Facebook Cuts Third-Party Data Providers From Ad Targeting

Summary

• FB is expected to cut third-party data providers from ad targeting.
• This could hurt advertisers' ability to effectively target Facebook users. Third-party data providers could become FB competitors.
• FB is also expected to block fake accounts which could hurt MAU growth.
• Such moves could negatively impact revenue or reduce the value of FB's social network.
• Sell FB.

Source: The New York Times

Facebook (FB) is in the midst of a public relations firestorm over who has access to its user data and how they use it. The company has now decided to stop using third-party data providers like Experian (OTCQX:EXPGY) and Acxiom (ACXM) for ad targeting:

Facebook says it will stop using data from third-party data aggregators — companies like Experian and Acxiom — to help supplement its own data set for ad targeting.

Facebook previously let advertisers target people using data from a number of sources... Facebook confirmed the move in a statement attributable to Graham Mudd, a product marketing director at the company.

”We want to let advertisers know that we will be shutting down Partner Categories,” Mudd said in the statement. “This product enables third-party data providers to offer their targeting directly on Facebook. While this is common industry practice, we believe this step, winding down over the next six months, will help improve people’s privacy on Facebook.”

The decision comes after Cambridge Analytica, a political consulting firm in the U.K., did digital work for Donald Trump's 2016 presidential campaign and allegedly used Facebook data to target voters.

Could It Impact Revenue?

In deciding to stop using third-party data providers, Facebook did not divulge [i] the amount of revenue it generates by aggregating data from third-party data providers or [ii] how much of the ad dollars it shares with companies like Experian or Acxiom for the right to supplement their data with Facebook's. Recode implies Facebook receives ad money for the bundled data and gives some of it to third-party data providers:

Data from third-party services like Experian, which can collect offline data such as purchasing activity, that Facebook uses to help supplement its own data set. When marketers use this data to target ads on Facebook, the social giant gives some of the ad money from that sale to the data provider.

I am sure Facebook is not supplementing its own ad data with third-party data for no reason. Data from those companies likely allow advertisers to [i] better target Facebook users and [ii] better predict who is most likely to respond to a particular ad.

Facebook has over 2 billion monthly active users ("MAUs"). By layering in data from Experian and Axciom, advertisers could potentially mine Facebook user data and place targeted ads that are cost effective. Sans third-party data, an advertiser's programming model could be less predictive of how many and which Facebook users would respond to an ad. It could potentially make ads less cost effective and make Facebook's platform less valuable to advertisers.

Could Third-Party Data Providers Become Facebook Competitors?

In the case of third-party data providers, to make up for lost income for not being able to bundle their data with Facebook's, they may have to sell their data to advertisers a la carte. Having more data providers chasing the same ad dollars could take some revenue from Facebook or cause a decline in ad rates. Either way, it could have a negative impact on Facebook's nearly $13 billion in quarterly ad revenue.

Is The Social Network Less Valuable Now?

The true value of Facebook's network is the ability to connect people. The company can connect its 2 billion users with one another. It can connect advertisers with consumers and advertisers with third-party data providers who opt into Facebook's ecosystem. Facebook's business model is tailored around building its social network, creating a web of connections and mining users' personal data to attract advertisers and third-party apps. Monetizing this data and using it in any way the company deems fit makes its network strong. Undermining any one of these processes could weaken it.

I understand that Facebook does not sell user data; it was likely leaked to Cambridge Analytica from someone who had access to Facebook's user data. Maybe a thirty-party app provider sold the data against Facebook's policy. That said, if in protecting user data Facebook deters certain third-parties from interacting with its network, it could potentially weaken the "network effect" and lower the value of the network.

Facebook Tamping Down On Fake Accounts

At year-end 2017, Facebook had $2.1 billion monthly active users, which grew 14% Y/Y. The chance to reach billions of users on one platform is almost too lucrative for advertisers to pass up. The account growth is also attractive to investors who still see FB as a growth stock. A key question is, "How many of those accounts are fake?" I have heard this question asked about Facebook in the past; however, I never believed the company had an incentive to root out fake accounts.

Per Recode Facebook is creating a detailed plan to fight interference in the 2018 midterm elections, including blocking fake accounts:

Facebook is trying to prevent bad actors from getting started at all. The company says it’s blocking “millions of fake accounts each day at the point of creation.”

If the company blocks millions of fake accounts, then it could cause the growth in "reported" MAUs to slow or even reduce the MAU count. This could make the site less valuable to advertisers and potentially cause investors to cool to the stock.

Conclusion

The changes being contemplated by Facebook could reduce the value of its social network and/or hurt MAU growth. FB is up over 10% Y/Y, but the stock could fall now that its business model has come under scrutiny. Sell FB.

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