ASCG Month in Review: April 2018
In Case You Missed It
Kinder Morgan announced that if there is no clear path forward by May 31st, the project’s continuation would be highly unlikely. The company cited the BC government’s actions, stating that they are not comfortable subjecting shareholder funds to political risk. Premier Notley stated the AB government is prepared to “outright purchase” the TMX expansion if needed. Trudeau stated the federal government is considering several options to ensure the pipeline is built.
ATB Financial announced a partnership with the University of Alberta Faculty of Science for Artificial Intelligence. The 4-year partnership will have $940,000 directed into various research projects and student internships. When asked about the university, ATB Chief Transformation Officer Wellington Holbrook remarked that “Partnering with the University of Alberta was a priority for ATB. Both our organizations share a deep commitment to elevating Alberta as a leader in AI and machine learning”.
The Edmonton Journal interviewed David Nedohin, the co-founder and president of Scope, an augmented reality company based in Edmonton. Scope currently has an additional office in San Francisco and 25 local employees. David expected the company to double in size and thanks to Startup Edmonton and top tier programs like Computing Science at the U of A, Edmonton’s AR industry will see significant growth in the coming years.
EVIO (OTCQB: EVIO), a provider of analytical testing services for cannabis in the U.S. and Canada has agreed to purchase 50% of Keystone Labs, a Health Canada-accredited testing facility with the Good Manufacturing Practice (GMP) licence. This purchase represents a concern of potential bottlenecks for testing cannabis with increased production from legalization coming soon. The acquisition will cost EVIO Canada C$2,495,000.
Edmonton has seen continued long term unemployment decline, hitting a seasonality-adjusted rate of 6.7%. Meanwhile, Calgary’s unemployment has creeped up for its fourth month in a row to 8.2%.
Feature Story: Monopolies in Big Tech? Regulating the “Frightful Five”.
When you think of the word monopoly, you might think of the popular board game depicting a moustached 19th century robber baron or businessmen like John Rockefeller and Andrew Carnegie. During the late 19th and early 20th century, it was these industrialist titans that came to dominate the American economy. 1911 marked a monumental year in the business world, as it was the year where the U.S. Supreme Court found Standard Oil, John Rockefeller’s company, guilty of breaching the Sherman Antitrust Act, an act designed to restrain unreasonable monopolies. At the time, Standard Oil held nearly 90% of the market for oil production in the United States. The court found that Standard Oil “restrained trade through its preferential deals with railroads, its control of pipelines and by engaging in unfair practices like price-cutting to drive smaller competitors out of business”. As a result, Standard Oil was broken up into 34 independent businesses that were to be spread across the country and abroad. The courts sent a clear message that day: competition was the prevailing ideology in America, and monopolies would not be tolerated.
Fast forward over a hundred years, and the new business titans aren’t in the industrial sectors, but in technology. Silicon Valley has become the epicentre of America’s new economy, and Zuckerberg and Bezos are akin to the Rockefeller's and Carnegie's of our time. Similar to their 20th century counterparts, the companies dominating today’s economy: Alphabet, Amazon, Apple, Facebook and Microsoft, are no strangers to scrutiny. Nicknamed the “Frightful Five” by NYT's Farhad Manjoo, public opinion on these giants has swayed dramatically in the past few years. From Facebook’s Cambridge Analytica scandal and Russian Ads debacle, to Apple’s encryption dispute with the FBI and Amazon’s allergies to corporate taxes, more people now than ever believe these companies have gotten too big and powerful to ignore.
Polling data provides further evidence of this shift: In a public opinion poll from November 2017, only 40% of Americans believed their government would do enough to regulate big tech. Just a few months later in February, that number jumped up to 55%. It’s clear that a lot of people want these companies to be regulated, but what’s not clear is how to go about doing so without hampering the tech ecosystem at large.
In this Month in Review, the ASCG has chosen to analyze Silicon Valley’s Frightful Five, looking into the monopolistic aspects of each company, as well as offering three recommendations for lawmakers around regulating these companies moving forward.
Is it a monopoly? Well, that depends on the company.
