Look out tech stock lovers, there's a new Sheriff in town, and she’s not likely to look the other way when it comes to monopolies.
It’s no real surprise that investors love tech companies – they’re the ultimate business model in so many ways.
They don’t generate any content, but profit off all of it.
They have customers globally, but pay taxes locally (often in favorable jurisdictions).
They’ve got tons of staff, but hardly any stuff.
They’re natural monopolies, the more people use them, the more they need to be used.
And no one knows this better than Lina Khan, who’s just been appointed the head of the U.S. Federal Trade Commission.
Khan, who’s just 32, knows her monopolies and she isn’t afraid to break them up.
In 2013, as a junior policy analyst, she wrote an op-ed in Time magazine after noticing that despite there being 40 brands of candy at her local supermarket, no more than three companies were behind them,
“If we want a healthier, more diverse market — and more variety in our Halloween buckets — we could start by reviving some of our antitrust laws.”
Khan’s appointment has sent shockwaves through Washington, Wall Street and the Silicon Valley with the prospect of her ushering in a new era of antitrust enforcement, especially against Big Tech, looming.
To peek into the mind of Khan, just check out an article she wrote in the Yale Law Journal in 2017, an article
that would catapult her to fame, “Amazon’s Antitrust Paradox.”
According to Khan, companies like Amazon (-0.07%) have benefited from a general ambivalence towards antitrust enforcement for decades, a period during which low consumer prices were used as justification for looking to other way on what would otherwise be seen as anticompetitive behavior.
Khan envisions a different era for antitrust enforcement akin to the early 20th century when the U.S. didn’t hesitate to bust monopolies like Standard Oil, which at its zenith controlled over 90% of all oil production and 85% of all final sales in the United States.
But Khan faces several challenges to busting up Big Tech, because one of the biggest defenses that Silicon Valley’s highly paid lawyers have always mounted is that their clients compete not on a local but global scale.
Companies like Amazon are dominant in the U.S., but their monopoly powers are nowhere close to Standard Oil’s, with the e-commerce giant garnering a 40.4% market share this year.
Companies like Google (-1.34%) however will have a harder time arguing that they aren’t dominant, with a staggering 92.05% market share for search engines as of February this year.
Facebook (-2.04%) is not far behind, accounting for a nearly 71.8% share of social media as of May 2021.
Firms like Apple (-1.01%) on the other hand command around 49% of U.S. smartphone shipments, as of last year.
Investors would do well to recall the abortive break-up of Microsoft (-0.56%) in the mid-90s, which saw its CEO Bill Gates step down, and the firm enter a period where startups like Google and Amazon came to pick up the tech gauntlet.
And that’s what Khan and her colleagues at the Federal Trade Commission will be keeping an eye on.
Tech firms have gotten so big that often the easiest way to stay dominant is to either acquire startup competition, or enter into a battle of attrition which the incumbents almost inevitably win.
Zappos was acquired by Amazon, Instagram and WhatsApp by Facebook, and the list goes on.
And while Microsoft has seen a resurgence of late, it spent the better part of a decade laying low and going slow on acquisitions, or what could potentially be perceived to be anti-competitive behavior, lest the FTC come knocking at its door again - much to the chagrin of its long-suffering shareholders.
But Microsoft was alone in the mid-90s.
These days a clutch of CEOs are typically summoned to Capitol Hill to testify before lawmakers and Khan will have her work cut out for her, but she’s not likely to shy away from the task.
And that makes things particularly testy for Big Tech investors – it’s hard to say who Khan will target first and what effect that will have.
Realistically, natural monopolies like search and social media, which enjoy significant network effects, are harder to break-up, but threatened action against them may make them slow their acquisition activity.
On the other hand, Amazon, whom Khan has studied intimately since she was in law school, may be a prime target, especially when the firm can be depicted as the big corporate robber baron depriving honest to goodness hardworking American mom-and-pop stores of a livelihood.
That sort of David vs Goliath-type characterization would be the perfect centerpiece for the Biden administration’s “we the people” brand of governance and anathema to the legion of shareholders who have gotten rich off Amazon's stock.