The party could over for the big four tech companies.
Apple (AAPL -1.96%), Amazon.com (AMZN -0.77%), Alphabet (GOOG -1.24%) (GOOGL -1.02%), and Facebook (META -0.74%) were under the spotlight again this week, after a House of Representatives committee released a 449-page report accusing all four companies of exercising monopoly-like power and abuse.
The end result of the Democratic-led investigation is still unclear since Republicans didn't support all of its findings, but calls to break up the four tech titans could grow louder if Joe Biden wins the election and Democrats take the Senate.
Antitrust momentum has been building since Democratic Sen. Elizabeth Warren of Massachusetts laid out an argument to break up the companies during her presidential campaign, and the CEOs of all four companies testified before Congress in July as part of antitrust hearings. During the coronavirus pandemic, each company has gained market power, and all four stocks have soared, making a breakup likelier. Today, the combined market cap for the companies tops $5.35 trillion.
Whether these companies get broken up or face other sanctions remains to be seen, and the process could play out for years. For investors, there are a number of competitors ready to take advantage if these monopolies are broken up. Keep reading to see why Shopify (SHOP 0.05%), Netflix (NFLX -2.04%), and Pinterest (PINS -0.16%) would be among the winners in an antitrust crackdown.
The House committee concluded that Amazon's e-commerce marketplace constitutes a monopoly, noting that the company has 2.3 million marketplace sellers globally and 37% of them count on their Amazon business for their sole source of income. Amazon uses the data from its marketplace to launch copycat products to hot sellers, often undercutting them on price.
More than any other company, Shopify is emerging as Amazon's closest direct competitor for small businesses. Shopify provides software to help companies run their businesses, and it's expanded from that platform into digital payments, small-business lending, its own online storefront, and partnerships with companies such as Walmart, Facebook, and Pinterest.
The company has put up blockbuster growth since its 2015 IPO and now has more than 1 million merchants on its platform, ranging from small businesses to entrenched corporations. The company has many of the tools to meet the needs of small businesses on Amazon's marketplace, and it would be likely to capitalize on the opportunity if Amazon is forced to unwind parts of its business or separate its marketplace.
At the end of 2018, Netflix stopped allowing new subscribers to sign up through its app in Apple's App Store. The streaming giant had been the biggest source of revenue for Apple, generating an estimated $256 million in revenue that year for the iPhone maker in what is very high-margin revenue from owning prime digital real estate. Apple takes 30% of in-app payments, meaning Netflix brought in about $853 million in revenue from in-app payments in 2018. The issue has become central to the antitrust case against Apple and attracted more attention when Fortnite maker Epic Games was forced to pull its app from the App Store after it stopped collecting payments for Apple.
The House committee alleged that Apple's 30% cut was excessive and said it's allowed the company to "generate supra-normal profits." Netflix still has an iOS app but will only allow new customers to join through a Web browser. If the App Store rules are redefined, the company may be able to begin collecting payments through its iOS app once again.
In addition, three of the four monopoly companies now have competing streaming services with Netflix, including Apple TV+, Amazon Prime, and YouTube TV. Facebook is also stepping up its efforts in video, with Facebook Watch and IGTV. Any headwind that its competitors face as they build out their streaming capacity is likely to favor Netflix, a pure-play streamer, and one that has avoided the antitrust scrutiny that the rest of the FAANG group has faced because it's focused on one industry.
One business the group of companies listed above unquestionably dominates is digital advertising. Alphabet and Facebook are No. 1 and No. 2 in the industry, respectively, and Amazon has moved into third place as it has recognized the value of a high-margin revenue stream that it easily layer on top of its e-commerce business.
A regulatory crackdown could potentially mean Instagram is split from Facebook, or YouTube could be severed from Google. It could also end some of the competitive advantages Google derives from its search monopoly, which include using data without permission.
While a number of other companies would benefit from an opening in digital advertising, Pinterest seems to be the best-positioned to take advantage of it. The image discovery site saw a wave of new business during the July boycott against Facebook, and its focus on positive content means it can avoid some of the headaches that have befallen platforms such as Facebook and Twitter, especially during the election season.
Advertisers want other outlets besides Facebook and Google, and Pinterest looks like a good option, since many of its users actually want ads on the platform because they help them find what they're looking for. Any weakness at Facebook or Google is likely to lead to an opportunity for Pinterest, as we saw with the boycott.