The growing interest of the US federal government to further regulate the shares of Big Tech companies in the kneeling technical sector was announced Monday when anti-trust probes and the possibility of additional privacy legislation for users were considered. Investors have rightly noticed the warning signs
Facebook (NASDAQ :), which has been at the center of several controversies in recent years, fell by 7.5% on Monday. Alphabet (NASDAQ 🙂 and Amazon (NASDAQ :), both selected by the federal agencies and Congress, fell by 6.1% and 4.6% respectively.
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The shares have recovered somewhat from the higher expectations of a Fed rate cut, but the headwind for Big Tech has not disappeared.
In recent years, especially after the news broke in early 2018 that user privacy on Facebook was being seriously violated by third-party data collection, both government regulators and activist groups have become more critical of the seemingly unlimited power of major technology companies, such as and of their often aggressive business tactics.
Congress in the US held several sessions with top officials, including Facebook CEO Mark Zuckerberg and Alphabet CEO Sundar Pichai. The research does not end on the basis of public opinion and the persistent problems throughout the sector. Do Big Tech shares share serious danger?
End of Laissez-Faire
First, it must be acknowledged that the enormous growth of what we now call Big Tech is partly due to the fact that the US government is taking a laissez-faire stance towards these companies. The Federal Trade Commission (FTC) is, together with the Ministry of Justice, the two agencies that represent the government in antitrust cases. Both have remained largely on the sidelines to date
In the past, the FTC has chosen to allow Facebook & # 39; s acquisition of WhatsApp and Instagram, both of which played a major role in Facebook's success and ability to dominate today's competition. The FTC also approved Amazon & # 39; s acquisition of Whole Foods in 2017, allowing the etail colossus to expand beyond the digital realm
Any change in the willingness of government institutions to allow Big Tech to buy smaller companies or expand into new areas will inevitably harm future growth prospects.
How bad can it get?
For Big Tech (and investors in the sector), the worst-case scenario would be strict regulations, along with forced antitrust-related interruptions, such as Massachusetts Senator and Democratic presidential candidate Elizabeth Warren proposing. She wants technology to be regulated as a utility, so that companies cannot only own and operate companies on their platforms. Warren is also looking to break down previously approved mergers, such as the aforementioned WhatsApp, Instagram and Whole Foods acquisitions.
For Big Tech, however, the whole is greater than the sum of the parts. A lot of potential growth comes from flawless integration and seamless services. Creating separate entities would introduce the friction that Big Tech is trying to eliminate, thereby compromising the appeal of their customers.
But with all the respect that is due to Senator Warren, such drastic moves are unlikely. Her proposal can be considered extreme, probably intended to draw attention to her presidential bid for 2020. Such radical legislation adopted in Congress is highly unlikely – according to some estimates less than 1%.
Past Precedent probably gives answers
As a way of understanding what is really at stake here, there is a recent precedent for guidance. Antitrust cases have become a European specialty in recent years
European courts have been investigating Google for more than a decade and issuing fines totaling $ 9.25 billion dollars in that period. Although Google had to adjust its behavior to comply with EU regulatory decisions, the results mainly relate to specific products. & # 39; Google Shopping & # 39; for example, the proprietary in-search advertising service that once featured Google ads has been forced since June 2017 to include third-party ads in the store search engine.
Similarly, Microsoft (NASDAQ 🙂 came under attack in the US in the late 1990s because of monopolistic practices regarding its operating systems and other software components, such as its Internet Explorer browser. In June 2000, a court ordered Microsoft to be split into two components – one producing operating systems, the other software. However, during the company's call, the D.C Circuit decided not to ignore the decision that a breach would stifle innovation. The lawsuit ended with a settlement that did not materially affect Microsoft's business, making it the powerhouse it is today.
Growing policy influence?
It would also underestimate that Big Tech's influence on policy would be a big mistake. First, many companies, including Facebook, say they are willing to collaborate with regulators while investigating self-regulation. For example, Facebook added thousands of content reviewers to its platform, trying to calm critics.
These companies have also actively increased their lobbying activities in recent years and spend a total of $ 77.9 million on this front in 2018, according to the non-partisan Center for Responsive Politics. Assuming that Google, Facebook, Amazon or other Big Tech managers would silently meet the attempts to dissolve them, it would be extremely naive
Conclusion
Investors should better evaluate rumors versus business activities. Successfully disturbing Big Tech is easier said than done.
Although there is a growing consensus on government intervention in the sector – creating negative pressure on technical stocks – what is over is the prologue. Both regulators and judges have proven to be careful with their approach to technical regulation, because they know that a single decision can harm innovation and harm the economy
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The most likely outcome is therefore: years of evaluation, followed by a decision that will be pleasant for both the government and Big Tech. Our advice would be to buy the rumor and sell the news.
