Financial Myths: ​“The Falcon Cannot Hear the Falconer” — Part I

Michael McTague  |

Image via Anthony Quintano/Flickr CC

The refs are blowing their whistles. Facebook (FB) finds itself under a nasty pile on. The modern communication wizards give the impression they don’t know how many enemies they have. A long build up finds the social media giant has turned into the anti-social ogre. Where is this headed and why did it all blow up?

Facebook’s Trouble Builds

Sharing personal data without making clear who is buying the information is the icing on the cake. The body of the confection consists of advertising that is new and reaches a geographically wide audience but does not target likely buyers. For example, the restaurant in New York City that gets thousands of Internet hits is being viewed by teenagers playing video games in Seattle. Facebook follows the Yelp path. During the first year, Internet advertising pleases vendors, but after the initial burst, the value fades. This pattern was in place before Facebook’s personal buying and searching habit information crisis exploded.

Facebook does not understand how advertising works. In addition to not knowing how to get the product in front of the buyer, Facebook is not a news agency. Its track record in running inaccurate news has overwhelmed its argument that they allow people to see, copy and share whatever they like. News feed lacks editing and fact checking and the weakness has caught up with the social media giant.

As these issues have percolated, Facebook’s responses do not rise to the level of their image as a corporate giant. In market share and profit margin, they are the Atlas. The company has promised to “look into” matters and come up with a plan. In management responsiveness and problem-solving skill, they are the ninety pound weakling.

The algorithmic geniuses show serious limitations: management ineffectiveness, inaccurate stories under the heading of news, and shotgun advertising, blanketing a huge market of possible buyers and the uninterested.

Events are moving rapidly. Zuckerberg appeared before Congress and promises to take care of the problems. Meanwhile, the market capitalization of the company has dipped dramatically, losing $46 billion since January 1. The company may be out of the valley and headed to another peak, but the Myth Buster sees Facebook at risk of coming into the line of legal fire.

Facebook is a monopoly. Thirty-six years ago, the government began its surgery on AT&T (T) to remove a severe case of baby bells. Since then, huge mergers and acquisitions are reviewed and some have been held off, but a real monopoly breakup has not taken place. The reasons should be clear.

No company has gained the unbelievable hegemony over the weekly expenses or daily lives of Americans that once belonged to Standard Oil of New Jersey or AT&T – the only crystal clear monopolies in US history. Several mammoth corporations hold absolute sway over some area of human activity, but they lack the predatory bite or at least have not built up enough enemies to justify a massive government brawl. A third reason for the anti-trust lethargy is that the breakup of a giant may not lead to better or cheaper service. Was breaking up AT&T such a great idea? Consider how many consumers wish AT&T would come back from the dead and put the baby bells in good order. (The Myth Buster is one!)

Benign or Predatory Monopolies

Is it possible that Facebook will drift into this anti-trust no man’s land? Almost every product or service offers reasonable competition. McDonald’s (MCD) battles Burger King and Wendy’s. Home Depot (HD) dukes it out with Lowe’s (LOW). Baseball and football strive to be most valuable while basketball and hockey extend their seasons just in case someone is bored with the “major” sports. Imagine, ice hockey in the summer! Republicans lead in Congress but can rarely reach the 60% margin to hold full control. Contemporary America avoids monopolies.

Facebook is different. Only a few people remember MySpace, its social media predecessor. As they tell us often, Facebook’s algorithms are unmatched. For the simple meaning of social media – messages, photos, videos – no viable competition exists. Their Achilles heel is the harm they do combined with their droopy responses.

Congress has dipped into the controversy, no doubt waiting to see how Facebook cleans things up. If they decide to push for a legal fix, the language will shift from algorithms to cartel and market domination. If that happens, the company that ate up the social media side of tech stocks will fade. Maybe Google (GOOGL) will jump into the zone. If it does, the end-the-monopoly train will keep rolling, biting Google in a few years. Then, Microsoft (MSFT) and Apple (AAPL) may be hit by the anti-tech tsunami.

The title of this series is taken from Yeats’ poem, “The Second Coming.” A falcon may not hear the falconer and a company may not remember its strategic mission. Indeed, technology monopolies on the way to a fall cannot remember the good reasons that propelled their elaborate flights. In matters of this kind, the law slumbers as giants roam the nation, but when giants cause harm to a large number of people, their size does them in. The next entry will examine other technology giants that may be at risk of whirling out of control, forgetting their mission in the search for easy money.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 154.05 -0.87 -0.56 19,761,347 Trade
GOOGL Alphabet Inc. 1,105.18 7.27 0.66 2,064,289 Trade
AAPL Apple Inc. 219.31 3.29 1.52 33,078,726 Trade
LOW Lowe's Companies Inc. 99.59 -0.12 -0.12 4,686,650 Trade
MCD McDonald's Corporation 167.49 0.68 0.41 3,509,973 Trade
HD Home Depot Inc. (The) 179.85 -0.59 -0.33 7,004,297 Trade
T AT&T Inc. 32.87 0.37 1.14 35,133,029 Trade
MSFT Microsoft Corporation 108.66 0.16 0.15 32,785,475 Trade

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