Breaking Up Big Tech: Increasing Employment & Improving Value of Aggregate Companies
Almost 66 percent of Americans now support breaking up Big Tech firms such as Amazon, Apple, Facebook and Google, according to new data published by Vox in September 2019. In fact, support for this issue is much broader than other issues in recent American history. The Vox poll results demonstrate a consensus that cuts across political party affiliations, demographics, education levels, and age groups.
Those who advocate for Big Tech breakups cite various rationales. One of the most compelling arguments in favor of such breakups, however, is that it would result in more jobs for highly-skilled professionals, including the holders of specialized business master’s degrees and MBAs.
At New York University’s Stern School of Business, Professor Scott Galloway has done some of the leading advocacy work for Big Tech breakups. Several of the arguments presented in this article are based on his research and lectures, such as his video “It’s Time: Break Up Big Tech” (YouTube, December 2017).
Professor Galloway holds an MBA from the University of California’s Haas School of Business. After he had founded (or invested in) nine startups with three successful exits, Poets and Quants named him one of the top business school professors in the world in 2012. These days he’s one of the most fascinating figures in graduate management education. That’s in part because of his provocative opinions and openly progressive political leanings.
A former member of the board of directors of the New York Times, Professor Galloway has forecasted trends and business moves with uncanny accuracy. For example, Professor Galloway gained celebrity status for predicting that Amazon would buy a national retail chain. A week later, Amazon announced their acquisition of Whole Foods Market.
Breaking Up Big Tech Would Prevent Further Job Destruction
First, consider the per-employee market capitalizations of some well-known firms. Overall, on balance, traditional corporate successes employ many more people than Big Tech firms do today.
Per-Employee Market Capitalizations
Here are a few examples. First, Procter & Gamble, the domestic and cleaning products manufacturer founded in 1837, has a market capitalization of $304.39 billion and employs 97,000 people. That means P&G sports a per-employee market cap of $3.13 million (Yahoo Finance, Dec. 2019).
Second, Intel, which remains the manufacturer of the microprocessors that drive most desktop and laptop computers, has a market capitalization of $252.51 billion. Intel reports 107,400 employees, giving them a market cap per employee of $2.35 million.
Third, Johnson & Johnson, the manufacturer of medical and first aid supplies, has a total capitalization of $361.85 billion. The firm employs 135,100 personnel; Johnson & Johnson’s per-employee cap is $2.68 million.
Now consider Facebook, founded in 2003. Unlike much older firms like Procter & Gamble, Intel, or Johnson & Johnson, Facebook doesn’t manufacture a product. Facebook instead provides a social networking platform that depends on more than a billion members for content. It leverages that content through network effects and monetizes the audience by selling advertising.
Facebook suffered a dive in market capitalization in 2018 following a number of well-publicized scandals. Today this firm has a market cap of $575 billion, but only employs 43,000, for a per-employee capitalization of $13.3 million. That still amounts to almost five times the average of Procter & Gamble, Intel, and Johnson & Johnson.
Gutting Advertising’s Labor Market
At their core, two of the four Big Tech firms—Facebook and Google—continue to rely on online advertising for most of their revenues. Yet advertising is increasingly a zero-sum business with flat growth.
In zero-sum industries, if one firm wins business, another loses. The only way for an advertising business to grow is to take business from another firm within the industry.
Based on 2017 data, Google and Facebook are adding earnings at roughly $29 billion per year. Those earnings correlate with 20,000 new high-paying jobs annually.
Compare that job growth with what those additional earnings would buy in terms of traditional advertising jobs for professionals at more conventional ad agencies. Looking at the top five advertising conglomerates (WPP PLC, Omnicom, Publicis Groupe, Interpublic Group of Companies, and Dentsu Aegis Network), that revenue would have needed about 219,000 professionals at those firms. So in other words, Google and Facebook are destroying jobs among traditional advertising professionals at a rate of 199,000 each year.
