Earlier this week, markets were slowly moving up for most of Tuesday, until the late afternoon. Then, in a matter of minutes, the Dow dropped 421 points, and the S&P 500 and the Nasdaq weren’t far behind.
The reason that Big Media is going with for this drop is a tweet from President Trump on stimulus. Now, as late as Saturday, Trump had tweeted that America “wants and needs stimulus.”
And by all accounts, negotiations between House Democrats and Treasury Secretary Mnuchin were making progress.
But yesterday, President Trump tweeted that he was cancelling all negotiations over another round of stimulus, until after the election.
Now, Big Media isn’t exactly wrong to say this is why markets dropped. With the Fed having expended all its ammunition, more help for the economy can only come from Congress and the White House.
But by focusing on the abruptly halted stimulus talks, Big Media isn’t talking about another crucial event that happened overnight.
One that could mean big profits for you if you know where to invest.
This is the reason tech stocks especially struggled to even stay flat for the day.
See, a leak of a Congressional memo put a huge issue back on investors’ radar.
And the implications for Big Tech couldn’t be greater…
Big Tech Could Be in Big Trouble
The House of Representatives Subcommittee on Antitrust, Commercial and Administrative Law has been looking into whether Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc.’s (GOOGL) Google, and Facebook Inc. (FB) have too much market power and have misused it since June of last year.
According to a leaked memo from Republican Congressman Ken Buck on the subcommittee, that final report – which was originally due to come out on Tuesday morning, but was postponed slightly because of new information as well as to give Republicans more input – was likely to be a lot stronger than most experts expected.
And now with the report out in full (all 450 pages of it) – it seems Sen. Bucks’ memo was pretty accurate.
The report outlines a wide variety of measures against the four Big Tech companies, including banning the firms from acquiring smaller start-ups, eliminating the “arbitration clauses” that Big Tech use to avoid being exposed to class-action lawsuits, and “breaking up” the companies so that they couldn’t participate in any marketplace they also run.
There seems to be quite a bit of consensus from both parties that Big Tech has overstepped the bounds of fair competition.
And while traders’ initial response to the original leak was to be wary (the four mega tech stocks in question were all down in an up market), things aren’t nearly as bad as they may seem at first glance.
In fact, we’ve seen this show before, in the early 2000s.
And the Big Tech company that got slapped down hard then is doing better than ever now…
What History Can Teach Us About Today’s Tech Troubles
That company, of course, is Microsoft Corp. (MSFT). Almost everyone who’s ever used a computer after the mid-1990s has used a piece of software made by Microsoft. Even today, the company’s Windows operating system and Office application suite are practically the only game in town for much of the world.
For better or worse, Word, Excel, and Outlook are staples in corporate America, for example.
In the mid-1990s through to the early 2000s, Microsoft got into trouble with regulators. In the U.S., the company was accused of bundling its then-new web browser, Internet Explorer, with its dominant Windows operating system.
As you’d imagine, that squeezed out competitors like the once-ubiquitous Netscape.
In Europe, Microsoft’s bundling of Windows Media Player got it in hot waters for similar reasons.
These might sound like paltry concerns, but remember that this was still at the early stages of the Internet. A monopoly on the control of our access to the Internet was a crucial issue, and already web sites were starting to be designed not with standards in mind, but simply to look good on Internet Explorer.
Microsoft ended up settling the U.S. case, agreeing to share some of the inner workings of Windows to make applications from other developers work just as well as Microsoft’s own.
In the European case, Microsoft was ordered to offer a version of Windows without Windows Media Player, as well as again open up its server and desktop software to make interoperable with products from other developers.
After years of litigation, billions of dollars in fines, and settlements that effectively barred the company from using parts of its market position to profit, you’d think Microsoft would be a wreck today.
And yet a look at Microsoft’s chart shows the opposite. Here’s the stock’s performance from 1993, when the first serious complaint against Microsoft was lodged, to today:
Much like other tech stocks, Microsoft’s shares ran up during the dot-com years, went down with the crash, and then held steady for roughly the next decade.
