Facebook: The European GDPR Regulation Problem

Mar. 27, 2018 9:42 AM ETMeta Platforms, Inc. (META)GOOG, GOOGL, TWTR39 Comments
George Kesarios profile picture
George Kesarios
12.02K Followers

Summary

  • The Cambridge Analytica incident that put FaceBook in the news recently is a past event.
  • However it has opened the discussion if social media platforms need regulation.
  • The Europeans are about to introduce such regulation that has been in discussions for over 5 years.

The recent Cambridge Analytica incident that opened the floodgates for Facebook (FB) shares is in itself not the problem. We all knew companies and advertisers were using user data in all sort of ways for many years now. Perhaps not is such a provocative way, but it was happening.

In a nutshell, Cambridge Analytica used apps to not only harvest user information, but also friends of friends' information. Again, that in itself might not be the problem, if users themselves were aware of it.

The problem is the change in perception, pertaining to the way personal information is used, and who can use this information.

According to published articles and sources over the past several years, FB offers advertisers 98 data points to try to sell you something. The list is as follows:

1. Location

2. Age

3. Generation

4. Gender

5. Language

6. Education level

7. Field of study

8. School

9. Ethnic affinity

10. Income and net worth

11. Home ownership and type

12. Home value

13. Property size

14. Square footage of home

15. Year home was built

16. Household composition

17. Users who have an anniversary within 30 days

18. Users who are away from family or hometown

19. Users who are friends with someone who has an anniversary, is newly married or engaged, recently moved, or has an upcoming birthday

20. Users in long-distance relationships

21. Users in new relationships

22. Users who have new jobs

23. Users who are newly engaged

24. Users who are newly married

25. Users who have recently moved

26. Users who have birthdays soon

27. Parents

28. Expectant parents

29. Mothers, divided by "type" (soccer, trendy, etc.)

30. Users who are likely to engage in politics

31. Conservatives and liberals

32. Relationship status

33. Employer

34. Industry

35. Job title

36. Office type

37. Interests

38. Users who own motorcycles

39. Users who plan to buy a car (and what kind/brand of car, and how soon)

40. Users who bought auto parts or accessories recently

41. Users who are likely to need auto parts or services

42. Style and brand of car you drive

43. Year car was bought

44. Age of car

45. How much money user is likely to spend on next car

46. Where user is likely to buy next car

47. How many employees your company has

48. Users who own small businesses

49. Users who work in management or are executives

50. Users who have donated to charity (divided by type)

51. Operating system

52. Users who play canvas games

53. Users who own a gaming console

54. Users who have created a Facebook event

55. Users who have used Facebook Payments

56. Users who have spent more than average on Facebook Payments

57. Users who administer a Facebook page

58. Users who have recently uploaded photos to Facebook

59. Internet browser

60. Email service

61. Early/late adopters of technology

62. Expats (divided by what country they are from originally)

63. Users who belong to a credit union, national bank or regional bank

64. Users who investor (divided by investment type)

65. Number of credit lines

66. Users who are active credit card users

67. Credit card type

68. Users who have a debit card

69. Users who carry a balance on their credit card

70. Users who listen to the radio

71. Preference in TV shows

72. Users who use a mobile device (divided by what brand they use)

73. Internet connection type

74. Users who recently acquired a smartphone or tablet

75. Users who access the Internet through a smartphone or tablet

76. Users who use coupons

77. Types of clothing user's household buys

78. Time of year user's household shops most

79. Users who are "heavy" buyers of beer, wine or spirits

80. Users who buy groceries (and what kinds)

81. Users who buy beauty products

82. Users who buy allergy medications, cough/cold medications, pain relief products, and over-the-counter meds

83. Users who spend money on household products

84. Users who spend money on products for kids or pets, and what kinds of pets

85. Users whose household makes more purchases than is average

86. Users who tend to shop online (or off)

87. Types of restaurants user eats at

88. Kinds of stores user shops at

89. Users who are "receptive" to offers from companies offering online auto insurance, higher education or mortgages, and prepaid debit cards/satellite TV

90. Length of time user has lived in house

91. Users who are likely to move soon

92. Users who are interested in the Olympics, fall football, cricket or Ramadan

93. Users who travel frequently, for work or pleasure

94. Users who commute to work

95. Types of vacations user tends to go on

96. Users who recently returned from a trip

97. Users who recently used a travel app

98. Users who participate in a timeshare

Source

Obviously one of the reason for FB's success as an advertising platform stems from the number of datapoint available to advertisers. In addition, FB also offers the best geographic targeting.

