If earnings week wasn’t enough, Big Tech is facing more news-worthy drama. This Wednesday, the CEOs of the FAAMG ex-Microsoft group appear in front of Congress to talk about unfair competitive practices.
This is a cloud that has been hanging over the heads of large technology companies for a while, probably starting with Microsoft’s infamous antitrust case in the 1990s. As tech has become an ever more dominant force in the US economy, the risk of government intervention chipping away at these companies’ competitive edge is real.
It seems to me like Alphabet (for its dominance in search), Facebook (social media) and Amazon (e-commerce) stand to lose most from government scrutiny. The last two are further entangled in issues of good faith regarding content manipulation and “fair” tax contributions, respectively. Apple, on the other hand, might only get in trouble for matters associated with the App Store, the bundling of services and unfair bargaining power over developers.
CEO Tim Cook’s argument is that Apple is not a monopoly in any of the businesses that it is involved in. While the company gets close to it in the smartwatch and tablet spaces (although the closest competitors in both cases are not American companies that US Congress might have an interest in protecting), I tend to largely agree with the executive. Therefore, regarding the Cupertino company, I see two possible outcomes from this week’s hearings.
Scenario #1: a slap on the wrist
If anything comes out of this process, I think that the most likely consequence will be a slap on Apple’s wrist. This would probably take the form of a negotiated cash settlement similar to what Google’s Alphabet had to pay to the European authorities in the past.
In this case, I think investors have little to worry about. Sure, a few billion dollars here or there would put a minor dent on Apple’s $80 billion-plus net cash position. Maybe the stock price would hiccup for a moment but recover quickly, once investors understood that there is more value gained from putting antitrust concerns behind than value lost through a one-time legal charge.
Scenario #2: intervention
The worst-case scenario is also the least likely outcome, in my view. An eventual attempt by the Department of Justice or similar regulatory agency to interfere in Apple’s business would be a negative for the company and investor sentiment.
My main concern would be a potential court decision that resembles Judge Thomas Jackson’s initial ruling on Microsoft, in 1999. Back then, the Redmond-based company was found guilty of antitrust practices and ordered to decouple its operating system from its internet browsing businesses. The decision was later overturned in the appeals court.
The strength of Apple’s ecosystem is a crucial piece of my investment thesis. Letting customers in the door through the iPhone, for example, and upselling them on services like apps or music and video streaming makes an investment in the company compelling. A disruption here could lead to fewer revenue opportunities and even a decrease in the stock’s valuations.
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