Facebook privacy scandal divides markets as media spotlight focuses on data security

The world’s largest social media company has sparked a social media storm that’s captured the attention of the entire world yet again.

According to revelations first made by British newspaper, The Guardian, an obscure political consultancy firm called Cambridge Analytica “harvested” reams of personal data under the guise of “academic research” from 57 million Facebook account holders.

At the forefront of this business model was Dr Aleksandr Kogan, a clinical psychologist from Cambridge University and Alexander Nix, CEO who are now both under criminal suspicion. The only problem is that it’s not clear which exact law(s) were violated.

In the wake of the accusations made by the Guardian, Facebook has scrambled to blame “rogue third parties” for “platform abuse” as part of an elaborate finger-pointing exercise. “The entire company is outraged we were deceived,” Facebook officials said in a statement last week on Tuesday.

Meanwhile, critics are claiming Facebook has been guzzling private data and offloading it to the highest bidder.

The same critics are also inclined to believe that as Facebook’s data treasure-trove mushrooms on the back of a growing user base, its staggering level of financial performance and growth over the past 6 years is given the appropriate context i.e. they’ve been cheating their way to the top.

But have they?

Book-faced

Facebook is the world’s favourite social media hub, to exchange anything (and everything) people can think of. But to make its platform truly valuable and to enable the all-encompassing interactivity it provides, Facebook needs one thing above all else from its users: data.

Trailblazing functionality, commercial traction, avant-garde service features and shareholder applause are all dependent on the number of data Facebook’s users choose to divulge with Facebook and other users of the platform.

As in all industries, difficulties tend to arise when a commodity (data) is passed on without being paid for (permission). The big difference is that data is not physical and cannot have the same limitations that (for example) a tonne of timber has.

Data can be copied multiple times, amended, and its access limited. Physical commodities have constraints that binary data doesn’t which makes managing them logistically difficult. But with metadata, it can be collected, analysed and weaponised in a short time.

The market effects of improper behaviour they wreak can be of the same magnitude. In fact, as the latest Facebook saga has shown, data breaches can potentially wreak havoc to a greater degree than stolen loot.

Cambridge Analytica whistleblower Christopher Wylie:

According to Christopher Wylie, the whistleblower at the heart of the allegations, Cambridge Analytica used financial backing from hedge fund billionaire Robert Mercer and political influence from Donald Trump’s former adviser Steve Bannon, to profile millions of people in order to launch personalised political advertisements.

The implications have been far-reaching as both the UK and the US have launched parliamentary investigations.

What to see what Facebook has on you (at a minimum)?

1. Goto https://t.co/UFPfcZwJw7
2. Click "Download a copy of your Facebook data"
3. Wait for automatic email from Facebook
4. Download the ZIP file link in the email
5. Extract it and open 'html/index.htm'

— Defend Assange Campaign (@DefendAssange) March 24, 2018

Even the anti-establishment Julian Assange is weighing in with a swipe at Facebook, with a timely tweet directing users to check what Facebook “has on you”.

Fallout begins

The US Congress and the British Parliament have summoned Mark Zuckerberg to give evidence regarding Facebook’s role in how an obscure company – Cambridge Analytica – was able to obtain personal data from over 50 million Facebook users when those same users had set those privacy settings to private.

If political scandals raise the question of who knew what and when; and economic ones raise the question of who paid for what and when — then in the rather entangled social media fiasco that has embroiled Facebook, the question being asked by market commentators and policymakers is, who clicked what and why?

How could a simple survey app downloaded by a few thousand people, allow a company to pull down the innermost details of 57 million users? More worryingly, the retrieved data was then weaponised to manipulate public opinion via targeted “psychographic” campaigns.

By knowing the intimate details of people’s lives, Cambridge Analytica played on the emotions and psychological states of its target audience, to influence their behaviour.

Put simply, it would appear Cambridge Analytica was in the business of selling subtly-veiled digital coercion to the highest bidder.

Market impact

The impact on social media, in general, has been negative with users quickly adopting calls to delete Facebook accounts en masse.

The #deleteFacebook hashtag is trending as they say in social media circles.

Exactly how many users Facebook loses as a result of this scandal is not yet clear, but Facebook shares have taken a ~10% hit thus far and its future user base is likely to think twice before agreeing to all the default privacy settings.

The other actor in this episode, Cambridge Analytica, has been raided by British authorities and is under suspicion in the US for assisting Donald Trump to romp to victory in 2016.

The whole episode has raised several uneasy questions about privacy and the intentions of social media companies offering attractive applications for people to use.

British backlash

More than a dozen investigators from the Information Commissioner’s Office (ICO) stormed Cambridge Analytica’s central London office on 23 March, shortly after a High Court judge granted a warrant.

