When it comes to Monday’s big selloff in large cap tech, did the market get it wrong?
Apple (ticker: AAPL), Alphabet (GOOGL), Amazon.com (AMZN) and Facebook (FB) lost a collective $140 billion in market cap on Monday. That led the Nasdaq Composite to shed 1.6%, even as the Dow Jones Industrial Average closed up slightly. The tech selloff came in reaction to news reports that the companies could face scrutiny from antitrust regulators, with the Justice Department taking on Apple and Alphabet, and the Federal Trade Commission taking on Facebook and Amazon. To compound matters, the House Judiciary Committee on Monday announced “a bipartisan investigation into competition in digital markets.”
And investors sold shares in all four. But maybe they should have loaded up, instead.
That’s what Scott Galloway thinks. An outspoken serial entrepreneur (including the e-commerce company Red Envelope), who teaches marketing at New York University, Galloway has been asserting for years now that investors should be pushing Alphabet, Facebook and Google in particular to break up their businesses.
Alphabet, he thinks, should spin off YouTube. Facebook, he argues, should spin Instagram and WhatsApp. And Amazon shareholders, he’s convinced, would be the big winner if the company spun off Amazon Web Services, which just might be one of the 10 largest companies in the world on a stand-alone basis. In every case, he thinks shareholders would be the big winner from a breakup strategy.
“DoJ and the FTC are slowly but steadily getting it right,” he says. “But the market on Monday got it wrong. Break them up and the spinoffs will be accretive to shareholders. There’s an opportunity for enormous value creation.” Galloway notes that Facebook, for instance, has muffled the value of the businesses it acquired, driving off talented founders and reducing innovation. He says that it is almost always the case that spinoffs and breakups create value for shareholders—they don’t destroy it. He points to the break up of AT&T and the eBay spin of PayPal as cases where tremendous value came from breaking a larger company into parts. “Over the long term,” he says, “conglomerates don’t work.”
Roger McNamee, the longtime tech investor and the author of Zucked: Waking Up To the Facebook Catastrophe, thinks the real issue with the large tech players isn’t valuation—it’s their fundamental business models.
He sees serious issues in all four of the companies at the heart of the selloff, but sees easier fixes for Apple (which he thinks needs to change the financial model for the App Store) and for Amazon (which he thinks should probably get out of the Amazon Basics business, competing with other vendors on its own platform.) He has more serious concerns about the business models at both Facebook and Google, which he argues provides essentially no benefit in exchange for the mammoth amount of data they gather about consumers.
“They make like 95% of their profits from stuff that’s at best ethically challenging, like the chemical industry in the 1950s, creating massive externalities in the process,” McNamee says. “They both should change their business models.”
One question is whether the leadership of these companies should get out in front of potential antitrust actions and proactively spin off assets that were once stand-alone businesses. Clearly, Washington insiders are increasingly unsettled by the concentration of power in online advertising and commerce.
“A small number of dominant, unregulated platforms have extraordinary power over commerce, communication, and information online,” the House Judiciary Committee said in a press release announcing their new probe. “Based on investigative reporting and oversight by international policy makers and enforcers, there are concerns that these platforms have the incentive and ability to harm the competitive process. The Antitrust Subcommittee will conduct a top-to-bottom review of the market power held by giant tech platforms. This is the first time Congress has undertaken an investigation into this behavior.”
There are concerns about the role of the largest tech on both sides of the aisle. President Donald Trump and Sen. Elizabeth Warren find themselves similarly uncomfortable with the power of the country’s most influential technology businesses. In a Medium post in March, Warren asserted that “today’s big tech companies have too much power over our economy, our society, and our democracy.” She asserted that Google, Facebook, and Amazon in particular have “bulldozed competition, used our private information for profit, and tilted the playing field against everyone else,” hurting small businesses and innovation in process.
Should investors be worried? Maybe not. Instead they should see a buying opportunity and push for change sooner rather than later.
Write to Eric Savitz at eric.savitz@barrons.com
https://www.barrons.com/articles/breaking-up-tech-bullish-case-51559651095
2019-06-04 13:40:00Z
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