Pando

Facebook is now two companies. One is having a good week

By Kevin Kelleher , written on April 26, 2018

From The Disruption Desk

Any large company is going to be seen as sometimes good, sometimes bad, but rarely has that tension played out so dramatically – and so weirdly – as it is right now with Facebook.

All along, Good Facebook and Bad Facebook have been at odds. Early on, its founder called users who trusted him with data “dumb fucks.” But Facebook's mission became one to “make the world more open and connected.” But Facebook repeatedly angered users with intrusive privacy policies. But Facebook keeps saying it's sorry and vowing to fix things. But Facebook's lax privacy helps sway elections. But look! Facebook delights investors with record revenue and profit!

After several months of Bad Facebook enduring public shaming, Good Facebook stepped forward with some happy news this week – well, happy at least for investors. Facebook shares are up 10% today following an earnings report that showed revenue and net income much stronger than expected. Revenue surged 49% to just shy of $12 billion (a growth rate that accelerated from the 44%-to-47% pace of the past three quarters), while earnings of $1.69 a share left Wall Street's estimate of $1.35 a share in the dust.

Most encouraging for the company, however, was evidence that #deletefacebook was just a transient trend. Facebook added 70 million monthly active users in the last quarter. The bulk of them were in Asia, particularly India, Indonesia and Vietnam. But monthly users grew by 7 million in Europe, where new data-protection laws are being enacted, and by 2 million in North America. Daily active users grew by 1 million to 185 million in North America, incremental but notable because this metric slipped last quarter.

Active users in Facebook's most lucrative market is flat over the past six months. That's not great, but it strongly suggests Facebook users aren't abandoning the site. Advertisers, meanwhile, are proving even more loyal. They spent on average $23.59 for every Facebook user in the U.S. and Canada, up 38% from a year ago. We users may keep tolerating Facebook, but the businesses who want to reach us love Facebook. And therefore the company's investors do too.

As for Bad Facebook, it made a quick cameo during the conference call discussing the fabulous earnings. “It's clear now we didn't do enough to prevent these tools from being used for harm as well,” Mark Zuckerberg intoned, “whether that's foreign interference in elections, fake news, hate speech, or app developers and data privacy.”

Notice how Zuckerberg wraps that disturbing litany of iniquities inside the more mundane sin of sloth" "We didn't do enough.” Later on, Zuckerberg admits to “one of my great regrets in how we've run the company so far.” Imagine, in 2018, how the CEO of Facebook would finish that sentence. Does he greatly regret porting user data from 87 million accounts to Cambridge Analytica? Does he greatly regret targeting misinformation to the most credulous voters? What about amplifying hate speech in Myanmar with deadly consequences?

Here's how Zuckerberg finished that sentence:

One of my great regrets in how we've run the company so far is I feel like we didn't get to shape the way that mobile platforms developed as much as would be good because they were developed contemporaneously with Facebook early on, right. I mean, iOS and Android came out around 2007.

If you have ever wondered who on earth pities Mark Zuckerberg for the failure of the Facebook phone, you now have your answer. It's Mark Zuckerberg. Which makes sense, in a way, because the most painful failures this man lives with are failures of engineering, not of right and wrong.

Facebook is widely regarded as a social media company, but it's really an engineering company. It engineers its way around any obstacle it encounters: mobile ads, creative competitors, privacy backlashes, Congressional hearings. You name it, Facebook will fix it. Facebook has never met a problem it can't hack into submission, and the latest earnings report is just more evidence of that.

From an engineering standpoint, this is a very good thing. But there's a potential bug in this approach: If Faceook can't clean up the problems that its platform has created, it can just create the appearance that it has. And that is what I found troubling about the comments its executives made on the earnings call.

“Over the next three years, we're going to keep building Facebook to not only be a service that people love to use, but also one that's good for people and good for society,” Zuckerberg said, which sounds, well, good. But later on: “Over the next 10 years, we're continuing to work on the long-term technology that we need to break down barriers and bring the world closer together.”

There is no acknowledgement that breaking down those very barriers have allowed things to happen that aren't good for society. It's like Zuckerberg is saying he'll fix everything he's broken just so things can break again. Because there's nothing a skilled engineer loves more than finding a problem and solving it.

