The US Department of Justice has accused Google of suppressing competition in internet search in an antitrust lawsuit that marks the beginning of a landmark case against one of the world’s largest technology groups.
Hello and welcome back to patrick boyle on finance in today’s video i’m going to be responding to a viewer question from jorus who asked about how breaking up the u.s tech giants might actually work in practice we’ll talk about how anti-competition law is meant to work what’s actually happening with the tech giants as well as some ideas as to how the current
Situation could end up being resolved 2020 has been both the best of times and the worst of times for mega cap technology stocks people have relied on them for online shopping for entertainment for social contact and for doing business this has meant that they’ve prospered significantly through lockdowns and this has pushed their market values to new highs some of
These companies have extraordinary gross margins ranging from 38 for apple to 80 for facebook for context the s p 500 companies have an average growth margin of roughly 34 while being a great year for these stocks 2020 may also go down as the year when momentum towards legislative action to curb their market power becomes unstoppable interestingly both democrats
And republicans have access to grind with the u.s tech giants an issue that both elizabeth warren and donald trump agree on is truly bipartisan the left are upset about the concentration of wealth that’s accruing to the company founders and investors they feel that the tech giants aren’t paying enough in taxes and they view them as the new robber barons stifling
Competition across a number of industries and driving down wages the right on the other hand are concerned with free speech on these tech platforms and their perception that conservative opinions are being suppressed by predominantly left-leaning silicon valley platforms both sides are concerned about foreign influence in politics through under-regulated tech
Platforms these pressures are not just coming from the united states either european anti-trust bodies are also focusing their attention on the us tech giants with market dominant positions they are imposing heavy fines on many of these names they argue that these tech giants operate using international tax shields that they garner high profits squelch competition
And fail to contribute adequately to the societies in which they operate two weeks ago the u.s house antitrust subcommittee released an investigation report into apple amazon google and facebook all four companies were alleged to wield monopoly or substantial power and to have abused it so what exactly is antitrust legislation well antitrust laws are in place in
Almost every part of the world to prevent certain types of business practices courts in the united states have applied antitrust laws from 1890 through to the present digital age with the same basic objective in place to protect competition for the benefit of consumers the aim to ensure strong incentives for business efficiency to keep prices down and to keep
Quality up and to foster innovation the first u.s antitrust law the sherman act was passed by congress in 1890 as a charter of economic liberty aimed at preserving free and unfettered competition in 1914 congress passed two additional antitrust laws the federal trade commission act which created the ftc and the clayton act with some revisions these are the three
Main federal antitrust laws still in effect today the first really big antitrust case was in 1911 21 years after the passing of the sherman act against rockefeller’s standard oil company which at the time controlled almost all oil production processing marketing and transportation in the united states the courts ordered the company to be broken up by divesting
Itself of its major holdings 33 companies in all chevron exxonmobil bp and marathon oil can all be traced back to rockefeller standard oil company anti-competition law is both broad and vague thus how and if antitrust laws are enforced has varied significantly over time and enforcement depends heavily on political will enforcement fell significantly during
Both world wars as government needed to rely on big business at that time for war production the 1974 breakup of a t marked the end of the really aggressive antitrust enforcement era since the reagan presidency there’s been a move to only bring anti-trust cases if it can be demonstrated that consumers are being harmed by a large business this is known as the
Consumer welfare standard the most recent really big case was the united states versus microsoft the issue central to the case was whether microsoft was allowed to bundle its web browser software with its windows operating system the court ordered a breakup of microsoft in june 2000 but then in 2001 the department of justice reached an agreement with microsoft
To settle the case the settlement required microsoft to share its api with third-party companies and appoint a panel of three people who would have full access to microsoft systems records and source code for five years in order to ensure compliance if you’re interested in reading more on the topic of antitrust regulation there is a chapter on the topic in my
Corporate finance book which i’ll link to in the video description so where does all of this bring us to today well the investigation that just concluded found that google has monopoly power in the market for search facebook has monopoly power in the social networking market and the report said that amazon and apple have significant and durable market power in
The u.s online retail market and in mobile operating systems and mobile app stores respectively critics of the tech giants have singled out facebook’s instagram and whatsapp services and google’s youtube and android cell phone operating system as among the businesses that should be considered for divestiture it’s been argued that facebook’s purchase of instagram
Allowed them to simply eliminate a potential social network competitor rather than buying in any new technology the report said that the four companies have abused their market power by charging excessive fees imposing tough contract terms and extracting valuable data from individuals and businesses that rely on them and have few genuine alternatives to turn to each
Platform according to the report now serves as a gatekeeper over a key channel of distribution by controlling access to markets these giants can pick winners and losers throughout our economy in addition to proposing separation of some dominant tech platforms from the company’s other businesses the report also calls for these firms being prohibited from entering
Adjacent lines of business preventing these platforms from preferring their own services and limiting their data collection the report suggests that congress must take action to update antitrust laws with these tech companies in mind although the investigation was bipartisan republicans backed anti-trust enforcement but stopped short of signing on to the most
Of the report’s recommendations meaning that for any big change to happen democrats would have to win the presidency the senate and the house next month an electoral title wave would be needed democratic presidential contender joe biden has said that company breakups should be considered so what might happen if democrats did win big in the election well they
Could significantly increase the funding of the ftc its current budget is 500 million dollars a year which is equivalent to about three days worth of operating revenue for facebook antitrust regulation is all hashed out in court and an underfunded ftc might struggle to compete with the largest companies in the u.s in particular because the man or woman on the
Street doesn’t really appear to care that much about many of the issues being fought over in addition to more funding new legislation would likely need to be written the current laws on the books would make it very difficult to bring a meaningful case to break up any of the tech giants most of the breakups in the past relate to companies having access to a piece
