Massachusetts senator, and presidential hopeful, Elizabeth Warren has promised to break up Big Tech if she is elected to the White House. Photo / AP
It is open season on Big Tech. As US politicians and regulators circle the industry, a once unthinkable idea is starting to be voiced more widely: whether a forced break-up of some of the world's most powerful companies will soon be on the agenda.
The idea was first thrust into the headlines in March by Elizabeth Warren, the Massachusetts senator and presidential hopeful, who promised to break up Big Tech if she is elected to the White House.
This week, the shadow of drastic regulatory action was cast again over Silicon Valley after it emerged that the US Department of Justice and the Federal Trade Commission had divided up responsibility for potential antitrust investigations.
At the same time, the House judiciary committee announced its own inquiry into whether US antitrust laws need to be tightened up to deal with the tech giants.
The flurry of interest has emboldened the industry's critics and prompted executives and analysts to start asking a question that until recently seemed inconceivable: What form should any forced break-ups take?
The possibilities raised most frequently include declaring some markets off-limits to the biggest tech companies; carving out their most powerful platforms to become separate regulated utilities; and unwinding past acquisitions that raised few concerns at the time they were completed.
But even cutting the tech giants down to size and scattering their operations between a group of successor companies might not be enough to silence all the concerns.
"All it's going to do is distribute the problem, not solve it. If you bust up Google into 10 parts, you still have 10 people" assembling detailed data profiles of internet users, said Roger McNamee, a veteran Silicon Valley investor and critic of Big Tech.
The chances of a forced unbundling of the leading tech companies are hard to handicap. Warren's call for drastic action was nothing more than "a rhetorical way of getting attention politically", one Washington critic of Google said.
"It shows you're serious, kicking ass and taking names in antitrust. But her people know that getting there is hard."
For regulators, meanwhile, antitrust cases seeking the ultimate sanction of a break-up are "horrifically expensive to bring, and the remedies are always disappointing", said Herbert Hovenkamp, an antitrust professor at the University of Pennsylvania.
He pointed to Microsoft's successful appeal against a 2001 court order to separate its Windows business from everything else as one reason why US regulators were likely to be wary of pursuing similar action now.
But that has not prevented growing debate about what form forced break-ups or other structural limits on the tech industry might take.
One approach would be to restrict the number of markets in which the companies can operate. That would mark a throwback to an older way of looking at the economy in which large areas of commercial activity were limited to a prescribed set of companies, said Michael Cusumano, a management professor at the Massachusetts Institute of Technology.
There was a precedent for such a move, said McNamee: a 1956 US consent decree involving AT&T. The intervention restricted the telecoms monopolist to only operating in regulated markets, reducing the risk that it would throw its weight around more broadly.
A similar arrangement could be used to restrain the tech companies. Obvious examples of businesses they could be shut out of, according to McNamee, are transport and financial services, where they are already starting to make a mark. Drawing lines like this would also force the companies to shed any operations they already have in these areas.
A second idea that has gained growing support among tech's critics would involve splitting off monopolistic digital platforms. Supporters of this idea, such as Warren, say it would address a common problem: the winner-takes-all phenomenon, where network effects produce dominant platforms.
For today's biggest tech companies, the platforms range from Google's search engine and the mobile app stores of Apple and Google to Amazon's ecommerce marketplace.
Trying to carve out the big tech platforms into standalone companies, however, would not be as simple as it sounds. One complication comes from the different business models that tech companies have built around their platforms.
For instance, Google doesn't charge for its Android mobile operating system, instead using it to draw users to its advertising-supported services.
"Pull all that apart, and it would ruin the company," said Cusumano. "It's the free Android business that enables things like Maps and Gmail."
Deciding what constitutes a platform, and how to carve up the many functions in the tech giants' digital operations, would also turn out to be a complex and contentious process.
A third option for restructuring Big Tech would involve unwinding past acquisitions, such as Facebook's purchase of WhatsApp and Instagram, and Google's of YouTube.
These operations remain distinct inside both companies, making a split easier to achieve.
However, Facebook chief executive Mark Zuckerberg said recently that he planned to tie Facebook's various services more tightly together — interpreted by some as a pre-emptive move to make it harder to break up the company.
Even some analysts generally opposed to breaking up big tech companies concede that some acquisitions may have gone too far.
Mark Mahaney, an internet analyst at RBC Capital Markets, said that the tech companies had brought considerable benefits for their consumers — but Google's acquisition of DoubleClick, the display advertising business, might be one deal that could be unwound, even though it was cleared by both the FTC and European regulators at the time.
How future break-ups would affect the companies is hard to judge. Some argue that they would be an unmitigated disaster for investors. Amazon's retail business, split from Amazon Web Services (AWS), would be exposed as a chronic lossmaker, said Bill Smead, head of Smead Capital Management, a value investor based in Seattle, leaving it "selling at a loss and shipping for free".
Similarly, if Apple were forced to spin off its apps and services, cutting it back to its low-growth software and hardware platforms, it would strip the company of its best prospects for growth. "If you remove the ability of Apple to sell services, it's devastating," said Cusumano.
But in other cases, break-ups might actually benefit shareholders. Businesses such as Instagram or YouTube, for instance, might be able to step out from the shadow cast by their corporate parents and go on to become tech giants in their own right.
"I would argue the sum of the parts is worth more than the whole," said Youssef Squali, an analyst at SunTrust Robinson Humphrey.
Some analysts also point to conflicts of interest inside today's tech groups that, while not raising regulatory concerns, could hamper their business prospects, making spin-offs desirable.
AWS's dominance of the cloud computing market, for instance, has left other retail companies with a difficult choice: should they rely on a rival to supply their essential computing needs? As an independent company, AWS would stir less fear among potential customers, said Dave Bartoletti, an analyst at Forrester Research.
"There's a ton of logic in them being standalone businesses," said Squali. He compared the potential of spin-offs with the performance of PayPal, the payments business whose market value has more than tripled since it was spun out of eBay in 2015.
With the battle lines only just being drawn over Big Tech's future, however, the prospects for any significant corporate restructuring are likely to take years to become clear.
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Written by: Richard Waters
© Financial Times
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