Facebook as an Object Lesson: Consider a Business’ Core

Written by Jordan BlansitUpdated: 25th Feb 2022
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Facebook’s playbook is an old tune by now. Let’s see if you can hum it with me.

  • Phase One: The company gathers, shares, sells, and exploits user data to boost its bottom line.
  • Phase Two: The company gets caught by journalists, regulators, shareholders, or their own poor performance.
  • Phase Three: Executives cry foul and “Oh but think of the youth/small businesses/our shareholders/the company’s bottom line” when anyone proposes curbing their business practices in any way.
  • Phase Four: While the PR team handles the backlash, company executives quietly move onto the next shady stage of Facebook’s scheme to dominate the world (wide web).

Okay, so, maybe I’m biased. But it sure seems like Facebook is caught in a familiar pattern yet again – and frankly, no one should be surprised.

Wait – What Happened to Facebook?

On 2 February 2022, Facebook’s newly minted parent company Meta delivered disappointing fourth quarter and year-end results. The highlights include:

  • Lower-than-expected earnings
  • The first drop in daily and monthly active users in 18 years
  • Weak guidance compared to expectations for the upcoming quarter

While it’s not unusual for a company’s stock to dip when earnings disappoint, what is a little unusual is the extent of the market’s reaction. On February 2, Meta’s stock closed at $323 per share. By February 3, the share price had plunged over 26% to $237.76, wiping $250 billion from the company’s market cap in a single day.

Meta CEO Mark Zuckerberg felt the pain particularly intensely. As of February 4, he’d lost nearly $30 billion from his massive fortune, bringing his net worth below $85 billion. (To be clear, that’s still greater than the gross domestic product of Luxembourg, a country with 640,000 people – but I digress.)

There are several narratives that explain the poor results behind Facebook’s fall from grace, including:

  • An algorithm that primarily attracts an aging user base while younger generations flock to TikTok and other competitors
  • The sheer sums sunk into Zuckerberg’s latest project, the metaverse
  • The frequent appearance of leaked papers and whistleblowers in front of various regulatory agencies and committees

Of course, each of these narratives holds a degree of truth. But the single largest culprit likely lies beyond the company’s direct sphere of influence: Apple.

An Apple a Day Keeps the Marketers Away

Essentially, there are two primary ways to target digital advertisements: based on your search history or your general digital behaviors.

Over the last decade, Facebook has constructed its revenue-generating business model on the second. In other words, the reason your phone constantly shows you uncannily accurate ads is because Facebook tracks your shopping and app activity and sells that information to marketers all over the web.

At least, it did – until Apple pricked a pin in Facebook’s privacy-pounding profit production.

Let’s back up a bit.

Enter iOS 14.5

In April 2021, Apple rolled out a long-awaited update: iOS 14.5. This update was packed with new privacy features that promised users more control over their digital identities and data usage.

The update’s big selling point was a small, seemingly insignificant change: App Tracking Transparency (ATT). In short, the first time you open an app with marketer tracking, a pop-up asks consent to track you for advertising purposes.

If you allow tracking, business continues as usual. But if you opt out, two things happen.

The first is that Apple disables the app from accessing your unique identifier, which builds a profile of your digital activity on your device. Without your identifier, marketers can’t track your behaviors or target you with personalized ads.

However, even with the new update, Apple couldn’t block all types of marketer tracking. For instance, some companies use “fingerprinting” to pair harmless data like your screen resolution and OS for identification and marketing purposes.

Enter the update’s second action: to inform the app developer that you’re not cool with being tracked. Now, Apple can leverage users’ non-consent to ban privacy-violating apps from the App Store, eliminating your tracking woes at the source.

Facebook Fights Back

Apple didn’t make its privacy changes overnight; it announced them nearly a year in advance, in June 2020. Within a month, Facebook was on the attack.

In an August 2020 blog post, Facebook warned that the impending privacy changes would devastate part of its advertising business. In December 2020, Bloomberg reported that the company had taken out multiple full-page newspaper ads entitled “We’re standing up to Apple for small businesses everywhere”.

Not even a month later in January 2021, Mark Zuckerberg said that Apple was becoming one of Facebook’s competitors. (Never mind that in March, he realized the company could be in a “stronger position” as businesses profited from setting up shop inside Facebook’s own apps.)

Then, in October 2021, Facebook seized its first real opportunity to crow that it was right. During the company’s Q3 earnings call, Zuckerberg blamed its lower-than-expected earnings on Apple’s privacy changes, claiming that Apple was “negatively affecting” Facebook. He also threw a gut shot, stating that the iPhone market was harming “millions of small businesses in what is already a difficult time”. The social media CEO also reiterated Apple as a threat, noting that iMessage’s “growing popularity” posed a risk to Facebook’s messaging platforms.

…Sort Of

Facebook spent over six months yelling their displeasure about the danger of Apple’s unilateral decision-making abilities to the world. Surely, they also dedicated billions of dollars and brilliant minds to finding workarounds to protect their profits. (And small businesses, of course.)

At least, that’s what people inside the company and out appeared to expect. But Facebook’s response was limited to bluster and blame-naming, as well as brief warnings in quarterly updates that Apple’s upcoming changes would cause “headwinds” for the company.

