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Equity Perspectives

What effect might potential government actions around privacy and market dominance have on Google, Amazon, and other major Internet firms? 

The Issue: Increasing Regulatory Risk for Big Tech
Could major U.S. Internet companies, already facing regulatory pressure from the European Union, begin to encounter similar difficulties in the United States? On September 12, the European Union’s copyright directive aimed at major Internet companies passed a preliminary vote, with a final vote scheduled for January 2019. The legislation would require Internet platforms to pay for links to news and other content (a so-called “link tax”) and create filter systems to prevent copyright infringements of material from news and other content providers. The European Union had already passed far-reaching legislation on Internet privacy with its General Data Protection Regulation initiative.

What does this have to do with the United States? Institutional research outfit Washington Analysis recently noted that similar topics are being discussed at a series of hearings by the U.S. Federal Trade Commission (FTC) that will run through January 2019.  According to Lord Abbett equity analysts Eric Ghernati, who covers technology stocks, and Tulu Yunus, who follows the U.S. communication services sector, FTC chairman Joseph Simons has set an “aggressive” agenda of hearings on various topics around Google, Facebook, and Amazon, three of the so-called “FAANG” group of big-cap technology names.1 Washington Analysis pointed out that the FTC does not have rulemaking authority, though the Commission may use trade regulation rules to remedy what they perceive to be unfair or deceptive practices that occur on an industry-wide basis. Any statutory changes to copyright laws would have to come from the U.S. Congress, “which is highly unlikely given its current dysfunction.”

Still, the market remains sensitive to concerns over increased scrutiny of “Big Tech.” Ghernati and Yunus believe that the European Union’s copyright directive vote on September 12 weighed on share prices of Facebook and two other social media companies—Twitter and Snap Inc., parent of Snapchat—as well as search giant Google, and that regulatory concerns in the United States remain a big debate around many Internet stocks in general.

Impact Assessment   
“We don’t really see [the September 12 vote] as a game-changer in any way, though it does add to negative headlines around regulation in the sector,” the analysts said. More specifically, the analysts believe that social media names such as Facebook, Twitter, and Snapchat could face potential headwinds from the EU legislation, while there would likely be “no material impact” on Google.

The analysts cited a number of reasons why they were “not highly concerned” about the EU news. First, the directive is “a long way” from becoming law in the broader European Union, as member states will take the guidance and draft their own laws after passage of the directive, if it passes, in January. Second, they figure that the likelihood of such regulation “emigrating” to the United States remains small at this time. The analysts noted Washington Analysis’s assessment of the limits of the FTC’s power, and the reduced likelihood of congressional legislation in the current U.S. political environment. Finally, they think the “link tax” may result in some negative unintended consequences. Versions of the copyright directive passed in Spain and Germany have proven disruptive to consumers, news aggregators, and press publishers, including the shutdown of Google News in Spain.

As the analysts weighed these European regulatory matters, questions about the U.S. regulatory environment emerged. In recent weeks, President Trump and a number of U.S. lawmakers have expressed concerns about the market power of the major tech companies, along with user privacy issues and the potential politicization of search results. Ghernati thinks it’s worth considering a related question: What’s the risk that dominant Internet companies such as Google and Amazon could face a much heavier regulatory hand from the U.S. government, including possible antitrust actions?

Breakup Breakdown
Ghernati, who covers Google and Amazon, offered his perspective. For Google, he doesn’t see antitrust to be a “serious risk” because the company provides a free service to consumers. While the FTC can initiate investigations2 if it believes laws—or in this case, consumer privacy— have been violated, it is difficult to make a case that consumers have been harmed or that competition has been stifled to cause an unwarranted increase in the price of Internet consumption by the presence of Google. Internet users do have alternatives to Google, which offers mostly free services, in terms of search and other Web services, but “Google happens to be the best” in many of these areas. While the U.S. government can regulate privacy matters, Ghernati believes Google has been, and remains, more compliant on privacy “than most give it credit for.” Google did suffer a recent setback, however, after The Wall Street Journal reported on October 8 that the search provider exposed the private data of hundreds of thousands of users of the Google+ social network, and then decided not to disclose the issue.

As for Amazon, Ghernati believes any antitrust action against the company “opens up a precedent that’s tough to support.” He noted that while the e-commerce giant is “capturing a disproportionate amount of economic growth … that’s not because the market structure is supportive of it, or that the company is doing anything that supports regulators’ inquiries—it is just that competition has been slow to respond.”

Ghernati also believes that “it would be difficult to impose hefty regulation against ‘national champions’ [U.S. companies that are global market leaders]” like major technology companies while Trump is pursuing aggressive trade actions against China.

Ghernati and Yunus directly addressed the antitrust question. They reiterated that current U.S. antitrust guidelines call for using consumer prices as the proxy for consumer welfare, and pointed out that it would be difficult to make cases against companies whose products and services are free (Google and Facebook) or whose prices are among the lowest available (Amazon). They noted that while some have sought to expand the meaning of consumer welfare beyond prices (e.g., tech’s impact on the labor market and innovation), “these definitions won’t change overnight.” While there has been speculation that the FTC may launch an antitrust investigation before Trump’s first term is up, “inside the current law, any remedies are likely to be immaterial.”

How might the U.S. Department of Justice approach the market dominance of the tech titans? The analysts cited a Q&A with Makan Delrahim, the current U.S. Assistant Attorney General for the Antitrust Division, that appeared on the technology news site Recode.3 Delrahim spoke positively about the U.S. government’s antitrust lawsuit against Microsoft, settled in 2001. The limits placed on the software firm in the settlement fostered greater competition, allowing for the emergence of Apple and Google as major players in the tech landscape. More important, “Microsoft didn’t need to be broken up.”

The Conclusion: Major Regulatory/Breakup Risks? Not Likely, for Now
Ghernati and Yunus summed up their views in a joint note to colleagues: “Given all this, the risk of a breakup of any of these [major U.S. technology] companies feels relatively low at the moment.” In the meantime, however, with the next round of FTC hearings and U.S. midterm elections looming, “investors can expect to see headlines around regulation continue.”

 

1FAANG is a popular acronym for five high-performing technology stocks: Facebook, Amazon, Apple, Netflix, and Google [now Alphabet, Inc.].

2More information on Section II.b of the FTC’s investigative and rule making authority can be found at https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority

3Eric Johnson, “Full Q&A: Assistant Attorney General Makan Delrahim talks antitrust on Recode Decode,” Recode.com, September 1, 2018.

 

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