Facebook (FB) - Get Report shares were down on Friday after New York State attorney general Letitia James announced that her office is opening an investigation into Facebook "for antitrust issues," with the cooperation of attorneys general in Colorado, Florida, Iowa, Nebraska, North Carolina, Ohio, Tennessee, and the District of Columbia.
The announcement follows a report Tuesday by The Washington Post that more than half of U.S. attorneys general are preparing to unveil an antitrust investigation into Alphabet's (GOOGL) - Get Report Google unit on Monday, citing unnamed sources. Facebook was trading down 1.7% to $187.71 in afternoon trading on Friday, while Alphabet shares declined fractionally to $1,209.06.
The state actions, like inquiries at the Federal level announced earlier this year, and actions by the European Union, are likely to be the "new normal" for companies for the foreseeable future, according to some sell-side observers, but it seems there's little actual impact the actions can have in terms of breaking up companies or imposing strong regulations.
"This is a toothless investigation designed for headlines and for political advantage, and attention grabbing," says Michael Pachter, who follows Facebook for Wedbush Securities, referring to New York AG James's announcement. As Pachter sees it, antitrust only refers to "pecuniary" harm to consumers, such as imposing higher prices. Facebook doesn't charge consumers anything, and so it would be hard to show such harm.
"There is zero possibility Facebook can be broken up because they are charging consumers too much," Pachter said. "That can't happen, unless you were to change the antitrust laws."
Facebook's Will Castleberry, vice president, state and local policy, said in a statement that "People have multiple choices for every one of the services we provide. We understand that if we stop innovating, people can easily leave our platform." He added that Facebook plans to "work constructively with state attorneys general and we welcome a conversation with policymakers about the competitive environment in which we operate."
James's office did not immediately return a call for comment.
A backdoor way to show that both Facebook and Google harm consumers would be to demonstrate that their control of advertising markets, and prices of ads, harms consumers indirectly. But Pachter insists such efforts would run into trouble with the U.S. rules on interstate commerce.
"Federal law is supreme" in the battle between what the government and the states can regulate, Pachter points out. And, anyway, "Facebook can say, we are not selling ads to NY advertisers, these are global ad contracts," so that there isn't really a local product to regulate.
Nevertheless Pachter thinks such investigations are "going to be status quo forever now," because every attorney general, including whoever follows James, wants to make a name for themselves. Hence, "If Facebook has to spend $500 million this year to defend themselves, they will have to spend that next year and the year after, and on and on," he says.
Pachter has an Outperform rating on Facebook stock, and a $265 price target.
Similar points have been raised by others. In several notes over the past year, BMO Capital Markets' Dan Salmon has emphasized that little is possible on the antitrust front.
"In the U.S. at least, antitrust has typically been framed against consumer harm over the past 30-40 years," Salmon has written. But Google and Facebook, and Amazon (AMZN) - Get Report , for that matter, "exert no such pressure on consumers."
What's more, writes Salmon, most people misconstrue just how much market dominance Mega-Cap Tech has. People tend to "under-size" the total market for ads, he argues. The total global spend on "marketing," which includes advertising, PR agencies, market research, etc., was $1.465 trillion last year, he estimates. Within that, the more relevant market for Facebook and the rest is "paid media," namely, brand advertising on television, radio, internet and elsewhere, as well as direct advertising and trade marketing. All those add up to $1.23 trillion.
With the forecast for paid media rising to $1.4 trillion next year, Salmon estimates Google will take the world's biggest share, at 14.7%, and Facebook will come up second, with 6.1%. That, in his mind, leaves the companies far less dominant than if their market was measured as only the internet portion.
Nevertheless, like Pachter, Salmon argues that "the issue isn't going away anytime soon" with respect to antitrust and market dominance. Google's "long slow dance with EU regulators has begun to yield real fines," he observes, while "for Facebook, the fact that it is the focal point of the conversation about user privacy gives rise to a variety of issues related to size and antitrust, including whether or not the company properly complied with its 2011 FTC consent decree."
Salmon expects headlines about regulation and investigations will continue to affect the trading of the stocks.
Tiernan Ray neither owns nor trades shares of any companies mentioned in this article.