America’s technology giants are in the antitrust spotlight

Just like other life-transforming technologies of the past, today’s tech giants are reaching maturity — that inevitable transformation from fresh young face of innovation to overgrown, mistrusted hulk. Telltale wrinkles appeared in May amid reports that US antitrust bodies would be investigating Alphabet, Apple, Amazon and Facebook’s competitive practices for possible violations.

Their share prices have fallen as investors fear a growth-busting breakup of these behemoths. We’ve been highlighting this inevitable development in InvestmentInsights over the past year, in a series called ‘The great tech breakup’. The history of antitrust in America, which we looked at in the first article in this series, suggests a bust-up isn’t imminent or the end of the road for the underlying businesses even if it comes. But further volatility is likely for the big US tech firms in the near term.

The taste of freedom

At the turn of the last century, America was waking up to the tremendous freedom and opportunity provided by the internal combustion engine. Today social media and the internet are radically changing how we communicate, transact and live. Oil was the lifeblood of the new economy of the 20th century, and increasingly controlled by John D Rockefeller’s Standard Oil.

Today’s quality data is pivotal and increasingly concentrated in the hands of a few tech giants. Standard Oil was found to be abusing its power, and was split up by the government in 1911 after taking its case all the way to the Supreme Court. They broke it up to ensure competition reigned supreme in America. Could the same happen with today’s tech titans?

Why does new technology eventually attract the regulatory control of the state? There’s a tipping point where a luxurious new gadget or service becomes so ubiquitous that it’s seen as a de facto right. There was a time — not so long ago — when indoor plumbing or electricity were beyond the reach of many Americans and Britons. Now it’s unthinkable to let a home or office be without them. Perhaps it’s enlightening to think that you should now add internet access to that list of required amenities.

But today’s high-tech businesses, with their complexity of design, operation and business models, make antitrust law — which is always evolving and depends ultimately on the view of the Supreme Court — difficult to apply, something we explored in part two of ‘The great tech breakup’. In more recent antitrust history, Microsoft continually clashed with the government. It eventually settled in 2001, and agreed to be more open with its software and coding in return for remaining intact as a business. It then languished in the doldrums for a decade before re-emerging as a tech giant once again (figure 7).

Even if one or more of Microsoft’s younger rivals are broken up, there is hope for investors that the sum of the parts may be worth more than the whole. When Standard Oil was split into Exxon, Mobil and Chevron, the combined growth of these businesses easily eclipsed their predecessor. You could say it was win-win: Mr Rockefeller got richer and America got a free and competitive oil market.

For antitrust breakups to happen, it needs both to be pushed by the government and a sympathetic ear in the Supreme Court, the final arbiter of antitrust law in the US, as we noted in the conclusion of ‘The great tech breakup’. President Donald Trump has been vocal about wanting to rein in tech companies. But the court has tacked significantly to the right after Trump’s appointment of Neil Gorsuch and Brett Kavanaugh.

Whether US tech giants will survive the coming years unscathed depends on political machinations, both at home and abroad, and the economic beliefs of two greenhorn Supreme Court Justices. Some new technology may come along to eclipse them, but we doubt they’ll be going extinct any time soon.