US tech giants have been accused of abuse of market power at home and are facing mounting criticism internationally as well.
The EU is working on rules to restrict the market power of internet companies in a bid to increase competition, according to the Financial Times.
On Tuesday, the US government filed a lawsuit against Google accusing it of unlawfully maintaining a monopoly in online search and advertising.
A year-long bipartisan investigation in the US led to a 449-page congressional report that recommended restructuring the four largest tech companies, Google, Facebook, Amazon and Apple, after it was concluded they had exploited their power.
Republicans are not supporting the report’s recommendations; but, should Joe Biden win November’s presidential election, Democratic officials expect it to receive greater consideration, the FT reported.
The conclusions in the report are grave.
“The Subcommittee’s series of hearings produced significant evidence that these firms wield their dominance in ways that erode entrepreneurship, degrade American’s privacy online, and undermine the vibrancy of the free and diverse press.
“The result is less innovation, fewer choices for consumers, and a weakened democracy. […] Our economy and democracy are at stake,” it stated.
Rising opposition to big tech has coincided with increasing demand for digital services due to the pandemic.
Takeshi Kawamoto, senior analyst at Nomura Asset Management, comments: “The market is citing overvaluation of technology shares, but we lived through the dot-com bubble and, compared to back then, the overvaluation is within reasonable levels.
“Fast forward to today and most technology stocks are still undervalued or fairly valued on our valuation model.”
A break-up or restructuring of US tech giants is a necessary step to limit their market power, says Barry Lynn, executive director of the Open Markets Institute.
Speaking at an OECD conference, Lynn explains that the congressional report “was the most important report on antitrust issues in 50 years”.
“It’s laying the foundation in the United States certainly, for a radically different approach to this, which means that we have a lot to build upon.”
Lynn believes that many issues that governments are facing derive from concentrated power and monopoly issues.
He argues that neoliberal thinking has deliberately undermined competition policy; overthrown the ideological foundations of the American Republic and hollowed out democracies.
Under the banner of market efficiency promoted by neoliberals, the undue growth of corporations has been supported, and resulted in issues such as the control over communications and news media, the corruption of science and the destruction of our climate, Lynn says.
Impact of the regulation
But observers believe that the actual impact of a clampdown on US tech giants may be limited.
Martin Hermann, senior portfolio manager at Berenberg, expects “mostly headline risk” for US tech stocks in the short term and during the elections.
Kawamoto believes that news on potential regulation has already been discounted in the share price of the big tech stocks.
Both asset managers suggest that any legal processes around a potential break-up of the tech giants would evolve over years.
But while the intentions behind the proposals appear serious, it is less clear what the actual impact will look like.
Hermann says that “there is a strong will in the US from both parties, as well as in Europe, to overhaul laws and rules regarding platform companies”.
“Possible steps could be restrictions of acquisitions, limitations on how they can operate their own services against competing ones or in an unlikely event even a break-up of parts of the business,” he explains.
Kawamoto, however, argues that any consequences from regulation will be insignificant, as they “will not hurt the underlying business models of big tech”.
“It will be difficult to make a legal case for antitrust because the services that big tech enables are either free or price deflationary.
“Most likely scenario is after years in the courts, the government and big tech settle for a monetary sum that is not meaningful to the shares and are forced to make changes to their business model that will not change the competitive landscape. Trying to break up these companies will take even longer in the courts and it is questionable whether competitive positioning would change at all,” he continues.
Both Kawamoto and Hermann also suggest that, should a break-up happen, company valuations could even benefit; given that the large conglomerates may trade at a discount to the sum-of-their-parts.
Opportunity for smaller stocks?
Proponents of limiting the power of big tech argue that smaller companies could thrive if the big platforms see a structural reorganisation to limit their dominance.
Hermann believes that “the law of big numbers becomes, at some point, a challenge for any company”.
He suggests investors look also to mid-sized tech stocks, such as ad tech companies, that are seeing a strong tailwind from online shopping; as well as reasonably-priced software as a service (SaaS) companies that operate in under-penetrated verticals.
Kawamoto also sees general investment opportunities for smaller tech companies succeeding in SaaS; but not as a result of gains that these firms acquired from a possible restructuring of big tech.
He explains that “in areas such as online advertising and e-commerce, it will be difficult for start-ups to have traction without working with the dominant platforms”.
*Please note that one day after the publication of this article, the US government filed the antitrust lawsuit against Google and this article was updated to include this fact.