What do we define as a monopoly?
The problem with most definitions of a monopoly is that they’re relegated to traditional business models that don’t align with a lot of tech companies. For example, services like Google Search or Facebook are free for consumers, and are not price fixed for advertisers.
As such, for the sake of this article, we’ve defined a monopoly as when a company’s market share, capital, and influence make it extremely unlikely for a new incumbent to compete. We also look into whether each of these companies has used their monopoly power to gain leverage into a new business line. Finally, we are purposely excluding the Chinese market due to state led censorship blocking many foreign companies, including the Frightful Five from competing.
If you ask Mark Zuckerberg if Facebook has a monopoly, like Republican Senator Lindsey Graham did recently, he’ll likely tell you no. His argument? “The average American uses eight different apps to communicate with their friends and stay in touch with people”. What Zuckerberg conveniently left out of this statement however was that in the U.S, three of the top 10 IOS apps are owned by Facebook; #4 Instagram, #6 Messenger and #8 Facebook. Zooming out to the top 20, and Facebook owns four of the top twenty, with Whatsapp sitting at #19. In addition, from a time perspective, Facebook-owned apps dominate total time spent across major social media platforms. Looking at Facebook and Instagram combined, the average percentage of minutes spent across 13 different countries was above 80% in all cases, with most countries reporting figures higher than 90% of total minutes spent.
Facebook also seems to have an irreplaceable role in the lives of its users. Despite high levels of user distrust (80% according to recent surveys), Facebook’s user growth doesn’t seem to be stopping anytime soon. This April, the platform surpassed 2.2 billion monthly active users, just 100 million people away from the entire global followership of Christianity. The only place where Facebook hasn’t been able to break in is China, a market where state-led censorship has restricted major Silicon Valley players in favour of homegrown tech giants like Tencent, Baidu, Xiaomi, and Alibaba.
Outside of China, Facebook’s capital and influence on an expansive user base have made it extremely difficult for current and future players alike to truly threaten it. The incumbents that have tried to challenge Facebook’s throne have suffered one of two fates: they either get bought out, like WhatsApp and Instagram, or Facebook aggressively copies their biggest selling feature, like with the implementation of Snapchat’s story feature on Instagram. Given this large degree of influence, as well as their strong market share in the social media realm, we classify Facebook as a monopoly.
Although it is the world’s most valuable company, unlike Facebook, Apple has much more competition in various fields. In smartphones for example, Apple is actually the 2nd biggest global player, trailing leader Samsung by 6.8%. In the operating system market, Apple loses to Microsoft, which possesses a superior 89% of the desktop market, compared to Apple’s 8%. In the music streaming market, Apple possess only around half of the market share of it’s biggest competitor, Spotify, which possess 40% of the market compared to Apple’s 19%. Finally, Apple plays second fiddle in the mobile operating system duopoly, with a market share of 29%, compared to Google’s Android at around 70%.
It is important to note that despite neither Google nor Apple having a monopoly in the mobile operating system market, when combined, they possess an exceedingly dominant 99% of the market. This duopoly makes it very difficult for new entrants to break into this market and garner significant market share, restricting consumer choice and product innovation to major players.
Where many argue Apple does have an unfair advantage is on its app store. Spotify, for example, has gone on record stating that Apple has blocked app updates to the Spotify app, and has an unfair competitive advantage by collecting a 30% fee on all subscription fees paid through Apple apps. This has caused Spotify to charge IoS users an extra $3 a month on their premium service, to make up the difference.
Apple’s control of the app market is a monopolistic aspect of its business model. However, given the breadth of sectors it operates in (smartphones, operating systems, tablets, music streaming), and the strong competition it faces from other companies like Samsung, Spotify Google, and Microsoft, we do not classify Apple as a monopoly. With that being said, when combined with Google, we would say that the two companies possess a duopoly on the mobile operating system market.
Amazon may be one of the largest success stories in the business world today : an online bookstore turned e-commerce giant. Most people would look at Amazon and merely see it as an online Walmart; both companies have significant global presence, sell just about everything for low cost, and have massive revenues. The only difference is that Amazon does everything Walmart does, more effectively.
