Taming the Golden Geese (Without Killing Them)

Big Tech emerged as a hero of the Great Lockdown, connecting remote workers and students, tracing the disease and delivering streaming entertainment to cheer us all up. 

Now comes the backlash.

Doubts around the power of the world’s largest technology firms have been building for years, but even as the pandemic still burns politicians are spinning a web of new laws to address an arc of worries from data privacy to election interference. The question for investors, whose tech stocks delivered handsome returns through the crisis and blowout earnings for the second quarter, is whether these rules will tame the Golden Geese—or kill them.

Last week's Congressional grilling of top tech executives revealed just how emotional and complex the debate has become, because voters themselves have very mixed feelings. They love their iPhones but worry about the Chinese supply chain. They can’t stop posting pictures of their cats, but they still aren’t sure what Facebook is doing with their data. A fresh U.S. poll shows technology as an industry has soared in popularity, even while Facebook, Google and Apple slip.

To understand the tricky waters ahead for Big Tech, it’s worth reviewing just how disruptive these firms have been—and continue to be. Breathless claims that "data is the new oil" miss the point. Data and technology firms today are far more important than oil.

Most successful business models or operational activities involve gathering, analyzing and processing information. It could be medical research or financial market dynamics. It could be assembling an automobile or mining for copper. The powerful combination of mobile communications, remote sensors, massive storage and powerful analytics means there are few such activities that can’t be done much better, much faster and much cheaper. 

In particular, recent gains in artificial intelligence now offer the possibility of combining data sets that were too difficult—perhaps impossible—to link because of geographical, bureaucratic or technical barriers. Investors in almost any business need to understand if its managers have a strategy to incorporate these enchanting new tools or compete against firms that do.

“Breathless claims that 'data is the new oil' miss the point. Data and technology firms today are far more important than oil.”

This is where the technological magic begins and the political nightmares follow. Just as important now is the need to keep an eye on five areas of government attention that may upend their business models entirely.

• Competition: Size and success draw attention, which means it's hardly surprising that firms that dominate Internet searches, mobile handsets and social media draw scrutiny for their pricing models and bare-handed treatment of business rivals. Current rules for yesterday's trusts and monopolies never contemplated Google’s dominance of online advertising or Amazon’s share of online sales.  
  
  In the Congressional hearing last Wednesday, Republicans and Democrats seemed strangely aligned in their eagerness to impose some rules. Europe’s powerful competition regulator has been leading the charge against U.S. tech giants and trying not to make it look like she’s on an anti-American campaign.
   
• Privacy: Europe has led on privacy protection, too, through its General Data Protection Regulation (GDPR), which requires firms to seek permission to use personal data for each specific purpose and imposes fines up to 2% of global revenues for violations. Meanwhile, a series of court cases have restricted the ways U.S. firms handle data on European citizens. Especially contentious is how these firms might be required to share the data with U.S. national security agencies without an ability to challenge the decision.
  
  While laudable in their aims, these rules add complexity to any firm with a European employee or customer, whose data requires special treatment and protection that only larger and richer firms can afford. It becomes even harder for new ideas to surface. 
   
• Security: Traditional needs of national security and police agencies are complicated enough when information or evidence were mainly in locked filing cabinets that required court orders to obtain. Now, the most valuable information is on the cloud, pulling technology firms right into the middle of these difficult questions.
  
  The vivid standoff between the Federal Bureau of Investigation and Apple over access to the iPhone of a terror suspect dissolved after federal agents said they had secured access on their own. But the warnings of then-FBI Director James Comey that law enforcement faced a digital world that is “going dark” continue to fuel a debate about just how technology firms balance data privacy with criminal investigations.
   
• Freedom: It gets more complicated when these issues arise in countries without enshrined personal liberties. In China, the law requires citizens to support national intelligence work, which makes it much harder to resist a request to track political dissidents. Along the same lines, Google is just the most prominent firm to run afoul of China’s “Great Firewall” and other censorship laws.
  
  Abroad, suspicions about the Chinese government’s control over its technology firms fuel misgivings about the security of China’s national champions Huawei and ZTE. Tech firms find themselves straddling a widening rift between Chinese and Western government rules, especially around the rapidly expanding business of cloud services. As soon as one side claims to be defending data security, the other denounces it for protecting its “National Champions.”
   
• Democracy: The politics of democracies pose yet another set of challenges for technology firms as pressures mount around social media platforms and search engines to police inaccurate or offensive content. 

With elections approaching in the United States, there are further worries about foreign interference, either through hacking into voting systems themselves or introducing fake or manipulative information that casts doubt on the legitimacy of the result.

All this leaves one of the most dynamic sectors of the global economy increasingly shaped by politics and regulation. Investors need to keep one eye on the disruptive forces that will continue to drive innovation, efficiency, change and profit, with another eye on the lengthening list of rules.
 

TECHNOLOGY OUTPERFORMANCE YTD (INDEXED TO 100)

Source: Bloomberg. As of July 30, 2020.