Should big tech be broken up? It’s such an existential question for the start of a new week. Nonetheless, it’s a question that many have asked for over a year now, as the big tech stocks continue to gain a more significant chunk of the major indexes.
As of Mar. 8, big tech stocks accounted for somewhere between 20% and 31% of the SPDR S&P 500 ETF (NYSEARCA:SPY) net assets of $253 billion. I say, somewhere, because stocks like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are now part of the Communication Services sector and not Information Technology.
Let’s just split the difference and say big tech stocks account for 25.5% of the S&P 500, almost the same amount as the Financials and Healthcare sectors combined. As tech stocks go, so goes the S&P 500.
A year ago, I wrote a piece entitled Here is What a Potential Breakup of Alphabet Inc Stock Would Look Like. In it, I argued why Alphabet investors shouldn’t be concerned about a Google breakup; I believe it would be good for the company’s share price. Legendary tech investor Roger McNamee was the one to suggest the FANG stocks should be broken up.
I just ran with the idea.
A New Plan
Now, Senator Elizabeth Warren has a plan to break up the big tech stocks.
“Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy,” Warren wrote in Mar. 8 blog post on her 2020 Campaign website. “They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”
If you work in the tech industry and you’re honest about the situation, I think you’ll agree with the Massachusetts senator. Innovation only thrives when small businesses can grow into big companies. Warren believes this isn’t happening as a result of big tech stocks.
Her Solution?
Companies with revenues of more than $25 billion would have to separate their platform utilities from the rest of their businesses in those instances where the company was providing third-party businesses a platform but also competing against those third parties.
Examples include Amazon (NASDAQ:AMZN) and Alphabet. In the case of Amazon, it would be required to separate Amazon Marketplace from AmazonBasics, the company’s in-house brand. In Alphabet’s situation, much like what I described in my article last year, Google would have to separate its search business from the rest of the company.
In the second part of her plan, Warren would appoint regulators to reverse mergers that she believes have made it impossible for small tech entrepreneurs to compete with big tech.
Senator Warren spent much of her career studying these kinds of economic issues before becoming a senator. If anyone understands them, it would be her.
“Weak antitrust enforcement has led to a dramatic reduction in competition and innovation in the tech sector. Venture capitalists are now hesitant to fund new startups to compete with these big tech companies because it’s so easy for the big companies to either snap up growing competitors or drive them out of business,” Warren wrote in her blog post. “The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.”
The Bottom Line for Big Tech Stocks
If you own any of the FANG stocks, I would not fear Warren’s efforts to make the tech industry more competitive; I would embrace it. While each of these stocks has contributed to making our lives a little easier or more fun, it has come at a cost to the little guy in technology.
Standard Oil was broken up in 1911 after the Supreme Court ruled that the oil company controlled by billionaire John D. Rockefeller did restrain trade through business practices such as price-cutting, effectively putting the little guy out of business.
Today, three descendants of Standard Oil are part of the S&P 500: Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP).
And they’re all doing just fine on their own.
I have no idea if Senator Warren has a chance to be President. What I do know is that she has a better grasp of how economies work (and don’t work) then the current person residing in the White House.
Don’t be scared of a breakup. Embrace it.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
