When George Soros took to the podium at Davos last month, he delivered a stinging broadside to the tech titans. “Davos is a good place to announce that their days are numbered,” railed the octogenarian, multi-billionaire investor. “Regulation and taxation will be their undoing and EU Competition Commissioner Vestager will be their nemesis.”
Mr Soros is one of a growing number of notables calling for tech giants to be bought to heel. There are some deeply dystopian concerns occupying Mr Soros and other likeminded critics, including the prospect that “IT monopolies” could facilitate “totalitarian control the likes of which not even Aldous Huxley or George Orwell could have imagined”. But from an investment perspective, perhaps the most tangible part of Mr Soros’s Davos tirade was his argument that big technology companies are bad for competition and consumers, and “undermine the efficiency of the market economy”.
Because “Facebook and Google effectively control over half of all internet advertising revenue”, content providers have to use their platforms and “accept whatever terms they are offered” helping these big tech firms generate “exceptional profitability”. In Mr Soros’ view they are “near-monopoly distributors” and should be regulated as though they were public utilities with the objective of “preserving competition, innovation, and fair and open universal access”.
What’s more, the tech titans’ control of data and their ability to use it to manipulate users for “their own commercial purposes” allows them to “use discriminatory pricing to keep for themselves more of the benefits that otherwise they would have to share with consumers”.
The mounting concern about tech giants that exploit “network effects”, such as the so-called FANGs (Facebook, Amazon, Netflix and Google), comes at a time when a broader rethink about the role of anti-trust law appears to be under way. A recent Brookings Institute paper provides some stark numbers to illustrate the growing concentration in many industries, including IT. Indeed, the share of US GDP accounted for by Fortune 500 companies has increased from 58 per cent to 73 per cent since 1980, and whereas the top 60 companies accounted for less than a fifth of GDP back in 1954, now the top 20 alone account for over a fifth.
The problem with this, according to the Brookings paper, is that increased concentration may have benefited corporate profits at the expense of wages, consumer welfare and business investment. Indeed, the paper points out that “labour and capital share have been declining simultaneously between 1984 and 2014, offset by rising profits in the non-financial corporate sector”.
While the enforcement of anti-trust laws experienced a shift away from broader consumer welfare and political considerations from the 1970s, the Brookings paper sees a brewing populist backlash and “recent developments on Capitol Hill suggest [that] a serious re-evaluation of the purposes and powers of antitrust law and enforcement has begun”.
A key reason this debate is relevant to investors is that the rise in monopolistic corporate power may be an important factor behind elevated levels of profitability in the US and other developed markets. That means changes in anti-trust laws could have a real, albeit slow and grinding, impact on equity market returns. Arguably of more immediate significance, though, is the fact the FANGs now appear clearly in many influential people’s sights. Given their popularity as investments and their weighting in key US and global indices, that’s significant. The issue is succinctly summed up by Jonathan Ruffer in the latest investment view from his eponymous firm.
“Two thousand years ago, stability was threatened by marauders who could overpower the local authority of a distant power. Today, those marauders take a different form: they are the corporate ‘disruptors’ – the Amazons, Facebooks, Twitters, Ubers which have discountenanced governments, who are unable to stop them conversing across borders, changing the way business is done, how conversations are constructed, all the while avoiding tax. In many investment climates, they would trade at low ratings – the judgement being the speed at which they could grow while conditions remain favourable, counterbalanced by the danger of their business model being de-railed by non–market forces. Today’s market looks only at the element which is benign for the disruptors – but there will be a fight back. We are already seeing one against Uber where the authorities are increasingly imaginative in their resistance to their business model. They remain dangerous investments – remember Minister Fouquet, who overreached himself on seventeenth century France’s milch cows, and who hosted a dinner for Louis XIV, and 7,000 others. Too lavish, thought the king, and Fouquet spent the next 19 years in prison, no doubt on a modest price/earnings ratio.”