- Pro-privacy regulations could have an unintended consequence: reinforcing Facebook's dominance.
- New rules taking effect next month in Europe and ones being discussed in the US and elsewhere could throw up barriers to competitors and funnel more ad dollars to Facebook, a Morningstar analyst said in a new report.
- Another analyst agreed the concern was "plausible," but said the new rules could also end up fundamentally changing the market.
Battered over privacy issues in recent weeks, Facebook faces tough new regulations in Europe and potentially elsewhere, including at home.
But rather than curtailing the social networking giant's power, the rules could leave it stronger than ever.
That's the take of Morningstar Equity Research analyst Ali Mogharabi. The new regulations could actually create hurdles that will be a bigger burden for potential competitors to Facebook than for Facebook itself, Mogharabi said in a research note Friday.
"Future regulations, such as the General Data Protection Regulation in Europe or some bills being proposed in the United States, are likely to create barriers to entry," he wrote. "This might actually make it harder for competing social networks to collect valuable user data to sell ads, and in turn may help Facebook maintain its dominant position as the social network of choice for advertisers."
Set to take effect next month, the European Union's General Data Protection Regulation (GDPR) promises to give European consumers more control over their private information. Following the Cambridge Analytica scandal, some US lawmakers are discussing putting in place similar rules.
While some have seen such rules as a way to rein in Facebook, GDPR and similar potential regulations in the US could prove to be a financial windfall for the company, especially if they help weed out its competitors, Mogharabi said.
"Further regulations could limit Facebook's access to and/or utilization of user data, which could lower its advertising prices," he wrote. But, he added, "we think they could also ... help Facebook maintain its dominant position in the social network space, possibly resulting in higher Facebook ad prices as advertisers find even fewer digital alternatives."
The analyst estimates Facebook's stock, which closed regular trading Friday at $166.28, has a "fair value" of $198.
Not everyone's convinced Facebook will benefit from the rules
But other Facebook analysts aren't as optimistic about how the company will fare under new regulations. Instead, they argue that stricter privacy rules could precipitate a broader transformation in the market that may or may not work in Facebook's favour.
GDPR will likely cause "a general slowdown in digital spending in Europe," Pivotal Research Group's Brian Wieser said in his own research note Thursday. While Facebook "may very well grow its share, growth will likely slow along with the market share."
Wieser has been far more bearish on Facebook than Mogharabi and other financial analysts. He has a rare "sell" rating on the company's shares and a price target of $138.
Mogharabi's analysis of how Facebook might benefit from regulations is "plausible," Wieser told Business Insider. But, he added, the analysis is also "willfully optimistic."
GDPR and similar regulations will make it more difficult for Facebook and other companies to use customers' data. That could lead to an increased stream of ad dollars into Facebook, Wieser said. But it could also spark a broader shift in online advertising.
If advertisers see user-targeting through Facebook and similar services as increasingly difficult, they might fall back on older strategies, such as placing ads next to content — videos, articles, and the like — that itself is targeted at particular audiences. Traditional publishers can accommodate that kind of strategy, but Facebook can't, he said.
Similarly, you might see companies emerge that are "legitimately GDPR-privacy-friendly-by-design," Wieser said. These would be Facebook alternatives that wouldn't be reliant on user-targeted advertising and so wouldn't be constrained by GDPR or similar regulations. Such companies might also see a boost from increased consumer awareness of privacy issues, he said.
More radically, if the new regulations are accompanied by a sea change in attitudes towards public data sharing, Facebook and other social networking services may see their use and relevance diminish.
"They exist today, and something different could exist in the future. People can get tired of Facebook," Wieser said. "You can't take it as a given that it persists. It probably does, but it could just as easily fade away."
