Bill Wagner / April 21, 2018

Human Nature

This one is mostly about Facebook, but it’s also about human nature and motivation.

This one is mostly about Facebook, but it’s also about human nature and motivation.

One of the classic descriptions of the difference between liberals and conservatives is that liberals generally believe that societal pressures primarily drive human behavior, and since folks are not fully responsible for their actions, it is government’s role to control society and solve individual problems. Conservatives generally believe in individual choice, personal responsibility, and limited government. Neither denies that there is the potential for goodness in all, but conservatives are more likely to be realists and view folks as primarily acting in their own best interests.

This is important for negotiations because a key element of any successful negotiation is being brutally honest with yourself about what you want, understanding as best you can the motivation of the other guy, and designing a process that gets more of the former. Removing bias from that assessment is critical, but as a conservative, my default position is typically determined by a belief that the motivation of my counterpart is best described as “what’s in it for me?” That may seem like a glorified statement of the obvious, but often liberals ascribe more of an altruistic motive to the other guy, and that compromises the results. We accord sainthood to the pure altruists, but those folks are very rare and not representative of the real world. Consider a couple of examples before we get to Facebook.

The negotiations with North Korea are moving ahead. It’s pretty clear what the U.S. would consider a win, but the negotiating posture the U.S. takes is critically dependent on what motivates Kim Jong-un. It’s significantly different if we believe he has delusions of grandeur about uniting the Peninsula under his rule with all intruders gone versus if he simply wants to be secure in his own little realm and enjoy the goodies of being king. I am strongly in the “it’s good to be king” camp, and it appears that Trump is as well. That leads to a simple carrot/stick negotiating framework that depends in large part on convincing Kim (and by extension China) that unless he completely denuclearizes North Korea, with inspections sufficient for verification, he will lose the throne, by military means if necessary. Trump is also playing to Kim’s ego by suggesting that a deal would give him worldwide recognition, while a fraudulent negotiation would cause Trump to leave the table, with the military/sanction options intact. That’s one reason the reaction to Syrian chemical weapons was so important — it was far more of a signal to North and Iran than a strategic move in Syria, per se.

The quid pro quo (which also derives from the base assumption) is that the U.S. would find a way to guarantee the survival, and even material prosperity, of the Kim regime. That has set the stage for the pre-summit between North and South Korea, which has a treaty to formally end the Korean War on the agenda. Kim has also dropped his demand that the U.S. remove its troops from the South, which signals that if a security/prosperity arrangement is strong enough, it doesn’t matter if we keep troops there. Obviously the devil will be in the details, and Kim could play games by stretching out the time tables, redefining what he means by “troops can stay” or fudging on the conditions for dismantling/verifying his nuke program. But if Trump has read his motives correctly, which I believe he has, this has a chance to be a win/win.

With the James Comey book tour circus in full bloom, what is being lost is why and how the entire controversy over the FBI and Justice Department actions in the Hillary Clinton email and Trump/Russia collusion got started. What motivated the senior officials in both organizations to do what they did? In true conservative fashion, I believe it was primarily enlightened self-interest. All organizations have a character, typically set by the boss. In this case, the tone was set from the beginning by none other than Barack Obama himself. He politicized both organizations, and adherence to the Obama agenda, even if by corrupt means, was encouraged and rewarded not by overt memo but by subtle winks and nods. He attracted folks for senior positions willing to bend the rules for personal advancement. If there was one single thread that went through everything, as the Hillary email matter and the election unfolded, it was a certainty that Hillary was going to be the next boss, and the Obama management style of rewarding institutionalized corruption would be put on steroids.

It may not be any more complicated than that. Career enhancement was job number one, and bending the rules was expected. There may have been some animosity toward Trump that drove the post-election activities, but it was just as likely a cover-your-butt concern that Trump would find out what had been going on during the Obama years and call them on it. Maybe instead of the holier-than-thou motives of ridding the country of a dangerous president, it was all about creating leverage against Trump to possibly keep their jobs and/or deflect prosecution. Comey himself admitted that when he stated that the prospect of Hillary being president influenced his decision to go public with the Anthony Weiner email disclosure. In fact, it was because he had agreed under oath to go back to Congress if anything new surfaced, and 500,000 emails from Hillary, some of them classified, on the computer of a guy under indictment for sexting with underage girls might meet that criterion. But he chose to cite politics, as if that was perfectly normal.

If you want Exhibit A of where this all started, remember that Obama was aware from day one that Hillary was compromising national security and breaking the law with her unsecure server; Obama was on many of the email trials (often under an assumed name). He could have nipped it in the bud at any time, but chose not to, and for that he could be complicit in a crime. Of course, no one wants to go there (“there” being defined as bringing down the first black president), so it is virtually certain that any future investigations will end before reaching Hillary. But the fall guys who played the game at the FBI and Justice may not get off so easy.

Back to Facebook. It’s been some time since Mark Zuckerberg spent two days testifying in DC and was all over the front pages. What we’ve heard since then has been, well, crickets — and for good reason. Facebook’s army of lobbyists has feverishly been working the rooms behind the scenes to keep DC at bay. Zuckerberg’s stated motivation to continue the Facebook mission of connecting the world and making communication with/education of the developing nations of the world a reality while scrupulously guarding the privacy of Facebook users is, of course, a distant second to the primary goal of minimizing DC interference with Facebook’s spectacularly profitable business model. In that regard, Zuckerberg was hugely successful.

