Facebook Weathers Another Regulatory Storm: Does It Matter?

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“If Instagram’s success was because Facebook bought it and nurtured it into a successful site, you wouldn’t want to penalize Facebook for doing that,” Gregory Rosston, director of the Public Policy Program at Stanford University, says


Facebook’s users — and its advertising partners — don’t seem to care about the company’s array of recent privacy and regulatory issues. That much is clear, after Facebook reported its second quarter earnings on Wednesday. The social network posted 8% year-over-year growth for both daily and monthly users — bringing it to 1.59 billion daily users worldwide. In the U.S., where Facebook has been hit by several scandals in the last 18 months, its base increased slightly from 186 million to 187 million daily users. MoffettNathanson analyst Michael Nathanson, in a note to clients on Thursday morning, called it a “remarkable turnaround” for Facebook, a year after the company barely added any new users during Q2 2018. This time last year, the company was still weathering the revelation of the Cambridge Analytica data leak, where Facebook admitted up to 87 million users had their profile information unknowingly accessed by the political consulting firm. The privacy blunder — and others to follow — put Facebook under intense pressure from both the media and Washington, D.C. and threw it into a state of purgatory for the rest of the year. Now, Facebook’s user growth, together with advertisers loving Stories — its ephemeral pictures and videos feature — led it to matching a company record with $16.9 billion in quarterly revenue. “To be clear,” Nanthanson wrote, “after the [Q2 2018] shock, we did not think this growth rate would be this strong after such a rocky period.” Does that mean Facebook is officially out of the woods? Not yet. Facebook reached a record-setting $5 billion settlement with the Federal Trade Commission on Wednesday over its mishandling of user data — only to share later in the afternoon that the FTC was carrying out another investigation, this time into antitrust concerns. The news, coupled with CEO Mark Zuckerberg and CFO David Wehner saying on the company’s earnings call the company will be investing in more privacy measures, dampened Wall Street’s mood, at least a bit. Facebook’s stock, immediately after its earnings came out, was on the verge of passing its all-time high of $217 per share. By Thursday morning, shares had dipped 2% to about $200 per share. The takeaway: While a user exodus is not an immediate concern, another government probe is worrisome. The FTC’s antitrust probe comes on the heels of the Justice Department announcing its own investigation into anti-competitive practices in Silicon Valley — something that could also ensnare Facebook. But just because regulators are looking into anti-competitive practices doesn’t mean it’s a slam-dunk case. In fact, several antitrust experts recently told TheWrap it would be difficult to knock Facebook down on these grounds. Based on the Sherman Act of 1890, the bedrock of modern U.S. antitrust law, Penn State antitrust scholar John Lopatka said regulators would need “two necessary ingredients” to take action: Not only does there have to be proof Facebook is a monopoly, but you’d also have to show Facebook extended its monopoly “through anti-competitive conduct.” “We can assume Facebook has monopoly power in the social media platform market, but that’s not enough,” Lopatka added. “You still have to prove it acquired or maintains that power through anti-competitive power, and I don’t know any reason to believe that’s the case.” On Wednesday, Facebook said its family of apps — Facebook proper, Messenger, WhatsApp and Instagram — are now used at least once a month by 2.7 billion people. Facebook’s critics have pointed to this strength as one of the core reasons it should be broken up; how can anyone else compete? Gregory Rosston, director of the Public Policy Program at Stanford University, said the current popularity of Instagram wasn’t a guarantee when Facebook bought it for $1 billion in 2012, however. “When Facebook bought Instagram, Instagram was one of several different photo-sharing sites. Is it that everybody knew Instagram was going to be the one that would be really successful as a potential competitor to Facebook? I doubt that, or the acquisition would not have been approved [by the FTC in 2012],” Rosston said. He continued: “If Instagram’s success was because Facebook bought it and nurtured it into a successful site, you wouldn’t want to penalize Facebook for doing that, because that would really penalize success and that would be a bad thing to do with antitrust.” Breaking up Facebook and its network of apps is a possibility, he said, “but you need to be very careful about what you do to not stifle incentives to build businesses and be successful.” It also remains to be seen how vigorously the Justice Department and FTC are willing to dig for dirt. FTC director Jim Kohm told Business Insider it reached its $5 billion settlement with Facebook in part because it didn’t want to push Zuckerberg to testify — fearing the company would fight back and prolong the issue. And just as favorably for Facebook, the FTC, while requiring quarterly check-ins and the appointment of a new privacy committee, did not impose any changes to its business. Could Facebook settle again to keep a more comprehensive inspection from taking place? It’s a possibility. So while the regulatory guillotine continues to linger above Facebook, it isn’t guaranteed to drop. In the meantime, Facebook — thanks to advertisers gravitating towards Stories and its ability to keep finding users under rocks — appears poised to keep its turnaround going. “We acknowledge regulatory uncertainty may weigh on [Facebook],” Morgan Stanley analyst Brian Nowak said in a note to investors on Thursday, “but see upwards revisions and more sustained growth giving investors more confidence in the durability of long-term earnings power.”

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