The main question that should be answered by us as a society is, if advertisers should have access to all this information.

My answer is that this should be up to the individual. Users should have the option to let FB forward this information to advertisers or not. This because some feel comfortable with third parties having this information, other do not.

The next question is, should the government regulate social platforms like FB, so as to allow certain kind of advertising or not.

The answer is yes it should. Besides the fake news, fake products, or illegal products that are rampant on social platforms, hate groups have been allowed to operate on them, as have terrorist organizations in many instances.

You cannot advertise fake products, unregulated products, or hate views on regular television. As such, some regulation is in order, even if FB has already taken steps to clean house.

Also, irrespective if FB cleans house or not, it should not be allowed to self-regulate itself. No I am not a big government fan (quite the opposite), but that's what governments are supposed to do.

The importance of European GDPR regulation (General Data Protection Regulation)

GDPR is the most comprehensive law governing social media over the past 20 years. By most accounts, Europe is ahead of the U.S. in social media regulation. Most commentators I heard think that for once the U.S. will probably follow Europe in this respect.

The most important aspect of GDPR that will affect FB, and every other social platform, including Alphabet (GOOG) (GOOGL) and Twitter (TWTR), is that of consent.

From GDPR's site:

Consent

The conditions for consent have been strengthened, and companies will no longer be able to use long illegible terms and conditions full of legalese, as the request for consent must be given in an intelligible and easily accessible form, with the purpose for data processing attached to that consent. Consent must be clear and distinguishable from other matters and provided in an intelligible and easily accessible form, using clear and plain language. It must be as easy to withdraw consent as it is to give it.​

So for example, out of the 98 datapoints FB collects on us, users would have to agree that FB is allowed to collect them. Also, users might consent to only several datapoints, and not all 98.

So for example, I might agree through a Q&A process to permit FB and its advertisers to only see where I am located, my age, and gender. So instead of 98 datapoints, advertisers will only have 3.

Is this less appealing to advertisers? Of course it is, and chances are that they will pay less for those 3 datapoints as opposed to 98. So yes, on a forward looking basis, chances are that FB will face strong revenue headwinds.

Another problem is compliance. FB and other social media platforms will have to spend a lot of money on compliance. This will involve both hiring more people, and spending money on software. Yes, this in the long term will bite into earnings.

European officials said FB will not be reprimanded for the Cambridge Analytica case this time, because the regulation is not yet in effect. However please note that GDPR is going into effect on May 25, and companies will have a 2 year grace period to comply.

And it is my opinion that sooner to later the U.S. will have similar laws governing the collection of personal information and use thereof.

Bottom line

Eventually social media platforms will be regulated, especially as per the collection and use of personal information.

European GDPR regulation is a work in progress for over 5 years now, and has nothing to do with the Cambridge Analytica incident.

Chances are FB and other platforms will spend a lot of money on compliance in the future that will to some extent eat into their earnings.

FB's advertising appeal in the future might come into question, if advertisers deem that fewer user datapoints are worth less.

As such, FB's valuation has been called to question by the market, because we do not yet know if all the above will affect its advertising revenue in the future.

Many commentators have pointed out that Europe is ahead in social media regulation, and that GDPR regulation will eventually be adopted by the U.S. and by many other countries.

FB shares might look like a great bargain, however with future revenue growth and profitability in question, market participants are better off remaining on the sidelines until the dust settles, and we get a more complete picture of how regulations might affect FB's business model in the future.

This article was written by

George Kesarios profile picture
12.02K Followers
I only look at stocks that have the possibility to double over a twelve month period and stocks in which the risk/reward ratio payout is high. In addition I focus on swing trade opportunities. I focus more on valuations and risk/reward metrics as opposed to what make companies tick. I have been a professional investor for over 20 years and during the past several years an economics analyst and financial writer for capital.gr, the biggest economic news portal in Greece. I have managed money from time to time and have also done some seed venture capital projects in the past.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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