Amazon, with a market cap of $764 billion, now evokes fear into its competitors. Amazon is a tech leader, a book leader, a delivery leader, a retail leader, and now a grocery leader. Amazon owns almost 44% of the e-commerce market in the United States, with the next closest competitor, Ebay, only possessing 6.8% of the market. The power Amazon derives from that market share is clear when almost $12 billion in the market cap of grocery retailers was wiped after they acquired Whole Foods, healthcare company stocks increased 6-8% when Amazon announced they wouldn’t enter the pharmaceutical industry, and FedEx and UPS dropped 4.9% and 3.6% after Amazon got into the delivery game.
Outside of North America, we see Walmart and Alphabet teaming together against Amazon with the ability to make Walmart purchases on Google Homes and the potential partnership to acquire Flipkart, India’s largest e-commerce company and Amazon’s largest Indian rival. In addition, although Amazon dominates North America and Europe, it is dominated by Alibaba in China, and is currently competing with Alibaba for markets like Australia and Singapore.
Amazon’s efficient allocation of capital and willingness to axe poor investments early on have led it to become one of the top companies in the world. The strategic moves into various industries and a focus on innovation have led Amazon’s market cap to reach 2.5x Walmart’s in less than 3 years, growing faster than most can keep up with.
Another example of Amazon’s market power can be seen in the race for Amazon’s HQ2, a topic we discussed in January Month in Review. Looking into that situation deeper reveals how municipalities, provinces, states, and even federal governments, were throwing offers left, right, and sideways,with New Jersey looking to give $7 billion in incentives and Justin Trudeau himself writing a letter to Jeff Bezos on the final day of round 1 offers.
Due to Amazon’s dominant market share, significant growth potential, and power over government decision makers, we classify it as a monopoly in North American and European markets. How Amazon will fare in markets such as Singapore, Australia, and India are still to be determined.
“Search for information about (someone or something) on the Internet using the search engine Google”. That’s the Oxford Dictionary definition of the verb google. Very few companies are able to weave a trademark or their name into our everyday speech (think Kleenex, Q-tips, etc.), but none of them have been able to evoke the same level of dominance Google has, possessing 91% of the global search engine market (excluding China). Outside of the search engine market, Google and Facebook seem to enjoy a duopoly in the online advertising marketing, enjoying a combined market share of 61%.
The likes of Peter Thiel and Former Microsoft CEO, Steve Balmer have called Google a monopoly (albeit Peter Thiel sees this as a good thing, see here) and Eric Schmidt, the executive chairman of Alphabet has even said “I would agree, sir, that we're in that area...”, when asked by a U.S. Senator if Google was a monopoly.
It’s easy to see that Alphabet’s size and grasp on the search engine market is one that one would equate to a monopoly. However, Google has gone one step further, by using its monopoly power unscrupulously to gain favour over competitors. In June of 2017, they were found guilty of manipulating search results so its own products and services would show up first. After a €2.4 billion fine, the EU is now drafting new regulations for e-commerce, search engine, and app store transparency. In addition, the EU’s antitrust chief is still threatening to break Alphabet up, citing grave suspicions about the Silicon Valley based giant.
One of the other issues with Alphabet is their transition away from one of their most well known core values: “Don’t be evil”. In 2015, this core value was removed from the Alphabet code of conduct, a value that had been there before Google became the company it is today. Now, Alphabet has entered industries that we thought they never would, such as the military with Google AI object detection for the military’s drones. Inherently evil? No. But it does beg the question of whether Alphabet has reached the stage where it has become too large. Alphabet’s willingness to hinder its competition, move away from its core values (A move that Steve Jobs said should never happen in any company), and its immense diversification has us calling the company a monopoly.
In 1998, The U.S. Department of Justice filed antitrust charges against Microsoft after they had given their software away for free to beat out Netscape, illegally monopolizing the operating systems and internet browser markets. Today, Microsoft’s grasp on the browser side certainly isn’t a concern, but they still remain the most widely used operating system on the planet. The Windows OS has a global market share of 89% on personal computers, but just about everything is usable on other operating systems like Mac OS.
