You Are the Product: Analysis

This story is going massively viral: You Are the Product

IMHO, I don’t understand what the big deal is. People knowingly create Facebook accounts with their personal information, such as name and address, so why is it a surprise that Facebook stores and uses such information. The best/easiest solution is to just not use Facebook. [1]

The ads work on two models. In one of them, advertisers ask Facebook to target consumers from a particular demographic – our thirty-something bourbon-drinking country music fan, or our African American in Philadelphia who was lukewarm about Hillary. But Facebook also delivers ads via a process of online auctions, which happen in real time whenever you click on a website. Because every website you’ve ever visited (more or less) has planted a cookie on your web browser, when you go to a new site, there is a real-time auction, in millionths of a second, to decide what your eyeballs are worth and what ads should be served to them, based on what your interests, and income level and whatnot, are known to be. This is the reason ads have that disconcerting tendency to follow you around, so that you look at a new telly or a pair of shoes or a holiday destination, and they’re still turning up on every site you visit weeks later. This was how, by chucking talent and resources at the problem, Facebook was able to turn mobile from a potential revenue disaster to a great hot steamy geyser of profit.

Facebook is free and they have thousands of employees and other costs. Facebook has to make money somehow. Without the ability to target ads by demographics and interests, advertisers would have no reason to advertise, because the ROI would be so poor due to the ads being poorly targeted, and hence Facebook would lose money and have no reason to exist. If an advertiser, for example, wants to advertise life insurance or annuities, what good would it be to show such ads to users under the age of 20, who would have no use for such services? Likewise, if a brand is selling maternity clothes, they would presumably want to target women of child-bearing age, not men.

One of the goals of capitalism, in the business sense, is to turn a profit. The left constantly complains how Amazon is a bubble and unprofitable, yet they also complain about Facebook, too, despite Facebook being very profitable. What the left wants is profitability on their terms. Walmart, Philip Morris, Altria, and Exxon, despite being profitable, are evil because they make profit in ways the far-left doesn’t morally approve of.

What Zuckerberg had instead of originality was the ability to get things done and to see the big issues clearly. The crucial thing with internet start-ups is the ability to execute plans and to adapt to changing circumstances. It’s Zuck’s skill at doing that – at hiring talented engineers, and at navigating the big-picture trends in his industry – that has taken his company to where it is today. Those two huge sister companies under Facebook’s giant wing, Instagram and WhatsApp, were bought for $1 billion and $19 billion respectively, at a point when they had no revenue. No banker or analyst or sage could have told Zuckerberg what those acquisitions were worth; nobody knew better than he did. He could see where things were going and help make them go there. That talent turned out to be worth several hundred billion dollars.

And that is one of the reasons why I own Facebook stock, and why I have held since 2012 with no plans to sell. Even though Zuck’s politics suck, he ‘s competent at increasing shareholder value, which is what matters most. When he bought Instagram in 2013 for $1 billion, the useless financial media said he overpaid and that it was a bubble; fast-forward four years and Instagram is worth $30-50 billion alone. Instagram generates over a billion in revenue alone every year and is profitable. I correctly predicted in 2012 & 2013 that Facebook stock would go much higher. The media is almost always wrong: number one rule to investing, and pretty much everything.

Perhaps the biggest potential threat to Facebook is that its users might go off it. Two billion monthly active users is a lot of people, and the ‘network effects’ – the scale of the connectivity – are, obviously, extraordinary. But there are other internet companies which connect people on the same scale – Snapchat has 166 million daily users, Twitter 328 million monthly users – and as we’ve seen in the disappearance of Myspace, the onetime leader in social media, when people change their minds about a service, they can go off it hard and fast.

It could happen, but it’s very improbable. It would be like everyone deciding not to use Microsoft Windows or not to use Amazon. For the 30+ year-old demographic, there aren’t better alternatives to Facebook. The 30+ demographic tends to be much less fickle the the under-20 demographic. And because Facebook owns Instagram and What’s App, young people who defect will still be using Facebook-owned products.

