What Policymakers Can Learn from Last Week’s Tech Sector Slide
A surprise jolt to tech stocks illustrates that leadership positions in the digital sector are not nearly as durable as policymakers think.
Facebook parent Meta’s stock plunged last week by more than a quarter over the two days following a weak Q4 in which the company lost users for the first time in history. The decline, widely attributed to fierce competition from TikTok and other changing marketplace dynamics, also pulled down Meta competitors.
Inside the Beltway, ‘techlash’ crusaders briefly contemplated a startling prospect: Meta stock might decline enough that it would no longer qualify for proposed anti-tech regulations. The gerrymandered definitions in bills including S. 2992 (AICOA) rely heavily on market capitalization to single out Meta, along with Amazon, Apple, Google, and Microsoft. A sudden swing in market capitalization might upset the house of cards upon which regulations tailor-made for these five firms precariously rests.
The current proposals are extreme enough that even proponents of government intervention have expressed doubts. While a policy position can be argued; one can’t argue with millions of disinterested investors looking at evidence of insurgent competition and adjusting their positions accordingly. The market’s swoon last week laid bare the illogic of gerrymandering regulations around specific firms, instead of targeting misconduct generally: Congress was attempting to hamstring leading U.S. companies, even while capital markets were responding to the evidence that upstart rivals might be overtaking them.
It’s common to regard leadership positions in the sector as unassailable. A firm’s prospects can appear durable until they aren’t. Observers once proclaimed Myspace unstoppable, even a natural monopoly with a “rosy future.” Today News Corp’s one-time social darling is a footnote to Internet history, unseated by superior products like LinkedIn, Facebook, and Snapchat. Now, the erstwhile upstarts have sleepless nights of their own, looking over their shoulders at TikTok’s 3 billion downloads and 1 billion monthly average users. At the same time, TikTok is eating lunches on the advertising side of the market as well, snagging advertisers from the Superbowl. This phenomenon isn’t specific to the digital space. Corporate longevity in the S&P 500 has been on a steady downward trajectory amid growing creative destruction. These trends prompted Jeff Bezos to famously caution Amazon staff in 2018 to “obsess over customers”’ because “one day Amazon will fail.”
Notwithstanding this regular, cyclical disruption, there are proponents of extreme intervention in the U.S. digital sector, who argue that leading firms are so successful that they discourage investment. Yet that’s not what the data tells us. Venture capitalists are funding more startups than ever. Industry data shows that startups are receiving more total VC funding than ever before, particularly those in early stages. According to financial economist Susan Woodward, by mid-2021, VC funding had nearly exceeded the whole of 2020.
Historically, U.S. regulators didn’t protect one competitor from another; they defended the competitive process. But that’s not the only view on how markets should be organized, and some want to move the goalposts, applying stricter competition standards to leading businesses, while giving ailing sectors a free pass to collude and cartelize.
This isn’t new; Washington’s responsiveness to ailing businesses is a well-recognized paradox. But the risk of competition policy that doesn’t navigate by the guiding star of consumers’ interests is that virtually any government action can be rationalized, and businesses have a strong incentive to engage in swampetition, instead of fighting it out in the open market.
This isn’t a recipe for a thriving digital economy. Consumers and businesses alike would be better served by a regulatory framework focused on conduct and the competitive process, rather than picking winners and losers.
