October 12, 2020
Published on Forbes.com
So far in 2020, investing has been an almost risk-free venture if you put your money in Alphabet, Amazon, Apple, Facebook and Microsoft. Flush with money from the U.S. Federal Reserve and Japan’s SoftBank, the “Nasdaq whale,” the Big Five digital leaders seem too big and too well funded to fail. With interest rates apparently staying flat for the next few years, this situation can persist.
In truth, these exuberant investments in the Big Five have created extremely risky dynamics—for the functionality of free markets, the health of civic society and the future of innovation. These once rebellious, disruptive companies have become behemoths that jealously guard their power and the status quo. Their alleged innovation “ecosystem” resembles a hunting preserve where they, the hunters, control which startups live or die. Far too many become meals and trophies.
Had the Big Five grown phenomenally while playing by fair rules, it would be much harder to criticize their success. Yet mounting evidence suggests that the Big Five maintain their dominance thanks to insufficient regulation, anticompetitive behavior and business models that manipulate users. Meanwhile, they have driven up the cost of capital for innovations that combat climate change while also luring away key talent.
Five years ago, those would have been controversial claims. Today, though, the Big Five know that they are in a precarious situation. They are not perceived to be responsible corporate citizens. As such, arguments to break up big tech have gained traction in Washington, where the House Antitrust Subcommittee has concluded that these companies “…have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.” But what would antitrust action really accomplish? Alibaba, Huawei and Tencent have the most to gain from a Big Five breakup.
A better outcome than a breakup would be for the Big Five to step up and embrace responsibility. That is no easy task, as they will have to reconsider how they create value, what products they offer and how they interact with the wider innovation ecosystem, their stakeholders and society at large.
Can they do it? And if the Big Five were responsible and trusted, what would that look like?
The Value of Writing Your Own Rules
Why are the Big Five considered so valuable by investors? Collectively, they constitute more than 20% of the stock market’s total worth. Collectively, they have acquired more than 730 companies in the past few years, ensuring those never become competition. Collectively, they managed to avoid over $100 billion in taxes in the 2010s (including Netflix).
Those are signals of power but not reasons for it. The real answer has to do with the erosion of the bond market, the rules of business and who is perceived to be setting them.
Consider that a decade ago, when BP’s Deepwater Horizon fiasco spilled 5 million barrels of oil into the Gulf of Mexico, its stock lost more than half its value that year. That was long before the costs to the company ($65 billion) were known. BP hasn’t fully recovered. The message was clear: when negligence leads to 11 deaths and irreparable damage to a resource shared by millions of people, there are consequences.
In 2019, Facebook was fined a record-breaking $5 billion by the Federal Trade Commission (FTC) for its myriad privacy scandals, including the Cambridge Analytica debacle. Recall that Facebook’s flagrant disregard for data privacy enabled Cambridge Analytica to illegally obtain personal information from 87 million users and monetize it for targeted political advertisements. Although its effect on the 2016 election remains inconclusive, the scandal certainly helped undermine faith in U.S. elections and democracy. Care to estimate the cost of that?
So how did markets respond to the FTC fine? Facebook stock climbed 1.8%, adding $10 billion to its market cap. Facebook, with revenue of more than $70 billion, could easily afford this cost of doing shady business. The markets rewarded Facebook for showing that it could freely abuse civil rights and undermine political institutions in pursuit of profits.
The message to investors was clear: Facebook is unassailable.
In a healthy democracy, the government defines the borders of the playing field, and businesses compete within those borders. But the Big Five have grown so big that they write their own rules. They have over 238 registered lobbyists leading their war against antitrust action and privacy regulation in Washington.
Thus, when Facebook demonstrates that it can break the rules with a mere slap on the wrist, its stock rises. Perceived to be above law, the Big Five see less volatility and have become the perfect alternative to bonds in a long duration, low interest market. Hence, their massive valuations.
On-Demand Distractions for the Masses or Satisfying Real Needs?
Can the Big Five move from today’s offerings of “junk food” for the masses to more substantial products, while foregoing stock buybacks?
The disruptive products and services they introduced years ago have become a sort of fast-food delivery business—a sugary, fatty treat we devour to forget COVID and climate change. We, the consumers, have become their dependable junkies, hooked on self-righteous content, psychological validation, underpriced sweatshop goods, and so forth. Now that they are expanding beyond comfort and convenience, what, exactly, are their investors funding?
Google (owned by Alphabet) is developing a system of “surveillance capitalism” that monetizes your private searches, private emails, private documents and location data while manipulating your understanding of the world—all to generate advertising revenues. No business today can survive without massive investments in search engine optimization (SEO) and search engine marketing (SEM) from Google. The more digital content produced (to win Google’s SEO game), and harder it is for a business to be found amidst that barrage of content, the more essential Google becomes, and the more it can charge for search advertising. Its more noble endeavors at Google X are a nice PR sideshow to this racket.
