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).