Should tech giants Amazon and Facebook be broken up?
Issues over data privacy and market dominance have led to fresh calls for intervention but CFO and advisor Matt Hibbard argues for market forces.
Amazon’s recent set of results for Q1 2018 have confounded the City analysts. With revenues for the quarter jumping 43% to $51bn and net income more than doubling to $1.6bn, it was way beyond expectations. Amazon’s strength is now diverse. Its revenues are from online sales, TV production, web hosting and its Whole Foods grocery chain it bought last year. Amazon Web Services (AWS), which hosts organisations such as Netflix and Airbnb reported a 49% growth in sales in the first quarter to $5.44bn.
Clearly it’s a phenomenal company but it’s not immune to criticism. Issues around taxation continue to haunt the business leading to calls for action from US President Donald Trump through to former Walmart CEO Bill Simon. They are not alone and it’s not just Amazon either. Facebook too, particularly following the Cambridge Analytica revelations, is coming under increasing pressure to change or face being broken-up — the words of Oregon Senator Ron Wyden.
Add Google and Apple into the mix and you have a heady concoction of global powerhouses; but, is their influence so powerful that it would be better to break them up? What would this really achieve in the long run?
Their growth has been based on creating technologies that consumers demand, whether a social platform, goods that can be purchased at an optimal price and delivered within a day or a phone with an intuitive platform. Consumers have the choice whether to use these services or not at all.
Facebook, for example, is facing blowback from its consumers given the recent privacy issues raised by Cambridge Analytica. If Facebook can’t get confidence back from its consumers, it runs a significant long term risk and perhaps opens an opportunity to other social media platforms with better privacy controls. The best control for these companies is that they are at the mercy of consumer demand for their products and services.
Apple, Facebook, Google and Amazon have received nominal amounts of support from the government. Concerns in how they use personal data are important and should be debated. However, breaking them up due to their influence alone would be significantly more detrimental to the economy than helpful to the consumer.
We often forget we are in a global economy. If Amazon was to be broken up, it would still need to compete with Ali Baba for example, which would likely give Ali Baba a competitive advantage, at least in the short term.
The reality is, asset markets fluctuate over the years and the market cap of commodity-based companies during the period from 2000–2007 was significantly higher than technology companies. After the tech boom and bust in 1999, investment was pushed towards commodity and oil related companies. For example, Total, a French Oil and Gas company, when adjusted for inflation, had a market capitalization $650bn. Facebook on the other hand has a market capitalization of $500bn, slightly lower. Should the Oil companies have been broken up during the cycle when commodities were valued higher?
When compared to oil companies and banks, these are relatively young companies. They all started from nothing, grew into a niche market, disrupted older technologies and continued to leverage their technologies to grow into new larger spaces.
If you look at Amazon for example, it started as an online book company and consumers ultimately chose Amazon over companies like book store Barnes and Nobles. But it leveraged its approach, to be much further reaching and as we have seen, is now investing in areas well outside of selling books online.
At a more philosophical level, instead of asking whether these companies need to be broken up, we should ask ourselves what made them so successful? Can their success be replicated in other industries or to help fix problems that aren’t being solved? The positive impact in terms of jobs, consumer pricing and ease of communication have far outweighed the costs. Personally, I agree with IMF president Christine Lagarde who said recently that breaking-up the tech giants “does not seem like the right answer.” It isn’t.
As long as markets remain open for competition, these companies will too likely be disrupted in the long term. A smaller group of entrepreneurs will develop disruptive ideas and execute it in a way we could have never foreseen. Then the debate will be whether we can let these companies fail given their contribution to employment and the economy, not whether to break them up. We need to encourage innovation and productivity, to challenge the tech giants. Breaking them up would not only send the wrong message, it would actually hurt the economies which have helped them thrive for so long.