This month, a US judge ruled that “Google is a monopoly, and it has acted as one to maintain its monopoly”. That finding opens the way to a wide range of additional steps, including potentially a forced break-up of Alphabet, Google’s parent company.
First, a bit of context. There’s a reasonably broad political consensus in the US that a small number of large tech companies wield too much power. Of course, both Republicans and Democrats usually believe that technology companies tilt the playing field in favour of the other side, but they agree on the basic point.
In recent decades, antitrust issues have largely been neglected in the US, allowing big companies to get bigger. The Biden administration, however, committed to taking a more robust approach to antitrust issues, targeting companies that abuse their market power and, as a result, restrict consumer choice.
It’s been a slow process, but this month’s ruling is one of five antitrust actions currently targeting some of the large tech companies (Google, Amazon, Apple and Meta). You’d guess that the US Department of Justice’s success in this case will give them confidence to keep going. Microsoft isn’t currently on the list, which is slightly ironic since Microsoft successfully appealed a ruling calling for it to be broken up for abusing its market position back in the 1990s. It’s a bigger business now than it was back then.
Why does this matter for investors? There are a couple of points to make. First, these are some of the largest companies by market capitalisation in the world, and have driven a lot of the market returns over the past few years. Second, it’s worth highlighting again the steady drift higher in US profit margins over the past few years. Strong profit growth in US tech companies explains a lot of that improvement.
It’s an important reminder that most investors don’t usually look for competitive industries – quite the reverse. They like sustainable monopolies, so long as they own them.
So, should investors be concerned about the risk that regulation will hit big tech profits? Again, a few points to make. It seems likely that the US government will try to take a more active stance against tech businesses with very high market share – and Google’s position in advertising is probably the most obvious example. But, there are a lot of potential remedies that could be applied before we even consider a forced break-up. You’d guess that the big tech companies will deploy a well-planned playbook of lobbying and concessions to protect their positions. Whatever conclusions we end up with will likely take a number of years and be subject to several appeals.
It’s also important to remember that the government may not win its cases against these companies. A survey of US antitrust professors from earlier this year asked them to rank the strength of the Department of Justice’s case. Opinions varied, but relatively few professors expected the US government to win all five cases, or even the majority of them. The case against Google was widely agreed to be the strongest, which is interesting given some of the potential risks to search that could potentially come from generative AI.
Where does this get us? We’d guess it’s too soon to start panicking about the profit pools of big tech companies, even if the regulatory environment looks set to get a bit tougher. Wherever we end up, it’ll take some years before we get there and there are a lot of intermediate steps that these businesses could take to mitigate some of these concerns. But it does seem that the increased anti-trust focus on big tech is here to stay.
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