March 27th, 2018
The Facebook situation could go from bad to worse if the company doesn’t take quick, decisive steps to convince users and regulators that data security is a top priority. Our survey research shows that an alarming share - 70% of the U.S. internet population expressed varying levels of distrust of Facebook, when it comes to personal data. As the FTC digs into the finer details, they will likely use "trust" as context for further inquiry into data best practices of Facebook, but also the entire ad-supported digital ecosystem. While the rules around user data privacy clearly need to be rewritten, LUFT believes that rigid regulation would stymie innovation in social networking and consumer tech more generally. The likely losers here would be advertisers, the ad tech firms built around FB, and the fresh platforms aiming to go toe-to-toe with Facebook.
The pressure on Facebook to act is mounting on all sides. Investors are ditching the stock, regulators (including the FTC) are moving in to investigate, advertisers are getting skittish, competitors are using the opportunity to speak out (Tim Cook), and users have vowed to leave the platform for good (#deletefacebook). Left unchecked, regulators will likely take a hard hand to ensure a deeper top-down imperative for data privacy. We see this option as undesirable for reasons previously stated.
The Federal Trade Commission confirmed that it will be investigating the company. Thirty-seven U.S. states and territories have also requested more detail on how Facebook safeguards user data against misuse by third parties. Facebook and other ad platforms including Google depend on user data to power their various ad products and services.
The free-service-for-data model has served these digital businesses well. And while we don’t think that resulting regulation will kill FB or Google by any stretch, it could have lasting impact on the value chain of advertisers and servicing companies that have grown to depend on retargeting and ad performance optimization. A deeper investigation into Facebook could put the remaining targeted ad ecosystem at risk, depending on how hard the feds decide to go at them. The full extent of the impact could now depend on FB's ability to quickly reestablish trust among its virtually ubiquitous user base.
Do users trust Facebook with their personal data?
One key metric regulators will likely use as context for deeper inquiry is brand trust and consumer sentiment toward data best practices. For this analysis, we surveyed the U.S. internet population to gain better insight into consumer attitudes toward Facebook. When asked whether respondents trusted Facebook with their personal data, just 7% expressed a clear degree of trust.
70% of the U.S. internet population expressed varying degrees of distrust. This figure is alarmingly high. If anything, it speaks to the realities of the current ad-and-data supported model for online applications and services. Here we assume that consumers understand that users offer up their online behavior data to third parties, in exchange for free service. Facebook uses pixel tracking technology to capture the online behavior of its members. This is a critical component to its retargeting capability and value-add to advertisers. Regulators will dig into the details to determine whether this model creates overall harm to the consumer. In this light, perhaps the use-but-don't-trust model is the right approach for a centralized (hint hint blockchain enthusiasts) social media network.
Overall the trust issue seems to be a Facebook challenge, rather than a wider distrust of the internet and big technology companies. Reuters/Ipsos ran a similar survey and found that other brands fared better on their trust scale, compared to Facebook. We ran our own benchmarks prior to the Cambridge Analytica incident and found that Facebook’s overall brand as a force for good was held in lower regard compared to Google and Amazon. What about Instagram?
The Words We Use To Describe Our Relationship With Facebook
We also ran a test to compare how Americans felt about Facebook compared to Instagram. We asked respondents to offer the word that best described their relationship with Facebook. Overall, responses skewed toward the negative end of the spectrum for Facebook. Instagram's reaction spectrum skewed more toward neutral rather than negative. For the neutral category, we included respondents that indicated a lack of relationship.
Here are the negative and positive words respondents used to describe their relationship with FB and Instagram.
Negative: awful, ambivalent, bad for kids, annoying, can do without, controlling, antipathy, cautious, creepy, bored, dislike, devil, boring, don't like, disgusted conflicted, frustrating, distrust, don't care for it, gossip, evil, drama, negative, fake news, lame, nonsense, hate it, mediocre, not good, hatred, not needed, insidious, overdone, old, intrusive, rabbit hole, overbearing, invasive, skeptical, perplexing, it causes a lot of the problems that we see today, sick of it, liberal, so so, spooky, losers, tiring, stupid, Orwellian, too much opinion, sucky, political, tired, proceed with caution, too many annoying news articles, Russian, unnecessary, sad, useless, should be more careful with Russian hackers, waste of time, slanted liberal, spy, subversive, terrible, trash, trouble, wary, worthless, zucksucks
Addictive, awesome, connecting, convenient, cool, dope, educational, enjoyable, entertaining, excellent, fair, family, fine, fun, funny, good, great, happy, hooked, impressed, informative, interesting, like, love, love it, nice, ok, relevant, tolerable, valuable
The recent controversy over Facebook's member data misuse has clearly impacted the company's brand reputation and stock price. Advertisers and agencies have also expressed concern and frustration over the reputation crisis and whether ads on the platform could harbor negative associative effects. Can advertisers afford to ditch Facebook forever? Google and FB reportedly control 80% of digital ad spend so probably not. However, Facebook needs to take big steps to win back consumer trust, to secure the full faith and backing of advertisers and equity investors.
Arguably, this debacle was only a matter of time amid rising backlash and criticism over big technology platforms and their handling of user data. European regulators have been more proactive. General Data Protection Regulation (GDPR) is due to roll out across the EU in May. Companies will need to retrofit their systems to comply on various levels. One safeguard will include the option for consumers to request a complete data purge upon request. Tracking and maintaining user data to this degree, in the absence of previous best practices, is clearly a challenge for big social media networks that collaborate with third parties to improve ad performance, but also for other digital brands that use similar applications to advertise on Facebook and Google.
Whether regulators ban the use of customer data for ad targeting is unlikely. However, pending regulations could cause distress to Facebook’s various ad products and consequently revenues. Likewise, the entire digital marketing & advertising ecosystem could endure impacts if regulators clamp down on data usage. Our sense is that Cambridge Analytica was likely the tip of the iceberg of an industry that has gorged itself on relatively cheap and accessible user data.
The platform’s 1.5 billion daily active visitor base creates a wide competitive moat around the entire family of brands including Instagram. Size gives merit to the argument that FB is too big to fail. However, the now intensely negative media publicity and user backlash is emboldening regulators and watch dogs to dig deeper into the company's user data best practices. We worry about what they might find.
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