In the two weeks since Zuckerberg testified before Congress, other controversies have arisen. Facebook hosted at least 120 private groups sharing information on shady scams like wire fraoud and denial-of-service attacks for hire. Its interface notifying European users of data-protection laws was slammed for dark design patterns. False rumors powered by the platform caused unrest and death in Sri Lanka. Even as Facebook was reporting earnings, the New York Times published a story about fake Zuckerberg and Sandberg accounts set up to defraud Facebook users.

As many observers have noted, the elusive bug in Facebook's business model lies at its very core. Its failures are encoded into the ad model that made it a success in the first place. Facebook could switch to a subscription model, but it won't happen. In the U.S., it would need to match the $23.59 it's currently making per quarter in ad revenue per user (roughly $8 per month), and then keep raising that fee by 40% or so each year.

Before Congress, Zuckerberg professed an openness to exploring subscription models, but two analysts on the earnings call yestertday asked about this possibility and both received answers that seem to have evolved from Facebook's thinking a mere two weeks ago. One analyst asked about the potential for revenue “away from advertising,” and Zuckerberg said, in essence, that ads are too deeply entwined with its stated mission of connecting the world.

We think that ads is a great business model that is aligned with our mission. We want to build a service that can help connect everyone around the world, so we want to offer that service for free and have it be affordable, and that's completely aligned with what we're trying to do.

Another pointed to the success that Netflix, Spotify, Apple and Amazon are having with subscriptions before asking, could there even be supplemental revenue Facebook could derive from subscriptions. Sheryl Sandberg responded with a who-knows? shrug before shutting the notion down.

We've certainly thought about lots of other forms of monetization, including subscriptions, and we'll always continue to consider everything... I think a strong focus on ads continues to be the best investment we can make. It's also very core to our mission. Ads gives us the ability to provide a free service to the world.

And herein lies a disappointing takeaway from this quarter. If Zuckerberg offered a modicum of apology, iterated over and over until effective, Sandberg appears to be the openly staunch defender of the ad machine that has drawn so much criticism toward Facebook.

“We're proud of the ad model we've built,” Sandberg said. That makes sense if you're one of the small businesses endlessly paraded into one of her case studies, or if you're a Facebook shareholder. But the ad model was built on weaknesses that have been exploited again and again. By defending that model, how is Sandberg not saying those exploitations, and their consequences, are worth the cost?

I think the answer came from Sandberg's other comments on the call.

“At Facebook, we have always built privacy protections into our ad system,” she said. “We use the information you provide and that we receive from websites to target ads for advertisers, but we don't tell them who you are."

All of this is true, in a technical sense. Facebook was in fact built to protect (some) privacy – rather than publishing on the open web, you could simply share with your friends. Advertisers could target ads based on your behavior. That was the deal, although Facebook tried again and again to get your permission to share your data with others.

But just because there were protecitons doesn't mean they were anywhere near adequate. And just because Facebook doesn't give advertisers our user names, there is still enough info shared they can easily connect it with a name if they so wanted.

Then Sandberg said this: "We don't sell your information to advertisers or anyone else.”

Again, this may be strictly true, but I'll respond with a now infamous quote from Zuckerberg: “Senator, we run ads.” Facebook is not outright selling our personal data, sure. But it's a kind of data broker. It makes money from advertisers by running ads, and in the process, it shares our personal information to target those ads. In that transaction, there is a bartering of personal information for ad revenue that takes a great deal of executive rationalization to portray as innocent.

Facebook is engineering language here, and anyone listening to Sandberg would know it. But the audience in this case was as friendly to Facebook as the Capitol Hill committees were aspiring to be confrontational. Sandberg wants Facebook to be the profit engine that could - even if it means squeezing those profits from a platform that Zuckerberg has repeatedly admitted to be corrupt - and also to be innocent of such corruption.

This is fine, but only in the sense that investors are happy right now. In the wake of public criticism, Facebook authorized another $9 billion in stock buybacks, beyond the $6 billion it okayed in 2016. That's a plush cushion in case the stock falls again. And remember, many Facebook's shareholders are current or former employees of Facebook. It pays to keep them content.

Facebook has become so successful it can no longer be a single company. It's two of them – one so good it deserves your trust, another so bad it's obscenely profitable. Sooner or later, the day will come when those two realities will collide. That day is not coming this week. In fact, we just took a big step backward from its arrival.