Facebook’s Not the First Tech Company Congress Challenged

Last week, Facebook’s founder and CEO, Mark Zuckerberg, endured two days of questions from members of the House of Representatives and Senators. Testifying before Congress must have been uncomfortable for Zuckerberg but the question for traders is how this could impact the stock.

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  • Congressional interest can carry a number of consequences. It could result in new regulations that limit the company’s operations. Or, the interest in the company could even lead to changes in the company’s operating structure.

    One extreme example of how Congress affected a company is found in the case of Standard Oil.

    The company was founded in 1870 by John D. Rockefeller and Henry Flagler. By 1904, Standard controlled 91% of production and 85% of final sales. Its controversial history as one of the world’s first and largest multinational corporations ended in 1911, when the United States Supreme Court ruled that Standard Oil was an illegal monopoly.

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    Facebook could, eventually face a similar fate. It is a large company in the social media space and arguably no other company is close to replacing its platform. But, a potential breakup would take years to come about.

    The breakup of Standard Oil actually led to some of the largest companies we have today.

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  • An outcome like that for Facebook could benefit long term investors. But, more recent history tells us that outcome is unlikely. More recent Congressional hearings have not led to changes in tech companies.

    Tech Company Scrutiny Is Not Unprecedented

    In February 2006, “four major U.S. tech companies took a beating in Congress over their business practices in China. Democrats and Republicans turned a critical eye the role Yahoo, Cisco Systems, Microsoft, and Google played in helping the Chinese government censor and monitor the internet.”

    The companies were critical of the own actions with the Vice President of Communications at Google, admitting that choosing to offer a censored version of their search engine to comply with Chinese regulations wasn’t in keeping with Google’s usual mandate to offer open access to information.

    The companies, of course, offered a defense of their actions. The Associate General Counsel at Microsoft said, “The internet has already transformed the economic, cultural, and political landscape of China. It is vital that companies, particularly American companies, with the widest array of communications and information services, continue to offer services there.”

    Some of the Representatives were not impressed. The rebukes were bipartisan.

    Democratic Congressman Tom Lantos, of California, a Holocaust survivor, compared these companies to IBM during the Second World War. Lantos said IBM supplied technology that helped maintain lists of Jews who were sent to the death camps.

    He was blunt. “Your abhorrent activities in China are a disgrace. I simply do not understand how your corporate leadership sleeps at night.”

    As NPR reported, “On the other side of the aisle, Republican Chris Smith, Chair of the sub-committee who called the hearings, reminded the panel of just what kind of regime they were supporting in the People’s Republic of China, or PRC.

    He asked, “Are you gentlemen aware of just how widespread torture really is in China? Propaganda and secret police are the two main pillars of any dictatorship anywhere in the world, and that includes the PRC.”

    While it was a long day for the company executives facing Congress, the news had little impact on the stocks. The chart of Google (Nasdaq: GOOGL) is shown below.

    The stock reached a short term bottom on the day of the testimony. For the next year, Google and the other companies performed in line with the broad stock market. In part, that is due to their influence on the market indexes. But, equal weighted indexes showed the same trends at the time.

    Microsoft Was Also In the Hot Seat

    In March 1998, Microsoft (Nasdaq: MSFT) was forced to testify about what some in Congress considered to be its position as a monopoly in the computer market. At the time, Microsoft had a 90% market share with its Windows operating system.

    Microsoft was also under fire for bundling the Internet Explorer browser with its operating software. The company’s market leading position in Office software was also a concern. Yet, the stock chart shows that the questioning had little impact on the stock price.

    After the hearing, the Justice Department, along with Attorneys General of 20 states, sued the company, arguing it was a monopoly. The case took years to unfold in the court system and Microsoft spent at least tens of millions of dollars and many hours of executives’ time addressing concerns.

    In the end, the market made the call. Microsoft is still large, but Chromebooks provide an inexpensive alternative to Windows while Apple offers a more expensive but convenient alternative, as well. Google Docs has replaced Office for many users. And, Google’s Chrome is a leading browser now.

    This could happen to Facebook. The market will decide if the company should grow or contract in size. Some degree of regulations is likely needed because this is a new situation. Personal data has never been collected like this and regulations aren’t in place to address this question.

    But, the stock of Facebook is likely to continue leading the market as the market takes years to decide what the next large social media success story will be.

    Now, we know that keeping up with the news on Facebook and other companies, and understanding how they relate to market history is a big job. But, it’s important to do this research in order to potentially avoid devastating losses.

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