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Monday, December 18, 2017
Why FACEBOOK is Headed For a TERRIBLE 2018
Leonid Bershidsky Bloomberg View
Facebook is projected to boost sales by 46 percent and double net income, but make no mistake: It had a terrible year. Despite its financial performance, the social-media giant is facing a reckoning in 2018 as regulators close in on several fronts.
To outsiders and regulators, Facebook looks like a dangerous provider of instant gratification in a space suddenly vital to the health of society. It’s also making abuse and aggression too easy — something the UK Committee on Standards in Public Life pointed out in a new report. The panel urged the prime minister to back legislation to “shift the balance of liability for illegal content to the social media companies.”
While Facebook remains the biggest platform, Google and Twitter are facing similar pressure from governments in the US and in Europe. Germany enacted a law requiring the social networks to remove hate speech promptly or face fines. In the US, the activities of a Russian troll farm during the 2016 election campaign prompted scrutiny of Facebook’s ad selling practices and a (rather ham-handed) legislative attempt to force some transparency.
Taxation is another area that regulators, especially in Europe, are targeting. Facebook, like Google, books almost all its non-US revenue in Ireland with its low corporate tax rate — and pays most of it to a tax haven for the use of intellectual property rights. The practice resulted in a 10.1 percent effective tax rate for Facebook in the third quarter of 2017.
This year, top European economies, led by France, Germany, Italy and Spain, called for a turnover tax on the tech companies to compensate for their tax avoidance. This angry move failed to get enough traction on the European Union level. But individual nations are taking action — Italy’s ruling party backed a plan to withhold 6 percent of any digital advertising purchase in the country.
On Tuesday, Facebook announced that it will start booking revenue from large ad sales in the countries they occur, not Ireland. But when Facebook and Google tested this approach in the UK, it didn’t result in a significantly higher tax bill, according to Irish economist Seamus Coffey. Last year, Facebook UK paid $3.5 million in taxes while booking $1.1 billion in revenue.
Regardless of where the company books sales, it still has to pay for the intellectual property rights held far from European shores, likely in the Cayman Islands. Coffey doubts that the new scheme will significantly change Facebook’s overall tax bill. Instead, it will create insultingly small revenue streams to more countries.
Facebook’s also trying to preempt concerns about problematic advertising and offensive content by hiring 1,000 reviewers. But even if Facebook hired in 100,000 people, they’d have trouble policing the sea of effectively anonymous content produced by 2 billion users, an unknown number of which are bots and paid trolls. The obvious solution is to enforce Facebook’s user policy (which says people can only post under their real names) and hold them responsible for what they publish. But that would cause Facebook’s user base to shrink, which would alarm investors.
A third line of attack is likely to become important soon, perhaps as soon as next year. Former Facebook executive Antonio Garcia-Martínez argued earlier this year that Facebook’s ad targeting based on data collected from users is essentially unethical (and also that Facebook oversells its targeting ability). This resonates with politicians and privacy advocates.
The social networks’ carefree years of unregulated, untaxed growth are coming to an end. Facebook will probably remain a major force in the attention market, especially given its foothold in the messenger app market and the popularity of Instagram with young people. It may keep rowing against the tide and offering meaningless concessions, but that’s not an endless path.
Eventually — likely soon — it’ll have to submit to rules and popular attitude changes that will cut its ambition down to size and perhaps force it to rethink its business model.