Of fixed infrastructure whether it’s oil railway tracks or a network of telephone lines that prevents other companies from competing with them they then get to charge whatever they want for the use of this infrastructure regulation of the new tech firms might be difficult to enact under existing legislation especially when two of these firms google and facebook
Offer a service that is free to the consumer in addition the services provided by firms like facebook are not exactly necessities so what might a breakup look like well the department of justice could in theory break up the various business lines of alphabet separating the search engine from youtube from google maps and from gmail they could force facebook to
Divest whatsapp and instagram other changes that could happen would be to require the tech giants to go through the courts rather than arbitration in disputes with their suppliers such as publishers forcing these disputes through the courts would open them up to class action lawsuits for example in truth though none of these remedies would address the fundamental
Monopoly power these firms hold with the network effect of each of their platforms other remedies might include making these firms integrate with each other and with other smaller firms a search on amazon could show products from other sellers like walmart or even small local stores in addition amazon could be prevented from selling their amazon basics products
Altogether competing with the people selling on amazon products like whatsapp apple’s facetime zoom and skype could all be forced to link to each other allowing people to have just one of these softwares on their phone or computer and be able to communicate with people on other platforms you don’t have to own the same brand of phone as your neighbor in order
To call them up so why do you need to have the same messaging app the eu is talking about regulation where gatekeepers cannot use data received from business users for advertising services for any purpose other than advertising services in february margarite vestiger the european regulator in charge of regulating big tech warned that dominant players would
Be forced to open up their data to smaller companies a draft of the european digital services act says that the likes of amazon and google shall not use data collected on the platform for their own commercial activities unless they make it accessible to business users active in the same commercial activities i’m not exactly sure what that would do for digital
Privacy but that is something that that could come out soon the economic premise behind the decades-long u.s retreat from antitrust enforcement is that three firms are usually sufficient to provide competition in any market monopolies are only temporary they feel and mergers create efficiencies that are reliably passed on to consumers in the form of lower prices
In deciding whether to block a merger or outlaw business practices judges today mostly rely on economic analysis of how much prices will go up or down an updated antitrust law might reject the laissez-faire approach replacing it with the idea that under enforcement of antitrust laws is a greater risk to the vibrancy of the american economy than over enforcement
Under new regulation dominant firms in highly concentrated markets could end up being banned from buying any company in an adjacent market particularly in concentrated markets such a rule would have prevented cvs from buying the health insurer aetna at t from buying time warner and ticketmaster from buying concert promoter live nation john quacka an economist
At northeastern university suggests that a broader analysis of competition would require regulators to consider how u.s prices compare to foreign prices and how profit margins and company valuations compare across similar industries as an example my british cell phone contract costs around twelve dollars a month and my u.s cell phone contract costs around seventy
Dollars per month for pretty much the identical service there’s possibly a less competitive marketplace for this service in the united states even if you are against any government regulation of businesses you might still recognize that there is some urgency to the idea of coming up with a new rulebook for these new types of business as the us politicians move
Slowly european regulators are racing ahead in regulating the business practices of the tech giants they’re imposing billion dollar fines and prompting complaints that their aim is to hamstring their transatlantic rivals society has had a long time to come up with rules for how older technologies like things like landlines taxi services public utilities and so on
Are regulated ideas like no call lists prevented telemarketers from interrupting you at dinner time to sell you solar panels society now needs to come up with ideas for how these new technologies are treated hot issues are things like privacy and data collection free speech on social media platforms modern day employment contracts and so on if the united states
Can be seen to come up with rules that are both good for the public and for business they can possibly prevent other governments who have no interest in seeing these firms succeed pass onerous regulations and hit u.s firms with huge fines the recent american attack on tick-tock for example could set a worrying international precedent for how to deal with foreign
Technology firms this would be quite bad obviously for the united states where most large tech firms are based regulation of the tech giants could mean that small businesses would be able to sell their products on amazon without the fear of amazon pushing them out of business with a competing amazon basics product google might be prevented from suppressing competitors
By demoting their products on google search facebook if forced to divest might face real competition from instagram and whatsapp to improve the user experience and protect user privacy while there is a lot of negativity about these tech giants many of them are actually just great examples of new technologies replacing inefficient overpriced older technologies
Whatsapp for example gained in popularity because oligopolistic mobile phone services were overcharging for text messaging and international phone calls it’s reasonable to believe that if the tech giants abuse their monopoly positions that new competitors might come in and just take their places if the worst case scenario for the tech giants is a forced breakup
What would this mean for shareholders a breakup might actually turn out to be a positive as it would shine a light on the value of the sum of the parts that these companies currently obscure is instagram for example worth more independent of facebook for reference when a t was broken up the baby bells that resulted were quickly worth more than a t had been there
Are many pundits out there putting forward possible solutions i watched a ted talk a little while ago where the speaker argued that individuals should own their own data and be paid by the tech firms who collect and use it such a setup would most likely bankrupt the tech giants while generating tiny payments for each registered user we would then have to pay for
All of the online services that we use right now things like email maps and so on governments are faced with a delicate balancing act in regulating these new types of firm combined these companies make up almost a quarter of the s p 500 and they’ve recently been the main engine of growth in the u.s stock market if you invest in an index fund you do have some of
These companies in your retirement account while neither republicans nor democrats appear to be delighted with silicon valley right now they may not wish to over regulate them and kill the goose that laid the golden egg if you found this interesting make sure that you hit the like button below and do subscribe if you’d like to see more content like this see you again soon bye
Transcribed from video
Will The Department Of Justice Break Up Big Tech? What Is Anti Trust Law? By Patrick Boyle
