Margrethe Vestager, the European Union’s (EU) antitrust chief, continues to nip at the heels of big tech. She has decided to launch two new antitrust cases against Apple (US:AAPL), looking at its commission structure on sales and subscriptions made via its App Store, and a separate investigation into the manner in which Apple Pay should be used in merchants’ apps and websites. The European Commission has previously taken aim at Apple over its tax arrangements in the Irish Republic, while other US tech counterparts such as Google parent company Alphabet (US:GOOGL) have also previously come under scrutiny from European regulators.
News on the Apple probes followed an earlier report in the Wall Street Journal that Ms Vestager has also trained her sights on Amazon.com (US:AMZN), specifically the way in which it exploits data generated from third-party retailers on its site.
Trading blocs are protectionist by nature, so there is a certain irony in an EU competition commissioner going after the world’s largest online marketplace. Nevertheless, it is the latest sign that the Danish politician is intent on reining in business practices, which my colleague Alex Newman believes are the result of “a long-sighted, often creative and sometimes brutal drive to dominate every market it [Amazon] touches”.
A company does not have to achieve pure monopoly status to garner some of the related benefits, such as lower long-run average costs. If adequately capitalised, it can simply crowd out competition by prioritising market share over profitability as its footprint expands. This criticism has been levelled at Amazon in the past, as reduced competition can potentially result in unfavourable price structures for consumers over the long haul.
This time around, however, the EU Commissioner is apparently more interested in Amazon’s ability to utilise the metadata linked to sale patterns for its third-party retailers, with a view to creating Amazon-branded products which then compete with the original goods. In an instant, Amazon can tell which products are flying off the shelves and which third-party vendors are attracting the most attention.
Legal challenges proliferate as online dominance grows
Big tech companies are now faced by legal challenges across multiple jurisdictions, with the step-up in institutional scrutiny a possible reflection of how regulatory frameworks often lag technological change. For investors, these latest developments again raise the question as to whether regulatory risk has been adequately priced in to valuations for the US tech giants. Although this is nigh on impossible to quantify, at the very least it should remind us that these businesses are certainly not inviolate.
From Wuhan to Silicon Valley
The orthodox view is that the global pandemic, or rather our response to it, has enhanced the market position of the FAANGs. With more commercial functions and personal interactions being conducted online than ever before, their reputation as modern-day utilities has been further entrenched. Although this view is eminently reasonable, we cannot blithely assume that the enforced changes in behaviour will fundamentally alter the way that businesses and consumers act over the long run. They may well accelerate existing trends, but we cannot say with certainty if they will resonate fully over the long run. For now, there is no 'new normal'.
What we can say is that big tech has been propping up the major US indices through the second-quarter rally, on the back of what Alex Newman describes as “an unwavering allocation to fast-growing US-based market winners” – for “unwavering”, should we read “indiscriminate?” For even as the EU was zeroing in on Apple's alleged antitrust practices, the Trump White House was leaking details of what is termed the “Executive Order on Online Censorship”.
All the President's memes
The Executive Order targets social media companies and the liability protections they enjoy under Section 230 of the Communications Decency Act, which make it virtually impossible to sue an online provider for defamation because of third-party posts on its pages. Section 230 was originally formulated to allow the nascent online media industry to take root in the economy by providing protections not afforded to conventional media outlets and the press.
The legislation effectively treats the likes of Facebook (US:FB), YouTube, and Twitter (US:TWTR) as if they were public forums, largely devoid of editorial accountability. The Executive Order was triggered by a recent decision by Twitter to flag as “potentially misleading” two of the President’s tweets, his favoured mode of communication. The argument runs that the online media companies should not enjoy the protections set out in the legislation if they selectively editorialise content. Conversely, others in Washington pour scorn on the online providers because they have failed to adequately monitor their platforms (a case of damned if you do, damned if you don't).
Priced for world domination
Judging by valuations, it seems as though institutional investors are sanguine in the face of regulatory risk. On the day that Facebook was hit with a multi-billion dollar fine over the Cambridge Analytica fiasco, its share priced crept up slightly. The ongoing lockdown measures have also been favourable for Facebook and other social media sites, but they have been doubly so for Amazon, which will capture a significant proportion of the growth in e-commerce with conventional retail activity curtailed.
It helps to explain why the group’s share price is up by a third this year, even though aggregate demand in many advanced economies has slumped alarmingly. A diversification in favour of non-retail revenue streams has reinforced margins, with the web services arm now generating the lion’s share of profits. Amazon's shares are priced for world domination on a forward price/earnings multiple just shy of three figures. Even aside from Ms Vestager’s attentions, there must be several favourable assumptions built into the current valuation, something of a worry as the regulatory regimes tighten, possibly with a view to putting the brakes on further vertical integration.
