Did Cambridge Analytica Debacle Kill Facebook’s Business Model?

Will It Hurt Facebook’s Revenue

I doubt the loss of two or three clients could dent Facebook’s quarterly revenue. For now what matters most are (“MAUs”) MAU growth. At Q4 Facebook had 1.4 billion daily actively users (“DAUs”) and 2.1 billion MAUs. Both metrics grew Y/Y by high single-digits. One of the first things I noticed was that user growth had slowed. The company’s MAUs were not much higher than the 1.94 billion it had at Q1 2017.

Source: techcrunch

The slow down in Facebook’s month-over-month user growth was not lost on Techcrunch editor Josh Constine either:

Facebook now has 1.4 billion daily users, up 2.18% compared to growing 3.8% to 1.37 billion users in Q3. That’s a sizeable slow down, and the lowest quarter-over-quarter percentage daily user growth ever reported by the company.

That could be because CEO Mark Zuckerberg says Facebook made changes including showing fewer viral videos “that reduced time spent on Facebook by roughly 50 million hours every day.” That equates to 2.14 minutes per daily user per day, or 5% of total time spent on Facebook. The viral video changes triggered Facebook’s first-ever decline in daily active users in the US & Canada region, which saw a 700,000 user decline.

The month-over-month slow down was to be expected after Facebook reached a critical mass of users. In my opinion, the biggest risk to advertising on Facebook is that users may not be as engaged as one would like. The MAUs and MAU growth do not necessarily measure [i] user engagement, [ii] how long a subscriber spent on watching a Facebook ad or video or [iii] if a brand is associated with negatively-charged content. I doubt a maker of bath salt would want its brand associated with the “bath-salt challenge” popularized by teens.

The Cambridge debacle raises several questions. “Did Facebook know what Cambridge was doing with its user data? Were customers aware of the level of third-party developer access to users’s data?” If Facebook hid these details from institutions and/or users then what else could it be hiding? The next stage of transparency will likely surround the level of engagement pursuant to Facebook ads. I expect advertiser to push for metrics on how engaged users are and will likely ask for it at a granular level. If Facebook cannot provide it then it could behoove customers to assume the worst – [i] users are not as engaged with the ads as once assumed and/or [ii] user engagement level is on the decline.

Conclusion

The Cambridge debacle could cause customers to push for more transparency over how engaged users are with Facebook ads. If the company cannot provide it then it could be catalyst for advertisers to abandon Facebook ads for more traditional media. Paying for ads based on MAUs and MAU growth may not cut it anymore. Questions over the effectively of Facebook’s business model could reduce revenue and earnings and potentially cause the stock to fall further. Avoid FB.