According to Professor Galloway, we’ve never observed firms “as good at destroying jobs” as Big Tech. He told Salon in November 2017:
Amazon needs one worker for every two Macy’s does to do the same amount of transactions. They’re not doing anything wrong, we’ve just never seen the pace of this type of job destruction. If you look at technology’s focus right now, it’s mostly on artificial intelligence, stores without cashiers. It’s all about taking humans out of the process. We have a future where these middle class jobs are literally being sucked out of the economy, and it’s being hollowed out.
Breaking Up Big Tech Would Promote High-Paying Managerial Jobs at Startups
It would be one thing if the job-destroying Big Tech firms didn’t also seek to crush innovative startups and subsidiaries that are the engines driving high-paying managerial job creation in the economy.
However, that doesn’t appear to be the case. This video on the innovation and startup ecosystem from a 2018 conference on competition and antitrust at the University of Chicago’s Booth School of Business presents an overview of the issues that follow.
Lately some influential commentators like O’Reilly Media’s Tim O’Reilly have discussed Big Tech firms’ “eating the ecosystem.” Others cite “kill zones,” where Big Tech relegates the new and innovative startup competitors they’ve acquired. A good example of an upstart caught up in such a kill zone was Picasa, the beloved photo sharing website that Google bought and killed.
London-based economist and management consultant Ian Hathaway found evidence that kill zones exist by examining three industry sectors dominated by Amazon, Google, and Facebook. Those market segments encompassed Internet retail, Internet software, and social platform software. In 2018, Hathaway found that early stage venture financings had recently plummeted in those sectors relative to other comparable industry spaces.
Two Anticompetitive Strategies
By now the evidence seems overwhelming that Big Tech firms are consistently acquiring startups or driving them out of business. Big Tech accomplishes these objectives using two approaches: strategic acquisitions and marketplace exploitation.
First, Big Tech uses mergers and acquisitions to buy potential competitors. For example, after Google found its own products could not compete with them, Google bought the online video platform YouTube, the mapping website Waze, and the online advertising vendor DoubleClick.
As this CBS News 60 Minutes video explains, Google has bought more than 200 companies to date. Those acquisitions included the firm that built the Android operating system, which resulted in a bitter falling out between Google’s founders and Apple’s Steve Jobs. Today Google’s Android OS drives 80 percent of the world’s smartphones.
Similarly, Facebook bought the photo sharing site Instagram, which took photo sharing market dominance away from Picasa. Facebook also bought the messaging and calling platform WhatsApp.
Second, Big Tech limits competition on the proprietary marketplaces they own in a variety of ways.
By now most Amazon shoppers are familiar with the AmazonBasics store-brand product line. Amazon is essentially duplicating goods already sold on their marketplace and then selling their own versions.
Manufacturing instead of buying duplicate goods for resale amounts to a form of backward integration, a common competitive strategy examined in-depth by Harvard Business School professor Michael Porter in his 1980s treatises such as “Competitive Strategy and Competitive Advantage.” That Amazon might eventually choose to backward integrate within selected markets on its platform doesn’t surprise observers.
However, combining backward integration with aggressive pricing can amount to a predatory practice that can corner markets and crush small sellers. The Wall Street Journal observed Amazon’s engaging in this practice as early as 2012. More recently, Rain Design, a longtime Amazon seller that makes computer accessories, complained to Bloomberg about poor sales after AmazonBasics introduced a nearly identical product but only charged 50 percent of Rain’s price.
Instances like the one involving Rain Design have focused the attention of legal scholars who specialize in antitrust on Amazon, as this Yale Law Journal article demonstrates. And in November 2019 an online merchant voiced one of the first allegations of harm to consumers by Amazon, an essential element for most successful antitrust actions. The merchant complained in a 62-page letter to Federal lawmakers that it had to raise prices because Amazon required the merchant to use its expensive logistics system.
Dr. Hal Singer, an antitrust expert who teaches MBA students advanced microeconomic price theory and applications at Georgetown University’s McDonough School of Business, told the Los Angeles Times in November 2019 that the allegations merit attention:
When it comes to Amazon’s dealings with third-party merchants, some of the conduct actually does lend itself to antitrust scrutiny. If you can connect the conduct to some measurable harm, in this case increased prices, that gets you into the antitrust ballpark.
