Facebook – Bipedal voting

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The only vote is the one by foot.

• There comes a time in every company’s history when rapid action is needed to avert disaster.
• Facebook’s current predicament is starting to look like that time and the reaction by Facebook so far increasingly looks like the actions of a company that knows it does not have to answer to shareholders.
• On the 25^th of May, the EU’s General Data Protection Regulation (GDPR) comes into force and as things stand today, this will affect around 1.5bn of Facebook’s users.
• This is because all of Facebook’s users outside of US and Canada have their agreement with Facebook Ireland which is in the EU and therefore subject to the GDPR regulation.
• GDPR is a restrictive regulation that takes little account of how the internet companies work but I think it has one advantage in that user data can only be used when the user explicitly gives his permission.
• This gives Facebook & Co. the opportunity to be upfront with their users, explain how the relationship works and give users options for how they would like to pay for the service they are consuming.
• I have long been of the opinion that 99%+ of Facebook users still think that the company is providing its service for free and that they are the customer.
• Consequently, these users are under the impression that the data that they upload to Facebook belongs to them, explaining the furore that ensued when Facebook and its associates legitimately used the data to make money.
• Unfortunately, Facebook’s users are not the customers, they are the product.
• The real customers are the advertisers who pay Facebook for an audience to which to market their wares.
• This reality has been very badly communicated by the internet service companies who appear to be more than happy for everyone to scroll to the bottom and click agree.
• Under GDPR this is very likely to be considered not enough to enable the usage of data and so a clearer agreement is needed.
• Consequently, something along the lines of: “We are able to provide this service to you by selling using your data for targeted advertising. If you would like us not to do this, we can offer you a subscription for $X per month.” will be needed to ensure that the relationship is clear.
• This is where business on the internet is likely to go and I think that once the choice to pay with cash or personal data is clearly understood, then the problem will have mostly been solved.
• Furthermore, it will also satisfy the requirement under GDPR allowing everything continue as before but with the user now fully aware of what he has signed up for.
• Unfortunately, Facebook does not seem to be interested in taking this path and instead intends to move its non-US users from the Irish agreement to the US one thereby bypassing GDPR.
• I think that this action is completely contrary to the sentiments that Mark Zuckerberg expressed to congress and is also contrary to the best interests of minority shareholders.
• Facebook has been caught out and its “move fast and break things” philosophy is itself badly broken and needs to change (see here and here).
• Hence, I think its best shot at staving off a mass exodus of users long-term is to address the issue head-on, take the hit and move on with the next chapter of its history.
• Unfortunately, it seems to prefer to duck and dive and perpetuate its old strategy for as long as possible and because Mark Zuckerberg controls the company, he can do whatever he wants.
• This is exactly why I have long believed that while super-voting share distributions are of great benefit to small private companies, they have no place in large, public corporations (see here, here, here and here).
• This reminds me of Ericsson in 2002 which also did not have to answer to its shareholders and consequently sat idly by and watched the company burn as the internet bubble collapsed.
• The result of this inaction and unwillingness to give up a failing strategy was an emergency, highly dilutive rights issue priced at a massive 74% discount to stave of imminent collapse.
• Facebook is not even close to this point, but the parallels are clear.
• It seems to be unwilling to give up on what is rapidly becoming an obsolete philosophy most likely because the founder and controlling shareholder is emotionally wedded to the company he created.
• This means he is likely to hold onto this losing strategy for much longer than he should, resulting in Facebook’s problems being much worse and lasting much longer than if shareholders could force him to act or force him out.
• While the share price was endlessly going up and growth never seemed to stop, no one cared about control, but now this is going to matter.
• All of the indicators are now going the wrong way for Facebook and I think that shareholders may be best served by using the one vote that they do have; their feet.