Investing in Big Tech as Storm Clouds Form

Way back in 2021, I wrote about regulators coming for big tech; my contention was that there is nothing more profitable than unregulated monopolies. My postulation being that Alphabet, Microsoft, Meta, Amazon, and Apple were exactly that. This was at a point when the regulators were starting to come for them. (And they finally have – more on that below). But before we do that, in the piece, I concluded that despite the impending legal and regulatory battles, which at that point seemed inevitable, they would still outperform the market. So how did that turn out?

So, let’s compare their performances versus the S&P 500.

Of course, we were deep in the pandemic in January 2021, and big tech was in the middle of an incredible bull run. Depending on the portfolio mix, big tech would still have been a better bet than the index. That said, it is interesting to note which firms of the big tech cadre outperformed the market – Alphabet, Apple, and Microsoft. All of which have had the most regulatory scrutiny.

Microsoft — has had to fight for its US$69 billion acquisition of Activision Blizzard and is now looking to unbundle MS Office and Teams to thwart further antitrust investigations.

Apple — is currently facing a number of challenges, including a further $2 billion suit in London against throttling iPhone batteries. Their App Store pricing and terms are under constant investigation, the CCP has banned government employees from using iPhones (due to other concerns), and the EU has forced them to adopt standard USB-C connections.

Alphabet — the most dominant of all, too, has a long list of regulatory hurdles in front of them, none more significant than the antitrust case brought by the US Department of Justice. The first big play by the DOJ since Microsoft in 2000.

It’s fair to say the regulators don’t move quickly, but the regulatory clouds are finally forming over big tech’s heads.

The 90% Monopoly

The similarities between Microsoft at the turn of the century and Alphabet today are quite telling. In 2001, Microsoft had a market share of 92 per cent of computer Operating Systems, and in 2023, Google search has a 90 per cent market share in every market it operates freely in.

There’s a fair argument to be made that if the antitrust case was not made against Microsoft for bundling its Internet Explorer browser, Google may never have gotten a decent foothold on more open-source browsers. We might be asking people to 'Bing' it when we didn’t know the answer to something. Despite Microsoft not being split up after the case in 2021, the case alone surely made Microsoft a more timid monopolist in the internet era, hence opening the door for a new generation of tech – something which has clearly benefited investors.

But Google didn’t settle for just search; they strategically branched out. In 2000, they unveiled AdWords, which wasn't merely an add-on but a revenue superhighway that would later subsidize many of Google's free services. Something which baffled regulators under the 'no consumer harm test' and lower prices (free?) being a net good for consumers. It created a new marketplace; an entirely new economic system in the web era.

Following that, Google's innovation ledger continued to accrue assets: Gmail in 2004, which commodified digital communication; Maps in 2005, bringing locational context into economic decisions; Docs in 2006, altering the productivity landscape; Android in 2007, an open-source play that ended up capturing massive market share in the mobile OS sector; and finally, Chrome in 2008, solidifying the browser as not just a window but a marketplace unto itself. Since that time, few of its services have been transformational. In fact, Google search has morphed from a springboard to send you to the most relevant page to providing search answer boxes, which scrape data from other sites to keep you on their revenue-generating pages.

Pay to Play

Even though Google has transformed search results into a rotating display of ads and in-house services, it commands a staggering 90 per cent of the search market share and an even more eye-popping 95 per cent on mobile platforms. The strategy echoes Microsoft's historical playbook: Google wields its influence through Android, the ubiquitous mobile OS, and deploys more than $10 billion annually to ensure it's the default option on various devices. Google claims its market dominance stems from offering a superior product, yet one can't help but wonder why they'd drop $10 billion each year to maintain that "default setting" if the product alone was that compelling.

This search supremacy isn't just about market share; it's a self-reinforcing loop. The dominion in search equips Google with an unparalleled database of user behaviour and preferences, enriching the quality of its search algorithms. Further, Google's tentacles reach into adjacent products like Gmail, effectively aggregating more user data and solidifying its position. This cumulative data moat makes it an uphill battle for any rival trying to penetrate the market. We're not just witnessing a company in action; we're observing an economic powerhouse that has meticulously engineered barriers to entry.

Similar to how Microsoft's Windows was the foundational layer of its economic stronghold, Google Search and Android became the cornerstones upon which Google constructed its monopolistic empire. This isn't just a story of technological innovations; it's a narrative of calculated economic vectors, each offering a new paradigm for generating capital and value. We're not merely talking about companies; we're talking about economic ecosystems that redefine and control market structures.

Still a Good Investment?

It does seem like all of big tech will remain a good investment right up until they are thwarted or broken up. The reality is that these firms are the infrastructure of the digital era, and every consumer and business user of their platforms needs to pay a toll to merely participate in the modern economy. Whether that is ad words for people to find your business or 'retail margin' on App Store downloads and purchases. The kicker is, they may even be better investments after that.

The two biggest antitrust splits in US history – Standard Oil and AT&T – something paradoxical happened: When the U.S. government dismantled Standard Oil in 1911, John D. Rockefeller, the majority shareholder, didn't lose wealth; he ascended to become the world's richest man. It turns out that the fragmented entities, now unshackled and incentivized to compete and innovate, escalated in market value, surpassing the worth they collectively held under the umbrella of Standard Oil. The disassembly of AT&T didn't just redistribute assets; it catalyzed a surge of innovation and profitability in the telecom sector. This disruption laid the groundwork for the internet market boom of the 1990s, fundamentally reconfiguring how value was generated. Microsoft, although it managed to dodge a breakup in 2001, wasn't stunted by the Department of Justice's constraints. In fact, the limitations spurred the company toward greater innovation. This regulatory move also signalled the onset of expansive growth in the tech sector, which has since delivered monumental value for stakeholders.

It seems we might have a rare win/win situation on our hands. Should powerful tech firms remain unencumbered, they'll continue to provide profit through sheer market monopoly power, and if they are forced to change, provide us with access to wider market innovations and economic shifts we can only imagine.