Though the reasons for their disappointing earnings differ in their details, in both cases the companies have been compelled to act by Capitol Hill to prevent a recurrence of the Russian interference. That action has proved expensive — in terms of hiring new staff to review content for Facebook and in efforts to suspend fake accounts for Twitter, which has had the inadvertent effect of driving down a crucial count of the company’s active users.
Both also have been the target of a public backlash against the expansive role of social media in American life, a trend fueled by allegations that Facebook and Twitter should have been more aggressive in preventing the Russian disinformation and taken even more forceful corrective measures afterward.
“People are angry with the platforms,” said Clint Watts, a former FBI agent and Foreign Policy Research Institute senior fellow who studies disinformation. “They built a system where it was too easy to manipulate.”
The Internet Research Agency in St. Petersburg, owned by an ally of Vladimir Putin, controlled 270 pages and accounts on Facebook and nearly 4,000 accounts on Twitter, which the companies revealed last fall. A third company used by the Russians, Google, has weathered the aftermath more easily. Its parent company, Alphabet, posted strong earnings last week.
Even Facebook and Twitter suffered little obvious impact to their profitability after the first disclosures of the interference. But the costs affiliated with their corporate response have become increasingly clear.
Facebook significantly lowered its revenue projections last week, citing privacy missteps, new regulations in Europe and increased investments in security. Those new investments in safety and security include the development of artificial intelligence technology that can spot bad accounts and staff increases of 20,000 people by the end of the year, according to the company’s latest projections. A Facebook executive disclosed in a call with reporters last week that such efforts to combat disinformation and other political abuse are still largely “manual” and not automated — meaning that for the foreseeable future they will rely heavily on individual staff members to conduct reviews.
The growing head count — up 47 percent from the previous year — is a significant expense, said Chief Financial Officer Dave Wehner. Investors who for years had been bullish on Facebook were stunned by the lowered predictions: The stock suffered the largest single-day drop in Wall Street history.
A day later, Twitter said it lost a million monthly users in the second quarter and expects to see further declines, paying a price for an aggressive new campaign to suspend fake and suspicious accounts, the type the Russians used. In response, Twitter’s stock closed down 21 percent Friday. The report offered the most definitive evidence yet that the company’s efforts are having a measurable impact on Twitter’s ability to attract and maintain active users — a key metric in Wall Street’s assessments of the company.
Google is the only major tech company Russia used as a conduit for misinformation to have avoided a major reversal in its stock price. Its shares surged in the past week after a strong earnings report — despite a $5.1 billion fine imposed by European antitrust regulators.
The perception of technology companies has shifted dramatically since last year, notably with revelations last fall that Russian operatives from the Internet Research Agency flooded Facebook and Twitter with bots and fake accounts to spread divisive narratives ahead of the 2016 presidential election. Politicians on both sides of the aisle, from Sens. Bernie Sanders (I-Vt.) to Ted Cruz (R-Tex.), have questioned whether social media platforms are good for democracy, for health and for the economy as a whole — and have raised the prospect of more regulation of the industry.
One reason the financial consequence is showing up now, instead of right after the Russia hearings in Congress last fall, is that it takes time to rev up hiring and start new initiatives within companies.
Twitter’s work accelerated this spring, after news reports revealed that Twitter’s fake-follower problems were much greater than before, and the company completed the testing phase of new artificial intelligence tools that can detect thousands of signals and make automated decisions in order to sweep large numbers of accounts. The formal launch of those tools was in May, shortly after the company’s last quarterly earnings.
Facebook began new technological efforts to go after disinformation right after the 2016 election. But the wave of hiring and the financial forecasts of lower revenue didn’t start until the company reported third-quarter earnings last November, which took place the same day as the hearings.
“I’ve directed our teams to invest so much in security — on top of the other investments we’re making — that it will significantly impact our profitability going forward, and I wanted our investors to hear that directly from me,” Facebook chief executive Mark Zuckerberg said at the time.
But investors largely ignored the CEO’s warning because Facebook’s business was so good. The company surpassed more than $10 billion in quarterly revenue for the first time, blowing past investors’ financial targets for the company.
Over the past eight months, however, Facebook has faced two additional hurdles that were a tipping point for the company, analysts said: The Cambridge Analytica controversy and a new privacy law in Europe that significantly affects targeted advertising, the company’s main source of revenue.
The Cambridge revelations, which showed that a Trump-affiliated consultancy had inappropriately obtained the private profiles of tens of millions of Facebook users, shed light on Facebook’s lax protections and has caused a crisis of public trust in the company. The result is that Facebook has been pushed to make further investments in privacy that limit its ability to collect data for targeted ads.
In addition to the financial impact, the drop in stock value can hurt morale and cause retention and recruitment problems at technology companies, where workers receive a significant portion of their compensation through stock options, said Roger McNamee, an early investor in Facebook and Google who has become a critic of the social network.
Facebook employees in particular are motivated by the idea that the company is good for the world, and the 2016 election has already caused serious questioning among workers. The falling stock was a major point of discussion among Facebook employees who use the workplace chat app Blind last week, according to comments in a public chat room reviewed by The Washington Post.