The FTC is going after Big Tech. The “big boys” include Amazon, Apple, Alphabet (Google’s parent), Microsoft, Facebook (Meta) and Tesla. They account for over $9 trillion in market value- 24% of the S&P 500. The other 494 companies account for the other 76%. The P/E (price/earnings) ratio of these six companies is almost 50. The other 494 are at about 12. This makes the overall P/E ratio of 21. The 15 year average of the S&P 500 is 15. So, while most of the companies’ valuations are less than past decades, the “gang of six” is in bubble-like territory. Big Tech is a big deal in many ways.
Not surprising, for years, lawmakers and many Americans have agreed that something should be done about the giant tech companies’ power. Meta and Google face multiple antitrust investigations around the world. Yet, traditional antitrust laws are having little impact on them. During the Reagan era in the 1980s, antitrust law developed a test for determining whether a company was a monopoly or not by analyzing whether its dominance harmed customers. A good example of this was the case that found Microsoft guilty of anti-competitive, monopolistic actions by forcing its own web browsers upon computers that installed the Windows operating system. However, for example, since Google and Meta offer their services to users for free, it is hard to prosecute them as monopolists, since there has been no price gouging or unfair sales revenue imposed on the customer. Of course, both extract huge amounts of marketing data from the users and pay nothing for that.
As a result, antitrust litigation to curtail Big Tech’s power has not had much impact. Courts have generally not been on the side of the FTC or the Justice department. Recently, Apple’s App store was brought to court to answer the question if they were a monopolist in the case of EPIC games vs. Apple. The federal court said “No.” The U.S. District Court did say Apple would have to stop preventing companies like EPIC from telling their users that they could pay for games in places other than Apple’s App store. Apple, of course, is appealing that. When Big Tech loses they are generally fined but the amount has been a tiny fraction of the company’s revenue.
Now, the Federal Trade Commission and its chairwoman, Lina Khan, is shifting the arguments. The FTC contends that the monopolistic power of big tech hurts the economy by harming companies, who often are its partners. The FTC, according to the WSJ, calls it “monopsony.” A monopsony is a market with one dominant buyer who has almost unlimited power over the sellers of services. Monopolists gouge customers. “Monopsonists gouge companies” and therefore damage competition and hurt the overall economy.
Here are some examples. Google and Facebook can set ad space rates at almost any price since they have little competition. Amazon has huge power over companies that want to sell goods online. Amazon has 40% of the online retail business- Walmart is #2 at 5%. Amazon controls the fees sellers pay to list their goods, the rates the sellers pay for advertising, shipping and fulfillment costs and where their goods appear on its site. Amazon is the effective buyer of the goods, even if it is not the end consumer. Apple’s App store is the place where app developers and sellers want to be.
The FTC also wants to block mergers and purchases of Big Tech. Between 2010 and 2019, Big Tech collectively acquired 616 companies. Since companies don’t have to disclose acquisitions under $92 million, almost all of these were not disclosed, hence, the regulators, Congress and the public didn’t know about these. Then in 2021, Amazon, Alphabet and Microsoft announced more mergers and acquisitions than in any other year in the past decade.
We’ll see what traction the FTC, the Justice Department, Congress and public sentiment have on limiting the power of Big Tech. Their power has had a big impact on the economy and the stock markets. As we write this blog on February 3, Facebooks parent META has missed their earnings estimates and the price of their stock has plunged over 20%, wiping out over $200 billion in market value. We’ll keep watching this space for you. Big Tech is a Big Deal.