A number of recent news stories support our view that the downside risk to the internet monoliths may be increasing. In no particular order, we could list Uber losing its license in London for running fast and loose with the regulations, the Chinese authorities more strictly controlling the content on Facebook and WhatsApp, and an increasing focus on the lack of effort made by social media sites to control harmful content. Is the free ride that these near monopolies have had coming to an end?
In the era of big data, natural monopolies form easily and quickly as the company with the most customer information is able to leverage that advantage to gather more customers, and hence more information. Any new entrant starts with a huge disadvantage, no customers and no information.
This market power, combined with vast financial resources, makes the large internet platforms appear so powerful that it has led to a careless approach to customers and even governments. As much as customers value the service highly, this carelessness, such as Uber’s failure to comply with TfL (Transport for London) regulations, might appear a good strategy, but it concerns us greatly.
Populist sentiment can be fickle. In one breath people are complaining about Uber’s failure to offer minimal employment rights and minimum wage, in the next, almost one million people sign a petition to keep them on the road, despite notable breaches of the law.
We think the tide is gradually turning, Facebook complains that it’s too difficult to filter illegal or offensive content when it makes in excess of US$2bn per quarter. This is absurd, they are simply not trying. In our eyes, it’s a case of corporate immaturity and irresponsibility. The same can be said of Uber’s attitude, which has led to a number of potential public safety and security implications.
A recent academic study which suggested that excessive use of social media may be harming the mental health of the younger generation may, in the fullness of time, be the internet’s tobacco moment.
Coming in the near future will be the US’s tax reform plan, whereby the win-win for the Trump administration will be a clampdown on offshore tax avoidance combined with a reduction in overall tax rates, as part of the Make America Great Again programme.
The Democrats are very likely to support the plan if it involves an increase in taxes on big business and a reduction in the burden on small businesses. This is also potentially highly positive for job growth. The technology industry would be potentially the big losers in this, while the smaller and mid-sized domestically based companies the winners.
Our process focusses on risk, as much as it does on our views of the future. So, as the companies in our consumer technology basket have risen this year we have tended to reduce them into strength. At the same time we have had a bias towards the Asian businesses in this area, where the regulatory risk is believed to be lower.
As the news develops we will keep this sector on close watch. While much of its huge performance is justified by spectacular rates of revenue growth, both from advertising and direct from consumer revenues, if net profits come under pressure from falling margins and higher tax rates the story could change from growth to maturity quite quickly.
David Jane is manager of Miton’s multi-asset fund range.
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