Facebook has swung into full gear with its damage control efforts – both Mark Zuckerberg and Sheryl Sandberg have been turning on the charm to an almost universally hostile audience. The net result is likely to be a series of changes that will keep the hoards from baying for blood but negatively impact long-term revenue potential.
While the immediate term performance of Facebook will be unaffected by the current furore, the changes present and future that are being put in place will only hurt its commerciality. As a result, long-term growth will be lower, costs higher leading inexorably to a lower valuation.
Zuckerberg’s comments that the #DeleteFacebook movement has had no material impact (as I expected), caused a relief rally but I think that there is far worse ahead. This is because:
1. AI: Before this fuss even began, the outlook for Facebook was already very difficult for 2018. This is because it already has a serious problem with fake news and offensive content which it is unable to control. This problem is best controlled with AI which can spot the content immediately it is uploaded and prevent it from trending.
Unfortunately, Facebook’s AI is not up to the task and so it is being forced to recruit 10,000 more humans to do the job of the machines. This means that opex will rise between 40-60% this year, which Facebook has already admitted to.
2. Preventive measures: As a result of the outrage, Facebook will be forced to take a number of measures to prevent user data from leaving its website and may also have to limit the uses that it, itself can make of the data. This means less data sharing between Facebook-owned digital-life services, resulting in less relevant insights and lower value of advertising. Furthermore, any revenues that Facebook can earn from third parties by providing insights will also be reduced.
I still believe that the main reason for its current predicament is that it was less than upfront with new users about the realities of their relationship with Facebook. Facebook appears to have been more than happy for everyone to scroll to the bottom and click agree, not realizing the implications of paying for Facebook’s service with personal data.
I suspect that users would have been far more wary about exposing their entire lives on Facebook had they been fully aware of this reality, but this is what needs to made clear now
Consequently, something along the lines of “We are able to provide this service to you by using your data for targeted advertising. If you would like us not to do this, we can offer you a subscription for $X per month” will be needed to ensure that the relationship is clear.
With this kind of proposition on the table, I suspect that the majority of users will still opt to pay with personal data, but with the relationship clear, there will be no more nasty surprises, and regulatory incursions should be satisfied.
This is likely to be a lengthy process and in the meantime, I think that the outlook for Facebook’s revenues has taken another leg down. Hence, I see more downside and think that short-term rallies should be used to lighten or eradicate positions.
This article was originally published at RadioFreeMobile