The year 2019 was one of uncertainty. The antitrust genie for big tech was released from the bottle, privacy questions came to the forefront, and international trade was a constant concern.
In 2020 numerous trends will continue their own momentum, and the U.S. presidential election, will alter or accelerate some trends. Here are four projections:
1. Regulation for big tech finally arrives
2. Peak FANG
3. Goodbye traditional media
4. The founder/CEO exodus continues
Big Tech Gets Regulated—Without Breakups
There’s overwhelming bi-partisan support to challenge big tech’s hegemony, with the most extreme calls coming from Sen. Elizabeth Warren (D-Mass.). Given that she’s unlikely to win the Democratic Party’s nomination, breakups are improbable. While even the President and some administration officials have sounded intrigued by breakup, it’s not a path they’re likely to take. But they are mad and determined to act.
Old antitrust rules cannot apply for two reasons: there is a lack of market concentration and no demonstrable economic harm. Yet, according to Attorney General William Barr, the legal infrastructure exists to take on big tech’s business practices outside of antitrust laws.
What might this look like? The big items will likely include regulation around advertising pricing, giving consumers more control of their personal data, creating firewalls to prevent data from being transferred between different platforms owned by the same parent, and significantly higher regulatory hurdles when tech companies want to buy smaller brands.
Any of these scenarios are bound to have adverse consequences for existing business models. Many would also impact Twitter, despite its relatively smaller footprint.
It’s noteworthy that net neutrality’s essential repeal led to internet connectivity providers reverting to oversight by the Federal Trade Commission, instead of the Federal Communications Commission. This makes antitrust-related action easier, because now the oversight agency also monitors and prosecutes antitrust violations. Expect enforcement actions in 2020.
Finally, the upcoming election is going to shine a spotlight on policies around censorship on tech platforms. The nature of free speech hangs in the balance. We’re already hearing outcry from some politicians on both sides of the political spectrum about Google’s new political ad policy which added restrictions on political microtargeting. There also appear to be rifts inside Facebook’s board and among its employees about the appropriateness of the company’s current policy, reiterated repeatedly by Mark Zuckerberg, that politicians should be able to say whatever they want in Facebook ads regardless of truth.
The year will bring repeated discussions about what content and ads should and should not be banned. No one is fact-checking the fact checkers, mind you. The challenge is you can’t have it both ways. For instance, while Facebook CEO Mark Zuckerberg clearly expresses a commitment to free speech, the company’s dubious new content oversight board (also referred to as a “supreme court”) makes one question his sincerity. Will the board just be a smokescreen that enables Facebook to censor speech without taking the blame itself?
Democrats who now make up the majority in the House of Representatives have said they would like to create an Internet Bill of Rights. It could happen, including language concerning censorship. Washington may well get behind an Internet Bill of Rights that demands the equal treatment of content, as AT&T’s CEO has suggested.
That would be good. As we’ve written here, tech’s primary value is that it allows users to save time. The less you trust the source, the more time you have to spend curating content elsewhere. This is antithetical to tech’s true purpose.
Peak FANG
As meteoric as the rise of the FANG stocks has been over the past several years, they are now all inherently mature companies. Looking at their forward valuations, shares are generally fairly valued given their estimated growth prospects—Facebook is at 23 times price-to-earnings (3 times price-to-sales), Amazon 69X PE (3X sales), Netflix 62X PE (6X sales), Google 26X PE (5X sales). The key takeaway is that valuations have likely peaked because the growth prospects are well understood. As a result, positive surprises need to come from outside core businesses–developments that would generate incremental shareholder benefit above baseline expectations.
Facebook will need to rely heavily on monetization of its portfolio apps, with significant reliance on third parties that tap into the Facebook interface in order to drive value for users, while Google and Amazon (as well as Microsoft) are battling it out in cloud services using price as a weapon. Meanwhile, Netflix, while better poised versus new entrants to the streaming wars, is already facing mounting pricing pressure and a ballooning balance sheet. There is a positive caveat to concerns about Amazon, however, as its logistics and grocery businesses reflect untapped retail opportunities. Just consider Walmart’s successes with the entry into grocery.
