Part 1: Oh Zuck (#004)


The Creator

The movie “The Social Network” does a good, albeit not completely accurate, job of telling the story of how Facebook was created. In the last act of the movie, Jessie Eisenberg playing Mark Zuckerberg remarks to an attorney “I invented Facebook”. The same sentiment was on display at when Mark Zuckerberg appeared in front of the Senate Judiciary and Commerce Committee:

“[…] Advertisers and developers will never take priority over that as long as I’m running Facebook.

[…] I started Facebook when I was in college.

[…] I believe deeply in what we’re doing. […] I know we’ll look back and view helping people connect and giving more people a voice as a positive force in the world.   

I realize the issues we’re talking about today aren’t just issues for Facebook and our community — they’re challenges for all of us as Americans.”

That sounds like there’s a lot of trust that we need to put in Mark Zuckerberg. And it is really just about him. Mark Zuckerberg holds around 16% of Facebook’s equity, but with the help of some creative accountants and lawyer, he retains almost 60% of the voting power in the company. In 2016, Mark Zuckerberg voted to give himself perpetual sole voting control of the company regardless of his ownership stake, but the move never materialized. It was a mix of public option shifting against non-voting stock, with Snap Inc.’s IPO and later Google’s listing of non-voting shares, and minority stockholders moving against the proposal in courts. Matt Levine in September 2017:

“So, Zuckerberg lost [Facebook gave up its plan to give Mark Zuckerberg perpetual sole voting control], I guess, but his loss gives you a sense of what real power looks like. His hand-picked board cheerfully agreed to let him control his company forever even with a tiny minority of its stock, but also, when controlling his company forever seemed like it might create an inconvenience for him — like, he’d have to show up in court and answer some questions — then he could just drop it and still control the company for decades and remain unfathomably wealthy while also giving away unfathomable amounts of money.”

There are two things that I want to point out here:

  1. Facebook’s current problems with Cambridge Analytica are of an apocalyptic scale for the company, otherwise, Mark Zuckerberg would have never volunteered to go in front of the Senate Judiciary and Commerce Committee; and
  2. This move was announced in a less than usual Facebook note that left many people scratching their heads – remember “A letter to our daughter”?

“We [Mark Zuckerberg and Priscilla Chan] will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission. We know this is a small contribution compared to all the resources and talents of those already working on these issues. But we want to do what we can, working alongside many others.”

The Book

Facebook seems like it is a college project gone wrong – wrong due to the scale and scope of its influence and the real effects it is having on its users and dare I say the society. In the Senate Committee hearing, the House panel’s leader, Republican Rep. Greg Walden (Ore.), said:

“While Facebook has certainly grown, I worry it has not matured. I think it is time to ask whether Facebook may have moved too fast and broken too many things.”

Those of a slightly more entrepreneurial disposition than I look up this quote by Grace Hopper as a beacon of bias toward action:

“It’s easier to ask forgiveness than it is to get permission.”

It sounds great, and I find a hard time arguing against it; regardless of its problems, ZuckFacebook is still a great case study of the modern American dream. But this adage breaks down when you are functioning on the scale of a country; the scale of Facebook. Surely the story should end differently when a company with 2 billion users acts irresponsibly versus when it is a group of college students in a dorm room. We must hold Facebook accountable.

But as any MBA worth their salt will tell you; the primary mission of any corporation is to maximize shareholder value, Facebook has done quite well on that metric.

The growth in the number of users has been the key to Facebook’s success:

FB Daily Active Users

This growth is what has made Facebook shareholders very happy, and rich people. Over the last six years, Facebook has generated 419% compound returns for its shareholders. The recent news has led to a drop in Facebook’s stock price leading to negative returns for the firm time in a calendar year since the stock’s IPO in 2012.

Still, the stock price chart looks great, especially if you hold the stock:

FB Stock price

Clearly, an increase in subscribers has been great for the company’s bottom line. But many argue that Facebook has been less than scrupulous in the way it has gone about building this customer base. Let’s take a walk down memory lane…

2004: Facebook is launched on February 5th with membership limited to students from Harvard University.

