In a post on Facebook’s website, Mark Zuckerberg has announced profound changes to Facebook’s approach to privacy and, by implication, its business model. Facebook is going to change so that it becomes much more like WhatsApp, a Facebook-owned entity that allows people to communicate privately with one another. Like WhatsApp, Facebook will encrypt people’s communications with one another so that no one — not even Facebook itself — can see what they are saying to one another. Should this ambition be realized, it is nothing less than an epochal shift in Facebook’s business model. Here’s why it happened, and what it means.
Facebook is doing this under pressure
Over the past year and a half, Facebook has faced increasing political pressure. It took Facebook some time to figure out its business model, but as soon as it did, it was straightforward. Connect people together, see how they communicate with one another, put this together with other data to figure out their interests and predilections, then serve them up to advertisers in identifiable chunks (e.g. single white men with conservative leanings living in New Jersey who had searched for new cars in the past 30 days). It was incredibly lucrative: Facebook and Google soon came to dominate online advertising. However, it generated increasing legal and political headaches. Some of Facebook’s earlier business experiments (allowing companies such as Cambridge Analytica to gather data using Facebook services) turned out to be highly controversial. Russian influence operations were able to use Facebook to spread their message.
Finally and perhaps most importantly, new European rules made it possible for regulators to go after Facebook. As Abraham Newman and I discuss in our new book, “Of Privacy and Power,” European rules have had increasingly serious consequences for American business. A series of court cases mounted by the activist Max Schrems and his organization NOYB posed a fundamental threat to Facebook’s advertising-based business model, by arguing that it was fundamentally incompatible with European rules on consent. It’s hard to know Zuckerberg’s exact motivations, but this more hostile environment surely helps explain why he has made this move.
It helps that Zuckerberg is king
Most businesses would find it extremely hard to make such a radical change to their business model, especially when they are still very profitable. Shareholders and middle managers might revolt. Facebook is different. It has a highly hierarchical internal structure, which is dominated by a very inner court of people, most of whom Zuckerberg has known for years. It also has a very unusual corporate governance and ownership system. Mark Zuckerberg is not only the CEO of Facebook. He is also the chairman and the controlling shareholder. As Margaret Levi, Tim O’Reilly and I wrote for Vox.com, he is the undisputed king. Being king means that he doesn’t have to get anyone’s permission to make radical changes to Facebook’s business model. It also may mean difficulties in implementing the plan for change. Having to get other people’s permission can be a pain, but sometimes those people can raise practical objections or point out important difficulties. It will be interesting to watch how Facebook’s engineers deal with this problem, and what this means for Facebook’s internal organization, which is now largely oriented around an advertising-based model. Big personnel changes are likely.
Facebook will try to make money from services
Zuckerberg isn’t just changing course because he was pushed. He is also being pulled by new opportunities, which might provide a more politically sustainable business model. The Chinese company WeChat has transformed itself from a business based on communications to a platform for a wide variety of commercial activities. Zuckerberg’s statement hints that he wants to do the same thing. In Facebook’s ideal new world, people will still be pulled in by the opportunity to talk to their friends. However, they will also start to use payment systems to transfer money to family members, to buy and sell, and eventually perhaps support an entire economic infrastructure. It is a bold move, which might or might not pay off.
Some governments won’t be happy
Under Facebook’s new model, people’s communications with one another will be completely private and encrypted. This has some advantages. It makes some kinds of political manipulation harder to carry off at a wide scale. However, it also means, obviously, that government authorities will not be able to see what people are saying to one another. Most obviously, this will make authoritarian regimes such as China unhappy and unwilling to admit Facebook to their markets (or to kick Facebook out when it is already present). However, it may also have consequences for democratic countries, too. Countries such as Australia and the United Kingdom are trying to compel companies to provide access to communications. In the United States, FBI Director Christopher A. Wray made a speech Wednesday calling for government access to encrypted communications. Facebook may be reducing its exposure to some legal and political risks, but only at the price of increasing its exposure to others.