IN MAY OF this year the social network giant Facebook went public with the third highest Initial Public Offering (IPO) in the history of the NASDAQ. (Google and Apple being the first and second highest.)
Facebook’s starting share price of $38 put the overall company value at an astronomical $104 billion. Those who doubted that the company was not worth as much as what Facebook’s bankers were valuing it at were quickly proven right. Many, such as financial analyst Sam Hamadeh thought the share price should have been closer to “$24-$25, and that’s being generous,” says Hamadeh.
The share price has fallen steadily through the past few months but earlier this month took a sharp decline as the first of five “lock-ups” expired, allowing company insiders and those with majority shareholder stakes, such as Goldman Sachs, to sell off their shares. Facebook’s current share price is $19.05, and as the four remaining lock-ups expire over the next six months Facebook Inc., will undoubtedly be feeling the heat from their shareholders. And more importantly how will this pressure affect the 950 million “active users” on Facebook?
What is important to remember about Facebook is how the company makes money. Facebook does not have any traditional commodity, such as copper or ore, no mobile phones or cars. What it does have, and what it made revenue of 3.8 billion from in 2011, is users’ data, mine and very possibly yours.
“Facebook is a one-stop shop: they mine, process and refine your data”
The language used around data is very telling – at the initial stage data it is “mined”. Many large organisations that mine data such as Tesco sell this raw material through one of their subsidiary companies on an open market to the highest bidder. Whoever buys this raw data will then process it into a refined or as Facebook succinctly term it “granular” data to be sold on to companies who use the information to place adverts in front of an appropriate or “targeted audience”.
Facebook is more of a one-stop shop: they mine, process and refine the data, and then use their own website as a platform upon which to sell advertising space. It is a cyclical and clever system.
It is also perfectly legal. You know that 19 point agreement that you tick when you sign up to Facebook? Well it is all there. No one has ever claimed that services such as Google, Facebook or Yahoo are provided for free. The internet is certainly not a free service provided by a bunch of geeky idealists who think that privacy should be a thing of the past. Facebook may have started out as a fun project by group of very smart people at Harvard University. However, even at the very beginning, this group of people knew that privacy would be a problem for them and data would be their gold dust.
The original Facebook mission statement has changed only slightly from the early days of 2004 when it read “to give people the power to share and make the world more open and connected.” It now reads: “Facebook helps you connect and share with the people in your life.”
“The jury is still out on advertising on Facebook”
The obvious revenue model for such a powerful broadcasting tool was advertising and it did not take long for the Facebook team to realise that their data gathering would eradicate one of the biggest problems that tradition advertisers faced. “Half of my advertising doesn’t work,” claimed the nineteenth century retailer John Wanamaker, “the problem is I don’t know which half”.
Wanamaker’s targeting would have been significantly narrowed if he had been advertising on Facebook.
That said, the jury is still out on whether Facebook, despite all of their gathered data, is a worthwhile place for companies to advertise. Firstly, there are issues around the 950 million active users, a figure that Facebook itself issues.
An “active user” is defined as someone who logs into the site at least once a month. The fact that Facebook charges an advertiser for a users “engagement” with an advert means that companies find it difficult to calculate an exact return on their investment.
The biggest issue that Facebook faces with regards to selling advertising space is that in many cases it simply doesn’t work. The average Facebook user does not go online to see adverts. And there is the fact that the conclusion that Facebook’s algorithms, the system which decides which ads is appropriate to a particular user, can get it annoyingly wrong. Spare a thought for Australian Josh Wilson who bought his girlfriend something online. Five minutes later his girlfriend rang to tell him that people were calling to congratulate her – Facebook had informed them all that he had bought something from a jeweller who specialised in engagement rings.
The biggest issue the social network site is that many of the large corporations with massive annual advertising budgets have not seen a decent turnaround on their investment. In the US, the car manufacturer General Motors have pulled their $10 million Facebook spend because they realised that very few people were walking into their showrooms and buying a car because of an ad they saw on Facebook.
