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Disinformation May Destroy Facebook

|About: Facebook, Inc. (FB), TWTR
Summary

Disinformation may meaningful affect Facebook DAUs and its ecosystem.

Users could seek ways to break from information silos.

Network strength in APAC may be overestimated.

Current valuation seems based on a bull-case scenario.

In the past day both Twitter (TWTR US) and Facebook (FB US) published an update on how they are handling complaints of hate speech and disinformation lodged mostly at the ethnic Chinese community. See links:

Twitter: Information operations directed at Hong Kong

Facebook: Removing Coordinated Inauthentic Behavior From China

Political debate aside, I want to highlight the potential consequences of their actions. The seemingly calculated actions by Facebook could easily backfire, as explained below.

In order to the understand the dynamics and why we see this to pose a risk to FB's DAUs, I must first highlight what is disinformation. In essence, using media channels to push two differing views of an event, as a way to sway public view. The rhetoric coming from China media outlets has been meaningfully different to what many news correspondents observed on the ground. I won't drown in the details here but provide two links here for future reading:

New York Times (US): China Is Waging a Disinformation War Against Hong Kong Protesters

Independent (NASDAQ:UK): China's disinformation war is trying to turn its citizens against the Hong Kong protesters

The disinformation have created massive confusions to the public. Twitter today, besides highlighting the challenges, announced they will stop accepting advertising state-controlled news media entities.

Despite similar timing, Facebook has taken a very difference stance on the matter compared to Twitter. While they highlighted some of the offending groups, they did it more of a public relations act, rather than anything in substance. Searching on “cockroaches” in traditional Chinese (“曱甴“) and you can still easily find numerous groups that continue to promote hatred and violence, and Facebook users also continue to see numerous sponsored advertisements from state-backed entities.

In essence, despite following Twitter's press release, Facebook has not meaningfully acted to reduce disinformation on its platform. One of the groups that was shut have already mirrored itself with a different name, and continue its operations.

What's the impact by allowing disinformation? As social media platform rely on trust that the information they received are relevant to them, FB as a public platform has created more information silos, and user are as well slowing turning hostile against new and/or contrasting information flows. If the spirit of an online community is to connect the world, FB is increasingly moving away from that directive. This can have a long lasting impact to the usefulness of the platform.

Nonetheless, Facebook and WhatsApp remain two widely used platforms with high DAUs, with APAC remain its key growth driver and surpassing 600m. It remains to be seen their current ways of handling of the information, would enable them to enter the China market. In an era when messages can easily go viral, these platforms may need to take a stronger stance to ensure everyone adhere to the “Community Standards”, or risk user revolt when opportunity arise.

Are there alternative competition coming in the near term? A number of messaging apps have popped up such as Telegram or Signal, and users may migrate to other platforms that can offer better security, and frankly, better content quality.

Facebook is now trading at 21X 2019E PER based on Bloomberg consensus earnings - latest developments and inaction by Facebook may may make investors think twice if they are already pricing in a bull case scenario.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.