Are antitrust investigations into FAANG1 stocks just another drop in the ocean for big tech, or could there be wider ramifications as regulatory scrutiny intensifies?
Over the past few years, US regulators have taken a deeper look into how ‘big tech’ companies treat data privacy. More recently, the conversation has shifted towards the question of whether some of the biggest names in the sector are relying on unfair competitive practices.
At the beginning of June, the US House Judiciary Committee kicked off its inaugural hearing to examine some of the more prominent tech companies, their influence on digital markets and their impact on e-commerce, content and communications.2 Depending on the outcome of the hearing, this in turn could lead to formal investigations by the Federal Trade Commission (FTC) and the US Justice Department.3
For Newton global equity portfolio manager Paul Markham, the prospect of increased scrutiny around FAANG stocks is just one part of a bigger picture, and he believes the hearings could be a springboard for regulators aiming to apply more oversight to the internet as a whole.
Will history repeat itself?
The conversation around uncompetitive practices is a valid one, he says, given big tech’s influence over its end-markets. At present, he notes, regulators are looking into Google and Facebook’s domination of digital advertising, which between them is expected to reach 75% of global digital ad revenue by 2020.4 There is also scrutiny surrounding the M&A practices of the tech behemoths, with Facebook reportedly having acquired 92 companies since 20075, including competitors like Whatsapp and Instagram.
“Because these types of companies have not been seen as major systemic risks, governments have generally allowed M&A in the sector to go unchecked,” Markham says. “But it may well be scrutiny does start to intensify because these companies are equivalent in importance to General Electric, Walmart and Exxon in decades gone by, in terms of market dominance.”
For historical context, Markham recalls tech giant Microsoft’s run-in with regulators in 1992, when the FTC launched an investigation into whether or not the company was monopolising the PC operating system industry. An even earlier precedent was the Justice Department’s 1969 suit against computer mainframe manufacturer IBM. While the IBM case resulted in a 13-year battle that ultimately led nowhere, Microsoft’s legal troubles concluded in a settlement that temporarily impacted its stock price.6
In Markham’s opinion, if today’s antitrust investigations came to a similar conclusion, the FAANG’s stock prices would likely be affected, which in turn could create buying opportunities for investors who believe in the underlying fundamentals of those companies.
“If the investigations play out like Microsoft’s, I believe in the short term it could impact stock valuations,” Markham says. “I think the pro-growth tilt the market has had for the past seven years could make the FAANG stocks vulnerable to that kind of cross-wind.”
Fish in the stream
This doesn’t necessarily mean big tech will lose its dominion over the market, however. In the realm of advertising, for example, Markham takes issue with those who believe traditional media outlets could take back some of the ground lost to tech companies over the past two decades.
“You may find, for instance, that advertising dollars shift towards music streaming companies instead,” he says. “A lot of people are unwilling to pay for music streaming subscriptions and use those services like radio stations, where they’re used to hearing advertisements. If you believe the penetration of music streaming will continue, that’s one area where the tech companies could still grow even in the face of increased regulatory scrutiny.”
For Professional Clients only. Any views and opinions are those of the interviewee, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
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1 The acronym FAANGs refers to the ‘big five’ tech stocks, Facebook, Amazon, Apple, Netflix & Google (subsequently renamed alphabet.
2 The Washington Post: Facebook, Google and other tech giants to face antitrust investigation by house committee, 3 June 2019
3 CNN: Google, Facebook and Apple could face US antitrust probes as regulators divide up each tech territory, 3 June 2019
4 MarketWatch: ‘The antitrust suspects: Facebook and Apple appear to be most at risk’, 24 June 2019
6 Business Insider: ‘Microsoft's stock just hit the highest point since a judge ruled it broke antitrust law back in 2000’, 22 October 2015