Big Tech Breakups: Dream On

The article by Ryan Tracy in the Wall Street Journal carries the title “House Democrats To Call For Big Tech Breakups.

The threat is to reduce the power of the large technology companies. This could have significant implications for investors.

It seems as if politicians have been talking for decades abort breaking up the big tech businesses, but when push comes to shove they end up will little or nothing to boast about.

So, here we are again, focusing on Alphabet Inc.’s Google (NASDAQ: GOOG), Apple Inc. (NASDAQ: AAPL), Inc. (NASDAQ: AMZN), and Facebook Inc. (NASDAQ: FB).

The House Antitrust Subcommittee has spent almost 15 months studying these organizations.

And, the result?

Well, to me the result seems underwhelming, at best.

Congressional Study

Over one million documents have been review. There were open hearings in July of the CEOs of the companies. And there have been discussions and discussions and discussions.

The leader of the task is David Cicilline, a Democrat from Rhode Island.

And, what is the first thing that comes out from the chair of this subcommittee?

Mr. Tracy indicates that the panel “is poised to recommend significant measures targeting Big Tech’s power, including requiring owners of huge technology platforms to separate those platforms from other businesses.”

It seems that such a law “could potentially ban Amazon from competing with sellers on, or Google from offering services that consumers look for on its search engine.”

Really? And, more….

Well, Mr. Cicilline added that other policy options might include “boosting the budgets of U. S. antitrust enforcement agencies, amending U. S. antitrust laws with an eye toward making them less permissive and mandating ‘interoperability’ so that consumers and businesses can more easily move from one tech platform to another.”

But, a member of the committee, Kelly Armstrong, a Republican from North Dakota, expressed concerns that such “broad measures” requiring Big Tech to separate lines of business could affect other industries that also operate online.

There is the argument that existing antitrust laws are sufficient to bring enforcement actions against these large tech companies.

Yet, the existing antitrust laws have not been applied and the things Mr. Cicilline is talking about seem, well, ambiguous and vague.

Mr. Cicilline talks about a Glass-Steagall Act for the Internet separating segments of Internet platforms. One of Mr. Cicilline’s top staffers cites, as a guide, the Bank Holding Company Act of 1956, a law that requires companies to separate different businesses lines from one another.

And, there are still other thoughts and plans.

Going Forward

Does it sound like people really don’t have their act together?

That what it seems like to me. All this research, testimony and discussion seems to have failed to produce a common thread.

The reason for this failure, to me, is the fact that the politicians really don’t understand the economics of information technology. Dealing with intellectual property is something entirely different than dealing with physical reality, with brick and mortar, with engineered products.

The economics of the manufacturing firm is well understood and is tangible. Dealing with the financial affairs of this world is also understood and is tangible. The antitrust efforts in this space were well defined and enforceable. Separation could be achieved.

Information goods are not like that. The networks and platforms that can be built out of intellectual capital are achieved at zero or close-to-zero marginal cost and can be scaled almost without limit.

These companies generate massive cash flows and require little or no debt. Given their size, they require relatively little physical presence. The economics of these organizations bear little relationship with the economics of manufacturing firms or financial institutions. The antitrust field, built up around the economics of the manufacturing firms or the financial institutions, cannot be applied to the organization centered in the field of information technology.

This is why economists, lawyers, and politicians have had such a difficult time in coming up with a way to regulate and control the big tech firms.

And, Then We Are Dealing With Information

But, the final point of this discussion, is that when dealing with big tech, we are dealing with information, zeros and ones. One of the primary characteristics of information is that information grows and spreads and cannot be contained. The spread of information can be slowed here and there for a time, but ultimately the spread and growth of information cannot be stopped.

What does this mean? Basically, it means that the government can try and apply controls over what the big tech firms are doing, but there are many, many ways that these organizations can find their way around the rules and restrictions.

Historically, we have always observed that manufacturing firms and financial firms, one way or another work around the rules and regulations. This is often the source of what economists call “unintended consequences.” That is, firms react to rules and regulations by doing all they can to carry on business in areas that might be restricted, but the result of this is that unintended outcomes occur, things that the regulators and politicians didn’t intend to take place.

Well, what we have seen in the world of information technology, working with intellectual capital, businesses can continue to do, in one way or another, almost anything they want to do. This is what, I believe, is frustrating the politicians… Mr. Cicilline for one… right now. This is what is making the ideas coming out of the Congressional committee so…well… underwhelming.

And, what does this mean for investors. I think that the politicians can do very little to really constrain big tech. And, if the politicians try to exert more control, I think you will see more and more “unintended consequences” than you have ever seen before.

I think the politicians are going to have to find another way to seek out the cooperation of big tech to reduce public concerns. Explicit controls are never going to work.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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