Facebook and Other FANG Companies Under Pressure: Data Mining Scandal Could Burst Tech Bubble
Facebook stock lost about 11% of its value in less than 48 hours. Is Wall Street about to experience the implosion of a new tech bubble? Or are the FANG stocks, which have made double-digit gains since the start of 2018, going to blow up? FANG is an acronym for the market’s biggest leading technology companies: Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOG), the parent company of Google.
Many analysts have avoided the subject of a tech bubble. After all, the last such event provoked a major stock market crash (in 2000). Thus, the focus of the explanation for Facebook stock’s dramatic bearish turn rests on a scandal involving data manipulation and privacy. The case touches on “Russiagate.”
But it also shows two things. The first is that social media platforms are used for new forms of “mining.” The treasure they produce is information and, depending on the level of manipulation, the information can become highly valuable.
Facebook Was Always Going to Be a Target for Data Miners
Facebook is the largest data mining operation in the world, containing the most precious nuggets of information. Still, government officials—and investors—may prefer the discussion to remain in the realm of data privacy because there are other problems that it helps to mask. The main one is the insignificant amount of tax that many FANG companies pay. The subject has come up at the G20 summit in Argentina.
Few are aware that companies like Facebook, Google, or even Amazon pay too little in taxes, exploiting their multinational standings. This is at a time when the governments of the richest countries in the world are growing more concerned about the rising income disparities or inequalities. (Source: “Australia warns G20 leaders the digital economy is ‘no tax-free club’,” ZDNet, March 20, 2018.)
These exacerbate social tensions. For the time being, mainstream politicians are realizing that almost all recent political elections in the West have produced problematic results for their parties (left, center, or right). Those among them who have done their homework will stress the need for fair taxation of FANG companies. Others—and they will prevail for the immediate future—will focus on the media angle and the breach of privacy.
Facebook Will Be Made a Scapegoat
Facebook and other social media platforms will serve as the main cushion of public outrage.
A campaign—ironically using another social media platform (“Twitter”) as its vehicle—has already begun: #DeleteFacebook. This could help deflect the attention from some FANG stocks and lay the blame squarely on Facebook. The advantage is clear: it would limit the impact and prevent the tech bubble from imploding—or exploding. (Source: “#DeleteFacebook Is Trending, Is This the End of the Social Network?,” Newsweek, March 20, 2018.)
The argument that will likely grab the scenes is the following: Facebook, far from being the social platform where friends and family members could reunite and share aspects of their lives, serves corporate interests.
Some might notice that Facebook is a corporate entity with shares trading on Wall Street, so why should that be surprising? They might even defend Facebook. It offers a free service in exchange for data. Yet you probably learned long ago that there’s no such thing as a free lunch or a free service. Somebody always pays.
Indeed, there will be an effort to isolate Facebook. This is not merely to prevent a major stock market crash, which would inevitably happen as a side effect of the bursting tech bubble. There are political intrigues that must be upheld, even if any Google search will reveal that Donald Trump’s presidential campaign managers made a highly effective use of social media, trying to understand what voters’ concerns were.
The Use of Data Mining Is Not a Surprise
Trump used the services of Cambridge Analytica, which had links to Trump in the form of Bob Mercer, one of his main donors. It’s a mystery why the fact that campaign manager Steve Bannon used Cambridge Analytica effectively to help his candidate win has blown up to such effect now. It was well documented in 2016, if not earlier. (Source: “Data firm in talks for role in White House messaging – and Trump business,” The Guardian, November 23, 2016.)
Feigning surprise that Cambridge Analytica would target Facebook and other social media platforms might also be described as rich or disingenuous. Why would anyone be surprised? That’s what social media does; it reveals preferences. That’s what it means to Like a post. It makes sense. Before the advent of social media, campaigners had to hit the pavement and gather such information manually.
As with everything else these days, the Internet is a huge mine of information. Frankly, why there is such surprise, shock even, at the fact that Facebook details were used to help a candidate win an election might be the bigger question. It’s a mystery and I’m not up to the task now. Psychologists the caliber of Carl Jung or Sigmund Freud are needed.
Strange causes or not, the blowback has begun against Facebook. Whether you voted for, like, or even pay attention to President Trump is not the point. Facebook may have met its first major “Waterloo.”
Rather than self-questioning or really trying to understand what voters care about, the main political parties are targeting the means of success. (And this goes for the Democratic and the Republican parties—Trump is an outsider to both; he only used the Republicans as commuters use a bus, to reach his destination.)
Russiagate, Pavlovian Reflexes, and the Real Risks to FANG Stocks
Many users, triggered by the same collective Pavlovian reflex that has made the Russiagate molehill into a Himalaya-worthy mountain, will suddenly discover that they share personal details online and, for a few hours, might actually succeed in staying away.
But those to look for are the financial analysts. This breed of human will discuss the “astonishing” discovery that Facebook has a privacy and data problem, in technical terms.
The stress will be on Facebook itself and perhaps its CEO Mark Zuckerberg. Facebook’s Chief Security Officer Alex Stamos has already resigned. (Source: “Facebook’s security chief is leaving after clash over Russian misinformation,” The Verge, March 19, 2018.)
The markets reacted by stopping the hemorrhage of Facebook stock on March 20. Will that be sufficient? Not if the media has a say. They want to get back some of the influence that Facebook has stolen from them. The “Zuck” will produce more scapegoats in order to feed their hunger and bloodlust.
Meanwhile, to avoid the tax question, the U.S. government will note that Facebook and social media outlets in general have become too vulnerable to manipulations. Political groups and foreign governments’ interest and use of social media will lead Congress to demand more controls and measures against data breaches. But, realistically, how could that work now? There’s an entire generation of early teenagers who have never known a world without social media. Why is anybody surprised?
The European Union (EU) parliament will also demand explanations and assurances from Facebook. Nevertheless, it’s the EU and the other G20 countries, like Australia, which will have the more financially loaded questions.
Analysts might look to this moment—in retrospect—as the “black swan” or tail risk event that caused the FANG or tech bubble to burst. Of course, no tech bubble can survive in isolation. It follows that a major stock market crash would follow. But let’s focus on the FANG companies.
No More Tax-Free Club for the FANG Companies
Given that most social media companies—except for a handful of Chinese ones—in the G20 are American and are listed on Wall Street, the other G20 countries have little to lose. They may even use the occasion to break up the big social outlets like Facebook into more manageable pieces. Even so, the G20 will work harder to impose a new tax regime on Facebook and the other big multinational firms like Amazon and Netflix.
They will not secure results right away. But, especially in the face of Trump’s new international tariff game, they will insist that the FANG and other “new economy” companies can no longer remain exempt—for all intents—from taxation. The G20 is out to break the tax-free club. The first steps could come early enough. They could include a tax on gross sales, depending on where users reside. (Source: ZDNet, op cit.)
As common sense as that appears, such a tax—not to mention what could come later—contrasts sharply with the United States. Congress and Silicon Valley, Republican and Democrat, will shout that they cannot be expected to pay taxes that inhibit the tech sector from growing. As a reminder of the stakes, the FANG sector has seen some remarkable stock developments since the start of 2018. Netflix has gained some 65% and Amazon has risen 32%. Facebook is merely the first to meet an obstacle.
Facebook has remained a target for bears as allegations that Russian operators have reached out to American voters with ads and fake news persist. The Senate and House Commissions have gotten involved, launching inquiries. But Zuckerberg has managed to stay away. How long will he be able to stay away? The sight of Zuckerberg testifying before Congress could be the trigger for a massive FANG sell-off and the burst of the tech bubble. Be vigilant.