Think Like a Bank: What Is Facebook’s Exposure to Risky Revenue?

(Bloomberg Opinion) -- What’s a troubled social network to do? Facing a crisis of confidence, Facebook appears to struggle to take actions on its own, whether out of uncertainty or stubbornness, and it’s not clear a divided Congress and the Trump administration could agree on regulatory actions to force its hand.

One simple first step would be a bit more financial transparency. Inspired by troubled financial firms over the past decade, the company could disclose revenue from various ad sectors, the way banks reported loan exposure to the mortgage industry a decade ago or the energy industry a few years ago. That would give all interested parties a better idea about how big a part of Facebook’s business relates to activities that may be problematic.

Facebook should consider doing this because its current unregulated business model is more like a financial services firm than it is like a traditional media firm. Media firms either create or stand behind all the content they distribute. Media companies that do reporting will publish corrections to inaccuracies they report, and even in the personality-driven world of punditry, firms ultimately decide whether or not they stand behind the work of people like MSNBC host Rachel Maddow or Fox News personality Sean Hannity.

Facebook doesn’t do that. It’s enormously profitable for the company to produce little content of its own, letting those on the platform pay to do it instead. Then Facebook takes a cut of revenue from advertisers who want access to the audience.

Facebook is taking steps to monitor more content, through technology and human content monitors, but it would fiercely oppose being held to the same standards traditional media firms are held to.

Some percentage of activity on Facebook is always going to be fraudulent or inappropriate. Which makes the company more like a credit card company or a bank, where some percentage of charges will be fraudulent or loans will go bad.

The company’s actions and public statements show that executives know these costs will have to be accounted for. They’re spending billions of dollars to catch and address “bad content,” and even if it’s not clear what regulation could or should look like to further address their issues, it’s clearly a risk for the company. What’s unknown is just how much exposure the company has.

It’s worth trying to break out and disclose that. The company could start by disclosing what percentage of revenue comes from news, political and activism advertisers. (It’s true that this wouldn’t be the cleanest exercise, because, for instance, it’s hard to know what the loss of user activity would be if news and political content were banished from the site. Some might even expect an increase in users or engagement.)

Facebook’s revenue over the past 12 months was over $50 billion. If foreign governments were blocked from buying electoral influence through Facebook, would the company suddenly be insolvent? Probably not, but at the moment, regulators and the public just don’t know. Putting dollar figures to sources would be a strong start toward transparency, and then the next steps might be clearer.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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