Facebook, Inc.'s (FB) controversial political past should spell more turmoil for the company as the controversial mid-term season kicks off.
The increased scrutiny and possible encroachment of regulation will be an unwelcome sign for shareholders.
Policing the Platform
As we reach the first mid-term since the 2016 election, which drew Facebook into a firestorm of criticism for its role in the Cambridge Analytica scandal, it's unlikely that Facebook will be able to fly under the radar of regulators.
A report released on Monday from Harvard's Kennedy School entitled "Digital Deceit II: A Policy Agenda to Fight Disinformation on the Internet," lambasts Facebook and its social media peers, calling for policy changes to rein them in.
Dipayan Ghosh, a co-author of the report, said the companies are incapable of fixing the holes in their information systems.
"We cannot expect digital media companies to regulate themselves," Ghosh, who serves as Pozen Fellow at the Shorenstein Center on Media, Politics and Public Policy, wrote. "The American electorate requires novel public policies to address the nature of the business model underlying the internet. Nothing short of the integrity of the American political system itself is at stake."
Some scholars have even gone as far as to say the company is irreparably broken.
"The sad conclusion to my book is that the problem with Facebook is Facebook," Siva Vaidhyanathan, the Robertson Professor of Media Studies and director of the Center for Media and Citizenship at the University of Virginia said at a Harvard Law School Luncheon last week.
Vaidhyanathan, who released his latest book Antisocial Media: How Facebook Disconnects Us and Undermines Democracy in June, said the platform's targeted advertising, surveillance capability, and user data storage as aspects of the platform that make it intrinsically political.
"We should gather, debate, inform our elected leaders that we have demands and concerns, and order them to address these problems in a serious fashion, and we have not done that," he said in his fiery remarks calling for regulation.
The Senate Commerce Committee hearing scheduled for Wednesday, which will address privacy concerns at Google (GOOG) , Apple, Inc. (AAPL) , AT&T (T) , and Twitter, Inc. (TWTR) is indicative of policymakers' seriousness about these problems.
If Facebook incurs similar ire from politicians, who've already hosted the company twice, as it has from these academics, a crackdown could be imminent and shareholders would likely be the one's hurt most immediately.
Academics were not shy in voicing their critiques on Facebook's privacy controls as well.
Nicholas Economides, Professor of Economics at New York University and prominent critic of Facebook told Real Money in August that the privacy issues are one of the foremost issues with the product.
"The default setting for Facebook data sharing should be to opt out, not in," he said, indicating his belief that Facebook should not control advertiser relationships.
General Data Protection Regulation (GDPR) in Europe has shown regulation of this kind is possible.
For example, a scandal like the Cambridge Analytica Scandal would more than $1.5 billion fine under the new regulation. That type of fine would take more than half of Instagram's 2017 profits from Facebook's balance sheet.
Whether, the companies will pay the full fines given their army of lawyers is up for debate, but public advocacy groups in Europe show no signs of relenting in their pursuit of payment for data exploitation.
NOYB- European Center for Digital Rights, a Vienna-based advocacy group, has called for up to €7 billion in fines for some of the largest social media purveyors.
"We probably will not immediately have billions of penalty payments, but the corporations have intentionally violated the GDPR, so we expect a corresponding penalty under GDPR," Max Schrems, the group's leader wrote explaining his high proposed penalties.
Recently, controversy over banning of conservative-minded commentators and alleged bias of platforms like Facebook has drawn the ire of powerful politicians, including the president himself.
The company's "political monoculture" has come under attack even from its own employees, who have suggested an internal bias.
"We tear down posters welcoming Trump supporters. We regularly propose removing Thiel from our board because he supported Trump," senior Facebook engineer Brian Amerige decried in a letter made public by The New York Times last month. "We're quick to suggest firing people who turn out to be misunderstood, and even quicker to conclude our colleagues are bigots."
The internal strife at the company is unlikely to abate amidst the midterms, which could lead to more bad press for a company bombarded with negative public attention in recent years.
Though, shareholders should fear the impact of a possible executive order. Bloomberg reported on Monday there is an antitrust executive order document in its preliminary stages right now, which would likely draw the company into a lengthy battle with the government.
President Trump: "I think that Google and Twitter and Facebook they're really treading on very very troubled territory. And they have to be careful. It's not fair to large portions of the population" pic.twitter.com/yK8Vg1iBJB— CSPAN (@cspan) August 28, 2018
The president's warning to Facebook to "be careful" might be a wise warning to traders as well, as increased scrutiny this midterm season could spell volatility over the next few months.