Big Tech: Too Big, Too Powerful?

As we were all following the Mark Zuckerberg congressional spectacle hearing last week, @raycaglianone tweeted out a question that led to an interesting classroom discussion: is Facebook a monopoly? I think the general consensus was no in terms of a social platform for its users and a more complicated answer in terms of an advertising platform. But if some think Facebook might be a monopoly for online advertising, then what’s Google?? This got me thinking…not specifically about which companies are monopolies, but more general about whether tech companies are becoming too big and too powerful in today’s society.

Too Big?

“Too big to fail” is a term that originated back in the 1980’s and became a household phrase during the 2008 financial crisis. The term historically refers to large financial institutions that have significant interconnectedness across markets, and whose failure (i.e. bankruptcy) would have devastating effects on the USA/world economy and financial system. When these institutions face failure, the government will bailout the firm with tax payer dollars to keep them running to avoid potentially costlier consequences. Refer to the $700B bailout of big banks, AIG, and others during the financial crisis.

too-big-to-fail-cartoon

Ten years later and “too big to fail” still applies to large financial institutions, but are tech companies on their way to the “too big to fail” party?

largest-companies-by-market-cap-chart

The graphic above shows how massive tech companies have become. An updated 2018 version of this graphic would show Apple with market cap of $886B, Alphabet $718B, Microsoft $717B, Amazon $693B, and Facebook $478B (or ~$537B if not for Cambridge Analytica). And as of the end of 2017, technology stocks have grown to account for 23.8% of the S&P 500 index weight. This is a growing risk for the tens of millions of people that invest in index funds seeking diversification, but are inadvertently investing in more of a technology momentum fund. A downswing in the technology sector would result in severe, widespread loses like the dotcom bubble.

tech sp500

WSJ: Tech shares are dominating global benchmarkets

These companies are not only accumulating massive wealth, but are diversifying into many aspects of the lives of consumers and other businesses. If Facebook disappeared tomorrow, I’m confident the world would be okay. But what would happen if Amazon or Google ever failed? For example: Amazon has over 500,000 employees in the USA and is involved in retailing everything from A to Z, web services (AWS), groceries, music, TV, smart home technology,  logistics, payments, and much more. AWS has a 62% market share in the public cloud space, followed distantly by Microsoft at 20% and Google at 12%. This is a large institution that seems to have significant interconnectedness across markets and would have devastating effects if failed.

Too Powerful?

Data

data.jpg

It should be no surprise to anyone that the tech companies collect a lot of data on us and use it to generate profits. Our data is the price we pay to access “free” products like Facebook and Gmail, and to have integrated online experiences across our smart devices. Tech companies are using our data to target us with advertisements and influence our purchasing behavior. And as we saw with the Facebook / Cambridge Analytica fiasco, there are third-parties out there that are trying to access our data for nefarious purposes.

In today’s world of Big Data, data is power. And currently all of the data and power sits with the tech companies. An interesting question is who should the data belong to? It’s our data, so should we get a cut of the profits from the tech companies? Some suggest the tech companies should be taxed for using our personal data. On another front – an exciting, potential application of blockchain technology is to give the power back to the public so we can control who uses our data and profit when our data is used.

Lobbying

Tech companies have an increased role in shaping policy and regulation in Washington D.C. According to a Fast Company article, Google, Facebook, Apple, and Amazon combined spent over $50 million on lobbying during 2017, a record high for the tech companies. Google is lobbying on issues ranging from autonomous vehicles, anti-trust concerns, and internet privacy; Facebook on its view of itself as a social platform instead of a publisher; Apple on encryption and immigration; Amazon on online sales tax and delivery drones. Many, including a hedge fund making a $10 million bet, believe the location for Amazon HQ 2.0 will be Arlington, VA. This would conveniently put Amazon on the doorstep of policymakers.

From last week’s Zuckerberg hearing, it was clear most of Washington is clueless on Facebook, its business model, and the data/privacy issues at hand. It’s a safe bet to assume their knowledge on other technologies of the future (AI, blockchain, autonomous vehicles, etc) is also lacking. Lobbying from tech companies certainly has its place and is important in providing subject-matter experts on tech-related policies. However, it would be naïve to think lobbying is all rainbows and roses designed for the greater good of consumers. These are for-profit corporations whose goal is to create shareholder value. These companies do not want policies that call for increased regulation on their industries, or increased competition, or “too big to fail” labels that come attached with increased scrutiny.

lobbyist

Wrap-Up

The size and importance of technology companies in society is in uncharted territories.  The Facebook hearing was probably just the start of what will be increased scrutiny on the tech industry in the coming years, and there are a lot of questions that will need to be answered. Should these companies be given government backing if/when they face tough economic times? Should these companies be broken up to prevent monopolies and increase competition? Should they be left alone and trust that markets and future innovation from new startups will be enough to keep the current major players in check? Time will tell, but I would love to hear your thoughts below.

