(Oct 4): If you look at the world’s most valuable companies, you will find that even after the recent stock-market selloff, tech giants like Apple, Google’s parent Alphabet, Facebook, Amazon.com, Microsoft as well as China’s Alibaba Group Holding and Tencent Holdings are the major players on a list that was once dominated by the likes of oil giant ExxonMobil or conglomerates such as billionaire Warren Buffett’s Berkshire Hathaway, which incidentally is Apple’s largest shareholder.

Increasingly, however, global tech behemoths are in the crosshairs of regulators around the world. Though policymakers from Brussels to Washington and Beijing are unlikely to do anything drastic like breaking them up at any point soon, their actions and growing regulatory scrutiny are starting to weigh on the tech giants. “The risk is that regulatory action could lead to business practice changes that ultimately negatively impact their financial outlook,” says Mark Mahaney, internet analyst for RBC Capital Markets in San Francisco.

To be sure, internet platforms have burgeoned to become huge beasts whose unfettered growth seems unstoppable. Take Facebook, for example. The social media firm has more than two billion active users, which is more than the combined population of China, the US and Japan. Google dominates internet search advertising, accounting for over 68% of global market share, and its mobile operating system Android is used by 79% of all smartphones sold worldwide compared with about 17% for Apple’s iOS-based iPhones. And Amazon is an increasingly powerful and growing force in retail. It accounts for over 5% of all retail sales and 43% of online sales in the US. “These platforms have created clear consumer value,” says Mahaney. “Google places a world of information free at your fingertips, Facebook offers us real-time connection with friends around the world, and Amazon gives us the best price, selection and convenience for whatever it is that we want to buy.” 

That is just one reason why tech giants have emerged as the hottest investment theme, with global stocks adding US$2.3 trillion ($3.1 trillion) in market value over the past 12 months. The other reason is that large global tech players are still growing revenues — and in most cases, profits — at warp speed. “Alphabet has reported 30 straight quarters of 20-plus per cent annualised revenue growth, Facebook has had 50% annualised growth in ad revenues for 17 quarters and Amazon’s retail revenues have grown 20% annually for over a decade — rare in a global environment where most companies have been hard-pressed to show little, if any, growth at all,” says Mahaney.

Antitrust action
The concept of regulators reining in powerful companies is not new. In 1890, after the US government enacted the Sherman Antitrust Act, state and federal regulators sued tycoon John Rockefeller’s Standard Oil and eventually forced its break-up. Nearly nine decades later, in 1982, the then US telephone monopoly AT&T was broken up into regional Bell operating companies, or Baby Bells, and an international carrier. In the late 1990s, US regulators went after software behemoth Microsoft, which at the time had 90% market share of personal computer operating systems. Though Microsoft survived the intense antitrust scrutiny, it was bogged down for over a decade and ultimately missed the internet, mobile and social media revolution that created Google, Amazon and Facebook and reshaped Apple as a giant smartphone player.

“Amazon, Google and Facebook are super-monopolies on the scale of Standard Oil a century ago,” says prominent US venture capitalist Roger McNamee of Elevation Partners in San Francisco, an early Facebook investor. “The share of the markets they operate in is literally on the same scale as Standard Oil more than 100 years ago — with the big difference that their reach is now global, not just within a single country.” Little wonder, then, that ideologues from the extremes of the American political spectrum, including ex-White House aide Steve Bannon and Democratic Senator Bernie Sanders, have called for Google and Facebook to be regulated as “public utilities”.

So, who is vulnerable? All of the big global tech players. “Among the big-cap internet stocks, Alphabet faces the greatest regulatory risk,” says Mahaney. In late June, the European Union (EU) levied a US$2.7 billion fine — the largest ever — on the global search giant for monopolistic practices in its comparison shopping portal. European regulators gave Alphabet a 90-day deadline to propose changes to its search engine results or face further punitive fines.

Alphabet has since made submissions to the regulator on how it is changing the way its comparison shopping site works even as its executives argue that it is not anti-competitive in any way. Indeed, they note, over the years, Google has consistently lost market share as a “product search engine” to Amazon.

Yet, the fine for the comparison shopping portal is just one of Google’s many headaches. The EU’s tough-talking Commissioner for Competition Margrethe Vestager is looking to take even more aggressive actions against Alphabet. She has already cited some of the anti-competitive business practices of Google’s mobile operating system Android as well as its advertising placement service, AdSense, in a “Statement of Objections”. 

The concern, says RBC’s Mahaney, “is that the next EU regulatory action may well involve forcing Google to ‘unbundle’ Android from its other services — Search, YouTube, Maps”. That, he says, in turn could provide negotiating leverage to Google’s mobile, desktop and carrier partners, which will mean higher traffic acquisition costs. One such partner is Apple, to whom it pays nearly US$3 billion a year for being the main search engine on iPhones, iPads and AppleWatch. Mahaney notes that traffic acquisition costs are already a major expense, estimated at US$21 billion this year, or nearly 22% of Google’s total ad revenues.

