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Is Facebook (And Tech) Having A Standard Oil Moment?

Summary:
Facebook co-founder Mark Zuckerberg endured five hours of questions in the US Senate on Tuesday, at one point conceding what’s probably inevitable: tighter government oversight of social media in general and his firm in particular. “My position is not that there should be no regulation,” he said, trying to get in front of what appears to be a rising political tide of change. “I think the real question as the internet becomes more important in people’s lives is what is the right regulation.” The finer points of how legislation might be written was not on the mind of Senator John Kennedy, a Louisiana Republican, who told Zuckerberg “your user agreement sucks.” Lest there should be any doubt of where this might be headed, Kennedy advised that “I don’t want to vote to have to regulate

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Facebook co-founder Mark Zuckerberg endured five hours of questions in the US Senate on Tuesday, at one point conceding what’s probably inevitable: tighter government oversight of social media in general and his firm in particular. “My position is not that there should be no regulation,” he said, trying to get in front of what appears to be a rising political tide of change. “I think the real question as the internet becomes more important in people’s lives is what is the right regulation.”

The finer points of how legislation might be written was not on the mind of Senator John Kennedy, a Louisiana Republican, who told Zuckerberg “your user agreement sucks.” Lest there should be any doubt of where this might be headed, Kennedy advised that “I don’t want to vote to have to regulate Facebook, but by God I will. A lot of that depends on you.”

It’s unclear what a new era of government regulation of Facebook and the online industry might look like, but it would be surprising if Washington does nothing in the wake of private-data and fake-news scandals that have engulfed Zuckerberg’s firm in recent months. The tipping point was the recent revelation that Cambridge Analytica illegally harvested data from millions of Facebook users to influence elections.

The scandal has become a turning point for reconsidering the self-regulating aspect of social media businesses. Sen. Lindsey Graham, a Republican from South Carolina, was strikingly blunt, insisting that “Facebook is a virtual monopoly and monopolies need to be regulated.”

I expect the regulatory regime for a company like Facebook will be challenging and difficult. It could possibly take the creation of new laws and regulations to deal with this platform. But I do believe this: continued self-regulation is not the right answer when it comes to dealing with the abuses we have seen on Facebook.

Zuckerberg tried to convince Senators otherwise, but when asked to name Facebook’s biggest competitor he stumbled, citing Google, Apple, Amazon, and Microsoft as firms with “overlap[ing]” business operations.

Nice try, Mark, but that’s a weak comparison at best. Although all these firms are tech behemoths, the differences in business models overwhelm any similarities. Google comes the closest, but no one will confuse it as a direct competitor to Facebook. For something approaching an apples-to-apples comparison at similar scale one should turn to China, where social media giants such as WeChat and Renren stalk the landscape. But in the US, Facebook’s in a league of its own.


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In an effort to satisfy skeptical Senators that there was still a case for self-regulation, Zuckerberg explained how Facebook was ramping up efforts to monitor content with growing numbers of employees and artificial-intelligence applications.

But for Graham it was all about marketplace alternatives. He pointed to the auto industry as a healthy example of robust competition, as revealed in this excerpt from an exchange between the Senator and Zuckerberg in yesterday’s hearing:

LG: Let me put it this way. If I buy a Ford, and it doesn’t work well, and I don’t like it, I can buy a Chevy. If I’m upset with Facebook, what’s the equivalent product I can go sign up for?

MZ: Well, the second category I was going to talk about…

LG: I’m not talking about categories. I’m talking about real competition you face. ‘Cause car companies face a lot of competition. They make a defective car, it gets out in the world, people stop buying that car, they buy another one. Is there an alternative to Facebook in the private sector?

MZ: The average American uses eight different apps to communicate with their friends and stay in touch with people ranging from text to email—

LG: Which is the same service you provide?

MZ: Well, we provide a number of different services.

LG: Is Twitter the same as what you do?

MZ: It overlaps with a portion of what we do.

LG: You don’t think you have a monopoly?

MZ: It certainly doesn’t feel like that to me.

Whatever Zukerberg feels, the regulatory forces are marching forward and it’s unlikely the trend will stop, much less reverse. Next month, the European Union’s new data protection law kicks in and Facebook and other tech companies will have to comply in order to remain active in the EU. 

Changes are probably coming in the US, too, as yesterday’s Senate hearing suggests. The initial reaction in tech stocks, however, was positive. Facebook’s shares rallied 4.5% and the Technology Select Sector SPDR (XLK) jumped 2.5% on Tuesday.

But there’s a long road ahead and so it’s anyone’s guess how the regulatory front will evolve and how it will impact business models for the social media industry.

This much is clear: there’s a lot of anger and frustration directed at Facebook and it’s likely that this raw emotion will be channeled into a political reaction of one form or another. Yesterday’s hearing seems destined to mark a watershed moment for Facebook and other social media firms operating in the US.

Although the details are different, it’s hard not to see parallels with Standard Oil. After years of expansion and amassing monopoly power in the late-19th and early 20th century, the government ruled in 1911 the company was an illegal monopoly and broke it into smaller pieces. Facebook, of course, is a very different company in a very different age and any regulatory change will be customized for a digital age. The common theme that’s likely to endure is that the government will probably act in some capacity. Expecting that politicians will simply walk away from this moment and do nothing is to misunderstand the nature of Washington.

As  cybersecurity expert Molly McKew said yesterday, “I think that this really signals the end of this wild west period…” for social media.

James Picerno
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers. Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg Markets, Mutual Funds, Modern Maturity, Investment Advisor, Reuters, and his popular finance blog, The CapitalSpectator.

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