“The amount of collected data on each user is outstanding”
Facebook does not tell an advertiser exactly who you are “unless you give [us] permission”, but rather creates highly-detailed demographics. The categories under which these demographics are created have become increasingly detailed over the past eight years as Facebook changes its Data User Policy. Facebook now considers it their entitlement to use any information that a user puts up on their site. “Everything you do and say on Facebook can be used to serve you ads,” explains Erin Egan, Chief Privacy Officer with Facebook. This, the site claims, is “to enhance user experience”.
The amount of information that Facebook collects is over 500 terabytes of data each day. And the amount of collected data on each user is quite outstanding. In 2011,an Austrian law student by the name of Max Schrems asked Facebook to release all of the information they had on him. After 40 days Schrems was sent a disk which contained 1,222 A4 pages gathered on his Facebook interaction since he had joined the site in 2008. Within these files Schrems was categorised under 57 individual sections ranging from “Religious” and “Political Views” to “Credit Cards”, even a section on “Vanity”.
Schrems approached the Irish Data Protection Commissioner (IDPC) with his findings from the 1,222-page document and lodged a total of 22 complaints which Schrems claimed were in breach of European Privacy Law. Mark Zuckerberg once tweeted, “Move fast and break things”. Presumably he wasn’t talking about law.
Facebook’s headquarters outside the US and Canada are based in Ireland and therefore the Irish Data Protection Commissioner is responsible for ensuring that the company’s policies are in concurrence with Irish and European privacy and data protection laws.
In 2011 the Commissioner’s office carried its largest audit to date, spending a total of three months investigating Facebook policies. The result was a 149-page audit which made certain recommendations but did not find Facebook to be in significant breach of EU data protection laws. What the audit outlines is more the fact that Facebook users, should they read their sign up contract, are made aware of what Facebook is and how their data will be exploited.
The recommendations indicate that users should be made more aware of what Facebook does with users’ data and states that ‘there is a distinction to be drawn between the settings which are essentially about the user exercising control over how their information is presented and available to others that use Facebook and the settings which determine how Facebook can use that information”.
“The DPC is currently drawing up a report to be released in October”
Rather then immediately implementing these recommendations Facebook decided to let the users decide how much information they needed to know. The company invited users to vote on changes to their Statement of Rights and Responsibilities and User Data Policy. Facebook agreed that if 30 per cent (270 million) of their active users voted, then they would take the result as legally binding, however if less than 30 per cent voted they would take it as “advisive” . Voting was open for one week, from June 1 to June 8. Despite the obvious importance of the vote, Facebook made no mention of it in their official blogs, no awareness on users’ timelines and no mention of it when users logged into their accounts. The result was that just over 320,000 people voted.
The Commissioner is currently drawing up a report to be released in October on Facebook’s actions since the initial audit last year and has stated that “Failure to comply with any such obligation could result in enforcement action”. The eyes of the tech-business world will be watching carefully to see if the Commissioner sticks to his word.
Should Facebook get away with a light slap on the wrist many will breath a sigh of relief and Ireland will be seen as a market place where big businesses can get away with bending the rules. Should the Commissioner find that Facebook are not acting in accordance with his recommendations and apply a hefty fine for not doing so, this could most likely deter many prospective corporations from setting up in Ireland and result in a loss of much-needed revenue and employment.
Mark Zuckerberg once advised start-ups to “Move fast and break things. If you are not breaking things you are not moving fast enough”. It is this smash-and-grab attitude that has served Facebook so well and has certainly contributed to the meteoric rise of the social network site. It has also meant that as an organisation Facebook regularly gets it wrong.
Whether these are genuine mistakes or clever moves to push the boundaries of privacy is not really relevant as the mistakes are still happening. Facebook is at a very tricky stage. One way follows the ill-fated Bebo, Myspace and Yahoo, the other takes a stride toward the mighty Google.
The question that users of Facebook may need to be asking themselves at this critical point is how comfortable do they feel about this corporation having so much information on them. And more than that, information that they may very well further exploit to satisfy the baying shareholders.
Eoin Lynch is a video producer with The Guardian and tweets at @Eoinlyncho
Read: Facebook to be audited by Irish Data Protection Commissioner>
Read: Facebook agrees to major privacy changes following DPC audit>
In full: The DPC’s full audit of Facebook’s privacy settings>
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