Amazon has proved to be an important source of basic goods and necessities during the pandemic. However, the company turns cities into retail deserts, raises the carbon footprint of goods, practices “strip-mining” (i.e., copying software of its own AWS sellers) and misappropriates data from Amazon merchants to develop competing, Amazon-branded products—some of which have been known to explode, smoke, melt or catch fire yet remain on the market because nobody regulates Amazon. It’s even known to pilfer ideas from startups while vetting them for venture capital investments.
And there’s Apple, at times the most profitable company in the world. It has used the clout of its App Store to extract exorbitant fees from companies that lack the scale and power to negotiate a better deal. Its labor violations and abuses in China—documented by China Labor Watch—include the overuse of dispatch workers (to reduce costs), excessive overtime, unpaid work, inadequate protective equipment and no reporting of workplace injuries, among other allegations.
Facebook, similar to Google, sells the ability to manipulate their users’ behavior, as former employees and insiders attest in The Social Dilemma, a Netflix documentary. Estranged from its innocent intention of connecting people, Facebook now profits from polarization, extremism, isolation, foreign election interference, tech addiction, political violence and mental illness. Its platform increasingly brings out the weakest and worst in people instead of strengthening society.
And Microsoft? Though a model citizen compared to the other four, Microsoft is Facebook-izing LinkedIn and their flirt to acquire TikTok indicates that they, too, would like to get a faster horse in the surveillance and behavioral manipulation race.
No wonder the House Antitrust Committee is up in arms!
Young Davids Can No Longer Beat These Goliath Monopolies
The stock market rewards the Big Five for writing their own rules and creating products and services that cause widescale harm. Still, institutional investors prefer that “bond” security and risk-free returns of the Big Five over backing crucial advancements in cleantech, robotics and industrial innovation that are riskier and more capital-intensive but necessary for the energy transition and higher standards of living globally. Investors seem to prefer frothy apps over substantial innovation.
Shockingly, this preference is also shown by many so-called Environment, Social, and Governance (ESG) funds, which enrich many Salon Socialists while assuaging their materialist guilt (see my earlier article on this topic). The result is that big tech has the cash reserves to kill all competition, while also limiting investments that are necessary for a better future.
Put yourself in the shoes of young entrepreneurs in the cleantech industry. Maybe you have a bold idea to decarbonize an industry or push fusion energy to commercialization. You know it will be a long road ahead, access to the necessary development capital is scarce and you must go the extra mile to attract forward-looking investors who can withstand the lure of the Big Five. Meanwhile, the Big Five are seducing and then neutralizing your most talented employees with salaries no startup can match.
And if you dare to create something that threatens one of the Big Five? Since they are more in the business of acquisitions than innovation, one of them will acquire your startup long before you can maximize the value. Countless investors will line up to supply capital for an exit strategy that results in a quick sale to the Big Five for a 3x return. Few investors will help you scale up to a 10-to-20x return (or more) over a longer period. As such, the Big Five lure young innovators into becoming their cheap R&D servants.
If we as a society allocate scarce talent and capital that way, we grow more efficient at furthering what we have: a tech ecosystem incapable of producing the breakthrough innovations the world really needs; not to mention low business startup rates, income inequality, a climate disaster, political polarization and dysfunctional democracies.
Innovation Outside the Hunting Grounds
The western entrepreneurial ecosystem that originated in Silicon Valley and initially offered so much hope has, in the past decade, evolved into a fenced hunting ground for the Big Five. It is an anathema to real innovation. It has become much harder now than in the past to create a breakthrough technology startup.
If the Big Five want to forestall a breakup and reclaim an image of accountability, I believe they must do three things:
The good news is that there are harbingers of such change at the Big Five. Microsoft has committed to not only become carbon neutral by 2030, but to remove enough carbon by 2050 to account for all its emissions since its founding in 1975. Google has pledged to run on carbon-free energy by 2030 and bought enough carbon offsets to cancel out all of its historical carbons emissions (theoretically).
Another bright spot is Amazon’s $2 billion climate fund, which has the potential to fund groundbreaking clean technologies. Yet, it needs to be put in perspective. Between 2010 and 2019, the company paid $3.4 billion in income taxes on $960.5 billion of revenue and $26.8 billion of profits. In a primetime Amazon commercial, one employee says the company’s carbon footprint will be net zero by 2040, but “…we don’t really know exactly how we’re going to get there.” A suggestion: spend that PR budget and then some on clean technology startups instead of redemption commercials. That would certainly strengthen the perception that Amazon intends to become a more responsible citizen.
As for Apple, it has become the champion of privacy, rolling out new tools to prevent tracking, protect user contact information and limit location tracking. Its peers should take note.
And Facebook? If its official response to The Social Dilemma is any indication, Facebook has little appetite for responsibility or change. Perhaps the House Antitrust Committee should initially focus on Facebook while giving the others a second chance.
The Big Five are not the risk-free, bond-style investments that they appear to be. The risks they pose to civic society are immense. However, the breakup of the Big Five is not inevitable. They can still choose to become responsible corporations and stewards of the societies that have powered their success. I hope they indeed step up.