Facebook founder and CEO Mark Zuckerberg is going to be hammered with questions from lawmakers Tuesday and Wednesday in Washington. If he can keep the conversation focused on data privacy, he'll emerge a winner.
That's because Facebook's real bugaboo isn't privacy at all. The biggest potential threat to Facebook — along with Alphabet — would be if Congress focuses on how much those two dominate the modern-day advertising market. The two companies accounted for 73 percent of all U.S. digital advertising in the second quarter of 2017, according to a December note to clients from Pivotal analyst Brian Wieser.
That's probably not healthy for competition as digital advertising explodes. It is estimated to be at $300 billion by 2020 as half of all global ad dollars are spent online.
Virtually every other social media company has failed to break out as a threat to Google and Facebook because of their stranglehold on the advertising market. And Facebook has been quick to acquire threats, such as Instagram and WhatsApp.
Any drastic actions against Facebook would come from federal antitrust enforcers, not legislators, including bringing a monopolization case against the company. So, keeping the conversation on data privacy should be Facebook's priority, said Jason Kint, CEO of Digital Content Next.
Discussing privacy may be fine at first, but it could open the door to a much more uncomfortable conversation for Facebook, which is their dominance around the data model, said Kint. "Regulation isn't that scary to Facebook, because if they find ways to simply regulate their data collection, they maintain their power," he said.
"Facebook's business model is what's causing all of these scandals," said Matt Stoller, a fellow at the Open Markets Institute. "How they make money is actually the problem. Keeping this focused on consumer privacy gets rules written that will actually entrench their dominance."
Zuckerberg will be addressing Congress to discuss the ways his company can better limit "fake news, foreign interference in elections, and hate speech" from the Facebook platform, according to prepared remarks published by the House Energy and Commerce Committee. He'll also be examining ways Facebook can improve data privacy after up to 87 million users unknowingly had their data obtained by political analytics firm Cambridge Analytica.
Privacy concerns have long hung over Facebook, which took in more than $40 billion in revenue in 2017, largely from targeted advertising based on user data. But it's unclear if users, en masse, really care that their data is being sold to third parties.
Zuckerberg said last week Facebook hasn't seen any meaningful impact on usage or ad sales in the wake of a data privacy scandal. As Andrew Ross Sorkin, co-anchor of CNBC's "Squawk Box," wrote in a New York Times column on Tuesday, "The reality is that when it comes to privacy, the trade-off has already been made: We decided long ago to give away our personal information in exchange for free content and the ability to interact seamlessly with others."
What could actually hurt Facebook's future is if Congress started to beat the drum that Facebook's digital presence is simply too large and anti-competitive. While breaking up the company may be difficult — and new legislation is not likely to come anytime soon — separating core Facebook from some of the applications it has acquired for additional growth, including Instagram and WhatsApp, could severely hurt Facebook's prospects. Instagram's audience skews younger than Facebook's and has a lot of runway left for international growth, with a growing user base of about 1 billion compared with Facebook's 2 billion.
"There was intense legislative attention on the gasoline companies in the 2000s, and it caused the companies to exercise restraint due to the political scrutiny," said William Kovacic, professor of global competition law and policy at George Washington University and director of Competition Law Center. "Legislative scrutiny can cause companies to pull their punches."
And, similar to Amazon, simply discussing Facebook's potentially harmful marketplace presence may cause Zuckerberg to slow future acquisitions that could expand the company's digital footprint. The Open Markets Institute recommends Facebook, Instagram and WhatsApp be split into three different companies. Facebook should also have a five-year moratorium on other acquisitions to prevent further social media consolidation, Stoller said.
There's evidence of recent bipartisan attention addressed at questioning if Facebook, Google, Amazon and Apple are too powerful. Regulators from several states have called for more oversight on antitrust grounds.
So Zuckerberg would be wise to dodge questions about Facebook's advertising dominance and embrace how privacy can be improved.
Improving data privacy only helps Facebook in the long run. Breaking its business model doesn't.