When the CEO of Facebook testifies before Congress, the nation takes notice. Political economist Matt Miller offers his perspective on what investors should watch for as major tech companies come under increased regulatory scrutiny.
Apu Sikri: Matt, you also follow regulatory issues for Capital. Technology giants have been getting a lot of attention lately, especially in light of the Facebook/Cambridge Analytica issue. It's something you've been talking about for a year, saying we're going to start to see a little bit more attention focused on the large companies, especially as they increasingly gather consumer data. Where do you see this going?
Matt Miller: Big issue, obviously. There's a couple of different threads, I think, behind the political energy that's kind of putting a target on some of the big firms — and we're talking about the Facebooks, Amazons, Googles in particular. And one strain of energy behind this is on the growing concentration of power, not just in tech but a kind of increasing monopolization or market power in concentration across a whole range of industries in the U.S.: health care, pharma, airlines. It's part of a broader critique that the center-left has of what's ailing the U.S. economy.
And again, whatever listeners may or may not think of the merits of those arguments, there's a lot of energy around it. And there's no question in my mind that economic power, market concentration, the call for renewed tougher anti-trust enforcement will be a big theme. That's one of the areas [in which] the tech firms then come under scrutiny as a result of their large and growing presence in Americans' lives.
On the other hand, as you said, there's this whole data privacy issue, which in many ways, you know, the economists would say that people kind of vote with their feet, or with their behavior. And for years, we've known to some extent that if we're getting Facebook or Google for free — just like with television — it's free, but it also means that there's some sort of advertising that supports the business model. Because these aren't nonprofits; they're operating as businesses, and advertising is the way it's been done.
The question that I try and work through with our investment team is what's this actually going to mean in terms of policy change or regulatory change that could affect the business models of Facebook and Google and Amazon in the years ahead, and thus how our analysts might think about their prospect for earnings and multiples, etc. One thing I think in this regard is that, unlike health care companies, health insurers — which people love to hate and politicians love to rail against — unlike big banks, as being ostensibly a part of the financial crisis — and politicians love to beat up on big banks — and that led to a major set of regulatory responses, the big tech companies, Amazon, Facebook, Google and the like, are enormously popular. And most consumers feel that they're free, that they've improved their lives.
Jeff Bezos's recent annual report for Amazon cited that for something like the tenth year running, Amazon is viewed by consumers as the best firm in the world, not just in the U.S. but globally. And when I think about where would the politics go on this, it's hard for me to see those politicians standing in front of a crowd and saying, "And it's time we break up Facebook, Google and Amazon."
My own judgment at present is that most audiences of everyday Americans would say, "What are you talking about, break up Amazon? I mean, I do one click, I get stuff delivered to my house. It's coming now in like one day or three hours, depending on where I live." Getting political traction on that in a way that would change the regulatory or legal environment in the near term before the 2020 election, I think, is a lower probability. I do think, on Facebook in particular — and this will affect all those who take political advertising generally — that because of the hearings this year, because of the perceived lack of scrupulousness about private data that Facebook can arguably be charged with, there will be some kind of legislation, perhaps, that limits political advertising, that requires new sets of disclosures and more careful use of data related to those who do that.
And I think from the point of view of the tech companies, that would be beneficial, in fact, because I think they're perfectly ready to comply with that. The political advertising, as our analysts will tell you, is a very tiny portion of their overall business. And so, I think there may be a situation where politicians in Washington are able to declare victory by the end of 2018 by having done something on the immediate Cambridge Analytica bucket of issues that would not undermine the business model of some of these larger companies, and in fact, maybe put in protections that Americans, broadly, will feel more comfortable with.
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