The Decline And Fall Of The Facebook Empire

Date: 10/05/2021
Author: Mr. X


When I first started writing this, Facebook (FB) was still down after several hours. It wasn’t just Facebook itself. It was Instagram, WhatsApp, Oculus, Facebook Messenger, and every store or operation that is run off FB’s network. Yesterday morning, Facebook workers were reportedly unable to even enter its office buildings. Initial reports suggest that it is a Domain Name System (DNS) issue, with Facebook.com even appearing as “available for sale” on some sites for a brief time.

It appears someone at Facebook updated the company’s Border Gateway Protocol (BGP) records. These are essentially the “directions” that allow computers to find what they are looking for. Thus, when they were removed, computers couldn’t “find” Facebook (or anything that depends on it).

In the few hours that the Facebook network went down, Mark Zuckerberg lost an estimated $6 billion.

What actually caused the disruption still isn’t known. It could have been a massively successful cyberattack. It could have been a catastrophic technical error. If you’re of a conspiratorial bent, it could be the trial run for a far larger Internet shutdown.

Or it could have just been a disgruntled employee.

That last possibility doesn’t seem so extreme after the last few days. Whistleblower Frances Haugen accused the company of misconduct and will be testifying before a Senate subcommittee today. She had also provided The Wall Street Journal with documents that led to one blockbuster story after another. FB may have further to fall as a result because I doubt she was the only unhappy employee.

There are several allegations against the company. Three are especially important. First, Facebook supposedly knew that Instagram was causing emotional harm to young women because of the body image issues it created. Second, Facebook did not sufficiently control misinformation on the website, particularly during the events surrounding the 2020 election, the January 6, 2021 riot, and the COVID-19 pandemic. Finally, Frances Haugen said that the company optimizes content that is, in her words, “hateful,” “divisive,” and “polarizing.”

The Democratic Senate majority can be expected to highlight these claims today.

Yet there are other accusations against Facebook from conservatives. Former president Donald Trump sued Facebook (and other social media companies) in July after they suspended his account. Senators such as Ted Cruz (R-TX) have also accused the company of being politically biased.

Facebook has a serious problem because it is losing teenagers. In 2012, an estimated 94% of teenagers used Facebook. In 2019, just a slim majority used it. This has led to internal company research (leaked to The Wall Street Journal) speaking about preteens aged 10-12 as an “untapped resource.”

From a cynical business point of view, that may be correct. However, whatever you could conceivably gain by marketing to that audience is far less than the public relations damage incurred when that language is festooned across international media.

The same internal research reportedly found that the teenaged audience on Facebook will decline by an additional 45% by 2023. As teenagers flee the platform, the company must rely on older people to make ends meet. However, this presents its own problem.

The rhetoric used by some of these older people is being overseen by employees who may find it offensive. Make no mistake–the “whistleblower” Frances Haugen wants more control over online speech. You may think that is a good thing or a bad thing, but it puts FB in an impossible trap.

Once social media companies are in the position of “approving” online speech, there will always be new material that needs to be censored. The goalposts will also be ever-shifting.

Frances Haugen is also absolutely right that Facebook has an inherent interest in promoting polarizing content because it generates more “engagement.” Yet every post that can be linked to violence or threats also becomes another excuse for protests, boycotts, possible employee sabotage, or government action. We may see an example of what that last part might look like today.

FB has no escape because if it does respond to the whistleblower’s allegations, it may alienate some conservatives who remain part of the company’s user base. Traditionally, the party that is out of power wins the midterm elections. It’s a long way until then, but if the Democrats can’t get their act together on infrastructure, the Republicans may retake Congress in 2022. That would mean senators like Ted Cruz, Josh Hawley (R-MO), and others who have spoken against Big Tech would have their own platform to crusade against Facebook for “bias.”

Is Facebook actually biased? It’s an impossible question. It depends on what you think is permissible free speech or not. The country no longer has a consensus around that question. Social media itself is probably part of the reason for that divide.

With the Facebook network of companies down yesterday, FB is also open to a different charge. Progressive leader Rep. Alexandria Ocasio-Cortez (D-NY) called for breaking up the company. She claimed that FB’s dominance is not the result of free market competition, but the company’s propensity for simply buying out possible competitors. Additionally, WhatsApp is a vital avenue of communication for many people not just in this country, but in other nations, especially in Latin America. If all these things fail because of one mistake, that’s a problem for the country and the world.

I have to admit she has a point.

It is not that Facebook is backwards-looking. Mark Zuckerberg’s focus on the “metaverse,” the eventual union of social media with “real life,” shows that he is one of the most forward-looking corporate leaders today. He clearly recognizes that his company’s position is extremely fragile if he does not take the lead in what will become an entirely new market. Yet he must build that future conquest upon the crumbling foundations of his current empire.

It may seem strange to speak in such terms, but Zuckerberg is a keen student of ancient history. His sister Dr. Donna Zuckerberg is an influential classics scholar. Mark Zuckerberg reportedly has a special fascination with Caesar Augustus.

Of course, Augustus’s triumph was precisely that he was able to build a lasting political order out of the ruins of the old Roman Republic. Mark Zuckerberg’s challenge seems just as daunting today. Unfortunately for him, Zuckerberg does not enjoy Augustus’s advantage of a cowed Senate. Instead, he faces powerful figures that will be opposed to him and his company, no matter what he does.

What does this mean for investors uninterested in anything but the bottom line? FB shareholders should probably want the GOP to take back Congress. Republicans generally avoid regulating big business, whatever they say at rallies about “wokeness” to whip up the grassroots. Facebook’s best interest would probably be a Republican victory in 2022. The GOP would talk tough but do little.

Progressives have more commitment. If the Democrats manage to overcome their self-imposed squabbling over infrastructure, they could defy history and keep Congress. In that case, FB may face a serious effort to break up the company. Yesterday’s fiasco would prove to be a powerful argument for the company’s foes. One incident shut down an entire network and all the businesses that relied on it.

Rather than Mark Zuckerberg conquering a new empire in the metaverse, yesterday might have been his Teutoburg Forest. He should remember Augustus’s greatest triumph was not seizing new lands, but holding on to what Rome already had.

 

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.

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