The Latest Scandals Show Why Facebook Is Invincible
September has been a terrible month for Facebook (NASDAQ: FB) as the brand has been dragged through the mud on two separate scandals.
First, the social network was found to have allowed inauthentic Russian ads on its website that tried to influence voters during the presidential campaign. Facebook and CEO Mark Zuckerberg had vigorously denied that its website had been infiltrated, but an internal investigation revealed that about $100,000 had been spent on about 3,000 ads posing to be from activists, but that were really from Russian sources.
A week later, a ProPublica investigation found that the social network's ad-targeting allowed advertisers to select anti-Semitic users.
Both items stoked outrage against the social media giant and once again painted a portrait of a company whose influence was out of control, being run by algorithms instead of people.
Facebook exacerbated the problem by initially refusing to share the bulk of the Russian ads, though it later said it would. The news also increased calls for greater oversight and regulation of Facebook, and similar demands have been building for other tech giants like Alphabet and Amazon.com.
You might think such news would roil Facebook shares, but the stock has barely flinched in the last month.
Facebook remains just a few points away from its all-time high.
A bulletproof business model
Plenty of analysts have said that such events make Facebook vulnerable, but the company has a base of 2 billion users around the globe, many of whom go on the social network every day. They depend on Facebook and its products to communicate with friends and family, share photos, and follow the news.
Really, the only way such scandals could hurt Facebook is if they force it to lose users or advertisers.
While millions of Facebook users are likely dismayed that the social network became a pawn in the election, or that its algorithm was used in a racist way, those incidents ultimately don't affect their experiences with the social network, so it's unlikely to change their behavior.
Even if they were disgusted enough with Facebook to leave it, they would most likely switch to Instagram, a Facebook property that is the world's second most popular social network and now has 800 million users. Instagram Stories has also succeeded in neutralizing the threat from Snap Inc's (NYSE: SNAP) Snapchat, which is the closest thing to a rival Facebook has faced in years.
As far as messaging apps go, Facebook also dominates there thanks to WhatsApp, which has over 1 billion daily users. In other words, it's not so easy to find Facebook's services like messaging and photo-sharing elsewhere.
Advertisers, meanwhile, follow eyeballs, and they are unlikely to abandon a platform with 2 billion users, especially when it allows for such precise targeting. Want to get your message out to female wine drinkers, ages 25-34, in a specific zip code? Facebook can do that, and it does it better than anyone else. The information on its users and that targeting capability has separated the company from competitors like Twitter (NYSE: TWTR) and Google, who just don't have the same level of user knowledge and therefore can't match its targeting.
Finally, the regulatory threat seems minimal at this point. Though Facebook may be something of a social media monopoly, especially with its ownership of Instagram and WhatsApp, it's not one that can easily be broken up. Making 10 smaller Facebooks instead of one big one would not be in the public interest, and the company's massive user base is not eliminating choices or raising prices for either consumers or advertisers -- Facebook's real customers.
In the aftermath of the Russia scandal, the social network announced changes to how it will handle political ads. The company said it would make those ads viewable by anyone, not just those who are targeted, and said it would require political advertisers to disclose funding, a rule that currently applies to television ads but not social media.
Those changes should quell the uproar for now, but Facebook will likely face similar challenges as its importance and influence in the media grows. While this is probably not the last time Facebook will spark outrage, investors should take heart knowing that such events do little to threaten the company's underlying business.
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