Weekly readings – 29th June 2019

Bodies in seats. A horrifying investigative piece on the working environment of and the emotional toll on employees who are tasked with policing content on Facebook.

Millions of Business Listings on Google Maps Are Fake—and Google Profits. Fake business listings plague Google Maps and can spell potential danger on users.

Why Google+ Failed. An insider perspective on why Google’s attempt to unseat Facebook failed.

The 70-year-old retiree who became America’s worst counterfeiter. A highly interesting story that I believe is unknown to many.

GDPR Enforcement Tracker. 56 fines since its official introduction with Google’s $50 million fine as the biggest one so far. Whether GDPR met your expectation, the most important point I think is that without regulations, how could you hold companies accountable?

How E-Commerce Sites Manipulate You Into Buying Things You May Not Want

The Insulin Racket. A deep dive into why insulin, which is very critical to many’s well-being, became three times more expensive in the span of 10 years. Drug companies profited while lives were devastated.

Jony Ive Is Leaving Apple. I like John Gruber’s take on this.

Freemium’s Public Moment. Some interesting head-to-head comparisons between Fremium-based companies

Amazon is watching.

Weekly readings – 22nd June 2019

“Amazon’s Choice” Does Not Necessarily Mean A Product Is Good. Amazon’s Choice is a popular trigger to shoppers about a product’s quality and popularity. This piece sheds some light on the feature.

Algorithms Won’t Fix What’s Wrong With YouTube.

How a janitor at Frito-Lay invented Flamin’ Hot Cheetos. An amazing story about the VP of PepsiCo from a janitor to a C-Suite executive of a world class corporation. “I do have a Ph.D.,” he responded. “I’ve been poor, hungry and determined.”

This psychologist explains why people confess to crimes they didn’t commit

IAB Podcast Ad Revenue Study: An Analysis of the Largest Players in the Podcasting Industry

Reuters Institute Digital News Report 2019. A very interesting study on consumption of digital news across countries

Tesla, Facing Setbacks and Skeptics, Tries to Get Back on Course. A nice overview of Tesla’s situation

Why Google’s Advertising Dominance Is Drawing Antitrust Scrutiny

The ambitious plan behind Facebook’s cryptocurrency, Libra. A quick overview of Libra, if you don’t have time to read the supporting documents released by Libra Org.

Scooter Breakdowns Weigh on Lime

Take-aways from Facebook’s quarterly report

This post will be about what I took away from reading Facebook’s quarterly report, presentation and earning call transcript.

  • There are 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month with more than 2.1 billion people using at least one every day.
  • Stories have more than 500 million actives every day across all platforms
  • Mobile ad revenue by 30% year over year and made up of 93% of Facebook’s revenue this quarter
  • 3 million advertisers use Stories Ads
  • Interactive Stories Ads was introduced last month
  • Facebook daily active users reached 1.56 billion with growth in India, Indonesia and Philippines leading the way. I wonder how this number relates to the 2.7 billion figure mentioned in the first bullet. For instance, I use all the apps from Facebook almost on a daily basis. Will I count as one or four users?
  • “The average price per ad decreased 4% and the number of ad impressions served across our services increased 32%”
  • “Payments and Other Fees revenue was $165 million, down 4% year-over-year and down 40% from Q4 which benefitted from holiday sales of Oculus and Portal.”
  • “Turning now to expenses. Total expenses were $11.8 billion, up 80%. This includes a $3 billion accrual taken in connection with the inquiry of the Federal Trade Commission into our platform and user data practices. This matter remains unresolved, and we estimate that the associated range of loss is between $3 billion and $5 billion. Absent this accrual our total expense growth rate would have been 46 percentage points lower. Operating income was $3.3 billion representing a 22% operating margin. Absent the accrual, operating margin would have been 20 percentage points higher.”

Daily Active Users YoY Growth

Source: Facebook

DAUs year-over-year growth in fiscal year 2019 slowed down compared to Q1 2018.

