National Post (National Edition)
Parts vs. whole
WHY BIG TECH MAY BE A WISE INVESTMENT, EVEN IF WASHINGTON BREAKS THEM UP.
With all the drama following the U.S. election and excitement over potential vaccines for COVID-19, government inquiries into big tech have for the most part slipped by under the radar. Yet, the probes are a very significant event and one we will be focused on for a long time to come.
In early October, after a 16-month investigation into competitive practices at Apple, Amazon, Facebook and Google, the U.S. House Judiciary Subcommittee on Antitrust released its findings and recommendations on how to reform laws to fit the digital age.
The report stated that these companies “have become the kind of monopolies we last saw in the era of oil barons and railroad tycoons…. These firms typically run the marketplace while also competing in it — a position that enables them to write one set of rules for others, while they play by another, or to engage in a form of their own private quasi regulation that is unaccountable to anyone but themselves.”
A mere two weeks later, the U.S. Justice Department filed an antitrust lawsuit against Google. The Department did this “to stop Google from unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets and to remedy the competitive harms.”
The public release from the DoJ went on: “This lawsuit strikes at the heart of Google's grip over the internet for millions of American consumers, advertisers, small businesses and entrepreneurs beholden to an unlawful monopolist.” Serious accusations, indeed.
Unless you've been living in a cave for the past 25 years, you are well aware of Google. The word has become a verb in the same way that a tissue is referred to as a Kleenex.
A small sample of the statistics for Google parent Alphabet Inc.'s place in the world are staggering. Its search engine handles 2 trillion searches every year, giving it a 93 per cent market share. Its YouTube subsidiary has over 500 hours of content uploaded every minute. It has 2 billion logged-in monthly users and more than 70 per cent of views are now on mobile. In the U.S., 73 per cent of adults are users, more than Facebook (69 per cent) and almost twice as much as the next runner-up, Instagram (37 per cent). Google Maps covers 99 per cent of the world and has one billion users every month. Android, Alphabet's mobile-phone operating system, was used on two billion devices monthly in 2017 and is expected to have a worldwide market share of 87 per cent by 2022.
Google, through, these subsidiaries, gathers information on individuals with every click. They have a growing profile of billions of people, their likes and dislikes. I suspect they know more about people worldwide than the governments of the countries in which they live.
In the book Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked by
Adam Alter, the case is made that video games and streaming services, among other virtual items, are the new opioids. YouTube keeps you coming back with suggestions to watch other videos, keeping users on the service for hours at a time. Google Search may or may not be classified as an addiction but in some ways, it is worse. It is the portal through which you search for answers.
As Scott Galloway writes in the book, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google, Google is like a god. It answers all questions. It may not be exactly what you want but you can keep asking over and over again. It is our portal to anything you want to know. Try finding information more efficiently any other way. And of course, it is filled with advertisements.
Across these subsidiaries, Alphabet helps advertisers target, with pinpoint precision, people who might just be interested in what they have to offer.
Warren Buffett for years has said that you want to own a business that has a “share of the mind.” I can't think of any company that owns more of people's mind than Alphabet: Google, YouTube, Android, Google Maps — they do not just have a share of the mind, they actually influence people's behaviour and their desires. And every day they just keep gathering more delicate information. No wonder there are governments out there considering breaking the company up.
From an investor point of view — and my firm is invested in Google — well, you must invert. The same things that give governments pause make this, in our view, a dream company to own, with barriers to entry that reach the sky. Who is a real competitor to the Google search engine? Who is going to take over from Google Maps, or Android? The question is: if you had $100 billion, could you build a serious competitor to the Google search engine? The barriers to entry are almost impenetrable and I don't see a new competitor emerging soon.
If you look at Alphabet from Buffett's “wonderful business” viewpoint, it checks all the boxes. To name a few key ones: A huge sustainable competitive advantage in numerous sectors; a growing stream of free cash flow; a royalty on the growth of others, requiring little capital itself; and great management.
What if the government is successful in breaking Alphabet into different pieces of the whole? Let's use history as a guide. The breakup of Standard Oil of Ohio in 1911 created 34 stand-alone companies. Today, those 34 include four of the world's largest oil and gas companies: Chevron, ExxonMobil, BP and Marathon. If Standard Oil existed today in its original structure, it would be worth in excess of US$1 trillion, making it one of the richest companies in the world and the founder, J.D. Rockefeller (if he were alive today), worth around US$400 billion. There are other examples including the 1984 breakup of the original AT&T and the 1990s antitrust suit against Microsoft.
So, if the U.S government is successful in breaking up Alphabet, history indicates that the pieces may be worth much more that the current whole. In any event, the success of the government in doing so will take years. In the meantime, Alphabet will continue growing ever stronger and larger.
HAVE BECOME THE KIND OF MONOPOLIES WE LAST SAW IN THE ERA OF OIL BARONS AND RAILROAD TYCOONS.