Keys

  • The parent companies of these brands moderate their profits and suffer from reputation crises. Is the new world economy shifting to a new paradigm?
  • This moderation has been seen on stock exchanges. Towards the new norm of the stock exchange? The bubble bursts or a soft landing?
  • The fall in Facebook stock has been considerable and investors have ample doubts. Maturity crisis or irreversible mistrust?

 

Although many analysts have been warning of a stock market and financial adjustment for the large emerging companies for years, the blow has been tougher than expected. And it has not just been in economic terms, nor has it been brought about by the financial or accounting fundamentals of these companies. The triggers are related to new intangibles of the economy: the power of reputation, political neutrality, environmental friendliness and/or fair trade.

The Cambridge Analytica scandal broke a few months ago, a data analytics company that obtained information from Facebook users illegally. They then sold private information to electoral strategists to influence political processes like Brexit or the United States elections that took Donald Trump to the White House. The repercussions forced Cambridge Analytica to close down and Mark Zuckerberg, founder and president of Facebook, appeared before the U.S. Congress and Senate and the European Parliament.

This was not a one-off case, but an especially serious milestone in a series of events that Zuckerberg admitted occurred more often than normal. Although he promised to take immediate action, several data leaks have occurred since his appearances, which has enhanced the doubts about his company in the minds of many investors. It should be said that this is surely THE quintessentially multinational of the new digital economy. That is why the lingering doubts about it, in turn, mean spreading a certain mantle of doubt over many companies that share the Facebook paradigm and philosophy.

A crisis in figures

The parent company of the social media closed the second quarter of 2018 with a net profit of €3.23bn, up 42 %. But the company did not meet market forecasts; they expected more. The monthly figure for new users was the lowest in its history, with a mere 1.5% growth. But what really made the data negative was the fact that occurred immediately after the Cambridge Analytica scandal; the discovery of the details of how the social media could have impacted the investiture of Trump.

Thus, on the 26th July, Facebook fell by no less than 19% on the stock market after releasing these results. On a symbolical level, the company lost $120bn in a day, the largest fall in the history of the stock exchange. A black day that triggered a personal loss of $15.9bn Zuckerberg personally. Although the company has recovered over the weeks, widespread doubt remains in the markets and in public opinion, around this and other flagship companies of the new world economy.

Reputation and the new world economy

The crisis of Facebook and other companies is analyzed from several standpoints that can be summarized in three:

  1. The analysts that, from a moderate point of view, believe that this is a maturity crisis, typical of any disruptive company amid volatile markets. This is a time of transition that will help to “normalize” these companies in the market. In other words: they will have to pay more taxes, accept closer regulation by the authorities to avoid monopoly situations or prevent harmful interference in the political or employment situations of liberal democracies. Many strike the parallel with the big oil companies of the 19th century, which were firmly regulated in the 20th century, when the authorities realized that their excessive power represented a threat.
  2. On the other hand, those who most favor these companies find that their problems lie in an excess of regulation that will end up dulling the entrepreneurial spiritand will affect the dynamism of these companies. Thus, restricting the flexibility and freedom of operation of companies like Facebook, Apple or Uber, will only spread sclerosis in the West that will lose out in competitiveness against Asian companies, whose authorities have far fewer scruples when it comes to being scandalized by these affairs. This option is the one that defends a deregulated economy.
  3. Finally, we have the pessimists who think thatthe companies of the new world economy are incompatible with democracy and welfare. On the one hand, Facebook and other social media grab our attention and mislead us with fake news and/or sell our data to be able to manipulate us, based on science, which perverts the healthy process of public debate. Moreover, they physically use schemes that enable them to avoid taxes, thus emptying the public coffers used to redistribute wealth. These companies are seen as one of the major causes of the rise in inequality and the fall in job security as they have skilfully escaped from tax systems and employment regulations. This loss of rights has come to be known by the name of one of the flagship companies of the new economy: uberisation.

The new world economy has come face to face with a paradox: it’s birth and growth are due, in part, to reasons of image and reputation. Initially, they had a reputation as renovators, more in line with the open and horizontal spirit of the times. They came to be seen as truly democratic companies, focused on generating communities, better services and bringing down prices. But all this has collapsed, in part because of the way they have been misused. Furthermore, their competitive base has been shown to be business as usual, in the worst possible sense: maximize profits without too much consideration for privacy, political stability, the fiscal health necessary for the welfare and employment stability of their users and employees.

In short, it is a maturity crisis, but also a reputation crisis at a time when everything to do with this will be capital for the good progress of any company. These companies will have to take this seriously, as the inertia of the years when they first appeared no longer works. Social awareness of all these matters has grown exponentially with the hangover from the economic crisis, so it would appear that the recovery of this reputation probably does not depend on major marketing campaigns, but rather on a redesign of their basic fiscal, employment and social fundamentals, to become, paradoxically, companies of the new economy that are more like those of the old economy.