Articles

Breaking Up Big Tech: Way More Than Meets the Eye

Nov 6, 2020

Big Tech’s influence is just as big as it is controversial. So, we understand why some people say, “just break them up.” But breaking up any company is hard, let alone behemoths like Alphabet, Amazon, Apple and Facebook. In our view, such talk misses the mark. Yes, Big Tech’s outsized reach creates competition and fairness issues. But Big Tech also facilitates innovation and creativity across sectors. It lowers barriers to entry, and in a global economy that needs to find new avenues to growth, these mega-caps’ products and services can help. That is not to say that Big Tech couldn’t use some guardrails, which we see as the most likely scenario. Either way, the history of antitrust action suggests long, drawn-out legal affairs that could provide some overhang for Big Tech.

Department of Justice Puts Google on the Hot Seat

Big Tech breakup talk heated recently with the Department of Justice filing its much-anticipated lawsuit against Alphabet subsidiary Google for monopolizing internet search and ad markets. With lawmakers threatening regulations, Google’s argument is that “people use Google because they choose to—not because they’re forced to or because they can’t find alternatives”.1 The market largely shrugged off news of the suit, seemingly noting that anti-trust legislation takes years to settle, and oftentimes changes course.

Amid the Google lawsuit, which would be the largest antitrust cases in US history, industry-wide regulations may be ready for change. A hot topic in political circles is Section 230, a provision of the 1996 Communications Decency Act. Section 230 essentially protects and absolves internet service providers and tech platforms from liability for their users’ posts. Section 230 also allows platforms wide-ranging freedoms to moderate and remove posts that they find objectionable, as long as restrictions are implemented consistently and in good faith.

In an ideal world, any regulation would seek to accelerate competition, innovation, and growth, while implementing stronger protections for consumer data and policing content. Being realistic, though, the lobbying culture will likely drive legislation.

Congressional Report Invokes the “M” Word

Lawmakers on Capitol Hill issued their own warning for Big Tech last month. A well-publicized House judiciary subcommittee report alleged that Alphabet, Apple, Amazon, and Facebook exercise monopoly power in various ways and means. Among the highlights, the report said:

  • Amazon engages in “extensive anti-competitive conduct in its treatment of third-party sellers”.
  • Apple uses its operating system and app store “to create and enforce barriers to competition and discriminate against and exclude rivals”.
  • Facebook behaves like a monopoly that is “firmly entrenched and unlikely to be eroded by competitive pressure from new entrants or existing firms”.
  • Google links services with user data to create “an ecosystem of interlocking monopolies”.

Headlining the Democrat-led report was the committee’s recommendation for structural separations and measures prohibiting the big platforms from entering adjacent lines of business. Hypothetically, were this scenario to play out, YouTube could be separated from Google or Instagram from Facebook. The committee concluded that the big platforms increasingly crowd out small and medium-sized businesses (SMEs) and leave too few search, e-commerce, and social media options for consumers.

Also, the committee went so far as to recommend that antitrust regulators presume Big Tech mergers are anti-competitive and to require those firms to prove that they’re not. In other words, guilty until proven innocent.

What Ifs Aplenty: Market Impact of Big Tech Scrutiny and Legislation Talk

Heightened scrutiny and legislation could be negative for internet, e-commerce, communication services, and technology companies, and companies that traffic in user data. Data privacy regulations may be particularly costly at first but may not necessarily represent a major structural margin shift. Companies most at risk have already begun to self-regulate, engaging content review capabilities. Consumers are also increasingly aware of and demanding data privacy. Leaning into this pressure may turn stricter data privacy protocols into a competitive advantage.3

For investors, it’s interesting to project what smaller Big Tech could mean for the market. The following examples illustrate that in some ways breakups could actually be advantageous for certain companies (Amazon) given the value unlocked and the potential for new innovation, but detrimental for others (Facebook).

