The Economist USA - 26.10.2019

The EconomistOctober 26th 2019 Business 57

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stagram. In June Bloomberg Intelligence

reckoned that Instagram would fetch

$100bn (although some in Silicon Valley

put the number much higher, at around

$200bn, because of its fast growth). Brent

Thill of Jefferies, a bank, values Amazon’s

online retail business (including Amazon

Basics, but without its marketplace) at

nearly $200bn and the firm’s physical

stores (mostly Whole Foods) at up to $6bn.

If good comparisons and financial data

are absent, such estimates are more art

than science, says Brian Wieser of Group m,

the world’s largest advertising buyer. That

makes it even harder to put a number on

Google’s advertising business as a whole

(Jefferies’ estimate is $539bn). Ms Warren

wants to split it into an ad marketplace and

services that operate in it. But valuing its

constituent parts is guesswork. The firm is

not forthcoming with numbers.

These are not the only problems.

WhatsApp, despite the whopping price Fa-

cebook paid for it, does not make much

money, which makes assessing its worth

hard. Trying to estimate a price for Apple’s

and Google’s apps would be hopeless.

The fuzziness of Ms Warren’s plan also

makes estimating a total break-up value

difficult. If Facebook has to part with

WhatsApp, why should it keep Messenger,

its other instant-messaging service? Or

why should Apple keep iMessage? Both

may be regarded as services on top of a plat-

form utility. It is similarly unclear what

would happen to the app stores of Apple

and Google or the cloud-computing arms

of Amazon and Google (and Microsoft’s, for

that matter, a rival to Amazon). A spin-off

of Amazon Web Services, for example,

would create the world’s second-most-

valuable corporate it firm. It would be

worth $438bn, says Morgan Stanley, a

bank—about four times more than ibm.

Even though most analysts assume that

the separate parts are worth more than the

whole, could the opposite be true? Break-

ups could destroy value. Synergies would

evaporate, points out Amit Daryanani of

Evercore isi, a financial firm. Apple may no

longer be able to offer a tightly integrated

package of hardware, software and ser-

vices, which is its main competitive advan-

tage. If Amazon were shorn of cloud-com-

puting arm, it would lose its most

profitable business, making whatever is

left a less attractive investment. It is also

unclear how markets would react if divesti-

tures were to weaken network effects, the

economic forces that let big firms get big-

ger and are pervasive in the digital world.

Those who think they can benefit from

break-ups ought not to be too hopeful. Po-

litical and legal barriers abound. Even if Ms

Warren wins next year’s election, the Sen-

ate would probably remain under Republi-

can control and might be unwilling to en-

dorse a radical break-up. The other path,

through regulatory agencies, seems equal-

ly rocky. Ms Warren intends to appoint reg-

ulators “committed to reversing illegal and

anticompetitive tech mergers”. But they

would probably have to make their cases in

court. Both federal appeals-court judges

and the conservative majority on the Su-

preme Court are antitrust sceptics.

Second, practical difficulties will act as

a further drag. In other industries “line-of-

business” prohibitions, of the sort Ms War-

ren wants to impose on Amazon and Apple,

have been used to avoid abuse of a domi-

nant position. American railways were

banned from carrying commodities they

produced themselves and banks from en-

gaging in commerce. In the digital world,

these borders are more arbitrary and fluid.

No platforming

Separating platforms from services which

run on them sounds elegant. But how

would one divvy up all the data the tech

giants have collected? What is part of the

platform and what is not? What happens if

the lines between them move? Instant-

messaging could be described as a feature

of a social-networking platform but also a

separate service. The case against Micro-

soft was triggered when it bundled its Win-

dows operating system with its web brows-

er, which were then separate pieces of

software. Today, browsers are usually con-

sidered part of an operating system.

Third, the fear of unintended conse-

quences will act as a brake on break-ups.

Ms Warren’s plan was in part inspired by

Lina Khan, a legal scholar, who in 2017 pub-

lished an influential paper entitled “Ama-

zon’s Antitrust Paradox” and now advises

the antitrust subcommittee of the House of

Representatives in its investigation of Big

Tech. But in a more recent paper she lists

several drawbacks to heavy regulation.

Quickly evolving technology can make

break-ups obsolete. Because they intro-

duce friction, they could lead to higher

prices. If they are limited in what they can

do, platforms may cut investment, thus

slowing innovation. Although she identi-

fies these drawbacks she says they are “not

a compelling argument for inaction”.

What is more, break-ups alone will not

suffice to tame big tech. Harold Feld at Pub-

lic Knowledge, a left-leaning think-tank,

notes the “starfish problem”. Some starfish

have incredible powers of regeneration:

tear them up and the pieces quickly grow

into complete new creatures. Similarly,

one part of a tech giant could become dom-

inant again because of network effects.

Break-ups, he argues, need to be comple-

mented by regulation that weakens this ef-

fect, for instance with requirements that a

user of one instant-messaging service can

exchange texts with another.

Given all these hurdles, will break-ups

ever happen? Sector-wide divestitures

seem unlikely, but even Makan Delrahim,

head of the Department of Justice’s anti-

trust division, said on October 22nd that

they are “perfectly on the table”. Amazon

looks vulnerable. It is disrupting many in-

dustries and creating many enemies. A

Give them a break?

Sources: Jefferies; UBS; Evercore ISI; Bloomberg

2019 revenue forecast, as % of total

Alphabet (Google)

Total: $132.2bn

Amazon

Total: $278.8bn

Facebook

Total: $70.2bn

Apple

Total: $259.0bn

Market capitalisation, October 23rd 2019

Core advertising

62.7

YouTube

15.7

Google Cloud 8.5

Play (app store)7.2

Other

5.9

Online stores

53.0

Physical stores

7.4

Advertising

3.9

Other

24.5

Amazon Web Services

11.1

Core advertising

71.6

Instagram

23.1

Messenger

2.5

Other

2.8

App Store 5.9

Apple Music 2.6

Other

5.5

Hardware

86.0

Alphabet (Google)

$861.7bn

Amazon

$873.4bn

Facebook

$520.2bn

Apple

$1.09trn