Time to break up?

The honeymoon for US tech giants may be over, but is it time to break up? Chief investment officer Julian Chillingworth discusses the intensifying antitrust scrutiny of America’s tech titans and how their future may rest on political machinations.

Illuminated emoji girl crossing arms

Just like other life-transforming technologies of the past, today’s tech giants are making that inevitable transformation from fresh young face of innovation to overgrown, mistrusted hulk. Telltale wrinkles appeared in May amid reports that US antitrust bodies would be investigating Alphabet, Apple, Amazon and Facebook’s competitive practices for possible violations.

Their share prices took a hit as investors feared a growth-busting breakup of these behemoths. So should you be concerned about exposure to these tech giants in client portfolios?

We’ve been talking about this inevitable development in our InvestmentInsights publication over the past year, in a series called ‘The great tech breakup’. First we looked at the history of antitrust in America, and that didn’t suggest bust-ups of the big US tech firms were imminent; or the end of the road for these businesses even if breakups did come. But we don’t doubt that they’ll see more volatility in the short term.

The taste of freedom

A century ago America was waking up to the tremendous freedom and opportunity provided by the internal combustion engine. Oil was the lifeblood of the new economy of the 20th century, and increasingly controlled by John D Rockefeller’s Standard Oil.

Today social media and the internet are radically changing how we communicate, transact and live. Today’s quality data is pivotal and increasingly concentrated in the hands of a few tech giants. Standard Oil was found to be abusing its power, and was split up by the government in 1911 after taking its case all the way to the Supreme Court. They broke it up to ensure competition reigned supreme in America. Could the same happen with today’s tech titans?

First we need to ask, why does new technology eventually attract the controlling gaze of state regulators? There’s a tipping point where a luxurious new gadget or service becomes so ubiquitous that it’s seen as a de facto right. There was a time — not so long ago — when indoor plumbing or electricity were beyond the reach of many Americans and Britons. Now it’s unthinkable to let a home or office be without them. Should we now add internet access to that list of required amenities?

The trouble is, today’s high-tech businesses, with their complexity of design, operation and business models, make antitrust law — which is always evolving and depends ultimately on the view of the Supreme Court — difficult to apply. That’s something we explored in part two of ‘The great tech breakup’. In more recent antitrust history, Microsoft continually clashed with the government. It eventually settled in 2001, and agreed to be more open with its software and coding in return for remaining intact as a business. It then languished in the doldrums for a decade before re-emerging as a tech giant once again.

Even if one or more of Microsoft’s younger rivals are broken up, there is hope for investors that the sum of the parts may be worth more than the whole. When Standard Oil was split into Exxon, Mobil and Chevron, the combined growth of these businesses easily eclipsed their predecessor. You could say it was win-win: Mr Rockefeller got richer and America got a free and competitive oil market.

For antitrust breakups to happen two things are required: the government has to push for it and the Supreme Court has to have a sympathetic ear. America’s top court is the final arbiter of antitrust law, as we noted in the conclusion of ‘The great tech breakup’. President Donald Trump has been vocal about wanting to rein in tech companies. But the court has tacked significantly to the right after Trump’s appointment of Neil Gorsuch and Brett Kavanaugh.

Will US tech giants survive the coming years unscathed? That depends on political machinations, both at home and abroad, and the economic beliefs of two greenhorn Supreme Court Justices. Some new technology may come along to eclipse them, but we doubt they’ll be going extinct any time soon.

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
Average: 3 (2 votes)

Subscribe to the In the KNOW blog email