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Grahamites
Grahamites
Articles (328) 

The Facebook Dilemma

Why the social media giant's growth brought complicated issues

September 16, 2019 | About:

In my previous article, I wrote about my process of exploring the answers to three of the big-picture questions regarding Facebook Inc. (NASDAQ:FB). Now I’ll share my notes from a fabulous documentary regarding the social media giant, which helped me tremendously in terms of seeking answers to three other big-picture questions enlisted from my article on the four levels of information:

  • What threats has Facebook brought to governments all around the world?
  • Has Facebook brought dramatic changes to how democracy works?
  • Is Facebook incentivized to mishandle users' private data?

The documentary I mentioned above is a two-part Frontline series called "The Facebook Dilemma," which was directed by James Jacoby. The documentary recounted the miraculous rise of the social media giant and the high cost and dramatic issues that came along with its meteoric profit growth, especially after the company went public. I admire what Mark Zuckerberg has achieved - taking Facebook from a website that connected college students to a social media empire that serves as an important news source for billions of people around the globe.

As I mentioned in my previous piece, Facebook’s engineers designed products that are almost irresistible. In the documentary, one previous Facebook employee said the company's News Feed, which is generated by a proprietary algorithm called "the secret sauce," truly propelled its growth. The other “secret sauce” is the use of the "Like" button. As a review, below are the tricks employed by Facebook’s engineers:

  1. Compelling goals that are just beyond reach.
  2. Irresistible and unpredictable positive feedback.
  3. A sense of incremental progress and improvement.
  4. Tasks that become slowly more difficult over time.
  5. Unresolved tensions that demand resolution.
  6. Strong social connections.

The irresistible nature of the platform, together with Zuckerberg’s inspirational motto (move fast and break things) and mission (making the world more open and connected) were among the major factors that contributed to Facebook’s unprecedented user expansion. Connecting billions of people around the world is an absolutely great achievement. There’s nothing wrong with it. But as the user base expands exponentially, the opportunities to manipulate the platform also grew. Facebook’s attitude and approach in terms of dealing with what Naomi Gleit (current Facebook human resources executive) describes as ways in which Facebook might be used for bad things, that’s deeply troubling and concerning. Zuckerberg has consistently refused to recognize the enormous influence Facebook has and the responsibility that comes with that. "They took over the role of editing without the responsibility of editing," one of the interviewees Jacoby spoke to said.

To take on the editing responsibility, Facebook would have to hire a lot of moderators. But after the company went public in 2012, it had to maintain super-fast profit growth, so hiring a lot of moderators was in direct conflict with the profit growth goal. Meanwhile, Facebook’s management team didn’t think of the company as the problem. As Jacoby said, not beefing up the surveillance team was “in part, to keep costs down and, in part, because ideologically they didn’t think of themselves as responsible for what people were doing there…We’ve heard this from insiders that were there at the time, the company took a much more hands-off approach as soon as Wall Street got involved.”

Truly disturbing events surely followed in the years after Facebook’s IPO:

  • Fake news generated on Facebook played a role in the horrifying genocide of the Rohingya Muslims in Myanmar.
  • Fake news on Facebook was manipulated to trigger violence and political opposition in the Philippines.
  • Macedonian people were paid to generate disinformation regarding ludicrous news stories, such as the one about the pope endorsing then-presidential candidate Donald Trump.
  • The Cambridge Analytica scandal.
  • Russia’s spreading of misinformation on the social network to foment distrust in Ukraine’s new administration and to promote support of Russia’s invasion and occupation of parts of Ukraine.
  • Concerns about Russian interference in the 2016 U.S. presidential election.

Now you can see why Zuckerberg had to testify before Congress. When I watched it on YouTube, I muted the video and noticed how nervous and unsettling Zuckerberg was, almost throughout the process. As Jacoby observed: “There were various points in time where they didn’t invest the energy, the thought and the resources to figuring out what to do with a what is a very difficult set of problems. It’s only now that they’re starting to deal with these issues that are so complicated.”

Conclusion

Facebook has been a darling on Wall Street, and many investors I admire are shareholders of the company. The financial numbers have been great and advertisers love Facebook’s platforms. But I’ve seen very few discussions within the investment community regarding the real long-term risks the social media giant is facing. Serious long-term Facebook investors should ask themselves whether they are comfortable with the complicated issues the company is facing and whether they are comfortable with a management team who has been slow to catch up with the issues and acted only upon the forces of public pressure. It’s probably in the too-hard pile, to say the least.

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About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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