Is the Facebook Whistleblower Situation Significant for Investors?
News or Noise: Would Regulation of Social Media Companies Hurt Their Profitability?
In today’s world, social media is everywhere we turn. The cat is out of the bag and the future remains on-line and connected. The continued movement of our society, and younger generations, from “analog” (radio, broadcast TV, cable) to a “digital” (Facebook, Google, Twitter, Instagram, Tik Tok, Amazon, Microsoft) distribution economy has been viewed as a blessing and a curse by many.
This week, a former Facebook product manager told lawmakers that Facebook consistently puts its own profits over users’ health and safety. The whistleblower argued that Facebook did this by using their algorithms to steer users toward high-engagement posts that that are viewed as “harmful” or “misinformation” by some in the legacy mainstream media or government.
Not to downplay this story, but is this really shocking news? We have seen these stories’ multiple times over the past 5 years. A public social media/technology company, uses its expertise and technology to target, engage, capture, and monetize their audience’s attention and traffic while on their website.
Facebook reaches a tremendous number of people via its three primary digital properties. Facebook reaches 2.74 billion monthly users, Instagram reaches 1.07 billion users, and What’s App property has roughly 2 billion active users. The more these type of stories appear, the closer all social media companies slowly move toward government regulation of social media, and potentially of the entire internet, which presents significant questions and issues regarding the open internet, free speech, private vs. public distinctions, censorship, and individual freedom.
But putting those questions to the side, and looking at these developments from an investor’s perspective, what would social media regulation mean for profitability? Most likely, it would be marginally bad for profitability. Regulation of some sort appears inevitable at this point. Looking forward, this is a short-term headwind for all social media companies.
However, time and time again we have seen these episodes of -15-20% weakness in the social media stocks as short-term selloffs with them regaining footing along with their long-term secular growth prospects. Large companies recognize that working within the bounds of a regulatory framework is simply a part of doing business, and good companies will continue to find ways to navigate such frameworks successfully.
In our view, this story is news and deserves continued attention throughout 2022.
News or Noise: News…and bears watching throughout 2022
(Note: As an aside, this quarter’s results for FB are likely to be noisy, but not because of this story. Results are likely to be noise because of Apple’s changing its ad tracking system earlier this year to an “opt-in” instead of “opt-out”. This likely leads to a deceleration in secular growth but also should create an “easy comparison” for 2022 as political spending is likely to surge higher in the 2nd and 3rd quarter of 2022.)
Source Article:
https://www.cnbc.com/2021/10/05/facebook-whistleblower-testifies-before-senate-committee.html
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