Should Tech Titans Be Broken Up?
Zacks Investment Research | May 30, 2019 04:35AM ET
The conversation around splitting up technology companies is gathering momentum because of their attitude to governance in the face of growing discontent about the way they treat privacy and antitrust issues.
The two primary culprits are Facebook (NASDAQ:FB) and Alphabet’s (NASDAQ:GOOGL) Google because of their size and the way they control the platforms for information dissemination in the world today.
Being the de facto gatekeepers of the world’s information, they have the onerous duty of maintaining honesty, integrity, fairness, neutrality, transparency and privacy in this activity, something that may at times be in conflict with their need to maximize profit. So the problem boils down to the need to satisfy users and lawmakers on the one hand and investors on the other.
As far as lawmakers are concerned, these mega platforms are to a large extent their making. It’s not by chance that the U.S. has its own Facebook, Google, Amazon and Apple. Policies have in the past supported the creation of behemoths that have today become a phenomenon beyond everyone’s control. And it comes with a feeling of entitlement for these companies that could do no wrong just a few years back by virtue of their representation of America’s power and progress.
That could be why Facebook executives Zuckerberg and Sandberg glibly ignored summons to testify before the international grand committee on big data, privacy and democracy, hosted by Canada’s parliament in Ottawa. While the company did send its subject-matter experts, the disrespect to lawmakers around the world didn’t go unnoticed.
Jim Balsillie, chairman of the Ontario Centre for International Governance Innovation said, “By displacing the print and broadcast media in influencing public opinion, technology is becoming the new Fourth Estate. In our system of checks and balances, this makes technology co-equal with the executive, the legislative and the judiciary… When this new Fourth Estate declines to appear before this committee — as Silicon Valley executives are currently doing — it is symbolically asserting this aspirational co-equal status ... The work of this international grand committee is a vital first step toward redress of this untenable current situation.”
New Democratic Party lawmaker Charlie Angus added, “Facebook has serious responsibilities in terms of the misuse of the platform that has led to mass killings in Myanmar, the undermining of electoral systems around the world, the attack on private rights and citizen rights.”
As legislators around the world get together to control the influence of American technology companies, it’s high time the government did something about the situation. This could be why representatives on both sides have started calling for a split up of Facebook, which could open the door to splitting up other companies as well.
Get The News You Want
Is Splitting the Solution?
The big question here is whether this is the solution, i.e. whether it addresses the problem at all.
Take Facebook for example.
Splitting up the company would mean that WhatsApp, Instagram and Facebook will be different companies. While this could garner undivided management time to solve privacy and other issues, it’s still a practically insurmountable task given that there are billions of posts every day. So filtering fake news remains a problem.
Facebook has already stepped up hiring to manually remove offending posts and is supplementing this with artificial intelligence-inspired suggestions/algorithms. The results are disastrous. Until the government can come up with a viable solution to the fake news problem, splitting up the company won’t help.
The privacy problem on the other hand may be easier to solve by regulating the business as a utility. If Facebook doesn’t have a financial need to capture or sell user data (to advertisers), it can be more scrupulous about it and collect data only when it’s required to improve the service.
Read about Facebook’s antitrust problem here and why I disagree with Zuckerberg’s comment that it isn’t a monopoly: Facebook Roundup: Regulatory, FTC Fine & More of The Usual
In Google’s case too, there’s both a dominating aspect and a privacy aspect.
The company collects a whole lot of information on you through its Android OS, the questions you type into the search box, the links you click on, the music you listen to on YouTube, the location evident in Maps, the apps downloaded from Play Store and through Nest devices, Chromecast, smart displays and other automated home devices linked to its services. The company in fact knows more about you than you may be aware of about yourself.
But as the EU leaned in favor of RTBF, signed the GDPR into being and slapped successive fines on the company (that it is of course appealing), Google has over time made it easier and easier to access your data and delete it if you like.
Google’s bigger problem at the moment is related to its dominance that it can do little about. While it’s true that Google is the life blood of the Internet to the extent that it supports smaller content providers, the company’s own services are at times in competition with these providers. Google’s propensity to favor its own services led to a fine in the EU and could potentially land it in more trouble elsewhere if it doesn’t mend its ways.
It’s also widely believed that Silicon Valley has a liberal focus and there are a lot of questions about the way its algorithms rank pages.
Google also bundles a group of its most important apps with the OS that it doesn’t get paid for. Calls to disassociate the app bundle from the OS are a big headache for Google because there isn’t any other way to monetize the OS.
On the other hand, this bundling and related agreements with manufacturers to preload no other apps tends toward anticompetitive behavior. That’s because users are wooed into the Google ecosystem this way, and if they are more or less happy with it, they may not try another alternative, thus deterring innovation in the space and limiting customer choice. This problem led to another fine in the EU but other countries are yet to take action.
Google’s other businesses still contribute a small fraction of its revenue, so splitting up the company won’t have much of an impact.
In Apple’s (NASDAQ:AAPL) case, there is no privacy issue. In fact companies like IBM (NYSE:IBM) and SAP AG (NYSE:SAP) are tying up with the company at the enterprise level precisely because it has been such a responsible custodian of user data (even to the detriment of its own products like Siri).
Apple’s problem is related to its dominance that I’ve gone into some detail here: Apple's Antitrust Problem .
As far as Amazon (NASDAQ:AMZN) is concerned, there’s no denying that the company is dominating ecommerce, not only in the U.S. but also several other markets. It’s also guzzling up a huge amount of user information as it processes sales. Amazon’s strategy is to price as low as it can and since this is good for consumers, nobody is complaining. Also, sales information is something incidental to the carrying out of operations, so there seems to be little to complain about.
While there is the growing list of private labels that get preference at Prime Day, the company’s ecommerce business is so huge that this is nothing but a little boost to profits, there’s unlikely to be any danger to small sellers.
Also note the number of devices it has started selling, entering your living room with its Fire TV and then moving on to Echo and other Alexa-powered devices.
Google, Facebook and increasingly Amazon are major players in the advertising market, dwarfing any others in the space. So there’s a certain amount of momentum these companies enjoy. The size of their platforms makes them very attractive for advertisers and so, there is a bigger demand on them for tools that can better target users. As long as advertising remains the main source of revenue, splitting up a company will cripple it without solving the problem at hand.
Conclusion
It’s worth noting that the larger the platform, the greater the complexity and the lesser the likelihood of a perfect solution. At the same time, weakening technology companies financially is not a good idea at all. They are the ones that have made the maximum progress in developing artificial intelligence, spending many more billions in the space than the government.
If you consider that it is China’s stated goal to become the leader in artificial intelligence and also that they will leave no stone unturned to get there, what you don’t want is to cripple your own chances of staying ahead. Privacy is an important issue but it does appear that there will have to be some compromises.
Facebook carries a Zacks Rank #2 (Buy) while the others carry a Zacks Rank #3 (Hold).You can see .
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