Microsoft, like other tech companies, has expanded its product and service offerings. They now have retail stores, they are one of the three largest game console companies, they are in hardware (Surface line), and are aggressively investing in cloud-based services. Despite these moves, Microsoft is not monopolistic. They are rarely the forerunner of these new industries, lagging behind Google for the cloud, Apple on hardware, and Sony on game consoles. Microsoft sees the cloud as the key for their continued growth, but is in fierce competition with Amazon and Google to reach success in the industry. Additionally, Microsoft wasn’t able to take advantage of the smartphone movement, cancelling the Windows Phone.
Despite the market share of Windows, Microsoft has not proven to be nor has it been accused recently of exerting its influence through this segment. Although they have been successful with the Surface line and the growth of their cloud services, the only monopolistic aspect of their business, Windows, comprises significantly less than half of their revenue. Microsoft does not exert its power, nor does it pose a major threat to specific industries, thus we do not consider Microsoft a monopoly.
How do we regulate them?
Whether they are technically a monopoly or not, the combined influence of these firms has threatened the proliferation of new incumbents and small businesses, and perpetuated serious issues around user data privacy and political interference. This has led many to point to stiffer regulations on Silicon Valley’s giants as the answer to this problem. However, the difficult part about regulating these firms is that unlike in the case of Standard Oil for example, you cannot just break up these companies geographically. An internet company like Facebook or Amazon doesn’t really have geographic borders, their influence is globally encompassing.
This leads us to the second part of our Month In Review, where we provide three recommendations for lawmakers around regulating these companies moving forward.
Our lawmakers must be proficient in the language of big tech
If there was one thing that was painfully obvious from the Facebook Congress hearings, it was that several US Senators were woefully uneducated around how Facebook and its subsidiaries actually operate. Questions like “ If I'm emailing within WhatsApp ... does that inform your advertisers?" or “How do you sustain a business model in which users don't pay for your service? ” led to instant internet memefication and infamy. These questions are also widely indicative of a larger problem; many lawmakers do not actually understand how these technology platforms operate. According to prominent Silicon Valley Venture Capitalist Hemant Taneja, this is where government needs to step up.
“The reason there is no oversight is because you have humans on the other side that can’t look at these black boxes. You can’t go into these markets that are fundamentally at the intersection of policy and technology, these regulated markets, and not have governance be software enabled for products that are entirely AI powered... To me it’s about the government: Where’s your AI department? They don’t have it. I think it’s ridiculous.”
Lawmakers must treat companies as multi-industry entities
This particular area is more directed towards Facebook and Alphabet, but has applications with the others in the Frightful Five. Listening to Zuckerberg’s recent hearing, Greg Walden asked Zuckerberg if he considered Facebook to be a media company. His response? “I consider us to be a technology company.” This is where this issue stems; in a world of increased consolidation and high levels of acquisitions, large, global companies rarely fit neatly into one industry label. Samsung, for example, has its technology arm, but is also an appliance company, has a fashion arm, a chemical engineering arm, and an aerospace and defence arm. More recently, we have seen automotive companies invest heavily into self-driving technology and the electrification of their product lines. Ford announced a 5-year $4.5 billion investment for technological upgrades to their lines and attended the Consumer Electronics Show (CES) 2018. Ford is still primarily an automotive company, but now has aspects of a technology company.
This begs the question: Can companies be regulated and tried as if they operated within singular industry today? Facebook could easily be described as a media company through its portrayal of news and videos, a technology company through its social media platforms, and gaming company through Facebook games.Through intelligent maneuvering and a lack of understanding from regulators, thus far, they have been regulated solely as a technology company.
Another set of issues stems from when companies report the segments they’re involved in. Alphabet, for example, reports two segments: Google, which involves Android, Google search, Gmail, etc. and “Other Bets”, which includes their experimental divisions, Nest, etc. Nest was a $3.2 billion acquisition, but is not a reportable segment due to the fact that it’s revenue is immaterial. As an investor, one would think that the company should be explicit in how well the acquisition is performing. Otherwise, due to the immateriality of the investment and despite it being worth billions, the realization of the benefits are much more difficult to determine from an external perspective. Public companies should be transparent whenever possible as this promotes increased trust in financial markets.
