The new Biden administration in the US has increased momentum into expanding antitrust legislation and tackling monopolistic tech giants across the world.
We have also seen the Australian Government attack Facebook and the subsequent moves by Facebook to ‘unfriend’ governments such as Australia as they try to take action. Is this the beginning of the end for Big Tech or are the social networks big enough to defend their position – and what does this mean for how we value these companies going forward?
In our third Balanced Perspective event, Iain Power, Fund Manager of the Nedgroup Investments Balanced Fund, gives us his views.
If one looks at the last 12 months the drum beat of regulation in terms of these Big Tech companies is getting louder. We must also take into consideration that some of the antitrust laws were written many decades ago without tech companies in mind and there is clearly a need to refocus on that.
There is also evidence that a lot of these big Tech companies have been abusing their power and their gate-keeper status which has resulted in regulators around the world reacting with legislation to bring them under control. The example of the Australian government declaring Facebook a ‘publisher of news’ and therefore liable to pay for that right to publish is probably a small example of what is to come as the battle between the Big Tech giants and regulators hardens.
There is a case to be made that these tech companies should adhere to a set of rules that define how they utilise the data and information that they collect. Our view is that things are going to change. The US house judiciary committee last year concluded a 16-month investigation into these companies and found real evidence of monopolistic, anti-competitive practices and we are going to now see congress deliberate this over the next few years and pass regulation to level the playing field. This is going to create a headwind for many of these businesses.
Ultimately, we think regulators will call for some kind of break-up of these companies. To take this into account in terms of valuations is very difficult, but it will likely take the form of lower margins (for example, Facebook has already announced subsequent to the Australian foray that it will be spending $1billion in the form of news licences etc. which is an amount that will have a notable effect on its margins).
The bottom line is that this space is changing and the net position for the tech companies will be negative because of the costs and potentially increasing taxes on the horizon for them. They may even get to a position where they are not allowed to acquire competitors which will have obvious consequences for growth, so the long-term risk will continue to build.
Having said that, valuations for the sector still look punchy. We are not suggesting that the Big Tech companies will simply stop growing, it will just get harder and more risky. Therefore, even without the antitrust movement, this is not an area where we are seeing probability of long-term returns.
If we look at other areas in the world like China, there has been the investigation into Alibaba (which is one of your largest holdings) from an antitrust perspective. In terms of China’s command of the economy they operate differently. Chinese regulators came out with their code for the tech companies within three months and gave companies time to react. In the case of Alibaba, Jack Ma was particularly outspoken against these laws, so he and Alibaba have likely taken the brunt of the focus of the Chinese regulators.
However, if you look at the evidence put forward by the regulators against Alibaba it looks very similar to the case of Amazon. For example, Alibaba has a clause that they made merchants sign that they could only advertise their products on one platform. So, if they wanted to sell their product on Alibaba, they were not allowed to sell anywhere else.
When you compare that to Amazon – Amazon uses the data that it gathers on its third-party merchants to substitute their own products which competed with the third-party merchants. They would also penalise merchants for selling products cheaper than the Amazon brands. There are lots of these practices that we have seen in Alibaba that are very similar to the anticompetitive practices used by Amazon, and this is what the Chinese regulators have reacted to in order to try and level the playing field.
It’s important to remember that antitrust and anticompetitive regulation is ultimately in the best interest of consumers and other businesses and can root out monopolistic behaviour. It makes for a healthy environment and gives the smaller Chinese online retailers a boost if you look at the likes of JD.com.
It all comes down to valuation. From our perspective, when we look at Alibaba, we see a great business that is growing its revenue in excess of 30% per annum. Its market share is anywhere between 40-50% of the particular verticals with meaningful runway to continue to grow and monetise their services. You can buy this in Alibaba on a forward multiple of around 20x which is a significant discount against the likes of Amazon.
Currently, we can see a set of circumstances which has created a very attractive entry point for investors to put capital into an Alibaba knowing that the landscape is going to become more regulated - but we don’t think it’s going to take away from the fact that this is a hugely successful business which has a massive network effect and significant opportunity to monetise this benefit. At the moment you get to buy it at a bargain because of the antitrust spotlight that regulators are putting on the company right now.
There is definitely increased pressure on these Big Tech companies, which is likely to grow in future and come from various sources including shareholders. This will have an impact on the valuations of these companies and so the focus on how they’re positioned around the world is very important with regards to assessing value going forward.