Investors beware: regulators are moving in on the big tech companies

Regulatory action against the big tech companies should serve as a warning to investors of just how fragile these stocks’ valuations are.

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We've been warning for some time now that the main risk for big tech is regulatory. The investment banks and the market bulls have long been in denial about this, but they may soon have to change their tune.

The US federal government is "stepping up its scrutiny of the world's biggest tech companies", says the New York Times this week. The Justice Department is taking on antitrust investigations related to Apple and Google, and the Federal Trade Commission (FTC) is going to have a go at Facebook and Amazon.

If they find evidence of anti-competitive behaviour (and it is hard to imagine they won't) we will see the "first overhaul of anti-trust rules in many decades".

This might all come to nothing, of course. After all, the big tech firms, with all the lawyers, lobbyists, PR specialists and well connected somebodies they can afford (well hello there Nick Clegg), can constantly argue that they aren't disadvantaging the consumer. How can a product be bad if it is free at the point of use?

But regulators know perfectly well that handing over data in exchange for a service is much the same (if less transparent) as paying a monetary price for a service.

They also know that three corporate titans that didn't exist 30 years ago Amazon, Google, and Facebook have, as the Wall Street Journal puts, it amassed "the power to sway large parts of the US economy and society, from the stock market to political discourse, from personal shopping habits to how small businesses sell their wares." Their "network advantages, data caches and economies of scale" now make it hard for other firms to succeed, something that has made long-term investors love them for years (investors love nothing more than a proper "moat" around a business) but something that also surely disadvantages the consumer one way or another.

Look at it like that and the investigations could well end in boring and expensive lawsuits, more fines and new laws that limit the reach of the big firms or even force them to break up (even Chris Hughes, one of Facebook's founders, reckons the firm should be broken up).

The political mood inclines us towards the latter result. Let's not forget that the FTC has already had a go at Facebook over privacy concerns (Facebook is expecting $3bn-$5bn worth of fines for this) or that Donald Trump is said to be keen on intervention here.

Let's also not forget that the EU is already on this: they fined Google €1.5bn only a few months ago for anti competitive behaviour in the advertising market. That's on top of just over €4bn last year for forcing smartphone producers to use its operating system and €2.4bn in 2017 for abusing its position to shovel its own price comparison service to the top of searches. It is also on Apple's case after a complaint from Spotify about it abusing its power over app downloads.

Facebook, Alphabet (parent of Google) Amazon and Apple all fell nastily on the news of the divvying up of the investigations (Facebook by 9.3% at one point). Overall, says Bloomberg, $137bn was wiped from the FANGS in a matter of hours. And that's before anything new actually happens. A reminder, perhaps, for investors of the fragile assumptions on which the valuations of so many of the world's most expensive stocks currently rest.

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