Published November 10, 2022 | 2 min read
Key Points
- Big tech companies are having an almost ‘tobacco industry’ moment, as their negative effects on society and the marketplace are not going unnoticed by investors.
- On regulation, legislators face significant challenges relating to the vastly complex and fast changing nature of big tech companies.
- M&A deals are a high priority for big tech companies, who must continue to increase their value proposition. But these deals are likely to be increasingly scrutinized and even blocked in the future.
Big tech companies dominate the internet and information technology industry. But, key players face a future riddled with regulation battles. The pandemic-induced acceleration of digitization bumped issues of data privacy, social media usage, cyber security and small business survival to the top of legislators' priority lists.
However, change is unlikely to come anytime soon. Regulation faces challenges on reaching global consensus, setting inconsistent legal precedents and keeping up with the fast-moving nature of the industry.
A ‘tobacco industry’ moment?
Critics of big tech claim the industry has reached a turning point. The toxic impact of social media platforms on mental health is becoming widely accepted, with high profile cases of mental illness in young people directly linked to usage.
Many big tech companies made changes that negatively impact different entities in the marketplace. Privacy changes and digital advertising algorithms are impacting the revenue-generation abilities of small businesses globally.
Despite these issues, big tech platforms are intertwined into the fabric of society. Can their dominance be regulated? What risks do these issues pose to future investment opportunities?
The reality of regulation
When it comes to the reality of regulation, change isn’t expected to arrive soon. Regulators are under resourced and face a vastly complex and continually changing industry. We feel that without the creation of a specialized digital regulatory agency that is empowered to take a firmer stance on the role of big tech, there will be a long and drawn-out battle over regulation in the future. Real change may be slow to occur.
Big tech companies are digitally native, data-centric and interconnected businesses. Therefore, they retain a powerful position in the market. Their dominance makes dividing and containing them an immense challenge. Coming to a consensus over the harms caused by these digital platforms is also problematic, as well as any broader agreement on how to reduce these harms.
Another issue lies in the legality of singling out big tech companies based on their prevalence. Curtailing the ability of one company to sell first party products in a bid to protect small business is arguably discriminatory, and sets a difficult legal precedent.
Looking ahead
One avenue the Federal Trade Commission (FTC) might pursue is to prevent profitable businesses subsidizing less profitable businesses, forcing the latter to function alone. This would disrupt common big tech models, which benefit from significant market share as a result.
A drastic shift that poses the most notable regulatory risk could arrive with changes to M&A. The FTC has already started to block some meaningful deals, and we expect more of that in the future. Big tech companies must continue to grow value over time, and most platforms would like to expand into end markets. After a certain point in their business journey, the only real remaining avenue to achieve this growth is in the pursuit of other platforms.
As a result of the pandemic, which highlighted digital transformation, it has never been easier to identify secular trends in relation to big tech. But today’s economic volatility and market turbulence is making it more of a challenge to capitalize on these trends.
Despite this, when imagining the future of big tech regulation, the risk appears more moderate than it may typically be perceived by the market.