Governments and regulatory bodies need to stop seeing global companies, especially large tech companies, as single-industry entities. Uber was a technology company that took regulators years to start seeing as a transportation company. Seeing Uber as a transportation company shouldn’t cause them to lose their label as a technology company as those labels are not mutually exclusive.
Moving forward, we recognize that classifying companies under multiple industries will likely make legislation harder to enforce. With that being said, it will also enable lawmakers to create tailored legislation that prevents companies from using classification loopholes to avoid regulations they should be following.
Using the GDPR as a reference for updating data privacy regulation
On May 25th, the GDPR (General Data Protection Regulation) will come into effect, drastically changing the data privacy landscape across all member countries of the EU. The act will “apply to any organisation that is handling Europeans' data… regardless of where it is in the world”. The penalty for non compliance is steep: GDPR authorities can issue fines up to €20 million or 4% of annual global turnover, whichever figure is higher.
In terms of the act itself, it is primarily concerned with imposing stricter regulations around personal data that promote transparency and user consent. The act has three major stakeholders:
Data controllers: Those who coordinate processing of personal data (e.g a SAAS startup).
Data processors: Responsible for processing personal data, listen to the data controllers (e.g 3rd party application used to analyze user data by a SAAS startup).
Data subjects: Residents of EU using goods and services that are provided by the data controllers (e.g user of a SAAS startup’s product or service).
In essence, this act is trying to arm every day people, or data subjects, with rights they did not previously have. This includes the right to ask exactly how user data is being used, the right to have their user data permanently deleted, and the right to transfer their user data from one platform to another (i.e: from Apple Music to Spotify if you transfer memberships). The act also mandates that in the event of a data breach, a data controller must inform all data subjects within 72 hours of learning of the breach.
This act is a huge deal for one integral reason: it fundamentally rejects the notion that users are currently giving adequate consent to technology companies to use their data. From a regulator’s perspective, your consent is currently given when you agree to the terms on a pop up form that is filled with paragraph after paragraph of dense legalese. However, nobody actually takes the time to sit down and read these terms, the “legalese” is so dense that Carnegie Mellon professor Lorrie Faith Cranor calculated it would take between 180-300 hours a year to read through those pop up forms. The EU is the first major jurisdiction in the world to deem this form of consent to be “legally inadequate”, and demand that companies only use your data if you give a “yes” answer to a clearly articulated request.
Despite it treading new ground in the field of consumer data protection, the GDPR isn’t exactly universally acclaimed. IBM recently marched on Capitol Hill to stop the US from adopting similar laws, and many small businesses have said this law would run them out of business. With that being said, the GDPR can serve as a template that American and Canadian lawmakers alike can draw from when updating their own data privacy laws. Given that Canadian data privacy laws are now around 17 years old, and the United States lacks a single, comprehensive federal law that regulates personal data, both jurisdictions would benefit from revisiting their own regulatory regimes.
Silicon Valley’s Frightful Five are akin to the AT&T's, Standard Oil’s and Carnegie Steel’s of today, large monolithic enterprises that dominate their respective markets. While we deemed that Apple and Microsoft weren’t actually monopolies, they are two of the largest, most influential technology companies we have today. When looked at together, the influence of all of these firms has threatened the proliferation of new incumbents and small businesses alike, reducing consumer choice and arguably, stifling innovation. In addition, we are now seeing serious issues across some of these businesses in data privacy, illegal query tampering and political campaign interference.
This has led many to point to stiffer regulations on Silicon Valley’s giants as the answer to this problem. However, unlike the monopolies of yesterday, today’s technology giants are not limited to geographical boundaries, or single industries. As such, we recommend North American lawmakers update themselves on the latest technological trends, regulate companies as multi-industry entities and use the EU’s GDPR as a template in crafting their own regulatory updates.