Will Regulating Facebook Work?

I don’t quite know how I got so cynical.

Maybe it is spending too much time studying ‘how the sausage is made’ in the media industry, that leaves me skeptical of most things I read.

Maybe it was being told by every adult that I had to go to college, only to graduate with tens of thousands of dollars worth of debt and *almost* no tangible impact on job prospects to show for the effort.

Maybe it was Santa. 

Anywho, I’ve seen a major narrative take hold over the last few years that sounded good at first, but makes less sense the more I think about it: Regulate Big Tech.

That could mean antitrust lawsuits and forced divestments or rigid compliance restrictions (like Europe’s GDPR framework).

Both come with ready-made taglines that politicians can use to rally support. “Break Up Big Tech” and “Protect Your Privacy and Your Data”, respectively.

Last week, the Federal Trade Commission and 46 US state attorney generals brought an antitrust lawsuit against Facebook

They allege that two acquisitions, Instagram and WhatsApp, that they made back in 2012 and 2014, respectively, were anticompetitive.

Nevermind the fact that unwinding 8-year-old transactions raises basic questions about the statute of limitations.

More importantly, what proof do we have that regulating a large technology company yields positive results?

Cambridge Analytica and API Access

After the 2016 election, the primary narrative that gripped large media entities was the Cambridge Analytica scandal.

To quickly summarize, millions of Facebook users' personal data was acquired without the individuals' consent by Cambridge Analytica and subsequently sold to the analytics teams for the 2016 Ted Cruz and Donald Trump presidential campaigns.

This caused a severe backlash and led to a public apology by Facebook.  They were forced to pay a $5 billion settlement by the FTC.

The company also changed their policies to block the exporting of user data by 3rd parties. Facebook acted swiftly and severely to try and turn around the popular narrative about their culpability, but #DeleteFacebook still grabbed a lot of attention across the media.

Here is Facebook’s stock performance since banning

Revenues have doubled and their market capitalization is up about 70%.

Why?

One of the major drivers is that by cutting off API access to third parties, Facebook has made their pool of data more exclusive. 

If you want a custom audience for your advertising spend with a comprehensive psychographic profile and enormous inventory of ad slots, Facebook is now the only game in town.

Competitors that could have built up competing databases have been blocked off by Facebook’s move to stop API access to their data externally. 

Further, that same API access could have been used by academic researchers to understand the impact social media is having on our society.

By turning off the spigot of data for everyone, they’ve made their algorithms and impact more opaque.

Academic researchers have found studying the platform significantly more difficult since these changes were in place.

So the net result of Cambridge Analytica is that Facebook has seen a reduction in competitors and a false sense of security for consumers.

General Data Protection Regulation (GDPR)

GDPR was adopted in the spring of 2016 by the European Union. You probably remember every service you’ve ever used emailing you with updated terms of service and every website starting to pop up with an announcement that they cookie you.

I clicked “yes” and carried on with my normal behavior.

The aim of GDPR’s data and privacy regulation is to give control to individuals over their personal data. 

Mark Zuckerberg says, “I think the GDPR in general is going to be a very positive step for the internet.”

Hmmm…

This higher standard puts a significantly higher burden on every company from a compliance standpoint. The total cost for EU companies is estimated at around €200 billion while for US companies the estimate is for $41.7 billion.

You know who can easily handle the millions of dollars in costs associated with more compliance?

Facebook.

They’re sitting with $5.5 billion cash on their balance sheet.

You know who can’t?

Every startup that aspires to be a Facebook competitor.

By imposing hundreds of thousands (or millions) of dollars in compliance costs to every company in the space, regulators end up entrenching the established firms’ oligopoly.

This is called Regulatory Capture and is pervasive in all highly regulated industries.

It’s the reason there are so few banks. 

Facebook doesn't mind dealing with more regulation if that simultaneously digs a moat around their kingdom keeping out competition.

Privacy Protections

For the last two years, Apple has run a series of ad campaigns highlighting their commitment to privacy.

It’s been a masterclass in positioning.

Apple doesn’t sell ads and has no reason to collect data, outside of anonymized Siri queries and other inputs to improve software performance. While Google, Facebook, and Amazon were targeted for their enormous data collection pools. 

Facebook responds with a significant strategic and PR initiative to let everyone know that messages on WhatsApp are encrypted.

Great.

As you’d expect with billions of users, some percentage use Facebook’s platform for gross and despicable behavior. Criminal networks, terrorists, and child abusers need messaging, too.

As these tech companies rush to provide consumers with the privacy they desire, they also grant that technological capability to dangerous actors.

Now, law enforcement is left to combat more technologically enabled criminals, who have the tools to coordinate at scale.

What to Do

There’s nothing for us to do about this. No #DeleteFacebook campaign or boycott.

The train is out of the station on the antitrust legislation and a bunch of politicians want to score brownie points on the punching bag du jour.

If you buy these arguments, then consider this.

Most likely, this case will not be successful in breaking up Facebook. Even when Microsoft lost their antitrust case 21 years ago, they were not broken up.

Instead, they were simply unable to acquire Amazon or Google, which have since grown into their two largest competitors.

Inevitably, the next decade will see 1-3 more social networks pop up to compete with Facebook. If they’re able to make it out of the cradle and into adolescence, we’ll get a more competitive landscape for social platforms that will benefit users across the board.

Stay optimistic. The future is bright.