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Content moderation push may trip Twitter, but Facebook, Google to stand tall

With U.S. President Donald Trump permanently banned from Twitter Inc.'s platform and suspended from other social networks, content moderation is once again at the center of a raging debate.

In the wake of the deadly Jan. 6 riots in Washington, D.C., various social media platforms either deleted posts from the president, suspended his accounts or banned him from their services permanently. This is once again raising questions about how tech platforms moderate content on their platforms and the legal mechanisms that allow them to do so.

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Specifically, Section 230 of the Communications Decency Act, a law that functions as a cherished liability shield for online platforms, has come under increased scrutiny. The law enables those platforms to moderate content posted on their sites, as long as those efforts are taken in good faith. But though the law is touted by the industry as sacrosanct and has been threatened by lawmakers, industry analysts do not think the threat of regulatory or legislative action on content moderation diminishes the attractiveness of stocks like Facebook Inc. and Alphabet Inc.'s Google LLC to investors, even as one believes Twitter needs to do more to protect its site.

Facebook and Google

"The question for me as an investor is always: Well, is there going to be a material revenue hit on one side, and or will there be a material expense hit as they have to ramp up head count to help with any moderation that either Congress forces them to do, or in the case of Facebook, you've seen them do kind of on their own in recent years," said Chad Brand, founder and president of investment advisory firm Peridot Capital Management.

Considering these factors, Brand said he does not believe the risk of content moderation reform will have a big impact on sentiment in the near term or actual results in the long term, because the expenses companies like Facebook and Google could face are not that high for them, he said.

"It's not that much because these companies are so big, they are so dominant," said Brand. "Even Facebook was able to grow their profits, even with higher expenses, because the advertising revenue was there because they still have the user base."

Brand said advertising money will continue to go where the eyeballs are, and as long as eyeballs are on Google and Facebook, they will have more than sufficient revenue to offset any potential expenses from content moderation reform.

"From a fundamental analyst perspective … I'm not going to change my earnings estimates based on any of these policies and therefore I wouldn't change my estimate of what these stocks are worth or their investment merit," he said.

Risk of regulation

Michael Pachter, an analyst at Wedbush Securities who focuses on social media, said in an interview that despite the Democrats' control of both chambers of Congress, he thinks the chance of "real legislation" is zero because the party only has a slim margin of control.

The new Congress features a 50-50 split in the Senate between Democrats and Republicans. Vice President-elect Kamala Harris will be able to cast a tie-breaking vote for Democrats. In the House, Democrats have an 11-member margin.

"It doesn't take very many defections ... pro-business Democrats to say no," Pachter said.

Still, he does not think the threat of Section 230 reform severely diminishes the attraction of large tech stocks to investors.

"Probably there's a mild sentiment that an all-Democratic House, Senate and Presidency has the potential to perhaps regulate a bit more severely. and so that will kind of keep all these things [major tech stocks] down a little bit, and so they're all off their highs, but they're not getting hammered," he said.

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Moderating moderation

In the days since Democrats won control of the Senate and a violent mob of insurrectionists stormed the U.S. Capitol to protest election results, many tech platforms have jumped into action and taken their most drastic content moderation actions to date.

On Jan. 8, Twitter Inc. permanently suspended President Donald Trump from its platform; Facebook CEO Mark Zuckerberg announced on Jan. 7 that Trump would be suspended "indefinitely" and "at least" through the inauguration from Facebook and Instagram LLC.

Additionally, Amazon.com Inc.'s Twitch Interactive Inc. disabled Trump's account until the end of his term and YouTube LLC announced it would start penalizing channels that post videos with false claims about the U.S. presidential election.

Asked about the implications of some of these content moderation actions, Pachter said he thinks the sites are "paying lip service" to concerns of elected officials to show they can moderate content without legislation or regulation.

"Once the Senate flipped, I think they were like, 'Oh, we'd better show Congress that we're serious.'"

Twitter

While Michael Nathanson, a senior research analyst at MoffettNathanson, wrote in a Jan. 11 research report that he does not anticipate a major change to Section 230, he believes Twitter has not spent enough to clean up its platform and that it could hurt the company in the long run.

Specifically, Nathanson says he continues to believe that Twitter is "over-earning today due to massive under-investment in technology and safety."

While Facebook has "aggressively stepped up their investment in content moderation and AI systems in an effort to reduce the rampant hate speech and fake news that were on their platform," Nathanson says Twitter's "basic approach to adequately fix this issue was limited by the relatively meager size of their revenue base, which would have barely covered the incremental $5 billion in safety spending that Facebook put through in 2018."

Ultimately, Nathanson says his concern over Twitter's platform safety, along with additional concerns, lead him to believe that the company's stock is not fully pricing in the long-term headwinds of these concerns, along with "the increasing likelihood of great regulatory pressure."

On Jan. 11, in the wake of permanently suspending Trump's personal account, shares in Twitter were down 6.5% in afternoon trading. Alphabet shares were down 2.1%, and Facebook shares were down almost 3.5%.