What if capitalism isn’t as capitalist as you think?
The FAANG companies have together bought over 450 companies since the financial crisis.
You want to challenge them? You want to innovate? Are you a disruptor?
Well great, your new target is no longer to replace the incumbent quasi-monopoly in your industry. Instead, the best you can hope for is to be bought by them.
When I was in China a couple of weeks ago, I was trying to keep an eye out for Western brands that seemed particularly popular.
Two of the seven or eight that I wrote down were cosmetics brands – Roger and Gallet, and Kiehls.
Both pretty high end, but that’s not all they have in common.
They’re both owned by, drum roll please… L’Oreal. This highlighted the fact that most small or medium sized brands you come across are actually owned by large conglomerates. Pret a Manger cafes being owned by McDonald’s is a classic surprising example.
Many of the best clean tech startups have been bought by Shell, BP, Exxon or the like.
But at least those big oil companies are doing something with them, as they try to escape the death spiral of peak oil and ESG (environmental, social and governance) investing. In tech, they often don’t bother doing anything with the companies they acquire.
The FAANG stocks seem to be just buying them to stop them from challenging their dominance.
This is so common in fact, that some ingenious onlooker has started a website dedicated to the companies that Google has acquired, and then swiftly “shelved”.
It’s called killedbygoogle.com. Google it.
There are some pretty cool sounding companies on there.
Word Lens was an app which could translate text seen by your phone camera, in real time, without an internet connection. Useful in foreign countries – especially ones with other alphabets.
Or what about hangouts on air, which allowed users to host multi-person online video chats, while live-streaming and recording it on YouTube (also owned by Google). That particular project was shelved just 26 days after being acquired.
In the first three months of 2019, a Google-owned or branded product “died” roughly every nine days.
This is such a common phenomenon that venture capital firms in Silicon Valley won’t even fund you any more if what you’re proposing to do competes or aligns with Google, Facebook or Amazon. They call that sector “the killing zone”.
All this brings quite a lot of things into question.
Is capitalism as capitalist as we think? Is there competition, dynamism, and improvement?
Are competition and the profit motive driving society forward in a way that a few dusty blokes in the Kremlin never could?
The age-old example is lunch in London. Every one of a few million workers gets the lunch they want, from the culture they want (fried rice, Christmas baguette, bowl of pasta), at the time they want and for a reasonable cost.
That would be totally impossible for a “Committee on Lunch” to organise. A planned system is what schools have, and school food is famously bad.
And here’s the point – if Caffe Nero starts charging too much for its coffees, people will start migrating to Pret. If the quality at Pret goes downhill, some new chain might seize the opportunity and fill the gap. And so it goes.
However, did you ever hear about why the game Monopoly was invented?
The point was to show that in a free market, one person ends up with everything. Someone gets a bit ahead, and then more ahead, and ends up with a property monopoly.
And so it seems to be in the US today.
For example, an enormous 49% of online sales were made by just a single company.
No prizes for guessing – Amazon. (eBay was well behind in second place with a mere 6.6%.)
And a few cracks have started to appear in the image of that once humble bookseller.
Jeff Bezos’ character, affair and divorce, lack of charitable giving and general megalomania for a start. Then there’s the working conditions for its staff, where back-breaking work is sometimes far too literal, and off work usually means no pay, even if it’s from an injury resulting from the immense workload and challenging targets.
In business, getting “Amazoned” is when the company starts operating in your field. Shares in every company in the tractor manufacturing business would fall, for example, if Amazon started making tractors. No one can compete.
And because Amazon has such a huge share of the market (it has more members than Germany has people), as a retailer you almost have to be on there.
But in doing so, you give away some pretty valuable info to Bezos’ retail empire, such as what products sell better from your range, to whom, and at what price point or time of year.
Suddenly, Amazon with its huge advantages of scale can start making those same products, using all the info it gained from helping you sell yours, and it can undercut you, and promote its product ahead of yours. You just can’t compete with that.
And it’s also a marketplace home to many counterfeit products, leading Birkenstock to pull its famous sandals from the site and ban retailers from using it too.
Amazon may not be buying and killing competition like Google is, but it’s destroying competition in its own way.
Together, the FAANG stocks bought 400 other companies between 2007 and 2017. And as we know from Google, most of them don’t make the cut. And this is why both are coming under increasing security of regulators and politicians alike.
And it’s not just the big tech firms where consolidation has accelerated.
In the US, four banks control 40% of all banking assets (it was below 10% in 1990). The number of bank charters in the US has more than halved since then as well.
(One reason, ironically, is increased regulation – only the bigger banks have the resources to find their way through the thick maze of extensive new regulations.)
In airlines, the combined market share of the top four companies has risen from 68% to 84% since 1990. In addition, airline profits per customer are far higher than what they are in Europe as a result.
Most regions in the US only have one choice of internet provider, and prices are roughly double what they are in comparable countries.
Moreover, this concentration affects wealth distribution too – in 1962, the top 1% and bottom 90% had the same share of the US’s wealth (34%). Since then, the top 1% have claimed an extra 6%, taking them to 40%, while the bottom 90% have lost 12%, taking them to only 22%. It takes Bezos something like 30 seconds to earn the average American annual wage.
All in all, capitalism is looking a lot more like the board game Monopoly now than it did a decade or two ago.
Warren Buffett has benefited from this, as his strategy of quality, value and defensive moat investing involves basically buying and holding those companies that have successfully monopolised. That’s how to create a durable competitive advantage – buy out the competition until there’s only a few big players left…
So is antitrust coming for these companies?
Not if Google has anything to do with it. Then Barack Obama received more visits to the White House from Google than any administration had previously, by any company.
Now though, public sentiment does seem to be shifting against them. The FAANG stocks have come under Sauron’s watchful gaze of late, so they could be first in line. Some democratic candidates – Elizabeth Warren in particular – are very keen on breaking up big tech.
The whole point of capitalism is that capital, optimism and the profit motive combine to create dynamic economies, where ageing giants are replaced by nimbler upstarts.
Companies rise, fall, and are replaced. But not if the ageing giants buy out, or cheat to defeat the startups intending to replace them.
Right now we have the unusual situation of oil companies, banks, tobacco companies all facing “death by disruption” – from renewables, fintech and vaping. But those former conglomerates are controlling the process, because they’ve bought and are developing their own replacements.
So for now, competition in our capitalist society doesn’t seem to be living up to its competitive claims, but it is following the path the Charles Darrow, inventor of the game Monopoly, would have expected.
If given a free rein, assets consolidate in the hands of individuals.
That’s probably why the FAANG stocks have just been going up and up and up. There’s just not that many other places for tech investors to put their money.
Whether through anti-trust, a burgeoning pension deficit, or a global recession, if the big tech firms suffer, fall or break up, then the next wave of competition will drive innovation, and investment returns too – you just might have to be a bit more selective.
With tech investors not sure where to stake their money outside of the FAANGs… one booming area could be clean energy tech – which could see a major lift-off in 2020. That’s exactly what my colleague James Allen has been working on.
Just recently, he’s come across a particularly exciting sub-sector within clean energy tech. It ticks all of his boxes, and the global narrative supporting his view is gaining followers and momentum every day. The timing of his latest report is really incredible, it feels like it’s come just at the point of lift-off for the industry, and his two favourite companies within it.
I truly believe in the work James is doing here, and can’t recommend enough that you take a look into it here.
I think it’s going to be the source of some incredible short, medium, and long-term returns.
All the best,
Investment Research Analyst, Southbank Investment Research