2005: In October, Facebook expands to other universities around the world, followed by a version for high-schools, and opening access to companies like Apple and Microsoft.

2008: Facebook hits 100 million users in August, more than 4 years after launch. By late 2007, the platform also had over 100 business pages.

2009: Eight months later the platform reaches 200 million users.

2010: Facebook launches Open Graph; an application that allows the integration of Facebook user data with a third party website or web-service. Users’ and their friends’ data was being shared with third parties if a user clicked on an ad or if they allowed permission to a website to sign-in with their Facebook account.

After protest and pushback from users and regulators, Facebook moved to fix some of these problems, and in May 2010, Mark Zuckerberg wrote in the Washington Post:

“[Facebook] has become a community of more than 400 million people in just a few years. 

[…] Sometimes we move too fast — and after listing to recent concerns, we’re responding.

[…] The biggest message we have heard is that people want easier control over their information. […] Our intention was to give you lots of granular controls; but that may not have been what many of you wanted. We just missed the mark.

[…] Here are the principles under which Facebook operates:

– You have control over how your information is shared.
– We do not share your personal information with people or service you don’t want.
– We do not give advertisers access to your personal information.
– We do not and never will sell any of your information to anyone.
– We will always keep Facebook a free service for everyone.”

Now obviously Facebook has fallen short of many of these promises, to say the least. There are many other times in the short history of Facebook that Mark Zuckerberg makes similar promises, most recently during his appearance in front of the Senate in April 208. Back to the timeline.

2012: The Obama campaign makes use of Facebook data in the re-election bid. Carol Davidsen, an Obama campaign staffer:

“Facebook was surprised we were able to suck out the whole social graph, but they didn’t stop us once they realized what we were doing.We would ask permission to basically scrape your profile, and also scrape your friends’ [data].”

Later the same year, Facebook reached 1 billion active users.

2013: A personality quiz app called “Thisisyourdigitallife” was created by Aleksandr Kogan. It was later revealed that the app scraped users’ and their friends’ data.

2014: Cambridge Analytica hired freelancers using Amazon Turk to download the app and do the personality quiz. Users were paid between $1 and $2, and around 300,000 people download the app and completed the personality quiz.

This may not seem like a large number, but at the time, the mean number of friends per user was 338 and the median was at 200. So conservatively, Cambridge Analytica has access to data of over 60 million users, from “Thisisyourdigitallife”. Current estimates published by Facebook suggest that the data of about 87 million users was compromised.

Late in 2014, Facebook changed its rules to limit developer access to user data. Third parties now had to request user permission to access their friend’s data. It is worth noting here that this is not a high mark. Apps like Tinder still cannot be used if users do not allow access to their friend’s data.

2015: Late in the year it was reported that Cambridge Analytica was working with the Ted Cruz campaign. It was alleged that the campaign was using psychological data based on research spanning tens of millions of Facebook users to try and get an advantage in the race. Research shows that using psychological data, advertisers can create ads with the purpose of maximizing dopamine release in users, significantly increasing the chances of engagement with these advertisements – but more on this in part 2.

2016: With the help of Cambridge Analytica, the Trump campaign began heavily investing in Facebook ads. It would later be revealed from private recordings that Cambridge Analytica was responsible for the “Defeat Crooked Hillary” video campaign on Facebook.

March 2018: A Guardian headline reads:

“Revealed: 50 million Facebook profiles harvested for Cambridge Analytica in major data breach”

The Guardian and The New York Times published an expose on how the Trump campaign used user data harvested by Cambridge Analytica to gain an advantage and win the 2016 election.

The FTC launched an inquiry into the claim, and later in the month, Mark Zuckerberg made an appearance before the Senate Judiciary and Commerce Committee.