Monthly Active Users YoY Growth

The same sentiment goes for Monthly Active Users

Revenue YoY Growth

In Q1 2019, the revenue YoY growth in America is the largest among geographies, even bigger than that of APAC

Average Revenue Per User YoY Growth

Average Revenue Per User YoY Growth in US & America is pretty impressive given how competitive the market is and the size of Facebook’s already massive business.

Operating Margin

Operating margin in 2018 contracted across the quarters compared to 2017. Even without the expected FTC fine, the margin would be 42%, lowered than that of previous first quarters in 2017 and 2018.

Thoughts

The numbers show that even though the growth slowed down in the first quarter of 2019 compared to Q1 2018, the business strength still seems to be pretty impressive, especially in APAC and North America. However, the company still has a lot of issues to deal with. The scandals related to the company are reported almost on a monthly basis. I suspect that ensuring the user safety and integrity of the platforms will be expensive and challenging. Plus, regulations and lawmakers are putting increasing pressure on Facebook. GDPR was mentioned repeatedly during the earning call in the sense that compliance with such regulations would negatively impact the business. In addition, Amazon has been growing fast as a fierce competitor in the advertising field, taking ads money from Google.

There is mention of cannibalization between Feed Ads and Stories Ads and Facebook building tools to help advertisers place ads in the most efficient and effective way

Now, we’re really applying that lesson to Stories. First, we need to convince marketers that people are using Stories, and I think having seen the mobile shift, their process – they’re getting that I think more quickly. But then we have to make it easy. So if you look at some of the tools and products I’ve talked about in the last couple of quarters, now you can – rather than us saying to you, go make a Stories ad you can just send us some pictures, some text, some very easy posts and we will create some Stories ads for you.

So our process is, we have one sales team selling all of these products; I think that helps us a lot because they already have those relationships. And we’re doing all we can to make it very easy to adopt the format. We also want to make this as automated as possible. So the long run view should be that you can give us maybe simple pictures, maybe simple videos, maybe an ad you’ve produced and we can do the placement for you. Because we think over time our systems will do a better job deciding where your ads should be placed and even helping you target. And so you’re seeing us build tools in that direction as well.

In terms of how much of its incremental, I’m sure not all of it is. There’s – definitely has to be some cannibalization for people who are doing feed ads as they get Stories. But we’ve seen that over time as we move people we’re able to get increasing shares, hopefully, of their budget but it’s our job to earn that. We tell marketers all over the world that we want to be the best dollar, the best minute, the best euro they spend and it’s up to us to prove that ROI and we’re going to continue to do that.

To convince people to pay for something, first it’s better to prove that the goods in question have value. By making Stories cheap, Facebook makes it an appealing option in addition to the Feed Ads. Though there is concern over cannibalization, Facebook doesn’t seem to have trouble increasing the revenue or the advertising Average Revenue Per User.

Concern over Facebook’s new privacy-focused vision

A few days ago, Mark Zuckerberg shared with the world his privacy-focused vision for Facebook moving forward. I understand that it may make sense strategically for the company, but I have real concerns over the feasibility of the strategy.

Lack of trust

Facebook has been littered with scandals for the past two years. The trust between the blue brand and users isn’t particularly at its all-time high. There have been documented evidence on the exodus of users from Facebook or the significant decrease in activities. If the trust is already shaky, why would users trust Facebook with every aspect of their life by using their proposed super app? (The super app concept is similar to WeChat, which users can use to do many things while on the platform such as booking movie tickets, paying bills, transferring money to friends and families…). If we can’t trust Facebook with just daily communication, how can we entrust it with more aspects of our life? If you can’t trust a dentist to treat your teeth, would you trust that dentist if he said he could fix your eyes?

The audience

I think one of the reasons why WeChat is successful is because of the target audience. Coming from that part of the world, I can say from personal experience that we Asians tend to not care as much as Western audience about privacy. I think there is a reason why WeChat hasn’t been as successful overseas as it is in China. If it were marketed to Western audience, given its relationship with the Chinese government and Western users’ concern over privacy, I don’t think it would be a triumphant effort. Hence, to convince Western users to use Facebook for everything, the trust has to be pretty solid. It’s not there now for sure.

