Pando

Early Facebook investor Roger McNamee says Facebook’s moves today aren’t nearly enough

By Sarah Lacy , written on January 12, 2018

From The Disruption Desk

Roger McNamee isn’t the first-- or even second-- crucial early Facebook insider to argue how damaging the company’s core business MO has become to society. But he certainly did the most thorough take down. 

In a long essay in Washington Monthly which ran this past weekend, McNamee methodically lays out his bona fides, his case that Facebook should have known and was told how their system was being manipulated, and -- the most interesting part-- how the company can be saved, despite this all being tied into the core of how Facebook does business. 

Step one: He begins with a story of the time he met Mark Zuckerberg, how he became an investor when given the choice to invest or join the board, and how he encouraged Zuckerberg to hire Sandberg. “In my thirty-five-year career in technology investing, I have never made a bigger contribution to a company’s success than I made at Facebook. It was my proudest accomplishment,” he writes. He stopped mentoring him when it went public. 

Success has a million fathers, and there are plenty of folks who claim to have more of a “direct line” to founders than they actually do. But I covered Facebook closely in these years, and my impression was always that the two were indeed as close as McNamee asserts. 

Step two: McNamee explains how he-- as little more than a power user of the site-- first noticed that something strange was going on during the Democratic primary in early 2016. Those instincts were confirmed after the Brexit vote. 

He neatly breaks down why: 

People tend to react more to inputs that land low on the brainstem. Fear and anger produce a lot more engagement and sharing than joy. The result is that the algorithms favor sensational content over substance...They have created billions of individual channels, each of which can be pushed further into negativity and extremism without the risk of alienating other audience members. To the contrary: the platforms help people self-segregate into like-minded filter bubbles, reducing the risk of exposure to challenging ideas.

It took Brexit for me to begin to see the danger of this dynamic….The “Leave” campaign made an absurd promise—there would be savings from leaving the European Union that would fund a big improvement in the National Health System—while also exploiting xenophobia by casting Brexit as the best way to protect English culture and jobs from immigrants. It was too-good-to-be-true nonsense mixed with fearmongering.

Meanwhile, the Remain campaign was making an appeal to reason. Leave’s crude, emotional message would have been turbocharged by sharing far more than Remain’s. I did not see it at the time, but the users most likely to respond to Leave’s messages were probably less wealthy and therefore cheaper for the advertiser to target: the price of Facebook (and Google) ads is determined by auction, and the cost of targeting more upscale consumers gets bid up higher by actual businesses trying to sell them things. As a consequence, Facebook was a much cheaper and more effective platform for Leave in terms of cost per user reached. And filter bubbles would ensure that people on the Leave side would rarely have their questionable beliefs challenged. Facebook’s model may have had the power to reshape an entire continent.

I can’t say whether McNamee intends it, but the message here is: A dude using Facebook to market his band, Moon Alice, saw this as a user... How could those inside the company not?

Especially when... He explicitly told them.

Step three: They knew. 

I have had this debate constantly in the last year: When did Facebook know their platforms were being manipulated to swing elections? Did they ever? And I’ve also had this conversation with tons of Silicon Valley outsiders: How could they not know? 

“We didn’t know” has become the rallying cry of so many people senior in Facebook’s ranks, and those who still want to believe in the company. As McNamee points out in his essay, there are a lot of idealists there. 

And yet, as we now know, Facebook's awareness of Russian election meddling reached right to the top of the company. As the Washington Post reported...

Nine days after Facebook chief executive Mark Zuckerberg dismissed as “crazy” the idea that fake news on his company’s social network played a key role in the U.S. election, President Barack Obama pulled the youthful tech billionaire aside and delivered what he hoped would be a wake-up call.

McNamee warned them too, he says. 

He writes: 

Mark and Sheryl were my friends, and my goal was to make them aware of the problems so they could fix them. I certainly wasn’t trying to take down a company in which I still hold equity. I sent them the op-ed on October 30. They each responded the next day. The gist of their messages was the same: We appreciate you reaching out; we think you’re misinterpreting the news; we’re doing great things that you can’t see. Then they connected me to Dan Rose, a longtime Facebook executive with whom I had an excellent relationship. Dan is a great listener and a patient man, but he was unwilling to accept that there might be a systemic issue. Instead, he asserted that Facebook was not a media company, and therefore was not responsible for the actions of third parties.

