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Stocks  | July 25, 2019

Large-cap tech shares are mostly shrugging off the news that the U.S. Department of Justice plans to review “the practices of market-leading online platforms.” Indeed, today’s news is brimming with reports on regulatory actions against tech businesses—but the real market moving news on tech this week will be financial.

Facebook (ticker: FB) reports earnings Wednesday; Alphabet (GOOGL) and (AMZN) report Thursday. On Tuesday, Snap (SNAP) reported huge user growth, and the stock is on fire. Investors don’t believe that Washington’s investigations will have a material impact on big tech’s financial results, so they are largely ignoring them for now.

It’s a busy day on the regulatory front, even aside from the DoJ story.

Facebook (FB) reached an agreement with the Federal Trade Commission to pay a $5 billion fine over the company’s data privacy practices. In announcing the penalty, the FTC said the agreement also “requires Facebook to restructure its approach to privacy from the corporate board-level down, and establishes strong new mechanisms to ensure that Facebook executives are accountable for the decisions they make about privacy, and that those decisions are subject to meaningful oversight.”

Facebook said the agreement “provides a comprehensive new framework for protecting people’s privacy and the information they give us.”

But Democrats on the Commission observed that the penalties were more or less meaningless in the larger scheme of things—something investors had already figured out.

“The proposed settlement does little to change [Facebook’s] business model or practices,” writes Commissioner Rohit Chopra in a dissenting opinion. “The settlement imposes no meaningful changes to the company’s structure or financial incentives, which led to these violations. Nor does it include any restrictions on the company’s mass surveillance or advertising tactics. Instead, the order allows Facebook to decide for itself how much information it can harvest from users and what it can do with that information, as long as it creates a paper trail.”

Commissioner Rebecca Kelly Slaughter writes in her own dissent that in the interest of shedding a spotlight on Facebook’s behavior, the FTC should have litigated the matter. “The Commission would better serve the public interest and be more likely to effectively change Facebook by fighting for the right outcome in a public court of law,” she writes.

Meanwhile, Facebook yesterday also reached a deal with the Securities and Exchange Commission to pay a $100 million fine “for making misleading disclosures regarding the risk of misuse of Facebook user data,” a case tied to the Cambridge Analytica scandal. (On Wednesday, Netflix happened to unveil a new documentary on Facebook and the Cambridge Analytica story called The Great Hack.)

Additionally, The Wall Street Journal reports that Apple (APPL) appears to be favoring its own apps in App Store searches. The Journal writes that “the company’s apps ranked first in more than 60% of basic searches, such as for ‘maps,’ the analysis showed. Apple apps that generate revenue through subscriptions or sales, like Music or Books, showed up first in 95% of searches related to those apps.”

While the DoJ announcement Tuesday didn’t name names, there’s little mystery about which companies the government has in mind.

“The Department’s review will consider the widespread concerns that consumers, businesses, and entrepreneurs have expressed about search, social media, and some retail services online,” the government said in a press release.

“The goal of the Department’s review is to assess the competitive conditions in the online marketplace in an objective and fair-minded manner and to ensure Americans have access to free markets in which companies compete on the merits to provide services that users want. If violations of law are identified, the Department will proceed appropriately to seek redress.”

The language suggests they are going after four of the world’s largest companies by market cap—Alphabet’s Google unit dominates search, Facebook rules social media, and is synonymous with online retail. Apple likely falls under the online retail rubric, as well, given its dominant App Store platform.

A spokesman for Google declined to comment on the DoJ announcement directly, and instead pointed to testimony last week by Adam Cohen, Google’s director of economic policy, during a House subcommittee hearing on online platforms. “In the face of intense competition, we are proud of our record of continued innovation,” he said. “We have helped reduce prices and expand choice for consumers and merchants in the U.S. and around the world. We have created new competition in many sectors, and new competitive pressures often lead to concerns from rivals. We have consistently shown how our business is designed and operated to benefit our customers.”

Apple declined to comment on the DoJ announcement, while Facebook and Amazon didn’t immediately respond to requests for comment.

Microsoft (MSFT), largely a cloud play now and the world’s most valuable public company, was once the government’s favorite tech target. It appears to have avoided the investigators this time around.

It’s not entirely clear how the DoJ announcement relates to previous news that the FTC and the Justice Department had agreed to divvy up their investigatory responsibilities, with Justice taking on Apple and Google, and the FTC focusing on Amazon and Facebook. But the overall intent seems the same—to curb the behavior of tech giants.

So how is this likely to play out?

Wedbush analyst Daniel Ives wrote in a research note Wednesday that any push to break up the companies is likely to fail. Current antitrust law is intended to protect consumers against predatory pricing, not punish companies for being big and successful.

In the cases of Google and Facebook, the companies don’t charge for their primary products—so there’s no pricing, let alone predatory pricing. To assess the market effect of the companies on other measures isn’t impossible, but, Ives notes, it would likely require changes in antitrust law, and in the current political mood in Washington, that seems “exceedingly unlikely.”

Legislation could have a more immediate impact, though, particularly the pending California Consumer Privacy Act, which Barron’srecently covered. The law goes into effect in January and is intended to force changes in the way companies collect and sell personal information. For Google and Facebook, and increasingly for Apple and Amazon, the ability to sell targeted ads is of huge value. Federal legislation to do the same could be the route to real change in the tech business, with a higher probability of success than antitrust enforcement.

Ives predicts that Congress and the DoJ will investigate, and find “no harm, no foul.” He thinks investors should buy all of the big four stocks on any weakness relating to the investigations.

In afternoon trading, Facebook is down 0.4% to $201.51; Alphabet is down 1.2%, to $1,134.75; Apple is down 0.4%, to $208.03; and Amazon is 0.3%, to $1988.95. The tech-heavy Nasdaq Composite is up 0.4%.

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