Does big tech have a blind spot?
The giants of Big Tech have emerged as the undoubted corporate victors of the past decade.
Throughout that period, companies like Amazon, Facebook, and Google dominated the global marketplace, capturing ever-larger market shares and destroying upstart competitors in their way.
These firms built impressive businesses, and investors rewarded their achievements with doubly impressive valuations: the top five technology companies now account for over 20 percent of the S&P 500’s total value.
Even when the pandemic wrought havoc on national economies worldwide, Big Tech prospered.
Their stunning success is in part accounted for by some very smart and motivated entrepreneurs. But Big Tech’s rise was also aided by decades of ultra-low interest rates and hands-off anti-trust regulation.
When investors have almost nothing to gain by parking their cash in savings accounts or low-risk government bonds, the cost of waiting for future cash flows to materialise declines.
As a result, when interest rates are low, the prospect of achieving outsized returns a couple decades down the line seems more appealing than playing it safe. After all, what have you got to lose in the meantime?
With patient markets and a surplus of cheap money, tech firms could use the capital from their backers to pursue ambitious investments of their own. Consider Facebook’s prescient acquisition of Instagram in 2012 for $1 billion, or its more recent investment in Oculus, a developer of virtual reality hardware, which won’t bear fruit for years to come, even by Mark Zuckerberg’s own admission.
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These sorts of investments persuaded markets that Big Tech could always thwart competition and maintain dominance—either by developing cutting-edge technology in-house or very often simply by acquiring potential competitors outright.
The threat of anti-trust enforcement never seemed serious so long as governments lacked an understanding of key industry dynamics in the first place.
At the same time, leading tech companies operate platforms that work by leveraging the power of network effects: when more users join, product quality improves, generating more and more demand.
Consider Facebook again. With only a few members, Facebook’s platform would be pointless; with 2.85 billion members, it forms a centrepiece of social life that people can hardly live without. Similar dynamics underlie the triumphs of Google and Amazon.
Absent government regulation, network effects make for winner-takes-all markets, where a small number of leading firms rule, and insurgents stand no chance.
And so we arrived at our current situation. Facebook dominates social media, Amazon dominates e-commerce, and Google dominates search. These companies owe their rich valuations to the market’s conviction that they will enjoy monopoly-like powers for a very long time.
But it’s short-sighted to assume that the future will always resemble the recent past. While interest rate movements are difficult to predict, the low-rate environment of the last few decades is already unravelling.
First, globalisation has started to slow or even reverse. That shift means good news in the short-term for workers in advanced economies. Faced with reduced competition from cheap labour abroad, domestic workers will collect higher wages at home—but higher wages for workers translates into higher labour costs for the companies that employ them.
Over the long-term, firms will be encouraged to minimise labour costs by investing in labour-saving automation technologies, much of which have been developed during or accelerated by our recent experience with Covid-19. As demand for capital to invest in these technologies increases, we may find that interest rates follow suit.
Second, after a decades-long period of expansion, the global labour force is now entering a phase of stagnant growth, as millions of Chinese workers age into retirement. In a world with fewer workers who save, and more retirees who consume, the global supply of savings could start to dry up. That would put further upward pressure on real interest rates.
Higher interest rates would trim investors’ patience and limit Big Tech’s ability to pursue the kinds of acquisitions and R&D on which its dominance depends. The valuations of leading tech companies would suffer as their business models face serious threats.
But Big Tech faces greater dangers still. Perhaps more important than the risk of rate rises, governments have started to wake up to the costs of economic concentration.
In the United States, where the giants of Big Tech were born, anti-trust policy remained hands-off and laissez-faire for decades. But American politicians on both sides of the aisle increasingly recognise that’s no longer credible.
Earlier this year, President Biden appointed a prominent advocate of stricter anti-trust regulation, Lina Khan, to lead to Federal Trade Commission. Meanwhile, several of Big Tech’s leading critics in Congress are from the historically business-friendly Republican Party; indeed, the Republican senator Josh Hawley just published a book entitled “The Tyranny of Big Tech”.
In Brussels, the liberal Vice President of the European Commission, Margrethe Vestager is leading a charge against Apple. Over in Asia, the Chinese Government has taken aim at Ant Group, which owns the country’s biggest digital payment platform, and at Didi, China’s answer to Uber. As politicians adopt a tougher stance, Big Tech’s monopolies strategy – of acquiring threatening and disruptive upstarts – could yet be spiked.
Investors rightly acknowledge that policies to mitigate climate change could leave oil companies with billions of pounds in “stranded assets”. It would be a mistake to ignore the risk of a wave of anti-trust enforcement doing the same to Big Tech.
The eighteenth-century philosopher David Hume observed that “the supposition, that the future resembles the past, is not founded on arguments of any kind, but is derived entirely from habit.”
Investors have grown accustomed to the idea that Big Tech’s rise will continue unabated, and in perpetuity. Perhaps the time has come to question that habit.
Read more: Why Vestager’s legacy is about to catch up with her