In the hope that Facebook would respond to my goodwill with a serious effort to solve the problems, I told Dan that I would not publish the op-ed. Then came the U.S. election. The next day, I lost it. I told Dan there was a flaw in Facebook’s business model. The platform was being exploited by a range of bad actors, including supporters of extremism, yet management claimed the company was not responsible. Facebook’s users, I warned, might not always agree. The brand was at risk of becoming toxic.

This was-- remember-- around the time that Zuckerberg openly scoffed that Facebook could have impacted the election. 

That McNamee was close with Facebook’s leaders isn’t questioned. So at what point in his argument do those still defending Facebook find fault in his account? 

McNamee has been on a mission since the election to educate Washington folks about the dangers that Facebook and Google pose-- two companies he has personally profited enormously from. He details joining forces with Tristan Harris, formerly the design ethicist at Google, and how the two of them have made several trips to Washington to explain exactly how these platforms work, and how they can be manipulated. He describes his elation that this became a major national issue this fall. 

As I wrote around the same time, “when tech CEOs are the ones calling for regulation, you know ‘disruption’ has gone too far.” That piece was about Elon Musk, but the same goes for men who profit off said disruption. 

In previous interviews, McNamee has admitted his naivety in what these companies have become: "When I invested in Facebook in particular, where I was very, very active, it never occurred to me that anything bad could ever happen from people sharing photographs and stories about family," he told CNBC last August after a USA Today oped that wasn’t quite as detailed as this one, but pointed to the same issues with Google and Facebook. 

What this new essay does that that previous one didn’t, and previous Facebook insiders haven’t, is detail how regulators can deal with the problem. McNamee notes that traditional tools like fines and judgements don’t come close to denting these companies, mentioning a record $2.7 billion judgement the EU levied against Google that “bounced off Google like a spitball off a battleship.”

He argues for a range of things including a statute of limitations on how long these platforms can use user data for advertising, that all your social assets including your social graph should be exportable, and that users should be allowed to essentially “fork” and use older versions of these apps the way you can decide not to update downloadable software if you don’t like the changes and new terms of it. 

Perhaps the most devastating was his suggestion that these companies not be allowed to make any more acquisitions until these problems are addressed. 

He similarly makes the case that our modern post-Reagan approach to antitrust needs to be fundamentally rethought: 

 ...antitrust law has operated under the principle that monopoly is not a problem so long as it doesn’t result in higher prices for consumers. Under that framework, Facebook and Google have been allowed to dominate several industries—not just search and social media but also email, video, photos, and digital ad sales, among others—increasing their monopolies by buying potential rivals like YouTube and Instagram. While superficially appealing, this approach ignores costs that don’t show up in a price tag. Addiction to Facebook, YouTube, and other platforms has a cost. Election manipulation has a cost. Reduced innovation and shrinkage of the entrepreneurial economy has a cost. All of these costs are evident today.

It’s the most cogent argument I’ve read on what could be done to “fix” Facebook and Google, their ability to be manipulated and how their core systems are optimized for spreading misinformation. An argument -- even if you don’t agree with all of it-- that there’s plenty that could be done, if this truly is Mark Zuckerberg’s 2018 goal

But McNamee’s suggestions would also devastate these companies’ abilities to continue to perform as shareholders have come to expect. John Battelle made a similar point in the wake of Zuckerberg’s announcement that fixing Facebook would be his 2018 goal.

You cannot fix Facebook without completely gutting its advertising-driven business model.

And because he is required by Wall Street to put his shareholders above all else, there’s no way in hell Zuckerberg will do that.

Put another way, Facebook has gotten too big to pivot to a new, more “sustainable” business model. The company is on track to earn at least $16 billion in profits in 2017.

Zuckerberg announced his first step in making changes yesterday. It’s mild compared to the things McNamee or Battelle suggested: The company will change its algorithms to show more friends and family moments that people want to engage with, rather than flooding your feed with content and video that is consuming and keeps you on the site longer, but has created a lot of these divisions. 

From Zuckerberg’s post:

"Recently we've gotten feedback from our community that public content — posts from businesses, brands and media — is crowding out the personal moments that lead us to connect more with each other. I’m changing the goal I give our product teams from focusing on helping you find relevant content to helping you have more meaningful social interactions."

He acknowledged the cost: That Facebook's two billion users will spend less time on the site and engagement will likely define as well. And it’s a blow for Facebooks heavy bet on video as a major future revenue stream. It also likely screws over media partners and businesses, but, well, that’s been Facebook since the dawn of the Platform. 

