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What Does Facebook’s Cambridge Analytica Scandal and Valuation Drop Mean for Advertising?

With a 3-step plan, Mark Zuckerberg hopes to address the scandal and rebuild public trust, but the effects on the platform's advertising channels can already be felt.

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By now, most people are aware of the Cambridge Analytica scandal and the recent historical drop in Facebook’s stock price and valuation. For those who aren’t familiar with the situation, here’s a brief timeline:

March 17, 2018 – The Guardian and The New York Times report that as many as 87 million Facebook profiles were harvested for Cambridge Analytica. Christopher Wylie, co-founder of Cambridge Analytica, claims that the data sold to the company was used to build psychographic profiles of people and then deliver pro-Trump content to them online.

March 21, 2018 – In a Facebook post, Mark Zuckerberg addresses the Cambridge Analytica scandal. Zuckerberg outlines a three-step plan to solve any future misuse of user data:
1. Investigate any third-party apps that had access to large amounts of information before Facebook’s platform change in 2014
2. Restrict developers’ access to user data
3. Provide users with a tool that shows them what apps have access to their data

April 10, 2018 – Zuckerberg testifies before a joint session of the Senate Commerce and Judiciary committees in what turns into a long and awkward conversation between older Senators that seem out of date with modern social media and a very nervous Zuckerberg.

April 25, 2018 – Despite the backlash from the Cambridge Analytica scandal, Facebook reports Q1 earnings well above analysts’ estimates. In a conference call that afternoon, Zuckerberg reflects on the earnings report, “Despite facing important challenges, our community and business are off to a strong start in 2018. 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.”

July 26, 2018 – Following the first full quarter after the Cambridge Analytica scandal, Facebook loses about $119 billion of its value as the company’s share price drops by almost 19% marking the biggest single day drop in U.S. market history.

Declining User Growth Across the Platform

One main reason investors are losing confidence in Facebook is the declining user growth on the platform. Daily average users did increase by 11% in the second quarter, but according to Bloomberg, the total number of daily average users dropped about 10 million short of analysts’ expectations with U.S. and Canada seeing no growth in its user base.

This speaks to Facebook’s market penetration in North America, but more importantly, users are losing their trust in Facebook. According to a recent Reuters poll, less than half of Americans trust Facebook to obey U.S. privacy laws. Even prominent Silicon Valley figures such as Elon Musk and Brian Acton, founder of WhatsApp, have encouraged people to delete their Facebook profiles.

Facebook Cambridge Analytica

What This Means for Advertising

Advertising has flourished in recent years because of the evolution of big data and continually growing access to consumer data. Consumers have been willing to share personal information in exchange for more meaningful content from brands. This process of data collection has been largely transparent, but with the rise of social media platforms, that transparency has been lost.

Facebook in particular has always been more than willing to give advertisers access to user data because of its reliance on advertising as a revenue source. In fact, mobile advertising is currently responsible for 90 percent of Facebook’s revenue. Facebook has built its business around balancing user’s needs with those of advertisers. After the Cambridge Analytica scandal, it looks like Facebook is going to overwhelmingly put users’ needs ahead of advertisers’.

So, what does this mean for advertisers going forward? The good news is that Facebook can’t afford to completely remove advertising from the platform, but they will try their best to change the landscape of advertising in favor of users. As Facebook tightens its privacy controls, highly targeted advertising will become a harder task for advertisers.

In the past, advertisers have had access to third party data providers to build audiences. These third-party providers will soon be removed, and advertisers will either have to rely on less targeted ad placements or use interest-based targeting to build their audiences. Interest-based targeting allows advertisers to target people interested in a subject related to your product.

However, interest-based targeting may not always target the audience you want. For example, if a company that sells makeup wants to target female users in the 18-34 range they might build an audience that has Taylor Swift as an interest. This seems like a solid strategy, however Taylor Swift has plenty of male fans as well. With Taylor Swift set as an interest, the makeup company will reach its target demographic, but their audience may also include male fans of Taylor Swift that have no intent of buying makeup products.

Advertisers can add multiple interests to an audience to hedge against this from occurring, but there might still be instances of irrelevant targeting because of the loose logic of interest-based targeting.

The permanent effects of the Cambridge Analytica scandal on Facebook’s revenue and user growth is still to be determined as Facebook rolls out the three-step plan that Zuckerberg has envisioned. If Facebook is able to properly manage user’s expectations of how their data is being used then it will still be a viable platform for advertising, however restrictions on how user data can be used for advertising are on the way.

As artificial intelligence and machine learning techniques continue to evolve the way we target consumers, advertisers and Facebook will have to carefully manage consumers’ perception of how their data is being used.

 

Shahzeb Arif is an analytics manager at FortyFour. 

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