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Will the Government Break Up Facebook and Google?

Written by Samuel Taube
Posted August 1, 2020

The U.S. government has a long (if somewhat inconsistent) history of standing up to corporate monopoly power. 

Teddy Roosevelt’s administration broke up the railroad trusts at the turn of the 20th century. Gerald Ford’s Department of Justice filed a series of lawsuits in the mid-1970s that eventually led to the breakup of the Bell telephone monopoly. 

And a few days ago, Congress interrogated the heads of four of the world’s largest tech companies about a slew of alleged antitrust violations committed in recent years, raising the possibility of more government-mandated breakups in the near future. 

Last week’s tech antitrust hearing brought Democratic and Republican legislators together against the common enemies of Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Apple (NASDAQ: AAPL). Given the bipartisan rancor against Big Tech, it’s worth taking the possibility of enforcement actions seriously. 

But how likely is it the hearings will lead to strict penalties, really? And what would those penalties actually mean for these four tech giants and their shareholders? 

To answer these questions, we should probably start by summarizing the tech antitrust hearing in question...

What Happened in the Tech Antitrust Hearing

At the start of the hearing, House Judiciary Antitrust, Commercial and Administrative Law Subcommittee Chair David Cicilline described a series of commonalities between the four tech companies being questioned. 

According to Cicilline, Facebook, Amazon, Alphabet, and Apple each have exclusive control over a “key channel of distribution” of products and services, like Google’s ad network or Apple’s App Store. 

He alleged that each of these companies uses their substantial data-gathering capabilities to monitor and outflank potential competitors. And he argued that they all “abuse their control over current technologies to extend their power” by giving unfair advantages to their own products or creating predatory pricing schemes. 

Once the questioning got underway, it focused on specific allegations against each company. 

Representatives Jerrold Nadler and Pramila Jayapal released subpoenaed emails and instant messages from Facebook staff that seemed to show Facebook had acquired Instagram in 2012 specifically to prevent it from becoming a competitive threat. 

Facebook CEO Mark Zuckerberg offered only a weak denial of this charge, speculating that Instagram wouldn’t have succeeded as a business without Facebook’s backing.    

Jayapal also questioned Alphabet CEO Sundar Pichai about subsidiary Google’s control of massive digital advertising networks. Google buys online ad space at very low rates from newspapers, then sells that same ad space at much higher rates to businesses. 

Many see Google’s buy-side and sell-side dominance in online ad markets as an inherent conflict of interest, and Jayapal likened it to insider trading. Pichai disagreed but did not offer any detailed arguments in his rebuttal. 

Representative Val Butler Demings asked Apple CEO Tim Cook about allegations that the company has removed third-party apps from its App Store to remove competition against its own software. Cook denied wrongdoing, saying that Apple has only removed apps for violations of company policy. 

And several representatives — including David Cicilline and Lucy McBath — interrogated Amazon CEO Jeff Bezos about a Wall Street Journal report that the company uses data harvested from third-party sellers in its marketplace to decide which products to manufacture and sell through its private-label brands like Amazon Basics. 

According to Cicilline, third-party sellers had told Congress “heartbreaking stories” about Amazon poaching their best-selling products by developing and mass-marketing cheaper versions. 

Bezos didn’t even attempt to deny the allegations, saying, “I can’t answer that question yes or no. What I can tell you is we have a policy against using seller-specific data to aid our private label business, but I can’t guarantee that policy has never been violated.”

The tech antitrust hearing ended after nearly six hours with an ominous concluding statement from Cicilline: “This hearing has made one fact clear to me: These companies as they exist today have monopoly power. Some need to be broken up, all need to be properly regulated and held accountable.”

What would that actually mean for Facebook, Amazon, Alphabet, and Apple’s bottom lines? 

The Stakes for Big Tech

Of the four companies discussed in the tech antitrust hearing, Alphabet arguably has the most to lose from possible enforcement actions. 

The conglomerate draws more than 80% of its total revenue from Google’s ad networks and Congress seems to believe that it would need to divest either its ad space-buying business or its ad-selling business in order to eliminate conflicts of interest. Either move would take a big bite out of that 80%. 

Facebook could also be hit hard by a mandate to divest former-competitor subsidiaries like Instagram. The photo-sharing platform accounts for more than 30% of its revenue.

Amazon and Apple are less at risk due to the fact that their alleged antitrust violations involve relatively minor components of their businesses. Amazon earns just 5.6% of its revenue from the sale of private-label products while Apple earns just 4.4% of its revenue from third-party developers on its App Store. 

To summarize, if Congress took all the actions it talked about in last week’s hearing, the results would be catastrophic for Alphabet, survivable but damaging for Facebook, and only slightly inconvenient for Amazon and Apple. 

But how likely is it to take any of those actions?  

Will the Government Follow Through? 

It’s far from certain that anything will come out of the tech antitrust hearing, because as I mentioned at the beginning of this article, the U.S. government has not been especially consistent in its antitrust actions over time. 

Almost 40 years have passed since the breakup of the Bell system, which was the most recent anti-monopoly action in U.S. history. And even that breakup was voluntary; AT&T created its own plan to divest the Bell Operating Companies with government approval. 

Strong enforcement actions are unlikely, although it’s possible that Facebook could see increased scrutiny, given the company’s importance in disseminating political information during election years like this one. 

But regardless of whether or not Congress follows through on all of its threats, the recent tech antitrust hearings mark a notable shift in regulatory sentiment toward Big Tech. 

In the 2010’s, the U.S. government had little awareness of the operations of these companies and much less concerns about the ethics of their business practices. But today, it seems clear that they’re watching and that investors should be more careful in selecting tech stocks. 

To that end, it’s a great time to subscribe to Technology and Opportunity. Editor Jason Stutman recently locked in a 48% gain in just four months on a social media company which has miraculously shielded itself from Congressional scrutiny. Click here to learn more about the publication. 

Until next time,

Monica Savaglia

Samuel Taube

Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.

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