Since the breakup of AT&T in 1982, antitrust has become an arcane part of market and economic thinking. It resurfaced again in recent years on concerns about the possible monopoly powers of mega capitalisation technology companies.
That issue comes to a head in September when Google faces the Department of Justice Antitrust Division in court over accusations that it has monopolised internet search and search advertising.
The outcome of the case could be as profound as the one against Microsoft in the 1990s that helped to open the personal computer market to competition, even though the initial ruling against Microsoft was reversed on appeal.
Antitrust and ESG do not always seem like overlapping topics. The progressive weakening of antitrust since the early 1980s, however, does raise important governance concerns about how market influence is wielded and if this has come at the expense of workers and other stakeholders, as well as harming innovation.
Meta and Amazon last year were two of the biggest spending corporate lobbyists in the US; healthcare provider Blue Cross Blue Shield was the largest.
It was striking that in 1998, 240 economists wrote an open letter to US president Bill Clinton condemning the case against Microsoft as acting against the interests of consumers, citing lower prices and new product innovation in the technology market overall.
It is an argument that has been used in recent years by judges to dismiss antitrust cases, with some judges stating monopolies are good for consumer welfare. Such a narrow framing of monopoly fails to reflect how much has changed in the world, including the ability to influence outcomes across systems.
It is easy to fall into the trap of focusing antitrust concerns on large-cap technology companies. Over a decade, ultra-low interest rates, taken to unprecedented levels during Covid, have played a significant role in reshaping business models.
‘Platform’ companies have been one of the most successful business models to appear during the easy money period. They have used technology to develop new markets and facilitate exchange of goods and services in a range of industries, not just ecommerce and social media. Initially unprofitable, some have become massive companies valued at trillions of dollars and can be found in many sustainable or ESG portfolios.
Access to cheap finance has allowed platform business models to thrive, aided by rolling up market segments through acquisition across a wide variety of industries spanning pet care, healthcare, farming, events management and more.
For example, over 20% of the veterinary practices in the UK are now controlled by private equity firms, who have been active backers of the platform approach. This market share has largely been built through acquisition and industry consolidation that accelerated over Covid and follows the model used by many firms in the US healthcare system.
While there have been considerable benefits from platform business models, such as lower prices and access to new services, these often do not persist as market share increases.
Consolidation of industries can easily lead to a winner-takes-all mentality and a reinforcement of monopoly behaviour through restricting access for new competition, even if that was not the original intent. Innovation and monopoly do not make for natural bedfellows.
The network effect can be a powerful force, especially when platforms begin to vertically integrate their business model. While they may not exert a monopoly on a narrow segment of a market, it is possible that they limit competition through access up or downstream in a system.
Data has become a valuable tool for leverage as platform companies see how goods and services flow through the system and from where value can be most easily extracted. The creation of an effective ecosystem on convenience and low prices can then be reversed when competition is limited, and prices and fees increased across the value chain or access denied.
Clashes between governments and regulators around the world with some of the biggest platform companies is instructive: When market dominance goes too far it can lead to an exaggerated sense of corporate entitlement and the rightness of might.
Mark Zuckerberg of Meta once opined that “Facebook is more like a government than a traditional company….. and we’re really setting policies”. There must come a point when the automatic belief in the benign benefits of private market solutions needs to be challenged and robust guardrails re-established. Relying solely on Schumpeter creative destruction forces to assail the elevated moats of entrenched incumbents may not be enough.
Collectively we appear to have lost our instinctive scepticism of the powerful. The painful dominance of market returns over the last year by a small number of large companies reminds active investors of the need for a vibrant and diverse ecosystem of opportunities.
In an ironic twist, antitrust accusations are being used as a weapon against the stewardship activities of investors in the US. The threat of litigation is shaking the conviction of many of the tourists in the ESG and climate space and we are seeing a reversal in the rush to add sustainability labels or commitments.
Sustainability is not about convenient labels alone and should be backed by intent embedded in the investment or corporate objectives.