The Overly Social Network

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What's going on?

Shares of Facebook dropped almost 7% on Monday after concerns emerged over the weekend that a controversial political analysis firm improperly benefited from access to some of its users’ data.

What does this mean?

The issue stems from an old Facebook policy, in effect from 2007-2015, that allowed people to build apps on top of Facebook’s platform (remember Farmville?). Users could agree to give those apps access to their own profiles – and to some data on their Facebook “friends” too. Part of the deal was that the companies acquiring the data were forbidden from sharing it with third parties – but, surprise surprise, some almost certainly did. Cambridge Analytica, a British firm with ties to the Trump presidential campaign, was allegedly one company that acquired data without users’ permission and subsequently used it to target American voters (and possibly others) with ads designed to influence their vote.

Why should I care?

For markets: Facebook’s golden goose may cook its stock price.

Facebook’s practice of sharing its users’ data with third parties was widely known and considered normal at the time (e.g. Tinder users could see which Facebook friends they shared with potential dates). The bigger issue for Facebook is that one of its chief value propositions (access to its users’ data) has now become a major potential liability. One pressing question for investors is whether this will change users’ behaviour. In other words, will people become far less willing to allow Facebook to use their personal data? If so, Facebook’s appeal for advertisers would likely wane.

The bigger picture: Tech giants are facing a regulatory backlash.

The European Union, known to be much more antagonistic towards US tech companies than American regulators, wasted no time on Monday in calling for an investigation. American politicians were also quick to condemn Facebook’s policies. Political and regulatory scrutiny of Facebook, as well as other tech giants like Alphabet and Amazon, is intensifying ­– which represents a material risk for investors.

Originally posted as part of the Finimize daily email.

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