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 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.
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?
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.
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.
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.
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.
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.