Facebook's next privacy challenge

The reliance on personal information is a potential weakness. The GDPR limits how companies can use individuals' data, leading Facebook to let users opt out of some types of targeted advertising

Facebook Inc’s FB — 0.54 per cent advertisers in Europe are on the front lines of its efforts to tighten privacy practices, and their frustrations help explain why the social-media giant’s troubles are far from over.
 
Facebook said Europe’s new privacy law — General Data Protection Regulation, or GDPR — contributed to slowing revenue growth in its quarterly earnings report on Wednesday, which sent its shares plunging nearly 20 per cent over Thursday and Friday. Some advertisers say another looming privacy change at the Silicon Valley giant could amplify that effect.
 
Under pressure from the GDPR and the scandals over its handling of personal information, Facebook earlier this year said it would shut down ad tools called “Partner Categories” powered by outside data brokers. Those tools let Facebook advertisers target ads at people based on third-party data such as their offline purchasing history.
 
Facebook eliminated Partner Categories in Germany, France and the UK on May 24, the day before the GDPR went into effect. By October 1, Facebook plans to stop showing ads based on Partner Categories globally. This means advertisers will have access only to their own data and data Facebook collects itself.
 
Some large advertisers, including beer maker Heineken NV, say ending a major way to target ads using information gathered by outside companies could have a significant effect on them.
 
“It’s going to have an impact for us because a good chunk of our spend uses non-Facebook targeting” from outside firms, said Ron Amram, global head of media for Heineken, which says Facebook is the largest recipient of its ad dollars. Amram said he is “optimistic” Facebook will find a solution to allow the targeting to continue before October.
 
A Facebook spokesman said such targeting in Partner Categories is “common industry practice,” but that the company shut down the feature “to help improve people’s privacy on Facebook.”
 
Facebook’s deep stores of data on its 2.23 billion monthly users have put it on track to win nearly 18 per cent of the world’s digital ad market in 2018, second to 31 per cent for Alphabet Inc’s Google, according to eMarketer. Facebook uses data it collects about users through its app and like buttons to target ads at individuals based on everything from which stores they have recently been near to whether their web browsing reveals an interest in salsa music.

The reliance on personal information is now also a potential weakness. The GDPR limits how companies can use individuals’ data, leading Facebook to let users opt out of some types of targeted advertising. Revelations that personal information on up to 87 million Facebook users was improperly obtained by Cambridge Analytica, a data firm that worked for President Trump’s 2016 campaign, added pressure on Facebook.
 
On Wednesday, Facebook said European revenue in the second quarter grew 47 per cent from a year earlier — still rapid but well below the 59 per cent of the prior quarter.
 
Facebook said its number of daily active users in Europe shrank by 3 million to 279 million at the end of the second quarter from the end of the first quarter, a period during which users were asked to agree to its new terms of service ahead of the GDPR. Among the users who remained, a minority opted out of certain types of targeted ads, the company said. And Facebook warned that its stricter privacy practices would continue dragging on growth for the rest of the year.
 
Privacy changes also affected some advertisers. One executive at a major advertising company said confusion over how to certify to Facebook that their own customer data was GDPR-compliant led to pauses in advertising spending.
 
The GDPR also complicated budget planning for some advertisers, because Facebook stopped providing estimates of how many users would be selected by specified targeting criteria, said Simon Vreeman, growth marketing manager for VanMoof BV, an Amsterdam-based smart-bicycle company that spends 60 per cent to 70 per cent of its ad budget on Facebook.
 
“You don’t get this data anymore which makes it harder to plan your advertising or plan your budget,” Vreeman said.
 
VanMoof and some other advertisers said that they hadn’t noticed significant declines in the clicks on their Facebook ads, and hadn’t changed their spending patterns significantly. But several pointed to longer-term trends of slowing user growth and declining engagement — leading to fewer clicks and likes on their ads, and higher costs per click.
 
Labfresh BV, an online clothing label that spends €50,000 (about $58,000) a month on ads, has gone to spending about 55 per cent of that on Facebook, down from 90 per cent six months ago, said Kasper Brandi Petersen, Labfresh’s founder and CEO.
 
For Facebook, GDPR is “a nice boogeyman to have,” Petersen said. “The real problem is falling engagement.”
 
The silver lining for Facebook: Labfresh is spending the difference on ads in Facebook’s photo-sharing service, Instagram. But Instagram generally is far less lucrative for Facebook than its main app.
 
The decision to remove Partner Categories targeting options already has hit some Facebook advertisers.
 
French business-analytics startup Toucan Toco was forced to stop using those targeting categories to show its ads to people with job titles indicating they might be interested in its product, according to Adrien Wiesenbach, who runs the company’s ad buying. He can still use those categories in the US for now, but Facebook will start phasing out that ability beginning in August.
 
“I’d be willing to spend more money for better targeting,” said Wiesenbach, who spends about a third of his €300,000 annual ad budget on Facebook. “But the targeting in Europe has gotten less granular.”