MARKET COMMENTARY

An Overlooked Risk? Big Tech May Face Legal Challenges

11.13.2020 - Anna Kastrilevich

Questions about the size and influence of US Big Tech firms have been raised in the media and by recent government actions. The Department of Justice (DOJ) recently filed a lawsuit against Google alleging the company possesses an unfair advantage due to its dominant search engine and search advertising platform[1]. It is significant as it’s the first major monopoly case in decades as well as the first aimed at a major technology company since the Microsoft lawsuit in 1988. The US government is also considering bringing a case against Facebook. A bipartisan group of over 40 state attorneys general (AGs) has launched a probe into Google and Facebook’s business practices[2].  Finally, in another show of bipartisanship, a Congressional report released in early October recommended more antitrust oversight, adding to the scrutiny Big Tech firms are facing. 

US Antitrust Approach May Be Shifting

We believe US antitrust philosophy may be reaching an inflection point. The language of the Sherman Antitrust Act of 1890 is broad and open to interpretation based on shifting philosophical, political, and judicial views[3]. Enforcement has also varied over time based on those variables. Antitrust enforcement peaked in the 1960s, reverting to a less aggressive approach in the following decade amid a backlash to government involvement.[4]

The 1970s marked a critical turning point for antitrust philosophy in the US. Robert Bork, a former US Solicitor General, and his colleagues at the University of Chicago propagated an interpretation of the Sherman Act as having the singular intent of protecting consumer welfare. Under this interpretation, corporate activity that did not result in a clear price increase for consumers was deemed acceptable. This philosophy gained broad appeal due to the perceived rigor of using a quantifiable factor like price to gauge competition. As a result, according to a Harvard Business School white paper, “the applications of antitrust law narrowed, and the judiciary became less interventionist in policing market transactions.”[5] However, given recent government actions, we think the pendulum may be potentially swinging back towards a more active regulatory approach.

A New Playbook Is Needed

Many services provided by Big Tech today are free, so the consumer welfare standard appears to be met. However, some critics argue that the price standard is too narrow and does not include important considerations such as protections of user data and privacy. The University of Chicago academics likely never envisioned the possibility that a company would give away its product for “free”, willingly experience short-term losses to gain market share or use customer data as an advantage against competitors. The economics of modern platform companies have evolved to a point in which a new regulatory playbook may be warranted.

In terms of remedies, expert recommendations vary from enforcing current laws to passing new legislation for the digital era and establishing new watchdog agencies. Senator Amy Klobuchar sponsored legislation proposing that dominant companies would have to prove that their practices don’t harm competition.[6] The act would also allow for civil penalties of up to 15% of a company’s revenues for antitrust violations. We think Big Tech fines may offer the path of least resistance for governments in terms of enforcement options, though similar fines have not been successful in curtailing market concentration in the European Union.[7]

Election Outcome Lowers Risk of Extreme Regulation

While both Democrats and Republicans have expressed concerns over market concentration, we think enforcement will likely fall along partisan lines. As of this writing, we expect a split government between President-elect Joe Biden, a narrow Democratic majority in the House of Representatives, and a Senate majority to be decided in two January runoff races in Georgia. This balance likely lowers the risk of an extreme uptick in enforcement, which has been reflected in market valuations.  In fact, since November 3, the so-called FAANG+ stocks are up 8.2% [8].

However, we do not expect the antitrust “genie” to go back in the bottle either. State AG investigations are still pending, several state houses are drafting privacy protection legislation and the DOJ continues to bring cases, including suing to block Visa’s proposed acquisition of fintech competitor Plaid in early November.[9]

Regulatory Spotlight Will Likely Remain on Big Tech

The FAANGs+ have largely driven S&P 500 performance during 2020 and comprise an astounding 25% of the index (up from 18% a year ago).[10] With the growth in passive investing, many investors may have unknowingly accumulated exposure to companies facing investigations and regulatory risk. Furthermore, these potential risks may not be reflected in current market valuations.

Perhaps the market is seeing through these risks given that, historically, big government antitrust cases have taken a long time to pursue and, at times, have ultimately been scuttled.  For example, the IBM case dragged on for 13 years until it was eventually dismissed under President Reagan. By the time a case settles, market dynamics may have shifted the defendant’s market position, as was the case with IBM when market preferences shifted from mainframes to personal computers.[11] Additionally, Big Tech has posted exceptional growth and profits. The COVID-19 pandemic has accelerated secular shifts toward digital business models including e-commerce and streaming entertainment. These companies operate in “winner-take-most” segments and have been doing just that, which appears to have put a target on their backs. We do not know what arrows the government may have in its quiver, but we think it is important to highlight and be mindful of this risk even as markets appear to shrug it off at the moment.

[1] Google’s parent company is Alphabet.

[2] Source: The Wall Street Journal, “States to Launch Google, Facebook Antitrust Probes”, John D. McKinnon, 9/6/2019.

[3] Source: Harvard Business School, “US Antitrust Law and Policy in Historical Perspective”, Working Paper 19-110, Laura Phillips Sawyer, 2019.  

[4] Ibid.

[5] Ibid.

[6] Source: “Klobuchar Introduces Legislation to Deter Anticompetitive Abuses”, 3/10/2020. Senator Klobuchar is the Ranking Member of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights. https://www.klobuchar.senate.gov/public/index.cfm/2020/3/klobuchar-introduces-legislation-to-deter-anticompetitive-abuses  

[7] Source: New York Times, “Europe Is Toughest on Big Tech, Yet Big Tech Still Reigns”, Adam Satariano, 11/11/2019.

[8] Source: FactSet, as of 11/16/2020. Proxied by XLK ETF. The FAANGs+ include Facebook, Amazon, Apple, Netflix, Google Alphabet, and Microsoft.

[9] Source: Department of Justice, “Justice Department Sues to Block Visa's Proposed Acquisition of Plaid”, 11/5/2020. https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposed-acquisition-plaid

[10] Source: Bloomberg, as of 10/29/2020.

[11]Source: CNET, “IBM and Microsoft: Antitrust then and now”, 1/2/2002.  https://www.cnet.com/news/ibm-and-microsoft-antitrust-then-and-now/


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