Big tech now accounts for 20% of the entire index’s market capitalization… — Part 1
We are currently facing a human tragedy that is affecting everyone around the globe. The COVID-19 pandemic is a health crisis that further led to an economic crisis. When looking at the economic development, it can be seen that even though the current economic situation is devastating for a high number of companies, there are a few companies that can see themselves as winners of the crisis. Amongst them are the big four dominant technology firms: Apple, Google (Alphabet), Amazon and Facebook. When following the developments on the stock market and the first quarterly earnings calls of the four big tech firms two things get clear: Firstly, the GAFA companies reported a significant amount of cash reserves in their financial results for the first quarter of 2020. With reported cash reserves of USD 40.174 million, Apple has most cash at hand out of the four dominating tech firms. Jointly these four companies have USD 120 billion in cash reserves, which is a clear sign that even in the light of the upcoming recession, these companies have sufficient means to grow even bigger. Secondly, when looking at the big tech firms, one can see that after an initial drop during the major outbreak in the United States, an upward trend can be seen. Stock prices of these companies are on the rise, ascending to pre-crisis levels and even beyond. As a result, the five biggest companies of the S&P 500 — Microsoft, Apple, Amazon, Google’s parent Alphabet and Facebook — now account for a 20% of the entire index’s market capitalization.
An indication of what implication this might have can be seen when looking at Amazon, one of the biggest winners of this crisis. When Jeff Bezos advised his investors that they ‘may want to take a seat’ at the Q1 earnings reporting, he prepared them for the news that he is expecting to invest the projected second-quarter earnings of USD 4 billion in coronavirus related efforts. This is clearly in line with their business strategy to prioritize long term wins over short term gains, which in turn means future growth and more market power for Amazon.
Following these news made me start thinking about possible influences of recent developments on competition and innovation in the high technology field and the way the big tech firms are dominating our economy. More and more prominent voices are raising issues with regards to the monopolistic power of big tech firms, amongst others democratic presidential candidate Elizabeth Warren and NYU Stern School of Business Professor Scott Galloway. It is being questioned whether there should be a growing concern about the formation and execution of antitrust laws in order to prevent those firms from gaining monopolistic power. To better understand the importance and dynamics of antitrust laws and the role and effect of monopolistic power, I decided to take a look at the historical development of antitrust laws in the U.S.. How have antitrust laws been developed? Were there any prominent cases in this field that can be taken as a benchmark for today’s situation. What would be the benefits and the potential risks of breaking up these big tech firms?
The emergence of Antitrust laws
During the late 19th century and the early 20th century, the U.S. government and the Department of Justice (DOJ) formed the first antitrust laws. The primary purpose of these laws was to fight against concentrated market power and to create an economic environment that enables new players to enter the market and participate in the competition. Motivated by a reaction to the industrialization in the 19th century and a high concentration in the market environment, the U.S. government argued that too much power was in the hand of too little companies. On the forefront of the consolidation and market power concentration movements were leaders like J.P. Morgan and Rockefeller that believed in the benefit of consolidating entire industries into a single entity.
The rise of antitrust laws resulted in a split-up of significant companies and trusts by the end of 1910, however as the first World War began the enforcement of antitrust laws started to loosen and regulations and enforcements towards antitrust depended heavily on the political will of agencies, courts and the president. With Roosevelt trying to energize the economy and move out of a depression-era, another wave of antitrust laws began, which was put apart as soon as the second World War began. As a reaction to the developments in Germany and the role of concentrated power during the war, the most aggressive period of antitrust laws started. The time was characterized by big monopolies in steel, chemicals, electricity, coal and various other industries and the high concentration of power was a determinant factor during the second world war. This resulted in a period of peak antitrust, where U.S. Congress faced mergers with high criticism. The enforcement of antitrust laws resulted in a movement towards diversification in the U.S. economy, as the government did not allow mergers between firms in the same industry. Following these developments, the period of loosening antitrust laws began, led by Regan stating that the government should get out of business. The main argument for cutting back antitrust regulations was that big mergers could be an enabler for innovation and increased efficiency. Regulations were put into place that formed reactive antitrust laws in case the consumer was facing harm. Standards put into place during the 1980s and the Regan administration, are still in place today.
Antitrust laws are predominantly in place to protect the consumer and therefore to prevent oligopoly structures that lead to unbalanced markets
Even though talks of introducing stricter regulations around privacy and concerns about digital monopolies have faded from the political agenda as the coronavirus crisis dominates, it is more important than ever to reflect on the role of antitrust laws and the relevance for today’s economy. When looking at these developments, we have to ask ourselves the question whether a reactive approach towards antitrust concerns is the right way to act. We need to take a look at characteristics that are specific for high technology firms to evaluate whether antitrust laws formed 40 years ago are suitable for technology firms in the 21st century. There needs to be a balance between interventions from the government side in order to reduce the concentration of power and herewith allowing innovation and on the other hand enabling mergers and acquisitions to leverage resources with the aim to increase efficiency and create synergies between companies to enable innovation.
Is it still feasible to make use of antitrust laws that were built on developments in industries like steel, coal and electricity? Or do we have to take a look at technology firms from a different angle? Can the market development for high tech firms be predicted as easily as 40 years ago for the industries mentioned above? And is market share even a suitable determinant when assessing monopolistic power?
In order to find plausible answers to all the questions above, I will dig deeper into the specific characteristics of big tech firms and how these might influence the need for changes in antitrust laws. I will take a closer look at the impact of the current crises on future M&A activity and herewith reflect on the question of what developments might be happening in the big tech universe.
