Last night the House antitrust subcommittee issued a report which concludes their investigation that started over a year ago in June 2019…
· The investigation concluded that the Big tech platform companies (Apple, Facebook, Google and Amazon) abuse their market power…more detail on this below.
· Their investigation included the hearing this past July w/ the CEO’s of those companies.
· The report does not directly result in actions against any of these companies. It is a series of findings that could serve as a foundation to reform antitrust laws to better address big tech business models.
· The current investigations by the DoJ, FTC and States Attorneys general are obviously limited to application of current law. The question is whether current law is sufficient for antitrust action against them, or whether new laws would be required.
· The likelihood of changing the laws would increase with a change in control of the Senate.
Excerpt from the report…
§ “Although these four corporations differ in important ways, studying their business practices has revealed common problems. First, each platform 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. They not only wield tremendous power, but they also abuse it by charging exorbitant fees, imposing oppressive contract terms, and extracting valuable data from the people and businesses that rely on them. Second, each platform uses its gatekeeper position to maintain its market power. By controlling the infrastructure of the digital age, they have surveilled other businesses to identify potential rivals, and have ultimately bought out, copied, or cut off their competitive threats. And, finally, these firms have abused their role as intermediaries to further entrench and expand their dominance. Whether through self-preferencing, predatory pricing, or exclusionary conduct, the dominant platforms have exploited their power in order to become even more dominant. To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons. Although these firms have delivered clear benefits to society, the dominance of Amazon, Apple, Facebook, and Google has come at a price. These firms typically run the marketplace while also competing in it—a position that enables them to write one set of rules for others, while they play by another, or to engage in a form of their own private quasi regulation that is unaccountable to anyone but themselves.”
Among the recommendations in the report…
§ Reduce conflicts of interest thorough structural separations and line of business restrictions
§ Implement rules to prevent discrimination, favoritism, and self-preferencing
§ Promote innovation through interoperability and open access
§ Reduce market power through merger presumptions
§ Create an even playing field for the press
§ Prohibit abuse of Superior Bargaining Power including through anticompetitive contracts
Sending an update on Alphabet as the potential for a Department of Justice lawsuit is rising. As a reminder, they are being investigated by federal and state-level regulators (the DoJ and State Attorneys General) which began over the last year. It is widely expected that a lawsuit from the DoJ is imminent, which may or may not include the AG’s as part of that lawsuit (or they may take separate action). At issue is their dominance in search and their dominant position in the ad tech stack. These are separate but interconnected issues. Google’s dominance in search (~90% global share) gives them the best data (“click and query” data) which is the raw material for targeted advertising. Search also allows them to give preference to their own sites (e.g. YouTube) when placing ads. Revenue from Google’s own sites has been a key driver of growth. In ad tech, Google is present at all significant stages of the opaque ad tech stack – they are present on both the ‘buy’ and ‘sell’ sides of the market. They serve ads to Publishers (sell side) and help advertisers place ads (buy side). The concern involves their ability to limit competition via this vertical integration.
There are not many historical templates for US antitrust suits – in the last 50 years, there have been three major antitrust actions against dominant U.S. companies: IBM (1969), AT&T (1974) and Microsoft (1998). One thing we know from those cases is that they take a long time – likely at least 3 years. With IBM the trial took over a decade, w/ AT&T over 7 years and w/ MSFT over 3 yrs. So while a lawsuit may be imminent, it should take time for the implications of this to play out. It’s possible this could be resolved sooner if GOOG and the DoJ can settle w/ GOOG making some concessions. Such initial lawsuits sometimes state potential suggested remedies and sometimes they do not.
There are a wide range of potential remedies that could be sought. Current rumors are that the DoJ lawsuit will focus more on search. One area regulator’s could target is Google’s position as the default search engine on most mobile devices (they pay Apple for this privilege which is ~5% of Apple’s rev). Regulators could also target previous acquisitions (YouTube of DoubleClick) – The Clayton Act allows regulators to unwind previously-approved mergers. Other potential outcomes include changes to search that result in less ad revenue from owned sites, sharing/licensing of click and query data (could meaningfully increase competition but could still provide a fee stream), a forced to break-up (I don’t view that as big downside risk…in fact some argue the sum trades at a discount to the value of the parts).
The US is not the only place GOOG is facing antitrust scrutiny. For GOOG (and AAPL, AMZN & FB) there has been an expanding global footprint of regulatory scrutiny with the EU leading the charge, but w/ no significant consequence at this point. Since 2017 the EU has fined GOOG $9B, which is not meaningful given GOOG’s valuation and cash on their balance sheet (>$100B). The EU has also gone after GOOG’s position as the default search engine on Android phones, but to no real avail at this point. https://www.wsj.com/articles/some-google-search-rivals-lose-footing-on-android-system-11601289860?mod=tech_featst_pos1
Partisan considerations…
Scrutiny has been bipartisan. The outcome of the presidential election is unlikely to reduce antitrust risk for GOOG. With the new Supreme Court justice the implication is not clear cut. The most meaningful change could be Democratic control of Congress which could have implications for potential new antitrust law aimed at regulating big tech (this was the focus of The House Judiciary’s Antitrust Subcommittee hearing in July w/ GOOG, AMZN, FB and AAPL CEOs).
In summary, I view this growing regulatory scrutiny as an evolving risk but do not expect the filing of a lawsuit to catch the market by surprise; it is expected. If there are recommended remedies in the suit, this could have an impact (as investors know which outcome to “probability weight”), but again will take some time to resolve. I expect to keep re-assessing this as we know more.
https://www.wsj.com/articles/google-antitrust-suit-looms-over-issues-of-search-dominance-advertising-11600948051
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
www.crestwoodadvisors.com
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