Facebook – The foot vote.

Facebook must entice users not to disengage.

• Facebook’s future is going to be determined by whether users uncomfortable with being tracked disengage from using Facebook services.
• So far, the data is indicating that almost no one has walked meaning that Facebook should be fine once it has weathered the seemingly endless bad press.
• Data from PEW research indicates that most of Facebook’s users still have no understanding of how they are paying for the service that they consume setting the stage for another very difficult year.
• PEW’s survey found that 74% of US adults did not know that Facebook is maintaining a list of their traits and interests and 51% of all respondents were uncomfortable with Facebook gathering this information.
• In 2018, Facebook really struggled to deal with the ease with which 3^rd parties were able to legitimately get access to its users’ data.
• This triggered a significant decline in both the degree to which users trust Facebook with its data and the share price of the company.
• 2019 is shaping up to be a year where the focus moves onto how Facebook uses the data to make money for itself which creates another set of problems.
• The PEW data indicates that the vast majority of Facebook’s most advanced users still do not understand the relationship that they have with the service.
• The reality of this relationship is that they have sold their privacy to Facebook in return for the service that they enjoy.
• If Facebook is guilty of anything it is the fact that it has been less than upfront with its users, the vast majority of whom are under the delusion that the service is free.
• Nowhere does it say “We are able to provide with this service by using your personal data. If you would like us not to do this, the service costs $x per month”.
• The reasoning behind this is pretty simple in that many fewer users are likely to have signed up if this had been made crystal clear at the beginning.
• However, now that so many users are engaged with the service, Facebook has generated a massive network effect.
• This effect is very sticky, meaning that there is a very high possibility that users will continue to engage with the service even as the reality of how it is paid for becomes clear to them.
• RFM has calculated that Facebook has no real opportunity to offer a subscription-based service because it has to keep the service unfragmented to preserve the value of its network.
• This largely obviates the possibility to offer different tiers of service and leads to a requirement to charge a very high price to subscribers to ensure that it does not lose revenues if its most valuable users switch.
• This price is so high that RFM finds that no one is likely to switch leaving Facebook with no option but to continue monetising data with advertising.
• Hence, its target for 2019 must be to improve the quality or its service such that users who are disgruntled with finding out about how their data is used do not stop using the service because they are addicted to it.
• So far, very few users have disengaged and Facebook’s No. 1 priority for this year its to keep things this way.
• In the meantime, costs are still likely to rise much more quickly than revenues as Facebook is having to recruit humans to police its content because its AI is not up to the job.
• The net result is further declines in the valuation to match the unwinding of profitability.
• Facebook is not out of the woods yet.