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Facebook's business model wasn't an issue...until President Trump

Trump Vortex: Why Facebook's business model is only now coming under fire

Facebook is in full damage-control mode. One of its latest crises involves both President Trump and a massive data breach affecting as many as 87 million of its users, and it seems to be the tipping point in a difficult few years for the social media giant. Unlike past incidents over data privacy and fake news, investors and consumers seem to finally be taking note.

In the aftermath, Mark Zuckerberg has been repeating the same refrain – he and the company "didn't take a broad enough view of what our responsibility is." It's almost like Zuckerberg's Frankenstein moment. He created a monster 14 years ago, and he's now trying to figure out how to control the beast.

But none of these problems are new, which begs the obvious question – why is this only happening now?

If you look at the timing, it all seems oddly pegged to President Trump. To understand why, you need to look back at the two big events plaguing Facebook at the moment: "Fake News" and Cambridge Analytica.

Fake News and the 2016 U.S. presidential election

Let's go back to election day 2016. As soon as the results came in, reports of Russian interference came up. And as far as the Department of Justice is concerned, Moscow did it specifically to tilt the election to Trump. Zuckerberg initially called it a pretty crazy idea to think anyone could use FB to influence the election. He walked it back within the year.

But even though Facebook's stock kept plowing through new record highs, Zuckerberg couldn't shake the scrutiny over fake news this time.

To be clear, the fake news issue had popped up before. But the surprise Brexit vote and Trump's shock victory piqued Western interest and gave this social media manipulation international attention. In trying to explain the phenomenon of Trump, a lot of people started to ask what impact fake news had on the election.

But one ex-Facebooker argues Russia's Facebook ads were actually much less important to Trump's victory than the Trump campaign's own Facebook ads. Trump himself, on the campaign trail and in office, has been a pretty avid practitioner of social media. That relationship has proven to be pivotal both for him -- and for the platforms themselves.

His White House run wasn't Trump's first bid for public office. He at least talked about running in 1988, 2000, 2004, and 2012. But 2016 was when he got his social media strategy together.

Zuckerberg himself said there was more engagement with Trump's Facebook posts than Clinton's. And when it comes to ads, engagement is what Facebook rewards.

Cambridge Analytica

Now fast forward to 2018 – and the Trump campaign's ties to a data analytics firm that mined user information on Facebook have come into question.

Cambridge Analytica is perhaps the most prominent Facebook controversy right now. It's brought data privacy to the forefront of the public dialogue.

Back in 2013, a Cambridge University researcher made an app called "thisisyourdigitallife." More than 270,000 Facebook users took the quiz, thinking that any information the quiz gathered would be used for academic research.

Facebook says the quiz makers then handed the information over to political data analytics firm Cambridge Analytica.

In 2016, Jared Kushner hired Cambridge Analytica to take over the Trump campaign's data operations. It's not clear exactly when or if the data from that app was actually used.

But if it was, it could have granted them access to the data of as many as 87 million users. The roughly 300,000 people who downloaded the app didn't know their data would be used like this, and their Facebook friends who didn't download the app, didn't know anything.

Chesnot | Getty Images

Keep in mind that Facebook has been advertising the fact that it's the perfect place for candidates to access voters for years. This isn't the first time a presidential hopeful has scraped Facebook for voter data.

Just take the "Obama for America" app that launched in 2012. More than a million people downloaded the app, and it, too, apparently branched out to those people's friends to mine information, including "their birth dates, locations and 'likes.'" The Facebook users who actually downloaded the app knew their data was going to a political campaign – but their friends didn't. Unlike the fallout associated with Cambridge Analytica and President Trump, there was very little blowback for President Obama.

This idea of micro targeting feeds right into Facebook's current ad model. It's always been one of the big ways Facebook makes money. Facebook's business model relies on user data to build algorithms to sell advertising, which ultimately keeps the platform free for users. So, data is their business model.

But a big difference now appears to be that the data in question is tied to a president whom a lot of people just don't like.

Zuckerberg: There will always be a free Facebook

For now, the company is still sticking to the data-driven model. Facebook COO Sheryl Sandberg says Facebook users would have to pay to opt out of their data being used for targeted ads.

But Facebook's recent Trump-tied scandals have brought about some change. In his testimony on Capitol Hill, Zuckerberg announced plans to be more transparent about Facebook's data use. He said apps will have access to less user data, and it'll be easier for users to see which apps have that access. In response to Russia, Zuckerberg tightened up Facebook's political advertising policies and said Facebook is increasing its investment in security.

Facebook CEO Mark Zuckerberg arrives for his meeting with Sen. Bill Nelson, D-Fla., in the Hart Senate Office Building on Monday, April 9, 2018. Zuckerberg is on Capitol Hill to testify before the House and Senate this week.
Bill Clark | CQ Roll Call | Getty Images

So it seems Zuckerberg is taking steps to address the latest controversies. But Facebook's reputation has already taken the hit.

Even while the Cambridge Analytica scandal was unfolding, Facebook was in talks with hospitals in the hopes of matching patient data with Facebook user data.

To some people, that kind of access is expected. To others, it struck a nerve. #DeleteFacebook was trending after the Cambridge Analytica scandal, although Zuckerberg told House lawmakers it hadn't led to an exodus of users yet.

Platform versus publisher

The fact remains, for a good portion of the country, Facebook is how people get their news. That's brought new relevance – and urgency – to the one big question that's been plaguing Facebook for years: Is it a platform, or a publisher?

The company would say platform. Technically, they're right.

There's a section in the 1996 Communications Decency Act that reads, "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider."

Facebook didn't even exist when the federal law was written. But that single line has given companies like Facebook, Twitter, and Google the legal grounds to say they're not responsible for the content on their platforms. But that precedent has come under question.

Facebook's news feed is arranged based on algorithms, which means not everybody sees the same posts, videos and news stories. As more people turn to Facebook as their primary news source, the company is being looked at as a sort of "editor" of information online.

Facebook Stock Chart 180413

The Trump Vortex may have pulled Facebook into its orbit, but its stock price from the date of the inauguration to now is still up around 30%. It may be taking a hit from the media now, but just wait until Q1 earnings come out on April 25. Analysts expect them to be robust.

It's going to prove one thing – advertisers have nowhere else to go. Meaning that Facebook, along with the other big tech ad companies like Google, may join the list of "too big to fail."