Facebook – The dunce pt. II.

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Inability to automate bites Facebook again. 

• Facebook’s problems with fake news once again demonstrates the real problems that this company has with anything complex that is not carried out by a human.
• During the recent presidential election, it became clear that a large number of users rely on Facebook, Twitter etc. for current affairs rather than the traditional news broadcasters.
• This puts a huge responsibility on these players to only disseminate stories which are factually accurate which is something that Facebook in particular has been struggling with.
• Facebook has reacted quickly to address this issue but the remedies that it is putting in place reveal once again that Facebook relies almost completely on humans to carry out intelligent tasks.
• Facebook’s remedies to address fake news include:
  • First: Use third party organisations as fact checkers
  • Second: Verifying information with journalists.
  • Third: Relying on the community to report fake news.
• Very much like Facebook M and Facebook’s bots, this remedy relies almost exclusively on humans to solve difficult problems, highlighting yet again how weak Facebook is when it comes to artificial Intelligence (AI).
• This is a problem because humans are extremely expensive compared to machines and with the high level of traffic and content growth that Facebook is experiencing, quality checking is already a massive task and will only become greater.
• Facebook is trying very hard in AI and is recruiting as fast as it can, but AI takes a very long time to get right and I am concerned that Facebook will end up with a much higher cost structure than its rivals.
• This will mean that it will have a higher cost base than Google or Baidu leading to lower profitability.
• Given Facebook’s late entry into AI, I think that it will have to buy its way out of these problems because growing it organically is likely to take much too much time.
• Although this is a very serious problem, I have some confidence that Facebook will be able to sort it out.
• This confidence is based on the exceptional execution and implementation of a system for monetisation of mobile that led to mobile becoming the majority of Facebook’s revenues in a very short period of time.
• This problem is much more difficult to solve but I am hopeful that Facebook’s exceptional record in execution will see it through.
• This is yet another reason to be cautious on Facebook in the short-term (see here) but assuming that this is fixed, I continue to look for an entry point into the shares during 2017 or 2018.
• In the meantime, my preference remains Microsoft, Baidu and Tencent.