Scandals, Regulation & Outages: The Facebook Story

Unless you were living under a rock yesterday, what happened with Facebook was unprecedented. If you did pull a Patrick Star, then what you missed was that Facebook and all of its properties (Instagram, WhatsApp, etc.) were down yesterday for ~5 hours.

The last time this happened for them was in 2008, when a bug knocked Facebook offline for about a day, but the service only had 80 million users then (they now have 2.9 billion users). Outages like this are extremely uncommon, and they lose over $10M per hour in advertising revenue when they do occur. What makes this so much worse is that it also comes with terrible timing as there recently was a massive whistleblower event regarding the practices going on at Facebook behind closed doors. Pair that with massive data privacy headwinds attributed to iOS 14.5 and these three events can spell disaster for the social media giant.

But Facebook is an extremely unique position. While on one hand everything seems to be going wrong for them on the other hand last year they commanded 83% of US social media ad spend. With really only one other main place to advertise online (Google), companies are hard-pressed to find better alternatives.

So the question we are asking ourselves is: Is Facebook due to implode or are they too big to fail?

Let's tell you why and more below 👇

Spoiler Alert: No company is too big to fail.

But just because that is true, doesn't mean it is easy. Therefore let us explain what is happening and what it'll mean for Facebook in the short and long term.

Whistleblower Overview:

A whistleblower from Facebook recently came forward and spoke with 60 minutes about what is going on behind closed doors at the company. As a former data scientist, she said that she was a part of the "atrocities" going on there. She also claimed that relative to the other social networks, it wasn't close with the level of wrongdoings they were doing. So what are they? Here is a list of just of a few things:

• She said that Facebook is lying to the public about what they're doing to combat fake news, hate, etc. Facebook only really ends up actioning on 3-5% of hate on fb, despite being the best in the world at it.
• There is severe fake news/misinformation affecting societies around the world and Facebook is choosing not do anything about it because they make more money when they do.
  • Because of this negligence, Myanmar was able to use Facebook in 2018 to launch a genocide
• When she joined the team in 2019, she was specifically geared towards combating election misinformation and risk. Once the election ended they decided to disband the team because they claimed that their job had been completed. However soon thereafter, multiple groups in the US used the negated tech at Facebook to organized the coop on the capital.

Hard to believe? Yes. The information is wild and just the tip of the iceberg. But why is this happening?

Well the root of the problem was due to the changes they made to Facebook's algorithms back in 2018. So for example, if you swipe through Facebook for 5 minutes you're likely to see 50-100 posts, but Facebook realistically has tens of thousands of things that they could show you. So the algorithm has to pick what to show you based on the type of content you've engaged with the most in the past. The new changes to the algorithm picks the content via what is the most engaging and the research her group saw was that hateful and polarizing content gets engaged with and therefore the algo spreads it like wildfire.

The inherent problem with this is that if they fix the problem then people will spend less time on the app, thereby clicking less ads and thereby making Facebook less money. So when faced with the choice of making more money or doing the right thing, what do you think they did?

Well, like most major corporations when incentives are misaligned, they chose the money and chaos ensued.

The crazy thing is this is just ONE of the many problems facebook is currently facing. And unfortunately, the likely outcome of this is more senate hearings and some short term fixes, but likely 0 indictments, and no foreseeable changes over the long term. As bad as this is, we don't see this fundamentally altering the path Facebook is currently on. Are people annoyed and will people boycott the platform? 100% But you'd be fooling yourself if you think this is going to stop people from advertising on their platform. At the end of the day they have some of the best technology out there and they help companies make more money than they would elsewhere.

But there is another headwind going on right now, that actually will hurt Facebook's main revenue stream and that is, iOS 14.5.

iOS 14.5 Overview:

iOS 14.5 is Apple's new software that they rolled out across their iPhones earlier this year. The reason this is so important is because with the new software update, Apple gave their iPhone users the ability to easily opt out of cross-site and cross-app tracking and targeting. This is important because this is how Facebook tracks people across the internet, which is in large part how they're so effective in driving sales. And new data from analytics firm Branch indicates that just 25% of users are opting in to tracking, which is causing panic across the digital advertising industry.

Since the roll-out, brands who run ads on Facebook have said that Facebook is no longer able to reliably see how many sales their brands are making. So it has become significantly harder to figure out which ads are and aren't working. Additionally, retargeting - Facebook's bread and butter, also is impaired due to the shutdown of tracking across the internet.

And guess what? Facebook hasn't been able to solve for this so far. While people are still spending tons of money on the platform, this is severely affecting the effectiveness of one of the world's largest advertising channels. 

It is too early to tell how this will shake out of over the longer term, but this has the ability to completely alter their entire revenue stream going forward. The reason it hasn't yet is because there aren't other more effective platforms to use. But once there is, you better believe companies will exploit it, and suck money out of their facebook campaigns.

The TLDR is: this shouldn't deter material ad revenue for Facebook in the short term, but this has the ability to be a major show stopper for them over the longer term.

Outages & Facebook Outlook:

The funny thing is, the trouble doesn't stop here. As we mentioned above, Facebook also had a major outage yesterday. While in isolation it likely doesn't mean much, there is a lot of rumors going around that this is a part of the whistleblower event and could be the first of many attacks against the company. While we likely won't know what truly happened for some time, the punchline is that Facebook is feeling the heat like no other company in the US. 

But Facebook is in such a unique position. They're essentially viewed as a necessary evil. As a brand, you need to use them to grow your presence and make money, but at your core you really dont want to. Pair that with 0 innovation from the company (their only successful products have come via acquisitions) and we think Facebook is likely to get disrupted over the long term. It is hard to point our fingers at something and say that is it and this is when it'll happen, but we're confident something will come down the pike eventually. Therefore over the long term we're selling the company but over the next year, there still is upside amidst all the chaos given the revenue growth and reliance on the platform for brands advertising.

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