It seems that Big Tech has a target on its back, and by regulators and lawmakers Facebook (NASDAQ: FB) is no exception. Recent government activity could be worrying for shareholders in the social media giant. In a Fool Live episode recorded on June 16, Fool contributors Toby Bordelon and Brian Withers discuss what is going on in Washington that could affect Facebook’s business, and how investors should feel about these recent events.
Tobias Bordelon: I would like to talk briefly about Facebook when we move into our second company. What’s going on right now? There are a few antitrust issues that can be at play. Last week we saw some details on some of the bills, five potential antitrust laws that are going through Congress. I think hearings will start on some of these today. Some of them have an impact on Facebook, possibly restrictions on future acquisitions, rules on data collection, data usage and data portability from their customers.
In other news this week in the same vein, President Biden appointed Lina Khan to head the FTC, who was confirmed as commissioner just yesterday. Now she is the head of the commission. She was critical of tech companies, so that’s important. I don’t think she will really be the person who will curb the dynamic that we see for antitrust law [re]form. She will likely pursue it in new regulations. We’ll see how that works out.
You are currently seeing a lot of articles in the news about bipartisan cooperation on antitrust regulation. Facebook somehow managed to irritate politicians on both sides of the aisle. Large. We don’t want bipartisanism, but if you’re Facebook I think the bipartisanism you see is not exactly what you want. Not a good position when everyone wants to do something for your power.
Look now. On the plus side, and maybe that’s why Facebook gets so much attention, business is doing well. In the most recent quarter, the company increased its daily active users by 8% to nearly 1.9 billion; monthly active users increased by 10% to 2.85 billion. That’s huge. Even better, sales grew 48% year over year to over $ 26 billion. Now you see, almost a $ 1 trillion company growing 48% in sales. Large.
In a way, one would like to say that antitrust scrutiny is a sign of success. You have to be big and powerful and influential for Congress to really pay attention to what is happening and try to score with you politically. I think that’s a good sign in a way.
There is other news as well. I saw something. Oddly enough, Facebook is thinking about a smartwatch, which doesn’t make a lot of sense to me. I don’t know what to make of it. They have Oculus, right, so hardware is nothing new to them. I don’t know I need a Facebook watch. We do not care. That will be so minimal in terms of the bottom line.
It’s really about advertising. The company is all about advertising. This is what the antitrust authorities concentrate on, their power in the advertising market. This is what shareholders should focus on, future earnings. Potential headwinds with some cartel cases. But it’s still great business that I don’t think anyone should be put off because of what’s going on in Congress.
Brian Withers: Toby, thanks for these updates. You mention how big Facebook has gotten and is actually mostly an advertising business. Advertising accounts for almost 100% of their income. It has billions of users all over the world, yet it’s so massive nonetheless. I imagine its users, I am one of them, I don’t want to see any more advertisements. Is there some way to grow so that Facebook can balance the number of ads it serves against targeting companies that are actually paying the bills? Could it raise the price of smarter, more targeted ads?
Bordelon: Yes, I think they could to some extent. I think they have some pricing power. When you think of advertising, it’s all about the size of the audience you can reach and how closely that audience matches your advertiser’s preferred demographic. And Facebook does well on both points.
We have just talked about billions of dollars in monthly and daily active users. You have a huge potential audience and the data you collect is great for fine-tuning your targeting ads to make ads more valuable. As long as they have this large user base across all of their platforms, we’re talking about Facebook, we’re talking Instagram, WhatsApp, they’re going to have some pricing power.
Well, the problem there is going to boil down to that data collection and use. Because of this, some of the provisions in these antitrust laws are somewhat of a concern. You could limit Facebook’s ability to collect and use this information. This would reduce the value of the ad pool to advertisers. That is a concern here. But I think they will still find a way to refine it further and keep delivering to advertisers exactly what they want to see, in a meaningful way. If they have problems with data collection, so do everyone else. It’s not that they’ll be unique in what they’re dealing with.
Withers: Interesting. They’ll go on, go on.
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