For those of us invested in the stock market, we are amazed to see such a recovery from the sudden and violent shock of the world’s economy effectively being shut down. A lot of that recovery has been lead by just 5 companies, Apple, Microsoft, Amazon, Google and Facebook. They make up 23.7% of the S&P 500 and 14.14% of the MSCI World Index. There has been repeated calls for them to be broken up.
The case for breaking up big tech
Kill competition. Companies like Amazon can sell their own product below cost, forcing smaller competitors out of the market. Google can rank its own, paid reviews higher than those of other websites.
Stifle innovation. Investors won’t fund start ups that are in the “kill zone”. That is, areas that the big tech firms operate in. Without this funding, other, better ways of doing things may not get off the ground. When Microsoft were forced to change their practices in the 1990’s, it paved the way for Google.
Consumer data. The tech companies make their money off your data. By knowing all about you, companies like Facebook and Google can offer laser focused advertising services to paying companies. This is data that you give them in exchange for being able to get the likes of Google and Facebook for free.
Influence. Having just 5 companies controlling so much of the stock market is not a good representation of where the market is as a whole. At present, there is a huge disconnect between the market and the economy. But not all companies on listed indexes are doing well either. This is masked by the strong performance of a select few.
The case for keeping big tech intact
Good for small business. Big tech companies provide a cheap platform for small businesses to sell their products. This is most obvious on the likes of Amazon, the App store and Facebook.
R&D – Google (#1) and Amazon (#2) are the biggest spenders in R&D. Apple are #5, Microsoft #6 and Facebook #13. If they are broken up, this may reduce as more profitable parts of the business cannot pay for riskier parts of the business that may or may not work.
Funding for smaller start ups. A lot of smaller companies get funding solely on the basis of being bought up by bigger companies. Not being able to get funding will stifle innovation.
Will it make a difference? Even if they are broken up, will it make a difference. Say Instagram and Facebook are broken up, or Amazon Web Services from Amazon Marketplace. These are still big companies and instead of having 5 massive companies, you will have 30 big companies.
What about share price?
Most consumers won’t care in WhatsApp and Instagram are different listed companies but those who have their pensions and investments will. So will a break up mean a fall in the value of your investment in the S&P 500 or the MSCI World Index?
While it may cause a short term fall, it is predicted that in the medium and long term it will be a good thing for investors. In the past, where companies have been spun off, the combined value of these new companies has only grown, see PayPal and Ebay or AT&T.
From an investor point of view, it looks like it will be a good thing to break up Big Tech. The question is, will it be done?