Facebook shares tumbled by nearly 7% yesterday. It was their worst session in four years.
Well, this may surprise you. But it turns out that sharing tonnes of personal data with a social media site that's always been a little bit dodgy as to how it uses it, might result in some of that data ending up in places that you don't want it to.
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And this particular "data seep" has turned political, which means that Facebook can't just sweep it under the carpet, as it has previously.
The bigger question now, at least for investors, is does this mark the turning point for the FANG stocks (Facebook, Amazon, Netflix and Google)?
How to turn data into hard cash
The internet has brought us many wonderful things, many of which are free at the point of use. By and large, you pay for these services not with money, but with your data, your attention, or both.
Google offers you free email and acts as a librarian and curator to the world's biggest reference library and media source, among other things. While you use those services, it serves you with targeted ads.
Facebook helps you to keep in touch with your friends and exacerbates lifestyle envy it's the weaponisation of those daft round-robin letters you used to get at Christmas. While you use those services, it serves you with targeted ads.
LinkedIn actually, I still have no real idea of what LinkedIn does except send me irritating emails on a regular basis but I'd probably pay good money if they'd just stop it.
Anyway, these tech companies have largely made their money by harvesting information and using it to create connections, networks and audiences, where before there were none.
The reason this works as a business model is that, by itself, the information isn't worth a lot to the specific individual who owns it. The only way to generate value from it is to share it. So you can acquire it relatively cheaply. But when the information is pooled, it has a lot of value to the right customers.
This is not a new business model. Companies have been doing it since time immemorial. And there's nothing at all wrong with it. It's what the internet in particular is built on, but it's also the model on which any product you get "free" is based on. If you pick up a copy of the Evening Standard or Metro or Stylist on the street, then you are part of the product ("an audience") which they are selling for actual money to a customer ("an advertiser").
Or take a supermarket loyalty scheme. That's no different to Amazon. It records what you buy, and it suggests other products you might want. That data is valuable it's a tool to get you to buy more from the same shop but the service you get in return is valuable too. It's convenient and useful to be sent the occasional half-decent book recommendation by Amazon for example (although they're still not great at it).
Mark Zuckerberg, master media manipulator
Where this becomes "problematic" (to use the modern parlance) is when the nature of the transaction is vague. I've personally always been wary of using Facebook (I'm on it, but not very active on it) because I always struggled to get to the bottom of exactly which data it's using and how it's using it (and, to be fair, I couldn't really see the point of it).
This has all blown up now, because a company called Cambridge Analytica stands accused of exploiting its access to Facebook data to do targeted political advertising to support the Donald Trump election campaign, and apparently, to do the same for Brexit.
Facebook didn't hand the company this data. It's more the case that the data was harvested by a third party and then acquired by Cambridge Analytica. The precise legalities are unclear, and also depend on the jurisdiction (Britain and Europe have much tighter data protection laws than the US).
There's a lot of semantics involved (in other words, a lot of people are belatedly trying to cover their backsides) and you can read the exact details in any of the papers easily enough rather than have me reprint them here.
But the point is, whether it was done via loopholes, pure illegality or incompetence, the data of about 50 million Facebook users was used to target them with tailored political ads aimed at swaying them to vote for Trump. (Bear in mind that these people were leaning that way anyway we're not talking about brainwashing innocent Democrats here).
That's a major problem in itself. These networks are built on trust. You lose that trust, and your business model is in trouble. Facebook has always been bit blas about this (it has a history of pushing the privacy envelope), and it's always been able to shrug it off the users just go along with it.
But this time, it's serious. A lot of people (many of whom have a lot of political power themselves) would rather believe that Trump and Brexit were the result of the crafty manipulation of a mindless populace, rather than an understandable political reaction to the financial crisis and its status-quo-coddling aftermath.
They usually blame Rupert Murdoch, but they can't really blame him for Trump. But now they can blame Mark Zuckerberg. And who knows? If they campaign hard enough, maybe they can even get those dreadful election results overturned!
What if you knew exactly what was being done with your data?
In short, this isn't going to go away. Facebook isn't necessarily toast, but in terms of investment impact, I'd say that this is analogous to a major product recall situation something along the lines of VW and diesel gate.
The bigger question is: what's the knock-on effect for the other tech stocks? The market is already differentiating somewhat. Amazon, Netflix and Apple business models that aren't dependent on data-driven advertising all fell by about 1.5% yesterday. But Google parent Alphabet which is dependent on data-driven advertising lost 3.2%, notes the FT.
That makes sense. One way or another, this almost certainly spells greater regulation over the use of data. It could already mean big fines under existing regulations. And if it becomes more expensive to collect data and to forge the connections between it, then that business model is no longer going to be as profitable. On that front, Facebook and Google are the most vulnerable.
But it goes deeper than that. What if governments decide that Facebook can no longer pretend that it's a platform? What if they force it to take on the responsibilities of being a publisher? That's more than just a bit of additional friction that pretty much destroys the existing business model.
And what if we also start delving into how our data is being used by other platforms? That's not a product recall situation that makes this more like the banks pre-2007. Suddenly, what was deemed standard practice and uncontroversial within the industry looks appalling when exposed to the harsh light of consumer scrutiny.
What if you knew exactly what your data was being used for, and exactly who knew what about you? How would that affect your relationship with the tech companies and the technology that you use?
My phone knows exactly where I've been at almost every hour of the day, for the past year at least. At a superficial level, I don't really care I haven't been anywhere particularly unusual, and Google Maps is such a brilliant tool.
But how would I feel if I was sent a list of all the companies or people who had access to that data? I suspect I would be surprised or even shocked. I suspect that I might be less blas about sharing my data.
We've given up a lot of our privacy and our say in the future, as the Silicon Valley juggernaut has charged ahead with its own tech-utopia agenda. And by and large, I am broadly sympathetic to the tech nerds. I think they mean well, and they have had a lot of positive impact.
I hope Elon Musk gets to Mars. I hope robot cars rule the roads one day. I hope Jeff Bezos invents faster-than-light travel so that Amazon can deliver my stuff the day before I order it.
But power corrupts, and the over-mighty need to be reminded that they are a part of society too. That's the pendulum that's swinging now, and that's why I'd be cautious even on the less-broadly exposed tech stocks right now.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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