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4 things you should know about tech stocks and ‘antitrust’

Investment strategy

BNP Paribas Asset Management

Tech stocks have significantly outperformed the broader equity market in recent years, reflecting the rise of the digital economy

  • Although some of the digital giants have clocked staggering growth, they generate meagre profits, choosing to price below-cost and expand widely instead
  • Thanks to such strategies, some tech companies are at the centre of e-commerce and serve as essential infrastructure for a host of other businesses
  • Elements of these firms’ structure and conduct may pose anticompetitive concerns; recent announcements in the US suggest antitrust scrutiny may be on the way.


Exhibit 1: The NYSE FANG+, an index representing a segment of the technology and consumer discretionary sectors has significantly outperformed the S&P 500 Index since January 2015 (graph shows performance of these on the basis of indexation to 100 in January 2015)

ex1 no title

1: What are the ‘trusts’ in the term ‘antitrust’?

The historical background is well explained in the book « The Curse of Bigness – Antitrust in the New Gilded Age » by Professor Tim Wu of Columbia Law School. He explains how at the end of the nineteenth through the early twentieth century the ‘Trust Movement’ called for the reorganisation of the US/world economy into the form of a giant monopoly corporation. This objective was achieved with the rise of companies such as Standard Oil and AT&T in America or I.G. Farben in Germany.

In the US this monopolisation movement advanced at a cracking pace. Between 1895 and 1904, at least 2,274 manufacturing firms merged, leaving behind 157 corporations, most of which dominated their industry. By the early 1900s, nearly every major US industry was either already controlled by, or coming under the control of, a single monopolist. Among the best known monopolies was John D. Rockefeller’s Standard Oil, US Steel, International Mercantile Marine Co. These models inspired other copycat financiers who created a tobacco trust, a cotton trust, a sugar trust, a rubber trust, a film-makers trust, a nail trust, and so on. These were the monopolists of the gilded age.


2: What was the justification for the rise of such monopolies?

In the 1890s the US and world economy had undergone terrible shocks with hundreds of firms thrown into bankruptcy. Many blamed « ruinous competition » for driving prices too low.

Men like Rockefeller and John Pierpont Morgan, the leading exponents of the ‘Trust Movement’, argued that monopolies were a superior form of business organisation and were saving the US economy from ruin.

Adherents to the Trust Movement thought Adam Smith’s fierce competition had no place in a modern industrialised economy.


3: And what were the consequences of the rise of the trusts?

Although some of the firms built during this era were impressive creations, the monopolisation movement marked a radical break from values once seen as foundational to the US Republic, if not the more humanist traditions of Western civilisation. Historian Richard Hofstadter puts it this way:

“Nothing less was at stake than the entire organisation of American business and American politics, the very question of who was to control the country.”

Arguably the American tradition had, until that point, been defined by resistance to centralised power and monopoly. The American Revolution itself was in large part sparked by the abuses of Crown monopolies. The original Boston Tea Party can be considered an anti-monopoly protest.

The Trust Movement’s underlying philosophy and vision was that an economy should be centralised, run by great men, free from any government interference and there to promote the survival of the fittest, largely indifferent to the plight of the weak, poor and unfit.

The trusts – a challenge to the US constitution and US democracy

With the Trust Movement’s assertion that much of economic decision-making was beyond the government’s control, the question of who really ruled American was suddenly unclear. Fortifying matters was the tendencies of great monopolists, like Standard Oil or the New Haven Railroad to use bribes and other forms of influence to control political outcomes. The Trust Movement posed a new challenge for the US constitution that was committed to limited and separate powers, and never contemplated the rise of private power as great as any of the branches of government, and able to corrupt governmental operations to suit its ends.

Perhaps the most profound change brought about by the Trust Movement was the break with the idea that the US was a nation characterised by a relative sense of equality among its citizens. The rise of the trusts created a divide between the giant corporations and its workers, leading to strikes, violence, and a constant threat of class warfare.

