MarketWatch First Take: A horrible week for Facebook somehow gets even worse

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Facebook Inc. just ended a horrible week with a data breach that could be its worst yet, showing off in just a few days why any investor should be concerned about the world’s largest social network right now.

Friday’s news of a hack that affected at least 50 million users — and likely many more — could have more people deciding to, as a popular hashtag prescribes, #deletefacebook, if the Cambridge Analytica scandal has not previously pushed them there, as the company’s trustworthiness to safeguard personal information is damaged anew. Other companies could be more wary of working with Facebook, too, after the company admitted that the breach could have allowed users to log in to other services that use Facebook accounts to identify users.

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Facebook’s stock FB, -2.59%  , already down nearly 7% this year, fell further on Friday, while the S&P 500 SPX, +0.00% SPX, +0.00% , up nearly 9% this year, was flat for the day, showing that investors are also unhappy with the social-networking giant.

In a note headlined “Hits Just Keep on Coming,” Evercore ISI Securities analyst Anthony DiClemente noted that “if the impacted accounts were highly engaged users, we believe there would be a meaningful propensity to log back in, limiting the impact to engagement trends.” But, he added, for every 10% of impacted users who do not return to the platform because of this breach, “Facebook would lose roughly $200 million in ad revenue.”

Friday’s news was effectively a pile-on after the unsettling surprise first reported late Monday night by the New York Times that the co-founders of Instagram, Kevin Systrom and Mike Krieger, were leaving Facebook. Instagram, the photo-sharing service that Facebook CEO Mark Zuckerberg purchased for $1 billion just weeks before the company’s IPO in 2012, had been described as an ideal Silicon Valley merger because Facebook promised to leave Instagram and its co-founders alone, reporting only to Zuckerberg. Instagram is also thought to have been a big part of Facebook’s ability to keep growing revenue of late, even as it stopped loading more ads into the news feed on its core app.

As investors were digesting the departure of the Instagram co-founders, Forbes published an interview with Brian Acton, one of the co-founders of WhatsApp, in which Acton said he disagreed with Zuckerberg over how to make money from WhatsApp, a company Facebook famously purchased for more than $19 billion despite its having no revenue. Acton left on the table $850 million he would have been owed if he’d stayed.

His comments prompted a response from David Marcus, Facebook’s head of blockchain initiatives, who posted his own take on Facebook lambasting Acton’s comments as setting a “new standard of low class.” He noted that the founders of both Instagram and WhatsApp thrived during their time at Facebook, and said Zuckerberg protected WhatsApp for a long time as Acton exhibited passive-aggressiveness about the business model.

“There are few companies out there that empower and retain founders and their teams for as long as Facebook does,” Marcus wrote.

While it may have looked that way a couple of years ago, Facebook has not seemed to live up to that reputation of late. Oculus’s co-founders — aside from Palmer Luckey, who got the boot pretty quickly — were demoted in a shake-up last year and were not visible parts of a large event for new virtual-reality gear that was also on Facebook’s docket this busy week, as Instagram’s founders were walking and the WhatsApp co-founder was talking.

No matter how you look at the convergence of events, the bottom line is that Facebook is in a crisis spawned by slowing growth, the rising cost of dealing with its issues, and user discontent. It desperately needs services like Instagram, WhatsApp and Oculus to grow revenue to make up for the issues in Facebook’s core service, but it now seems to have lost or buried the executives who made those acquisitions what they are.

Investors are going to be supersensitive to any slowdowns in user growth after the past few months, and other startup founders may now be more wary of acquisition by Facebook. The social network may today be in a similar spot to the one it was in around the time of its IPO, when it had to prove that it was not missing the mobile revolution, and did. Whether it can pull off a reputational rehab this time will be up to Zuckerberg, and to how Facebook’s fiefdoms perform without their founders.

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