Brian Gaynor: Facebook needs to face up to hard questions

Cutouts of Mark Zuckerberg on the White House lawn in 2018. Photo / Bloomberg

COMMENT: The Christchurch terrorist attack raises the important issue of the role of social media companies, particularly Facebook.

Does Facebook do more harm than good and will its unsympathetic corporate culture encourage governments to introduce more restrictive social media regulation?

There were clear signs at last October's Wired25 Conference in San Francisco that Facebook had become an outlier. The conference was addressed by several chief executives and founders of social media companies, including LinkedIn, Pinterest and Reddit.

San Francisco's tech community is tight, but there was an underlying critical attitude towards Facebook founder Mark Zuckerberg, who was nearly always referred to as "Zuck".

There were sly comments about Zuck's house in Palo Alto and the annual US$10 million allocated by Facebook for "costs related to his and his family's personal security".

This column got the clear impression that conference speakers and attendees were concerned that Facebook's tough, and relatively heartless, corporate culture could lead to increased government regulation of the sector.

Facebook's response to the Christchurch tragedy has confirmed this hard-headed approach, particularly considering director Peter Thiel's relationship with this country.

Thiel was an early Facebook investor and joined the social media company's board inApril 2005.

He was granted New Zealand citizenship in June 2011 after spending only 12 days in the country. His application for citizenship was backed by Trade Me founder Sam Morgan and Xero founder Rod Drury.

Prime Minister Bill English later defended the decision, saying Thiel had "demonstrated his commitment to New Zealand".

Thiel, who has purchased a 193 hectare sheep station near Lake Wanaka, has a fascination with New Zealand, with The Guardian reporting him as saying he'd found "no other country that aligns more with my view of the future than New Zealand".

One view of the future is contained in the 1997 book The Sovereign Individual — How to Survive and Thrive during the collapse of the Welfare State, jointly written by James Dale Davidson and Lord William Rees-Mogg. The latter is the father of Jacob Rees-Mogg, who is playing a major role in the UK Brexit debacle.

A central thesis of the book, which is one of Thiel's top six reads, is that the rapid development of information technology will empower individuals, leading to the demise of the nation state.

This could lead to widespread social disorder, and Davidson and Rees-Mogg identify New Zealand and Argentina as the best countries to maintain lifestyles and protect assets during political and social crises.

This view is held by several Silicon Valley entrepreneurs. For example, the October 10, 2016 New Yorker profile of Sam Altman, the successful angel investor, notes "if the pandemic does come, Altman's backup plan is to fly with his friend Peter Thiel, the billionaire venture capitalist, to Thiel's house in New Zealand".

The Guardian journalist took a cynical view of this strategy, commenting: "The plan from this point, you'd assume, was to sit out the collapse of civilisation before re-emerging to provide seed-funding for, say, the insect-based protein sludge market."

Zuckerberg's and Thiel's silence in the aftermath of the March 15 tragedy is notable, particularly considering that the Christchurch terrorist represents the dark side of "The Sovereign Individual" empowered by the rapid development of information technology.

Neither Zuckerberg nor Thiel has made any comments on the March 15 Christchurch terrorist attacks on Facebook's Newsroom website.

Zuckerberg's last Newsroom comment is dated March 14.

Sheryl Sandberg, Facebook's chief operating officer, yesterday issued a letter saying the company knew it had work to do.

She said it was strengthening the rules for using Facebook Live and clamping down on hate groups.

Facebook makes a great deal of noise about transparency but its financial reporting in New Zealand is also extremely sparse.

Under New Zealand law, an NZ company that is a subsidiary of a body corporate incorporated outside NZ must file audited financial statements if, at the balance date for the two preceding accounting periods, at least one of the following applies:

• The total assets of the NZ company and its subsidiaries are more than $20m
• The total revenue is more than $10m

Facebook New Zealand is 100 per cent owned by Facebook Global Holdings, which is based in Palo Alto, California, but it hasn't lodged any NZ financial accounts since the December 2014 year.

These 2014 calendar year accounts showed that the company generated revenue of only $1,196,979 and had a tax provision of just $43,261.

The accompanying table shows Facebook's NZ financial figures compared with those reported by Facebook Australia, Facebook Ireland and the US listed company. Facebook Ireland is included because most of Facebook's non-US and Canadian financial transactions go through Dublin, including its NZ revenue.

Facebook New Zealand's total December 2014 year revenue of just $1,196,979 was received from Facebook Ireland as "service revenue generated under service agreement".

There are clear commercial advantages for Facebook New Zealand to pass its revenue through Ireland because of the EU country's relatively low tax rate.

In 2017, Facebook reported it had 2.9 million NZ users, representing almost 61 per cent of the population.

Facebook and KiwiSaver are two of the country's most popular commercial offerings in terms of numbers, both with around 2.9 million members, but KiwiSaver providers pay far more tax than Facebook because they don't wash their revenue through Ireland.

Facebook is clearly the world's largest social media platform, with a global market share of 68.9 per cent. It is followed by Pinterest, with a 15.2 per cent share; Twitter, 7.4 per cent; YouTube, owned by Google, 3.8 per cent; Reddit, 1.7 per cent; and Instagram, owned by Facebook, 1.6 per cent.

Facebook has a 61.3 per cent market share in Australia and 57.0 per cent in New Zealand at the end of February. Facebook's NZ market share has fallen from 71.2 per cent to 57.0 per cent over the past 12 months, with Pinterest, which has gone from 13.8 per cent to 24.4 per cent, being the big gainer. These figures are compiled by StatCounter GlobalStats.

Pinterest issued its IPO documents last week and is expected to list on the New York Stock Exchange next month with a sharemarket value of around US$12 billion.

It is not within the expertise of this column to determine whether social media has more positive than negative features but several clear observations can be made.

The first is that Facebook has NZ advertising revenue substantially above $10m, according to advertising surveys, and this is the criterion for overseas owned companies to publish their accounts on the Companies Office website.

Facebook New Zealand is avoiding this requirement by effectively shipping revenue to Ireland, which also reduces its NZ tax obligations.

Parliament should ensure that Facebook NZ meets its financial disclosure and tax obligations, as all New Zealand registered companies are required to do.

Second, social media companies should be responsible for removing hate speech and other violent messages from their platforms.

Germany, with its history of right-wing extremism, introduced legislation last year that holds Facebook, Twitter, YouTube and other social media companies responsible for what is published on their platforms. These organisations can be fined up to €50m ($82m) in Germany if they don't quickly remove objectionable content.

Zuckerberg and his management team, who are reluctant to introduce strict monitoring regimes unless forced to do so, now have 1200 people monitoring content in Germany.

Our politicians should be insisting on a similar level of social media platform scrutiny in New Zealand in the aftermath of the Christchurch tragedy.

- Brian Gaynor is a director of Milford Asset Management.