The Trust Movement engendered great popular resistance

In short, while the Trust Movement was powerful, lucrative, and had its true believers, it also engendered great popular resistance that threatened a new US revolution. Outrage in the US was channelled into organised labour, the farmers “Granger movement”, the founding of an Anti-Monopoly Party, and the emergence of populist candidates for the US Presidency.

The Sherman Act – the first antitrust law

It also led to the passage of the first antitrust law, the Sherman Act, enacted in 1890, during the first wave of reactions to the rise of the trusts. The language of the Sherman Act is very strong – its literal text bans so much that the scholarly debate over the Sherman Act’s meaning and history is still ongoing. But two things can be stated:

  • It was clearly a reaction to the rising power of the monopoly trusts, such as the Standard Oil Company.
  • It was clear members of Congress had diverse and disparate concerns ranging from the evils of monopoly pricing to the idea of a single trust owner with huge powers was fundamentally at odds with US democracy.
President Theodore Roosevelt – a committed trustbuster

Subsequently, US President Theodore Roosevelt directly confronted the greatest monopolists of the age, those at the very heart of the trust movement – J.P. Morgan and John D. Rockefeller – in acts of considerable political courage.

For Roosevelt, the growing power of the trusts represented a threat to US political democracy. He considered that if the US government did not get the trusts under control, the economic misery they would create would drive demand for extreme solutions, like Marxist or anarchist revolution.

The ‘trustbusting’ approach brought into the mainstream by Roosevelt and enacted by US Supreme Court Associate Justice (1916 to 1939) Louis Brandeis led to the break-up of Standard Oil and J.P. Morgan.

By the end of the 1910s, just about every one of the major trusts had been broken into pieces or had some encounter with the antitrust law. In this sense Roosevelt achieved his goal – making the primacy of the elected government over the structure of the US economy.

The Chicago School and a new doctrine

The trustbusting approach lasted through the 1960s. But with the rise of the Chicago School academics, and in particular Robert Bork, who turned the ideology of « consumer welfare » into a new antitrust philosophy with his book “The Antitrust Paradox” in 1978, the notion that too much corporate power alone was problematic was abandoned. Antitrust became technocratic and weak, pegged to the doctrine that as long as companies reduced prices for consumers, they could be as big as they wanted.

Where we stand today

As a result, any number of industries from airlines to media to pharmaceuticals has reached unprecedented levels of concentration.

But it is the big tech business – in which goods are bartered in exchange for personal data – that may provide the rational for a major review of the interpretation of monopoly power.

Do today’s tech giants – the Standard Oil or US Steel of our day – companies more powerful than governments – pose a threat to liberal democracy unless their power scan be constrained by a broader view of monopoly ?

If the internet is the railroad of our times – essential public infrastructure on which much the modern economy’s commerce and communication is conducted – do the private, profit-seeking companies that dominate it pose a monopoly problem?


4: So, are antitrust measures to rein in ‘big tech’ now being considered?

Yes, a sell-off in tech stocks in early June was attributed to announcements that US antitrust enforcers have divided jurisdiction for possible investigations into four of the big tech companies. This agreement between the US Department of Justice and the Federal Trade Commission paves the way for antitrust investigations. These two agencies share responsibility for antitrust enforcement in the US and must agree on jurisdiction before either launches an investigation.

Speaking at a conference last week, Makan Delrahim the US Department of Justice’s antitrust chief, referenced US trustbusting, including Standard Oil, AT&T and Microsoft. He pointed out that Standard Oil was considered a great innovator in its time but was broken up by the federal government.

At this juncture it is unclear what matters the agencies are examining or how aggressively they intend to move. Cases could take years to come to fruition and the agencies may eventually decide not to take action.

Subsequently and perhaps even more significantly, at least in the short term, the House of Representatives judiciary committee announced it would launch its own investigation into competition in digital markets. Over the next 18 months, this committee will hold hearings with leaders in the tech industry as well as some of their competitors to review the competitive playing field.

These announcements may represent a decisive shift for the technology sector as both Trump administration and Congress seem to be signalling a tougher stance on digital competition. In recent years, the primary antitrust risk for large US tech groups emanated from the European Union.

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