Will Trust Scandals Break Up the Tech Sector?

Google parent company Alphabet is the at the epicentre of global antitrust scrutiny, with investigations in Europe, Israel, South Korea, India and Japan

Sustainalytics 12 April, 2018 | 11:39AM
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The software and services industry, inclusive of companies providing enterprise and consumer applications, search engines, e-commerce and internet-based offerings, relies heavily on establishing digital ecosystems and selling cloud-based software and digital ads.

Using ideas originally hatched in garages, major players like Google's parent company Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT) have leveraged platform scale to generate extraordinary growth and now stand as lynchpins in the global economy.

Global IT spending is expected to hit $3.7 trillion in 2018, and the software and services industry will be the major beneficiary. However, as dominant industry players consolidate market power, exposure to anti-competitive concerns threaten to bring down a regulatory hammer amid growing interest in the idea that software and services giants may need to be broken up.

The past year has seen an uptick in anti-trust sentiment within the tech industry. These concerns are being driven by the perceived abuse of control of a dominant company or set of companies, which negatively impact the general software and services market by excluding smaller competitors from offering comparable goods and services, fixing prices and reducing consumer choice.

Platforms, and the proprietary algorithms that fuel them, enable a company to develop monopolistic characteristics by leveraging token services in one market to expand into secondary markets, all the while creating barriers of entry that stifle competition. By reducing market access and dynamism, benefits to consumers are called into question.

The platform-based business model of software and services companies gives unprecedented access to personal data leveraged for future pathways of monetisation. Through “free” services, companies like Alphabet and Facebook collect user behavioural data as an asset.

Anti-trust fines in the tech industry ESG social governance sustainable investing tech google facebook scandal

While antitrust risks can be identified by tracking penalties, assessing relevant controversies such as anti-competitive practices, data privacy and security, and media ethics, can signal future trajectories of company exposure to antitrust concerns. Over the past five years, Alphabet has experienced the largest number of such incidents.

Alphabet Sits at Centre of Controversy

Alphabet, with a market cap exceeding $762 billion, is the at the epicentre of global antitrust scrutiny, with ongoing investigations in Europe, Israel, South Korea, India and Japan. Much like the former monopolies Standard Oil and Bell System, Google has established an unparalleled market position through its search engine, which serves as the entryway into the digital world. Despite its positive benefits, some question whether such a concentration of power in one entity is beneficial for consumer welfare.

Google’s offerings, including its search engine, are under intense regulatory scrutiny by the European Commission, and the recurring investigations into its shopping service, Android software and AdSense platform point to an increased likelihood that this advertising-based business model may need to be adjusted. This presents potential for an impact on its revenue base in the long term and future penalties may require changes to its business model.

Google parent company Alphabet has experienced the highest number of anti-trust incidents ESG governance social sustainable scandal tech sector

Alphabet has tried to stem this regulatory pressure by engaging with European regulators although it has been unable to reach a satisfactory compromise. The fundamental issue is the difference between its own view on anti-competitive practices and the European Commission’s view. While Alphabet has initiated the process to appeal the June 2017 penalty, the difference in viewpoints is likely to lengthen this dispute even further

The regulatory scrutiny Alphabet is facing is unlikely to subside in the near term. While Europe has taken a piecemeal approach by targeting different aspects of Alphabet’s business, it is unclear which direction, if any, the US might pursue. Major technology companies will increasingly need to balance their ambitions with their responsibility to their stakeholders.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Alphabet Inc Class A176.79 USD0.93Rating
Meta Platforms Inc Class A504.16 USD0.01Rating
Microsoft Corp442.57 USD0.22Rating

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