Facebook, under fire for Russia ads, will boost spending in 2018

By: | Published: November 2, 2017 2:48 PM

Facebook Inc. has been under fire for Russian abuse of its platform leading up to the 2016 U.S. election. Now, the world’s largest social network said it will boost spending next year to confront the problem and fund new business initiatives.

In the third quarter, the company’s sales were unscathed by the raging public debate about Russian political ads on its platform. (Reuters)

Facebook Inc. has been under fire for Russian abuse of its platform leading up to the 2016 U.S. election. Now, the world’s largest social network said it will boost spending next year to confront the problem and fund new business initiatives. The 60 percent increase, which will go toward shoring up security and intelligence efforts and building out burgeoning businesses such as video and hardware, will cut into Facebook’s profits, Chief Executive Officer Mark Zuckerberg said on a conference call with investors. Zuckerberg took pains to explain why the added investment in security is a good business decision, just after Facebook’s general counsel was berated for hours by lawmakers over the use of its platform by Russian operatives.

“I’m dead serious about this,” Zuckerberg said, referring to moves the company is making to prevent future interference by foreign powers. Shares slipped about 1.8 percent in extended trading on the forecast for higher spending.

Facebook’s size and power has thrust the company into a tricky business position: it must continue to grow in influence, while proving to governments around the world that its social network is doing good for society. It’s an awkward balance — the same day Facebook’s general counsel made the case to Congress about how technically difficult it is to track down abusive activity, Chief Operating Officer Sheryl Sandberg touted the company’s ever-more-precise ad-targeting tools. Right after Congress released examples of the many Russian postings that attempted to divide Americans politically, Zuckerberg talked about Facebook’s lofty goal of bringing people together.

Record Revenue

In the third quarter, the company’s sales were unscathed by the raging public debate about Russian political ads on its platform. Revenue rose 47 percent to a record $10.3 billion, compared with the $9.84 billion analysts expected on average, according to data compiled by Bloomberg. Net income excluding some costs grew to $4.71 billion, or $1.59 a share, the Menlo Park, California-based company said Wednesday in a statement. Analysts had estimated $1.28 a share.

The $100,000 in Russian advertising spending being investigated by lawmakers pales next to the continued boost for the business thanks to growing demand for mobile marketing, especially via video. Meanwhile, Facebook continues to add users, with 1.37 billion people now logging on daily.

Despite all of Facebook’s critics, including angry U.S. senators, advertisers who question the company’s metrics and regulators who want to protect privacy in Europe, “Facebook can still continue to thrive because its properties have such vast reach and usage,’’ said Brian Wieser, an analyst at Pivotal Research. Before the report, Facebook stock rose 1.4 percent to a record $182.66. The shares are up 59 percent this year.

Security Investment

As part of its pledge to work harder to thwart foreign efforts to meddle in elections and foment political discord, the company said earlier this week that it planned to double the number of people working on safety and security to 20,000. “Protecting our community is more important than maximizing our profits,” Zuckerberg said. It was a rare departure from companies’ regular statements on their earnings reports. Zuckerberg’s re-evaluation of Facebook’s societal impact is the biggest internal reckoning for the social-media giant since the months following its initial public offering, when the company was struggling to make money on mobile phones.

Still, Facebook is capturing most of the growth in digital advertising, alongside Alphabet Inc.’s Google, because of its vast demographic knowledge about its users, which on a monthly basis top 2 billion. Advertisers for both Facebook and Google “showed increasing intent to spend more on those sites,’’ according to research by Mark Mahaney, an analyst at RBC Capital Markets. Alphabet also beat analysts’ estimates when the company reported earnings last week.

Facebook’s strategy centers on getting people to spend more time on its products, including Instagram and Messenger, and then making money off of those users through advertising. On its main social network, Facebook has added a “Watch” section for video shows and series, which is a sort of friend-based version of YouTube. Zuckerberg has said the company’s business prospects depend on its success in video advertising, which could be bolstered by the new section, where the company is paying to seed higher-quality content.

On the Instagram photo-sharing application, which now has more than 800 million users, the company has been adding ephemeral video postings, similar to Snapchat, so more people come to the app daily knowing the content won’t be there later. On its Messenger site, the chat app with at least 1.3 billion monthly users, the company is adding partnerships that let businesses talk directly with customers, with the goal of getting the consumers hooked on the app to plan their lives. Future initiatives include a not-yet-announced home video-chat device, which will help Facebook compete in that market with Google and Amazon.com Inc.

Of all those business plans, Instagram is the only one with an advertising strategy investors are familiar with. Facebook investors have pushed the shares to records on optimism for untapped future growth, but the company also consistently faces questions about the newer initiatives. “It’s too early to say whether Facebook has come up with a winning formula” on video advertising, according to EMarketer analyst Debra Aho Williamson, and “efforts to establish Messenger as a customer-service platform are moving slowly.” WhatsApp, another Facebook chat app with more than 1 billion users, is “moving even more slowly,” she said. Even so, the experiments show Facebook has room to grow beyond its current dominance. EMarketer expects Facebook to have a 17 percent share of the worldwide digital-ad market this year, second only to Google.

Congressional Testimony

Facebook sent General Counsel Colin Stretch to Washington to testify at three separate Congressional hearings on Tuesday and Wednesday. The executive spent hours reassuring senators and representatives that Facebook was committed to preventing election manipulation by foreign powers in the future — which wasn’t enough for the politicians, who pinpointed that the company doesn’t currently have the technology and may never be able to keep up with the threat.

Google and Twitter Inc. executives also appeared at the hearings, but Facebook got the brunt of the questions and the criticism after revealing that more than 126 million people may have seen politically divisive posts from the Internet Research Agency, a pro-Kremlin Russian group. Some lawmakers have proposed legislation that would require the companies to disclose the source of campaign ads online. The tech giants have long resisted federal regulation, but in recent weeks have unveiled steps they’re taking independently to increase the transparency of political and other ads. Zuckerberg said the company has started working with Congress on ad-transparency legislation. “I think this could be very good, if done well,” he said.

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