Facebook’s antitrust challenge has arrived in the form of lawsuits from the FTC and 40 plus states. The core issue is the company’s historical approach to acquire competitors versus compete.
The market’s muted response to FB shares reflects the fact these allegations have been known since July. That said, they are serious and will take years to navigate. While all Big Tech will have their regulatory headaches, Facebook has more acute risk. In the end, the company’s engagement will remain high, and FB’s multiple may face a headwind.
We see four potential outcomes, in order of most likely
- Facebook pays a big fine.
- Future M&A activity gets more difficult.
- Facebook wins and nothing happens.
- The company is broken up.
The worse outcome for Facebook is that M&A becomes more difficult. While Facebook has unprecendented network effects with roughly 3B monthly users, network dillution is possible with upstarts like TikTok.
An unlikely, best case outcome
A surprisingly positive outcome would be the company is broken up. We see a scenario in which investors view the sum of the parts as greater than the whole, and collectively increase Facebook’s valuation. While in this scenario some of the network effects would be comprised, each property (Facebook, Instagram, WhatsApp, Messenger) would still have reach orders of magnitude greater than any competitor. This reality will retain engagement and advertisers.
We expect engagement to remain unchanged
Despite these lawsuits and bad press, it’s unlikely to impact engagement on Facebook’s platforms. The Cambridge Analytica episode was largely more damaging PR, and yet yielded no change in engagement. We’re addicted to Facebook.
A response from Big Tech
Tim Cook, in an unrelated podcast this week, mentioned a “lack of responsibility” from Big Tech outside of Apple. This makes sense, as it’s easy for Apple to take the high road given they aren’t reliant on advertising.