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Facebook (FB) has been embroiled in political controversy for more than a year, amid mounting evidence of abuse on the social-media platform relating to the 2016 US elections. Yet earnings have continued to soar, along with the stock price.
Until now. Facebook’s shares have dropped by more than 11%, erasing some $60 billion in market value, following exposes published by the New York Times and the Observer of London showing how a political research firm working for Donald Trump’s campaign in 2016 exploited sensitive data belonging to as many as 50 million American Facebook users. The firm, Cambridge Analytica, used that data to identify voters susceptible to persuasion and make sure they saw ads or other content that praised Trump or bashed his opponents, including Hillary Clinton.
The essence of the Cambridge Analytica revelations is not new. It’s been apparent for months that political operatives of many persuasions flooded Facebook with content, both legitimate and bogus, to try influencing the outcome of the 2016 presidential election. In February, special prosecutor Robert Mueller filed an indictment (unrelated to Cambridge Analytica) detailing how Russian agents used Facebook and other social-media networks to try to swing the election in Trump’s favor. Facebook shares barely flinched, and were soon above pre-indictment levels. Until the March 19 selloff, Facebook shares had risen 49% since the day Trump won in 2016.
But investors obviously have major new worries about Facebook, as key legislators in the United States and Europe call for new hearings on the matter, possibly leading to new regulations. The U.S. Federal Trade Commission is also investigating whether Facebook violated a 2011 consent decree governing the privacy of user data, with billions of dollars in fines possible. “It could compromise Facebook’s business model,” says V.S. Subrahmanian, who teaches technology and cybersecurity at Dartmouth University. “They should have had a handle on this quite some time ago.”
Stiffer regulations
On Capitol Hill, a bill called the Honest Ads Act would require online political ads—like those Facebook earns millions from—to abide by the same rules as ads run via print and broadcast media, such as disclosing who paid for the ad. It would also require large digital platforms such as Facebook to track and report political spending by campaigns in ways they don’t have to do now. Many Democrats support the bill, but few Republicans do, and it hasn’t gotten much traction. That could change if fresh outrage turns voters against Facebook. If the bill were to pass, it might not harm Facebook’s financial performance much, if at all. But legislation can also take unexpected turns and end up more punitive than expected.