Facebook long had a knack for navigating privacy controversies related to its collection of user data. But the cost of its missteps finally caught up with it this week, sending its market value down more than $100 billion last Thursday in the largest drop in value in Wall Street history.

Long-simmering privacy concerns, dating to nearly the birth of the company in a Harvard dorm room in 2004, have in recent months taken more concrete form than ever. In May, the European Union imposed a strict new regulatory regime. US officials, meanwhile, have begun scrutinising Facebook in a multi-agency federal investigation related to its handling of a recent scandal that exposed the information of 87 million people.

Worries about the rising costs of privacy regulations, along with declining growth in users and revenue, played a key role in a major Wall Street selloff last Wednesday night and last Thursday, with Facebook’s stock closing down 19 per cent, at its lowest level in nearly three months. The steepness of the decline suggests investors are re-evaluating the viability of Facebook’s core business — collecting extensive data on users so that they can better target them with advertising — in a world in which public pressure is mounting for stricter privacy protections.

Facebook said the changes would continue to hurt revenues as more people opted out of ad targeting in the months ahead. The company also said that it would lose money because its advertiser partners had also been impacted by GDPR and because of other privacy changes to come.

But Facebook, like some other technology companies, has rolled out the user protections worldwide, meaning the consequences for the company are likely to be global.

Problems for the company have not been confined to privacy issues. Signs of trouble have been growing for nearly two years, since the aftermath of the 2016 presidential election when Chief Executive Mark Zuckerberg dismissed the possibility that the rampant spread of phony news reports on the platform affected the vote.

What followed was a major public reckoning, rare for high-flying technology companies. Facebook eventually disclosed aggressive Russian manipulation on its platform and had to answer pointed questions about it on Capitol Hill. Then, news reports in March detailed how political consultancy Cambridge Analytica had siphoned away the data of Facebook users for campaign targeting. This prompted another round of questioning on Capitol Hill, this time of Zuckerberg himself.

Facebook’s stock price proved resilient throughout these controversies — aside from a dip after the Cambridge Analytica news — even as Mr Zuckerberg warned that addressing issues such as privacy and disinformation on the platform would involve costs for the company. That three-year winning streak reversed abruptly after last Wednesday’s earnings call, which appeared to crystallise several longstanding concerns.

“The impact of data privacy and GDPR seems to have had a greater effect on their business than many had appreciated,” said Christopher Rossbach, chief investment officer at J Stern & Co. GDPR gave users more elaborate notices about how their data was being collected and used and required explicit approvals.

The earnings report suggests broader worries that a company that has grown at a furious pace for years may finally be seeing its growth easing, especially among younger users opting for such social media alternatives as Snapchat or Instagram.

Yet it’s the privacy issues and cascade of recent scandals that dominated commentary about Facebook on Thursday, as investors tried to make sense of Facebook’s tumble.

The US investigations, first reported by The Washington Post this month, have two major areas of inquiry.

The Federal Trade Commission is probing whether Facebook violated a 2011 consent decree with the agency governing its privacy practices when it shared data with Cambridge Analytica and other companies. And the Justice Department and Securities and Exchange Commission are examining whether Facebook’s portrayals of its actions with regard to Cambridge Analytica have been timely and accurate.

The broader political atmospherics surrounding the company also have darkened amid these controversies, with both Republicans and Democrats calling for possible new regulation of the tech industry and social media in particular.

“It takes a while for opinions to begin to settle, and I think the cumulative effect of months on end of scandal has shown that this is not something they are capable of fixing in any meaningful way — on their own,” said Sarah Miller, spokeswoman for Freedom From Facebook, a nonprofit coalition of progressive groups calling for Facebook to be broken up.

Analysts last Thursday morning began debating whether Facebook’s tumble signalled the likelihood of long-term stagnation or merely was a stumble — and hence an opportunity to buy a fundamentally strong stock before it continues rising again.

The Washington Post Service

Published in Dawn, The Business and Finance Weekly, July 30th, 2018