Bad news and Facebook

When Facebook’s stock plummeted earlier this week, wiping out US$120 billion dollars of market capitalisation in a single day, Wall Street’s analysts – most of whom had rated the stock as a strong buy just the day before –  couldn’t agree on the exact cause. Some blamed privacy concerns, others pointed to new European regulations, or changes to the newsfeed, or recent signs that the company may have hit the limits of its growth. Whatever the reason, or combination of reasons, the size of the losses immediately put other members of the so-called Faangs companies – Facebook, Apple, Amazon, Netflix and Google – on notice that they shouldn’t underestimate the volatility of investor confidence in hi-tech stocks.

After the European Union passed its General Data Protection Regulation, Facebook lost three million active daily users within a quarter. Negative media coverage after the Cambridge Analytica and fake news scandals also interrupted its seemingly unstoppable growth, but these losses were quickly swept away. This latest and sharpest decline, seems to stem from a more traditional concern, namely that Facebook may have reached the limit of how much advertising it can squeeze into its news feed. That was a large part of what led the company to adjust its growth projections after North American users spent millions fewer hours online, and the number of active daily users noticeably declined in the fourth quarter of 2017.

Faced with the lack of engagement, Facebook altered its newsfeed algorithm to boost “meaningful connections” among users, giving priority to material that a user’s friends and family showed interest in. Keeping in mind the emphasis on creating ‘viral’ posts in all digital communication – Facebook also owns Instagram and WhatsApp –this tweak suggests the company’s impatience with the old ways that we consume the news. Many traditional media companies in the US were taken over and dismantled not because they were no longer profitable, but because investors, encouraged by the early showing of the new digital media companies, wanted even larger returns. It is an irony that won’t be lost on any of these companies that Facebook is now struggling to meet similarly unrealistic expectations.

Whether or not Facebook weathers its latest crisis – and there are good reasons to believe that it will, – its recent stumbles show that the company is still unsure of its footing on the emerging news landscape. What began as a digital platform for catching up with friends and distant family members has become a news behemoth, but that success now entails social, political, and ethical questions that few of its founders anticipated.

It is hardly surprising that any of the Faangs, whose business model is built around creating addictive habits on their user base, should falter with the traditional obligations of gathering and disseminating the news. But after upending the previous media landscape they will eventually have to live up to these expectations, whether or not they would like to. Facebook’s recent experience suggests that the period of readjustment may will prove more volatile and unpredictable than any of them had bargained for.

Facebook’s total user base, including its apps, is currently 2.5 billion monthly active users. That’s more than enough to offset immediate concerns of a sudden decline in stock value, but it also indicates the scale of the challenge ahead. Apple is currently worth more than $950 billion; Amazon, Alphabet and Microsoft are all valued at more than $800 billion. Even after its downturn Facebook is valued at more than $500 billion. As Facebook is now learning, those outsized numbers bring with them outsized expectations.

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