Growth in advertising is oiling the wheels of Google and Facebook. Global internet ad spend is likely to top US$200 billion this year. Worldwide internet ad spend is still growing — at more than 15% a year. Growth for Google is coming from video advertising, particularly on YouTube, which generated US$10 billion in revenues last year, with nearly 30% growth expected this year. Facebook too is aggressively moving into video as it seeks to attract more video advertising. 

Facebook’s problem
But Facebook’s global reach and the huge amount of data it collects on its users could become its weakest link if regulators start to rein it in. Joshua Brown, CEO of Ritholtz Wealth Management in New York, in a recent blog post, noted that Facebook can identify two billion people around the world based on 200 points of data, “which in turn allows it to offer advertisers the holy grail of targeting”.

Advertisers know who is seeing their ads, when and where. Traditional media, such as print newspapers, have suffered because they can’t promise a precisely targeted audience to their advertisers. “What if a foreign government — say, Germany — decides that 200 data points is too much information for Facebook to collect and make available about their citizens to advertisers?” he wrote. “What if Germany says, ‘This is not okay. From now on, you can only utilise 100 of those 200 data points. We don’t want our citizens targeted to that degree by anyone — dishwashing detergent firms, political parties, special interest groups — it’s too much influence.’”

Whether Germany or the EU moves against Facebook in the near future for using too many data points, the social media operator is unlikely to be given a reprieve by antitrust regulators around the world for the responsibilities it has over the content on its platform.Facebook is already reeling from revelations that it was used by Russia to undermine last year’s US presidential election that put Donald Trump in the White House. The intense scrutiny could hurt Facebook’s value over time. On Sept 24, its stock plunged 4.5%, its worst day in nearly a year. It has since recouped some of the losses. 

It is not just the American internet platform giants that are increasingly taking the heat from regulators. Their Chinese counterparts — Baidu, Alibaba and Tencent, or BAT — are in the crosshairs of Beijing regulators. The Chinese internet giants had until recently deftly navigated the minefield of regulatory scrutiny in part by adopting self-censorship and cultivating close ties and partnership with the government. Regulators have moved against them only in response to public backlash.

In late September, China fined Tencent, Baidu and Weibo over banned content. Guangdong’s cyberspace authority moved against Tencent’s WeChat, which has 900 million users, while Beijing’s cyberspace authority cracked down on Sina Weibo, a Chinese version of Twitter, and Baidu’s Tieba, an online forum. Search giant Baidu had earlier faced Beijing’s wrath for making money by promoting fake drugs on its portal. Tencent felt the regulatory heat earlier this year following a brouhaha over Honour of Kings, a computer game. Alibaba was criticised for selling access to virtual private networks, allowing users to bypass Chinese censors. Alibaba’s fintech affiliate Ant Financial Services Group and Tencent’s WeBank were forced to go through the government-operated central clearing system that they were trying to disrupt. “The biggest risks to Alibaba’s and Tencent’s growth,” says James Lee, senior internet analyst at Mizuho Securities, “is Chinese regulators”. How far the Chinese internet giants go from here, he says, will depend on how much leeway Beijing gives them. 

China is not only keen to keep its home-grown internet giants on a tighter leash, but it is also restricting global players. Of the large global internet platform operators, only Amazon has operations in China. Yet, the US e-commerce giant remains a bit player in China even after a decade’s presence. Beijing recently began blocking WhatsApp, one of the two messaging services operated by Facebook. The ban comes months after Beijing disabled mainland Chinese from sending video messages and voice chats on WhatsApp as it moved to tighten control over online discussions ahead of the upcoming Communist Party congress.

Facebook founder and CEO Mark Zuckerberg has been wooing Beijing officials for years to allow access to its flagship social media app, Instagram as well as its Facebook Messenger service. Until recently, Beijing had closed an eye on WhatsApp access in China, which is seen as a niche messaging app compared with Tencent’s widely popular WeChat, but as WhatsApp’s reach began growing, China moved to nip it in the bud. 

Balancing act
Clearly, the EU’s US$2.7 billion antitrust fine is not large enough to change the behaviour of Google, which has more than US$100 billion in accumulated cash. The competition issue involving the big tech companies extends beyond Europe into the US and the rest of the world, McNamee notes in a recent TV interview. With their sheer size and huge resources, the likes of Google, Facebook and Amazon “stifle innovation and entrepreneurship”, he argues. “You can see this even in Silicon Valley. It’s very hard for any of the unicorn generation of companies to actually reach successful critical mass because if one of their competitors gets acquired by Google or Facebook, the category is over.”

Yet, while increased regulatory scrutiny may address some of the concerns around the dominant big tech firms in Silicon Valley, venture capitalists and tech analysts argue that the potentially negative innovation impact of incorrectly applied regulation is likely to hold antitrust regulators back from going too far. Tech has been the driving force behind global growth in recent years. As they move against Big Tech, regulators around the world need to balance the need to rein in the giants with the need to nurture innovation, which helps keep the wheels of growth turning.

This story appears in Issue 799 (week of Oct 2) of The Edge Singapore which is on sale now