Could Government Regulation End The Social Media Growth Story?

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Includes: FB, GOOG, GOOGL, MSFT, TWTR
by: Paul Franke

Summary

Greater regulation will mean higher costs and weakening traffic trends at the social media giants.

U.S. worker productivity has stalled at the same time as social media usage has permeated society.

Censorship of acceptable ideas on the internet is seriously being debated in western policy-maker circles.

The developers of social media in Silicon Valley and their backers on Wall Street are quick to tout all the positive attributes of today's new avenues for individuals to communicate and share ideas. However, the downside of eliminating face-to-face contact, the sound of common voices, looking people in the eye, and the responsibilities tied to expressing your views and opinions in person almost has entirely been brushed aside.

I have two main arguments that policy makers in the western world may soon contemplate writing new regulations on social media usage and development. First, worker productivity in the U.S. is directly being affected by social media overuse and distraction on the job. You can visit any restaurant, walk through an office environment, shop at a retailer, drive through a truck stop, view activity at a construction site, or discover wherever people are "working," someone is playing on Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) or Instagram. Productivity numbers have flattened in an unusual manner the last few years at the same time as social media has proliferated every nook and cranny of our lives.

Second, aside from the negative productivity issues created by constant and widespread access to personal discrete communication technologies, bullying, hate speech, pornography, shockingly abusive and violent video, incendiary language and fake news are proliferating. Stable societies are built with a general agreement on facts, respect for others, and rules of etiquette speaking in public or to large groups. Social media untethered and out-of-control throws protocol and politeness out the window. We are all witnessing this race to the bottom in how people communicate with others, both on and outside the internet.

Without doubt, truth and fact are being questioned on the internet. I would argue we are entering a new information paradigm where truth no longer exists, only opinion, times seven billion individual views of reality on the planet. No longer is an account of reality by the local newspaper or television network, corroborated by other mainstream reports, regarded as the truth. Now everything we have been taught to be true is being put into question. The simple virtues of kindness, respect and regard for the truth are being blurred and slurred by social media's unregulated, unrelenting prose.

U.S. productivity growth has stalled

Social media and networking sites witnessed 10% penetration of the U.S. population in 2005. By 2010 it grew markedly to about 50% usage, and has continued to 70%-plus of American adults accessing these new communication tools into 2017. The Smart Insights website has plenty of interesting charts and data on social media trends. The graph below highlights the wide-scale acceptance of social media communication since 2010, the same point in time as U.S. worker productivity stalled.

U.S. worker productivity has flattened in an unprecedented manner over the last several years. Economists have been scratching their heads, searching for a reason why. Basically, the rise and acceptance of networking media by American society lines up exactly over the weakest six-year stretch of worker productivity recorded the last 67 years on the graph below. I have circled in red this weak trend. No other credible explanation makes more sense than a major swath of workers are becoming distracted by smartphones and addicted to social media interaction.

Robotics and computer applications continue to push unit productivity per employee higher at a nice pace. We could argue U.S. employees have reached a peak in workload expectations and are more "overworked" today each hour of toil than ever before. However, that's a subjective argument made by workers each year, no matter the economic output rate.

The real test of my thesis will come in the next recession. Productivity usually bumps higher as employment falls faster than output like the spike in 2009. Layoffs and restructurings cut fat at big business, while production levels decline for only a small period in the overall economy. If employment and output fall at a similar pace, economists and government planners will have a serious problem going forward trying to engineer new growth. Will leaders try to regulate social media use when they realize falling or flat U.S. productivity is a consequence of these newly invented, highly disruptive communication tools?

Free association and free speech in an open technology-centered society now questioned

The terror attack in London over the weekend is leading to additional debate about how to censor or regulate social media sites that seem to be feeding hate speech and terrorist recruiting. Prime Minister Theresa May is talking about the need to introduce new regulation on social media content the last few days. Facebook immediately went on the defensive saying it is continuing to move forward with self-imposed censorship, but is it too little too late for western government policy makers?

Another negative for stability in society, tack on the exploding problem of fake or mostly fake news spreading like wildfire on social media. Recent surveys suggest as many as 20% of people change their view on a topic after reading a story on the internet. Many in American politics believe inaccurate news headlines spread virally on social media the last few weeks of the election cycle affected the close U.S. presidential election outcome in November.

