Too Much Power

“Too much power.” These words were included in Chairman Cicilline’s opening remarks Wednesday. Three simple words, yet effective enough to set the tone for the next 5 hours. What a week this has turned out to be. Several major areas were hit: the big tech hearing, big tech earnings, the FOMC meeting, 2nd quarter GDP, and the end of the extra $600 in unemployment benefits. But arguably the most notable was the antitrust hearing on Capitol Hill Wednesday. This would mark the first time all 4 CEOs would testify to the Congressional antitrust subcommittee together.

So, let’s begin with the big tech elephants in the room. On Wednesday, the chief executives of the largest 4 tech firms in the U.S. (Apple, Amazon, Google, and Facebook) were called to testify on Capitol Hill regarding their prominent influence in e-commerce, the internet, and social media as well as the tactics they used to achieve it. Though not about antitrust regulation, the last time we saw this many high-profile nonbank industry giants on Capitol Hill was the big tobacco hearing back in 1994. At the time, the large tobacco CEOs had denied the addiction claims of nicotine as well as the detrimental health effects of tobacco. A legal settlement, which came to be called the Tobacco Master Settlement Agreement, found the companies liable for $200 billion to be paid to states over 25 years. But I digress. Big tech isn’t a direct health concern to consumers, and Congress isn’t going to slap them with a $200 billion settlement for people irritated by the internet and social media.

Now, the thirteen months leading up to the hearing, an investigation was conducted by the antitrust subcommittee into each of the names that involved hundreds of hours of interviews and analyzed more than 1.3 million documents by anonymous sources inside the companies, former employees, and clients doing business with or through them. The investigations outlined the topics of discussion for Wednesday’s hearing with each tech giant being targeted for specific, alleged issues. The focus for Facebook’s CEO, Mark Zuckerberg, was on the way his company acquired nascent companies through tactics of developing similar apps to the company they wish to acquire in an effort to eliminate possible competition down the line. For Google’s CEO, Sundar Pichai, it was pressing on the issues of using search and advertising to favor Google’s own pages and products as well as accusations of stealing content from competing services. For Apple’s CEO, Tim Cook, the issues surrounded the App Store’s influence on the app developers, and the 30% commission from any paid apps and in-app purchases of digital content and services. For Amazon’s CEO, Jeff Bezos, it was relating to the treatment of third-party sellers and how seller data was used to create competing in-house brands. However, there is a similar theme between these seemingly dissimilar companies and that is size begets influence. Facebook used its size to assimilate competition (Instagram & WhatsApp), app developers on Apple’s App Store have to be complacent with the fees due to the very limited number of platforms in the mobile app market (Google’s Play Store), Amazon’s third-party sellers heavily rely on Amazon because of its significant user base, and Google can leverage its power of being the world’s dominant search engine (91% of the market).

So, what happens now? Cicilline didn’t leave this part up to interpretation and ended the hearing on an actionable note, “These companies, as they exist today, have monopoly power. This must end.” The next step comes in about a month after the subcommittee has reviewed all their findings in addition to Wednesday’s testimonies. At which point a report will be published that will provide a framework for what new regulations on not just big tech, but any tech startups could look like. As for the big 4 tech giants, they are currently still under investigation by antitrust officials from the Justice Department, and could be called into court if findings reveal any antitrust violations. However, Google seems to be the furthest along with the DOJ expected to announce a case soon on alleged antitrust violations regarding its online advertising.

The biggest threat right now for the companies is a breakup. Quite frankly, if any are even on that path now, we’d be in the very beginning stages of it. However, if history is any indication, who’s to say a company isn’t better off as two or more companies? The breakup of Ma Bell in 1984 (once AT&T’s informal nickname) into the seven “Baby Bells” led to the formation of multiple leaders in the telecom industry that we know today (AT&T, Verizon, and CenturyLink). An even older case was the breakup of Rockefeller’s Standard Oil in 1911 which led to the formation of successful leaders in the oil industry today (ExxonMobil, Chevron, and BP). The common theme here is that competition breeds development and innovation and has nearly always benefited the end consumer.

On another note, the Fed also met on the same day as the antitrust hearing where Powell continues to stress the same message the committee has been saying throughout the pandemic: rates will not go below zero and the Fed will continue working to stabilize and provide liquidity to the financial markets. Powell also called upon Congress once again to preserve income for unemployed workers as the $600 in extra unemployment benefits is set to end at the end of the week. On Thursday, the highly anticipated 2nd quarter GDP numbers confirmed the worst as the U.S. economy contracted roughly 32.9%. While this number was staggering, investors had, for the most part, priced in this possibility as we only saw a momentary impact to the market on Thursday that quickly recovered as investors awaited big tech earnings. Apple, Facebook, and Amazon rallied Friday morning due to positive earnings and revenue surprises from their prior night’s earnings calls which had confirmed their resilience as leaders of the S&P 500 in the face of the pandemic. Unfortunately, Google lagged the next morning as it reported its first revenue decline since it came to the public markets.

As we move into the late summer months, we do not anticipate making any major changes to client portfolios. With the S&P continuing to trend closer and closer to its all-time highs, we’re finding it difficult to spot any high-quality businesses trading at much of a discount. Knowing this, we plan to stick to our process and will look to take advantage of opportunities as they come by.

As always, please don’t hesitate to reach out with any questions or concerns you may have. And if you haven’t already, please sign up for part 4 of our Portfolio Construction series titled, Bringing it All Together, on August 12th. Please see below for the two available sessions:

Session 1: 11 AM – 12 PM

Session 2: 4 PM – 5 PM

Stay safe everyone!

Matt