The People

Every time a big company fails on its promises, there is a lot of outrage; sometimes things happen but in the case of Facebook generally not much seems to change. The silver lining this time is the drop in Facebook’s stock price. As Matt Levine notes, everything is a securities fraud:

“But the result is always “securities fraud,” whatever the nature of the underlying input. An undisclosed data breach is securities fraud, but an undisclosed sexual-harassment problem or chicken-mispricing conspiracy will get you to the same place. 

There is an important practical benefit to a legal regime that works like this: It makes it easy to punish bad behavior, at least by public companies, because every sort of bad behavior is also securities fraud. You don’t have to prove that the underlying chicken-mispricing conspiracy was illegal, or that the data breach was due to bad security procedures. 

All you have to prove is that it happened, and it wasn’t disclosed, and the stock went down when it was. The evaluation of the badness is in a sense outsourced to the market: We know that the behavior was illegal, not because there was a clear law against it, but because the stock went down. 

Securities law is an all-purpose tool for punishing corporate badness, a one-size-fits-all approach that makes all badness commensurable using the metric of stock price. It has a certain efficiency.” 

But this is still only an initial step in the process of redress. Recently Mark Zuckerberg noted:

“[All] Facebook users should assume their data has been scraped” 

The damage done to users, at the cost of generating returns for shareholders, some would argue, is not accounted for in drop in stock price or the damages that may be paid as a result (more on targeted advertisements in part 2). At the same time, there is some responsibility that rests on the users. Dr. Brandy Aven notes:

“The cost of being on Facebook, the service, and convenience it brings is in the value of your personal information that you are trading over.

As the adage goes:  “If you’re not paying for it, you are the product”.

One of the fundamentals of living in a capitalist society is the right to sign over private property. If that definition can be extended to personal information then when you sign up for any social network, to some extent you are signing over your personal information. 

On the other hand, most people simply do not realize the level of tracking Facebook and Google are able to achieve, from geolocation to following consumer using tools such as the Facebook Pixel.”

The boundaries of personal information and what users agree to share or keep private is very unclear.

Big Deal?

In a FiveThirtyEight Politics podcast from March 2018, Claire Malone in exploring the situation draws a parallel to Maddison Avenue trying to shape the image of Richard Nixon. Dr. Daniel Kreiss and Dr. Shannon McGreggor write:

“Technology firms are motivated to work in the political space for marketing, advertising revenue, and relationship-building in the service of lobbying efforts. To facilitate this, these firms have developed organizational structures and staffing patterns that accord with the partisan nature of American politics.” 

Further Dr. Kreiss notes:

“A company like Facebook controls every part of the process. […] they’re working in consulting with campaigns, but they also control the distribution platform, they control the ad-buying and targeting platform, they control the user data. They’re like the all in one package.” 

Sounds a lot like a monopoly – maybe a modern utility monopoly? Dr. Aven again:

“Facebook is not really a utility company. No service that they provide is essential, and a way to think about this is that you cannot really nationalize servers and algorithms.” 

Maybe there still is a case to break the company up à la the anti-trust issues Microsoft faced in the 80’s and 90’s.

There are many that remain unconvinced of the impact of Facebook and Cambridge Analytica on the outcome of the elections. Jody Avirgan notes:

“The criticism that you often hear among a lot of people, particularly in Republican circles at the highest level of politics is that they were much better markets than political data brokers or political data operatives.”

The impact of Facebook data and Cambridge Analytica remain unclear, but the number red-flags this episode raises are concerning;

  • 2 billion people have personal data on a platform that cannot keep it safe
  • Facebook’s strategy in dealing with the debacle is to say: just trust me 
  • Facebook is on the inside of these campaigns pushing advertising strategies and partisan content – the case for plausible deniability seems weak
  • Damages other than the fall in stock price may be entirely unquantifiable
  • Most other social media and online platform can be accused of many, if not all, of the same behaviors


© 2018 Tech&Frew Publishing. All Rights Reserved.

Views expressed are those of the writer alone. Written and researched by Rafay Mahmood. Comment, Subscribe, Share. 

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