What Would Regulation Of Facebook Look Like?

facebook ceo zuckerbergMy co-author Sally Hubbard is an expert on antitrust and together we share some thoughts on Facebook and the upcoming regulation. If your company operates in an adjacent or complementary space with Facebook, then what’s happening at the social media giant may be relevant to your board as well.  Government regulation of Facebook now appears inevitable. Facebook’s crises seem never-ending, from its platform fostering extremism that has even being used for genocide, to its problematic gatekeeper role as the arbiter of speech worldwide and its ubiquitous tracking of consumers and loose privacy practices. But what would that regulation look like, what companies could be impacted, and what should your board be doing about it?

Privacy regulation and antitrust enforcement are the two main categories of government intervention most likely on Facebook’s horizon.

Privacy Regulation

 The European Commission has already passed the comprehensive General Data Protection Regulation (GDPR). Privacy is considered a fundamental human right in Europe, and GDPR aims to curb the extensive tracking by Facebook, Google, and others in the digital advertising ecosystem. The GDPR has not yet had its intended effect, as complaints against Facebook for failing to comply with the law are still under investigation by regional data protection authorities.

The GDPR would require “freely given, informed and unambiguous consent” for each specific purpose that companies collect and process data. And companies would not be able to deny users access to their services if users deny consent, unless the data is essential for the service to function. For example, a map application may require a user’s location to provide directions, but the app would also need to get affirmative consent from the user to process their location in order to show them advertisements.

A version of GDPR could come to America, as California has already passed similar legislation that goes into effect in 2020. Moreover, the FTC is investigating Facebook for potentially violating a 2011 consent decree that required Facebook to put in place a comprehensive privacy program and to not misrepresent the extent to which it maintains the privacy of personal information. The FTC is under pressure to do more than just impose a fine on Facebook, and it could require GDPR-like measures as part of a revised consent order.  How would these regulations affect your company’s business?  This is an enterprise risk that could significantly impact your company’s revenue and business practices if your lead generation, go to market is via Facebook.

Comprehensive tracking of users is required to support the platforms’ targeted digital advertising business model. And Google and Facebook dominate this $88 billion digital advertising market, accounting for 90% of digital advertising growth in 2017, according to Pivotal Research analyst Brian Weiser.

The reason for Facebook and Google’s digital advertising dominance is that they track users across millions of sites, gathering data that allows them to more precisely target users than any other companies competing against them for digital advertising dollars. Think news publishers and content creators, who depend on advertising revenue but do not have the ubiquitous view of consumer behavior that Facebook and Google have.

Consumers, however, do not fully understand the extent to which Facebook and Google are tracking them, as shown in a recent study by Digital Content Next. If truly given the choice to deny consent for such ubiquitous tracking, studies indicate most consumers would say no. Remember that requiring users to check a box and allow tracking in order to use the service is not GDPR-compliant. With true transparency and actual choice, consumers would likely starve Facebook and Google of the data that fuels their dominance.

Who would be the winners of privacy regulation? News publishers and content creators, who could once again command a greater share of ad dollars. With a return to advertising based more on context than user data, publishers could lure advertisers with quality and niche content. Advertisers could also win, as they’d no longer waste billions of dollars on advertising fraud or be deceived by Facebook metric errors. And they would eliminate the real risk of their ads showing up next to hate speech or other distasteful content.

Breaking up Facebook would be a more severe remedy than U.S. enforcers have utilized in recent decades. It would involve unwinding the Instagram and WhatApp mergers as illegal. Instagram divested from Facebook could provide robust competition and a different option for advertisers, publishers, app developers, and consumers who are dissatisfied with Facebook’s terms of dealing.

With 2 billion monthly users, Facebook could likely survive any regulation or enforcement, as long as it pivots its business model. Early Facebook investor Roger McNamee, for instance, has urged Facebook to move to a subscription based model. Such a move would steer Facebook away from the tracking-based business model that has led to its worldwide regulatory nightmare.

From the board’s perspective, in addition to privacy and antitrust, another potential regulation includes rules on political advertising, like the one passed in Washington State, which would put Facebook on more equal footing with television broadcasters that must follow Federal Election Commission rules. Transparency rules that allow users to see why Facebook’s newsfeed algorithm is showing them particular content and that give insight into Facebook’s editorial determinations – whether made by humans or algorithm – have also been proposed. Such rules would address concerns about censorship, political bias, and disinformation campaigns.  Boards may expect to soon see more disclosure regulations and proposed limits on political contributions.

Corporations are prohibited from making direct campaign contributions, so the main way corporations influence campaigns is by funneling money through a variety of other organizations — most notably through so-called “Super PACs” and political nonprofits. Along with super PACs, corporations can funnel their money through political nonprofits, such as the NRA or Planned Parenthood, which is often referred to as dark money since it’s undisclosed.  But, anonymity can’t be guaranteed, and inadvertent disclosure may bring embarrassment or worse.  Dark money contributions pose serious legal, reputation, and business risks to companies and future additional regulation and disclosure is likely as indicated by the Dec 2018 Senate vote 50 to 49 to overturn a Trump administration policy that allows politically active nonprofits to withhold from the government the identities of their donors.

Your board should review the regulatory environment and the potential changes to consumers private data use as they may well impact your company’s business model.  Can you pivot to a subscription based model in advance and avoid a traumatic impact that may be unrecoverable?  Consider this possibility and any other strategic moves that may protect you from revenue killing regulation.

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