According to several British media reports out over the weekend, the investigators were seen leaving the premises early Saturday after spending about seven hours searching the office.

The regulator said it will “consider the evidence before deciding the next steps and coming to any conclusions.” This is one part of a larger investigation by the ICO into the use of personal data and analytics by political campaigns, parties, social media companies and other commercial actors,” according to an ICO spokesman.

The ICO is apparently investigating the allegation that with Facebook’s assistance, Cambridge Analytica used private data to manipulate elections, including the 2016 US election and the 2016 Brexit vote in Britain.

Both Cambridge Analytica and Facebook adamantly deny any wrongdoing and given the lack of firm charges suggests that the only “wrongdoing” was an all-mighty data leak.

Data leaks aren’t necessarily criminal offences as such, even if there are 57 million of them, and they are used for nefarious purposes. The authorities have their work cut out.

Cambridge Analytica has acted quickly by suspending its CEO Alexander Nix after Britain’s Channel 4 News broadcast recorded video footage showing Mr Nix talking up sleazy political tactics allegedly used for decades: entrapment, bribery and ruthless opportunism with the aim of discrediting politicians.

Undercover investigation by Channel 4 News on Cambridge Analytica:

The footage also showed Nix saying Cambridge Analytica played a major role in securing Donald Trump’s victory in the US election.

Lots of people can make this claim, whereas proving why millions of Americans voted for someone (or not) is going to be rather impractical and likely to be inconclusive.

Data security and good intentions

The key questions on the lips of avid social media users are: How secure is my data? And do social media companies have good intentions?

The answer, it seems, is no on both counts which explains the storm that is enveloping not only Facebook and Cambridge Analytica but is now spreading across the populist landscape to engulf primetime market role models such as Elon Musk.

The enigmatic frontman who is leading Tesla and SpaceX in terraforming modern society has given into temptation and flat-out deleted the Facebook accounts belonging to Tesla and SpaceX.

The move has got several sections of the online blogger-sphere up in arms, as a largely symbolic rejection of Facebook’s reputation.

What’s Facebook?

— Elon Musk (@elonmusk) March 23, 2018

Facebook however, continues to make money hand over fist, reporting US$13 billion revenue in 2017 with a year-on-year growth rate of 47%. Not bad for a company with almost no physical assets and relying entirely on ad revenue.

Despite the mounting allegations against the social media giant, its commercial capability seems to have remained intact, and we could see a gradual recovery of its share price once the news cycle moves on to its next frenzy.

How Facebook shares open on Monday morning in New York will be intriguing not only for traders and investors — on this occasion, the whole world will be watching.

Fundamental market reality and subjective social media opinion

What started as a row over how Cambridge Analytica harvested data from 57 million Facebook users, has now morphed into a heated public war of words about how Facebook and other prominent internet peers collect, handle and package digital data to generate stellar multibillion-dollar profits.

Profits that have propelled Facebook into the top 5 largest companies in the world by market capitalisation and a market valuation of US$460 billion.

Take the example of Alphabet (Google’s corporate parent). The company has come to be valued at around US$712 billion in the space of 20 years, fuelled by user-generated data and ad revenue.

Facebook is only 14 years old, but its current market valuation of US$463 billion, could well continue its 45-degree uptrend after the Cambridge Analytica scandal dust has settled.

In a world where data has become a commodity that’s growing in value, companies are making it easier for people to leave bits of data at their disposal and create the potential to generate tremendous earnings, especially when aggregated and commercialised. The question is where does the responsibility lie?

Are users responsible for every click they make? Or, are data collection vendors responsible for storing data and respecting user privacy at the individual level?

It’s an incredibly complicated question involving several market functions including anti-trust, privacy, competition and cybersecurity; not to mention to geographic jurisdictions. One country’s anti-trust laws could be another country’s violation of free speech.

With so many conflicting views and competing market approaches, it is no wonder that individual cases of gross malpractice allegedly perpetrated by the likes of Cambridge Analytica are occurring with increasing frequency.

Quite suddenly, and with a severe jolt to the social media market fabric — it has become crystal clear that seemingly innocuous personal information (especially when aggregated) is worth a pretty penny to many different groups and entities. And not necessarily for commercial purposes either.

As policymakers and criminal investigators pick the bones of this latest online privacy scandal, one thing remains abundantly clear: individuals rarely identify with the priorities of the majority, and are likely to continue sharing data without reading the small print — for the benefit of commercially-minded legally-astute businessmen expert at implementing distraction and misdirection to achieve economic and political goals.

Like or dislike, it’s the way of the world.