July 25, 2018 9:00 pm
Facebook lost users in Europe in the second quarter, when it implemented changes to follow new privacy rules in the EU and faced more intense scrutiny in the fallout from the Cambridge Analytica affair.
The number of daily active users in Europe fell by 3 million people from the first quarter, dropping to 279 million. The number of users in North America remained flat, at 185 million people.
Facebook also missed the revenue projections of most analysts for the second quarter. It reported second-quarter results on Wednesday afternoon.
Facebook generated $13.2 billion in revenue, shy of Wall Street’s expected $13.4 billion. The ad sales portion of revenue hit $13 billion in the second quarter, good for a gain of 42 percent from the year prior.
Facebook shares fell when the results came out and continued to drop during CEO Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg’s earnings call with Wall Street analysts. Down 20 percent in after-hours trading, the shares lost any gains they had made this year. Investors were spooked by forecasts form the company that revenue growth would continue to decelerate.
Zuckerberg confirmed during the call that GDPR was responsible for the user decrease in Europe.
Facebook faced a tougher climate in Europe since the new General Data Protection Regulation took effect at the end of May. Leading up to the new stricter privacy rules, Facebook notified users across Europe of pending changes to its privacy policies. All users had to affirm consent to its data collection practices before being allowed to continue to use Facebook.
“The implementation of GDPR in Europe and continued scrutiny of privacy policies following the Cambridge Analytica scandal left investors feeling uncertain about Facebook,” says Aaron Goldman, CMO of 4C, a Facebook marketing partner.
Still, 4C saw more ad revenue pumping through its platform going into Facebook, Goldman says, especially into its Instagram platform. Facebook and Instagram ad spending through 4C rose 48 percent year over year, according to Goldman.
Last quarter, Facebook also was undermined by the reaction to its involvement with Cambridge Analytica, the third-party developer accused of mishandling data on up to 87 million Facebook users and using it to help target ads for political campaigns in the U.S. and the U.K. The social network had to rewrite its playbook for working with developers and audit hundreds of developers to a account for any data it shared in the past.
Zuckerberg was compelled to meet with lawmakers in the U.S. and EU to testify about how Facebook is protecting user data. In the U.K., especially, Facebook drew the ire of lawmakers, who hit the social network with a $650,000 fine, the maximum amount allowable for mishandling user data.
“It wouldn’t be surprising if a couple million very irritated Brits left Facebook,” says Brian Wieser, analyst with Pivotal Research. “The mood was incendiary there.”
With Europe, users may have opted out of using the social network when they were confronted with its new privacy consent agreements, Wieser says.
Still, the loss of users should not have shocked investors because Facebook has said for the past two quarters that it was starting to hit the zenith of user growth in its most mature markets like North America.
“The market was expecting a lot more,” Wieser says. “But the problem is too much exuberance and undue optimism.”
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