Will Uncle Sam Force Big Tech to Break Up?
Last month, US Federal Trade Commission (FTC) Chairman Joe Simons said he was prepared to do what many investors have feared for months: break up major Tech or Tech-like companies, namely Facebook, Apple, Amazon and Google. While regulatory risk hogs headlines, we don’t view it as a sound reason to avoid Tech and Tech-like firms in the near term. Uncertainty and political chatter may heighten volatility but, in our view, any material changes are likely much further out in the future—if they even happen—and may end up watered down considerably from campaign trail proposals.
For years, many pundits and politicians have claimed Internet behemoths are too powerful and monopolistic—preventing competition, hurting small businesses and stifling innovation. This year, politicians started trying to do something. In March, the government created the “FTC Tech Task Force” to review pending and completed mergers. Then, in June, the House’s antitrust subcommittee announced they would launch a probe into Apple, Amazon, Google and Facebook’s alleged anti-competitive and anti-consumer business practices. The first hearings happened in July to much fanfare. That same month, the Department of Justice (DoJ) announced it would conduct its own antitrust review.
Some of the loudest voices supporting a shakeup are 2020 presidential hopefuls. Most prominent is Massachusetts Senator Elizabeth Warren, who has suggested dismantling Internet giants by designating an “online marketplace, an exchange, or platform for connecting third parties” as “platform utility.”[i] Some of her fellow candidates, including Bernie Sanders, agree. Other candidates and politicians simply believe big Internet companies should be subject to more regulation to address concerns over competition or suppressed content (the latter a pet issue among many GOP lawmakers). Because of this bipartisan fury, investors fear anti-Tech sentiment from both Republicans and Democrats may yield a big break up, significant business model changes or huge fines—roiling the sector.
While any of these outcomes are possible, we don’t view this possibility as a reason to avoid Tech now. Markets move on probabilities, not possibilities. We believe it is simply too early in the game to assign probabilities.
Take those Democratic campaign pledges to dismantle Internet giants—which many folks fear most. It is unknowable today whether they will eventually yield anything. Big Tech chatter may just be big talk on a hotly debated issue—a means to appeal to voters as the election nears. Candidates often use hot-button issues—such as healthcare, taxes, climate change, etc.—to differentiate themselves from the pack and galvanize their base early in the campaign. Especially this year on the Democratic side, given there are 20-plus candidates still vying for the nomination. But actual legislation depends on who wins the presidency, whether they have a strong congressional majority, and whether Tech regulation is even top of mind when the next administration gets down to brass tacks. Any legislation that emerges is highly likely to morph in the future, if it even gets off the ground. Campaign pledges often get watered down once Congress takes them on. We suggest letting the electoral process narrow the field before zeroing in on potential policies.
As for the present administration’s regulatory efforts, trying to guess at what kind of changes the FTC and DoJ may propose is a little more difficult. It is possible either regulatory body proposes material changes or penalties. But anything beyond symbolic fines probably gets bogged down in the legal system for eons. While some fear these fines may damage large Tech and Tech-like companies, history has shown fines are common and manageable. Governments have often nickel-and-dimed big firms through fines, whether they committed egregiously bad behavior or not. While these may seem large, they pale in comparison to the targeted Tech companies’ balance sheets. For instance, Google’s $1.7 billion fine from the EU in 2017 was a teensy 0.2% of its market cap at that time.[ii]
So what if antitrust cases happen? History shows antitrust cases against large firms generally take a long time to play out. For example, AT&T’s antitrust case, filed in 1974—on the basis of being the only US provider of telephone services and equipment—lasted 8 years. Microsoft’s antitrust case, filed in May 1998—rooted in Internet Explorer pre-install concerns—lasted nearly 15 years. While these are just two examples, they illustrate how long antitrust inquiries can be, giving the market plenty of time to digest possible outcomes. Some may point out that AT&T and Microsoft underperformed during periods of their investigations. However, each investigation spanned at least one bear market (one of which was the Tech bubble.) Moreover, virtually any stock will probably underperform at multiple points during such long stretches.
But when or whether any of this will occur is unknowable today. Hence, we think taking action now would be unwise for investors. That said, given the chatter, we wouldn’t be surprised if uncertainty spread in the short term, perhaps heightening volatility in Tech and Tech-like stocks. If it does, we counsel tuning out the noise.
Fisher Investments’ Editorial Staff does not recommend individual securities. The names above merely represent a theme we wish to highlight.
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