Big Tech's Biggest Risk

Possibly too big to fail - but not too big to regulate. In the US, Europe or China. JL

Dan Gallagher reports in the Wall Street Journal:

What can stop Big Tech? That’s becoming a $3 trillion question. The combined market capitalization of the five most valuable companies in the world, ha(s) risen $580 billion since the start of the year. That 25% gain—more than double what the S&P 500 has returned—is a wager by investors that the scale and deep pockets of these tech giants make them tough for competitors to dislodge. But that’s the point where governments often target big technology companies seen as too dominant in their respective spaces.
What can stop Big Tech? That’s becoming a $3 trillion question.
The combined market capitalization of the five most valuable companies in the world is fast approaching that mark, having risen more than $580 billion since the start of the year. That 25% gain—more than double what the broader S&P 500 has returned for the year—is a fair wager by investors that the mammoth scale and deep pockets of these five tech giants make them tough even for innovative competitors to dislodge.
But that’s the point where governments often target big technology companies seen as too dominant in their respective spaces. Microsoft , Intel Corp. INTC 2.52% and Qualcomm are just a few examples of past moves, while Alphabet Inc.’s Google is enmeshed in its own battle now. Facebook FB -0.82% seems likely to be next for its role in spreading political information—and misinformation.
This is a risk that investors shouldn’t ignore. While regulatory changes are unpredictable and can take a long time to germinate, their effect can produce new costs and—in some cases—slow growth. Just ask banks how much it costs to comply with “know your customer” rules to curb money laundering and terrorism financing. Any changes to the status quo are bad news for Google and Facebook, both of which have been handsomely rewarded by investors precisely for their ability to generate both attractive growth and rich profit margins.
Between them, Google and Facebook generated about $106 billion in advertising revenue last year. That’s roughly double in size from four years ago, and Wall Street projects it will nearly double again in three years. Despite rising costs for driving traffic, Google’s core business has kept its operating margin averaging above 30% over the last eight quarters. Facebook has averaged 43%.

New regulations could disrupt that momentum. Lawmakers are already discussing potential rules for campaign advertising on social networks. Recent investigations by news outlets such as ProPublica and Buzzfeed have shown how material such as anti-Semitic content can be targeted to a sympathetic audience. Those are especially painful revelations, since the companies’ hands-off models are a big reason why Google and Facebook generate much more revenue-per-employee than most other advertising-driven media businesses.
In fairness, passage of any significant new regulations in the U.S. seem a longshot in the current political climate. But Europe’s crackdown has already had an effect on Google. Parent company Alphabet’s shares have slipped 3% in the last three months since the EU first handed down a record-size fine in late June.
Facebook, meanwhile, slumped nearly 5% following news reports about Russian sources in funding “divisive” content during the election. The company is working with federal investigators to get to the bottom of the matter. But to head off more onerous regulations, Facebook may find that even two billion friends aren’t quite enough.