Looks like we just got Zucked . Again.
Mark Zuckerberg just made a lengthy announcement that has been described as a privacy pivot . Acknowledging that “we don’t currently have a strong reputation for building privacy protective services”, Zuckerberg intends to nudge users away from publicly broadcasting in a digital “town square” to giving them a digitally secure “living room” for more intimate private conversations. Zuckerberg’s missive has mistakenly been likened to a radical shift in mission and to momentous tech pivots, such as IBM’s decision to stop selling personal computers. Zuckerberg’s plan is none of the above: it is a pragmatic move of an obsessive CEO and little to do with privacy; it is not even a pivot; it appears tone-deaf as it gives ammunition to those who criticize Facebook.
More Pragmatism Than Privacy
Zuckerberg’s essay is a pragmatic business decision rather than some newfound manifesto for solving Facebook’s privacy problems. The writing is already on Zuckerberg’s wall: the underlying market realities for social media are changing. Consider two kinds of platforms owned by Facebook, the company – the town square version, e.g. Facebook, the original social network for broadcasting widely, and the living room version, e.g. a messaging subsidiary, such as WhatsApp, which narrowcasts to a select audience. The town square is slowly but surely emptying. As a social network, Facebook, has 15 million fewer users today than in 2017. During October – December of 2018, 23% of Facebook users in the U.S. showed signs of activity, e.g. updated their status or posted a comment, as compared to 32% at the same time in 2017. In 2016, Facebook accounted for more than half of time spent on social networks, but that figure is anticipated to be 44.6% in 2019, while, for the first time, from 2018 on, it was expected that Facebook usage among the 11-24 demographic – highly coveted by advertisers – would decline .
At the same time, the living room is increasingly where the action is taking place. In the third quarter of 2018, 63% of U.S. internet users shared articles and photos via messaging apps such as WhatsApp and Messenger, as compared to 55% sharing them on a town square social network. By the end of 2018, 60% of survey respondents globally (except for China) used WhatsApp, up from less than 50% two years earlier. In China, the dominant local messaging app, WeChat had 1 billion users in 2018, up from 500 million in 2014.
All Zuckerberg is doing is preparing the ground to shift resources over to where the users are going. The latest announcement is simply Strategy 101 (I should know; I teach the subject at The Fletcher School and as a former leader of McKinsey’s Strategy and Innovation practices have advised tech CEOs on this subject.) In fact, I would applaud Zuckerberg for taking a pre-emptive position as opposed to reacting after hitting the iceberg, as Kodak did with digital imaging or Blockbuster did with the advent of movies on demand. What is unusual is this CEO’s public declaration of strategic intent far in advance of actual execution; and this may have to do with the iceberg that Facebook actually did hit, in the form of an intense stretch of negative public opinion and regulatory pressures regarding its poor record of protecting user privacy, permitting its platform to be manipulated, its abuse of market power. This is simply a necessary shift in strategic focus that has been conveniently packaged as a revolutionary solution to the privacy problem.
Not A Pivot, Nor A Pivotal Moment
A pivot would be a switch to moving all the furniture to the living room while barricading the town square. Now, that would have been a truly pivotal moment, but don’t hold your breath. It is essential to remember, that as a publicly traded company, Zuckerberg has a fiduciary responsibility to shareholders and the town square makes all the money - and a lot of it. Despite all the turbulence, public opprobrium and bad press, Facebook made more money last year than it has done in the past. During October – December of 2018, Facebook’s revenue increased 30% from a year earlier to $16.9 billion, while profits increased 61% to $6.9 billion. Seven million advertisers spent money to advertise on the platform.
It would be madness to turn one’s back on this kind of profit.
It would be even greater madness when you consider the fact that Zuckerberg doesn’t quite have an idea about how to make the living room format deliver a threshold level of profitability that would make a pivot realistic. Consider this: Facebook makes 98% of its revenues from advertisers. While it has had only limited success with advertisements in the Messenger app, Facebook hasn’t even tested the concept in WhatsApp. Moreover, the extent and detail in terms of data collection capability of the town square cannot be matched by the more restricted format of the living room especially when that is combined with the living room messaging being encrypted end-to-end; with encryption, the ability to parse the data is even less – and is less monetizable .