Given this maturity, advertising and retail trends are largely predictable as digital completes its takeover. While in general this benefits these companies disproportionately, this trend is already appreciated. Additionally, the more nascent opportunities carry the necessary burden of delivering incremental profits above and beyond a status quo market consensus. That’s an uphill battle, as pricing power is no longer as much in the tool chest, whether for ads, subscriptions, or commission rates.
Regulators also have an uncanny ability to show up at market peaks. Look no further than Microsoft’s antitrust battle two decades ago. While many in the press cite any Democratic Party momentum in the election cycle as a regulatory headwind, it’s critical to realize that the pressure is likely to come from Republicans as well. Action even outside of the breakups may be costly and impact stock prices. In any case, with regulators now on the scene, we are close to the end of the cycle.
If we’re to assess the “FAANGs” not just the FANGs, Apple (that additional A) is in a different league. That’s because its growing services business is tangibly incremental to the bottom line. It has room to get even bigger and more profitable. The FANGs, for their part, still have plenty of earnings growth to come. But 2020 should still see peak valuations for most of these companies. They will not likely be exceeded for some time.
Goodbye Traditional Media
When paradigms shift, incumbent companies frequently fail to innovate accordingly, as the adjustments are either too painful or leaders are unwilling to acknowledge the emerging threats. When it comes to media, consider: A) Consumers digest media in increasingly unique, complicated ways; B) The content consumers are loyal to is increasingly coming directly from individuals rather than brands or even people who represent large organizations (Look for crowd-funding platforms like Patreon to gain steam.); and C) Content creation is accelerating, as is the variety of content formats and the number of distribution outlets.
It’s critical to internalize the notion that the Trump presidency is a product of technology and this new paradigm. Three years later, the media establishment is still clinging to what’s worked historically. But times have changed.
Mega-mergers led to six companies (Comcast, News Corp/Fox, Disney, Viacom, Time Warner, CBS), controlling 90%+ of traditional media content, as management teams sought to build legacy content libraries. But it may not work. The flaw in this strategy is two-fold. First, a library doesn’t matter much anymore as consumers transition to over-the-top devices and services. And second, exponential growth in competition undermines efforts at audience retention using digital distribution. Simply put, the days are past when networks could get rising affiliate fees from cable systems and ample ad dollars as well.
Meanwhile content is increasingly fragmented and easy to access. This in turn creates competition for the existing libraries, driving down owners’ ability to reach younger audiences. The value of traditional content libraries is decreasing, and the rate of decline is accelerating. Yes, even for Disney.
The Tech Management Exodus Continues
Interestingly, 2019 showed record corporate management exodus. About 1,500 CEOs departed—nearly 150 in November alone. This includes Alphabet CEO Larry Page, who recently ceded the job to Google CEO Sundar Pichai.
We expect 2020 to bring more of the same. In fact, we wouldn’t be surprised to see Mark Zuckerberg and/or Elon Musk step down. The Informationeven predicted Salesforce’s Marc Benioff would leave. Swifter action from policymakers could lead to a reevaluation of the roles for the leaders of the largest tech companies, potentially speeding their departures. It’s worth remembering that most modern day founders enjoy oversized voting control whether they remain at the helm or not. (Thus Page really wasn’t ceding that much except day-to-day headaches when he let Pichai “take over”.)
The bottom line is that tech CEOs will face both growing regulatory scrutiny and demands from both shareholders and other stakeholders for accountability. That may chase more leaders away. What’s happened over the last few years is that ‘new media’ has become just media, with legacy media increasingly marginalized. The businesses of Web 2.0 and the internet revolution have matured. Now they will be judged and evaluated as the major societal forces they are. In 2020, this will become very clear.
James Cakmak is a partner at Clockwise Capital and previously spent over 10 years as a Wall Street analyst covering tech and media. Ryan Guttridge is co-founder of Clockwise Capital and adjunct professor at Smith School of Business, University of Maryland.
Photo by By PaO_STUDIO, via Shutterstock.
