Break Up Facebook? What Would That Even Look Like?

Why a Breakup Won't Fix the Social Media Giant's Troubles

May 16, 2019
Finance
Logistics

SMITH BRAIN TRUST  The headline on Facebook co-founder Chris Hughes’ New York Times op-ed article made his position clear. “It’s Time To Break Up Facebook.”

But break up Facebook? What would that even look like?

Hughes isn’t alone. Massachusetts Sen. Elizabeth Warren has called for the breakup of Facebook and other tech giants, and at least two other Democratic presidential hopefuls say it’s a suggestion worth studying.

Maryland Smith’s David Kass says he understands some of their concerns. We know, for example, that Russia used Facebook as a platform to wage a disinformation campaign during the 2016 election campaign. We know privacy was breached and data misused by Cambridge Analytica. “There is a problem with privacy, absolutely, and with data being used inappropriately,” he says.

But he doesn’t agree with the rest of Hughes’ argument – that CEO Mark Zuckerberg is too powerful because he owns a majority of the company’s voting shares, that Facebook owns a monopoly in social media, and that Facebook should be broken into three separate companies: Facebook, Instagram and WhatsApp.

In what he calls his “earlier life,” Kass was an antitrust economist with the Federal Trade Commission. It was before he came to the University of Maryland’s Robert H. Smith School of Business, where he now teaches advanced financial management and business finance. He says the government’s two main antitrust laws, the Sherman Antitrust Act and the Clayton Antitrust Act, have been used when companies have been exhibiting anticompetitive behavior or they’ve been used to block future mergers. But neither applies to what’s happening at Facebook.

“The solution to these concerns isn’t to break up Facebook. The solution is regulatory oversight,” he says.

OK, but hypothetically

Kass and Maryland Smith adjunct professor Jon Crocker both try to recall a comparable case – when a similarly large corporate giant was forced to splinter. AT&T seems the only fitting comparison. The telecom giant was deemed a monopoly under the Sherman Antitrust Act and was forced to break into eight regional phone companies in 1984, after dominating the market for most of a century. Each of the “baby bells” would have its own independent management. AT&T, meanwhile, would continue as a long-distance provider. “AT&T was relatively easy to split up,” says Kass, “because it could be done along geographical lines. It’s hard to see how that could happen with Facebook.”

If you were a shareholder with 100 shares of AT&T at the time of the breakup, you would have received a proportional share in each of the new “baby bell” operating companies. So, you’d still own 100 shares of AT&T, but you’d also own 100 shares of Southwestern Bell, 100 shares of Ameritech, 100 shares of Bell South, and so on. The total value of the shares would add up to what you had when you owned only AT&T. “Over time, the operating companies did very well,” Kass notes, “and the shareholders who held on after the spinoff have done quite well, outperforming the market for many years.”

A breakup of Facebook would likely appear similar. A stockholder with 100 shares would be given 100 shares of Instagram and WhatsApp, for example. “But it makes absolutely no sense to break up Facebook from an antitrust point of view,” Kass repeats. “And it makes no sense from a regulatory point of view.”

Facebook’s troubles

There are problems with the world’s largest social network. The ability for users to post and share false information about local crimes, public health threats, vaccinations, immigration is one. The ability for the platform to be used to livestream or share violent crimes, as in the case of the New Zealand mass shooter, is another. And the ease with which foreign actors might interfere with a democratic election with a sophisticated disinformation campaign is yet one more. And there are others.

The problems are broadly about privacy, security, data misuse and election meddling – serious troubles that have had legislative investigators from at least 10 countries demanding answers.

But they aren’t about antitrust abuses, notes Crocker, who teaches business law at Maryland Smith. “At least in this respect, reliance upon antitrust laws to achieve privacy might be the wrong tool for the job. Instead perhaps something new and modeled upon the EU's General Data Protection Regulation (GDPR) would prove to be better tailored to address the issue.”

And those laws would mean potential fines, not a breakup, for Facebook, he adds.

Kass agrees. “Big isn’t necessarily bad. But we need some new laws to oversee this industry of social networks from a privacy point of view, to make sure that there are no abuses and to protect consumers.”

Facebook COO Sheryl Sandberg was interviewed on CNBC recently about criticisms about the social network and talk about its potential breakup. 

Play ball with new rules

For a hint of what laws Congress might consider, Crocker suggests a read of the European Union’s GDPR regulation. The sweeping legislation aimed to help EU citizens control their personal data and how it’s collected, used and shared, wherever they might go. Violators face fines, some of them hefty, like Google’s 50-billion-euro fine.

Facebook is no stranger to data-related regulatory fines. The FTC recently fined the company $5 billion for data abuses related to the Cambridge Analytica scandal.

“Five billion is certainly a big number and it makes headlines. It’s more than just a little slap on the wrist,” Kass says, noting that it’s not easy to decide how much is enough. “Do you make it $10 billion? $20 billion? Cripple the business? Put them out of business? I think you want to send a signal.”

He suggests perhaps taking a cue from Major League Baseball, which uses a system of increasing penalties for players who are caught using performance-enhancing drugs. The first suspension is 80 games (one-half of the 162 game season), the second a year, the third a permanent suspension.

“You could do something similar with Facebook. The fine is $5 billion this time, and it doubles each time this comes up,” Kass suggests. “It would provide enormous financial incentive to Facebook to make sure it doesn’t happen again, because the penalty can potentially become very large. And it would avoid crippling the company upfront.”

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About the Expert(s)

Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Sophomore Wall Street Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by the Washington Post, Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway.