Is Big Tech Too Big?

A couple of weeks ago Alphabet shares dropped 6%, Facebook tanked 7.5%, and Amazon shed 4.5% of its value. Why did this happen? An anti-trust probe was called into life regarding Alphabet’s Google Search business and investors fear a similar fate for its tech brethren, seemingly rightfully so: This news story unearths a public debate that has been discussed intensively since the 2016 US elections concerning Big Tech’s power and the need for anti-trust legislation. A debate, which appears to have the nearly unanimous agreement that these companies should be broken up. Logically, therefore, these firms should already be broken up, yet they are not. Why is this? Aside from the strawman “The government is corrupt/incompetent” reasoning, there actually exist multiple genuine arguments for keeping Big Tech intact, which we’ll be examining in the following. R&D Top R&D Spenders 2018 (Chart based off Statista) 2018’s biggest R&D spender, by far, was Amazon, with Alphabet coming in second and Facebook marginally securing a top 15 spot. This is the first argument for keeping these dominant companies intact: A market populated by many small companies is one with far less innovation: Each player needs to focus on maintaining its current position or fortifying it in the short-term and gets a smaller cut of the market, resulting in far fewer resources to invest in innovation. Today’s tech juggernauts on the other hand, not only are in a secure position in their respective markets in the near-term, but also have literal billions on their hands due to the large proportion of the market they control, meaning they can afford to spend money on projects with high barriers of entry and low chance of profit in the short-run (at the time of the initiation of such a venture). Examples include self-driving cars, superior AI systems and frameworks, and worldwide internet connection. In addition to initiating such projects, these companies need not worry about rushing to market with such investments and potentially causing harm to consumers, as they not only have an image to maintain but also boast the resources necessary to do so by delaying market entry until the technology is ripe. Conclusively, would a competitive market with many small firms produce the same “moonshot” technologies these companies create by pouring obscene amounts of resources into R&D? Yes. Would it take more time and/or compromise consumer safety more than in the previous case? Probably. Natural Monopolies Generally, when we speak of Natural Monopolies, we think power plant or water cleaning facility: Monopolies, that are purposefully held intact by the government for the sole reason that having multiple companies build the infrastructure to run such a business would be a colossal waste of resource — imagine 10 companies laying pipework for every household in the United States and only one being used per home. There is a case to be made that today’s tech titans fit this category: The average cost of acquiring one additional customer for a software company is enormous; nearly $400. Notice how these numbers are averages over the entire industry, meaning smaller firms likely spend much more than this while the companies we’re looking at here spend much less due to economies of scale and network effects. Why is this relevant? Each of these services only works so well precisely because it has so many users to train its machine learning models, meaning if these companies are broken up, their services will decline in quality due to their smaller size (e.g. lesser performance for advertisers due to Facebook and Instagram users not being linked anymore causing less predictability on what products these users like) leading to customers searching for alternatives. Since online platforms are very easy to use, this results in the obscenely high customer acquisition costs depicted above being paid by each company in the market (which would, in that case, include the fragments of the old tech juggernauts). Where do these extra resources come from, or rather, not go? Far-out research and development, as outlined above. The loss of productivity and intense cost of resources that breaking these companies up would cause makes the Natural Monopoly suit appear almost tailor-made for them. Global Competition Logos courtesy of Seeklogo Facebook, Google, and Amazon may be three of the most powerful companies in the western world, yet they do not compare to their Chinese counterparts when it comes to the largest country in the world, China. Baidu, Alibaba, and Tencent are the Chinese equivalent to Alphabet, Amazon, and Facebook, respectively. Aside from operating in the same business, they share the key feature of being extremely dominant in their individual markets and boasting similar numbers in user count, revenue, and innovation. However, contrary to the western Kings of technology, the Chinese giants are heavily subsidized by the government. This difference is key, as it rather obviously implies China is not looking to break these firms up in the near-term. This is important, as both the Chinese and American tech goliaths appear indestructible in their local markets, yet they find a match for their strength on the global stage. This means if any of the companies mentioned in this article were crippled by anti-trust legislation, their eastern counterpart would control the global market (aside from the company’s base camp, USA in this case). As counter-intuitive as it may sound, in this case, local monopolies are necessary to maintain global competitiveness. If the US wants to get serious about regulating its Tech juggernauts, it better make sure it’s on the same page as China. Conclusion In conclusion, are these arguments strong enough to justify keeping these supercompanies intact? Or are the tradeoffs for consumers and society just too high? No one knows for sure. Nonetheless, I hope this short article showed you a different side of a much-discussed topic and will be helpful in you finding your answer to the difficult question the whole world is currently posing itself: Is Big Tech big? too Nicolas