Facebook has specifically been blamed for lax oversight of terrorist propaganda and the abusive application of its technology to sway voters last November with fake news stories. The company has been spending capital rapidly in 2017 to engineer self-regulating tools that head off extra government rules and intervention in its business model.

The Google/Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube video website, Twitter and Facebook have been cracking down on terrorist recruiting videos, networking between like-minded individuals, and comments/speech designed to unite angry and violent thinkers. These efforts cost money, and will turn off groups of users, at a minimum. If the government intervenes with new guidelines for internet information sharing services, the odds of users fleeing social media sites increases dramatically. The net result could be less web traffic, higher costs of operation, and sharply lower income levels for this high-flying investment sector on Wall Street.

Believe it or not, the organization and spread of both violent terrorist activity and regular political discourse may be affected by regulating the free association guaranteed in the groundbreaking U.S. Bill of Rights. The First Amendment rights of free association, a free press and free speech may come under attack like never before soon as we deal with social networking run amok:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press, or the right of the people peaceably to assemble, and to petition the government for redress of grievances.

Once we start censoring one group or another from social media participation, where will the regulation ball stop, and who decides? We can and should try to stop hate on the internet. But will a desire for control of clearly harmful and violent thought spread to regular political discourse, if the powers that be want to stay at the top of the decision food chain? Since we have already started down the path of censorship for terrorist behavior, will widening regulation and censorship turn away regular users of social media worried how their ideas are collected and reviewed by the government. We're definitely talking about slipping into the realm of the seminal novel 1984 by George Orwell, regarding a government "Thought Police" force.

I personally quit Twitter cold turkey last year with 1,000 followers because I fear we are slipping into this reality. Why do I want to participate in such, when all of my political opinions of the day could end up being used against me in 5 or 10 years? It is quite clear Big Brother is recording every comment and video on the cloud already. In the end, large scale regulation and censorship, or fear of such, could be social media's undoing.

Final Thoughts

Productivity trends for workers in America have stagnated, and few can explain why. What if the proliferation of smartphones and social media has a downside for society? What if it the new communication game in town is hurting the nation's ability to pay its bills? Are corporations, businesses, and government ready to crack down on social media access on the job? Is the government also getting concerned about your views and comments on slanted news coverage and political persuasion counterproductive for America's future?

Censorship or outright plug pulling of social media outlets in nations like China, Russia, Turkey, Egypt and Iran may expand to western cultures. Free speech enthusiasts may be losing the high ground ethically and morally. If free speech leads to the death of innocent bystanders, is it worth the harm? That's the logic political leaders are grappling to understand. If regulation and censorship become the norm, will social media be able to grow at all past 2017? Is posting controversial, unconventional, politically correct or incorrect views (acceptable political views will switch in the next election cycle) worth the possible future aggravation of Big Brother paying a visit, deleting your online efforts, keeping you from getting a job, or possibly putting you in jail, depending on how far the pendulum swings in a deep recession or war footing scenario?

The downside of unfiltered hate, bullying, misinformation, and derogatory expression, broadcast to the world on YouTube, Facebook, Instagram, LinkedIn and Twitter is an ethical issue we will all grapple with in future years, regardless of where we live. Can we afford not to censor social media more heavily, if a growing number of people get hurt emotionally and physically from the status quo?

The downside of "anything goes" logic for internet access is definitely becoming a prominent issue for politicians, religious leaders, computer designers, lawyers, parents, and employers. We are all trying to figure out the best balance of individual rights vs. a safe society and productive economy. Debate that has previously been swept under the rug, ignored, and played down may be reaching a point where significant change in social media operations will be required in the U.S. and Europe.

The abstract risk of Big Brother stepping in and squashing the popularity of the entire social media/networking industry is not so abstract any more. Investors in richly-valued, growth expected social media stocks need to understand they are sitting on a tinder box of operational problems once the regulation match is lit. Profit margins on sales could be peaking in mid-2017, as government intervention and censorship will translate into higher costs for operators and slowing demand from users. Usage could actually move into reverse long term. Social media stocks could crash under a harsh western government crackdown scenario, following the start of a war or appearance of a major terrorist attack like 9/11. Food for thought, as social media stocks are not priced for interruptions in their steady growth trends far into the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.