The story that has been dominating the news recently has been Cambridge Analytica’s use of private Facebook data and subsequent fallout, which culminated this past week when Mark Zuckerberg faced a Congressional hearing on April 10th and 11th. Zuckerberg has dealt with harsh criticism over the past few weeks in regards to the misuse of data from the public in the form of judgement and the #DeleteFacebook movement. This was nothing compared to being grilled for 10 hours over his two hearing from congressmen about his perceived lack of empathy over the situation.
Cambridge Analytica is a British political consulting firm which utilizes data mining and analytics for electoral advice. The firm offers tools that can identify the personalities of voters and influence their behavior. It is largely funded by prominent Republican donor Robert Mercer and former Trump Chief Strategist Steve Bannon. The firm previously worked with Ted Cruz during his campaign for republican nomination in 2015 and was later hired by the Trump staff during his presidential campaign in 2016, which is where the bulk of criticism has been focused on. They were also involved with Leave.EU during campaign for Brexit. CEO Alexander Nix was found to have admitting to using shady practices such as bribes and prostitution to discredit opposing politicians.
Cambridge Analytica began gathering private data from Facebook in 2014 from a personality quiz app, whose data was sold to them. Zuckerberg told them to delete the data in 2015 because Facebook does not allow private data to be sold to any monetization-related service, but they did not do so. Reports began surfacing in march 2018, that this data was not deleted following an investigative report into Cambridge Analytica by Channel 4 News in Britain, which was released on March 19, 2018. It is reported that the firm collected information of up to 87 million Facebook users and influenced political races in countries throughout the world.
This hearing has more to do than just this one isolated incident; it is indicative of the state of the tech industry as a whole. There is currently a lack of regulation in the tech industry in terms of what companies are allowed to do with user data. Many in the tech industry saw the hearing as an evaluation of tech companies and the industry. A lot of startups attempt to emulate Facebook’s growth model in regards to its willingness to make misakes in an effort to expand. This led to many congressmen attacking Zuckerberg for a lack of oversight. There is an increased demand in the industry for using data collection in order to improve user experiences and design products around data mining. For the first time, it seems as if privacy concerns are at the forefront of this business strategy.
The long-term effects of the Zuckerberg hearing appear to be that there will be increased discussion over whether regulation is necessary. Zuckerberg agreed with Democratic Senator Ed Markey of Massachusetts that his proposed CONSENT Act seemed like a good idea, but was noncommittal about backing it. The bill requires explicit opt-in consent from users to use, share, or sell any personal information, as well as clear notification any time data is collected, shared, or used. The bill would also add new security and breach reporting requirements to prevent companies from without this information like Facebook did. In terms of offering up solutions, Zuckerberg stated that AI will be useful in the future in terms of moderating hate speech and that Facebook is going to “require a valid government identity and then verify the location” from companies attempting to gather data. This would not be helpful for shell corporations, who have their location listed in a different location.
For this reason, Facebook’s business model does not appear to be sustainable in the long term and companies will need to revamp how user data is handled. It appears that there will likely be increased regulations; however, there are questions over how increased regulations will affect tech giants. Some entrepreneurs believe it will level the playing field while others worry that it will lead to regulated monopolies such as utility companies.
This was not the first time the CEO of a major tech giant appeared for a congressional hearing. It happened on March 3, 1998 when Bill Gates was questioned whether Microsoft was a monopoly in the software business. There were similar fears back then that Microsoft could use its power to leverage its way into other forms of business such as news and data. The consensus among tech companies who spoke to congress then was that there should not be new regulations on the internet or tech industry because it what hurt the industry’s ability to innovate and remain at the forefront of tech.
The main difference is the public perception between the two cases. The public did not seem to have any disdain for Microsoft as a result of them dominating the software industry at the time because they had not used this leverage for heinous acts, nor where the senators in the hearing as aggressive in their criticism towards Gates; they were more inquisitive over how the company operated and its competitors. In contrast, there is currently severe contempt among the public toward Mark Zuckerberg for allowing their private data to be leaked.
It is interesting to consider how each company’s stock price was affected by the hearings. When looking at Facebook, we must look at how the stock was moving prior to the meeting and after since this whole issue started from the scandal. The Channel 4 News report was released on March 19th, which saw a tremendous dip in FB stock. It closed the previous day at $185.1 and closed at $172.6 at the close on the 19th. The price bottomed out at $152.2 on 3/27. The first hearing was on April 10th and its price saw a tremendous jump; after opening at $157.9, it closed at $165.0 by the end of the day. The second hearing the next day saw a slight bump to $166.3.
Figure 1. 2018 Facebook Stock Price, Reaction to Hearings
Facebook’s received a very positive perception as a result of Zuckerberg handling the criticism well and in turn, investors became more favorable that the scandal will not hurt Facebook further, nor that the company will face severe backlash from the government.
Microsoft did not see as much activity as a result of the Bill Gates’ senatorial hearing. Leading up to the hearing, there was some uncertainty leading the price to dip. The hearing saw an initial bump on the day of the hearing as the stock opened at $20.6 and closed at $21.1 on 3/3. There was a bit of uncertainty following the hearing which led the stock to bottom out at $20.0 on 3/5. This eventually subsided and Microsoft saw a bump when it became apparent that regulation would not come and it peaked at $23.25 on 4/3.
Figure 2. 1998 Microsoft Stock Price, Reaction to Hearings
Graphs are from Yahoo Finance