The End of Tech Stocks? – FAAG at risk

The house of representatives has published a 450-page long report that big tech companies (specifically FAAG), are disrupting innovation.

In this post, I will be summarizing the most important points to take away from the report, and factors to consider when investing in Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG).

Background Information
America’s antitrust laws date back to the 1890s. Standard Oil, an American company founded by John D. Rockefeller, secured 88% of America’s oil market share within 20 years, through aggressive acquisitions of fuel and railway companies. They’ve been criticized for using their monopolistic status to impose higher costs of transportation for their counterparts.

Rockefeller took over railway companies, which were essential in transporting goods throughout the country. Without transportation, no business could be done. What these mega tech companies are doing today is very similar to what Rockefeller did back then. Applications cannot reach the general public without being registered on Android and Apple’s app store. People looking to sell goods online must go through Amazon at some point.

As a result, in 1911, the US Supreme Court ruled that Standard Oil Trust must be dissolved under the Sherman Antitrust Act and split into 34 companies.

What has been suggested in this report is the probability of having to split FAAG, just like they did with Standard Oil in the 1910s, as both cases demonstrate similarities in the essence of their business models and strategies.

House Judiciary Antitrust Report
- It took 16 months to investigate and finalize the 450 page long report
- Targeted companies in this report are: Facebook, Google, Amazon, and Apple
- They have analyzed 1.3m documents and interviewed 250 players, dissecting these businesses in every detail possible

Amazon (AMZN)
The report claims that Amazon wields monopolistic power over third-party sellers. E-commerce sites such as Amazon offer two types of products: products that they source themselves and sell online, and products that are registered on their online marketplace by a third party seller. What’s suggested in the report is that the third party sellers using Amazon’s sales platform are at a disadvantaged position, as Amazon exposes more of their own products (which have much lucrative margins), rather than products listed on their marketplace.

Apple (AAPL)
In the case of Apple, the report states that there is an unfair monopoly over software distribution. Apple not only takes a huge amount of fees from the apps that are listed on their app store, but also from in-app purchases. They can also refuse to distribute the apps that they dislike, because all the apps that get listed on the app store go through a process of authorization.
For instance, if Apple were to launch a new music app, and decide to get rid of all other music streaming related apps on their app store, consumers would have no choice but to use Apple’s new app.

Facebook (FB)
The report suggests that Facebook possesses dominance in social networking. In a chart that demonstrates the number of monthly active persons (MAP) of social media companies, the order goes as follows: Youtube, Whatsapp, Facebook, Facebook Messenger, and Instagram.
Notice that except for Youtube, which is owned by Google, the top 2-5 applications with the most users all belong to Facebook. What’s even scarier is that Facebook is extremely good at either copying new and prominent services, or simply acquiring them.
Facebook can make a copy app of an existing application that possesses innovative services. Facebook can then use their platform to support traffic into their copy app (the cross promotion between Facebook and Instagram is one of the major reasons that the company grew exponentially).
When Facebook offered to acquire Snapchat (SNAP), they also mentioned that they were not only capable, but willing to make an app that offers the exact same service, which would ultimately do better, as Facebook possesses a bigger and smarter team, and more capital to invest in advertising.

Google (GOOG)
Google possesses monopoly over online search and search advertising. Thus, they can lead users into services that Google is supporting, or expose more results of companies that have paid Google for advertising (outside sponsored links). They can cherry-pick which results to show people, and essentially lead people into search results that Google wants them to see.

The report also demonstrates a list of all the companies that FAAG acquired, which reflects these companies’ strategy of ‘join us or die’.

Solutions
The report states that splitting these companies is a probable case. There could be different ways in splitting a company. For instance, in the case of Amazon, it could be split into two different companies, each focusing on e-commerce, and cloud services.

Another solution is to strengthen antitrust laws to prohibit big mergers and acquisition contracts.

The last solution is related to the significant amounts of data that these companies collect. The data they collect are used to expand into their next business, and the government’s solution to stop FAAG’s dominance is to limit their data collection.

Essentially, the government’s goal is to restore competition in the digital economy, as there aren’t any more companies that can challenge FAAG.

Conclusion
There is a lack of consensus between the democrats and republicans, making it difficult to settle on a clear solution. This report dominantly reflects a democratic stance on the issue. The irony is; the more earnings these tech stocks generate, and the more market share they take, the worse it could be for the stock’s price. Wall Street is betting on Biden’s victory, and if that becomes the case, these tech stocks will take a huge hit for the short term. From another perspective, however, this means that it’ll also be an opportunity for the smaller tech stocks, which have been under FAAG’s shadow, to shine.

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