Facebook’s business model under scrutiny

Facebook’s business model under scrutiny

From its creation in 2004, Facebook was a success story closely identified with one of its founders, Mark

Zuckerberg, a star among the Silicon Valley entrepreneurs. His global ambitions for the social media

platform, combined with WhatsApp, Instagram, and Messenger, seemed destined to grow inexorably

into a social media empire. Facebook’s IPO in 2012 opened the way to expand globally. He was able to

control the company through a share structure in which the voting system gave him control of the

company. He attempted to restructure Facebook in 2017, retaining control even though reducing his

shareholding. This was met with a lawsuit from shareholders, claiming the restructuring was unfair to

them, and that the board had been in breach of their legal duty in approving it. Zuckerberg withdrew

the plan, and investors could claim success.

By that time, Zuckerberg had other problems on his mind.

Mr. Zuckerberg has long felt that the idea of sharing was central to Facebook. In 2010, he said that

privacy was no longer a ‘social norm’ (Johnson, 2010). The indications were apparent then that

Facebook would encounter difficulties with privacy regulators. It was clear then that Facebook’s

approach to users’ data was that they could be used freely to generate revenues: this was its business

model. Facebook gave developers of data apps access to data. A complaint to the Irish data protection

authority by a law student, Max Schrems, in 2011, stated that Facebook had no control over what

developers did with the data, or the data of a user’s friends, even though they had not given consent.

Facebook made changes to the platform in 2015, but data that had been harvested had already been

incorporated in the system. By then, the wholesale harvesting of data was difficult to reverse.

In 2018, it was revealed that Cambridge Analytica, a data company that was taken on by the Trump campaign and by the Brexit Leave campaign,

had obtained Facebook data on 50 million people, which it used to micro-target voters with political

advertisements. That number was later revised upwards to 87 million. Facebook was called to appear

before investigative committees of legislators in the UK and the EU, and to give testimony before

Congress in the US. The answers by Mr. Zuckerberg and other executives contained apologies, but left

legislators unconvinced when questions about the core business model were raised. When Mr.

Zuckerberg was asked by a congressman whether he was willing to change his business model to protect

individual privacy, he replied, ‘I’m not sure what that means’ (Hern, 2018). The company’s share price

plummeted 20% in a few days in July 2018. Its number of users was up to 1.42 billion globally, but the

number had stalled in the US and fallen in Europe, which are Facebook’s biggest advertising markets.


Costs were rising, as the company was compelled to deal with security matters, suspending hundreds of

apps as a result of the Cambridge Analytica scandal. It was compelled to clamp down on political

advertising, the spread of fake news and the spread of hate speech. Face-book apologized for its failure

to act responsibly in dealing with third-party developers, and for its inadequate approach to privacy.

However, it has become clear that Facebook’s micro-targeting of users has been the attraction that it

offers advertisers, and this has involved harvesting vast amounts of data. If regulators were to clamp

down on these practices with stricter rules, it would be very costly for Facebook. Investors and users

have cause to be concerned.

The EU’s General Data Protection Regulation

(GDPR) took effect in May 2018. It provides for users to opt in, rather than out, of some data sharing.

This would impact on Facebook in the EU. Mr. Schrems has already filed four complaints under the

GDPR. Companies in breach face fines of 4% of global revenue. For Facebook in 2017, that would have

been $1.6 billion. Mr. Schrems complained of forced consent: the user had to consent or be denied

access to services. In the US, Facebook has already launched products that breach GDPR rules. Facebook

has become extraordinarily profitable through a business model based on data harvesting, which it

acknowledged was irresponsible. It was a costly path to take, undermining public and investor

confidence in the social media giant. Mr. Zucker-berg is now seeking to boost the profile of Insta-gram,

which has proved very popular. In part, he is seeking to compensate for the woes of Face-book in public


Adding to the threats of escalating costs have been moves in a number of countries to

force tech companies, which have been adept at tax avoidance arrangements, to pay more in taxes in

the country jurisdictions where they operate. The US regulator, the Federal Trade Commission (FTC)

imposed a massive fine of $5 billion on Facebook in 2019, for privacy violations stemming from the

Cambridge Analytica scandal. This was by far the largest fine ever imposed by the FTC. However, the FTC

did not order the company to make any structural changes. As a result, many feared that Facebook was

not likely to make the changes to its behaviour that would safeguard privacy in future (Davies and

Rushe, 2019).


• What are the risks for the company and its relations with shareholders in the climate of ‘tech backlash’

that many ordinary people feel?

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