Facebook Starts Paying a Price for Scandals
Facebook Starts Paying a Price for Scandals
By Sheera Frenkel July 25, 2018
SAN FRANCISCO — For nearly two years, Facebook has
appeared bulletproof despite a series of scandals about the misuse of its giant
social network.
But the Silicon Valley company’s streak ended on
Wednesday when it said that the accumulation of issues was starting to hurt its
multibillion-dollar business — and that the costs are set to continue playing
out for months.
Facebook reported on Wednesday that growth in digital
advertising sales and in the number of its users had decelerated in the second
quarter. The company’s leaders, including its chief executive, Mark Zuckerberg,
added that the trajectory was not likely to improve anytime soon, especially as
Facebook spends to improve the privacy and security of users.
Facebook has grappled with months of scrutiny over
Russian misuse of the platform in the 2016 American presidential campaign and
the harvesting of its users’ data through the political consulting firm
Cambridge Analytica. The results were among the first signs that the issues had
pierced the company’s image and would have a lasting effect on its moneymaking
machine.
In response, Facebook’s stock tumbled more than 23
percent in after-hours trading, erasing more than $120 billion in market value
in less than two hours. If those losses hold up through regular trading on
Thursday, the one-day stock decline will be the biggest in Facebook’s history.
“This is a fork-in-the-road situation for Facebook,” said
Daniel Ives, chief strategy officer and head of technology research for GBH
Insights, a marketing research firm. He said the challenges included regaining
public trust as well as increasing the number of people joining Facebook and
the time they spent on the platform.
Facebook reported a 42 percent increase in revenue and a
31 percent jump in profits for its second quarter, compared with a year
earlier. But the revenue of $13.2 billion missed Wall Street estimates of $13.4
billion. In addition, Facebook said its daily active users rose 11 percent from
a year earlier to 1.47 billion, compared with 13 percent growth in the previous
quarter.
On a conference call to discuss earnings, Mr. Zuckerberg
said profits would most likely take a further hit because the company planned
to spend more on security. And the chief financial officer, David Wehner, said
revenue growth would substantially decline for the rest of the year, partly
because Facebook planned to give people more options with their privacy
settings, including letting them limit the kinds of ads they saw.
Facebook has also said it wanted to hire 20,000 people by
the end of 2018 to help review content posted on the site and to work on its
security team. The company’s head count has already risen 47 percent since last
year, to 30,275.
“Looking ahead, we will continue to invest heavily in
security and privacy because we have a responsibility to keep people safe,” Mr.
Zuckerberg said on the call.
Other factors have also hurt Facebook’s number of users,
Mr. Zuckerberg said, including tough European rules that went into effect in
May to protect people’s online data. The legislation, known as the General Data
Protection Regulation, cost Facebook about one million users in Europe, he
said.
The shift in Facebook’s business fortunes follows a
series of crises that began in late 2016 with the revelations that it had
become a prime distributor of misinformation. That has since been exacerbated
by questions over the company’s role in securing private user data, its effect
on the democratic process and its commitment to stemming disinformation on the
site.
Mr. Zuckerberg has had to appear in front of lawmakers,
has apologized profusely and has tied himself into knots explaining what he
will and will not allow to appear on the social network.
After these events, several senior leaders have departed
Facebook, including a board director, its chief information security officer,
and its vice president of communications, marketing and public policy. This
week, Colin Stretch, who led Facebook’s investigation into Russian election interference
and who testified before Congress last year on Facebook’s behalf, said he would
leave the company by the end of the year.
Facebook is now gearing up to face one of its biggest
tests to date: ensuring that no one meddles in the 2018 midterm elections
through the social network.
Mr. Zuckerberg said on Wednesday that he was hopeful
Facebook would be able to limit disinformation and fake accounts, and that the
company was able to do so in elections this year in France, Mexico and Germany.
“We are much more confident that we are going to get this
right in the elections in 2018,” he said, adding that the company had begun
proactively looking for fake accounts.
Facebook has other bright spots. Even with its loss of
market value after reporting its financial results, it may not lose its spot as
the fifth-largest publicly traded company in the United States. The company
held a nearly $140 billion lead on Berkshire Hathaway, the sixth largest, at
the end of trading on Wednesday. And through Wednesday’s market close,
Facebook’s stock had gained 43 percent from its lows in the wake of the
Cambridge Analytica scandal in March.
Still, the challenge will be how to stem further losses.
Given all the questions about the misuse of the platform, “to explain that
there are a couple million people who chose not to continue using Facebook is
unsurprising,” said Brian Wieser, an analyst at Pivotal Research.
Follow Sheera Frenkel on Twitter: @sheeraf
Stephen Grocer and Matt Phillips contributed reporting
from New York.
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