Fb and Google Face a Rising Menace from Regulators

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I have always been skeptical of the effort to sue, legislate, and regulate social media companies to achieve better behavior. I think they could have their wrists slapped, but the risks weren’t material to the stocks. And that was the right call for the most part. Now I’m not so sure.

State and federal litigation against

Facebook

(Ticker: FB) and

alphabet

Google (togetL) is increasing. And social media companies are taking heat for their role in creating the tense political climate that led to a mob taking over the U.S. Capitol last Wednesday. In short, the risks to social media companies – and their shareholders – are increasing.

Over the past week, social networks have taken their most drastic measures yet to curb President Trump’s public comments. The most shocking news came late Friday when

Twitter

(TWTR) has permanently banned his account, citing “the risk of further incitement to violence”. (The stock fell nearly 4% late Friday night.) Facebook banned Trump from its platform at least until his presidency ended on Jan. 20.

Social media companies could finally come under pressure to take responsibility for our nation’s discourse and behavior, especially after the Capitol attack that left five people dead and dozens injured. And it’s hard to avoid having social media somehow to blame. After all, the rioters gathered using social media and posted them in real time on Twitter, Facebook, Instagram, and other websites as they stormed the Capitol.

It’s just the latest in a long list of social media topics. On the same day last week when members of Congress were forced to suspend the electoral college vote to hide in secure rooms, Facebook revised the “Terms of Use and Privacy Policy” for WhatsApp, the company’s popular two billion monthly messaging service Users. According to the revised policy, among other things, users must consent to WhatsApp data – their phone number, transaction data, IP address and other information – being allowed to be shared with Facebook so that the social network can make suggestions and provide you with relevant offers and advertisements. “Users have two options: click Yes or stop using WhatsApp.

Roger McNamee, an early investor in Facebook who has become one of its biggest critics, has for the past four years urged regulators, prosecutors, and lawmakers to end the company’s practice of converting user data into dollars, largely through targeted advertising. It’s what Professor Shoshana Zuboff of Harvard Business School calls “surveillance capitalism.”

In an interview last week, McNamee told me that Facebook’s WhatsApp change was “a huge F-You for antitrust authorities … a completely irresponsible act”.

A WhatsApp spokesperson said it started notifying some users of the change in December and that new terms are designed to make it easier for companies to communicate with consumers on WhatsApp. The company refused to share data with Facebook back in 2016, but no longer offers this option.

Facebook positions itself as a friend of a small business. Recently, a number of full-page advertisements ran in major newspapers attacking a new one

Apple

(AAPL) policy that requires Apple device users to choose to have their activity tracked across apps and websites. Apple sees this as a consumer privacy issue. Facebook positions it as bad for small businesses. More specifically, it would also be bad for Facebook’s business.

So far, investors are not concerned about social media liability. and last week’s events, which included Democrats taking control of the Senate, don’t seem to have changed their minds.

After an initial flutter, tech stocks still rose higher for the week. A seasoned Internet analyst I spoke to sees the risks of technical regulation only marginally increased if Georgian voters subject the Senate to democratic control – the tech giants have critics on both sides of the aisle, after all.

President-elect Biden, like Trump, has called for the removal of Section 230, a provision of the Communications Decency Act of 1996 that protects online businesses from liability for the contributions of their users. Still, investors don’t seem concerned about changes ahead. To start out, Biden will have his hands full fighting a raging pandemic and wounded economy – setting Section 230 may not be high on his to-do list.

And yet the risks to big tech are undoubtedly greater than they were a year ago. For one, McNamee predicts that the megacaps, including Facebook, Google,

Amazon.com

(AMZN) and Apple will lose all cartel cases in the coming months. He sees a particular risk in the case filed by a group of 10 attorneys general against Google in Texas. They argue that Google teamed up with Facebook to fix prices in the online advertising market.

McNamee points out that federal law at least allows price fixing through criminal offenses to be handled. Last year, a former CEO of Bumble Bee Foods was sentenced to 40 months in prison for teaming up with rivals StarKist and Chicken of the Sea to set the price of canned tuna. Big Tech is currently engaged in civil litigation. McNamee thinks the details in this 130-page Texas complaint are damned. Google says the case is “unfounded”. Facebook has refused to comment.

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

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