Now, Facebook is facing the full breadth and scope of the issue full-on. For anyone else, their dilemma (balancing the sanctity of users’ privacy versus their commitment to shareholders) is a fascinating moral quandary. For Facebook, privacy is a costly inconvenience that should never be a barrier. Thanks to the actions of a single rival, the company knows less about users, which means its ad targeting is less effective – which means advertisers are sharing smaller profits or bailing for better pastures.

Welcome, Android

This all happened weeks (and in some cases, years) ago. So, why is Facebook cropping back up?

Thank Android.

Dancing in the Shadows

Google, Android’s parent company, is in an unusual place. As a company that runs its own OS and the largest popular search engine in the world, it has a commitment to both privacy and protecting advertisers’ profits. At the same time, it’s already benefitted from Apple’s changes, as several advertisers fled to Google when Facebook proved a less viable hunting…er, targeting ground.

So, in light of renewed privacy concerns and advertiser woes, Google is attempting to do what it does best: straddle play the shadows between two worlds.

On 16 February 2022, Google put out a blog post outlining its plan to implement new privacy changes – in two years. Specifically, the company highlights the need for “new, more private advertising solutions” that “limit sharing of user data…without cross-app identifiers, including advertising ID.” Executives hope that their proposed waiting period will give advertisers time to prepare workarounds that balance profits with privacy.

Google also threw shade at Apple, stating, “We realize that other platforms have taken a different approach to ads privacy, bluntly restricting existing technologies used by developers and advertisers. We believe that – without first providing a privacy-preserving alternative path – such approaches can be ineffective and lead to worse outcomes for user privacy and developer businesses.”

Facebook Gives the Nod of Approval

While Meta fought Apple’s changes tooth and nail, it’s already voiced support for Google’s plan. Graham Mudd, Facebook’s VP of product marketing, ads, and business noted on Twitter that it’s “encouraging to see this long-term, collaborative approach to privacy-protective personalized advertising.”

In the meantime, Facebook has already begun working on a fix for advertisers with “aggregated event measurements.” (Essentially, these tell advertisers when a large group of users acts, instead of breaking down information device-by-device.) Facebook is also renewing interest in several internal tools, including opening digital storefronts and capturing user data within its own app.

Facebook as an Object Lesson

From an investors’ standpoint, Facebook remains a large company that’s demonstrated enormous growth since it went public. And though its share price is currently in a slump, it’s not the first time the company’s stumbled through a rough patch and come out stronger on the other side. In other words: despite Facebook’s moral greyness, it’s historically not an unviable investment if you’re looking to turn a profit.

However, Facebook is also the perfect encapsulation of an investment strategy that encourages investors to reap the profits of expansion without questioning core business models. By paying attention to Facebook’s balance sheet and stock trends without examining the substance behind its numbers, investors fail to grasp the broader implications of their decisions – let alone the inevitable financial ramifications.

The Good and the Advertisers

Toeing the line between accurate ad tracking and user privacy is a tall order (and not a little oxymoronic.) The fact of the matter is that micro-targeted advertisements are incredibly profitable – and users are sick of it.

But even the “good guys” in this privacy debate, if you can call Apple or Google the good guys, are using the situation to boost their own profits.

Apple, for one, sits apart from the crowd because its business model doesn’t run on advertising revenue. In fact, its user base welcomes the company’s commitment to privacy, which means Apple stands to profit from restricting ad tracking.

Nor has Apple kept its urge to throw shade at its haters restrained. It pointed out in a YouTube video that, as a smartphone user, “Your information is for sale. You have become the product.” Apple CEO Tim Cook even lobbed a not-so-opaque insult at Facebook during a privacy conference, stating, “We’re here today because the path of least resistance is rarely the path of wisdom. If a business is built on misleading users, on data exploitation, on choices that are no choices at all, then it does not deserve our praise. It deserves reform.”

Google, on the other hand, needs to keep its advertisers happy. Yet still, it acknowledges that it needs to do better when it comes to user privacy. And while waiting two years for permissive privacy practices is a bit generous considering user privacy will continue being trampled in the meantime, it’s admittedly more than Facebook has offered.

Which is exactly bupkis.

Bringing in the Bad

Ultimately, arguments about consumer privacy, small business’ rights to turn a profit, and Zuckerberg’s worries about “headwinds” are inconsequential red herrings. The real issue in the privacy debates is each business’ commitment to its own bottom line and the goodwill of its investors – regardless of its cost to the users on whom they rely.

But that doesn’t mean that Facebook isn’t the unambiguous bad guy with a long history of ignoring (or even advocating against) user privacy. It buries trackers in every app it can partner with, sells the data to anyone who will buy, and even places the rights of the data collecting industry over the rights of individual users not to be pawned like a cheap guitar.

At the end of the day, Facebook’s privacy-violating business model doesn’t fit in an increasingly privacy-conscious world. Facebook’s product isn’t its social media apps – it simply uses them to lure its real product: you. You’re not a Facebook user, you’re a Facebook data generator, and the company pimping you out is its business model.

And as an investor, that’s just fine…until the tide turns, and your portfolio takes a hit. Focusing only on stock charts is exactly how investors follow conventional wisdom right into a minefield, and protecting yourself means looking deeper. The privacy battles have just begun and will continue to shake up the industry. If you don’t want your portfolio in the crossfire, never forget that stocks represent actual businesses, and when the way a company takes a shot right to its business model, its stock price will, eventually, crumple.

Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.