Regulators can’t touch Facebook—but the market can

A lot of people want to punish Facebook (FB): For its domination of social media, its relentless data mining, its reluctance or maybe refusal to police disinformation. Politicians on both the left and the right would dismantle the social-media giant, if they could.

Facebook and its parent company, Meta, have been essentially impervious to such external pressure. Market forces, however, may now accomplish what legal authorities can’t: Punishing Facebook for a business model that relies heavily on the exploitation of users’ personal data.

Meta stock plunged by 27% on February 3, the biggest one-day drop since Facebook went public in 2012. The selloff followed a quarterly earnings disappointment, which, up till now, has been foreign to Facebook. But the real bombshell was the company’s acknowledgment that new efforts by Apple (AAPL) to protect user privacy made it harder for Facebook to target ads to those Apple customers, a new challenge that could cost Facebook more than $10 billion per year.

As Yahoo Finance’s Dan Howley explains, Apple launched a new privacy feature for its mobile devices last year that changed the way apps can track what users do with their iPhones and iPads. Before the change, apps such as Facebook could automatically track your activity, allowing them to know your likes and interests and target ads accordingly. Users could disable that feature on their devices, but most didn’t.

Apple has made privacy protection a distinguishing feature of its products, and the change means app tracking is now off by default on Apple’s newest operating system. If there’s anybody out there who really wants Facebook’s micro-targeted ads, they can change their settings so Facebook can track what they do. But an unstated part of Facebook’s entire business model is that it doesn’t ask permission to track and vacuum up data, because if it did, too many people would say no.

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Facebook and other app developers protested and even threatened legal action, but Apple stood firm. The net result has now shown up in Facebook’s bottom line: The company can’t target ads as effectively as it wants to the estimated 1 billion people worldwide who use an iPhone. That means companies that advertise on Facebook will get weaker results, lowering Facebook’s ad rates and driving some of them to advertise instead on Google or other platforms where they feel they can get more bang for the buck.

Advertising dynamo

Facebook has been a digital advertising dynamo for more than a decade, locking in gargantuan profits as an early mover in the race to monetize the personal information of its nearly 3 billion worldwide users, including those on Instagram, which Meta also owns. Facebook didn’t invent the model, but it perfected the strategy of offering users a free service in exchange for data that was worth a fortune when sliced ​​and diced for advertising purposes.

Facebook CEO Mark Zuckerberg pauses while speaking as he testifies before a joint hearing of the Commerce and Judiciary Committees on Capitol Hill in Washington, Tuesday, April 10, 2018, about the use of Facebook data to target American voters in the 2016 election. (AP Photo/Alex Brandon)

The market has been shifting, however, and Meta CEO Mark Zuckerberg—who has stoutly rebuffed nearly every effort to rein in his company’s business model—may be losing his wizard’s touch. Facebook has endured a barrage of bad publicity since it became clear a low-budget Russian disinformation campaign used Facebook during the 2016 presidential campaign to smear Democrat Hillary Clinton, in an effort to help elect Republican Donald Trump. The Cambridge Analytica scandal revealed that Facebook violated its own rules on data dissemination to allow a research firm working for the 2016 Trump campaign to target political ads at users based on info that was supposed to remain private.

Democratic Sen. Elizabeth Warren and Republican Sen. Josh Hawley want to break up Facebook, as do many other lawmakers. The Federal Trade Commission and attorneys general from 48 states are pursuing legal action against Facebook, claiming it’s a monopoly that ought to be subject to antitrust measures. There have been numerous hearings during recent years where Zuckerberg and other senior Facebookers have parried with interrogators and insisted that no, Facebook is not evil.

The law has largely been on Facebook’s side. But public opinion no longer is, and that, in turn, is aligning market forces against Facebook for what may be the first time since Zuckerberg and some fellow geeks dreamed up the scheme at Harvard in the early 2000s. In the Interbrand global rankings, Facebook ranked No. 8 among global brands in 2017. That was its high-water mark. By 2021, Facebook had fallen to 15. That probably understates the company’s problem, however, since those types of rankings involve name-recognition as much as quality perception.

Consumers worldwide have become markedly more concerned about data privacy as they’ve become more aware of the ways companies gather information on them and use it to make money. Europe leads in privacy protection, but the United States may be catching up. A recent Morning Consult found that 56% of registered voters support a federal law that would prohibit social media companies from targeting ads based on personal data—which is the core of Facebook’s business model. Only 23% said they would oppose such a law, while 21% said they weren’t sure.

Private sector

Congress doesn’t seem likely to pass such a law any time soon, but this is where the private sector comes in. Apple has clearly caught on to the growing desire for privacy, to the point where it has even fought the US government by refusing to help unlock the iPhones of criminals and terrorists. Those were unpopular positions at the time, but Apple stuck to its principles and the tech giant now seems to be in pole position just as consumer concern on the issue is peaking. Android phones, powered by Google’s software, don’t yet have similar protections, but Google parent Alphabet could flip on the issue, much as Apple did.

Apple is the world’s biggest and most valuable company, and the kind of gargantuan foe even the king of social media can’t face down. Facebook will remain profitable and probably continue to agitate its many detractors. But the market is now disciplining Facebook, and Zuckerberg can’t blow that off the way he can a few dyspeptic senators. At least four research shops downgraded their outlook for Facebook following the Feb. 3 rout, including JPMorgan, BMO and Loup Ventures. More downgrades are probably coming.

Facebook changed its name to Meta last year to emphasize a pivot to the so-called metaverse, where people will supposedly live digital lives independent of what they do in the physical world. But the metabucks haven’t arrived yet, and Meta may now face a turbulent period of marginal decline in its legacy business while it tries to establish a first-mover advantage in a different realm. It won’t have many sympathizers.

Rick Newman is a columnist and author of four books, including “Rebounders: How Winners Pivot from Setback to Success.Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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