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ANALYSIS: Will History or Regulators Come for Tech Giants First?

Nov. 1, 2021, 7:01 AM

An excellent way to lose money for most of the 21st century has been to bet against FAANG stocks, as Facebook, Amazon, Apple, Netflix, and Google’s parent, Alphabet, are known. What critics collectively refer to derisively as “Big Tech,” the holders of FAANG equities call a robust portfolio of the world’s most valuable firms. Through the past 20 years, no matter how awful the occurrences—a charismatic CEO dying prematurely, record-breaking settlements with regulators, or a new flu strain that turns the global economy upside down—the growth, power, and riches of the largest technology companies have not slowed; they’ve accelerated.

The currently rising chorus suggesting that a new normal is around the corner—with lawmakers poised to pass game-changing legislation, regulators ready to confront the tech giants, and/or judges about to break companies apart—is starting to sound more and more like the old unofficial slogan of the Brooklyn Dodgers: Wait ‘til next year. And yet, there is reason to believe next year might really be the one when both critics and allies of the tech industry must adjust to a major reset. The one when the industry is disrupted not by the passage of major legislation, but by just the threat of a different regulatory environment that levels the field enough that any tech firm too slow to innovate could eventually be displaced by a (current) smaller rival.

The Scalpel Approach

Setting aside the potential for upending the status quo through comprehensive legislation, relatively small achievable changes might be more important to everyone if they actually end up passing in this current political environment.

Mobile search is a good example. In the U.S., Google is the default search engine for all Android devices by design and all Apple devices through a licensing arrangement between the two companies. The same thing used to be true in Europe, but in 2018, the European Commission deemed Google’s leveraging arrangement on its own devices illegal and fined the company a record 4.34 billion euros ($5.07 billion). Today, users in the EU are given the choice of 12 search providers to set as the default when setting up their Android device.

I recently asked Sridhar Ramaswamy, CEO of the search engine Neeva and former Senior Vice President at Google, what is on his regulatory wish list for a startup like his, challenging a company with over 90% of the target market. He explained why default positions in search create an enormous challenge for any company trying to offer an alternative to Google. “He who controls the search box necessarily has a lot of influence, and defaults matter,” he said. “A push to have something similar to the choice screen that Europe has would be a very positive step.”

Two weeks after our conversation, a bipartisan Senate bill was announced to prevent the biggest U.S. technology companies from giving an advantage to their products over those of competitors. Given the stature of the bill’s cosponsors—which include the top Democrat and Republican on the Senate Judiciary Committee—these types of targeted proposals are more likely to come to fruition than swing-for-the-fences measures like calls for a new U.S. Data Protection Authority with a $100 million annual budget or a U.S. version of the GDPR.

Each of the FAANG companies faces rivals who would benefit from even small competitive changes. Shopify’s recent annual growth dwarfs Amazon’s. Snap’s usage and share price trajectory are the envy of anyone at Facebook. Apple’s app store, a cash cow made up primarily of game apps, is no longer secure in the wake of the ruling in Epic vs. Apple. The streaming video service industry—where Netflix competes—is filled with other well-funded competitors. Even Google, whose online search platform is the most entrenched, faces new entrants like Neeva and others that offer a robust product free of ads and surveillance tech.

Deal Volume as Harbinger

When the clamor on Capitol Hill to rein in Silicon Valley giants increased in 2019, I expected a slowdown in acquisitions by the big tech firms. Why would they invite more scrutiny of their size and business practices? That prediction was not just incorrect; it was wildly off the mark. In May, a Bloomberg Law analysis of deal activity among Silicon Valley’s top firms showed 2020 had seen record-high activity, with Big Tech acquisitions led by Google, followed by Facebook and Apple.

That trendline has continued through 2021. In September, the FTC published its study of 616 unreported acquisitions by the five most prominent technology companies in 2010–2019. The results painted a clear picture: These companies continued to operate business as usual, despite the hand-wringing headlines about “big, bad” Big Tech or lawmakers’ “I am very mad” tweets about their growing size.

The response to the report from tech industry critics was not surprising. On one hand, it is easy to dismiss as just more worry with little operational impact. However, private equity firms are already expressing unease about where the market is headed, due to the current wave of regulatory pushback. The FTC commissioned the report for a reason, which raises an important question: Is the exit-by-acquisition strategy still viable for small tech companies if the big ones aren’t buying them? If it is not, then that carries enormous market implications: For investment firms pouring millions of dollars into high-risk startups, the chance of an acquisition by the largest tech companies is a feature, not a bug.

What Comes Next?

We are not even to the quarter pole of this century, and the dominant tech players have completely turned over from those at the start. When it began, Apple stock traded for less than a dollar. Google started experimenting with including advertising in its search results. Netflix’s only product was shipping DVDs through the mail. Amazon was barely more than an online bookstore. And Mark Zuckerberg was honing his coding skills in high school.

The companies they displaced at the top of corporate America—Wal-Mart, IBM, Exxon Mobil, and Sears—were not reined in by regulatory burdens, nor by laws passed by Congress. Instead, innovation was allowed to flourish and respond to changes in society and technology, at least in part because regulators provided enough—imperfect in hindsight, but enough— oversight to let fair competition play out in the marketplace. The companies that eventually replace the giants who today seem untopplable are unlikely to be waiting around for the DOJ, FTC, or a European DPA to completely level the playing field.

Access additional analyses from our Bloomberg Law 2022 series here, including pieces covering trends in Litigation, Regulatory & Compliance, Transactions & Contracts, and the Future of the Legal Industry.

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