Whale Fall - Google and Antitrust
Clearly, the biggest business story of the year is the impact of the COVID-19 pandemic on the world and markets. However, a distant second to that in terms of importance must be the ongoing calls to somehow regulate big tech. Following multiple congressional committee hearings, the United States Justice Department last week sued Google, alleging anti-competitive behaviour under Section 2 of the Sherman Act.
As a disclaimer, I’m not much of an authority on antitrust law. I’m pretty much learning as I go. The process of reading up on it has, however, been incredibly insightful. In his brilliant book, ‘The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google’, Scott Galloway explains how these giant technology businesses essentially maintain market dominance through rather ingenious business practices — tilting their scale in various directions in order to stifle competitors. Antitrust investigations dig even deeper — trying to determine whether those actions are actually illegal.
Many have claimed that the current DOJ lawsuit against Google is another act of political theatre, being announced as it was so close to the election. It’s hard to know what the motivation is, however, I will say that the lawsuit is unusually specific. Rather than attack Google over its monopolization of search, or, as the EU has, argue against its preferential listings of Google Shopping and Google Flight in search results, the case is largely focused on Google’s policy of paying phone-makers, like Apple and Samsung, to be the default search engine.
From the DOJ:
For a general search engine, by far the most effective means of distribution is to be the preset default general search engine for mobile and computer search access points. Even where users can change the default, they rarely do. This leaves the preset default general search engine with de facto exclusivity. As Google itself has recognized, this is particularly true on mobile devices, where defaults are especially sticky.
The default position is a very powerful place to be. Anyone who is interested more in that could read ‘Nudge’ by Richard Thaler and Cass Sunsteini, which highlights how important the default is in everything from organ donations to 401k contributions. This lawsuit, if successful, could spell trouble for Google and, particularly, Apple, who Google pays between $8-12 billion a year to in order to be the default search engine on Safari. This represents somewhere between 15-20% of Apple’s worldwide net income and signals how much value Google assigns to being the default.
If you’re interested in reading more about this, I’d strongly recommend Ben Thompson’s recent article on the matter. I’d also suggest listening into Professor Scott Galloway’s interview with Roger McNamee for more philosophical discussion on big tech, data privacy, and antitrust in general.
My reading to this point has led me to the belief that antitrust, and the breaking up of large businesses in particular, is not something that investors should be worried about. In fact, it’s something that should be celebrated. It breaks the stranglehold major businesses have on innovation. It helps totally new and exciting sectors be born.
From Galloway’s interview of Roger McNamee (I’ve made some minor edits for clarity):
McNamee: It’s like playing a video game. They’ve won. It’s a clear victory. That’s all that antitrust law is. It’s the prize at the end. The thing that people forget in tech is that the application of antitrust law has triggered every major wave, starting in 1956 when we locked AT&T into this narrow space that effectively created an independent computer industry. We were the only country that had one that wasn’t tied to its telephone company. We also took the transistor and put it in the public domain that created Silicon Valley. The IBM case made software a separate industry. You go onto Carterfone that created data networking and the second AT&T case...Investors should be embracing antitrust.
I’ve recently finished reading Herman Melville’s ‘Moby Dick’ so I have whales on the brain. When a whale dies in open water, its carcass falls to the ocean floor and creates a complex localized ecosystem, attracting deep-sea organisms and sustaining them for decades. It’s called “whale fall”. Whether or not this recent DOJ lawsuit is successful, we need more whale falls in the business world.