Fake news is not, as Facebook has acknowledged, the only way it was used to influence the outcome of the 2016 presidential election. On 6 January 2017 the director of national intelligence published a report saying that the Russians had waged an internet disinformation campaign to damage Hillary Clinton and help Trump. ‘Moscow’s influence campaign followed a Russian messaging strategy that blends covert intelligence operations – such as cyber-activity – with overt efforts by Russian government agencies, state-funded media, third-party intermediaries, and paid social media users or “trolls”,’ the report said. At the end of April, Facebook got around to admitting this (by then) fairly obvious truth, in an interesting paper published by its internal security division. ‘Fake news’, they argue, is an unhelpful, catch-all term because misinformation is in fact spread in a variety of ways:

 

Information (or Influence) Operations – Actions taken by governments or organised non-state actors to distort domestic or foreign political sentiment.

 

False News – News articles that purport to be factual, but which contain intentional misstatements of fact with the intention to arouse passions, attract viewership, or deceive.

 

False Amplifiers – Co-ordinated activity by inauthentic accounts with the intent of manipulating political discussion (e.g. by discouraging specific parties from participating in discussion, or amplifying sensationalistic voices over others).

 

Disinformation – Inaccurate or manipulated information/content that is spread intentionally. This can include false news, or it can involve more subtle methods, such as false flag operations, feeding inaccurate quotes or stories to innocent intermediaries, or knowingly amplifying biased or misleading information.

Sounds like sour grapes because Hillary lost. Has she won, would they still be blaming Russia and ‘fake news’? Likely not. Yet not a peep about tabloids and MSM, which also disseminate dubious information. How about the efforts by the left to conceal Hillary’s poor health during the 2016 campaign (such as footage of her collapsing). Or Hillary’s ties to Saudi Arabia. Even Politifact could not deny that the Clinton Foundation received $25 million the from the Saudis. Or how Wikileaks email dump revealed that CNN debate moderator Donna Brazile provided Hillary answers to debate questions in advance.

From Real news or fake news? Give me the fake news:

The left elevates ‘the news’ as somehow being an incorruptible, unimpeachable institution that answers to a higher calling in the pursuit of the truth, when in reality the news media is just another for-profit venture, like selling shoes or running a casino. Without advertising, the news media would have no reason to exist. The purpose of ‘news’ is to fill the spaces between the ads, but the only difference between ‘real’ news and ‘fake’ news is that the former supposedly has more ‘integrity’, but even that is suspect…remember, ‘real’ news gave the world rape hoaxes, ‘rape culture’, and an imaginary ‘college rape epidemic’. ‘Real’ news said that the US economy and stock market would implode if Trump won (stocks are now at 52-week highs two weeks after Trump’s win), or, between 2009-2015, that there would be ‘dollar collapse’, hyperinflation’, ‘stock market crisis’ and ‘recession’, none of which have happened. Or the WMDs in Iraq, that apparently didn’t exist but the New York Times said they did. One can argue that real news, through spreading lies and sensationalism wrapped in a veneer of ‘credibility’ and ‘respectability’, is far more destructive than fake news can ever be.

The left cries ‘fake news’ when it goes against their agenda.

What this means is that even more than it is in the advertising business, Facebook is in the surveillance business. Facebook, in fact, is the biggest surveillance-based enterprise in the history of mankind. It knows far, far more about you than the most intrusive government has ever known about its citizens. It’s amazing that people haven’t really understood this about the company. I’ve spent time thinking about Facebook, and the thing I keep coming back to is that its users don’t realise what it is the company does. What Facebook does is watch you, and then use what it knows about you and your behaviour to sell ads. I’m not sure there has ever been a more complete disconnect between what a company says it does – ‘connect’, ‘build communities’ – and the commercial reality. Note that the company’s knowledge about its users isn’t used merely to target ads but to shape the flow of news to them. Since there is so much content posted on the site, the algorithms used to filter and direct that content are the thing that determines what you see: people think their news feed is largely to do with their friends and interests, and it sort of is, with the crucial proviso that it is their friends and interests as mediated by the commercial interests of Facebook. Your eyes are directed towards the place where they are most valuable for Facebook.

For that reason, were it to be generally understood that Facebook’s business model is based on surveillance, the company would be in danger. The one time Facebook did poll its users about the surveillance model was in 2011, when it proposed a change to its terms and conditions – the change that underpins the current template for its use of data. The result of the poll was clear: 90 per cent of the vote was against the changes. Facebook went ahead and made them anyway, on the grounds that so few people had voted. No surprise there, neither in the users’ distaste for surveillance nor in the company’s indifference to that distaste. But this is something which could change.

The biggest threat is not ad surveillance, but people getting fired for posting ‘offensive’ stuff on social media (or even being tagged in photos as having appeared at certain events), which is a form of surveillance that the left is apparently absolutely fine with.

