The big tech breakup: what are the chances?

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20/08/2020
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Another month and another roller-coaster for big tech. At the end of July, the giants of the United States technology industry gathered on video link: Tim Cook of Apple, Mark Zuckerberg of Facebook, Jeff Bezos of Amazon and Sundar Pichai of Google. These individuals run four companies with a rough combined market capitalisation of around $5 trillion as of 22 July and have revenue streams that make them look like countries. When earnings were last reported Apple had a near $200 billion cash pile (AXIOS). The growth of these firms has brought great returns to individual investors as well as wealth to their CEOs. Even during the recent lockdown, where tech stocks and funds have been resilient to market weakness.

The big four had been summoned before the House Judiciary Committee on antitrust accusations. This same committee, somewhat ironically, posted a link to its official YouTube page for the public to watch proceedings from home. It is unlikely that the committee hadn’t realised YouTube was a Google owned company, so perhaps it was a clever ploy to show how reliant even the government are on these big tech companies.

Fast forward to August and we have President Trump now aiming to have TikTok, a Chinese owned social media company, that has been a huge hit with teens globally, either shutdown or sold to another American tech behemoth, Microsoft. The same tech giant that was ordered by a judge in June 2000, just over twenty years ago, to be broken up into two parts; one to produce the operating system, and one to produce other software components. Although, this never actually happened (Wired). There have also been recent reports that both Oracle and Twitter could be potential suitors for TikTok’s assets outside of China.  Surely the irony has not been lost that a smaller upstart social media company being forcibly sold to an established giant narrows competition and does the exact opposite of what the House Judiciary Committee says that it wants to achieve. This really goes to the heart of the matter of why some believe the U.S won’t break up its big tech companies - at least not yet. The U.S. government has shown its hand to technology investors, it will choose national security and its global influence over any antitrust concerns.

On the surface, breaking up the big technology companies makes perfect sense when viewed from the perspective of the U.S. domestic market. Without question, these companies now hold astonishing amounts of power in a multitude of ways. In many cases, to make the argument that these companies are not monopolies or duopolies is a tough ask. But in the context of the wider world they are at the epicentre of a cultural struggle. Whether we like it or not, the Western world is now in an undeclared cold war with the Peoples Republic of China, which has some technology giants of its own.

Many of China’s tech companies are listed on the U.S. stock market, operating in a similar market space to their U.S. counterparts. Of course, the majority of the users of these Chinese technology companies live in China itself. They do not have the same reach or influence of the United States technology businesses that stretch around the world. But the importance of these tech companies, both from a soft power perspective and for the intelligence gathering qualities they possess, has not been lost on the Chinese. They are now outwardly looking to expand beyond China.

One such battleground is India where both Amazon and Alibaba are fighting for market share in a number of key areas including online payments, ecommerce and cloud computing. Cloud computing is an interesting area. Amazon has its AWS (Amazon Web Services) which is its hugely profitable cloud computer arm, used by some of the world’s most famous brands, such as Netflix, to power their internet sites. Alibaba has Alibaba Cloud or Aliyun in Chinese.

Now no company, certainly of Alibaba’s scale, can operate in China without the involvement of the government, so the chances of the Chinese Communist Party breaking up Alibaba for competition reason seems slim to non-existent. Would it therefore make sense for the U.S. government to breakup Amazon, weakening it in its global competition against its Chinese rival? The same can be said across the full spectrum of United States-based big tech companies: that there is a Chinese rival fighting them for influence in many developing markets. The key point is that these Chinese companies aren’t fighting with the Chinese state, but instead are working with their support. And, depending on where these companies are listed and on which exchanges, there may be future opportunities for Western investors.

But what if strategic importance is put aside and Western big tech does get broken up? It still may not be time for investors to sell. There are some good examples of the breakup of tech companies in the past we can draw on for clues. This has in the most part been done not for competition reasons, but for strategic reasons, and these new companies have gone on to thrive. One such example is Paypal which was spun out of eBay to create two very distinct standalone companies; one in ecommerce and one in online payments. Both businesses have been thriving during the lockdown period as shoppers and payments have moved online. If we were to see the big tech companies broken up there would still be highly valuable parts of these businesses to invest in. Indeed, for some investors it may make the newly formed companies more attractive and they could potentially more accurately target specific investment themes such as the rise in cloud computing or artificial intelligence.

The big tech breakup story isn’t going away, we will likely see more twists and turns and with the polls suggesting a likely Democrat victory in November’s presidential election, the heat is likely to be turned up further on Jeff Bezos and friends. But whether the U.S. will finally go ahead with a breakup remains unclear. What is certain is China’s tech giants are going nowhere, and they are firmly on the march.

 

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