As investors, we’re all missing the bigger meaning in last week’s $2.7 billion EU antitrust fine against Google.
It’s not just a fine. I believe it’s the opening shot in a soon-to-erupt antitrust war — pursued on both sides of the Atlantic — that’s going to take down some of techland’s most dominant names. (Yes, Amazon, I’m talking about you.)
Maybe that sounds just a little hyperbolic. A little too “out there.”
But I’m here to tell you this: The stirring of antitrust activity goes hand in hand with overheated markets that only amplify the power of a few companies that become too big, too dominant … in a word, too powerful.
When that happens, it’s only a matter of time before regulators step in.
It hasn’t gotten much press yet, but it’s already happening in the U.S.
Late last month, a federal judge ruled that a Federal Trade Commission (FTC) antitrust lawsuit can proceed against Qualcomm Inc. (Nasdaq: QCOM).
Qualcomm happens to be the largest independent manufacturer of chips used in smartphones (including those made by Apple and Samsung) in the world.
As the tech-news blog the Register noted a few months back:
The FTC alleged [Qualcomm] trashed U.S. antitrust laws by abusing the fact that it supplies baseband chips to a substantial chunk of the cellphone market. This gives it the ability to lean on the likes of Apple [which is also suing Qualcomm], and force them to sign expensive licensing deals that covered technology Qualcomm doesn’t even use in its chip blueprints, it is claimed.
In other words, Qualcomm has just gotten too damn big.
The FTC started investigating Qualcomm in 2014. Not coincidentally, that’s when the stock was at its highest price since the days of the dot-com boom years earlier. Today its 30% lower.
‘Softie Gets Sacked
The same thing happened to Microsoft Corp. (Nasdaq: MSFT) a generation ago.
In 1997, the company was flying high, its stock up 1,300% in six years. Nine out of every 10 people surfing the Internet then were using Microsoft’s Internet Explorer Web browser.
The Justice Department and the FTC had been nibbling around the edges of Microsoft’s business for years, but the roaring dominance of Internet Explorer — preloaded by PC manufacturers at Microsoft’s insistence — was the last straw.
In November 1999, the federal judge hearing the case issued his ruling: Microsoft held monopoly power and used it to harm consumers and its business rivals.
Microsoft shares hit their top price a month later — three months before the Nasdaq’s dot-com boom ended — and rolled over.
The shares wouldn’t recover those highs for more than a decade.
The Great 1970s Copier War
In 1959, an obscure photographic supply company named Haloid came out with a revolutionary device — a so-called “plain paper” copier machine.
Businesses couldn’t buy enough of them. In 1961, Haloid changed its name to Xerox and went public on the NYSE. The stock’s success minted a generation of millionaires, as the shares soared more than 7,000% in the next dozen years.
Even when IBM brought out a rival copying technology in 1970, Xerox Corp. (NYSE: XRX) maintained a lock on the burgeoning copier market with a 95% market share.
But it was all too much for regulators at the FTC. It brought suit in January 1973 against Xerox for unfair marketing and patent practices — dovetailing nicely with the stock topping out at $75 a share.
The shares wouldn’t see that price again for 25 years.
Different Mouse, Different Mousetrap
What makes the contemporary situation so interesting — and potentially dangerous for dominant tech companies such as Google and Amazon, and their investors — is that regulators are slowly developing new legal theories as grounds to break up their dominance.
Historically, antitrust actions boiled down to pricing. In other words, a big company dominates its market, and therefore keeps prices at an unfairly high level.
That doesn’t really apply to businesses such as Google or Amazon. Their strength and dominant power come from owning the Internet platforms that everyone else uses to conduct business.
Indeed, in 2012 the FTC investigated Amazon for alleged “predatory pricing” in the e-book market. But it’s kind of hard to make such a charge stick when Amazon’s actions — as a result of controlling the bookselling platform — drove consumer prices down, not up.
Earlier this year, in her paper “Amazon’s Antitrust Paradox,” Yale legal scholar Lina M. Khan put forth an alternative mode of antitrust attack: The platform itself may be anticompetitive.
“The economics of platform markets create incentives for a company to pursue growth over profits,” she writes, “a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational — even as existing doctrine treats it as irrational and therefore implausible.”
As I’ve noted here and on the pages of my newsletter, Total Wealth Insider, investors should be more than a little cautious about soaring stock prices and the complacent idea that nothing can stop the ride in the price of tech stocks and the broader market in general.
They’re wrong. It’s only a matter of time before antitrust regulators, both in Europe and eventually in the U.S. as well, start using the “power of the platform” as a hammer to beat down techland’s most dominant companies.
Jeff L. Yastine
Editor, Total Wealth Insider
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