Throughout most of my journalism career, AT&T (NYSE:T) ruled the communications world, and always got what it wanted from regulators.
This has changed. The problems faced by Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) in completing a new trans-Pacific cable illustrate both the problems, and opportunities, of life under the cloud czars.
The Pacific Light Cable Network, an 8,000-mile link under the Pacific Ocean, is being funded by Google, Facebook, and Chinese partners. But the Trump Administration doesn’t like the Chinese partners. Now the Justice Department, using a multi-agency force dubbed “Team Telecom,” is trying to keep the data cable from getting an operating license.
National Security?
The agencies are citing “national security concerns” for the move. China’s moves against Hong Kong, and the growing trade war, has the Administration seeking new ways to isolate it.
The Chinese partner in the new cable, Dr. Peng Telecom & Media Group, is based in Beijing and has close ties to the Chinese government. Huawei, the Chinese equipment company that the White House is anxious to wreck, is also one of the partners.
While AT&T has deep financial and lobbying ties to Washington — and likely wouldn’t have had a problem with such an approval — Google and Facebook are new players. They don’t have as many friends as the old monopoly. Even though they’re predicting billions of dollars in losses if the link can’t be lit, with greater profits going to existing cable operators those concerns are, for now, being ignored.
Innocent Bystanders
There are also some innocent bystanders involved in the controversy.
For example, the cable is due to connect the Philippines more closely to the global grid. Those links are being paid for by Facebook but could become a white elephant if the U.S. refuses an operating license.
China could also bypass all this. Huawei is looking to fund a new cable between Chile and China, a link the U.S. could not threaten to sever without direct military action, and one that would severely disadvantage American companies.
The controversy, in short, needs to be placed in context of a growing global battle for internet core market share, between the U.S. cloud czars and companies linked to China’s government. Google’s plan to link South Africa and Portugal is far along. Facebook’s plan to circle Africa with fiber cable is still in the planning stages. The Administration’s opposition to an operating license for the Chinese cable could easily backfire, with African nations preferring reliable Chinese partners to unreliable American ones.
Bottom Line for GOOGL Stock
None of these problems are yet hitting the market power of Facebook. Its stock is up 41% so far in 2019, opening for after-Labor Day trading with a market cap of $518 billion. GOOGL stock is up 17% for the year and opens this morning with a market cap of $812 billion. AT&T, which formerly dominated U.S. telecommunications, is worth $256 billion.
It’s clear that, with their abundant cash flow, the cloud czars are America’s chief players in the undersea cable market, through which 99% of the internet’s international traffic moves.
The most likely short-term result will be to increase the number of Google and Facebook lobbyists in Washington, and increase their political donations, in order to forestall adverse government actions like this one.
Alphabet’s lobbying budget passed that of AT&T only last year at $18 million. More important, while AT&T’s political contributions generally go to Republicans, Google is a bigger contributor to Democrats. Facebook has been more generous to Republicans in the past but is tilting slightly toward Democrats this cycle.
Expect greater political sophistication from the cloud czars.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
