July 1, 2021
Facebook scored a big (if only temporary) win for itself this week as a federal judge threw out two antitrust lawsuits brought by the Federal Trade Commission (“FTC”) and more than 40 states. The judge saw the federal case as “legally insufficient” because it didn’t properly prove how Facebook might be a monopoly.
In other words, Facebook is large, but how does its size give it special powers?
There’s no question Facebook is a tech monopoly… But apparently, our crackerjack government lawyers can’t see what’s right in front of their faces. In other words, Facebook is large, but how does its size give it special powers?
According to the judge’s ruling…
The FTC alleges only that Facebook has maintained a dominant share of the U.S. personal social networking market (in excess of 60%) since 2011, and “no other social network of comparable scales exists in the United States.” That is it. These allegations – which do not even provide an estimated actual figure or range for Facebook’s market share at any point over the past ten years – ultimately fall short of plausibly establishing that Facebook holds market power.
In other words, the government screwed up. Again.
In this case, the U.S. government failed to properly present any actual evidence as to how or why Facebook is a monopoly as well as how and why that’s a problem.
Nonetheless, the FTC has 30 days to refile its case… And the good news for those of us who believe Facebook holds too much sway over content because of its size is that there is a new head of the FTC who is expected to urge courts to think about monopolies in very different ways in this new era of Big Tech.
Enter Lina Khan…
One of the few things the Biden administration has done that I applaud is appointing Big Tech critic Lina Khan as chairperson of the FTC.
Khan, a law professor at Columbia University, has argued (as I have as well) that while trillion-dollar behemoth Amazon (AMZN) may not fit the classic definition of a textbook monopoly, it still has enormous power…
Historically, the government has stressed the need to prove how a particular company is gouging consumers with higher prices to confirm monopolistic status. And in the case of Amazon, as we all know, prices are lower for consumers. In fact, the company generates slim profit margins on the retail side of its business… choosing to instead grow its empire of users.
Nonetheless, in 2017, Khan’s “Amazon’s Antitrust Paradox” published in the Yale Law Journal. She makes the compelling argument that the current framework in antitrust law entirely pegged to consumer welfare doesn’t quite work in a modern economy…
We cannot cognize the potential harm to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive.
Khan has got her work cut out for her…
Her former colleague at Columbia University Law School, Securities Law Professor John Coffee, who gave me the lay of the antitrust land on this week’s podcast, said Khan’s views are highly controversial and…
“I don’t think right now I can expect she could adopt major rules at the FTC that would change the behavior of Facebook or Google… or force them to spin off without there being litigation that would last years. And the courts are not necessarily sympathetic to an attempt without legislation to change the goals and the purposes of antitrust law.”
John’s right… I suspect ultimately this will take years to address. But just as in the case of Ma Bell, the government will decide in favor of smaller, more competitive companies. The timeline could be five to 10 years in the making… but better to get started now than do nothing.
My concerns surrounding Big Tech stem primarily from my belief that Big Tech is chipping away at our First Amendment rights. I, myself, was recently “shadow banned” online, which really made me question whether these companies have gotten so large that they’re suppressing free speech.
Meanwhile, as monopolistic powers, some of these companies may not be gouging the average consumer, but – as the recent yearlong court case between Epic Games and Apple suggests – they certainly seem to be gouging producers…
Apple (AAPL) has a hefty 30% fee it charges producers on its app platform. And if you want access to the immensely popular video game Fortnite on your iPhone, the only way you can get it is through the Apple App Store. Google does the same on its Android phones… leaving one to ask: Why isn’t there more competition in the tech market?
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Breakups Can Equal Big Returns
Khan will help set the groundwork to think about monopolies differently in the era of Big Tech, and that’s an important step in the right direction.
But what about individuals who are invested in these giant companies? After all, it’s highly likely anyone who has money invested in a retirement plan has exposure to many of the government’s targets. Facebook, Apple, Microsoft (MSFT), Alphabet (GOOGL), and Amazon are some of the most widely held stocks by institutional investors.
So if these tech giants are broken up, what does that mean for all those mom-and-pop investors who have a stake in them via their retirement plans?