USA Today points out that some analysts see the move not as some magnanimous step, but a response to a decline that has already occurred in Facebook’s business:

But that negativity may already be showing up in Facebook's numbers. 

Pivotal Research analyst Brian Wieser says his analysis of recent Nielsen data shows consumption of Facebook declined in August and September. It's unclear if that's because Facebook already accounted for such a big chunk of our digital lives or because people are growing increasingly frustrated with it.

"Facebook is responding to a decline in consumption, not just encouraging a decline in consumption," Wieser says. 

Satisfaction with Facebook has slipped among users, according to RBC Capital Markets analyst Mark Mahaney. His research shows 11% of Facebook users are extremely satisfied with the service, down from 15% a year ago.

"We see Facebook’s News Feed change as Facebook reacting to greater public scrutiny of its value proposition," Mahaney wrote in a research note.

It’ll be interesting to see what— if anything— the step changes, and if it’s all Facebook does. None of this changes the way Facebook makes money, which to Battelle is what makes Facebook unchangeable. Actually fixing Facebook would break Facebook.

Indeed, the government doing the things McNamee recommends would be as radical as the break up as AT&T-- and McNamee points out that while people may believe it’s unlikely in this current administration-- it would lead to the same kind of explosion in innovation should it occur. 

I was reminded of a PandoMonthly we did with AOL founder and Internet legend Steve Case: 

I saw this evolution with AOL even before we merged with Time Warner but certainly after. We shifted subtly from being an attacker to being a defender.

I realized that the world really is divided into these two camps, and the mentality that you have to attack, disrupt, challenge the status quo and take them out, anything is possible, which is the entrepreneurial mindset, is different than the mindset required to operate a large complex organization.

It's not surprising to me that the people running Fortune 500 companies almost always have MBAs, but in the entrepreneurial world, it's not only not essential, it's sometimes not even helpful, because it forces you to analyze risk.

If you really analyze risk of almost every start-up accurately, you'd never do anything, because they're all so risky. You've got to take this leap of faith. Similarly, managing these complex organizations, it's, "How do you de-risk?" How do you grow the revenues, but also how do you make sure you don't lose what you've got?

They're just as focused on, in fact, more focused on protecting the downside, hedging the downside as they are optimizing the upside. In the sports world, they call it the "protect defense." That is the mentality for most large companies. Not all, there are some exceptions, but most large companies.

There is a difference between attackers and defenders. The great battle as you attack these new opportunities is how the attackers attack and how the defenders defend. Sometimes, it will be attackers co-opting defenders or vice versa…

...At some point, they will get to the point where they are now trying to defend what they've built, not trying from the new entrants who are trying to attack them on the fringe. It's an inevitable cycle.

Now, there are some exceptions. There are few companies that have done a remarkable job given their scale of still having a largely attacker mindset. Google has done that, not just protecting its core business quite effectively but moving into android and many other spaces.

Amazon, similarly, their core business continues to be strengthened. AWS, some of the other initiatives they're doing, Kindle, is really remarkable. They've been able to do that in scale, and Apple.

And Facebook. 

It’s ironic: Back when the then large incumbents like Google, Apple, Adobe, Intel, Intuit and others banded together in an illegal plan to artificially suppress wages by agreeing not to poach one another’s talent, it was Facebook, the powerful upstart, that wouldn’t join in, and effectively kept the plot from being more successful in its aim. To Case’s point, at some point the game changes. Attackers become defenders, or in the case of Google, Amazon and Facebook, they become a strange hybrid of the two. 

If you are looking for a cynical angle to cast doubt on McNamee’s account of what has transpired and what should be done, that’s the closest I can come: As a man whose made his fortune investing in disruptive technologies, Facebook and Google (and Amazon and Apple for that matter) have become so uncannily good at dominating so many industries that they are choking off innovation. 

McNamee starts his piece recounting the time he talked Zuckerberg out of selling Facebook to Yahoo for $1 billion. Look at the fate of the two social media giants that turned down similarly crazy sounding money from Facebook: Twitter and Snapchat. While both made plenty of early investors plenty of cash, neither have fared well competing with Facebook. 

There’s precious little white space in consumer Internet right now, whether it’s retail (Hey! Amazon!), entertainment (Hey! Netflix and Apple and Amazon!) or in anything ad-related (Google and Facebook control more than 80% of digital advertising, and that’s set to increase according to analysts.) 

So perhaps, McNamee’s self-interested angle is in busting up what’s thwarting his serving as a mentor to the next Zuckerberg. 

But shouldn’t that be in the Valley’s self-interest too?