D.A. Davidson's Tom Forte on big tech regulation

Tom Forte, D.A. Davidson Sr. Research Analyst, joins Yahoo Finance to discuss Sundar Pichai, Mark Zuckerberg, and Jack Dorsey testifying before the Senate Commerce Committee on section 230 and his thoughts on regulating big tech.

Video Transcript

MYLES UDLAND: An extremely busy couple of days for major tech companies began today. We had the executives from Twitter, Facebook, and Google on Capitol Hill testifying before lawmakers. Of course, we also have these companies and a few others reporting their earnings tomorrow night after the bell. Joining us now to discuss all of this is Tom Forte, he's a senior research analyst over at DA Davidson.

So Tom, let's start with what we heard from these executives on Capitol Hill today, kind of a follow up to the main event back in July. Did the tone of these conversations, in your view, change at all? Does it change how your thinking about regulatory risk for each of Twitter, Facebook, and Google?

TOM FORTE: The way that I think about it is the commonality between the Republicans and the Democrats, as seen in the House Judiciary Committee 400-page plus report, is that they realized that they need to scale back the excess influence these companies have, Amazon, Apple, Facebook, and Google. And then for today's testimony, throw in Twitter. The harder challenge is how to do it.

So we have an antitrust case against Google that's live today. And then today, they were thinking about removing the protections when it comes to who's liable for posting on social networks. So I think the commonality we know is that Democrats and Republicans agree that they need to rein in the excess influence. But I think it remains to be seen, and it's a work in progress on how they will ultimately do that via antitrust or regulation.

MYLES UDLAND: And then just speaking, I mean, today, again, was about the Section, kind of, 230 rule there. And as you think about the protections that that provides to these companies, is there a way-- like, would there have to be an entirely new law written, I guess, in your view, to make the content on these platforms the problem of the companies? Or is there a new way to apply this Section 230?

I know this is kind of a legalese, but certainly, that is part of the calculation here, I guess, in thinking about whether these companies truly face a major regulatory risk that would upset their business model.

TOM FORTE: So from a business model standpoint, the way I think about it is user-generated content is not free. So to the extent that Google, Facebook, and Twitter are going to have to police that content. Think, for example, if there was a one-minute delay between when you tweeted when Twitter determined if your tweet was appropriate and then when your tweet hit Twitter.

So I think that this is ultimately going to increase the cost of user-generated content. Having low-cost user-generated content versus, call it, professional content was what enabled the social networks to success-- have success against old print media. But I think this is ultimately going to raise the costs of doing business for these companies.

MYLES UDLAND: And then, I guess, as it raises the cost of doing business for the incumbent companies, does it make their positions, I guess, in a roundabout way, and I think this is what folks are concerned about as well, does it solidify and entrench these networks as primacy in our lives if it's more expensive to operate a network? It would be more expensive to start up a new network, and so on.

TOM FORTE: So my argument is no in this regard. So if the solution at the end of the day is essentially having a disclaimer at the end of a post, why couldn't a startup also have a disclaimer at the end of the post? So I think that you have two things that are going on. On one hand, they're trying to figure out a way to address who's responsible for the content of the network.

On the other hand, they're trying to rein in the excess influence that big technology companies have. So in my opinion, it's hard to envision a solution that makes it more difficult for a startup.

MYLES UDLAND: And Tom, I want to kind of transition now to the earnings that these companies are set to report tomorrow. And just thinking about their broad place within the market environment right now. As you think about these businesses and as you think about their stocks, their import to the rally, the kind of questions you're getting from investors on them, well, what are you expecting to see in these reports, and how are you thinking about these companies', kind of, continued growth? And we've seen a lot of growth pulled forward, Microsoft, very interesting quarter last night. How are you thinking about that part of the story for these companies as we head into 2021?

TOM FORTE: Yep, so for Facebook and Google and Twitter in particular, they're advertising-based business models. So the big surprise last time when the CEOs testified on Capitol Hill was they followed that testimony with a blowout quarter. I mean, just huge numbers in the June quarter for Amazon, Apple, Facebook, and Google.

So to the extent that there's data points suggesting that spending in the election was twice the rate of 2016, and to the extent that Facebook, Twitter, and Google are all generating advertising revenue from politics, an argument can be made that they will post very strong numbers, which makes the whole situation a little more ironic, I guess.

MYLES UDLAND: And then, I guess, in thinking about, you know, that pillar of the ad spend that you're seeing on those networks, there was a lot of concern very early in the pandemic that, you know, a second order effect would be businesses closing. Then they're not spending as much money on these networks. Therefore, ad spending goes down, and it hurts these businesses.

We haven't really seen that play out sort of at all so far in the pandemic. Is that something that you're wary of, or did that thesis maybe kind of fall off early on here?

TOM FORTE: It's a great point, and you definitely saw, to varying degrees, a material pullback in ad revenue in March and in early April. So with a second COVID spike now going on to the extent that that results in perhaps a new round of shelter in place, with business closures and economic weakness, then advertising revenue could once again be under duress. So the question will be, how do we manage the second spike?

Are we sheltering in place, or are we trying to manage it with masks, social distancing, things of that nature? And I think it's important to follow that to determine how that may affect the economy and ultimately advertising.