Facebook and Google Face a Growing Threat from Regulators – Barron’s

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Ive always been skeptical about the push to sue, legislate, and regulate social media companies toward better behavior. My view has been they might get their wrists slapped, but that the risks werent material to the stocks. And that has largely been the right call. Now Im not so sure.

State and federal litigation against Facebook (ticker: FB) and Alphabet -owned Google (GOOGL) is mounting. And social media firms are taking heat for their role in creating the fraught political climate that led to a mob taking over the U.S. Capitol this past Wednesday. In short, the risks to the social media companiesand their shareholdersare rising.

This past week, the social media networks took their most drastic actions yet to rein in President Trumps public comments. The most shocking news came late Friday when Twitter (TWTR) permanently suspended his account, citing the risk of further incitement of violence. (The stock was down nearly 4% in late trading Friday night.) Facebook has banned Trump on its platform at least until his presidency ends on Jan. 20.

The social media companies may finally be feeling pressure to take some responsibility for our nations discourse and behavior, especially in the wake of the attack on the Capitol, which left five people dead and dozens injured. And its hard to avoid the feeling that social media is somehow to blame. Rioters, after all, gathered with the help of social media and then posted in real-time to Twitter, Facebook, Instagram, and other sites as they stormed the Capitol.

Its just the latest in a long list of issues for social media. On the same day last week when Congress members had to suspend counting the Electoral College vote to hide in safe rooms, Facebook revised the terms and privacy policy for WhatsApp, the companys wildly popular messaging service that has two billion monthly users. Among other things, the revised policy requires users to agree to allow WhatsApp datatheir phone number, transaction data, IP address, and other informationto be shared with Facebook, so the social network can make suggestions to you and serve up relevant offers and ads. Users have two options: Click yes, or stop using WhatsApp.

Roger McNamee, an early investor in Facebook who has become one of its greatest critics, has spent the last four years urging regulators, prosecutors, and legislators to end the companys practice of converting user data into dollars, largely via targeted advertising. Its what Harvard Business School professor Shoshana Zuboff calls surveillance capitalism.

In an interview last week, McNamee told me that Facebooks WhatsApp change was a giant f-you to antitrust regulators...a completely irresponsible action.

A WhatsApp spokesperson says that it began notifying some users of the change in December and that new terms are intended to make it easier for businesses to communicate with consumers through WhatsApp. The company provided an opt-out of data sharing with Facebook back in 2016 but no longer offers that option.

Facebook is positioning itself as a friend to small business. It recently ran a series of full page ads in major newspapers attacking a new Apple (AAPL) policy that requires Apple device users to opt-in to having their activity tracked across apps and websites. Apple sees this as a consumer privacy issue; Facebook positions it as bad for small business. More to the point, it would also be bad for Facebooks business.

So far, investors remain unconcerned about social medias liability; and the events of the past week, which also included Democrats taking control of the Senate, dont seem to have changed their mind.

After an initial flutter, tech stocks still raced higher on the week. One veteran internet analyst I spoke with sees the risks of tech regulation only slightly heightened by Georgia voters flipping the Senate to Democratic controlthe tech giants, after all, have detractors on both sides of the aisle.

President-elect Biden, like Trump, has called for the elimination of Section 230, a provision of the 1996 Communications Decency Act that protects online businesses from being liable for their users posts. Still, investors seem unconcerned about imminent change. In the early going, Biden will have his hands full trying to address a raging pandemic and a wounded economyfixing Section 230 might not be high on his to-do list.

And yet, theres no question the risks to big tech are greater than they were a year ago. McNamee, for one, predicts that the megacaps, including Facebook, Google, Amazon.com (AMZN), and Applewill all lose antitrust cases in the months ahead. He sees particular risk in the case filed against Google in Texas by a group of 10 state attorneys general. They argue that Google conspired with Facebook to engage in price fixing in the online advertising market.

McNamee points out that federal law, at least, allows for felony treatment of price-fixing actions. Last year, a former CEO of Bumble Bee Foods was sentenced to 40 months in prison for conspiring with rivals StarKist and Chicken of the Sea to fix canned tuna prices. For now, Big Tech is dealing with civil cases. McNamee thinks the details in that 130-page Texas complaint are damning. Google says the case is meritless. Facebook has declined to comment.

Write to Eric J. Savitz at eric.savitz@barrons.com

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Facebook and Google Face a Growing Threat from Regulators - Barron's