What if Amazon and AWS split: A possible value-adding event for shareholders

Amazon Web Services (AWS) is the clear industry leader in the cloud computing space, and it’s exceptionally profitable, accounting for 77% of Amazon’s operative profit as of Q1 2020.4 AWS subsidizes less than profitable business segments for Amazon, allowing the company to consistently expand amid historically low profitability. Should AWS become an independent entity, the business could operate more nimbly, repurposing cash flows to the core business or returning excess cash to shareholders. While deemed a low probability, a spinoff resulting in an independent AWS looks to be a value-adding event, but may force Amazon to take a hard look at its capex funding.

What if Facebook and Instagram split: Older user demographic could weigh on Facebook

The 65 and older demographic now accounts for a dominant share of the Facebook platform’s user growth.5 Conversely, Instagram, which reaches a younger demographic that is more valuable to advertisers, is the company’s fastest-growing segment by user growth.6 A breakup could leave Facebook with the less desirable user base.

In a Facebook breakup scenario, consumers would likely benefit from more options to share content. An independent Instagram would promote renewed competition in the social media space. As new apps come to market today, legacy platforms often poach key features in an attempt to stay relevant. Instagram’s TikTok inspired Reels feature is a prime example. As separate entities, Facebook and Instagram may each try to recreate the lost features of the other, leveraging the network effect of their existing users.

Obvious Cons to Big Tech, But Pros Too, is Big Tech a Bridge?

The argument that Big Tech crowds out businesses and inhibits competition or forces smaller companies into sales is valid—it does. Amazon, the undisputed king of online retail with over $222.62 billion in e-commerce sales in 2019 and 37.3% of the online retail market, is an obvious example.7 The company’s fierce competitive practices and efficient logistics can put downward pressure on prices, benefitting consumers.8 However, the e-commerce juggernaut’s expansion tactics increasingly draw ire.

The company’s acquisition of Diapers.com illustrates such complaints. Intracompany emails document Amazon’s attempts to penetrate the diaper space. Seeking to increase market share, Amazon cut prices below cost, being willing to “lose $200 million in one month on diapers alone”.9 After the undercut weakened Diapers.com’s parent company sufficiently enough, Amazon acquired it, and then raised prices. Increased regulation around such anti-competitive behavior would benefit consumers via increased choice and competition.

It can also be argued that Big Tech is an essential bridge to innovation and opportunity. Amazon may pressure a company to sell too soon, but that company may not have existed were it not for the solutions that Amazon and its Big Tech cohorts offer. In a sense, Big Tech begets Small Tech. As Jay Jacobs and the Global X Research team wrote in Can Growth and Regulation Coexist for Big Tech?, that means it’s important that policymakers and regulators “create an optimal solution that promotes innovation and growth while protecting consumers.”

Perhaps there’s a scenario where the government can use antitrust threats to incentivize Big Tech into solving one of the U.S. economy’s biggest problems. Half of Americans still don’t have dependable internet. Maybe lawmakers can lean on Big Tech to help provide access to that population—also known as a new consumer base. In exchange, the government could offer more palatable discussions at the negotiating table.10

Conclusion: Some Type of Regulation—Eventually—Is Most Likely

The United States v. AT&T case that led to the 1984 Bell System divestiture lasted 10 years. The 1998 case against Microsoft took the better part of a decade to find that the company’s bundling of its operating system and other programs was monopolistic. But people still used rotary phones in 1984 and 1998 internet was primitive at best. Today, Big Tech connects every corner of the global economy and evolves constantly. Google, for example, accounts for roughly 90% of the web searches globally.11

Anti-tech antitrust is extremely complex. Uncertainty is likely to linger over the near-to-medium term, at least. Legal, political and regulatory rhetoric is loud, but currently, we don’t see the resolve, nor the wherewithal, to carry any case through to a breakup. New reins are much more likely down the road. However, it’s important that any regulation acknowledges that Big Tech is necessary for the internet ecosystem to function. Big Tech doesn’t ruin innovation and growth, it helps to cultivate it.

Category: Portfolios

Topics: Disruptive Technology

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