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Big tech — trouble coming down the line

  • The willingness of political leaders to target big tech firms is securing the FAANG stocks’ place as a target of popular discontent.
  • Being cast as bogeyman is something new for many of the firms, which based their phenomenal growth on fine-tuning and giving consumers what they want.
  • The firms are struggling to catch up as leaders in the US, the UK and France continue to propose measures that include breaking up the firms.

Senator Elizabeth Warren’s campaign to reduce the power and influence of big tech is developing an international following. With the UK only days from going to the polls, the Labour Party’s second most powerful politician, John McDonnell, has used what valuable time is left to attack big tech. In France, Cédric O, digital affairs minister, says that taxes are just a start and that future moves could include a ban on acquisitions or insisting that companies share data with their rivals.

Source: The Week

 

Tide of opinion

In his final speech before the election on Thursday, McDonnell, shadow chancellor, said that companies could be broken up or face tougher regulation. Speaking in London on Monday, he said:

“That will be the debate and the discussion that we will be having. There are clearly issues of accountability and there are clearly issues about the fair treatment of [tech] as a sector, as against other sectors.”

Source: The Times

With no election in France, Cédric O has taken the opportunity to travel to the US. Wired.com stated that “on a week-long, cross-country trip that involved meeting lawmakers, regulators, and academics to discuss antitrust tactics”, the French minister found the US a responsive audience:

“Tech platforms have a footprint in our economies and our democracies that is a huge challenge for public power.”

 Source: Wired

The US already has its own trailblazer in the space. Senator Warren, one of the leading runners in the election of the Democrat nominee for president, has been clear about her willingness to rein in the power of tech firms. Warren has concrete proposals in mind. These include designating e-commerce platforms such as Amazon as a ‘marketplace’ and thereby ensuring that smaller participants in that business community get a chance to prosper.

 

Policy measures

Debate in America and France appears to have extended beyond electioneering rhetoric. Proof that they are the markets to watch include the fact that President Emmanuel Macron has already brought into law a new levy that takes 3% of digital sales from companies with more than €750m ($829m) in global revenue and revenues in France of over €25m ($27m) in categories such as online ads or ride hailing. Ensuring that she has the freedom to enact her own policies, Warren has pledged to turn down campaign donations from big tech and its staff. A cap of $200 per head will tie her hands during the election campaign but free them should she beat the odds to be elected.

In the UK, McDonnell is trailing in the polls and there are few concrete proposals relating to big tech in his party’s manifesto. As the Times states:

 “It’s not how Britain could break up global technology giants, most of which are based in America.”

Source: The Times

While McDonnell may not actually have the tech firms in his sights, the fact that they are seen as a soft and popular target is quite telling.

 

Big oil / big tech

The model that is often suggested as a template is the break-up of Standard Oil in 1911. At that time, the Supreme Court ordered the dissolution of Standard Oil Co. on the ground that it was in violation of the Sherman Antitrust Act. The new companies went on to form the firms Exxon, Mobil and Chevron.

More recently, in 1982, AT&T was broken up into one long-distance company and seven regional firms, which became known as ‘Baby Bells’ – the move followed the argument that competition that replaces a monopoly benefits consumers and the economy as a whole.

A much more recent precedent actually involves one of the firms currently being discussed, Microsoft. In 1999, a coalition of 19 states and the federal Justice Department started a high-profile legal case against the firm. The trial found against Microsoft and stated that it had manipulated the market in an attempt to prevent competition from the rival Netscape browser.

The Standard Oil break-up sticks in the mind because its offspring went on to become market titans in their own right. However, the Microsoft action is probably more pertinent to the current day. The shot across the bows of the tech industry led to Microsoft ‘voluntarily’ agreeing to cease many of its practices. The judgment itself was challenged and overturned on appeal, but this was largely due to a legal technicality relating to process rather than a dismissal of the need for more regulation.

 

The enemy within

Being associated with fossil-fuel behemoths such as Standard Oil is not a good look for the tech stocks that thrive on ‘cool’. The sheer size of the tech firms and apparent market dominance also weigh against them and leave the door open to the regulators and tax authorities ultimately getting their way.

Alphabet Inc. vs Nasdaq – Year to Date

Source: TradingView

 

Some of the damage is self-inflicted. Buying up rivals makes commercial sense but nullifies the developments offered by the next generation of disruptors. As of December 2016, Google (Alphabet) had bought over 200 firms. Those smaller rivals that do try to compete face significant barriers to entry based on sheer scale of operation.

The support from Silicon Valley, which might surprise some, suggests that the smaller firms there would welcome a break-up of the FAANG names – if only to provide room for new firms to grow.

 

Race to the White House

 

Source: CNBC

Warren’s policies are not as unpopular or unique as some might suggest. Her ideas even find significant support in Silicon Valley. CNBC reported the comments of an aide to a start-up investor who has donated to Warren’s campaign:

“Most of SV [Silicon Valley] doesn’t work for big tech and a lot of big tech employees have values contrary to their employees … SV venerates competence, vision, disruption, and they see those qualities in Warren.”

Source: CNBC

If Warren is elected as the Democrat candidate, then she will also tap into the ‘anyone but Trump’ part of the electorate, who may be willing to hold their nose and vote against open markets to replace the incumbent president.