Takeaway: The Facebook whistleblower testifies before Congress today but the FTC poses a more immediate threat.

Editor's Note: Below is a complimentary research note written by Senior Telecommunications analyst Paul Glenchur. To access our Telecom-Media Policy research please email sales@hedgeye.com.

Facebook Whistleblower Testifies While FTC Poses Regulatory Threat - 10 5 2021 9 55 52 AM

Today, Frances Haugen, the Facebook whistleblower, will testify before a Senate committee, fueling concerns that Facebook knowingly encourages harmful user engagement to drive company revenues. 

Her testimony reinforces calls for legislation to rein in Facebook specifically and tech platforms generally, but Congress has struggled to develop consensus legislation addressing privacy, data security and tech platform market power. 

Bipartisan criticism of Facebook is picking up steam, and will be out in full force at today's Senate hearing, but a consensus legislative vehicle -- whether it's privacy, the section 230 liability shield or antitrust reform -- remains elusive.

As we've noted before, the Federal Trade Commission poses the more immediate threat to Facebook.  Although an FTC Democrat, Rohit Chopra, has been confirmed to lead the Consumer Financial Protection Bureau, another Democrat is in the pipeline and will very likely restore a 3-2 Democrat majority on the Commission in the months ahead. 

FTC Chair Lina Khan is interested in direct regulation of the dominant tech platforms and has encouraged petitions for rulemaking proceedings.

This follows a White House Executive Order in July that calls on the FTC to "establish rules on surveillance and the accumulation of data" as part of a larger effort to check the market power of the dominant tech platforms.

Recently, a public interest group filed a petition with the FTC that calls for a regulatory prohibition on the use of personal data for targeted or "surveillance" advertising, asserting that the digital advertising business models of Facebook and Google incentivize extensive data collection for personalized ads. 

In turn, according to the petition, these tech giants have taken control of the digital advertising markets and leveraged their respective data troves into adjacent markets, harming publishers, users and advertisers while erecting barriers to competitive entry. 

The group requests that the FTC prohibit surveillance advertising as an unfair method of competition.

In her prior academic capacity, FTC Chair Lina Khan has discounted the value of regulatory solutions that modify tech platform behavior, including the EU's General Data Protection Regulation (GDPR).  She supports structural regulatory approaches that attack inherent incentives to engage in anticompetitive conduct, eschewing a scalpel when a chainsaw can do the job more emphatically. 

Clearly, Chair Khan presumptively opposes more acquisitions by tech giants and supports a Facebook breakup, but she is on the record as well for ending surveillance-based business models.

The FTC petition from Accountable Tech could fit the bill.  If not, the FTC's explicit encouragement of petitions to tackle big tech could create additional opportunities. 

Chair Khan stood behind President Biden when he signed the July competition policy executive order.  The FTC -- like the FCC -- is an independent agency and is not obligated to follow through on the President's Executive Order. 

As a practical matter, however, we suspect the FTC will move forward and push for new rules addressing data collection and use for targeted or "surveillance" advertising. 

There could be mitigating factors. The need for a majority consensus on the Commission, the deployment of big tech opposition tactics, and potential input from Capitol Hill could soften the end result, but the risk of a heavy-handed regulatory outcome is meaningful.

Increasing regulatory and congressional pressure on Facebook is consistent with our big tech policy theme.  We expect more turbulence for the dominant tech platforms and even tangible regulatory proceedings that present significant threats to Facebook and the other tech giants. 

Because the courts and congress are highly uncertain and long duration events directed toward tech platforms, the FTC is the realistic venue for tangible, meaningful government action.  

As we've previously explained, however, the FTC's authority to impose substantive regulation or outlaw conduct deemed to be an "unfair method of competition" is far from clear. 

There is limited judicial precedent from the 1970s suggesting the existence of this power, but there are other precedents and doctrines of statutory interpretation that invite a challenge to the assertion of such regulatory authority. 

Moreover, the current composition of the Supreme Court is not likely to embrace this sudden burst of FTC regulatory adventurism. 

Nonetheless, we expect the FTC will likely move forward with regulatory efforts addressing surveillance advertising, tech platform gatekeeper market power and other progressive agenda priorities. 

Republican dissenters on the Commission will argue that the FTC's reach exceeds its legally authorized grasp and the inevitable appellate court fight will ensue.

This kind of regulatory storm generates the type of uncertainty that may reduce investor enthusiasm for the targeted tech giants, but absent congressional action, the FTC remains limited by existing statutes and legal precedents.  The law is the law, not what an activist FTC Chair wants the law to be. 

Still, this is an emboldened Commission with an aggressive agenda and the storm clouds are gathering.

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