I’m left wondering what will happen when and if this $450 billion penny drops. Wu’s history of attention merchants shows that there is a suggestive pattern here: that a boom is more often than not followed by a backlash, that a period of explosive growth triggers a public and sometimes legislative reaction. Wu’s first example is the draconian anti-poster laws introduced in early 20th-century Paris (and still in force – one reason the city is by contemporary standards undisfigured by ads). As Wu says, ‘when the commodity in question is access to people’s minds, the perpetual quest for growth ensures that forms of backlash, both major and minor, are all but inevitable.’ Wu calls a minor form of this phenomenon the ‘disenchantment effect’.

As I explain earlier, the left has been crying bubble since 2009 to no avail, whether it’s Google, Amazon, Facebook, or Tesla, yet no one holds the liberal media accountable for being wrong all the time, such as being wrong about predictions of Brexit and Trump’s win causing a recession. My prediction is, barring a recession, Facebook will be worth $1 trillion within 3-5 years. People in 2006 said Google was a fad, “Anyone can make a search engine”. They said the same about Facebook in 2010, “Anyone can make a social network. Facebook is Myspace”. Or Tesla in 2013, “Who is going to spend $100k on an electric car?”

The industry publication Ad Week estimates the annual cost of click fraud at $7 billion, about a sixth of the entire market. One single fraud site, Methbot, whose existence was exposed at the end of last year, uses a network of hacked computers to generate between three and five million dollars’ worth of fraudulent clicks every day. Estimates of fraudulent traffic’s market share are variable, with some guesses coming in at around 50 per cent; some website owners say their own data indicates a fraudulent-click rate of 90 per cent. This is by no means entirely Facebook’s problem, but it isn’t hard to imagine how it could lead to a big revolt against ‘ad tech’, as this technology is generally known, on the part of the companies who are paying for it. I’ve heard academics in the field say that there is a form of corporate groupthink in the world of the big buyers of advertising, who are currently responsible for directing large parts of their budgets towards Facebook. That mindset could change. Also, many of Facebook’s metrics are tilted to catch the light at the angle which makes them look shiniest. A video is counted as ‘viewed’ on Facebook if it runs for three seconds, even if the user is scrolling past it in her news feed and even if the sound is off. Many Facebook videos with hundreds of thousands of ‘views’, if counted by the techniques that are used to count television audiences, would have no viewers at all.

Cry me a river. Fraud and deception exists in all forms of advertising. Inflated magazine and newspaper subscriptions, for example. Also, the Facebook ad auction model is self-correcting for fraud: if advertisers are getting a low ROI due to fraud, they will bid less on the ads.

A customers’ revolt could overlap with a backlash from regulators and governments. Google and Facebook have what amounts to a monopoly on digital advertising. That monopoly power is becoming more and more important as advertising spend migrates online. Between them, they have already destroyed large sections of the newspaper industry. Facebook has done a huge amount to lower the quality of public debate and to ensure that it is easier than ever before to tell what Hitler approvingly called ‘big lies’ and broadcast them to a big audience. The company has no business need to care about that, but it is the kind of issue that could attract the attention of regulators.

But not a peep about left-wing media conglomerates. CNN is owned by Turner Broadcasting System, a division of Time Warner. Time Warner owns a lot of stuff. Disney owns ESPN (who knew?). National Amusements, a holding company owned by media mogul Sumner Redstone, owns Viacom and CBS, which owns MTV, VH1, Comedy Central and others.

That isn’t the only external threat to the Google/Facebook duopoly. The US attitude to anti-trust law was shaped by Robert Bork, the judge whom Reagan nominated for the Supreme Court but the Senate failed to confirm. Bork’s most influential legal stance came in the area of competition law. He promulgated the doctrine that the only form of anti-competitive action which matters concerns the prices paid by consumers. His idea was that if the price is falling that means the market is working, and no questions of monopoly need be addressed. This philosophy still shapes regulatory attitudes in the US and it’s the reason Amazon, for instance, has been left alone by regulators despite the manifestly monopolistic position it holds in the world of online retail, books especially.

What about the duopoly of CNN and MSNBC (which is owned by NBC, which is owned by Comcast). What about the newspaper monopoly that is the New York Times?

[1] One area of possible concern is the use of third-party tracking cookies. When one logs off of Facebook (or any website), the implication is said user no longer consents to using or engaging with said website in any way.