With more than 2.6 billion daily users, there's no denying that Facebook (FB 1.83%) reaches a lot of people around the world across Facebook, Messenger, Instagram, and WhatsApp. With increasing influence, what would it mean for the tech stock if regulators further scrutinize its practices and its growing power?
Corinne Cardina, Fool.com's healthcare and cannabis bureau chief, spoke with Nick Sciple, the bureau chief of tech, energy, and industrials, on a Fool Live episode recorded Feb. 11, about how the future of antitrust regulation will impact Facebook and its investors.
Corinne Cardina: Let's talk a little bit about Facebook's power, antitrust. That's been a big topic as it relates to a lot of these big tech companies. Nick, can you tell us, Facebook isn't just Facebook, it's Instagram, it's WhatsApp, it's Facebook Messenger, and it's all ad-driven. Tell us a little bit about Facebook as a, is it a monopoly? Is it a duopoly? Tell me about that.
Nick Sciple: That's a good question. We can argue about whether Facebook is a monopoly or not. This clearly depends how you define the market. I do think there's a couple of quotes that I think are interesting to maybe illustrate that. If you go to Facebook's 10-K, which just came out, their reported fourth-quarter earnings fairly recently, so the 10-K came out, I think, at the end of January. They say, "We face significant competition in every aspect of our business, including, but not limited to companies that facilitate the ability of users to share, communicate, and discover content and information online or enable marketers to reach their existing or perspective audiences." Basically, what they're saying is everybody who sells ads is a potential competitor to us. The reason I find that quote super interesting is because Peter Thiel, very famous investor, was actually the very first outside investor in Facebook, is on Facebook's Board of Directors, has a fantastic book, that I think every investor should read, called Zero to One. One of the things he talks about in that book is the people who have monopolies pretend that they don't have monopolies, they do things like what Facebook just said. They'll basically say, and it's because you don't want to get regulated by the government, you don't want the government come after you, so you'll never say that you are a monopoly. Anyone who has a monopoly will pretend that they are an incredible competition, which I think is the same type of thing that you see up from that quote I pulled from the 10-K. Depending on how you want to define it, obviously [Alphabet's] Google (GOOGL 4.20%)(GOOG 4.16%) is a significant competitor, Pinterest (PINS 4.66%), some of these other platforms are challenging Facebook, but just to give you some numbers, family daily active people, that's the number that Facebook discloses of across all of their platforms. These are complex algorithms to match users, to match that Facebook account and Instagram account. But in any event, it's a measurement of users across all their platforms; Facebook, Messenger, WhatsApp, and Instagram every day. Most recent quarter, daily active people was 2.6 billion on average, for December 2020, up 15% year-over-year. I pulled some numbers last night, just to give you some context, there are 7.7 billion people in the world, about 4.7 billion people have a connection to the Internet, 2.6 billion of those 4.7 billion people with a connection to the Internet, obviously, these are all estimates, but roughly, 2.6 billion of those people are spending some time on one of Facebook's properties every single day. That just speaks to when you have over half of the people who have the ability to get on the Internet, at least according to the data we're getting, are spending time on Facebook on a daily basis, they really have a strong position in the market. There are antitrust investigations going on. Those are focusing more around acquisitions of Instagram and other acquisitions in the past. We'll see what happens with those cases. I think a big question with Facebook, across the board, is they're off the edge of the map. They are off the edge of the map on antitrust. Historically, maybe we wouldn't have to enforce antitrust in the way that we're talking about doing. Instagram had four employees or something like that, when they acquired them. This idea that it's anti-competitive acquisition, we're in a brave, new world. They're on the other side. You mentioned earlier questions around privacy and what should they do and how should they use their market power to control that? We're also in a brave, new world. The area of privacy world is very much evolving, it's very different around the world. Different jurisdictions are taking different approaches. I think what we can say for sure is Facebook is very, very important. A massive amount of people across the world spend time on Facebook on a daily basis, get information there, find meaning through groups, and what have you. With that size and that market power, there's some obligation to regulate or what have you. What those obligations are and what they will look like in the future, we don't know and we're still figuring it out. I think if you read their 10-K, it's basically paragraph after paragraph of this could change, this regulation is new, etc. From my perspective, as an investor, I think whatever happens on the regulation side, this idea that people spend time in a meaningful way on Facebook everyday and use it for all those things in the real-world that I just described, I don't think that that's going away. I think Facebook is going to become, and all their properties are going to be important in the world going forward. It's a question of what's the box that regulators put them in? That's a big question mark we don't know the answer to yet.
Sciple: We're in a brave new world. We're all deciding what kind of the rules are supposed to be. Remember, Facebook is still only 13-years-old, 14-years-old age. It's still a very new property when it comes to human behavior, so I think we're going to figure this stuff out. It's going to be a challenge for Facebook though. I think there will be no ends to Facebook long term. I think it's going to be more regulated than it is today. They are going to be navigating lots of different regulatory regimes, just like they already are where there's different issues in Europe versus in the U.S. versus overseas. I think that's only going to continue to be an issue for Facebook. Now you can say that's a negative, they have to navigate all these regulations. We can talk about Apple (AAPL 4.08%) with their new iOS update trying to limit their ability to track users which may hurt their ability to monetize. I think those are all real concerns. On the other side of that, though, as it makes it harder for Facebook to make money, it also makes it harder for competitors or new entrants to come into the market. I think there's a fair argument to say that it ossifies the market. If you can't track folks across different platforms than maybe the people that have the big giant platform like Facebook, and maybe it augments their advantage a little bit. So I think it's a double-edged sword. I think Facebook is going to navigate that this legal stuff however they need to. They're going to come out of the backend of this with incredible market power. It's just a question of 'how does it look on the backend', like does the Federal Trade Commission come in and break the company up and give us a separate Instagram, Facebook, Messenger, and WhatsApp. From an investor point of view, I wouldn't mind that either! Slap of multiple on a slap a prices-to-sales multiple on Instagram. Slap a price-to-sales multiple on WhatsApp. So I think this is going to get a lot of attention and a lot of noise. But when it comes to the actual execution of the business. You can look at the numbers all over the place, behaviors aren't changing. People are still opening new accounts, people are still spending time on the platform. So from my perspective is I wouldn't get too distracted with the noise from an investor's point of view and from like what I want society to look like and all those sorts of things -- that's an important thing -- but I don't think the business long term, this is going to be kneecap, that the ability for the business to deliver returns.