Facebook is one of the most important firms in the American economy. The tech giant is a major employer in the United States. Its actions have a profound economic impact across the globe. This is the reason behind the hefty valuation that Facebook commands. However, this valuation and the entire business model came under siege on March 19, 2018. Facebook was found to be engaged in a political scandal. As a result, the valuation of Facebook suddenly crashed. The company lost more than $36 billion in market capitalization in a single day. This negative sentiment also impacted the Dow Jones Industrial Average which was down by close to 7% in a single day.
In this article, we will have a closer look at the political scandal that Facebook has been involved in. We will also consider some of the economic impacts of this scandal.
The Data Scandal Involving Facebook
Cambridge Analytica is a public relations firm based in the United Kingdom. This firm specializes in psychological profiling and even psychological warfare. This means that they collect data from social networking websites. This data is then used by Cambridge Analytica to draw psychological profiles of the respondents. Once these profiles are drawn the reaction of this audience to various messages are tested. Based on this testing, Cambridge Analytica enables political candidates to form a message which resonates with the population. The underlying belief behind these activities is that people do not vote based on rational thought. Instead, they vote based on emotions. If a company is somehow able to harvest data and understand the emotions, they reach a position wherein they can influence the outcome of the elections.
Facebook was involved in this scandal because the data collected by Cambridge Analytica, in this case, was collected on Facebook. Also, Facebook allowed them to harvest the data from the friends’ list of the users who had agreed to take the quiz. This means that people who had not even directly given permission for their data to be used were also affected by the scandal. It is said that Cambridge Analytica used Facebook on a massive scale. They harvested as many as 50 million profiles from Facebook during the period. These profiles were used by the Trump campaign during their election campaign. Also, the involvement of former White House staff and white supremacist Steve Bannon with Cambridge Analytica is making Facebook’s role look even more suspicious.
This scandal is more related to Facebook than to Cambridge Analytica. The reason behind this is that Facebook had full knowledge of the fact that the third party i.e. Cambridge Analytica was developing a tool specifically to harvest the user’s information. It is also known that Facebook had full knowledge of the fact that the data of many users will be taken without their direct consent. However, they still allowed the political consulting firm to harvest data. This is being seen by many as a violation of the privacy policy.
The Effects of Facebook’s Involvement
- There was a massive public outrage against Facebook and its policies. This is what led to the stock market crash. However, it also led Mark Zuckerberg to make a public appearance in order to do damage control. Facebook had to issue an apology for their inability to manage people’s data better. Mark Zuckerberg also announced a slew of measures that would be implemented at Facebook to enable robust data management practices that would ensure user privacy.
- Companies like Tesla, Mozilla, and Space X have stopped posting on their Facebook page. This is a small incident and will not have an impact on the bottom line of Facebook. However, this is the latest action in a series of events. Facebook has also been facing a delete facebook movement on Twitter. Irate users are urging others to delete their Facebook account since it has become too intrusive. Even Whatsapp co-founder Brian Acton suggested that everyone should delete their Facebook accounts.
- Facebook has also started facing increased regulatory pressures. Recently the company was called upon by politicians in the United States and the United Kingdom to explain their privacy policy. The regulatory burden will add to costs and will also impact the speed of operations at Facebook. Increased government interference is bad news for Facebook.
- Lastly, many firms have stopped funding their Facebook ad campaigns. This is because at this point in time, being associated with Facebook is bringing negative publicity to other firms. It is not clear whether this suspension of ads is for the short term or for the long term. A lot will depend on how Facebook manages this public relations crisis in the future. However, it is likely that Facebook revenue will drop in the forthcoming quarter as a result of this crisis.
To sum it up, Facebook is in the midst of a major crisis. The reputation of the firm has taken a major beating. Earlier, Facebook was involved in the net neutrality scandal. Now, Facebook is involved in the misuse of customer data. Any more scandals will have a negative impact on the already fragile financial statements of Facebook.
