Both stocks tumble in value amid fears of rising regulatory scrutiny
Thursday 13 Jun 2019 Author: Ian Conway

After the S&P 500 index lost $1.6trn in value in May due to fears of a tariff-induced US economic slowdown, investors in tech stocks Amazon, Facebook and Google-owner Alphabet faced further heavy losses on the first trading day of June over fears of rising regulatory scrutiny.

Alphabet shares lost 6% in a day, or more than $45bn in market value; Amazon lost 4.6% or $40bn in value; and Facebook lost 7.5% or $38bn in value.

Many UK investors hold these stocks in their portfolio. A further group will have exposure, even if they aren’t aware of it. A lot of investment trusts and funds – covering tech-specific ones to broader global collectives – have these stocks in their top holdings including Allianz Technology Trust (ATT) and Polar Capital Technology Trust (PCT).

It’s therefore important to look at the underlying story and whether the case for investing in these tech giants has changed.

SCRUTINY HAS BEEN BUILDING FOR YEARS

Last month we wrote about the rise of market power and warned that companies with dominant market positions like Amazon and Google were likely to face greater oversight, based on public and political concerns that the playing field has been tilted too far in their favour.

Until now the US regulators appeared to be taking a fairly relaxed stance, whereas the EU Commission has taken a high-profile role in investigating firms which it suspects of gaining an unfair advantage.

In recent years it has fined Google over €8bn for ‘illegal practices’ in search advertising and it ordered Apple to repay the Irish government €14bn in taxes after it ruled that the tax breaks offered to it amounted to ‘state aid’ and were also therefore illegal.

Behind the scenes the Department of Justice’s (DOJ) anti-trust department and the Federal Trade Commission (FTC), who share the job of anti-trust enforcement, have been planning their individual approaches.

Out of public view, the DoJ agreed with the FTC – which investigated Google in 2013 – to take the lead in a new probe into the search giant’s potential abuse of its market power.

FINGERS EVERYWHERE

DoJ officials are interested not just in Google’s dominant position in online search, where it is both a platform for selling advertising space on its own site as well as selling ads on sites across the web, but in its Android operating system which is now used in the majority of smartphones around the world.

The question is whether, given that Google controls much of the technology to buy online ads and its operating system dominates mobile phones, it gives preference to its own businesses in search results, as its accusers argue.

Officials will look at the transparency of the digital advertising business and whether Google is mis-using its position to extract a greater share of online advertising revenues.

Company executives insist that the firm is ‘just helping web users get information’ and letting advertisers and publishers connect better, and that it is transparent about how it promotes its own services.

The company claims that each new product or feature it has developed in recent years has been designed first and foremost to help consumers and to reduce ‘friction’.

FACEBOOK FACES OFF

While the DoJ gets to grips with Google, the FTC has secured the right to investigate Facebook for potentially illegal monopolistic practices.

Facebook has been under considerable scrutiny over the last year for privacy and how it handles users’ data, and has faced record fines for its failure to respond quickly enough to take down violent rhetoric and ‘fake news’. It has also been accused of involvement in election meddling on both sides of the Atlantic.

Founder Mark Zuckerberg admitted at a shareholder meeting recently that ‘if people were re-writing the rules for the internet, I don’t think they would want companies to have so much unilateral authority’.

The FTC hasn’t yet launched an investigation, but it is believed to be looking into whether the firm is stifling competition through its acquisitions of Instagram and WhatsApp.

Zuckerberg has called the argument that Facebook has a dominant position in advertising as ‘a little stretched’.

BREAKING UP IS HARD TO DO

Critics of both firms, including politicians, argue that they are too big and should be broken up, but there is no evidence that cracking down on them to that extent would benefit consumers in the long term. In contrast, breaking them up might stifle innovation and growth instead.

Break-ups are rare but not completely unheard of. Standard Oil and AT&T were both considered monopolistic and were broken up at the US government’s insistence but famously an attempt to break up Microsoft in 2000 failed.

More likely is that the anti-trust probes, when they arrive, will require the big tech firms to change certain business practices or face further fines. They could also see the government take a more aggressive stand in blocking future acquisitions.

Investors obviously need to be aware of the increased business risk of owning shares in these US tech giants going forward, but if history is any guide the regulators are more likely to just take away the punchbowl than try to end the party altogether.

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