August Update, 2020: The $2 Trillion Race

The great debate about certain technology companies and their ill effects on society were center stage last week when the CEO’s of Apple, Amazon, Facebook, and Google were grilled by the U.S. Congress. Both the Left and the Right want to punish and/or regulate ‘Big Tech’ but they don’t agree on what those regulations should be. When the government is angry with you, adhering to their wishes is going to be costly. What should investors do? Is this a good time to re-evaluate the bullish case for ‘Big Tech’?

Thursday last week saw the above-mentioned behemoths report earnings and, as usual, the results were spectacularly good. The race to be the first company with a $2 trillion market cap may soon be won by Apple, Amazon, or Microsoft. It will likely be a close call, with Apple currently leading the pack. It is hard to believe, that it was less than a year ago that the race to be the first company to be worth $1 trillion was won. Facebook is also on track to join the rather exclusive trillion-dollar market cap club, sooner rather than later.

The unimaginable size of these companies is one of the issues regulators argue is a major problem. This week, one day after defending themselves in front of Congress, they unleashed profits highlighting exactly the kind of news investors love but that some use as distinct proof of corporate excess and enormousness. One thing is certain, many people around the world (especially consumers and investors) highly approve of what these companies do and the services they provide, and it more than shows in their gargantuan profits.

Regulation is what strikes fear into any businessperson because it is usually synonymous with incremental costs, restrictions, and taxes. For the most part, ‘Big Tech’ has had minimal experience with regulation. Governments rightly wanted to encourage innovation and thus mostly left the industry alone. The rapid pace of growth and complexity of these businesses also left it hard for society and government to keep pace, much less understand, such rapid change and with that, regulation lagged.

The European Union has been the leader in beginning to apply more stringent rules to these companies. Some see it as the E.U. striking out against America and there is likely some truth to that. Still, the E.U. has begun to address privacy issues sternly with GDPR, has been aggressively, but unsuccessfully, pursuing higher taxation, and have tried, but so far also failed, to encourage greater competition. It is this last point that highlights the biggest complications with regulation. It’s tough to regulate away consumers choices. As Google has argued, competition is only one click away and still, most people will always use Google versus Bing or some other search engine. Why? Because consumers love Google. It’s user friendly, gets the job done quickly, and it’s easily accessible on your phone or desktop. It’s also equally true that given the new privacy rules (i.e. higher costs) new competitors can’t afford to start competing against Google.  This is the law of unintended consequences. Regulations, while perhaps hurting the incumbents, actually entrenches them even more and inadvertently kills any potential competition.

To try and combat regulation hurting competition, regulators have started to address their issues with ‘Big Tech’ by calling them monopolies—when in many cases they are not. They may act in anti-competitive manners, but this is not illegal if they are not monopolies.  Copying competitor’s features, doing market research, improving their products based on someone else’s innovations, or buying businesses can be criticized but they are not crimes unless a monopoly exists prior to the act. What the politicians are arguing is that these companies have created massive platforms and then favour their own products or services unfairly. For example, Amazon has 3^rd party sellers of soap, and then Amazon starts selling their own branded soap. Yet, Wal-Mart sells their own brands and that’s not illegal. When Google bought YouTube, that allowed them to compete against cable and that was good for consumers because it was free. Now cable vilifies Google because their own business model is failing. The consumer wins. Should that be illegal? The fact of the matter is that most of the lines of reasoning attacking these companies assume their behaviours are illegal when, in fact, they are common business practices.

Just because some outdated big businesses or industries (like newspapers) are failing doesn’t mean that a whole host of new smaller businesses are not thriving and growing. To use newspapers as an example, they are the biggest critics of Google and Facebook, however, the facts support that your access to information has been expanded and you are paying less for information. Should we slam Google for giving us cheaper and more diverse access to news and information or should we protect the advertising businesses of yesteryear? In the past, only big companies could advertise effectively because it was so expensive. Now, every business can reach millions of consumers who are likely interested in their product and the cost is pennies per impression. Is that bad for society?

The real issue is that, in 20 years Tech has gone from being just one of many industries to being systematically important to the fabric of global society. So important that governments are now even banning certain Apps from their consumers. Technology, as it always has, is changing the world and there are always winners and losers. We are now at a breaking point, where decisions and new laws will inevitably have to be made to regulate these behemoths. Will that mean breaking them up?

We don’t think that splitting up Facebook will stop hateful speech, nor will it likely lead to cheaper advertising. We don’t think that regulations will stop common business practices. We do think that regulators will increase privacy settings and increase transparency. We do think that the “American internet” is gone and that ‘Big Tech’ will have to work around unique legal systems globally. This will make the costs higher and restrict new entrants from competing. This move toward a fragmented Internet will mean higher costs for these giants, but it is unlikely to be a deathblow. If there is some form of break-up mandated for a few companies the parts will likely be worth more than the present. That’s historically what happens, and history is a pretty good guide.

In the meantime, these companies will keep growing because they provide products and services that billions of consumers want.

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