Political Miscalculation Puts Social Media Companies at Risk | Opinion

I am a Twitter shareholder. As a macro-focused investor, one of my priorities is to consider risks—especially the sort of "black swan" risks that few foresee.

Social media platforms are widely recognized as excellent businesses because of their low cost structures and network-effect monopolies. These factors make them particularly resilient to the black swan risks that can destroy more fragile businesses. Indeed, since COVID hit, Facebook and Twitter stocks have risen more than 25 percent. Snap (parent of Snapchat) and Pinterest have doubled. Alphabet (parent of Google and YouTube), Amazon and Apple have similar network monopolies and have also performed well even as the pandemic has wreaked havoc on much of the economy.

But I fear these companies' strong business models are leaving their executives complacent about a big risk.

Social media platforms have gained tremendous power over large segments of the public discourse. In response, many establishment media figures have called for them to exercise a degree of editorial censorship. Some of their own employees—many of them activism-oriented recent college graduates—have demanded even more aggressive censorship.

Despite some resistance, executives at these social media companies have acquiesced to many of the demands. Facebook and Twitter established "fact-check" programs that allow legacy media organizations to challenge claims they dislike. Many platforms have banned certain figures—primarily on the right—for "hate speech" or other subjective violations. And during COVID, full censorship became normalized as platforms blocked pieces that conflicted with CDC or other official pronouncements.

The 2020 election has further polarized this issue. Twitter and Facebook both censored the New York Post's Hunter Biden laptop story weeks before the election, restricting dissemination of a major news story (and applying a standard radically different than their permissive approach to unconfirmed claims about Trump). Twitter continues to lock out the Post, demanding that it withdraw the story. Such a decision seems to reflect a clear decision by executives at these companies to help Biden.

A contested election—far from a remote possibility since so many states have altered their voting procedures this year—could dramatically raise the stakes. There are already calls by prominent media and tech-industry figures to lock Trump's Twitter account—which he has used to bypass media gatekeepers and communicate directly with the American people—if the president disputes the mainstream media narrative on the election results. It would be consistent with the COVID-established pattern for social media censorship to extend to other citizens repeating the president's claims. Through such actions, social media platforms could give Trump opponents in the mainstream media vast leeway to shape the national narrative about any dispute.

My purpose here is not to propose policy responses to such moves. It's to consider the risk such actions create for social media companies themselves.

Social media executives have long feared the Left. They know the Left's threats are serious: Activist employees threaten to disrupt their operations, sustained media campaigns will nationally vilify them and progressive tax proposals could impose significant costs on both companies and individual executives. While Obama, like many recent Democrats seen as pro-business, often preferred large fines that could be directed to his nonprofit allies, today's Left is increasingly mirroring the language of earlier European progressives with calls for aggressive regulation and antitrust enforcement. Some even advocate nationalizing social media companies; one scenario envisions a PBS-like governance board. Senator Ron Wyden (D-OR) has suggested Mark Zuckerberg should face the "possibility of a prison term."

Some have argued that, besides reflecting the personal biases of their executives, technology companies' broader embrace of the Left (especially on social and cultural issues) represents a bet that they can buy one side off while relying on the Right's free-market orientation and commitment to procedural neutrality to limit risk from that side. There was a certain logic to that bet under our legacy political paradigm.

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A Twitter logo is displayed on a mobile phone with President Trump's Twitter page shown in the background on May 27, 2020, in Arlington, Virginia. Olivier Douliery / AFP/Getty

But that paradigm is not sustainable. As social media execs have recognized, the Left's willingness to punish political enemies has grown rapidly in recent years. As political polarization grows, it is naive to think this willingness can remain confined to one side.

Current Republican efforts focus on Senate hearings, anti-censorship regulation and possible reforms of Section 230. It's unlikely social media executives particularly fear this strategy. Such regulation, even if it limits their freedom to use their power for political purposes, may even strengthen incumbent companies who are better positioned to navigate complex new requirements.

Regulation is not the real risk. Politicians on the right will realize that not only do such threats face practical limitations, they do not effectively deter social media executives. In the face of widespread anger over a serious political miscalculation, politicians will inevitably seek more direct and punitive measures against the social media companies and executives themselves.

Some will object that our government lacks specific legal mechanisms to punish social media executives and companies. This misses the nature of black swan events, which cannot be easily predicted or analyzed. When assessing such risks, it is helpful to look beyond scenarios that are easy to envision in our current time and geographic context.

In much of the world—especially countries where political stakes have long been high—actions by executives of an important company to advance one side would meet severe consequences if their gambit failed. These consequences could involve the forced resignation of executives and even sale or nationalization of the company. Social media platforms, given their importance in so many communications, have grown to share many traits with utilities, and governments are particularly sensitive to politicized moves by utilities. Even in Europe, it would be surprising to see a major communications utility take sides on a contentious political debate without fear of repercussions.

Similar consequences are far from impossible in the United States, whatever the direct legal basis. Determined prosecutors have long recognized their power to use even tangential laws to nab a target. Al Capone's tax evasion conviction is a legendary example, and any number of white-collar convictions have been based on seemingly minor violations of some arcane law—with the difference between a slap on the wrist and a ruinous penalty dependent on the political favor of the target. Sometimes a conviction is not even necessary. Eliot Spitzer used the mere threat of indictment to force companies to agree to large fines and, in AIG's case, oust their CEO and restructure their governance to Spitzer's satisfaction. Trump's decision to force the sale of TikTok for national security reasons, though still in process, provides an even more drastic example.

Government officials also have more leeway than many appreciate to innovate in new contexts. Woodrow Wilson exercised enormous power over private businesses during WWI. Franklin D. Roosevelt did the same during the Great Depression, often employing threats similar to those Spitzer used to force recalcitrant executives to cooperate with his agenda. Even in what was widely seen as a Wall Street bailout by friendly regulators during the 2008 financial crisis, official actions with little legal precedent included appointing a "pay czar" to regulate executive compensation at large banks and placing large companies in a "conservatorship" that nearly wiped out shareholders. Most recently, COVID-related executive orders have placed widely varying restrictions on different industries and businesses.

It's hard to know how politicians might respond to a provocative action by a social media platform during a tense political moment, but this risk should not be ignored. History makes clear such moves can result in severe costs to individual executives, as well as to companies and their shareholders.

Social media executives underestimate the risk of political miscalculation at their own peril. They must not let their market power make them complacent, and they would be naive to assume they can use their platforms to sway politics without consequences. It may be impossible to completely avoid political risk as the stakes of American politics grow, but executives must think beyond legacy political patterns.

Nate Fischer is an investor and entrepreneur. Twitter: @NateAFischer.

The views expressed in this article are the writer's own.