The natural concern is the new, smaller spin-off companies won’t be as valuable as the former stand-alone companies. But that may not be the case. And history can be our guide…
In 1982, the government-mandated the breakup of the Bell Telephone System. AT&T was forced to give up control because it was deemed to have monopolistic dominance over domestic communication technology. The subsidiaries were spun off into seven “Baby Bells.” It reduced AT&T’s book value by roughly 70%.
But investors who held onto the shares have proven to be the real winners…
If you had owned AT&T’s stock following the Ma Bell split in 1984, you’d have generated a 484% gain just on the company’s stock price change.
And if you include the dividends, you’d be sitting on a 3,322% return…
That works out to a 10% compounded, annualized return per year for shares of AT&T. And it sure beats the S&P 500 Index’s 7.5% average annual return over the same period.
Plus, that doesn’t even include the returns of the other companies you would have owned. Vanguard Group had a study in June of 2000 that showed a $10,000 investment in AT&T pre-breakup would have turned into $173,030 (versus that same money invested in the S&P 500 equaling $149,030).
So with all the concern about a breakup happening, and fears that it will hurt some tech companies’ stock prices… I’ll reassure you with two points:
- A Big Tech breakup isn’t happening anytime soon, and
- You want to own the stock when it eventually happens.
As such, some of these so-called FAANG stocks are still worthwhile plays, even with their sky-high valuations.
In reality, for most of these companies, a breakup would make them even more valuable… knowing that typically, the sum of the parts is worth more than the whole (as was the case with AT&T).
The wealth gap in America has never been wider — we’ve still never fully recovered from the Great Recession of 2008, and it’s only going to get worse from here. But the effects of the Big Con are going to devastate those who don’t take action. So do something now while you still can.
Now, this analogy isn’t entirely perfect, and there are some winners and losers to be expected along the way…
Amazon, for example, has slim margins, but its web services business (Amazon Web Services, or “AWS”) is killing it. AWS has an operating margin of more than 30%. In fact, Amazon wasn’t even a profitable company until it got into the web-hosting-services business. Its operating income is now growing at roughly 56%. If Amazon were broken up, this is the part of the company most investors would want to own because of its profitability, growth profile, and potential for capital returns. Its performance alone could outweigh that of the other pieces.
Microsoft is another example of a big company with a fast-growing cloud business (Azure) that could be a breakout star. Google has jumped on the bandwagon and is now in the cloud-services business, too. Indeed, many of the companies are well-positioned and stocks you’d want to own ahead of any government breakup.
That said, Facebook and Twitter may be more vulnerable. These companies really depend on size. One of the reasons people are on Facebook or Twitter, to begin with, is because everyone else is. As such, shareholders might be far more vulnerable to a breakup of these companies, should one occur.
But don’t hold your breath… I hate to be so cynical but, right now anyway, Facebook and the others are in line with where the Biden administration wants and needs them to be. Conservatives and libertarians have been suppressed. (Heck, they even took down our friend Dr. Ron Paul’s page for a day with no explanation!)
But ultimately, the Left and Right both need to remember, if they can do it to one party, they can do the same to another. It’s in the public’s best interest to have many players in the social media field rather than just a handful controlling the industry. Our freedom of speech is too important not to take censorship seriously.
- Big Tech offers users a Catch-22 Hobson’s choice: take what we give you, or you get nothing.
- The Apple App Store charges an ample 30% “tax” for developers wanting their wares showcased – but Epic Games (producer of the too-popular Fortnite) took Tim Cook and company to court over this, with swaths of antitrust activists (and gamers) awaiting the decision.
- Google dominates the search and advertising market – they’ll claim they only have 9% of all American retail, but they own 49% of the online market. Meanwhile, Facebook’s an acquisition cannibal, swallowing up competitors whole. Just ask Instagram.
- Section 230 perhaps made sense when it came out in 1996, with a quaint Internet consisting of clunky travel blogs and the spare chat room. But now, with nearly everyone living online, it’s due for an upgrade.
- We need more creativity with corporate penalties – when the corporation commits X amount of crimes, we’ll suspend incentive compensation – no more stock options, everyone!
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Publisher, American Consequences
With Editorial Staff
July 1, 2021