Business | Facebook unfriended

Russian meddling is only one challenge facing the social-media giant

Young Americans are using it less, costs are soaring and regulation looms

|SAN FRANCISCO
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IN ITS early days Facebook embraced the motto “move fast and break things” to describe its engineers’ strategy of rapid innovation. “Move slowly, and try not to break anything else” seems to be its new creed. In the last year Facebook has contended with several controversies, including charges that it helped spread false news, unwittingly facilitated Russian meddling in the 2016 election and fanned political polarisation (see Briefing). After denials of responsibility and little action, Mark Zuckerberg, its boss, has talked of “fixing” Facebook in 2018. It will be a huge task.

Russia’s alleged manipulation of Facebook users will harm the company. On February 16th special counsel Robert Mueller filed conspiracy and fraud charges against 13 Russians for interfering in America’s 2016 election; Facebook was mentioned no fewer than 35 times as a place where Russian trolls swayed Americans through targeted political advertising and curated posts.

The indictment is also evidence that Facebook was not transparent in reporting the extent of activities that occurred on its platform. Last autumn it said it had determined Russian content reached around 130m Americans, and that Russian trolls had spent a mere $100,000 on ads during the 2016 election. Those figures seem too low. The Russian troll farm described in Mr Mueller’s indictment probably had an annual budget of around $70m and would have spent heavily on Facebook ads and content. American politicians may press the social-media firm for more information and also haul executives before Congress again to give testimony, especially as concerns mount about foreign interference in upcoming elections in 2018 and 2020—big distractions for a firm contending with several other significant challenges.

Controversies around Russian meddling, fake news and hateful speech on social media have not yet dented Facebook’s advertising revenues. But it seems likely that shrill and angry posts on the site, and bad press about social media, are playing a part in chilling usage of the core Facebook platform. Mr Zuckerberg’s approach to fixing it has been to tweak what posts users see, prioritising “meaningful interaction” over “meaningful content”, which has resulted in people seeing more of their friends’ updates and fewer news stories. But that does not go nearly far enough, says John Battelle of NewCo, a digital publisher.

Last month when Facebook reported earnings, it announced a decline in daily active users in America and Canada for the first time and estimated that, globally, users were spending around 50m fewer hours per day on Facebook. Such a drop translates into users worldwide spending around 15% less time on Facebook year over year, reckons Brian Wieser of Pivotal Research Group, an equity-research firm.

In America, Facebook is steadily losing users under the age of 25 (see chart). Youngsters are spending more time on other apps such as Snapchat, and Facebook-owned photo-sharing app Instagram, where their parents and grandparents are less likely to lurk. While Instagram and the two messaging apps that Facebook owns, Messenger and WhatsApp, help insulate the firm, “core” Facebook still accounts for at least 85% of the firm’s revenue. Americans and Canadians are by far its most valuable audience, with an average revenue per user of $86, four times more than the global average. If users continue to engage less with Facebook’s core network, it could cause advertisers to leave over time.

Yet most analysts and investors are still exuberant about future prospects for Facebook, which with a market value of $521bn is the world’s sixth biggest publicly traded firm. They may be underestimating some of the risks the firm faces. One challenge, which has been highlighted by the Russia controversy, is its sloppiness. For a company whose sales pitch to advertisers is that it offers precision, targeting and transparency superior to traditional media, including television, it is remarkable that it has struggled to track the movement of ad dollars and content on its properties.

Either its algorithms have become so complex and opaque that executives have failed to keep up with them, or they have deliberately chosen to “slow walk” their audit of foreign spending on Facebook. Neither explanation is flattering. The company this summer will introduce a feature to allow users to see who is behind a political ad and also to view every ad a particular buyer has purchased. But that is around nine months after it was proposed.

A second challenge is that Facebook’s costs are growing significantly. In 2018 expenses are expected to rise by around half, to $23bn, while gross revenue will grow by about a third, to $54bn, according to BMO Capital Markets, an investment bank. Today Facebook has around 14,000 workers overseeing security, safety, compliance and community operations, twice as many as a year earlier, and that figure is likely to rise as more countries require it to find and remove objectionable content.

Facebook is banking that future growth will come from luring more advertising spending away from television, but this will require investment in video content to the tune of billions of dollars. Meanwhile growth rates for digital advertising are bound to slow. This is particularly true in America, where digital’s share of total ad spending—which today stands at 44%—outstrips the percentage of time people spend on digital versus traditional media.

A third risk, and the biggest, is new regulation. Politicians have hardened their attitudes toward Facebook. It has swallowed up smaller rivals and has few friends among the political elite. Regulators could scuttle new deals, impose new restrictions on data-sharing between Facebook’s various apps, or fine it for anticompetitive behaviour and privacy violations. This is especially likely in Europe, but even at home watchdogs may get fiercer.

In the meantime Facebook will have to grapple with regulations that limit its ability to track consumers. In May a new data privacy law, the General Data Protection Regulation, comes into effect in Europe requiring firms to gain explicit consent from users to follow them around the web and share their information. The regulation could slow growth in digital advertising in Europe overall. It could also threaten some of Facebook’s ad products, such as a tool that lets advertisers find their own customers on the social network.

Facebook has faced adversity before. Many doubted if Mr Zuckerberg could even build a business early on, and then whether he could manage the transition from desktop computers to mobile phones. He proved the naysayers wrong.

These days analysts and investors appear to have suspended doubts about his company. Support from the market may offer reassurance. Facebook’s shares have fallen by only 8% from their peak at the start of February. But too many cheerleaders will not help it confront its biggest challenge, that of reinventing its core product, and repairing its reputation.

This article appeared in the Business section of the print edition under the headline "Facebook unfriended"

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