The Daily Update - Facing the Book? Regulation and Tech Returns

They say an apology can be worth a lot, but in Mark Zuckerberg's case it seems more than most; following his characteristically dry but apologetic testimony and questioning by the Senate his company’s net worth rose $25 billion (and his own share up almost $3bn). So eating ‘umble pie’ and not mincing words seems to have played off quite well, at least in the short term for ‘Mr Sugar-Mountain’. But although the Senate, in some of their questioning, have demonstrated a farcical amount of tech ignorance, clearly their chief concerns remain valid. Now, it seems momentum is building for a ratcheting-up in tech and platform regulation - both enforced by the law and autonomously to appease kvetching users.

Already Zuckerberg has confirmed that they plan to follow the EU’s General Data Protection Regulation (GDPR) worldwide. This comes into force on the 25th May necessitating greater control over personal information for users and enforcing larger fines for noncompliance (which, in recent months, they have shown they are keen to apply to other tech giant malfeasances). But this is perhaps too-little-too-late; Facebook have already lost the trust of their key audience with 73% of 18 to 29 year olds not trusting them to do the right thing, according to a recent Harvard Institute of Politics poll (49% stating “some of the time” and 24% stating “never”). The company knows how much harder it is to regain trust and users, and can’t but loose face over improperly sharing the personal data of 87 million accounts (which for comparison is equivalent to ~40% of the US adult population) and admitting to tracking users even after they have logged off.

However, the broader questions are how deep and how far away are these regulations going to be and what signs can we tease out from these latest hearings. This regulatory dynamic is important for the tech sector because we have seen the dramatic impact from regulation in the past in such industries as tobacco and biotech. When 40 states began litigation against tobacco companies in the mid-90s and when the US introduced greater regulation to the biotech industry in 2015 those sectors experienced prolonged underperformance versus the broader market, which in both cases undid around 3 years of outperformance in half the time.

This is probably too pessimistic a view to directly translate to the genuinely innovative and arguably more diverse tech sector. However, over the past 3 years (even after the recent dip) major tech (represented by the NYSE FANG+ Index) has outperformed the S&P 500 by over 100%: with the S&P up 34% and the FANG up 139%. So regulation could be a bitter and painful pill for the industry and investor alike in the short term even if it promotes better practice in the long run (and some argue plays into the hands of tech monopolies). Moreover it still looks like there is a lot of investigation and catch-up for the regulators to do before serious and encompassing legislation can be drafted. But while we wait for all that, one can still expect a few fines to be slapped on here and there, like plasters on a pouring wound, disapproving public voting with their feet and companies self-regulating - all of which will hamper profits (which can finally be said of Twitter after 12 years of losses). Facebook’s userbase has grown to 2.2 billion (up from 1.7bn in 2016) and revenues and profits to 40bn and 18bn respectively (from 28bn and 10bn in 2016). This works out to $18 of revenue per worldwide user, and if you are reading this in your native language and use Facebook you can expect they are capitalising more than that off of you. After all this, one would certainly be considered quite the optimist to expect user growth to continue at 25% annually and profits to again grow 5x in just 2 years (like 2015-2017).

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.