Facebook Feels the Pinch of Privacy

(Bloomberg Opinion) -- It’s easy to believe that Facebook Inc. is an unstoppable advertising force built on pervasive human surveillance and that meek regulatory or legislative efforts do nothing to stop it. 

Despite those concerns, the privacy reckoning for Facebook and the rest of the internet is denting the company’s ad machine.

Facebook spooked investors a bit on Wednesday during a conference call to discuss its second-quarter earnings. Executives said revenue growth would slow more than the company previously expected at the end of this year and into 2020, in part because of various restrictions or self-imposed limitations on Facebook’s data harvesting. 

Facebook didn’t spill all the details about the scope of this growth sag or the causes. Europe’s strict data privacy rules, imposed last year, require Facebook to obtain explicit permission from people for all sorts of data harvesting that is considered normal in the U.S., and executives have said that some Europeans are saying no.

Facebook’s revenue growth in Europe is slower than the pace in the U.S. and Canada and in the Asia-Pacific region. Facebook has also said the European data rules are having an impact outside of that continent, perhaps because of more attention on Facebook’s privacy practices.

Companies such as Apple Inc. that control important online gateways are also trying to crack down on the types of broad data collection in which Facebook and others engage. And Facebook itself has imposed limits on types of sometimes-creepy information marketers had used to target ads and closed down some of Facebook’s own ad-targeting categories, including ones that should not have existed.

Facebook has also promised a long-delayed feature that would allow people to decouple their internet browsing history from their Facebook user profiles. The company has warned advertisers that this “clear history” feature will make Facebook’s ads less personalized. (It should be said that Facebook hasn’t done much to limit the kinds of data the company itself harvests on billions of people.) 

The revenue warning shows that when Facebook and its advertising partners have handcuffs on how much they can do to assemble complex portraits of people as they roam around the web and the real world, the unstoppable growth machine sputters a bit. Facebook can’t pinpoint ever-more personalized ads, and people are less likely, perhaps, to respond to those pitches. Facebook makes a little less money. 

Analysts have been looking for Facebook’s growth rate to come in under 25% for the rest of this year. That is enviable for a company with more than $60 billion in yearly sales, but revenue rose 37% last year. There are a host of reasons Facebook isn’t growing as fast, including a slow shift of people away from its lucrative core social network into slightly less lucrative Instagram. Still, the expected slowdown shows that privacy limits imposed by governments, internet gatekeepers and Facebook itself are having an impact.

It’s not clear whether Facebook’s revenue forecast anticipated possible effects related to the U.S. Federal Trade Commission, which hit Facebook with a $5 billion fine on Wednesday for privacy-related violations and forced some structural changes on its handling of privacy matters. Facebook did tell investors that the FTC-imposed changes will require the company to spend a significant sum of money and will most likely slow the release of new products. 

It’s still possible that people will want many more concessions and actions from Facebook on user privacy. I wrote on Wednesday that the entire internet economy, including Facebook and Google, has thrived by normalizing ever more aggressive data harvesting in ways that people don’t fully understand and can’t meaningfully consent to. One fix would be to allow more users to permit Facebook’s information collection only inside the walls of its social network and other apps — not just about everywhere online and in the real world. 

But even without that drastic step, it’s clear that years of reckoning have complicated Facebook’s path forward. Yes, privacy crackdowns matter.

Mark Zuckerberg did say that the company has been surprised by the level of engagement with the main social network this year, and that activity on Facebook contributed to the company's revenue growth exceeding expectations in the second quarter.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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