Anti-Competitive a Hard Argument to Make Against Large Internet Platforms
Recent regulatory and legislative initiatives have targeted large Internet companies for potentially anti-competitive behavior. Research Analyst Tom DeLong discusses the potential long-term range of outcomes for these companies’ financial performance, and the implications for investors.
- Several regulatory and legislative initiatives have targeted large Internet companies for potentially anti-competitive behavior.
- Based on the factors currently used to gauge the competitive health of an industry, we believe that these companies should be able to successfully argue their case.
- Still, as the process unfolds, negative headlines could cause Internet companies to be less aggressive in expanding market share and acquiring innovative competitors. Over the long term, this could widen the potential range of outcomes for these companies’ financial performance.
Tom DeLong: This week, the press reports indicated that the DOJ [Department of Justice] and FTC [Federal Trade Commission] had split up jurisdiction of any potential future antitrust cases against large-cap tech. The House also launched their own antitrust investigation of large-cap tech broadly.
What we think is interesting about trying to regulate some of these large Internet platforms is the way that antitrust laws currently stand. The health of competition in an industry is measured on a couple of key factors. One, are consumers seeing low prices? Is the industry having a healthy output, and is innovation continuing to be robust? And, for Internet platforms, we know they get stronger as they get larger, usually as a result of the network effects that are inherent to the platform. And so the strategy they tend to take is one of growth over profits, and that often includes keeping prices low for consumers. And therefore, they are not violating any of the antitrust laws that are currently in the market.
So there are a few things that could potentially happen. If the industry were to see a material change to their business, we think the laws would have to be changed. For that to happen, there are two ways we could see that: The House could introduce new legislation, but that would need to be passed by the Senate. And a court case could be brought against the large-cap tech companies, and that could be appealed up to the Supreme Court, and the Supreme Court could offer their new judgment of how to interpret the current antitrust laws.
So, we don’t think either of these things happens before the 2020 election. The most likely outcome is modest changes to the business models for large-cap tech, potentially in the form of a settlement for any case that is brought against the companies. However, the House’s investigation could lead to things that come out that lead to negative headlines, new business partners becoming more wary of working with the companies, and the companies themselves could decide to take a more conservative approach to growth as a result of fearing criticism or the threat of regulation. And then longer term, there is a potential for future acquisitions to be more closely scrutinized, which could lead to an inability for the companies to acquire these new innovative startups that can help them propel growth over time.
From a stock perspective, we think this may result in some multiple overhang in the short term, and then in the long term, the threat of regulation would potentially widen the range outcomes for the fundamentals.
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