Facebook’s Facepalm Of A Week

Between an outage, the departures of top execs, and legal rumbings, you may have forgotten Facebook’s move to encryption. If the tech company indeed has a coin in the works, this week’s bad news will make it harder to sell.

It’s been a horrid week for Facebook CEO Mark Zuckerberg. It started with widespread criticism of his “pivot to private” manifesto, which offered his thinking behind a major strategy switch. Observers claimed it was a head-fake and that Facebook would not change its advertising-based business model, which accounts for the lion’s share of the company’s $55 billion in yearly revenues.

Facebook made headlines two days later when the company announced that two of Zuckerberg’s top executives were resigning. Several major business media sources surmised that the departures were due to internal disagreements over Zuckerberg’s new strategic direction. Apparently, the resignations came in the wake of the CEO’s move to integrate its three most popular apps: Instagram, Messenger, and WhatsApp. The latter is a dominant communications platform for far-flung rural communities as well as urbanites in emerging economies such as India and Brazil.

The next day, Forbes and other media outlets reported that New York federal prosecutors had issued subpoenas “for data-sharing agreements with device makers that hint that prosecutors in the Eastern District may be looking into Facebook privacy practices … [including] how it reportedly allowed phone and device manufacturers to access its users’ personal data in ways that were an exception to restrictions it placed on app developers.”

And that’s not even including a daylong outage that affected Facebook, Messenger, Instagram, and WhatsApp. Steadfast users were left to wander in a world bereft of avocado toast photos.

A Backdrop

Facebook CEO Mark Zuckerberg caught Wall Street and crypto enthusiasts off-guard last week with a surprise 3,000 word manifesto in which he outlined his so-called “pivot to encryption.” The rumors about the company’s efforts to launch a stablecoin quickly reignited. And so did the widespread public disenchantment for the man who has been working hard to put the Cambridge Analytica scandal behind him.

Some background: Facebook has been signaling its growing attraction to crypto and blockchain for some time. When the company hired David Marcus, former president of PayPal, in 2014 to form a blockchain team, people in the crypto community and elsewhere began speculating on the possible end game. Although Facebook has not released any public information to date about its virtual currency and instant payments ambitions, Zuckerberg’s blog post, with its emphasis on data privacy and encryption, prompted more guessing. When Fortune and others dissected the manifesto earlier this week, citing an equity analyst at Barclay’s who concluded the tech giant had a chance to add an extra $19 billion in annual revenue, the haters erupted.

They wondered: Could this be the end of BTC, ETH, and other popular cryptocurrencies? Or could it be a plus for the sector as the tech giants (Alphabet, Amazon, and Facebook) start to move into the space, and presumably spur giant waves of adoption globally? It was lost on no one that Facebook has some Jupiter-sized reputation issues around data privacy to repair before people will use WhatsApp to send money instantly and digitally to peers.

The guffaws were palpable in both the crypto and traditional media spheres. Predictably, the digital coin purists saw a siege coming.

For the traditional business reader, Fortune‘s China correspondent, Clay Chandler, put it this way: “Mark Zuckerberg Has WeChat Envy.” Chandler pointed out that China’s WeChat – a multipurpose messaging, social media, and mobile payment app developed by Tencent – has built-in payment features that make it more powerful than a simple ad-based social network like Facebook.

Zuckerberg’s privacy sermon also said that Facebook is following the path it forged with WhatsApp:

“[F]ocus on the most fundamental and private use case – messaging – make it as secure as possible, and then build more ways for people to interact on top of that, including calls, video chats, groups, stories, businesses, payments, commerce, and ultimately a platform for many other kinds of private services.”

The Zuckerberg zinger: “People should expect that we will do everything we can to keep them safe on our services within the limits of what’s possible in an encrypted service.”

That went over like a lead balloon. Another Fortune Facebook-watcher surmised that “Facebook isn’t forecasting any quick shift out of ads … Facebook hopes to keep making billions off its namesake platform and add new business models to its encrypted communications and messaging services, namely payments and e-commerce …”

Alan Murray, writing in CEO Daily, likened the privacy pledge to oil companies getting out of fossil fuels: “[I]t’s more like when BP said it was going hard into ‘green’ or other alternative energy products – without abandoning its oil business.”

Coin Connection

What does this all have to do with digital currency? Three things jump out. First, the coin already has a name, Facebook Coin, and people are talking about it as if it’s already been launched. That’s bound to raise hackles at Apple and Amazon.

Second, if Facebook is successful in launching a digital coin – whether it’s a stablecoin or a private version for use among customers looking to make instant payments globally on WhatsApp – it will face stiff competition in emerging markets such as India, which now has close to 500 million internet users and, Forrester Research predicts, will have 737 million by 2022. Indian families and businesses already receive a huge tide of money transfers from around the world each year. Facebook Coin combined with WhatsApp would presumably open up a rich vein of locked-in users.

Third, if the Facebook platform at some stage allows bitcoin, Ether, or another digital payment option to join the party, cryptocurrency adoption would conceivably grow exponentially. But what are Facebook’s odds of pulling this off? Doubtful, actually.

On the one hand, the Barclay’s analyst who grabbed a lot of attention this week with the calculation that Facebook could add $19 billion in annual revenue also suggested that a mediocre launch could generate $3 billion. That gave Wall Street a jolt, although it was quickly buried by Brexit and Boeing news.

On the other hand, Facebook, as personified by its leadership team, does not seem predisposed to take the ethos of crypto to heart. To many, Facebook looks like a centralized, decision-making fortress dedicated to keeping its publicly traded shares in the stratosphere. Its surveillance line of business doesn’t help to burnish its brand image. The Wall Street Journal reported last week on the latest Facebook data privacy outrage: Flo Health Inc.’s Flo Period & Ovulation Tracker, which claims 25 million active users, has a data-sharing arrangement with Facebook. Flo users who were having a period or who informed the app they intended to get pregnant had their data sent to advertisers.

Surely, capitalism is not a charity. Nor does it hand out Nobel Prizes for peace or economics. But squandering the public’s trust as Facebook has is not a good way to get into the banking business.

As one crypto commentator put it: “I’d trust a JP Morgan instantaneous transfer, but Facebook?”

Mary Driscoll covers finance and business trends as a staff writer for ETHNews. She formerly served as an editor for management and finance at the Economist Intelligence Unit and a research principal at APQC. In addition, she has written for The Wall Street Journal CFO Report, HBR-online, and strategy + business. Her book on corporate treasury management was published by John Wiley & Sons, Inc. Mary enjoys hiking and skiing in the Sierras with family. Her goal in life is to win big on Jeopardy.

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