General elections always put the focus on proposals, and threats of proposals from both sides of the aisle. Most are, quite frankly, a lot of hot air. But these, let’s call them “thought balloons”, can take on a life of their own. And when they do, what seems unlikely suddenly begins to look possible. That said, this is the situation surrounding some of the leading tech stocks.
Known colloquially as “big tech”, these stocks represent companies with some of the highest market capitalizations. Not surprisingly, these are also the companies with some of the richest stock prices.
However, there is a price to being big. And the Department of Justice, Federal Trade Commission (FTC) and state attorneys general are all looking into, or threatening to investigate the business practices of some of these leading tech companies. Overall, the primary issue is whether the companies are violating antitrust rules.
As they say, though, the devil is in the details. And the reality for many of these tech stocks is that it’s one thing to call for a breakup, but another to understand exactly how to break up these “monopolies” and what consequences it would invoke.
According to an email to InvestorPlace from William Rinehart — senior fellow at the Center for Growth and Opportunity at Utah State University:
“Breaking up a company is the most onerous action that the federal government could take to inject competition into an industry. It is the business equivalent of the death penalty and should be used when consumer harm is real.”
That said, let’s take a look at three tech stocks that could be most at risk moving forward.
Tech Stocks at Risk of Breakup: Facebook (FB)
The company that everybody loves to hate remains Facebook (NASDAQ:FB). Tim Wu of Columbia Law School cites the company’s acquisitions of Instagram and WhatsApp as being illegal, and says antitrust laws do not allow a company such as Facebook to buy its competitors.
Forgive my glibness, but that seems a little bit like charging Al Capone for tax fraud. The overriding issue with Facebook is privacy; Or rather, what exactly the company is doing with the private information it gleans from its customers. Regarding this, Wu says that because of the lack of competition Facebook receives, “they’ve been able to decrease the privacy protections that they offer people.”
Now we’re getting to the crux of the issue, but the reality is a bit more complicated. In terms of this, Rinehart described just how hard a breakup would be:
“By encouraging coordination among their internal departments, the tech titans have developed complex and constantly shifting organizational webs. This structure would frustrate any Standard Oil-style trustbusting effort because there are so few natural breaks within the companies. Splitting up these firms would require government officials to go cubicle by cubicle—a difficult and draconian move.”
The bottom line, says Rinehart, is that “separation is still quite controversial, so a more likely scenario would be more merger challenges by the FTC going forward.”
Therefore, while breaking up tech companies may seem simple, there are many underlying circumstances that come into play. Which, is good news for the near-term future of tech stocks.
Google (NASDAQ:GOOGL, NASDAQ:GOOG) comes in right behind Facebook in terms of companies that regulators would like to see trimmed down. However, the case against Google seems a bit harder to articulate.
“If you look at a company like Google with not much competition in search, they’ve been raising and raising their advertising rates,” Wu said. “So it’s less in the old-fashioned price-fixing kind of conspiracy but more about users having less choice, less places to go and, therefore, companies being able to get away with more.”
On the other hand, according to Michael Salinger, the Jacqueline and Arthur Bahr Professor of Markets, Public Policy, and Law at Boston University, breaking up Google may not even be legal.
“You’re only guilty of monopolization if you’ve attained your monopoly by means other than providing a better product at a better price. Look at Google. People want to search on Google. Their search yields useful information and it’s free, so it’s no wonder they’ve got such a strong position in the market.”
That said, this begs the question: is Google keeping out competition? Or has a better mousetrap not been built yet?
Nonetheless, as George Gilder points out in his book — Life After Google: The Fall of Big Data and The Rise of The Blockchain Economy — there are solutions coming down the tech pipeline all by themselves. One of these is blockchain, which will be more effective than the government could ever hope to be in allowing users to regain ownership and control of our own data.
And overall, that seems like good news for the future of Google and other tech stocks.
It stands to reason that Amazon (NASDAQ:AMZN) would fall under the regulatory crosshairs. For years, CEO Jeff Bezos has unapologetically flexed the company’s considerable muscle to push beyond its e-commerce roots. In recent years, this has seen the company expand into areas such as Whole Foods and Zappos. Democratic Presidential candidate Senator Elizabeth Warren, for one, believes that Amazon should not be allowed to own these companies.
However, necessity is the mother of invention. And in the last 18 months, there is a new retail model that is cropping up. This omnichannel model that allows consumers to get what they want, when they want it, where they want is allowing companies like Walmart (NYSE:WMT) and Target (NYSE:TGT) to not only survive, but begin to thrive — even as Amazon continues to grow.
This supports Gilder’s argument that innovation, not regulation, is the key to providing a check and balance for these tech leaders. It’s also the reason why Amazon is moving aggressively into Amazon Web Services (AWS). The company can slug it out forever in the world of e-commerce, but the real growth will come from expanding its business.
Overall, this will undoubtedly draw the ire of regulators and politicians. But as we are seeing, these things have a way of sorting themselves out — and tech companies and tech stocks will have to see how things shake out.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.