Moreover, the U.S. Justice Department and the Federal Trade Commission continue to investigate Amazon. But Amazon isn’t the only Big Tech firm criticized for behaviors which may block competition.
Google is well known to favor their own ratings of services through their search engine and Google Maps platforms, often spotlighting their ratings in right-column profiles. This practice has adversely affected smaller firms like Yelp who also display reviews on Google’s platform.
Facebook effectively killed a new product introduced by Twitter by de-platforming it. It’s also well known that Facebook meticulously tracks the operations of startups, even at early stages, that may threaten its platform.
Apple has refused to allow some apps from Spotify in their App Store. Not surprisingly, Spotify is considered by many to offer a service superior to the competing Apple Music service.
The Delicate Dance
Because of these tactics, entrepreneurs need to perform a delicate dance when they’re seeking funding from angel investors and the venture capital community. Often the founders’ strategy is to present their new ventures as acquisition targets from Big Tech, but not as stand-alone businesses that they intend to take public. If angels and venture firms suspect a competitive threat from a startup that Big Tech might seek to crush, they typically won’t fund such a venture.
These days we hear from some commentators that we’re in an “age of innovation” in Silicon Valley. However, that’s not a conclusion supported by the evidence. In fact, early Series A financing rounds have declined by more than one-fifth since 2012. Moreover, relatively fewer startups exist overall, as demonstrated by this research co-authored by University of Maryland economics Professor John Haltiwanger, an expert on job creation and destruction.
Breaking Up Big Tech Would Boost the Aggregate Value of the Separated Companies
There seem to be misconceptions among some people about the economic effects of Big Tech breakups. Many folks believe that dividing a conglomerate like Facebook into its four component businesses—Facebook, Messenger, Instagram, and the WhatsApp calling platform—would reduce the job creation and hiring activity among the divested firms. Such folks assume that the spinoffs would be smaller companies with less aggregate capitalization value than the parent conglomerate, which would translate into lower budgets for labor than the parent firm ever spent.
In fact, history shows that nothing could be further from the truth. After AT&T spun off the RBOCs—the regional Bell operating companies Nynex, Bell Atlantic, BellSouth, Southwestern Bell, US West, Pacific Telesis and Ameritech—followed by Bell Labs, the market capitalizations of the divested “Baby Bells” started to climb almost immediately. Ten years after the breakup, the aggregate market capitalization of the new AT&T plus the former subsidiaries amounted to several times that of the previous amalgamated AT&T monopoly. Carol J. Loomis, a Fortune reporter, pointed out in 1993:
. . .in terms of AT&T and its 1984 breakup. The world has since seen the energy unlocked by that event. . .AT&T—the surviving company—had a market value at year-end 1992 of close to $70 billion. But if the other seven Bell companies were to be tacked on, the value of the package would have been $208 billion, a figure that. . .is more than seven times AT&T’s value in 1972.
According to a 1999 article by Bloomberg writer Peter Coy:
The companies created out of the Bell System, including those since swallowed up, are worth about $810 billion today, vs. $59 billion before the breakup. That 1,300 percent gain compares to a market-cap rise of just 140 percent for IBM over the same period.
In a more recent example, a similar effect took place after Ebay spun off their PayPal subsidiary in 2015 upon demands from activist investor Carl Icahn. Once again, the market value of the new companies as separate entities dwarfed that of the consolidated conglomerate before the spinoff, which was about $80 billion. Today the aggregate capitalization of the two companies is worth $155.7 billion, which is almost double Ebay’s pre-spinoff capitalization.
With respect to a Big Tech breakup, investors can’t wait. In October 2019, analysts at three investment banks argued that the aggregate “break-up value” of Google’s subsidiaries would far surpass that of the holding company, Alphabet. One analyst at Needham & Company believes that appreciation may reach as high as 33 percent above Alphabet’s current market cap of $900 billion.
Overall, that scale of value creation could drive a tremendous surge in the number of high-paying jobs, including those for MBAs.