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The taming of the few

The regulatory challenge to Big Tech

Regulatory authorities around the world are targeting the big US tech giants. However, while investors need to keep a watchful eye on developments, Big Tech’s stranglehold and influence on numerous economic sectors will be hard to loosen.

The success of Apple, Amazon, Alphabet (parent company of Google), and Facebook has in recent years delivered stunning returns for investors. As of June 29, their collective worth was $6.66 trillion – 13 per cent more than the largest 100 British, 30 German and 40 French companies combined.1

Unfortunately for shareholders, the rapid increase in share prices has helped fuel accusations these companies have become too powerful and are behaving in an anti-competitive way, drawing the attention of regulators. Firms are accused of crushing would-be competitors and suppliers alike.

Figure 1: Big Tech stocks soar (combined market values $ billion)
Source: Eikon Datastream, Aviva Investors’ calculations, as of June 2021

Some commentators, such as David Teece, a global business professor at UC Berkeley’s Haas School of Business, see little need for regulators to get involved. He says if the opportunity to compete is kept wide open market forces will take care of dominance as smaller companies are more entrepreneurial and nimbler.2

Big Tech, big problem

Others are less convinced. According to Atlantic Equities technology analyst James Cordwell, there is now a widespread feeling Big Tech is a big problem. President Joe Biden’s appointment of Timothy Wu and Lina Khan looks like a decisive and seismic shift in attitudes within Washington. Both are antitrust lawyers who are prominent critics of the way Big Tech companies abuse their market power.

Given what is going on in Washington and elsewhere, there’s a high probability changes are coming

“Given what is going on in Washington, and indeed Europe and elsewhere, there’s a high probability changes are coming. The challenge is defining their precise form and timing,” Cordwell says.

First, authorities need to decide whether to use antitrust legislation to try to foster more competition or instead accept dominant online platforms as natural monopolies and regulate them as such. Whichever method they choose, taming Big Tech will not be easy.

Outdated legislation

Cordwell believes the US would rather go down the former route, which would explain Biden’s appointments of Wu and Khan. If this is true, legislation that better reflects the modern economy will be needed.

“The trouble with traditional competition approaches is these companies’ advantages go beyond pricing power or market share," explains Aviva Investors’ senior ESG analyst Louise Piffaut.

These companies’ advantages go beyond pricing power or market share

Although cases could be constructed against Apple, Alphabet, Amazon and Facebook, they would not be easy to win. While the likes of Google and Facebook may at first glance appear to be handing out their services for free, the reality is less simple. As Piffaut says, companies are reaping ever-bigger rewards by harvesting their customers’ data and monetising it with advertisers.

Some are calling for regulators to try to inject more competition by making it easier for consumers to take their data to rival companies. However, while data portability may sound like a good idea, there are doubts it would work in practice.

“People say data is the new oil and there is something good in that analogy because oil out of the ground is not much use; it's how it's refined that is important. Similarly, it's how Facebook or Google use data that makes it valuable. I don’t think data portability necessarily solves anything,” Cordwell argues.

Conflict of interests

Furthermore, there is an inherent tension between antitrust and data privacy laws. For example, were regulators to look to reduce the power of Facebook by making it easier for a customer to take their data elsewhere, that could potentially invade the privacy of their network of friends.

One of the unhelpful things around this debate is the issue is really one of antitrust and power

“One of the unhelpful things around this debate is the issue is really one of antitrust and power, yet a lot of the conversation focuses on privacy. In some ways, those two are kind of pulling in opposite directions in terms of the remedies you would be putting in place,” says Cordwell.

In any case, it is unclear how much an updated rulebook will help given the difficulty regulators have in defining the markets in which companies operate. The fact these businesses are complex, hard to understand, and evolving rapidly, will make it doubly difficult to draft effective legislation that stands the test of time.

Global divergence

Although global regulators would ideally agree a common roadmap, this looks unlikely. Europe, for example, not surprisingly given it has been employing antitrust legislation against big US tech firms for the past decade without much success, appears to want to regulate Big Tech as if they were public utilities.

Europe is something of a global test bed for data regulation and the growing power of tech companies

“Europe mobilised antitrust ten years before the US, was not happy with the result, and said we have to take another tack,” says Annabelle Gawer, Professor in the Digital Economy at the University of Surrey.

With its Digital Markets Act and Digital Service Act pieces of legislation, Europe is something of a global test bed for data regulation and the growing power of tech companies. However, whether the legislation can help curb the power of Big Tech, as and when it comes into force, is questionable.

According to Carmelo Cennamo, professor of strategy and entrepreneurship at Copenhagen Business School, and D. Daniel Sokol, professor of law at the University of Florida, the new rules may do little to promote competition and innovation, and could even stifle them.

“The EU is a cautionary tale of the unintended consequences of applying broad regulatory fixes to a rapidly evolving landscape,” they wrote in an article for the Harvard Business Review.3

Data protection

In 2018, Europe introduced The General Data Protection Regulation. Although widely considered the strictest and most far-reaching data protection and privacy laws ever passed, ironically it could strengthen the biggest players’ position.

