Should Investors Worry About the Facebook Scandal? – Guest editorial
Leverate’s Amram Margalit takes the view that any stockholder should analyze the situation and decide whether he still trusts Facebook and other data-storing giants. This trust – from users, advertisers and investors – would eventually be the key factor which will decide the value of Facebook in the future.
By Amram Margalit, Leverate
In a surprising turn of events, Facebook finally came face to face with the skeletons in its closet. Mark Zuckerberg stood before Congress, with an almost disoriented look on his face that was highlighted on every social forum, including – how ironically – Facebook.
In the aftermath of these events, Facebook lost more than $100 billion of its market value, compared to its February 1 peak. Amid the political riot caused by the revelation that 87 million Facebook users’ data was used to devise a campaign in support of Donald Trump, investors are trying to analyze the repercussions of the Cambridge Analytica controversy from their point of view.
What worries investors most is the loss of revenue due to what advertisers call the “credibility erosion” of ads and ad sources on Facebook, as well as the increased expenditure Facebook would need in order to monitor and police its site from now on. Investors also worry that other social media giants such as Twitter and Google would have to bear the brunt in the form of tougher regulations and limitations in the future.
If stricter regulations would not be imposed, users might lose confidence in Facebook, reducing their click-through rate, and thus reducing advertising rates on the site and in social media in general.
The scandal would also definitely affect the sites that come under Zuckerberg’s empire including Instagram and WhatsApp. So far, there haven’t been signs of mass departure of users from Facebook and its subsidiaries, but if this worst case scenario happens, there’s no doubt that advertisers and investors will soon follow suit. In order for Facebook to continue to strive, adverts need to keep running.
Goldman Sachs’ analysts have already predicted earlier that Facebook could lose 7% of its revenue due to the upcoming GDPR – the new European data protection regulations coming into effect this May.
But there are others who claim that the dynamics will change in favor of Facebook, with the new regulations fortifying its position at the top by making life harder for smaller competitors. In a tight regulatory environment, advertisers would have a hard time finding an alternative that holds that much user data as Facebook.
Which forecast will materialize depends on whether the new limitations would cause a major shift in the entire online marketing world. Meanwhile, investors are questioning whether social media would remain free of cost in the future, should user-targeted advertising become less relevant.
At the end of the day, every stockholder should analyze the situation and decide whether he still trusts Facebook and other data-storing giants. This trust – from users, advertisers and investors – would eventually be the key factor which will decide the value of Facebook in the future.
If all involved would keep business as usual, Facebook will cope with the crisis far better, even with the possibility of major regulatory changes. After the evident violation of our good faith, restoring it remains Facebook’s greatest challenge.
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