Regulatory hurdles

Facebook has attracted unwelcome attention from lawmakers recently. And for a good reason. Even if they had done nothing wrong, which is definitely not the case, I suspect that the road to the super app vision wouldn’t be without robust challenges from the regulatory perspective.

Essentially, it’s all well and good for Facebook to change its stance on privacy. However, the trust isn’t there. I would love to see more concrete actions to transition from a company whose more than 95% of its revenue is from ads to a company that values privacy first. I am not a believer at the moment since Facebook has used up the rope we gave them already. If they want us to trust them again, they have to do it the hard way. And I think they have to hurry as well as the world won’t stand still for them. If this is the vision that makes business sense, others will go for it as well.

If they are committed and succeed in the future, kudos to them. Until then, I choose to remain skeptical of the vision.

Facebook’s privacy-focused vision

Yesterday, Mark Zuckerberg released a blog post on a “privacy-focused vision” that centers on:

Private interactions. People should have simple, intimate places where they have clear control over who can communicate with them and confidence that no one else can access what they share.

Encryption. People’s private communications should be secure. End-to-end encryption prevents anyone — including us — from seeing what people share on our services.

Reducing Permanence. People should be comfortable being themselves, and should not have to worry about what they share coming back to hurt them later. So we won’t keep messages or stories around for longer than necessary to deliver the service or longer than people want them.

Safety. People should expect that we will do everything we can to keep them safe on our services within the limits of what’s possible in an encrypted service.

Interoperability. People should be able to use any of our apps to reach their friends, and they should be able to communicate across networks easily and securely.

Secure data storage. People should expect that we won’t store sensitive data in countries with weak records on human rights like privacy and freedom of expression in order to protect data from being improperly accessed.

Be that as it may that this vision can bring business and strategic benefits, meaning that Facebook has a reason to follow suit. Nonetheless, I have nothing, but skepticisms about this vision.

First of all, the majority of Facebook’s revenue comes from ads. By majority, I meant 98.5% of their revenue in 2018 comes from ads

Source: Facebook

When something is 98.5% of you, any claim that you will do something threatening that 98.5% part tends to raise genuine concerns about its legitimacy.

Second of all, Facebook’s track record on keeping its promise isn’t that great. For the last two years, it will be a hard ask to find a tech company that is involved in more scandals than the blue brand. I came across this disturbing article from Buzzfeed on Facebook. Here is what it has on decision-making at Facebook

Zuckerberg and Chief Operating Officer Sheryl Sandberg do not make judgment calls “until pressure is applied,” said another former employee, who worked with Facebook’s leadership and declined to be named for fear of retribution. “That pressure could come from the press or regulators, but they’re not keen on decision-making until they’re forced to do so.”

Buzzfeed

On Facebook’s attention to privacy

One former employee noted that Facebook’s executives historically only took privacy seriously if problems affected the key metrics of daily active users, which totaled 1.52 billion accounts in December, or monthly active users, which totaled 2.32 billion accounts. Both figures increased by about 9% year-over-year in December.

“If it came down to user privacy or MAU growth, Facebook always chose the latter,” the person said. 

Buzzfeed

On their denial to admit problems:

Other sources told BuzzFeed News that Facebook executives continue to view the problems of 2018 fundamentally as communication issues. They said some insiders among leadership and the rank and file could not understand how Facebook had become the focus of so much public ire and floated the idea that news publications, who had seen their business models decimated by Facebook and Google, had been directed to cover the company in a harsher light.

Buzzfeed

On a new feature called Clear History:

“If you watch the presentation, we really had nothing to show anyone,” said one person, who was close to F8. “Mark just wanted to score some points.”

Still, nine months after its initial announcement, Clear History is nowhere to be found. A Facebook executive conceded in a December interview with Recode that “it’s taking longer than we initially thought” due to issues with how data is stored and processed. 

