2017 Was Bad for Facebook. 2018 Will Be Worse. The carefree years of unregulated, untaxed growth are coming to an end.
2017 Was Bad for Facebook. 2018 Will Be Worse.
The tech giant's carefree years of unregulated, untaxed
growth are coming to an end.
By Leonid Bershidsky December 13, 2017, 11:00 PM PST
Facebook is projected to boost sales by 46 percent and
double net income, but make no mistake: It had a terrible year. Despite its
financial performance, the social media giant is facing a reckoning in 2018 as
regulators close in on several fronts.
The main issue cuts to the core of the company itself:
Rather than "building global community," as founder Mark Zuckerberg
sees Facebook's mission, it is "ripping apart the social fabric."
Those are the words of Chamath Palihapitiya, the company's former vice president
of user growth. He doesn't allow his kids to use Facebook because he doesn't
want them to become slaves to "short-term, dopamine-driven feedback
loops."
Palihapitya's criticism echoes that of Facebook's first
president, Sean Parker: "It literally changes your relationship with
society, with each other ... God only knows what it's doing to our children's
brains."
Facebook has reacted nervously to Palihapitya's
accusations, saying he hadn't worked at the company for a long time (he left in
2011) and wasn't aware of Facebook's recent initiatives. But I can't see any
practical manifestations of these efforts as a user who has drastically cut
back on social networking this year for the very reasons cited by Parker and
Palihapitya.
To outsiders and regulators, Facebook looks like a
dangerous provider of instant gratification in a space suddenly vital to the
health of society. It's also making abuse and aggression too easy -- something
the U.K. Committee on Standards in Public Life pointed out in a report
published on Wednesday. Sounding one of the loudest alarm bells on social media
yet, the panel urged the prime minister to back legislation to “shift the
balance of liability for illegal content to the social media companies."
While Facebook remains the biggest platform, Google and
Twitter are facing similar pressure from governments in the U.S. and in Europe.
Germany enacted a law requiring the social networks to remove hate speech
promptly or face fines. In the U.S., the activities of a Russian troll farm
during the 2016 election campaign prompted scrutiny of Facebook's ad selling
practices and a (rather ham-handed) legislative attempt to force some
transparency.
Taxation is another area that regulators, especially in
Europe, are targeting. Facebook, like Google, books almost all its non-U.S.
revenue in Ireland with its low corporate tax rate -- and pays most of it to a
tax haven for the use of intellectual property rights. The practice resulted in
a 10.1 percent effective tax rate for Facebook in the third quarter of 2017.
This year, the top European economies, led by France,
Germany, Italy and Spain, called for a turnover tax on the U.S. tech companies
to compensate for their tax avoidance. This angry move failed to get enough
traction on the European Union level thanks to Ireland and other nations that
fear the economic fallout. But individual nations are taking action -- Italy's
ruling party backed a plan to withhold 6 percent of any digital advertising
purchase in the country.
On Tuesday, Facebook announced that it will start booking
revenue from large ad sales in the countries they occur, not Ireland. But when
Facebook and Google tested this approach in the U.K., it didn't result in a
significantly higher tax bill, according to Irish economist Seamus Coffey. Last
year, Facebook U.K. paid 2.6 million pounds ($3.5 million) in taxes while
booking 842 million pounds in revenue. Regardless of where the company books
sales, it still has to pay for the intellectual property rights held far from
European shores, likely in the Cayman Islands. Coffey doubts that the new
scheme will significantly change Facebook's overall tax bill. Instead, it will
create insultingly small revenue streams to more countries.
Facebook’s also trying to pre-empt concerns about problematic
advertising and offensive content by hiring 1,000 reviewers. But even if
Facebook hired in 100,000 people, they'd have trouble policing the sea of
effectively anonymous content produced by 2 billion users, an unknown number of
which are bots and paid trolls. The obvious solution is to enforce Facebook's
user policy (which says people can only post under their real names) and hold
them responsible for what they publish. But that would cause Facebook's user
base to shrink, which would alarm investors.
A third line of attack is likely to become important
soon, perhaps as soon as next year. Former Facebook executive (yes, another
dissident insider) Antonio Garcia-Martinez argued earlier this year that
Facebook's ad targeting based on data collected from users is essentially
unethical (and also that Facebook oversells its targeting ability). This
resonates with politicians -- who worry about the social networks' voter
manipulation potential -- and privacy advocates. Even if new legislative curbs
on data gathering and ad targeting don't arrive soon, standards may start
shifting thanks to the efforts of people such as Brendan Eich, the creator of
Javascript and the Firefox browser. Eich's latest start-up produces a browser
that effectively blocks all ads -- and that will next year offer an entirely
new advertising model built on revenue sharing with consenting users.
The social networks' carefree years of unregulated,
untaxed growth are coming to an end. Facebook will probably remain a major
force in the attention market, especially given its foothold in the messenger
app market and the popularity of Instagram with young people. It may keep
rowing against the tide and offering meaningless concessions, but that's not an
endless path. Eventually -- likely soon -- it'll have to submit to rules and
popular attitude changes that will cut its ambition down to size and perhaps
force it to rethink its business model.
This column does not necessarily reflect the opinion of
the editorial board or Bloomberg LP and its owners.
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