8 comments

  1. JohnWalshFilms · ·

    Really interesting article, Matt. I agree, tech companies do appear to be the new standard of “too big to fail,” and I would be interested to see how that continues to play out in the coming years. Fascinating that Amazon would value proximity to Washington over other tech hubs in major cities – a huge indicator of your point. Do you think we’ll be seeing Google on the stand just as Zuckerberg has this past week?

  2. Lucy Wilson · ·

    Great post, Matt! I loved the parallel you drew between the “too big to fail” financial institutions and now the “too big to fail” tech companies. I certainly believe that the term is applicable to many of the tech companies in today’s world.

    With regard to tech companies and the power that they possess, I think it is particularly important to consider the context in which they came about. Ten years go, when the financial crisis occurred, technology, social media and digital business played a much smaller role in our day to day life. With the advances that have been made since then, technology has become integrated into nearly every company’s strategy and operations, even those that do not consider themselves tech companies (as I discussed in my most recent blog post about Sweetgreen). Bearing that in mind, it is not so surprising that fully technology companies have amassed the great amount of power that they do. However, like was the case with banks, the issue arises when they recklessly use that power and fail to regulate themselves. We’ve potentially saw the beginning of that with Facebook and the most recent Cambridge Analytica scandal. If tech companies continue behaving in that way, in my mind, it is no question that they will become too big to fail.

  3. profgarbusm · ·

    Wonderful post Matt. When I began to read this paper I must admit I felt that Amazon or Google failing as a company would not cause the same kind of harm as big banks falling out due to the nature of their industries. You really changed my mind though with your example of cloud, and the fact of that matter is that many companies and people DO rely on these companies to succeed and the effects can be detrimental.
    I’d like to take the optimist approach of professor Kane here and agree however, that I do not think tech companies are like the big banks. I do believe that they provide a great service for free and that if one will to falter, someone from the crowd would create the company needed to replace them. My one real worry for tech is not that it will collapse but that it simply does not hire enough people given the economic impact they can have. I know companies shouldn’t hire workers they don’t need but the fact is tech right now is comparable to the automotive industry at its height, and it employs far less people.

  4. Nice post. I’m not sure I’d put any tech company in the “too big to fail” category. Plenty of big tech companies have failed over the years, and I suspect that others will continue to rise up to replace them if these failed.

  5. roarkword · ·

    This post really got deeper into the discussion that we started in class and made some very cool points! I never considered the effect that the mass proliferation of tech companies as Fortune 500 members would result in a change in Index Fund composition. However, the term “technology momentum fund” really encapsulates the dueling opinions of the growing role of tech and digital in business. In my mind, it’s only natural that tech firms would grow in importance as a part of the Fortune 500 and as a society we incorporate the use of technology into business practices. However, with that increase in market cap comes an increase in money, hence lobbying power and this should definitely be a concern moving forward as policymakers become a larger part of technology regulation.

  6. Jobabes121 · ·

    Great post sir! I think the image that shows the change in largest companies by market cap overtime was the most powerful in this blog post, as it clearly shows the transition of “too big” companies from other companies to strictly tech. As others have already mentioned, the social media scene and the role tech plays in our lives has grown significantly overtime. This inevitably makes us wonder if the failure of such companies will have a similar impact that financial firms had during the financial crisis. It is a possible worry indeed, given their large size.

    However, I do not envision their failure cases to be “too big to fail.” One, financial institutions simply have far tremendous impact on other businesses, as every business, regardless of its nature, relies on financing and budgeting. Yet, there are plenty firms that do not necessarily use tech as their core platform or strategy. Even if you look at government entities, they use tech, but it’s not essential to a point where a failure of companies like Apple or Amazon will completely halt their work. This validates a point where many tech innovations these days aim to provide convenience and efficiency rather than essential resources/functions that are MANDATORY for businesses. Two, as Professor Kane mentioned, companies like AOL who dominated the tech space were simply replaced by other great ones who provided better service. There will always be backups, whereas financial institutions cannot really be replaced in a case of mortgage/lending agreement where they hold businesses’ money. Just different spectrum I believe that tech firms will not be entitled as “too big to fail.”

  7. bc_eagle1 · ·

    FB appears infallible and in some ways it seems to be. I agree that these companies wield a ton of power. However, my biggest concern would be to see how I can use fb or how they might change a certain algorithm making it difficult to reach my target audience. Besides protecting myself from identity theft and FB mind control, I have already resided that my information has been breached many times.

  8. jjaeh0ng · ·

    I appreciate your in depth analysis and discussion on the future of these powerful tech companies. Considering the amount of data they posses and utilize, I believe companies like google would not collapse in a day. Google is beyond a search engine these days: So many things in our lives are related to data and technology that this tech giant offers. In fact, just like Woody and Buzz say above, data is everywhere. On the other hand, Facebook is primarily functions as social networking platform with various of features. If the active user base leaves Facebook because of either privacy concerns or outdated interfaces, the power of Facebook will significantly decrease. In that case, we might see the grand fall of one of biggest tech companies.

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