15 May 2019


Is it time to break up the tech giants?

Last week the New York Times published an opinion essay penned by Facebook co-founder Chris Hughes, who calls for the breakup of the social media giant. Hughes, who left Facebook over a decade ago, levels a range of criticisms at the company and Mark Zuckerberg – chief amongst them the overwhelming power that Zuckerberg wields, but also his cavalier attitude towards privacy in the quest for “domination” and Facebook’s stifling of innovation and competition.

Setting aside the sensationalist slant and self-serving nature of the essay, it highlights the dangers and difficulty of blanket calls for regulation.

Firstly, it needs to be said that Hughes’ concerns are not without justification, and similar arguments can and have been levelled against the other usual suspects – Google, Amazon and even Apple. Yet an Elizabeth Warren-esque approach to regulation (“break ‘em up!”) is unlikely to be an appropriate remedy to the perceived market power of these companies.

Yes, these companies are big, and it is difficult for anyone to play down their market power with a straight face. But absolute size is not a trigger for regulation. And what is “market power” in the context of free consumer services? US anti-trust theory adheres closely to price abuse and is yet to evolve to address cheaper or free services. European anti-trust focuses more on anti-competitive behaviour which is easier to make a case for, but that has not prevented the EU from implementing well-intentioned regulations with unintended consequences (see our discussion of the GDPR here).

Indeed, it seems that the concerns of politicians, consumers, regulators and other stakeholders are nebulous (and change with the latest scandal), which is usually an impediment to writing effective regulation. As Chris Hughes’ essay demonstrates, the debate around Facebook alone touches on privacy, free speech, harmful/hateful content, anti-competitive behaviour, data interoperability and M&A – several of which are mutually incompatible regulatory objectives.

What exactly does “breaking up” Facebook by spinning off Instagram and WhatsApp achieve? Two or three people now have unchecked control over the social fabric of 2.4 billion people instead of one, but it does nothing to address privacy concerns or the spread of harmful content across the platforms. Zuckerberg’s recent privacy manifesto and Facebook’s pivot towards encrypted messaging addresses users’ privacy concerns but inhibits the company’s ability to moderate harmful content across its messaging platforms. The FCC made a gigantic blunder by greenlighting Facebook’s acquisition of Instagram, but separating the two now is not going to fix the (lack of) competitive landscape – the difficulty of building a social network is not in attracting users, but in effectively monetising those users so as to create a sustainable business (see Snap Inc.’s travails as an example). Separating Instagram will cripple its ability to monetise and thus its ability to compete with Facebook core. WhatsApp has substantially no monetisation to speak of.

Similar regulatory stumbling blocks arise for the other large internet and consumer companies as well. Some may be easier to overcome, but others have been erected long ago on the foundation of a naïve belief that the internet would only bring out the best in humanity and suppress its worst instincts. Momentum is clearly gathering for “something” to be done, but no one really knows what or how it should be done. Attention-grabbing articles like Hughes’ essay serve to fan the flames but offer little in the way of elegant solutions.

The Montgomery Global Funds own shares in Facebook, Alphabet, and Apple. This article was prepared 15 May with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.


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