Facebook and Google could soon have to play by a new set of rules

Erin Fuchs
Deputy Managing Editor
Mark Zuckerberg, founder of Facebook. REUTERS/Albert Gea

A sell-off of tech stocks dominated the financial news headlines Monday, as questions continued to loom over how Facebook (FB) may have facilitated Russia’s meddling in the 2016 election.

The tech-heavy Nasdaq Composite slumped by 0.9% on Monday, with Facebook shares having their worst day of the year and Apple (AAPL), Netflix (NFLX), and Amazon (AMZN) also seeing drops.

Regulators ‘asleep at the switch’

There’s no way to know why investors ran from tech stocks on Monday, or why those stocks bounced back on Tuesday. Still, it’s worth noting that the apparent skittishness around tech stocks comes amid increasing public distrust over tech companies — and the increasing likelihood that America’s once-untouchable tech giants may soon face new regulations in the U.S.

“It’s my own personal take that we’ve really seen regulators kind of falling asleep at the switch when it comes time to regulate these big online entities like Google and Facebook,” said Mark Bartholomew, a University of Buffalo professor specializing in law and technology.

But that may be starting to change. As the Reformed Broker’s Josh Brown noted on Friday, the U.S. government may try to check Facebook’s growing influence in the same way that it did with Microsoft (MSFT) two decades ago and Standard Oil before that.

Facebook had a tough day on Monday.

“Governments that feel threatened or genuinely fear for the safety and/or competitive position of their constituents will absolutely take action if they feel the need to,” Brown wrote.

The first step: Regulating political ads on the internet like TV ads

While new regulations of tech companies could take several forms, Bartholomew believes that the “biggest, most likely” regulatory change will require Facebook to keep closer tabs on the political ads that run on its site.

Specifically, Bartholomew said, the Federal Election Commission may end up reversing a 2006 rule that left most political activity on the internet unhindered by regulations.

“The momentum is towards changing what has to be disclosed for political ads,” he said.

What would this look like? Facebook might be required to keep a database that stored a digital copy of the ad along with whom the ad targeted, how much it cost, and when it ran. These requirements would be more in line with the regulatory mandates imposed on TV stations.

“When you put a political ad on TV, there’s a record of that,” Bartholomew noted.

‘Regulation will be coming’

Possibly staying a step ahead of regulators, Facebook has already started reining in its advertisers. Last week, Facebook said it would block ads targeting users based on derogatory terms, and earlier this month it unveiled new standards for the kind of content that can be monetized on Facebook.

At a trade conference Monday, a panel of advertising consultants suggested that both Facebook and Google (GOOG, GOOGL) would be wise to continue self-regulating political ads. Those two tech giants alone are set to take more than 60% of the digital ad market in 2017, according to eMarketer.

“I think there will be more scrutiny, and there better be more self-regulation,” political ad consultant Brent McGoldrick said at Advertising Week New York, according to Reuters. “Otherwise, I think regulation will be coming.”

Indeed, Congress has already taken some steps to listen to constituents who might be disillusioned with the outsize influence of tech companies. Sens. Amy Klobuchar (D-Minn.) and Mark R. Warner (D-Va.) are pushing a bill that would require more disclosures from companies like Facebook that run political advertising.

And, on the state level, there has been a push for restrictions on companies that use facial-recognition software without people’s consent, Bartholomew noted. In June, Washington became the latest state to enact a so-called biometric privacy law regulating the commercial use of identifiers like eye retinas or fingerprints.

The downside of regulation

Those who favor increased regulations like biometric privacy laws might argue that more rules protect consumers. And those in favor of more antitrust regulations would argue that checking the power of large companies could create a more competitive marketplace.

But there is a downside to increased antitrust regulation, according to Arun Sundararajan, a New York University business school professor and expert on the digital economy.

“We’re entering a ‘populist’ phase in the US where I expect a lot of enthusiasm to take antitrust action against Apple, Amazon, Facebook and Google. But often, the rationale for this action is flawed. All of these companies have monopoly power, yes,” he wrote in an email message. “But that isn’t always bad.”

The government shouldn’t simply ask whether a platform is “too big” but rather whether it’s extending its monopoly power in a way that’s hurting innovation. Paradoxically, antitrust action itself can stifle innovation, according to Sundararajan. He pointed to the example of Microsoft, which faced allegations from the U.S. government back in 1998 that it abused its monopoly power.

“The fact that Microsoft, the world’s dominant software company of the 90’s and early 2000s, did not take a global leadership position as we transitioned from desktop to mobile, is likely because they were worried about antitrust backlash,” Sundararajan said. “This likely led the US to lag other countries in mobile for many years.”

For his part, Bartholomew, the University of Buffalo professor, doesn’t necessarily believe that the US government will “break up” Google or Facebook the way it broke up Standard Oil into 34 companies. Rather, he believes these tech companies will likely have to be more transparent than they are.

As things stand, he said, “They play by a set of rules where they don’t have to disclose what they’re doing.” America’s tech giants might not be playing by that old set of rules for very long, though.

Erin Fuchs is deputy managing editor at Yahoo Finance.

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