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Facebook Privacy Initiatives: The Cost to Social Media Profits

Much of the talk about Facebook’s privacy scandals in the last year has homed in on the immorality of it. Until now, not a whole lot has been said about how much the self-inflicted and devious privacy flaps could erode the social media giant’s bottom line.

Let’s just say that Facebook has given us a street-level look at privacy’s wrath, should you cross it. The company’s newly released Q2 results are the first indication that the back-to-back-to-back privacy scandals along with the rollout of Europe’s General Data Protection Regulation (GDPR) have taken a toll on Facebook’s current report and framed a dreary outlook.

(Note: See a list of our Facebook privacy stories here.) 

Facebook Stock Drops 19 Percent

Maybe it’s just that people have had enough: In one day, actually in two hours, the bottom fell out of the stock, dropping as much as 24 percent at one point and almost 19 percent at the close of trading on Thursday. Overall, the company lost nearly $123 billion in market cap, and CEO Mark Zuckerberg’s personal losses amounted to a staggering $16.8 billion.

Privacy and security drove a sharp stake not only into Facebook’s Q2 report but also ominously into the company’s guidance, a trend line openly acknowledged by its top brass, who additionally pointed to the expected impact of GDPR on data privacy as a future drag on revenue, margins and earnings.

“GDPR was an important moment for our industry. We did see a decline in monthly actives in Europe, down by about 1 million people as a result,” Zuckerberg said on Facebook’s earning call. As for “safety and security,” Facebook’s long-term investments are in the “billions of dollars per year,” said company CEO David Wehner on the call. “Those will have a negative impact on margins.”

Here’s what else you need to know:

On privacy’s cost:

  • The company’s profit margin, which fell five points in Q2 to 42 percent, will dive into the “mid-30s” for more than two years due in part to the costs of upgrading privacy protection. “We’re continuing to focus our product development around putting privacy first and that’s going to, we believe, have some impact on revenue growth,” Wehner said.
  • Total expenses in the second quarter surged to $7.4 billion, up 50 percent compared with a year ago, in part to fix its privacy infrastructure and policies.

On GDPR:

  • GDPR has not yet had a revenue impact but that’s because it only rolled out at the end of May. Nonetheless, the “vast majority” of people opted into third party data use, Facebook said. At this point, it isn’t projecting that GDPR will have a big impact on revenue growth.

On growth:

  • Growth is decelerating. Worldwide, the company added just 22 million new users in the quarter, its lowest since 2011. Clearly, it will take a while for the company to earn back trust in users’ eyes. But in all fairness, the company’s growth rate has been absurdly high for so long, something had to squeeze it somewhere along the line.
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