Social Media Regulation Won't Harm Facebook If Zuckerberg Is Calling For It

Includes: AMZN, FB
by: Tim Worstall

Increased regulation of social media - Big Tech - is going to harm someone, but who?

The thing about regulation is that it might mildly harm incumbents, but it also protects them.

That's why Zuckerberg is calling for the regulation of social media like FB.

It could be seen as more than a little odd when a CEO asks the politicians to come regulate his company. Surely, the cries of all those right wing economists are correct, business just hates regulation? Desires to be left on its own to just get on with things without bureaucrats around their neck?

Well, yes and no. For the great truth about regulation of a business sector is that it affects different companies differently. The usual effect is that the incumbents find themselves protected by such regulation, it being those who would displace them who are most affected by the extra costs. It's understanding this which aids us in grasping what Mark Zuckerberg is calling for here, where he's asking for more regulation of social media including, obviously, Facebook (NASDAQ:FB).

"Every day, we make decisions about what speech is harmful, what constitutes political advertising, and how to prevent sophisticated cyberattacks," he wrote. "These are important for keeping our community safe. But if we were starting from scratch, we wouldn't ask companies to make these judgments alone."

More regulation over what constitutes harmful content could "set a baseline" for what is prohibited and require companies to "build systems for keeping harmful content to a bare minimum," he wrote.

Now rethink this a little. If there's legislation and a regulator, then there will be a necessity for systems to do what the legislation and regulator require. This being something that any and every social network will need to have. Including that little start-up that might have eyes on disrupting that nice business Mr. Zuckerberg has there.

It's also true that whatever those rules are, Facebook will have the cash flow to cover the overheads to installing and running them. That's always easier when you've already got 2 billion customers and your likely future competition has precisely zero so far. It's also going to be cheaper to argue for the regulation to hamper competition than splashing out a $ billion here or there to buy up those nascent competitors as with Instagram - or much more for WhatsApp.

We've had much the same with Amazon (NASDAQ:AMZN) and sales taxes. Back when Amazon was all in favour of online companies not having to collect sales taxes. For Amazon had maybe just the one physical site. An important point being that you only didn't have to collect sales taxes if you had no physical base in the particular tax jurisdiction. So, small companies didn't have to collect.

As Amazon has expanded with warehouses here and there and everywhere so, it found that the internet freedom not to collect no longer really applied to itself. It had physical locations in so many jurisdictions that it had to collect near everywhere anyway while smaller competitors did not. Amazon now supports online having to collect sales taxes everywhere. Funny that really, isn't it?

The underlying point here being that capitalists and companies argue for the law and regulation which will benefit them. This shouldn't be a surprise. The extant companies are also those who will be asked to aid in crafting the law and or regulation - and they'll lobby to make sure it's not too heinous anyway.

The logic here being that we've not got to worry too much about the regulation of the internet in our investing decisions. Zuckerberg is even recommending the expansion of the European Union's GDPR, or something like it, globally. Facebook knows how to deal with this; already has the technology in place. There are a number of American newspapers that don't, and if they don't, then think how much harder it will be for a start-up to do so? Quite, such regulation helps wall off Facebook from competition from new market entrants. That's why Zuckerberg is in favour.

And that's why we've not got to worry much about it. The VCs and angel investors, they do, for they're the people who will have to fund any new company through dealing with these restrictions. But we're in the public markets only, looking at only the extant companies. Those extant companies which might have costs complying with any new regulation but which will also gain protection from competition as a result of it.

Quite what the balance will be between the costs and the protection, well, that's unknown as yet. Except we do have the management of those incumbents arguing for the regulation - they at least think the net effect on their own companies will be positive. We should probably take their word for it.

On the large companies already traded on the public markets, further regulation will probably be mildly beneficial, the protective effects being greater than the costs. We as investors therefore don't have to worry overmuch about the ongoing calls - screams even - for more internet regulation.

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.