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Zoom And The Art Of Regulating Big Tech

December 18, 2020

Speed Read:

  • Big tech’s era of “moving fast and breaking things” is now being strongly challenged.
  • Antitrust regulators are catching up with the ethos. They have a history of overshooting.
  • Silicon Valley’s disruption engine has been a big prop to US equity outperformance over the last decade. This previous tailwind is now a stiff headwind.

Silicon Valley’s scrappy attitude of “move fast and break things” has not only become standard startup advice, but quickly evolved into a global movement for Big Tech. On the surface, this approach is all about testing new ideas, iterating quickly and aiming for more frequent points of learning. But, don’t be fooled, the overriding philosophy is simple: more is always better. More clicks. More downloads. More eyeballs. And faster — anything less than warp speed, hair blown-back velocity is unacceptable.

Yet, a rich irony is emerging. It turns out that regulators, too, can move fast and break things. The first significant shot across the bow for the tech industry came on October 20, 2020 when the Department of Justice sued Google parent Alphabet for anti-competitive conduct. The lawsuit claims that Alphabet’s payments to Apple Inc. to make Google its default search engine contravenes US law (Alphabet remits some USD $10 billion annually to Apple for this privilege). Then, in December, Facebook was sued by the Federal Trade Commission and 48 state attorneys-general for anti-competitive practices. The key allegation here is that Facebook’s purchases of WhatsApp and Instagram were strategic targets to neutralize their respective threats and entrench its own position as the dominant social networking platform.

But these individual cases are really about a much bigger issue: a shift in the regulator’s worldview. Increasingly, they view Big Tech through a different world lens — not as individual companies operating in efficient markets, but as winner-takes-all monopolists abusing their power. This reflects a deeper understanding of Big Tech’s business models, where the preferences, exchanges and interactions of users are monitored, leveraged and ultimately pushed and promoted across business lines through behaviourally-targeted algorithmic methods.

Looking ahead, regulators show no signs of slowing down. And why should they? The pandemic has hyper-charged the world’s movement to digitization. Data, not oil, has become the lifeblood of the modern economy. Google, Facebook and Amazon now account for some 70% of online advertising globally. There are legitimate concerns that Big Tech will stifle innovation and continue to swallow younger competitors.

It’s not just an American issue. Authorities all around the world have Big Tech in their sights. And they are gaining momentum. Companies like Amazon are facing growing hostility in Europe for paying low levels of local tax, invading privacy and crushing their rivals. An EU commission recently announced that it had reached a preliminary view that Amazon has violated their competition rules, pushing consumers toward its own products and away from unaffiliated marketplace sellers.

Brussels has also published draft papers of two new proposed regulations. Both papers aim to tackle unfair competition in the tech sector and represent the first significant overhaul of the EU’s approach to tech in over two decades. The proposed rules are an acknowledgment that existing antitrust law is inadequate and too slow-moving in the digital age. If passed into legislation, the laws would represent one of the most stringent set of regulations on Big Tech in the world and carry huge fines for offenders.

Investment Implications

Silicon Valley’s disruption engine has been a big prop to America’s equity outperformance over the last decade. When most companies slashed spending in order to boost earnings, tech provided a rare shot in the arm — an inoculation against a growth-deficient world.

The problem is now twofold. First, everyone is in on the trade. Valuations are very rich. The FAANGs recently accounted for more than 20% of the S&P 500’s market cap. Apple alone commands a bigger weight in the MSCI World equity index than any other single country apart from the US and Japan. A related issue is that several companies have tried to get in on the party, positioning themselves as tech unicorn plays. Through a combination of clever marketing and the willingness of shareholders to look the other way, many of these companies have, to put the most charitable spin on it, inflated expectations (perhaps a company that straps an iPad to a stationary exercise bike should not have a market cap of over $60 billion dollars?).

But it is the regulators who will throw a big stick in the spoke of Big Tech’s business model. Future acquisitions will face far more hostile scrutiny. Some of the incumbent tech giants could even be forced to breakup. In almost every way, tech companies will face a far more adverse regulatory environment over the coming years. The air has already started to go out of the most overstretched valuations. But there is plenty of room for further deflation — and for things to be broken.


Chief Executive Officer & Chief Investment Officer

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Portrait of Karen Tsang, VP Trading & Associate Portfolio Manager of Forstrong Global.

Karen Tsang

Vice President, Trading and Investment Operations & Portfolio Manager

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