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Will Government's Antitrust Investigation Derail Tech Giants?

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Tech giants Facebook (FB - Free Report) , Alphabet’s (GOOGL - Free Report) Google and Twitter (TWTR - Free Report) are likely face antitrust probe by the U.S. Government. The White House is reportedly issuing a draft executive order, instructing a thorough investigation on the conduct of social media and internet companies, by federal antitrust and law enforcement officials.

Even though the White House has claimed that the draft is not a part of the official policymaking process, a probe, if at all conducted, spells further trouble for social media and internet companies.

The order does not come as a surprise as President Donald Trump expressed his dissatisfaction on the alleged online censorship of prominent conservatives by social media and internet giants in August this year. Similar accusations against tech companies by other Republican politicians are long documented.



 

Continued Allegations Hurt Social Media Players

Trump had hinted at investigating the practice of “shadow banning” on Twitter, a practice which reduces the visibility of certain people or political groups on the website. According to him, Twitter had been practicing this for a number of prominent conservatives.

Moreover, in April, popular Youtubers and Democrats-turned-Republicans, Diamond and Silk, appealed to Trump to conduct a probe on Facebook and other social media platforms, claiming that their pro-Trump posts were deemed “unsafe to the community” by Facebook, which eventually led to their posts reaching significantly fewer followers.

This string of continued allegations might have led to the order being drafted by the White House, which, according to an official, is still in its preliminary stages. It is yet to be reviewed by other government agencies before it can be sent to the President for his signature.

Per a Pew Research Center survey, 72% of Americans and 85% of Republicans think that social media companies intentionally censor political viewpoints based on the companies’ preference.

Computer Algorithms to Blame?

Content on Facebook and Google is displayed by computer programs using numerous algorithms, which sort out the most relevant and trending topic of discussion among users.

Powered by these algorithms, most people on these platforms experience personalized results based on their searches, location and the like. Therefore, it could be difficult to prove biasness in the company’s practices.

Facebook, which stands its ground denying any misconduct, has agreed to answer critics by hiring former Republican Senator Jon Kyl, to internally investigate the issue.

Earlier this month, executives from Twitter and Facebook testified before the Congress. On the same day, the Justice Department announced that the Attorney General would meet state attorneys general to discuss the issue of biased censorship.

What This Means for the Companies

Facebook, which currently carries a Zacks Rank #5 (Strong Sell) is under severe scrutiny for its repeated failures to secure the platform as well as its operations with user data, post the Cambridge Analytica scandal, which affected 87 million users.

Recently, its executives testified before the Congress about the company’s role in the proliferation of fake news and its efforts to stop the spread of misinformation on its platforms ahead of elections in Brazil and the mid-term election in the United States.

Following this, Facebook announced it will restrain from physically sending its employees to promote the use of the platform for political campaigns. The latest antitrust probe, if conducted, will mean further trouble for Facebook, if proved guilty.

On the other hand, Alphabet, currently carrying a Zacks Rank #3 (Hold), faces significant litigations all over the world as a result of its dominant position in search.

Regulatory scrutiny continues to worsen with the competition commission issuing several statements of objections (which precedes judicial proceedings unless settled). The company has recently been hit with a record antitrust fine of €4.34 billion ($5 billion) for anticompetitive behavior in the EU.

Also, it was fined about $2.8 billion last year by the EU for unfairly favoring of its own services. Another antitrust charge is certainly going to severely hurt its revenues.

With a Zacks Rank #3, Twitter's slowing user base that doesn’t paint a rosy picture for investors. Since the company is significantly dependent on advertising, a slowing user growth rate amid increasing competition for ad dollars from much larger players does not bode well for the stock. Getting embroiled in antitrust issues means further headwinds for the company.

Stock to Consider

A top-ranked stock in the broader Computer and Technology sector is Match Group, Inc. (MTCH - Free Report) , carrying a Zacks Rank #2 (Buy), and a long-term earnings growth of 12.50%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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