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Is Facebook Going to Take Silicon Valley Down With It?

What the Cambridge Analytica scandal means for the rest of the tech industry

David Ramos/Getty Images

Facebook has faced plenty of scandals in its 14 years of existence, from its legal battles with the Winklevoss twins to its cozy relationship with authoritarians like Rodrigo Duterte of the Philippines. But recent revelations about the improper acquisition of tens of millions of Facebook users’ data by Cambridge Analytica, the data firm that worked closely with Donald Trump’s 2016 presidential campaign, may be its most serious challenge yet.

On Monday, Facebook shed over $60 billion in market value as its stock price tumbled amid calls in both America and Britain for greater regulation. Facebook’s response may have exacerbated its problems. Its defense—that Cambridge Analytica’s activities do not constitute a “data breach”—has only drawn attention to the laissez faire way in which the social network profits from its user data. Its top executives, CEO Mark Zuckerberg and COO Sheryl Sandberg, meanwhile, are nowhere to be found.

There were tremors throughout the tech world that a reckoning could be coming not just for Facebook, but also other data-hoarding giants like Google, Amazon, and Netflix. On Monday, their stocks fell, as if tethered to Facebook’s. But they regained their former momentum on Tuesday, when they decoupled from Facebook’s market plunge. (Uber, which also had a very bad day on Monday, is not publicly traded.)

But these companies are not out of the woods yet. While regulatory action, if it comes, will likely be focused on Facebook, the repercussions could be seismic—especially if these companies continue to recklessly collect data from their users.

Facebook’s coming war will be fought on two fronts. The first will be regulatory. The Cambridge Analytica scandal brought a host of criticism from lawmakers on both sides of the Atlantic. British MP Damian Collins demanded that Zuckerberg appear before Parliament, saying that previous statements from the company had created  “a false reassurance that Facebook’s stated policies are always robust and effectively policed.” In the United States, Senator Ron Wyden sent a letter to Zuckerberg asking for clarification about Cambridge Analytica’s activities; Wyden also asked Facebook to provide information about other privacy violations on the social network.

Many are anticipating that Zuckerberg will be called before Congress to explain his company’s lax response to what appear to be significant privacy violations. On Monday it was also announced that the Federal Trade Commission was investigating whether Facebook violated a 2011 decree related to personal user data and privacy.

The second will be with its users. Facebook has already made changes to its NewsFeed that acknowledge what research has shown—that Facebook does not make people feel very good about themselves or the world. Facebook’s role in politics, from its growing reputation as the world’s largest comments section to its dismissive response to Russian interference in the 2016 election, has also caused growing dissatisfaction. The Cambridge Analytical scandal, which merges Facebook’s privacy problem with its politics problem, is in some ways a perfect storm.

That other tech stocks have recovered their losses suggests that these companies and their investors see these problems as Mark Zuckerberg’s and Mark Zuckerberg’s alone. To an extent, they’re correct. There are few signs that Congress has an appetite for large-scale regulatory action. It is far more likely that Facebook will pay for the entire industry’s sins than that a regulatory reckoning will sweep over Silicon Valley.

But that doesn’t mean that this won’t be a transformative moment for the tech industry. Speaking to Bloomberg, London Capital Group’s head of research Jasper Lawler read the tea leaves: “The tech giant’s fast-and-loose handling of private data will feed the niggling doubt investors have had all along that the big U.S. tech stocks cannot keep going up so rapidly forever. Looking further out, legal action and greater industry regulation are huge headwinds ‘the Zuck’ has to contend with.”

Political and regulatory moves against Facebook could give investors cold feet, reducing the amount of cheap capital that has pushed tech companies to expand at exponential clips. A poor performance by Zuckerberg in front of Congress could have significant consequences for share prices and, for those companies that have not gone public, valuations.

The Cambridge Analytica story might also represent the end of tech’s self-regulatory phase. Tech companies have consistently told governments that they should not have to operate like other companies—that oversight and regulation would shackle them and cause them to be less innovative. They have also claimed that their users and the market will cause them to make rational choices that take issues like privacy and security into account. Governments have largely bought this argument, but this naive period may be coming to an end.

Growing discontent from users is just as dangerous. One important consequence of the Cambridge Analytica story is that it has made Facebook users more aware of the vulnerability of their personal information. Facebook is hardly alone in this regard; every large tech company is collecting that data, and many sell it to all sorts of third parties. Data has long been an important moat for companies—the more personalized data they collect, the more they’re protected from possible competitors. But, as Cambridge Analytica shows, many consumers aren’t aware that the internet is effectively a giant panopticon. That’s starting to change.