The team at Facebook is not having a great week, as it seems all of its recent data scandal chickens have come home to roost. Last Wednesday, July 25, its market cap took a US$120 billion beating in the aftermath of earnings that fell short of revenue and earnings targets. Analysts say this is the first indication that the animus over the Cambridge Analytica issue could have a longer-term impact on three dimensions of its platform: advertisers, users, and the cost to run the platform.
Two days later, Facebook and its executive team found themselves named in a class-action lawsuit—actually, several of them—alleging that the social network made false and misleading statements related to the decline of monthly active users prior to the second-quarter earnings report.
Over the weekend, Last Week Tonight served up its own version of an “honest Facebook” ad—in a parody of the apology ad they offered up a few weeks ago—that was pretty brutal and immediately went viral.
And then on Tuesday, July 31, three-and-a-half months after Mark Zuckerberg spent about 10 hours testifying in front of senators and congress people to apologize for the Cambridge Analytica incident (and explaining the internet to our elected representatives), the other shoe dropped when it came to the long-speculated subject of the federal government regulating big tech.
Virginia Senator Mark Warner, vice chairman of the Senate Intelligence Committee, released a policy paper detailing 20 options for the government to start regulating big tech a lot more closely.
“The speed with which these products have grown and come to dominate nearly every aspect of our social, political and economic lives has in many ways obscured the shortcomings of their creators in anticipating the harmful effects of their use,” the report stated in its opening paragraphs. “Government has failed to adapt and has been incapable or unwilling to adequately address the impacts of these trends on privacy, competition and public discourse.”
Thanks, Facebook, for being the catalyst for that.
What It Targets (and Why)
In fairness to Facebook, it is far from the only target of the regulations. Though the site was uniquely and specifically called out in the report for its various failings around the Cambridge Analytica scandal, Senator Warner’s report made it very clear that Facebook was the most visible problem at present, but not the only one.
In fact, reports called out most of the biggest and brightest names in technology as falling under the scope of the regulatory options being put forward: Facebook, Google, Twitter, Amazon, and Apple were all name-checked within the first hundred or so words.
And why not? There’s nothing like hovering near the US$1 trillion market cap to cause policy makers to suspect that you must be doing something wrong.
The report did note that all of these firms deserved both credit and praise for technological transformation they have engendered around the world. It also logged that much of what these firms do in terms of tracking data is actually predicated on the perfectly sound goal of providing better customer service across the board.
“User tracking can have important consumer benefits—for instance, by showing users more relevant ads and helping to optimize user experience across different apps.”
The problem, according to the report, is that all the opportunities for consumer harm that also exist in tracking and compiling extensive data profiles for consumers—particularly in light of the fact that these profiles and their contents are largely unknown to the customers to whom they refer.
The report notes that pervasive tracking can give businesses a chance to use behavioral data on a customer’s shopping and spending habits and exploit it to “drive engagement with an app or service.”
Or use it in ways that consumers like.
It can also influence the path a democracy might take, the report noted, referring specifically to the Cambridge Analytica scandal—or have an effect on a consumer’s life in a way that he or she might not have reasonably expected.
Assuming, it appears, that the impact on that consumer’s life as a result of those technologies is probably negative.
The good news, according to the report, is that there are “numerous opportunities” for policymakers, stakeholders and technologists to work together to operate to the broader advantage of “society, competition and broad-based innovation.”
“[The goal] is to make sure that we are adopting appropriate safeguards to ensure that this ecosystem no longer exists as the ‘Wild West’ – unmanaged and not accountable to users or broader society.”
So, how to get there?
The Suggested Regulations
There are a lot of suggestions in the report, but probably the most eye-catching is the suggestion that the US adopt a GDPR-like legislation.
These new regulations would require tech companies to obtain individual consent to use consumer data, notify customers of a data breach within 72 hours, and allow people to access their personal data and take it with them if they switch digital services. The Warner paper further recommends that some of the regulations can be legislated separately, as opposed to as a single parcel of rules, a la what just went into effect in the EU.
Also particularly eye-catching is a move to redefine a wide range of tech firms, including Twitter, Google, Facebook, Apple, Amazon, Comcast, Verizon, and Microsoft as “information fiduciaries.” This wholly de novo legal term would require firms to protect consumer data and not utilize it for their own benefit or for the benefit of third parties. This proposal, many critics have already noted, would effectively destroy the business model of several of these firms, and countless others.
It also reflects a similar lack of understanding that the regulators across the pond have for what these platform businesses do, how they are constructed and how those business models work.
A smaller-scope version of that proposal—which watchers agree would at least be less damaging—would simply treat many of these firms as the media companies they have long resisted being dubbed, and make internet platforms accountable to defamation and invasion of privacy laws, much as news media outlets already are.
On the less controversial side of the suggestions, the paper also advocates for media literacy in schools, including a public initiative to begin internet education early in life. The proposal also recommends beefing up military spending for the prevention of cyberattacks, as well as elevating sanctions and punitive measures against nations like Russia that already have a history of attacking US institutions through disinformation campaigns and various types of cybercrime.
Given that 87 million people’s data was leaked via the Cambridge Analytica scandal—and the outrage that came along with it—regulation proposals were almost certainly a guarantee.
How well the regulators understand what they are regulating remains an open question. The report, for example, calls out various online lending platforms that include “social media data” to make underwriting decisions.
“Users have no reason to expect that certain browsing behavior could determine the interest they pay on an auto-loan, much less that what their friends post could be used to determine that,” the report wrote.
A sound point—though PYMNTS has interviewed dozens of online lenders over the last nine years, and zero percent use things likes social media history and browsing data (or friends’ posts) to make underwriting decisions.
In fact, the vast, vast majority don’t use that kind of data for underwriting decisions at all—though they do often use it as a tool to establish identity. The reason is that social media data and browsing is highly curated and not all that informative. It’s hard to manipulate financial data—consumers paying their bills on time is what underwriters tend to look at most.
Using “alternative data streams” doesn’t mean looking at Facebook or Twitter to make underwriting decisions, it means looking at things like rent and phone bill payments that aren’t represented in traditional credit reports. That point of confusion seems to make a case that Senator Warner and other regulators perhaps have a bit more research to do before letting the ink dry on any new regulations.
But it seems that no matter what, regulation is soon coming to big tech. David Redl, a senior US Commerce Department official who oversees the National Telecommunications and Information Administration, noted in a speech on Friday that the administration is currently hard at work on a data privacy doctrine. While Senator Warner’s regulations do come from a Democrat, the Trump administration might welcome a rare chance to work across the aisle and collectively get some regulations in place.
Which means change is likely coming to the regulatory world in which big tech lives.
Full Content: PYMNTS