The hearings showed the worst of DC, as they often do — media sound bites, minute-by-minute demonstrations of how clueless our representatives are about the subject matter at hand, and no action steps. But our esteemed representatives brought this on themselves. Recall how this got traction: DC latched onto the possibility that a Facebook data privacy breach allowed over 50 million individuals to have their data inappropriately provided to a research firm “that had ties to the Trump campaign.” Democrats thought it was finally the silver bullet that was going to get Trump impeached. Turned out that there was a breach, but the data never made it to the Trump campaign. The DC outcry was so loud that it was not possible to put the genie back in the bottle, so hearings on “privacy” were inevitable. Make no mistake, there was zero groundswell for hearings like this without the prospect of getting Trump. Our representatives were too addicted to Facebook reach and checkbooks, but now they had no choice.

The questions for Zuckerberg were for the most part useful only to prove that members of Congress know nothing about technology or business. There main job was to create a few campaign sound bites while not seeming intimidated by a guy with a net worth equal to about a month’s interest on the national debt — a number they could relate to. I could list several examples, but my favorite was when a senator asked if the privacy statement that users agree to was a take-it-or-leave-it document or whether it was negotiable. Zuckerberg very politely informed the questioner that it was not negotiable, but I would have preferred another response — something like, “Of course, senator, that document is negotiable. We are staffed and prepared to have individual discussions with each of our two billion users to resolve any concerns. No problem.”

Zuckerberg’s response was representative of how he handled all of the hearings. He was phenomenally well prepared. Having dealt with several 30-something Internet masters of the universe over 15 years of investing in early stage companies, I can assure you that the investor and board adults at Facebook believed there was a greater than zero chance that Zuckerberg would be arrogant and condescending. But Zuckerberg was convinced that even though the questioners were spotting him multiple IQ points, they had the power to be an existential threat to the Facebook money machine, so he was on his best behavior and even dressed the part.

And what is that machine? Several times the issue of whether Facebook “sold” private data to advertisers was raised — probably the best example of a lack of understanding of what the Facebook business model is. I’ve been at the early stage investing game long enough to remember the original Internet business models. They were all about creating a website interesting enough to draw viewers, known as eyeballs. It didn’t really matter what the site did as long as folks visited it, and the company could then sell placements on the site to advertisers attracted by the possibility of reaching those eyeballs. That model crashed in part because at the peak someone did a calculation which showed that the total projected ad revenue on which the funding for all of these Internet platforms was based was around 25 times the total ad spend worldwide by every advertiser. Something had to give, and it did.

Facebook was not alone in building a platform designed to connect folks; it just did it better than anyone else and therefore was one of the few sites to prosper by offering the service for free and monetizing it via ad revenues. Facebook was built on data utilization on steroids. The more detailed the data, the better targeted the ads could be and the more Facebook could charge advertisers. Essentially, as long as the platform provided value to the users, which it did in spades, folks didn’t really care how their data was used. In fact, part of the appeal of Facebook was as a platform for folks to tell everyone everything about themselves anyway. The threat to Facebook is that privacy rules will make it more difficult to use the details of personal data to maximize ad rates. But it really is a valuation issue. For example, if tomorrow Facebook were prevented from using any personal data and didn’t increase revenues by charging users for the service, it would not go out of business. Advertisers would still find value in having two billion potential viewers, but the targeting would be far less effective, and the rates would go down. The losers would be Facebook shareholders.

So Zuckerberg prepared scrupulously. It was a thing of beauty to watch. He addressed every questioner by their title, regardless of how moronic the question. He made liberal use of touchy/feely words like “dorm room,” to make sure everyone knew where he came from, and “team,” as in I’ll have my team get back to you, to let everyone know he couldn’t do it without the little people. And that was great for everyone because it gave DC staffers the opportunity to follow up with their six-figure salary role models at the Internet poster child and drop off their résumés for all those expected increased positions in the Facebook public affairs department.

He complemented everyone on what great questions they asked, and when the question tiptoed into areas he was not ready for, he was saved by the bell, since the time for each questioner really didn’t allow for any meaningful follow-up. I’m sure his handlers negotiated that one. He repeatedly apologized, promised to do better on the privacy front and assured every questioner who raised the issue that users had full ownership and control of their personal data. He was less clear on the fact that users give Facebook a license to essentially use their data any way it wants. The fact is that in spite of surveys that show the majority of users “don’t trust” Facebook with their data, very few actually go through the drill to opt out. The bottom line is that as long as users see value in the platform, they really don’t care how Facebook uses their information. Zuckerberg was motivated primarily to keep that gravy train moving, and he hit a home run.

Advertisers have been looking for some time at the issue of having their brand associated with inappropriate content. The actual direct dollar impact of this is small, but the potential negative impact on brand image is not. The fallout and visibility of the hearings though has caused advertisers to take a closer look at how their customer data is being used and at the cost effectiveness of their overall social media advertising policies. These are typical issues for any ad platform, and Facebook will deal with them in the normal course of business. They do not rise to the existential threat that a heavy-handed privacy regulatory reaction from DC would. Mission accomplished by Zuckerberg on step one. And judging by the upward movement in Facebook stock since the hearings, the market believes so too — communication access and campaign donations rule.

Just as human nature motivations are driving the U.S./North Korea negotiations and help explain the roles of the senior FBI and the Justice Department officials in the Hillary and Trump controversies, they are also front and center in the Facebook saga. Connecting the world is a nice concept, but keeping a mid-twelve figure market value is what really drives the train.

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