This begs the question: how long will it take for the company to make the switch? This depends on how Facebook could conceivably make money from the living room format in ways that match its current gargantuan levels. Consider three options:
- One of the steps it is taking which could help is the proposed plan to integrate the technical infrastructure of WhatsApp and Messenger with Instagram, which would allow users to seamlessly communicate across three platforms for the first time, thereby creating new ways to open up advertising streams and tracking a diversity of user activity. This could lead to new revenue opportunities that are currently untapped and reduce costs through consolidation of the back end infrastructure and reduced need to monitor encrypted information. However, this integration is not without its risks: it could also raise the hackles of regulators as it could appear to be a pre-emptive move to prevent prominent lawmakers, such as Senator Elizabeth Warren , calling for a break-up of Facebook ; alternatively, it could even be considered as coming close to antitrust concerns about “tied” products .
- Another potential revenue stream is through data-sharing agreements with other parties. Facebook has, thus far, been stunningly inventive in getting access to users’ personal information, such as an individual user’s heart rates or when a woman is ovulating through data-sharing arrangements with independent specialized app developers. The potential for such arrangements goes up when Facebook launches its proposed push into payments, especially in its WhatsApp platform, as it is attempting in India. Such behind-the-scenes arrangements will be frowned upon in the new regime where Facebook’s stewardship of user data is under intense scrutiny.
- Another theory is that Facebook intends to model its revenue generation formula after China’s immensely popular WeChat. WeChat makes money from commissions derived from enabling many services, such as gaming and mobile payments that allow users to shop, play games, pay utility bills and order meal deliveries all from within the app. Facebook, of course will need to develop a similar widely accepted payments system. It has been at work on a new crypto coin in lieu of a payments system. But these solutions are unproven and a long way off – and unlike the case of WeChat, Facebook would be moving into payments in a very crowded space.
Mark Zuckerberg discovers privacy
In other words, Zuckerberg’s announcement is far from a pivot. It will be enormously difficult to execute and its timing will be driven by the appearance of a credible business model that can replicate the success of Facebook’s spectacularly successful legacy model.
The Living Room Can Be Uglier Than The Town Square
Facebook has, of course, been on the defensive about its many failures that came tumbling out in the past year. The living room is not a solution. Messaging apps such as WhatsApp can make the problems of viral misinformation and fake news even worse. This is because of several factors: first, since the message comes from a friend or family or an affinity group, it is more likely to be trusted; second, since messages are end-to-end encrypted, it is difficult to trace the sources or analyze them and identify the miscreants and stop the abuse; third, as I have argued elsewhere , thus far, WhatsApp has been hugely popular in the developing world, and this is where users tend to be more trusting of what they read on digital media and with potentially devastating outcomes – from mob violence, as was experienced in India, to pre-election voter manipulation, as was experienced in Brazil and Nigeria.
The most plausible business model that Zuckerberg may have in mind as his role model, WeChat, has huge problems with privacy . It is widely feared that its parent, Tencent, shares user data with the Chinese government, which, in turn, gives it regulatory protection. This is not only part of the political reality of China, it is integral to the WeChat business model. With its comprehensive view of a user’s activities, an all-purpose app is a treasure-trove for surveillance.
Facebook cannot rely on such bargains with governments, particularly in light of the criticism it has already faced about sharing data with private entities.
In fact, Zuckerberg has specifically gone so far as to commit that Facebook will not store sensitive user data in countries that have a poor record of protecting freedom of speech and human rights. However, this begs the question: will Facebook give up on its quest for cracking open the Chinese market? Restrictions on free speech and demands for data localization are increasingly being demanded by governments around the world, especially in countries where Facebook has some of the highest numbers of users : India, Brazil, Indonesia, Vietnam, Philippines, Turkey, to cite a few. It seems unlikely that Facebook can afford to turn its back on these countries and their governments altogether; it runs the risk of running afoul of its own commitment to not cooperating with governments.
In essence, what Facebook has done with its latest announcement may be good textbook strategy: pre-emptively moving to disrupt itself without abandoning the core business that funds everything, including the move away from the core. It is generally enormously difficult to execute, Microsoft had to go through it when it made the move from its dependence on a PC-centric world to a mobile and cloud centric world. Netflix had to go through it when it evolved from its ubiquitous red envelope mailers to streaming video. And yes, even IBM had to go through it. But the IBM analogy that fits here dates back to 1981 when it announced the IBM 5150, its first personal computer, while larger computers were still the norm. Each of these changes required a change at the system level – some of which were outside the control of the company, while others involved forward-looking moves made by the company. It was a matter of both good luck and good timing. Facebook's problem is that it will need both. Its continuing bad PR -as evidenced by the tone-deaf nature of the Zuckerberg announcement- can get in the way of its textbook strategy and it could run out of both luck and time.