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Break Up Facebook? Regulatory Oversight Is The Better Path

Facebook co-founder Chris Hughes and Massachusetts Sen. Elizabeth Warren have called for the breakup of Facebook and other tech giants, and at least two other Democratic presidential hopefuls say it’s a suggestion worth studying. However, Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business disagrees and points to regulatory oversight as a better approach. He does so from his perspective as a former antitrust economist with the Federal Trade Commission.

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First, Kass says he understands some of Hughes’ and Warren’s concerns. We know, for example, that Russia used Facebook as a platform to wage a disinformation campaign during the 2016 election campaign. We know privacy was breached and data misused by Cambridge Analytica. “There is a problem with privacy, absolutely, and with data being used inappropriately,” he says.

But he doesn’t agree with the rest of Hughes’ argument – that CEO Mark Zuckerberg is too powerful because he owns a majority of the company’s voting shares, that Facebook owns a monopoly in social media, and that Facebook should be broken into three separate companies: Facebook, Instagram and WhatsApp.

The government’s two main antitrust laws, the Sherman Antitrust Act and the Clayton Antitrust Act, have been used when companies have been exhibiting anticompetitive behavior or they’ve been used to block future mergers. But neither applies to what’s happening at Facebook, he says.

“The solution to these concerns isn’t to break up Facebook. The solution is regulatory oversight,” he says.

OK, but hypothetically

Kass and Maryland Smith adjunct professor Jon Crocker both try to recall a comparable case – when a similarly large corporate giant was forced to splinter. AT&T seems the only fitting comparison. The telecom giant was deemed a monopoly under the Sherman Antitrust Act and was forced to break into eight regional phone companies in 1984, after dominating the market for most of a century. Each of the “baby bells” would have its own independent management. AT&T, meanwhile, would continue as a long-distance provider. “AT&T was relatively easy to split up,” says Kass, “because it could be done along geographical lines. It’s hard to see how that could happen with Facebook.”

If you were a shareholder with 100 shares of AT&T at the time of the breakup, you would have received a proportional share in each of the new “baby bell” operating companies. So, you’d still own 100 shares of AT&T, but you’d also own 100 shares of Southwestern Bell, 100 shares of Ameritech, 100 shares of Bell South, and so on. The total value of the shares would add up to what you had when you owned only AT&T. “Over time, the operating companies did very well,” Kass notes, “and the shareholders who held on after the spinoff have done quite well, outperforming the market for many years.”

A breakup of Facebook would likely appear similar. A stockholder with 100 shares would be given 100 shares of Instagram and WhatsApp, for example. “But it makes absolutely no sense to break up Facebook from an antitrust point of view,” Kass repeats. “And it makes no sense from a regulatory point of view.”

Facebook’s troubles

There are problems with the world’s largest social network. The ability for users to post and share false information about local crimes, public health threats, vaccinations, immigration is one. The ability for the platform to be used to livestream or share violent crimes, as in the case of the New Zealand mass shooter, is another. And the ease with which foreign actors might interfere with a democratic election with a sophisticated disinformation campaign is yet one more. And there are others.

The problems are broadly about privacy, security, data misuse and election meddling – serious troubles that have had legislative investigators from at least 10 countries demanding answers.

But they aren’t about antitrust abuses, notes Crocker, who teaches business law at Maryland Smith. “At least in this respect, reliance upon antitrust laws to achieve privacy might be the wrong tool for the job. Instead perhaps something new and modeled upon the EU’s General Data Protection Regulation (GDPR) would prove to be better tailored to address the issue.”

And those laws would mean potential fines, not a breakup, for Facebook, he adds.

Kass agrees. “Big isn’t necessarily bad. But we need some new laws to oversee this industry of social networks from a privacy point of view, to make sure that there are no abuses and to protect consumers.”

Play ball with new rules

For a hint of what laws Congress might consider, Crocker suggests a read of the European Union’s GDPR regulation. The sweeping legislation aimed to help EU citizens control their personal data and how it’s collected, used and shared, wherever they might go. Violators face fines, some of them hefty, like Google’s 50-billion-euro fine.

Facebook is no stranger to data-related regulatory fines. The FTC recently fined the company $5 billion for data abuses related to the Cambridge Analytica scandal.

“Five billion is certainly a big number and it makes headlines. It’s more than just a little slap on the wrist,” Kass says, noting that it’s not easy to decide how much is enough. “Do you make it $10 billion? $20 billion? Cripple the business? Put them out of business? I think you want to send a signal.”

He suggests perhaps taking a cue from Major League Baseball, which uses a system of increasing penalties for players who are caught using performance-enhancing drugs. The first suspension is 80 games (one-half of the 162 game season), the second a year, the third a permanent suspension.

“You could do something similar with Facebook. The fine is $5 billion this time, and it doubles each time this comes up,” Kass suggests. “It would provide enormous financial incentive to Facebook to make sure it doesn’t happen again, because the penalty can potentially become very large. And it would avoid crippling the company upfront.”

Article by Smith Brain Trust, University of Maryland’s Robert H. Smith School of Business


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