Client Portals

Breaking Up Is Hard To Do4 min read

Regulation is even harder

Jun 11, 2019 - John Osbon ( 6 mins to read)

John Osbon

Senator and presidential candidate Elizabeth Warren fired the first shot across the tech bow with a call on March 8th to “break up big tech.” On June 3rd, the government entered the fray, announcing antitrust investigations into Amazon, Apple, Facebook and Google. Microsoft, the biggest tech company by market value, was a conspicuous non-mention. The four stocks had mixed price results from down -9% to up +5% during that period. Microsoft was up +9% over the same span. How will this saga play out, and what does it mean for investors in these big American companies?

Among those who see big tech as a problem there’s disagreement on what should be done to fix it. The three most likely outcomes are breakup, regulation and none of the above.

The breakup outcome

For many reasons, this is the least likely outcome. The US has not broken up a company since the AT&T dissolution decree in 1982. It’s a level of government involvement/interference that’s unpalatable to many. If it did happen, it’s likely to lead to higher stock prices based on current separation values. In a breakup you could invest directly in AWS (Amazon Web Services estimated value $500B), Waymo, YouTube, Instagram, Waze and WhatsApp. Most would likely rise in value as phone stocks did in the 80s. This would be a boon to pure play investors. Yes, any one of the big four could suffer a 10% decline due the distraction of spinning off pieces, but any decline would likely be temporary.

The regulatory outcome

Some argue that Apple’s App Store has too much market power and exploits app sellers (including some Apple competitors) by taking too large a commission. This could conceivably be changed through regulation, however it would likely take a very long time and cost both sides a fortune in legal fees. If successful, analysts say that cutting the commission in half to 15% would reduce Apple’s value by 5%, a relative blip.

Mandating a pricing change would be no slam dunk. Apple would argue this kind of regulation would harm small businesses who build their revenue through the App Store. Uber and AirBnB, once small businesses, would not exist without the App Store which is why Apple says its Store spurs innovation. Apple is only one example. The other three have less to lose through regulatory intervention.

The none of the above outcome

The none of the above outcome is the most likely end result. This path would delay returns for at least a year as it slowly becomes clear nothing will happen. The stress and anxiety would hold markets back temporarily. History shows that the government typically loses battles or settles for almost nothing. Google need only remind everyone that search is free because of them and that one of the founders and many of the current operators are immigrants. Pure plays, transparency, freedom to grow, and freedom to compete argue against government antitrust action. These four companies compete against each other to a greater or lesser degree over time; how can the government pick favorites?

Why all the noise?

What’s behind the big tech uproar anyway? One answer is the “big is bad” argument. While it’s easy to say big equals dangerous, the four big companies have led the way in employment and creation of new companies that employ even more people. And they have been doing it for decades. Another reason is “they’re worth too much.” This argument may have some credibility. The $1 trillion market value for a company has been consistently hard to maintain. Perhaps the outcry is telling us that smaller $100-500 billion dollar companies will perform better.

Your portfolio matters the most

We all know that markets don’t like uncertainty, so it’s safe to say that big tech returns will be hindered somewhat in the short term…until it’s more clear what the government’s approach will be. But neither breakup nor regulation will ruin these companies. Even if the government does take action, tech improvements will continue to march inexorably on, producing value for shareholders.

More likely, the movement to break up big tech will lack the strength to reach the finish line. There are too many counter-arguments to contend with. Questions like: who is harmed? Won’t this raise costs? Why is the government regulating behavior? Why is surveillance an antitrust issue? Who even has a monopoly in this market? These questions can be easily answered by the companies. Furthermore, why aren’t Microsoft, Walmart and ExxonMobil under investigation?

No matter what happens, the tech market will continue to grow and be a large part of an equity portfolio. The issue here is which segments you want to own and how they fulfill your family’s investment goals. We can help you cut through the noise so that you can focus your attention and time elsewhere.

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