A Lack of Trust Hurts Facebook
Using an example from the current news headlines, the performance of Facebook's stock since their recent launch on the Nasdaq stock exchange reflects a lack of mutual trust. Their stock's performance has been far weaker than almost all experts predicted.
Part of the reason for weak stock performance was a technical problem with Nasdaq's servers on the launch date (Wood, 2012). That is not the primary cause for the low performing stock. A lack of trust in Facebook appears to be the primary reason.
Privacy is at the heart of trust. Facebook has often been accused of compromising its users' privacy (Levin, 2012). This compromise in maintaining privacy for its users has resulted in a general lack of trust in the company itself. "An exchange partner worthy of trust is one that will not exploit other's exchange vulnerabilities" (Barney & Hansen, 1994, p. 176).
Investors put their trust in a company when they invest in their stock. They are trusting that the company will grow and that will result in an increased stock price. This exchange of money and trust puts both parties in a vulnerable position (Barney & Hansen, 1994, p. 176). The investor will lose money when their stock investment loses value. The company will lose money when their investor liquidates their stock.
In addition to privacy issues in dealing with users' activity and data, Facebook has been accused of taking that private data and making it available to app makers and the general public (Levin, 2012). Data given to advertisers has been more than what was required for the apps they created to function (Levin, 2012).
In an attempt to improve investors' confidence in Facebook, CEO Mark Zuckerberg responded that "the company had made 'a bunch of mistakes'" (Levin, 2012). This was a case of too little, too late. Facebook's initial stock price of $38 a share has tumbled to $27 a share, as of this writing ("Mark Zuckerberg's wealth down $4.5 billion as Facebook tumbles on NASDAQ", 2012).
Wood, R. (2012). Want A Piece Of Nasdaq's $40M Facebook Settlement? Forbes. Retrieved fromhttp://www.forbes.com/sites/
Levin, A. (2012). Did Facebook's Privacy Problems Foretell the IPO? Huffington Post. Retrieved fromhttp://www.huffingtonpost.com/
Barney, J. & Hansen, M. (1994). Trustworthiness as a Source of Competitive Advantage. Strategic Management Journal, 15, Winter, 175-190.
Mark Zuckerberg's wealth down $4.5 billion as Facebook tumbles on NASDAQ (2012). The Economic Times. Retrieved from http://economictimes.
Paul, what do you think of the network in which Facebook is embedded? Have they partnered with trustworthy organizations? If they formed an alliance with a highly trustworthy partner do you think their reputation could recover?
ReplyDeleteHey Paul,
ReplyDeleteAre you a regular FB user? I am (somewhat) and every time I log on I wonder how sustainable it is. It is obviously the medium for social interaction right now, but society changes quickly these days and I am inclined to believe that it is going to be left behind by a new technology. I get the impression that a lot of other users feel the same way. Do you think this may have something to do with their over-valuation? Lack of confidence in their product more than exploitation of their network?
Hi Paul,
ReplyDeleteYou talk about Facebook making users private information available to app developers and the general public. I wonder though, with Facebook making it available to the app developers and advertisers, are there partnerships and alliances that we don't know about? With Facebook's history of not being the must trustworthy company, it wouldn't surprise me.
And Dr. Pade, this also got me thinking about, with this weeks reading being based on partnerships and alliances, formally, I would like to find some time to find information on the ones that are done informally, if they still exist, like the early 20th centry "I'll scratch your back if you scratch mine deal." I know laws and regulations are in place but laws and regulations are in place for a lot of things.
Dr. Pade: Facebook seems to have partnered with trustworthy organizations, but they also seem to do things their own way, often with little input. I think that's another reason their stock has performed so poorly.
ReplyDeleteAnother highly trustworthy partner? Just yesterday, Apple announced tighter integration of Facebook with their forth-coming operating systems. That should help both sides.
Nik: I am a very regular user of Facebook for business. I use it too often for personal purposes. I think people will be ready to jump ship, at some point. And I agree that some of the over-valuation is a result of a general impression that tools like Facebook are ephemeral. However, the "next" tool in that arena will have to be very robust or have incredible marketing behind it for it to replace Facebook. Google+ is a better tool, in many ways. Its initial take-off was strong, but then people seemed to abandon the network and return to Facebook.
Justin: There might well be partnerships Facebook has that the public has no knowledge of. I would be very surprised if there weren't.
Hi Paul,
ReplyDeleteI think part of me was hoping you would disagree even though I knew you weren't.
I'm also interested in the impact of the Facebook IPO on the current trust issues with investment banks. And will we have solutions to the investment banking issues?
ReplyDeleteMy best guess is that time will tell, Cynthia.
DeletePaul do you think the distrust starts at the top in an organization? Is the CEO trustworthy? Facebook has had issues from day one leading one to believe there are also issues in management.
ReplyDeleteThe movie, "The Social Network," illustrates how your observations are very appropriate. Mark Z. came across as very smart - but also very untrustworthy. The major players in the movie (and in the early forming of the company), such as Sean Parker, represented just how decadent people could become as a result of huge money from the tech bubble.
DeleteHey Paul - privacy aside, I was under the impression that the investment firm really fumbled the ball at the goal line when it came to the IPO by withholding information to investors?
ReplyDeleteThere were bungles all across the board with Facebook's IPO. Sadly.
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