Given the political nature of the Cambridge Analytics and Facebook revelations over the past few weeks there is a charged atmosphere. There is also a high profile movement to delete Facebook (#DeleteFacebook.) There is a related debate shaping up between those who feel Facebook betrayed user’s trust and those that say we all knew all along how Facebook makes money on the consumers of the free service. One argument says people who are surprised that Facebook is selling their data are disingenuous. Will stay away from that debate for this blog and will focus on the business and technology management issues related to business impact and technology change. Also, as a given regulatory pace and the pace of innovation often have an impedance mismatch. The main premise of this article is that in the social media and digital transformation landscape, this impedance mismatch does not absolve innovators from addressing non-regulatory risks. We will also explore some assumptions around the concept of West Coast Law has potentially given large platform firms excessive confidence in their ability to stay ahead of regulation.
Bloomburg reports “Bruised by a privacy crisis, the social media giant lost its position among the top five S&P 500 companies” and “sparked a selloff that has wiped out about $95 billion in market value in the past two weeks.”[i] Regardless of regulatory, privacy, and other legal dimensions to this story and whether or not this business impact is permanent or something that Facebook leadership can overcome over time, the markets and consumers are speaking and #DeleteFacebook is only one dimension of the discussion.
But for two sided or multi-sided platform firms, the lesson is that regardless of legal and compliance dimensions, there will be tipping points where the value of platform membership for consumers or businesses can quickly change. These quick changes are as simple as market dynamics and consumer confidence and therefore can be more punishing than the political dimensions or legal dimensions. This can weaken a firm immediately when there is a crisis in confidence in the platform or network. This weakening can occur dramatically and will aggravate even the seemingly unstoppable “scale” networks. To put this evaporation in market capital into perspective, $19B is slightly less than Iceland’s Gross Domestic Product in 2017.[ii]
Given this immediate and large market feedback, regardless of how Facebook navigates the requests by governments for the CEO to testify or how many law suits are filed in how ever many countries — navigating this issue is an existential issue for a company that many assumed, until recently, was an unassailable leader and global brand. Facebook’s founder and CEO made a detailed statement that acknowledged “…we also made mistakes, there’s more to do, and we need to step up and do it.” Implied in his statement is that there could be other Apps beyond Cambridge Analytics that need to be addressed. Mark Zuckerberg promised in his post that Facebook will investigate, restrict developer access to prevent abuse, help people understand what apps access what data and how to use a Facebook provided privacy tool.[iii] But regardless, the business impact has been significant and will distract leadership and others at Facebook beyond the legal and regulatory implications. It seems clear today that the business dimensions will be more important than privacy and regulatory issues to Facebook’s long term business success.
West Coast Law is an old concept developed by Lawerence Lessig in his book titled “Code and Other Laws of Cyberspace” from the ’90s. He updated this tome as Codev2 in 2005. His main thesis is that Code is in fact the regulator. “That regulator is the obscurity in this book’s title — Code. In real space, we recognize how laws regulate — through constitutions, statutes, and other legal codes. In cyberspace we must understand how a different “code” regulates-how the software and hardware (i.e., the “code” of cyberspace) that make cyberspace what it is also regulate cyberspace as it is. As William Mitchell puts it, this code is cyberspace’s ‘law.’ ‘Lex Informatica,’ as Joel Reidenberg first put it, or better, ‘code is law’.”[iv] One way this has pervaded Silicon Valley Founder thinking is that code in some sense is self-regulating and that “real space law” lags business concepts in cyberspace. Some of that thinking results in a move fast and set first mover precedents before real space law shows up.
A classic and somewhat cynical application of this concept, is Uber. In order to expand quickly in metropolitan areas that have existing Taxi or other transportation regulation: “Uber had argued that it’s a technology platform that connects independent drivers with passengers.” Or in other words was simply an Internet service. That argument has recently hit significant headwinds with an European Union ruling that it is indeed a transportation service.[v] Often well-meaning technology firms race ahead of regulations knowing that existing regulations and laws do not really apply to the things they are doing. In the Facebook case, we could argue that they understand that they have been racing ahead of regulation and laws that do not specifically address their platform and have been relying on the Law of Code. Often technology company employees inherently understand these first mover and Law of Code concepts.
Facebook had a blind spot based about their success related to West Coast Law and privacy and lost touch with how their code regulated behavior of others like Cambridge Analytica and now they are trying to re-code. As evidence, 31% of their technology brethren at firms like Microsoft, Google, and Amazon plan to delete Facebook and these are folks that intrinsically understand the law of code.[vi]
In conclusion, investors and consumers and laws of the market may be the biggest issues facing Facebook today. The plunge in valuation and distractions facing management are clear. The #DeleteFacebook movement is supported by other technologists, who understand West Coast Law, and are voting with their feet. Many feel like Facebook crossed some invisible line. Others will look more closely at the privacy and ethical issues involved, but for today it is clear that in retrospect there are business and technical decisions that Facebook may have preferred they made differently.