Who will be the leaders of Artificial Intelligence? How should “big tech” be regulated

Fri 26 Jul 2019

We are at an inflection point. Technological innovation drives our economy, and ultimately, our standard of living. From rail roads to the Internet, technological progress has pushed our productivity levels to new heights, and we are now on the brink of the next step of this evolution. Artificial Intelligence.

Once just the topic of sci-fi novels, this subject is now the next big trend in many academic institutions and businesses around the globe. The fuel on which Artificial Intelligence runs is data. Quite simply, artificial intelligence is the use of statistics to solve problems typically encountered by humans; problems such as classification (Is this a photo of a plant or an animal?), Language processing or prediction given some inputs; where one might use a regression model. The businesses with the best chance of monetizing these evolving fields such as Machine learning or AI are those with access to the largest, cleanest data sets. The firms collecting the most personal data are the mega-cap technology companies such as Facebook and Google. Facebook has over 2 Billion monthly users and Google has a 91% share of internet searches; that’s a lot of data.

By leveraging these data sets (How do you think Netflix suggests shows for you?) these big technology companies have been able to grow revenues at extraordinary rates and outperform the S&P 500 by a wide margin.

However, with such size comes a multitude of questions from our politicians and the possibility of antitrust regulations being passed. To analyse this, we need a framework to understand why a firm would be a target of such laws, and a good starting point that is congruent with the legislation in place is the following;

A business should be regulated with greater scrutiny (and potentially spilt up) if:

A) Its current business practices are harmful to end consumers

B) Its current business practices are restricting competition

The famous Standard Oil antitrust case was contingent on Rockefeller’s deals with the rail roads for discounted shipping rates, which made it challenging for new entrants to the market and current competitors who were forced to pay higher rates. A definite strike on point B.

Facebook has connected families and friends around the globe, but its addictive nature and recent political scandals have called into question its net effect on the wellbeing of society. On point B, the presence of Twitter, and the fact that Facebook was not the first ever social media site does suggest that the platform is not restricting competition in this space. However, Facebook has been criticised in the past for its data governance, and is probably where regulators will go first given its controversial history regarding elections and the infamous Cambridge Analytica case.

Amazon is slightly more complicated. While it has enabled small business owners to earn a living through selling on their site studies show Amazon has promoted their own products over second-party sellers, and its huge share of the online retail space provides a large amount of pricing power which is challenging to compete with; though Walmart is giving it a good shot. Google is a classic case of a natural monopoly taking advantage of network effects and superior intellectual property. Their efficient search engine provides a huge benefit to consumers and competition is certainly not restricted; Bing search engine exists, but just has second rate search algorithms and low brand loyalty.

In conclusion, the threat of antitrust regulations must be considered when analysing these technology stocks, however, in the near term the most likely development is a change to the tax regime for these companies ( with a focus on sales rather than profit) rather than a business line break up ( Amazon into AWS and online retail, Facebook into WhatsApp, Instagram and the Social media platform). We note that the threat of regulation doesn’t have to be the end of supernormal profits, as Microsoft shareholders will be more than happy to tell you, and global technology stocks in the cloud, cyber security and software sectors still present excellent long-term opportunities for investors.

Daniel Gorringe, Investment Analyst