There is little doubt that when you are not paying for a service, you are the product. Have a look at the SOCL Global X Social Media ETF and the top holdings. How many of these services do you use?

Ask yourself how much you pay to use any of them? Guess how much corporate tax they pay? Now look at their valuation. The group trades at 6.6x sales and 164x earnings. The vast majority of them do not pay a dividend. Most of them report earnings in the next few weeks. It will be interesting to see if they comment

Now let’s look at Congress’ anti-trust lawsuit filed this week against Alphabet. Alphabet Inc’s Google must respond to the U.S. Justice Department’s antitrust lawsuit by Dec. 19, according to a court filing on Friday. The Justice Department on Tuesday sued the $1 trillion company and accused it of illegally using its market muscle to hobble rivals in the biggest challenge to the power and influence of Big Tech in decades. Google called the lawsuit “deeply flawed.”

The big issue in anti-trust is harm to the consumer and competition. Most think this is a nonissue that will result in a fine, some modifications and move on like we saw years ago with Microsoft search and monopoly around their suit of products. I think it is part of the bigger picture that includes big business and inequalities that have developed over the “internet” decades. Make no mistake, internet search is a huge plus to consumers. But the harm comes when you are not actually getting an unbiased result. This will take years to get through and won’t likely mean much in the short run, but it should launch years of increased regulation and (read lower profit margins) for an industry priced for perfection. Hard to argue the harm to consumers on the cost side to be sure, but it’s a growing undercurrent as technology advances. Very few people pay for any of these services. Search and on-line will only increase in the future (the pandemic has accelerated the clock) and on-line retail sales is a growing part of the economy. Who controls that initial sales add is a massive influence and revenue source for most of these companies.

One of the policies we liked from the Trump administration is to make doing business easier by lowering the regulatory burden on businesses. But there is a point where monopoly issues need some intervention. As much of a libertarian that I am, fostering competition an important function of free markets.  We have likely arrived at the point where governments need to get more invovled it seems and the fact that a handful of companies are such a large part of the market place is a huge issue contributing to inequality issues. You may disagree, but I see it as part of the structural problem that will limit the ability of many of these companies to get bigger. When priced for perfection and facing a growth challenge, the risks are growing.

A second important concern of the on-line world is Section 230 of the Communications Decency Act. Section 230 says that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”  Here are two posts that provide background on the issues:

Section 230 of the Communications Decency Act

Everything You Need to Know About Section 230

The combination of these two important influences on the social media sector should be an increasing focus for investors. It seems the speculation in the sector is getting extreme. SNAP’s recent rally is a good example. It’s trading above consensus forward analysts price targets and it makes no money yet. The recent high profile failure of Quibi is interesting. This was a service that people had to pay for. To solve section 230 issues, we can see some of these services being forced to charge users so that anonymity issues can be addressed. WOW that’s a gamechanger. How much would you pay per month to post silly pet pictures? How much would you pay to watch them?

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