What’s Next for Big Tech?

For investors, the past decade has first and foremost been the decade of “big tech”. Investors that were exposed to large tech companies thrived and others struggled. So much so that of the top ten companies in the world by market cap, all of them could be said to be perceived as being ‘tech plays’ by investors (Tesla is classified as an industrial, Google and Facebook are ‘communications services’ while Amazon is a consumer discretionary stock… but for the ease of argument, hopefully the reader will forgive the broad brush and accept that all the above companies deserve to be described as ‘tech’ stocks?):

Of course, not all tech companies are created equal. In recent months, Alibaba has been struggling on the back of domestic anti-trust actions, while Samsung Electronics and TSMC (along with many other semiconductor manufacturers) have thrived on the back of an unfolding chip shortage. Tesla (along with other electric vehicle plays, not least of which battery manufacturers) has also soared on continued hope of a rapid transition away from combustion engines towards electric cars. And amidst this bifurcating environment, US social media and consumer related stocks have broadly gone nowhere since early September:

This somewhat un-exciting stock market performance over recent months belies all the attention these companies have lately been attracting. In fact, one of the immediate discussion points that came up in the wake of last week’s Washington DC events is how social media companies would choose to respond to the growing US political polarization. As it turns out, Twitter and Facebook decided to block the accounts of President Trump (and those of a number of right wing personalities such as General Flynn, Sydney Powell etc,…). Google decided to kick off Parler (a Twitter-like application, where free speech remains unconstrained) from its app store, while Amazon also decided that Parler should no longer be a client of AWS… Extreme responses for extreme times?

The reader may remember the July 2016 failed “coup” attempt against Turkish President Erdogan. Following 48 hours of uncertainty, the blowback was fierce: army officers, policemen, judges, lawyers… up to half a million people were taken away for questioning, with 31,000 policemen and 15,000 army personnel losing their jobs (and, needless to say, a large number of them heading to jail). At the time, the gallows humour told the story of a lawyer sitting in an Istanbul cell and asking for a book to prepare his defence, only to be told by the warden: “We don’t have the book. But the judge who wrote that book is sitting in Block E”.

Fortunately, the purge that has followed last week’s so-called ‘coup attempt’ in DC (let’s be honest: the taking of the Capitol looked more like a season finale for The Duck Dynasty – maybe the Duck Dynasty goes to DC? – then a genuine coup attempt) is nowhere near as fierce as Erdogan’s. At least in real life. For in the social media space, it all of a sudden does feel as if Erdogan-like characters have taken control. 

Now leaving aside the debate on free speech (for the record, I am a free speech absolutist, firmly believing that bad ideas die in the sunlight and thrive in the shadows, and that any restrictions on free speech end up not only hurting long-term growth and social harmony, but also end up being self-defeating), the question at hand for investors is whether the past week’s decision by Jack Dorsey, Jeff Bezos, Mark Zuckerberg et al end up having a positive, negative, or neutral impact of the share price of these richly valued companies? I would argue that the impact will be negative for a number of reasons. 

The first, and most obvious, reason is that these big tech companies are today valued as the ultimate ‘long duration’ asset. Investors who own Facebook, Google, or Twitter own these companies on the premise that these companies will continue to generate large positive cash flows for about as far as the eye can see, and maybe beyond. Now of course, the political environment may be favourable to social media companies for the coming years (the number of Facebook and Alphabet alumnis working in the Biden-Harris transition team would, in another time, have made Goldman Sachs blush…). But simultaneously, the main lesson of all recent elections is that the US remains extremely politically divided, and that small shifts in voting preferences can rapidly tip the scales from one outcome to its precise opposite. Thus, does it make much sense for large social media companies to anger a substantial part of the US Republican Party? In essence, is that not a bet that the GOP never comes back to power ever again? Meanwhile, as Harold Wilson once said “a week is a long time in politics”. So a bet on never may seem short-sighted? In short, with their actions in the past week, hasn’t Big Tech just dramatically increased the political risk premium attached to their respective share prices?

The second reason that the social media purge may be bad business is that companies like Facebook, Twitter or Google thrive when the largest possible number of people use the services they offer. And undeniably, the “network effect” has proven in recent years to be particularly powerful. Now leaving aside the fact that, by trying to block Parler, big tech may have ended up giving Parler more free advertising then the nascent company could have ever hoped for, while at the same time almost guaranteeing the company a much greater to access to capital in the future (the US still has quite a few conservative billionaires who will find a few coins in their pockets to help fund what will be perceived as the defence of free speech), the reality is that if conservatives (which are still a non-insignificant part of the population in most Western democracies) no longer feel welcome on Twitter, Facebook or even Google, the “network effect” may start working in reverse?

The third reason is that a social media purge makes little sense given the very business model of most social media companies. Let’s face it: the rise of Trump was a God-send for Twitter. After all, social media companies want their users to stay engaged, and while cat and puppies videos are entertaining at first, they are unlikely to be a recipe for long-term user engagement. Instead, nothing seems to get people’s blood boiling, and thus capture their attention, as much as political events (or, to be fair, political events and large-scale health panics!). Thus, banning the extremes of one side of the political discussion risks triggering a collapse in user engagement?

Putting it all together, it would seem that Big Tech’s response to the events of the past week really constitutes an own goal of sizeable proportion. But perhaps one can hope that the leaders of the Big Tech companies will be rescued from their knee-jerk censorious responses by an incoming President Biden? Indeed, the current set-up means that President Biden has a golden opportunity to unite the country like few presidents had before him. All Biden needs to do is come out and re-affirm America’s long-tradition of defending free speech. He could quote Voltaire who is reported to have said that “I hate everything that you say but would lay down my life for you to have the right to say it” and simply ask the Big Tech company to stop de-platforming Americans. This would be a Mandela-like moment that would win the approval of 95% of Americans and would set up President Biden for a period of minimal opposition from a GOP needing to rebuild. One dares to dream. Because the alternative is more of the same. Only more so. Except, most likely, for the social media companies…