Cloud computing is the dominant economic fact of this decade. The companies that began investing billions of dollars per quarter, building networks of giant data centers linked by fiber cables, have created over $4 trillion of market value. In doing so, they gained the kind of dominance over the economy not seen since the age of the railroads in the 19th century.
The response? Break them up.
The calls have centered on the three companies focused on free services, none of them more than 25 years old. The services are supported by ads, and those ads are driven by algorithms built inside their clouds that use clicks to tease out what people might want to buy.
Selling goods based on who people are, called intrinsic marketing, has been a dream of marketers since the Web was spun 25 years ago. But for competing industries which used extrinsic marketing, building communities by advocating for places, industries or lifestyles, it has become a nightmare.
The entire media complex, from newspapers and magazines to TV, is being systematically run out of business by the companies that I dub “Cloud Czars.” These cloud stocks demand something be done to stop the process. Increasingly politicians are listening.
Facebook (FB): The Cause of the Problem
Facebook (NASDAQ:FB) is the newest, smallest and most controversial of cloud-computing stocks. Founded in 2004, Facebook made a fateful decision to invest the $1 billion in capital needed each quarter to build its cloud. CEO Mark Zuckerberg made the decision even before his company was bringing in the $1 billion per quarter needed to pay for it.
In 2018 Facebook had revenue of over $55.8 billion, and net income of over $22 billion. It had succeeded in building out its network with cash flow, had no long-term debt, and $41 billion in cash and investments in the bank. As of May 15, Facebook stock sports a market capitalization of roughly $530 billion.
But whether Facebook exists at the end of 2021 as it exists presently is now subject to question. Odds of a breakup are still long, but the theme of a Big Tech breakup is beginning to reverberate through the ranks of the 2020 presidential campaign.
Since co-founder Chris Hughes called Facebook a threat to democracy in a New York Times opinion piece last month, several Democratic presidential candidates, including frontrunner Joe Biden, have taken up the call.
At issue is what Facebook does, and what it allows to be done, with metadata and user preferences. The company stands accused of massive data breaches, violations of privacy, and even the election of Donald Trump, through targeted ads and manipulation of the algorithms in its news feed.
The breakup was first suggested by early Facebook advisor Roger McNamee in his book Zucked. The main proposal, from Massachusetts Democrat Elizabeth Warren, is to split the main Facebook service from Instagram and Whatsapp, on the theory that they’re competitors.
Facebook has tried to push back, but its arguments have drawn scorn even from the business press.
The company’s best chance to avoid a breakup may be a consent decree that it is negotiating with the Federal Trade Commission. This would replace one signed in 2011. Under it, Facebook would pay a $5 billion civil penalty for which it accounted in its first-quarter earnings report. Some Republicans want top executives held personally responsible for privacy lapses.
Amazon.com (AMZN): Too Big at Half Walmart’s Size
So far, no presidential candidate has joined Sen. Warren’s call to break up Amazon (NASDAQ:AMZN), but that could change. Amazon was founded as an online bookshop in 1994. Three years later Amazon went public at $18 per share. Today, Amazon stock trades at $1,860.65, as of this writing, and AMZN sports a market capitalization of $915 billion.
For the first quarter of 2019, Amazon reported net income of $3.5 billion on revenue of $59.7 billion. Most of the profit came from Amazon Web Services, the cloud network it first developed for its online store but then began re-selling in 2006. Amazon dominates the cloud infrastructure market, with $7.7 billion in revenue for just the March quarter, growing at 41% per year.
Warren’s argument against Amazon centers on its store brands, like Amazon Basics, which she says compete with offerings from small merchants who depend on its platform. Her proposal is to split the Amazon Marketplace, where over half the company’s sales are generated, from the rest of the company, and unwind its acquisitions of Whole Foods and Zappos.
Hatred of Amazon rose early this year after it chose a site near Washington D.C. for its second headquarters. It also canceled plans to build in New York after auditioning dozens of other cities for the role, demanding tax breaks and other perks. The whole adventure was called a “fiasco” by CityLab founder and urbanism expert Richard Florida. The effort has created its own countermovement of state legislatures that are opposed to incentives for corporate relocation.
Warren’s proposal has yet to catch fire the way her Facebook proposal has, but it is being given consideration. Despite its current size, Amazon is still barely half as big as Walmart (NYSE:WMT), which also has store brands. Its infrastructure may be the only thing letting smaller merchants compete with the Arkansas-based retailing giant. If the goal is to help smaller businesses compete, breaking up Amazon may even be counterproductive.
Alphabet (GOOGL): Does the Free Web Cost Too Much?
Google, the heart of the company now called Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), was founded in 1998, but now dominates the free internet. In the first quarter of 2019, Google earned $6.6 billion on revenues of $36.3 billion. It held over $100 billion in cash and investments, against $12 billion in long-term debt. At an opening price of about $1,140 per share the company was worth over $787 billion. Its initial public offering in 2004 was priced at $85 per share.
Cloud computing was based on the needs of its Google search engine to answer user queries quickly. It was built on a “virtual machine” sitting on top of programs’ operating systems, distributed computing among thousands of devices, and the use of cheap parts and open source software. The company now runs 16 cloud data centers in North America, Europe, Asia and South America, funded by its free services.
When it went public, in 2004, Google’s prospectus included the phrase “Don’t Be Evil” describing its corporate culture. Co-founders Larry Page and Sergey Brin took this to mean prohibitions against bias and conflicts of interest.
Warren’s manifesto praises Google as an alternative to Microsoft (NASDAQ:MSFT) but says its acquisitions of Waze, a traffic app, and DoubleClick, its ad engine, were anti-competitive, and that its search engine has demoted rivals like Yelp (NASDAQ:YELP). It calls for making Google Search a “platform utility,” and spinning it out along with the ad exchange. It also calls for Nest, its home automation company, to be spun-off.
While the call to break up Google has gotten little political support so far, it has gotten some intellectual support. Google has also been forced to pay billions of dollars in fines over issues of antitrust and privacy in Europe, which has no Cloud Czars.
Google has had to set up a separate tech center in Europe to deal with the European Community’s General Data Protection Regulation (GDPR). The search engine is also under pressure to censor extremist content, in other words, to follow government dictates over which views are heard.
Even if Google isn’t broken up, it faces high and rising costs from the government in handling the data that streams through its cloud. Whether it can juggle these costs while keeping all its services free and the stockholders happy is an open question.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.
