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Despite public outcry and fines, facebook doesn't budge

FACEBOOK has never been at a point at which its actions are so starkly in opposition to what it claims. In its earnings announcement on April 24, Facebook revealed that it has a war chest of US$3 billion for a potential fine resulting from its ongoing case with the Federal Trade Commission over privacy violations.

Yet, revenue figures performed an eyebrow raising 26 per cent for the first quarter of 2019, pushing Facebook's stock up by 9 per cent within hours of the announcement. This growth is apparently immune to the opinion of regulatory agencies, given that the company is mired in its biggest scandals around transparency and security. In other words, the "market" has again approved Facebook's strategy. But, what exactly is Facebook's strategy?

"Regulation could set baselines for what's prohibited and require companies to build systems for keeping harmful content to a bare minimum," CEO Mark Zuckerberg penned in an opinion piece for The Washington Post in March. So one would think that India, the world's largest democracy - in full election swing this month with over 900 million voters - could be the focus of Mr Zuckerberg's redeeming efforts, flying in the best data wizards from Menlo Park to Mumbai for example, to right the company's wrongs. Instead, Facebook quietly outsources the fact-checking work to contractors.

The seven contractors employed by Facebook in India are tiny. Bloomberg reported in April that one of them, named Boom, has only 11 fact checkers who seek to counter "hundreds of millions of first-time smartphone-Internet users (who) avidly share every suspect video and fake tidbit that come their way". Which raises an inevitable question "Why outsource such a task?"

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Economists have long observed that companies tend to outsource certain operations that they can "buy" from the marketplace, in which case they will not "make" those products. Except when the operation in question is critical. One good example is Tesla.

Visitors to Tesla's Palo Alto headquarters will notice how the firm takes voracious ownership of operations that it deems strategic. The most noticeable case is how it handles its battery technologies.

Although the batteries inside the famous Model S might resemble those found in a laptop, Tesla sought to master battery chemistry. The manufacturing equipment is similar to that used in consumer electronics. Yet this learning-by-doing approach has enabled the company to produce batteries suitable for supercharging vehicles, with a coolant running throughout the entire pack. These "small" tweaks matter, particularly in crucial areas where it's too risky to rely on external providers.

In the same vein, when Facebook outsources fact-checking to local subcontractors instead of integrating them in-house, it means that Facebook sees the work done by these people as non-strategic, or gets it done as cheaply as possible - or both. Outsourcing fact-checking weakens Facebook into a position where it can't control its entire operations. Mr Zuckerberg may say he's trying to reduce disinformation on Facebook; the corporate resource allocation clearly suggests that this task isn't a top priority.

But then, what exactly is Facebook's priority? A widespread narrative about Silicon Valley has been about "nerd gods building a better world", or that innovation can only be accomplished by a small group of nimble, profit-seeking entrepreneurs working amid the frenzy of market competition. In reality, Facebook is staffed by engineers who work as attention merchants, who are varyingly trained at or influenced by places like Stanford Persuasive Tech Lab. Their inclusion of addictive properties in new technologies are not accidents. The slot-machine action of swiping down to refresh a feed and the alarm-red notification badges are designed to satisfy Wall Street's relentless demand for growth in user numbers and users' time. To justify its stock price, Facebook is promoting growth at the expense of almost all other concerns.

Still, what has seriously been distorted here is the relationship between cause and effect. What the "market" shows with the earnings performance, is the result due to decisions made months, if not years ago. Advertising revenues are consequences of a company's popularity, which in turn, lead to a set of financial outcomes. Isn't it then curious that Facebook still doesn't see that Internet companies can live or die based on the importance it gives to public trust?

Before Facebook, there was Myspace - reigning king of social networks in the early 2000s. It commanded a loyal allegiance of music bands, photographers and other creatives since its founding in 2003. By 2006, it was the top social network in the US, and News Corp's Rupert Murdoch had purchased the company for US$580 million.

Then, Myspace lost visitors as Facebook gained them. Some blamed Myspace's design, which resembled a "massive spaghetti-ball mess", others attributed the failure to the lack of technological innovation. But the core problem was its reputation. The network was flooded "with scantily clad would-be celebrities, filling the site with highly sexualised photos", that led to the public perception of it as "a digital ghetto". Facebook became the next safe online haven.

Can Facebook avoid a similar fate? Because people today are deleting their accounts. For one micro-generation, there is Snap; for another, there is Vice, or TikTok. That's why Internet companies are often dubbed the "fruit flies" of the business world. Change is rapid, as much as life cycles are short.

"Internet companies that can react will survive and those who can't will die," said Pony Ma, co-founder and chief executive of the Chinese Internet giant Tencent Holdings. To which Intel's former chairman Andy Grove would conclude - "Only the paranoid survive".

  • The writers are from the IMD Business School in Switzerland and Singapore. Howard Yu is the LEGO professor of management and innovation, and author of 'LEAP: How to thrive in a world where everything can be copied' (PublicAffairs; June 2018). Mark Greeven is a Chinese-speaking Dutch professor of innovation and strategy, and author of 'Pioneers, hidden champions, changemakers, and underdogs' (MIT Press, 2019)