Consider it a warning shot across the bow of Silicon Valley, the opening salvo in a potentially brutal antitrust war. The head of the Department of Justice said in a public speech yesterday that low prices and free services would not shield “monopolists” from scrutiny. “There are only one or two significant players in important digital spaces, including internet search, social networks, mobile and desktop operating systems, and electronic book sales … This is true in certain input markets as well. For example, just two firms take in the lion’s share of online ad spending”, said the head of the DOJ, Makan Delrahim. He continued “Like today’s tech giants, Standard Oil was pioneering and generated a number of important patents. Scholars have noted, however, that Standard Oil’s innovation slowed as it became an entrenched monopolist”. Delrahim also listed specific behaviors which would spark investigation, including bundling products together.
FINSUM: The government is poised to launch a large and multi-fronted war on big tech. How long this will take, or how it will play out in markets is anyone’s guess, but it is hard to find any positives as far as big tech company share prices are concerned.
Markets sold off in a big way when new of the government’s antitrust push against the FANGS came out. The stocks lost $130 bn of value. However, the reaction may be overblown, with each stock needing to be assessed on its own merits, as the antitrust picture would look different for each of them. A managing partner at Andreesen Horowitz, one of Silicon Valley’s top venture capital firms, makes an interesting point, saying “The big challenge with these antitrust things is, it’s not obvious what the consumer harm is today”.
FINSUM: We think that point is very salient, as given the fact that it is hard to assert how consumers are being harmed, we expect the ultimate output of these investigations may be relatively light touch (such as a GDPR-like regulation).
All of the last year’s fear of anti-trust regulation seem to be coming true. Tech shares dropped yesterday on news that top US regulators had divvied up jurisdiction of tech giants for a forthcoming probe. The Department of Justice and the Federal Trade Commission, the agencies in charge of anti-trust, have decided who will manage what as they prepare to launch an anti-trust probe into Facebook, Amazon, Google, and Apple. It is still unclear exactly what will be investigated, as well as the scope of the probe. After the market closed, the US House of Representatives also announced its own investigation. The tumble in shares sent Google into a bear market.
FINSUM: This has been looming for some time, but now looks like a reality. This could be the start of some very serious volatility and changes for the FANGs.
The FANGs have gotten a lot of market pressure lately, both in the form of sell-offs, but also from analysts, who say tech companies will be among the worst hit by tariffs. However, one fund, Light Street Capital, which has made great returns betting on new technology companies, thinks Netflix has a lot of room to run. They reason they like Netflix is that the company has intentionally made its product very cheap in order to grow its subscriber base. They think there is a lot of room for Netflix to raise prices without alienating customers. Consumers have gotten used to paying $100 a month for cable, but are currently only paying $9-$12 per month for Netflix.
FINSUM: Netflix has a lot of room to expand margins. Think about the effect to earnings if it raised prices to a still very tolerable $14.99 per month.
Want to find a good test for whether the Fed has hiked rates too far? Look no further than everyone’s favorite, the FANG stocks. There is an increasing risk that the Fed may get very hawkish with its rate hikes, and if that happens, FANGs will show the pain first, says Julius Baer & Co. Baer thinks that the S&P 500 might sink 20% on the back of rate hikes before the Fed starts to moderate its action. It believes FANGs will feel the brunt of the losses. The NYSE FANG+ index peaked three months ago and has fallen 13% since June.
FINSUM: We do not disagree that rate hikes could cause market losses, but we don’t know why FANGs would feel the most heat other than the simple fact that they have gained the most.