Big Tech to be broken up?
Facebook, Amazon, Apple, Microsoft and Google (FAAMG). As of January of this year their combined market capitalisation stood at $5.2 trn, a threefold increase from 5 years ago. They are arguably the most powerful companies in the world and unarguably more powerful than many nation states. Yet they are still subject to the laws made by powerful authorities such as American anti-trust regulators and their European counterparts. It is within the rights of these governments to implement regulations and rulings that change the way these firms operate or even force them to break up. This is a power used sparingly in the USA with Standard Oil and AT&T the only companies made to bear the full brunt of this regulation. There was an attempt to break up Microsoft in 2001, but this failure means that it has been 40 odd years since we have witnessed a break up of a business giant. Indeed, authorities have not needed to use this level of regulation as few companies in recent times have amassed enough power to dictate large, and crucially vital, portions of the economy. FAAMG are rewriting this trend.
This hegemonic position attained by big tech is perhaps more alarmingly monopolistic than one may first imagine:
· Google has a 90% market share in the online search market
· Facebook has 59% of the social network market
· Amazon is responsible for 45-50% of all e-commerce spending in the United States
Source: Pension Pulse FAAMG represent nearly 20% of the market value of the S&P 500 and they don’t look like slowing down. Most strikingly, these firms are not only dominating the industries which they are most commonly associated with but they have slowly acquired vast swathes of the tech industry with for example Google acquiring Fitbit, a well known fitness technology firm, this year. They’ve also spread far beyond the traditional tech industry as shown by Amazon buying PillPack for $753 mn and entering the $500 bn prescription market. Amazon also picked up supermarket chain Whole Foods back in 2017.
Source: GrowthRocks It’s clear that FAAMG have become titans of the tech world and increasingly the wider business world. It is less clear why this is such a big problem; in a Schumpeterian outlook on the economy FAAMG represents a sparkling success of the market. So, why would Big Tech face the ire of anti-trust regulators? · FAAMG do not conduct fair business negotiations with other firms due to the huge power imbalance that exists. Patrick Spence, CEO of Sonos speaking at a hearing before the House of Representatives Antitrust Subcommittee, remarked on how Google insisted on Sonos users not being allowed to switch between the Google and Amazon voice assistants. Failure to comply meant that Sonos could no longer use Google Voice Assistant services. This power imbalance means that FAAMG are able to bully other companies for their own benefit and to the detriment of consumers · Spence also remarked on how Google and Amazon were using their success in one industry to dominate another. Both companies have engaged in predatory pricing (setting the price artificially low) for speakers as they profit from the consumer data collected by the speakers and transferred to other business lines rather than the speakers themselves. This puts smaller companies such as Sonos at a perennial disadvantage · Big Tech has also be known to purposefully infringe on the patents of small competitors. They do this knowing that by the time they are found guilty of it they will have already dominated the market and any fine which they are forced to pay pales in comparison to what they now earn in the market · FAAMG also directly take actions that are not the best for consumers. With the search engine market you can pay google so that your brand will come up first when a consumer searches up one of your competitors In recent years there has been movements made against FAAMG. Facebook is currently being investigated by 47 states, led by New York, about its ad pricing practices. In Europe, Microsoft was hit with a $1 bn fine in 2008 and Google was hit with a $9 bn fine in 2017, which it is currently appealing. FAAMG have hit back and have been anticipating the day when their organisations will be questioned; since 2010 big tech firms have reportedly spent almost $500 mn in lobbying the federal government. Big tech firms also have the ability to use their money to employ teams of lawyers to counter the government in the eventuality that the government even decides to take action against them. Microsoft demonstrated this by avoiding paying any fines and complying to only minor changes in how they operate when anti-trust regulators made a case in 2001 over Microsoft’s monopolies in web browsers and operating systems. What about political appetite for a break up of big tech? It appears as though the drastic action required to curb the rise of FAAMG necessitates a bold Presidency willing to sacrifice the political donations given by these firms as well as the media fallout. The Democrats, being the overwhelming recipient of FAAMG political donations, are much less likely to take harsh action such as a breakup of big tech. Though Joe Biden claims he wants to limit the powers of big tech he sat idly as Vice President during the Silicon Valley friendly Obama Administration, suggesting he is less likely to take action if he makes it to office. The most likely contenders to break up Big Tech; Bernie Sanders and Elizabeth Warren have fallen out of the democrat candidacy but still hold influence within the party.
The wildcard that is Trump may prove to turn aggressive towards FAAMG but this appears unlikely given the weakness of the US economy, driven by coronavirus. As noted later, national security and American primacy concerns also make this less likely. On the other side of the Atlantic there is more of a desire to attack FAAMG especially given revelations as to how little tax they pay, so more regulation and fines are likely to be called for by politicians in years to come. There is another aspect to the breaking up of big tech, which this article has not addressed thus far. The trade war, or more specifically tech war, which China and America have engaged in may lead to not only less government scrutiny for big tech but actually strong government support. America needs to pick and protect market leaders if it wants to win a slog out with China’s own tech firms such as Huawei, Tencent and Alibaba. Having massive firms who use profits from more traditional business lines and plough it into the development of new technologies such as AI, quantum computing and self driving cars, is essential if the US wants its own firms to control these sectors. Therefore, the presence of FAAMG is a good opponent to China’s rising tech sector and could give America the edge in the fight for economic dominance. All in all, a breakup of big tech in the US seems impossible given the lack of political support and the need for massive American companies to oppose their Chinese counterparts. Increased regulation, which supports consumers and smaller businesses will likely be needed in the coming years as these corporations amass power and cross the line of fairness on occasions. In Europe, there are likely to be more aggressive steps taken against big tech but this is more likely to be of the form of fines and regulations rather than a breaking up of the business.
Big tech remains a strong bet for investors and as they pioneer the new technologies of the 21st Century, expect their profitability and share prices to increase.