Buzzfeed

By now, you should see why I am skeptical of Facebook’s new vision. We all have to take a side and so does Facebook. It just happens that taking advertisers side means Facebook is not on ours as users.

Facebook & Privacy First Mentality

Quite a week for Facebook

It has been quite a few days for Facebook. First, two days ago on Techcrunch:

Facebook has confirmed it does in fact use phone numbers that users provided it for security purposes to also target them with ads.

Specifically a phone number handed over for two factor authentication (2FA) — a security technique that adds a second layer of authentication to help keep accounts secure.

Then, a bombshell was dropped yesterday. Per Wired:

ON FRIDAY, FACEBOOK revealed that it had suffered a security breach that impacted at least 50 million of its users, and possibly as many as 90 million. What it failed to mention initially, but revealed in a followup call Friday afternoon, is that the flaw affects more than just Facebook. If your account was impacted it means that a hacker could have accessed any account that you log into using Facebook.

Facebook’s track record in data security and privacy hasn’t been particularly stellar recently. 2018 is not 2010. Facebook doesn’t have the same dominant position as it used to in the social network market any more. Users have plenty of alternatives and substitutes to spend their time on. These scandals, coupled with its role in the “free speech vs hate speech” row, don’t do any good to Facebook’s image as well as its appeal to users when privacy has become more and more pressing as a concern to users.

Privacy & regulations

I have been resigned to the fact that there is no anonymity on the Internet and that complete privacy isn’t possible. Yet, when users trust a company with their data, whatever the data is, it’s the company’s responsibility to protect such data. As many important aspects of our lives take place on the Internet, the need to feel safe online is more overwhelming than ever. Without feeling safe, how could users feel comfortable using a service? Privacy and data security will be, if not already is, expected by default of companies. It’s not a nice-to-have feature any more. It’s a do-or-see-your-competitors-get-ahead game.

But companies are not in the business to lose money. If they are not legally required to bolster their security, don’t expect them to. That’s why companies fought hard against GDPR or privacy laws passed in California this year. And this is where I don’t understand the criticisms of some towards regulations such as GDPR. Yes, no law is perfect, especially in the beginning. That’s why we have amendments. GDPR is not an exception. It is a great first step to give power back to users and force companies to be liable for their actions/inactions.

A common criticism that I came across towards GDPR is that it makes it too expensive for small companies and startups to comply, widening the moat or competitive advantage gap between giants such as Google/Facebook and SMBs. Well, if a company with a deep pocket and better security measures has 10% of its 500,000 in user base breached, the impact is 50,000 users. If a small company with fewer recourses and much weaker security measures loses all of its 50,000 users, the impact is the same as in the first scenario. Hence, breaches at SMBs can have significant damages and ramifications as well.

Sure, the best case scenario is to have different levels of compliance applied to companies of different size. I’d love to see that happen. Nonetheless, without privacy regulations, imagine how much companies would care about our data and how much of a mess it would be. Despite having HIPAA in place, every year has been a banner year of cybersecurity in healthcare in the US and healthcare organizations spend 3% of their IT budget on cybersecurity. Verizon reported in their 2018 Payment Security Report that only 40% of all interviewed companies in North America maintained full compliance with PCI. Despite all the scandals related to data security in the past, Facebook still lets more unfortunate events happen. To be fair, I don’t imagine having impeccable security is easy. However, would companies even try to secure your data without any legal requirements?

Progress happens when we raise standards. Would cars be more environmentally friendly if we hadn’t enforced regulations on emission quality? If a university wants to raise its standard for incoming students, will it lower or raise the requirement for GMAT/SAT? Will a drug be safer for patients if the FDA enforces more or fewer tests? Big companies have the means to comply with stringent privacy regulations. Small companies/startups, though difficult, have more access to capital funding. Plus, public cloud providers are investing to have their infrastructure compliant with many compliance regulations (See more here for AWS compliance and Azure compliance). Regardless of size, companies have to take privacy seriously and consider it an integral piece of the puzzle, a competitive advantage if done right or a threat to their competitiveness if ignored.