Extremism is on the rise globally. Instead of attacking the root cause, politicians are increasingly scapegoating big technology companies.
Jean-Claude Juncker, president of the European Commission, warned last Wednesday that Google, Facebook and Twitter would be given one hour to remove extremist content, or else face fines of up 4% of revenues.
The proposal is preposterous on its face. To appear tough on extremism, politicians are prepared to tear down big tech.
It a warning sign for investors. This could get ugly.
Google and Facebook are wonderful digital businesses. They are also in the best position to ride a wave that is still building. Eventually, all advertising is going to be digital. It just makes sense.
The algorithms and communities built by the Silicon Valley giants offer precise demographic targets for advertisers. Despite the popularity of “Monday Night Football” or the “Big Bang Theory,” advertisers still can’t measure exactly who they are reaching.
This is not the case with Facebook, Instagram, YouTube and Google Search. In a results-oriented world, precise measurement matters.
Unfortunately, big tech is also an easy target for politicians.
All over the globe, Facebook, Google and Twitter are facing unprecedented attacks from both the left and right sides of the political spectrum. Surging profitability and the notion the data being collected is being misused is a deadly combination.
Investors need to begin preparing for the possibility that politicians may do something stupid.
In May, the European Union began enforcing the General Data Protection Regulation. The privacy law required all technology companies to tell users what data was being collected, how it would be used, and how it could be deleted.
The GDPR is a net win for big companies like Google and Facebook. It forces smaller companies with little or no name recognition to compete for user data. It is a public-relations battle they cannot possibly win.
The Juncker edict is different …
The plan still must gain approval from the European Union and the European Parliament. However, this action targets big tech specifically.
Google and Facebook executives claim they have made significant progress removing extremist content quickly and at scale. In addition to more machine-learning tools, last year Google managers committed to hiring 10,000 additional staff. Also in 2017, Facebook claimed 99% of all Islamic State and al-Qaeda content was removed before being flagged by users. And 83% was deleted within the first hour.
Hosting extremist content, even involuntarily, is terrible for business. Still, good intentions may not matter. Populism is growing. Politicians know they can scapegoat big tech for all of societies’ perceived ills.
Facebook is especially vulnerable. I have been watching the stock because it is trading very near my long-term support level. If the stock falls below $155, the tape could get really ugly.
At 20x forward earnings, the stock seems cheap given its growth potential. The problem is that value is relative.
Jon D. Markman