From trade wars to tech wars?

Thu 28 Jan 2021

Banning the President of the United States from Twitter might have come as a relief for some, but not for Jack Dorsey, the founder and CEO of Twitter itself. In a series of posts he acknowledged that the move has opened a particular can of worms he was previously keen on keeping shut. The discussion around the power of Big Tech. 

Mr. Dorsey will probably be familiar with this part of history. In 1892 a strike in Carnegie Steel’s Homestead factory which turned bloody became a rallying cry for citizens who objected to the power large monopolies had over their lives. In 1896, industry titans in oil, banking, energy and steel acknowledged that the common danger to their business models was a politician called William Jennings Bryan. Bryan was a populist, by the standards of the time,  and a brilliant orator whose unique “Cross of Gold” speech earned him the 1896 Democratic nomination. For the first time, Andrew Carnegie (Steel), JP Morgan (Banks and Energy) and John D. Rockefeller (Oil), the fiercest of business rivals, sat around the same table and agreed to finance an unlikely Republican presidential candidate, William McKinley, to ensure their businesses would not be disrupted. Mr. McKinley was at the time the governor of Ohio, where Standard Oil was based. Four years later, in 1900, they convinced McKinley to put on the Republican ticket another “Trust-buster”, Theodore (“Teddy”) Roosevelt, the New York Governor who was also attacking monopolies. With one stone (which translates to a lot of dollars), two birds were killed. Bryant, again running as the Democratic nominee for the second time, would be defeated permanently and Roosevelt would be handcuffed to the largely ceremonial office of Vice President. The plan backfired, quite literally, when McKinley was shot shortly after his re-election, in September 1901. Theodore Roosevelt would go on to become a very popular and dynamic US President (4th in historical rankings as opposed to McKinley’s 20th place), not to mention and a children’s toy, the iconic “Teddy Bear”.  By the end of the decade all monopolies would be crushed. The business tycoons, defeated but still deeply rich, would spend their last years as philanthropists. Bryan would go on to become the 41st Secretary of State under W. Wilson. All the money in the world (or most of it anyway) was enough to turn the tide of history. 

Mr. Trump’s ban from Twitter and almost all major social media platforms, as well as the banning of Parler, a social media platform frequently used by Mr. Trump’s supporters, from the Apple store, have drawn sharp criticism across the political spectrum, even from the usually reserved Angela Merkel, opening up the debate on big tech. With the Democrats squarely in control of Washington, and much of the Republican party ostensibly livid against Twitter, things don’t augur well for social media and tech companies. 

Breaking them up looks deceptively easy. After all, if the US government could defeat a Rockefeller, millennial Mark Zuckerberg looks like less of a problem. And, given the proven impact on electoral behaviour, one can see why the government would be keen to be rid of such influence which has already significantly disrupted the status quo. 

But the implications for everyone, markets included, make matters very complicated. 

Let’s start with the obvious. The top 5 US tech companies (Amazon, Facebook, Microsoft, Google and Apple) account for almost 23% of the S&P 500, almost double the concentration of ten years ago.

Breaking them up could have significant consequences for the world’s leading equity index, as much as the retreat of banks had twelve years ago. Performance leadership also belongs to those companies. 

Currently, investors know the business models and trust the leaderships involved. Will they be as open to investing in the tens of companies, all run differently by different people, that will come as a result of the break up? Also, given the low entry barriers to the industry (building a social media platform is much cheaper than building a steel plant), could that mean the end of those companies altogether?  

And then there’s the question of the economic impact. Not so much in terms of people employed in tech, but in terms of the millions of businesses which rely on Google, Apple and Amazon for their survival and expansion. In the UK alone, migration to off-store sales has been spectacular in the past few years. 

Businesses which have spent billions building viable marketing models on social media are in danger of seeing their long-time efforts and investment lost in an instant. The power of tech is not in its tangible assets, like the monopolies of the 19th century, but rather on the large number of people and other businesses who depend on them. Will consumers embrace their successors the same? Will they want to deal with 10 platforms where they only had one? Will concentration just happen again in the next successful platform? After all, if Twitter breaks up in 10 companies, what would prevent one from re-joining the original version in a few weeks? Or prevent another “Twitter” from taking the original’s place in a matter of months? 

And there are more important questions to be answered: The business model of Google relies on the collection of data of billions of people into one place, the analysis of that data and prediction of behaviour, which it then sells to companies which want to target consumers. Broken in pieces, can models be as effective? 

And how about the intelligence community? It is hardly a secret that global intelligence agencies have embraced social media as a way to monitor persons of interest. For example, the mob which stormed congress was mainly identified by their social media accounts and culprits were subsequently arrested and indicted. Reconfiguring social media would have a profound impact on intelligence gathering. 

For better or for worse, our world is an internet world and those companies are at the epicentre of it. Breaking them up would have unpredictable far-reaching consequences. Not breaking them up could keep electorates on the path of extreme polarisation and hyper-partisanship we witnessed in the last few years. 

We believe that “breaking” companies may not necessarily be the endgame in this particular case. 21^st century problems require 21^st century solutions. The answer could come, for example, from regulating the proprietary and secret algorithms which filter and direct content. While they make product targeting easier, it is hard for the algos to discern between a consumer who might be looking to buy a new laptop after having searched for a battery for his old one, and a citizen on the verge of radicalisation.  The quickness in which filter “bubbles” develop is often reminiscent of “High Pressure” sales tactics, which have already been regulated away in many industries like finance. And the persistence of the bubbles generates behaviour not unlike the one American psychologist Leon Festinger described in religious cults. It would cost social media companies some money to fix this, allow for more diverse information to infiltrate the “bubble”, and could reduce some social media addiction, but it is a scenario which simply brings valuations closer to average, not one which is hugely disruptive for the world economy. 

Banning Mr. Trump was not the end of populism, which constantly fuelled by stagnating incomes in the west and only fanned by the awesome power of social media. It might prove, in the near future, to have been the Boston Tea Party that launched Tech Wars. The choices are difficult. But the outcome will affect markets, investors and the real economy in ways we have yet to understand.