That’s no different than many other pre-2001 tech stocks.
And then starting around 2013, Microsoft’s stock really kicked into overdrive, and has been in a meteoric rise since.
The story of Microsoft and what happened to it later gives us at least a partial blueprint for how companies under the kind of antitrust scrutiny that Big Tech is under fare.
And as that chart shows you, the results can actually be pretty good…
A Masterclass in Weathering an Antitrust Storm
First of all, Microsoft shows us that it takes a decade or even longer for major antitrust actions to play out.
Second, it also shows that if the company is innovative, it can grow even stronger under this kind of scrutiny.
Because it was right around 2013 that Microsoft’s post-antitrust initiatives started bearing fruit. The new fields into which Microsoft launched have proven wildly successful.
The hugely successful but troubled Xbox 360 gaming console had launched in 2005, and its even more popular successor, the Xbox One, launched in 2014.
Meanwhile, Microsoft’s big push into cloud computing began in 2010, and really came into its own in 2014, when it was also given its current name, Microsoft Azure.
And this isn’t the only example of antitrust action actually making companies perform better.
Standard Oil, the quintessential monopolist, was broken up into 34 regional companies by the federal government in 1911.
Standard Oil’s founder, John D. Rockefeller, wasn’t too upset. In the decade following the split, Rockefeller’s own stake in what had been Standard Oil had quintupled.
Standard Oil of New York, the “Mobil” in today’s Exxon Mobil Corp. (XOM), doubled in value in just a year after the breakup.
Standard Oil of Indiana, which was bought by BP plc (BP) in 1998, almost tripled in a year.
Now, increases quite that large probably won’t happen with today’s Big Tech.
But increased transparency into their operation and more competition may well unlock more value and innovation at Apple, Amazon, Google, and Facebook, just as it did with Standard Oil and Microsoft.
So I don’t worry about their long-term future, even in the face of the harshest of antitrust measures.
Mind you, the “break up” of Big Tech companies mentioned in the report is nowhere near what happened to Standard Oil.
In fact, it seems to be referring to barring companies from participating in marketplaces they themselves run.
Far from actually breaking the Big Techs up into “Baby Bells”, as happened to the original AT&T, or to the regional oil companies that followed Standard Oil, this would have much smaller consequences. (The actual report does suggest breaking the companies into “structural separations” – so we could see some movement toward spin-offs, though the details are not really clear.)
In effect, it would ban Apple, Amazon, and Google from giving preferential treatment to their own products within their ecosystems. On the retail sales side, Amazon would be most affected, as the company has been accused of using the data it gleans from sales on its marketplace to create its own products. Google would also be quite affected in search results.
Still, the only two lines of actually successful Amazon consumer products are the Kindle ebook readers and the Alexa-enabled smart speakers. There are already plenty of good alternatives to either.
Of course, while the drama of hearings, lawsuits, and settlements goes on, Big Tech stocks may well be in for a rough ride.
That’s why my preferred play among the mega techs right now, with all this antitrust scrutiny, is the one tech giant that’s already been through it all.
And shown it’s stronger for it.
I’m referring to Microsoft, of course.
There will be other winners, too. Netflix Inc. (NFLX) may be a giant in the video streaming space, but few would accuse it of being a monopolist. It makes a bunch of movies and shows, buys the rest, and sells it all as a subscription.
If Amazon is forced to somehow disentangle its Amazon Prime Video service from the rest of its Amazon Prime subscription, Netflix may well be the winner.
After all, many people pay for Amazon Prime mostly for the shipping benefits, and might not want to subscribe to Prime Video separately if given the chance.
Similarly, shipping companies such as Fedex Corp. (FDX) and United Parcel Service Inc. (UPS) stand to gain if Amazon had to separate its online store from its extensive shipping network, while many of Facebook’s competitors in the social media and instant messaging space could gain ground if Facebook had to give up Instagram, Whatsapp, and so on.
If the antitrust discussion heats up in the next few months (especially post-election), then a rotation into MSFT will be a welcome haven.
Great trading, stay safe out there, and God bless you,
D.R. Barton, Jr.