“Online privacy” is an oxymoron like jumbo shrimp, military intelligence and crash landing. Nothing you do online is truly private; there’s always a record somewhere.

In the past few weeks, these privacy fears have taken center stage. We learned via a whistleblower that Facebook Inc. (Nasdaq: FB) may have given the private information of 87 million users to political research firm Cambridge Analytica, which then worked with Russian intelligence services to conduct a misinformation campaign ahead of the 2016 U.S. presidential election.

To be clear, it shouldn’t matter what side of the aisle you choose to rest your laurels. Any red-blooded American’s blood should be at its boiling point at the thought of a rival power holding the ability to influence our sacred democratic process.

This sparked a “#deleteFacebook” hashtag campaign, which research firm Sentio reported had 126,000 Twitter mentions on the first day. I guess no one saw the irony in taking to social media to complain about social media.

Facebook in the Spotlight

To be certain, there was enough negative publicity surrounding Facebook’s crucial data breach to send the stock tumbling 18% from $184 to $150 in the past month.

What started as a college freshman’s innocuous ploy to interact and meet college co-eds evolved into a platform that boasts 2 billion members and arguably knows more about its users than their own spouses.

Facebook’s membership is now bigger than any country or religion in the world; its platform allows influencers and businesses to reach like-minded consumers in ways unimaginable just a decade ago. At the same time, Facebook involuntarily became a weapon of democratic change.

After enough public outrage, Facebook’s founder and CEO, Mark Zuckerberg, was called to Capitol Hill this week to face questioning from lawmakers. The 5-foot-7-inches billionaire, propped up on a booster seat, was barraged by questions from politicians who made it comically apparent that their own social media was primarily handled by aides.

Most of the testimony seemed like senators were simply asking Zuckerberg how Facebook worked. Sen. John Kennedy, R-La., claimed that Facebook’s user agreement “sucks,” and then listed off a number of steps Facebook should take to improve data privacy, only to be repeatedly advised by Zuckerberg that the senator’s suggestions were already in place.

Octogenarian Sen. Orrin G. Hatch, R-Utah, simply couldn’t figure out how Facebook made so much money. To which Zuckerberg simply replied: “Senator, we run ads.”

This lack of understanding missed the point of the testimony, and didn’t get to the bottom of Facebook’s data monitoring and why the company hasn’t been more forthcoming with users on how their data is used.

How Facebook Makes Money

Since the senators couldn’t quite figure out Facebook, let me explain how it works.

Facebook knows a lot about you — more than you know it knows, and probably some things it knows that you don’t know about yourself because a computer’s memory is timeless.

It knows superficial information like where you live, your age, your likes/dislikes, your level of education and where you grew up.

It knows these things because you’ve either given them to it when setting up your profile, or it has extracted it over the years through benevolent and subtle methods.

“Here — take a fun quiz to find out what pop star you most resemble!”

“Here’s a fun survey to see which state you should live in!”

“What jungle animal are you?”

When you filled out these surveys or questionnaires, you may have inadvertently given not only your data, but all your friends’ data as well — without them even knowing.

That’s right — Facebook may have gotten access to your data because a loosely affiliated “friend” who you haven’t spoken to since the seventh grade opted you in.

The Facebook Messenger app’s algorithms can gather even more private information by scanning through your private communications looking for data useful to advertisers. These same algorithms comb the popular WhatsApp messenger, which Facebook purchased for $19 billion in 2014.

A Gold Mine for Advertisers

If Facebook knows everything about you, it’s easier to figure out what you’re likely to buy. And this trove of information is a gold mine for online advertisers.

While it might be considered a social media company, Facebook’s prime business is selling ads. And it does this very well.

In 2017, Facebook ads generated nearly $40 billion in revenue. That’s almost 50% higher than 2016’s $26 billion total, and nearly 10 times 2012’s ad revenues of $4.2 billion.

In the past few years, profitability increased dramatically. Net income was flat just five years ago, and it was $16 billion in 2017.

Facebook and the other ad juggernaut Google account for 61% of global online ad revenue. Moreover, they account for 25% of total global ad revenue, which includes online and real-world ad spending.

Crucial Data

E-commerce businesses love Facebook’s ad model. It’s easy to find customers and even easier to scale.

Let’s say you started an online business that sells chrome-plated fidget spinners.

Now, chrome-plated fidget spinners are a specific product that only appeals to a certain demographic. They’re not for everyone.

But how would you go about growing your business and finding new customers on Facebook’s platform?

Facebook’s algorithms can help. They will take a list of previous customers and create a new list of similar profiles that might also be interested in your fidget spinners.

This model permits more effective ad spending, as businesses are able to target consumers most likely to buy a chrome-plated fidget spinner. It cuts wasteful ad spending dramatically.

After Facebook creates the list, you pay for impressions to have this targeted list of potential customers view your ad. Facebook charges advertisers by number of impressions, or number of customers that see your ad.

If your revenues in selling chrome-plated fidget spinners exceed the cost of the ads, you can simply start placing more ads and earning more profits. This is how an online business grows via Facebook.

But to get there, the customer has to be willing to share private information about themselves. Without that crucial data, Facebook’s ad platform is much less appealing.

What’s Next

Facebook’s business model is built on trust. Users are willing, sometimes unknowingly, to give Facebook their private information and trust that it won’t be used for nefarious purposes.

This trust model shows signs of cracking. On top of that, just because lawmakers can’t figure out how to use Facebook doesn’t mean they can’t figure out how to regulate it.

I expect some heavy-handed data privacy laws to be passed in the coming months. While viewed as a negative for Facebook’s bottom line (look at the banks after Dodd-Frank regulation), it will be a beneficial outcome in the long run.

However, the elephant in the room remains the willingness of users to share their coveted data with Facebook and its advertisers. Lucky for Facebook, social media platforms have left us with an inability to focus on anything for more than a few moments.

While the “#deleteFacebook” campaign trended on social media for about a week, most users are back to posting news stories and photos of their recent spring break trips.

Maybe the next data breach will cause a little more urgency…

Regards,

Ian King

Editor, Crypto Profit Trader

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