Cambridge Analytica: a threat to Facebook’s shares and reputation?

Facebook is under the spotlight again as major questions are raised about how people’s data is collected, stored and used following revelations about Cambridge Analytica. 

Source: Bloomberg

Facebook knows a lot about you. I downloaded all the data that the social media site has on me and it knows everything – who my family is, what music, books, movies and clothing I like, every digital friend I have had and all their contact details, what events I have been to, what advertisements I have interacted with, what applications I have used, even who I have poked. 

Read more: the history of Facebook.

Anyone on Facebook would be naïve to think the company doesn’t have this information – what would Facebook even be without everyone’s personal data? But the backlash from recent allegations over how a third party used millions of Facebook user’s data means long-unanswered questions of how this data is collected, stored, used and accessed have resurfaced. 

Cambridge Analytica investigation exposes risks to Facebook data

In a nutshell, a transatlantic, joint-media investigation has revealed that a University of Cambridge psychology professor, Alexanadr Kogan, developed a research app that collected information on Facebook users that had chosen to download his app, which had been developed for psychologists to use. 

About 270,000 people downloaded the app, giving consent for Kogan to access information about them, as well as information about their friends with open privacy settings. This information, according to Facebook, was collected legally and legitimately. 

However, Kogan is alleged to have passed this information to other companies, including one named Cambridge Analytica, a UK-based company that provides services to political campaigns, governments and militaries. Facebook learnt the information had been passed on way back in 2015 and secured declarations from all involved, including whistleblower Christopher Wylie, that all the data and information had been destroyed. 

Three years on, the investigation alleged that this data – reportedly of up to 50 million Facebook users mainly in the US – had not been destroyed. 

With Cambridge Analytica having worked on elections in Nigeria, Kenya, the Czech Republic, India, Argentina and, most notably, Donald Trump’s US election campaign, the revelations have opened up serious concerns about how Facebook handles its data, and the role that it could have played in any political propaganda, how secure data is and how transparent Facebook has been with its users. 

Both Cambridge Analytica and Facebook have denied any wrongdoing.

Impact on Facebook, as well as Google, Twitter, SNAP and Amazon

So how will this latest stain on Facebook’s reputation impact the company going forward, and do peers like Alphabet's Google, Twitter and SNAP have anything to fear?

One of the reasons that the likes of Facebook has been able to brush off previous criticisms and fend off governments is because it has shared the burden with its peers, which together form the world’s formidable tech elite. The widespread worry over how data is handled is not confined to Facebook, but to all those that collect it, including Google, Twitter, SNAP and even the online e-commerce giants like Amazon, which is built on its unrivalled pile of customer purchasing data.  

Any government or regulatory intervention that could potentially spawn from the Facebook-Cambridge Analytica story is likely to be the most severe the industry has felt. This latest scandal has prompted quite a different tone from authorities on both sides of the Atlantic, with growing calls for Mark Zuckerberg to make his first-ever appearance in front of committees to answer questions, having previously sent other senior executives in his place. 

These companies have to gain the trust of a trifecta of stakeholders: governments, users, and advertisers and partners. 

Most of the concerns raised by government, whether it be tax or regulation, boil down to one question which keeps rumbling on for the sector. How are the likes of Facebook, Twitter and Google supposed to be regulated? As social media companies, technology firms, or media publishers? Regulatory intervention is becoming increasingly collaborative as well, with the EU recently calling for a ‘global response’ to taxation, for example. 

One of the topics to be discussed by the G7 world leaders later this year is how they can place pressure on these types of companies to help battle extremist groups on the digital battlefield. Similar to WhatsApp, Apple too has been reluctant in assisting authorities with encrypted messaging services on its iPhones. 

Advertising is how all these companies make their money, and any concerns from advertisers represents a serious threat. WPP, the world’s largest advertising agency, has recently demonstrated the significant shift happening within the industry. There has been more advertising and branding work being taken in-house by companies over concerns about brand safety, following several incidents when adverts were placed next to inappropriate material on sites like YouTube. 

Read more about what challenges face WPP and the wider advertising industry.

In turn, these Internet giants need to keep users on board if advertisers are to stick with them. The public’s concerns over their data and how it used is a matter which will only grow in importance for these digital behemoths, as well as their reputations.  

Facebook and Cambridge Analytica present harsh truth for industry

The current Facebook scandal is bringing to the fore a harsh truth for users of social media platforms and other free sites. All users give Facebook and other social media platforms, and online retailers like Amazon, their data in exchange for using the services for free. The data gives the platforms the ability to earn revenue by providing advertisers with the means to conduct precisely targeted advertising. 

Concerns about how the companies protect our data have always simmered away in the background, but the Facebook and Cambridge Analytica scandal shows that data protection is lax, and the issue is now very much at the fore. 

The question now is whether Facebook and its peers can prove they are doing much, much more to protect our data, or whether the model needs to change completely and users control their own data but pay for the online services they use. Either way, it will mean change and a potential revenue hit for the companies. And that’s one reason why share prices are suffering.

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