Facebook has faced growing scrutiny among regulators. Here are my thoughts on what will happen if it is further regulated or forced to break up.

Most of us don’t go a day without using Facebook or Instagram. But despite its prominence, social media is still a relatively new concept.

The rise of Facebook and social media as an industry has been so swift that regulatory bodies have not been able to properly regulate it.

However, things are starting to change. 

Last year, Facebook incurred a US$5 billion (S$7.1 billion) fine from the Federal Trade Commission (FTC) due to a privacy breach.

The company also recently agreed to pay a US$550 million settlement for collecting users’ facial recognition data.

There have also been a few threats from European regulatory bodies and Facebook may even face retrospective fines in the future.

That brings me to my next question: Should Facebook shareholders be worried about regulations?

WHAT ARE THE POSSIBLE REGULATORY MEASURES THAT FACEBOOK FACES? 

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Although fines are painful, they are one-off expenses. The biggest risk is therefore not fines, but regulators forcing Facebook to change the way it operates.

Regulations that could hurt Facebook include prohibiting the kind of advertisements it can offer, or controlling Facebook’s content.

Regulators could also force Facebook to spin-off or sell some of its assets. Currently, Facebook owns Instagram, Messenger, and Whatsapp.

Facebook reported in its 2019 fourth-quarter earnings conference call that there are now 2.9 billion people who use Facebook (the social media site), Instagram, Messenger, or Whastapp each month.

A recent article from Verge showed that Whatsapp currently has 2 billion users while Instagram has 1 billion (as of June 2018).

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THE LIKELIHOOD OF EXTREME REGULATION 

Although regulation is likely to hit Facebook, I think the odds of such extreme regulation are low.

After facing criticism in 2019, Facebook started taking privacy and regulation very seriously.

Facebook’s co-founder and CEO, Mark Zuckerberg, is outspoken about the need for regulation on social media companies. In a 30 March 2019 blog post, Zuckerberg wrote:

“I believe we need a more active role for governments and regulators. By updating the rules for the internet, we can preserve what’s best about it – the freedom for people to express themselves and for entrepreneurs to build new things – while also protecting society from broader harms.”

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His willingness to co-operate with regulators should put Facebook in a better position to negotiate.

Moreover, despite all the negativity surrounding Facebook, it’s my opinion that Facebook has done more good than harm to society.

Facebook not only provides humans with the ability to connect – it’s also a platform to express ourselves to a wide audience at relatively low cost.

Completely controlling the way Facebook is run will, therefore, have a net negative impact.

As such, I think the risk of extreme regulation is very low.

BUT WHAT WILL HAPPEN IF FACEBOOK IS FORCED TO BREAK UP

Perhaps the biggest risk is competition law. Facebook is by far the biggest social media company in the world. To promote greater competition in the social media space, regulators could force Facebook to spin-off Whatsapp, Messenger, and Instagram into separate entities. 

Such a move will likely erode margins as the separate entities compete for advertising dollars. However, I think the impact of this will not be that bad for shareholders due to the huge and growing addressable market for social media advertising.

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Zenith estimated in late 2019 that global social media ad spending was US$84 billion for the year, and is expected to increase by 17 per cent in 2020 and 13 per cent in 2021.

A break-up could even be a good thing. It will force Whatsapp and Messenger to find ways to monetise their huge user bases. Currently, Whatsapp is a free platform and does not have any advertisements.

If Whatsapp is spun off, investors will want to see it generate some form of revenue either through payments or advertising.

In addition, the separate entities could even command a higher valuation multiple and might even be a net gain for Facebook shareholders prior to the spin-off.

THE GOOD INVESTORS’ CONCLUSION 

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As social media grows, scrutiny and regulation will inevitably follow. It happens in all industries.

But as a Facebook shareholder, I am not that concerned over regulations. For one, given Facebook’s own stance on regulation, its net positive impact as a platform and its willingness to co-operate with regulators, the odds of extremely unfavourable regulation is very low.

Facebook has also spent big on privacy protection and removing harmful content from its platform. These initiatives should put it in a much better position to negotiate with regulators.

On top of that, anti-competition laws that may force Facebook to break up could even be a good thing for shareholders.

This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.



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