PMC Weekly Review – June 24, 2019

The Resurgence of Antitrust Efforts

Antitrust laws in the US date back to the late 1800s, and attempt to prevent firms from limiting competition and creating a stranglehold on any marketplace that can unfairly harm consumers and the economy. Proponents argue that these laws allow for increased economic efficiency and growth as competition spurs innovation and fair pricing among industries. Early laws focused on prohibiting monopolies, whereas more recent legislation has been more lenient on competitive behaviors, as long as they protect consumers. 

However, antitrust laws have not been overhauled in many decades, leaving them outdated in terms of big tech companies that did not exist when the laws were written. In fact, these firms operate in completely new industries, with fresh business models and innovative practices that have not been subject to much scrutiny to date. The Washington Post reported that the US brought an average of 15.7 antitrust cases per year from 1970-1999, but fewer than three cases per year from 2000-2014.

Big tech companies have grown rapidly since the financial crisis and trounced or purchased any competition in their way, as antitrust talk has been muted over the last 20 years. In fact, data from Bloomberg suggests that Alphabet, Amazon, Apple, Facebook, and Microsoft have made 431 acquisitions over the last decade, worth $155 billion. Some might say this growth inhibits competition, as these firms use their scale and power to tilt the landscape in their favor, whereas others believe the very nature of a low-cost platform (e.g., Amazon) or no-cost services, such as Google and Facebook, are actually positives for consumers. 

Alphabet, Facebook, Amazon, and Apple have come under fire recently by the federal government for issues including anticompetitive behaviors (which current antitrust laws address) as well as new practices involving user data and privacy. The Federal Trade Commission and the House Judiciary Committee—both of which have a mandate to enforce these laws—have split up their oversight on these tech firms, and each are launching investigations that will help decide how powerful a business can become without being unfair, as well as how user data can be protected and used. The big issue is: Have these big tech firms’ use of pricing or privacy breaches stifled competition and hurt consumers? 
To gain some insight into the topic, one might look to Europe, as our overseas counterparts have more aggressively targeted big tech firms, including Google, which has been fined a combined $9.5 billion since 2017 by the European Commission (the European Union’s executive institution). However, the EU’s tactics of fines and regulation have not yet hit the bottom line of these firms and raises the question: Would breaking up these firms provide better consumer protection? Whatever the answer, there is a long fight ahead.

Digital platforms have experienced impressive growth trajectories that have benefited consumers exponentially; however, they also have created new and complex issues never before seen, making this a difficult problem to fix. And if history is any indication, this is just the beginning. Precedent antitrust cases have taken years to litigate, with cases against IBM and AT&T lasting more than a decade each and affecting both firms’ valuations. Additionally, in 1998, Microsoft’s stock was hit when the Justice Department filed an antitrust suit against the company, and the stock price did not fully recover until 2011, when the settlement with the government expired. 
As the government works through these issues, big tech stock prices may see some downward pressure such as we saw on June 3, when the investigations were first announced. Facebook was down 7.50% on the news, while Amazon shed more than 4%. The declines accounted for a loss of roughly $35 billion from each company’s market cap in a single day.

Although it is too early to tell if these increasing regulatory concerns will be large enough to have a true impact on big tech company results, the issues are not going away anytime soon. The unwavering growth of big tech stock prices is hard to ignore and seems to be even harder to knock off track. However, the uncertainty around possible breakups, fines, or new regulations could create a dark cloud over these firms for many years to come. The trick for the government will be finding the right regulatory balance without going overboard. 

Monica Sengelmann, CFA
Investment Analyst

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