“GDPR really impacts your ability to follow people about and cross-pollinate data between platforms. In doing so it has created a higher barrier to entry for smaller platforms,” says Piffaut.

Giles Parkinson, global equities portfolio manager at Aviva Investors, agrees. “I see it benefitting the bigger platforms over smaller publishers,” he argues.

GDPR has created a higher barrier to entry for smaller platforms

Some policymakers, such as EU Commissioner Thierry Breton, believe some Big Tech companies might need to be split up if they continually violate the spirit of the rules.4 Any efforts by Europe to break up a big US tech company could also provoke a backlash in Washington.

Then again, the threat of breaking companies up is coming from the other side of the Atlantic, too. In December 2020, the Federal Trade Commission (FTC), the US competition watchdog, sued Facebook, alleging it is “illegally maintaining its personal social networking monopoly through a years-long course of anticompetitive conduct”. It says it may force it to divest assets, including Instagram and WhatsApp.5

On June 28 a federal court dismissed the suits, saying prosecutors had failed to provide a good enough explanation for how they came to the conclusion that Facebook controls more than 60 per cent of the social networking market. Prosecutors have up to 30 days to file new antitrust complaints addressing the judge’s concerns.

If they do, Cordwell is sceptical they will win. “It’s quite hard to argue Facebook has a monopoly. The FTC is trying to do it by defining the market in quite narrow terms but whether that can legally be argued I think is a real sticking point,” he says.

Whereas in the past these firms have all too easily been allowed to cement their dominant position by acquiring potential rivals, that will be extremely difficult, if not impossible, in future.

A taxing problem

Competition authorities are not the only ones turning up the heat on Big Tech; tax authorities are too. For years, US tech giants have been paying very little tax, despite eye-watering market valuations and growth rates. This partially reflects the kind of creative tax practices employed by virtually all multinational companies.

Tax authorities are turning up the heat on Big Tech

But it is also the by-product of an outdated international tax system that pre-dates the globalisation and digital eras. The nature of their businesses makes it almost impossible to identify where economic activity took place, enabling profits to be shifted to popular tax havens such as Bermuda, Ireland, Luxembourg and the Netherlands.

“These tech companies have made quite a few political enemies by playing quite fast and loose with the rules,” says Cordwell.

G7 Finance ministers on June 5 struck a landmark agreement to impose a 15 per cent minimum corporate tax rate in an effort to limit tax avoidance by multinationals. It is  unclear the deal will significantly dent Big Tech’s profitability.

A malign influence

Some companies are facing calls for greater regulatory oversight for another reason: mounting concern over the malign influence of the internet in general, and social media in particular.

Figure 2: Facebook's dominance of social media
Source: statcounter, shows % market share of browser usage based on page views

Both Zuckerberg and Twitter chief Jack Dorsey have themselves called for more regulation of harmful online content, arguing it is not for companies like theirs to decide what counts as legitimate free speech.

A hypothetical antitrust dragon?

With authorities threatening the biggest intervention in a generation, one might have expected investors to be concerned. Instead, the near vertical rally in share prices shows little sign of abating.

However, some observers caution against reading too much into what share prices currently imply in terms of the threat of regulatory intervention.

“The speed at which dollars are shifting from offline to online is accelerating. The market is asking itself: Do I really want to imagine some hypothetical antitrust dragon in five years’ time and miss out on this opportunity? Not really,” Parkinson says.

The 2022 forecast earnings for Facebook suggest the shares are being impacted to some degree

Moreover, as Cordwell argues, while there may be complacency, it would be wrong to take recent share price gains to mean the market is entirely unconcerned about the threat of regulatory intervention.

As for Alphabet, it is far from clear regulatory intervention would be a bad thing for its share price anyway.

“There’s a widespread feeling Google is worth more on a sum-of-the-parts basis than as an integrated business. Because it was so content with Google Search being so hyper profitable, it hasn’t monetised businesses like YouTube nearly as well as it should have,” Parkinson says.

Cordwell, who largely agrees, says Amazon is the one company where the market could be underestimating the threat of action. “These appointees to the Biden administration mean antitrust could start to come onto the agenda in a way that isn't currently envisaged,” he says.

Imperfect competition

Many believe the complexity of their businesses has allowed Big Tech companies to exploit wiggle room, undermine the spirit of the rulebooks and run rings around regulators, famously illustrated by a memorable altercation when Zuckerberg appeared before Congress in 2018.

Few dispute the need for at least some level of competition in healthy economies

Asked by 84-year-old Senator Orrin Hatch how Facebook sustained a business model “in which users don’t pay for your service”, Zuckerberg responded: “Senator, we run ads”, before breaking into a smirk.6

Since few dispute the need for at least some level of competition in healthy economies the days of Big Tech getting as easy ride as Zuckerberg did in 2018 look to be over. But just how much their influence and dominance can be reined in remains to be seen.

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