"Big Tech Threatened by Regulation:" What Else Is New?

This isn't an issue that will be sorted out overnight and without a lot of back and forth, so the plunging share prices look overdone. Read More...

Last week and over the weekend, there’ve been a number of reports from brokers and media houses saying that the Federal Trade Commission (FTC) and the Department of Justice (DoJ) have divided responsibility for regulatory oversight on the four big technology companies: Alphabet GOOGL, Facebook FB, Amazon AMZN and Apple AAPL.

So going forward, the FTC will focus on Amazon and Facebook while the DoJ takes up Google and Apple.

It was also reported that the House of Representatives Judiciary Committee is independently investigating competition in digital markets and the power wielded by big tech.

While both Republicans (particularly Lindsey Graham, Marsha Blackburn and Senator Josh Hawley) and Democrats (mainly Richard Blumenthal and presidential primary candidate and Massachusetts Senator Elizabeth Warren) support better regulation and oversight of these technology companies, the exact purpose of the current probe remains unclear.

Going by what they have been saying for a while now, they could be looking to break up the companies to curb their monopolistic tendencies, regulate them as utilities, and/or make stringent rules including for data protection, privacy and security of users that they must follow.

The president’s pet allegation of democrat bias may also be investigated.

Analysts also chimed in with their 2 cents…

Evercore ISI analyst Kevin Rippey cut his price target on Alphabet stock by $50 to $1,200, saying, “For investors, the investigation comes at a time when the stock’s bull case is challenged by concerns of an abrupt revenue slowdown last quarter.”

Also, “While precedent suggests that Google enjoys broad discretion over the direction of search results, the questions arising from an investigation will challenge the possibility of multiple expansion,” he added.

“A DOJ probe would likely take more than 5 years to resolve and, if it were to happen, a breakup would be distracting for management, add [general & administrative] expenses, and potentially impact the long-term valuation creation by Alphabet companies that could be operated more cautiously,” surmised analysts at Bank of America-Merrill Lynch.

On the other hand, they conceded that “To break up Google… the DOJ would likely have to file a lawsuit and convince judges that Google has undermined competition,” which could take years.

It’s not an unheard-of thing though – both AT&T T and Standard Oil had similar fates.

So naturally, shares in the four big tech companies plunged-

But It Isn’t So Easy

There are a number of questions that need to be answered before any action is taken.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" 1. In What Way Are They Dominant? Since Facebook is the only social network of its kind, Google the only search engine of its kind, Apple the only consumer tech company of its kind and Amazon the only retailer of its kind, they are definitely dominant players. But if you consider their revenue generating streams, they aren’t that dominant.” data-reactid=”33″> 1. In What Way Are They Dominant? Since Facebook is the only social network of its kind, Google the only search engine of its kind, Apple the only consumer tech company of its kind and Amazon the only retailer of its kind, they are definitely dominant players. But if you consider their revenue generating streams, they aren’t that dominant.

Google, for example, continues to see its digital advertising market share shrink. eMarketer says that it’s currently under 40% with Facebook just over 20%. Amazon, in spite of being such a late entrant is rapidly gaining share at just under 10%. This market, in spite of everything doesn’t feel like a monopoly. So laws protecting privacy etc will impact companies like Twitter TWTR, Snap SNAP and Pinterest PINS as much as they will big tech.

The closed ecosystem, captive users, the “Apple Tax” and competing new Apple services appear to be an abuse of power. At the same time, developers and users do have other options in Android, although they still won’t be able to access iOS users. Then again, Amazon may be the leading online retailer, but it won’t be able to hold its position if it charges unreasonably.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" 2. Does the consumer win or lose? In each case, the companies offer a compelling service that customers flock to, so they provide something of considerable value. If breaking up (or other regulatory action) impacts Google’s ability to display the most useful information, or affects Facebook’s ability to connect people, or prevents Apple from running a secure platform or prevents Amazon from charging an attractive price, it obviously isn’t the answer.” data-reactid=”40″> 2. Does the consumer win or lose? In each case, the companies offer a compelling service that customers flock to, so they provide something of considerable value. If breaking up (or other regulatory action) impacts Google’s ability to display the most useful information, or affects Facebook’s ability to connect people, or prevents Apple from running a secure platform or prevents Amazon from charging an attractive price, it obviously isn’t the answer.

However, the time has come when the companies must be evaluated to determine whether their activities prevent or make it unduly difficult for a competing player to enter the market, thereby stifling innovation and limiting consumer choice.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="3. Is the Action Appropriate? Regulators will also have to determine whether breaking up, fining, converting to utility or other action will be sufficient to deal with the problem. One might think that allowing users to access services from places other than the app store is an easy solution that Apple should be forced to accept.” data-reactid=”42″>3. Is the Action Appropriate? Regulators will also have to determine whether breaking up, fining, converting to utility or other action will be sufficient to deal with the problem. One might think that allowing users to access services from places other than the app store is an easy solution that Apple should be forced to accept.

There’s really no strong argument against this. But the cure may not always be as straightforward for the other companies, especially on the issue of privacy because companies are automatically the custodians of a lot of data as a part of the service they provide. A GDPR-like solution may be the answer in this regard.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" 4.What Are the Stakes? The big technology companies have a lot of resources. So huge fines are of no effect because they can comfortably swallow even very large fines and continue as before.” data-reactid=”44″> 4.What Are the Stakes? The big technology companies have a lot of resources. So huge fines are of no effect because they can comfortably swallow even very large fines and continue as before.

On the other hand, they can be made to use resources to set up effective control systems as directed by the government. This would be the best way to deal with both security and privacy concerns. Breaking or crippling them in any way would be a waste of resources, so the government is unlikely to move in that direction.

There’s also the artificial intelligence consideration. The amount of data these companies have accumulated puts them at the forefront of AI development. It would be remiss of lawmakers to set them back in this respect when it is one of the things.

Investor Action

Regulatory action takes years and there’s nothing to suggest that the outcome will be unfavorable, especially for the big players with their considerable resources and experience in dealing with antitrust situations. Yes, costs may go up, but any laws that come into being to regulate the environment will be tackled by big tech far easier than by small fry.

All four are already trading below their median P/E values over the past year, but only Apple is at a discount to the S&P 500 as well. Given the pros and cons, Facebook is a Buy (Zacks Rank #2) right now. As far as the others are concerned, it’s best to wait for bigger declines before building positions.

Or, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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