What is going on with tech firms?

 

The economy has made major strides under Trump’s presidency, and a large part of that historic rise is due to the success of tech giants. Led by Facebook (FB), Google (GOOGL), Amazon (AMZN), and Apple (AAPL), the tech industry continues to churn out historic returns as our society becomes evermore dependent on their advanced and addictive products. That’s why a recent Economist article coined an acronym to describe the world’s largest tech firms:

 

BAAD: Big, Anti-competitive, Addictive, and Destructive to democracy.

 

Let’s use our financial fluency tools to take a closer look at this acronym’s meaning and how its members affect the broader marketplace.

 

Big

 

America is the birthplace of many of the world’s largest, most revolutionary companies.

 

However, the same system that fosters this miraculous growth has a long history of allowing an over-concentration of size and power to develop.

 

In 1895, J.P. Morgan (JPM) was so powerful it essentially bailed the U.S. government out of an economic depression. In 1911, the mighty Standard Oil was broken up into 34 separate companies (Exxon-Mobil (XOM) and Chevron (CVX) among them) because it was viewed as monopolistic and predatory. Over a century (and a handful of economic crises) later, we still haven’t figured out exactly how to deal with systemically important banks that are deemed TBTF (to big to fail). Naturally, the same problems exist with this generation’s tech giants. The solutions, however, will look quite different.

 

Mark Zuckerberg could not have known that Facebook would have over 2 billion active members only a decade after its creation. Nor could Jeff Bezos have imagined that Amazon would come to dominate the world of e-commerce when he created a website to sell books out of his garage.

 

bezos

 

Today, both companies serve as two of the largest networks of consumers in the world. With such a large group of people being exposed to their services, tech giants like Facebook and Amazon have unparalleled amounts of user data and outreach ability. Facebook’s network of two billion active users provides information about a uniquely massive group of people that virtually no other service can provide.

 

However, many have complained that sites like Facebook have too much information. The use of cookies has allowed Facebook to provide personalized advertisements for its users, which has rubbed some the wrong way.

 

Anti-Competitive

 

As with any large company, tech giants have thwarted their competition in recent years. Just this past year, Amazon purchased Whole Foods for $13.7 billion. Shares of Kroger (KR), Rite-Aid (RAD), Walmart (WMT), and many other direct retail competitors to Amazon dropped significantly following the news. In addition, days after Blue Apron’s (APRN) IPO, Amazon announced a similar meal-kit delivery program that sent Blue Apron shares plummeting.

 

Similarly, Facebook purchased Instagram for $1 billion five years ago after failing to purchase Snapchat for a reported offer of $3 billion. Ever since Snapchat (SNAP) turned down Zuckerberg’s offer, he has seemingly made it clear that he is trying to take down the app. Soon after, Instagram added their own story and personal picture-chat functions, essentially adopting Snapchat’s two differentiating features.

 

These situations force consumers to ponder whether this lack of competition is a good thing. These companies are simplifying our lives by offering highly comprehensive services in one application. This means people rely on a small group of platforms for nearly all their needs and information. Just as many Americans depend on their local Wal-Mart for all of their household needs, many people’s online social network exists entirely on Facebook. These companies create a highly monopolistic market structure in their respective industries where competition is scarce, and consumer surplus and choice are transferred to companies in the form of larger profit margins.

 

Addictive

 

How many times have you checked Facebook to simply accept a friend request before realizing you have been scrolling through your newsfeed for hours. Have you ever pulled out your phone on the train and ended up buying a new pair of shoes you’ve been eyeing? New technology is addicting, and it is meant to be.

 

Facebook recently admitted to this phenomenon: that its technology is meant to keep bringing you back. However, Mark Zuckerberg recently announced plans to change this issue. He vowed to make the daily newsfeed consist of more posts from family and friends rather than business pages. Shares dipped by more than 5% following the news. This proclamation is a step in the right direction for tech giants worldwide. After all, shouldn’t the world’s social network be more about connecting people with people than people with products?

 

Destructive to democracy

 

This one is more complicated and less obvious to the daily user. But following Russia’s proven attack on our past election, this issue is possibly the most important.

 

Regardless of Trump’s involvement, or lack thereof, in the scandal, Facebook admitted that fake pages made by Russians were seen by roughly 126 million Americans during the 2016 election. The influence of tech giants like Facebook is frighteningly real due to their uniquely-massive size and network of consumers. We cannot believe everything we read on the internet, however, with the lack of competition between tech giants, we are forced to receive most of our media from individual sites. For many, Facebook is their only source of information and this leads to increasing influence for ‘fake news’.

 

So what does this mean?

 

You can get your daily necessities from Amazon; you can interact with your friends and family on Facebook; and you can have all your questions answered by Google, all from the comfort of your iPhone.Hey, even us at Rapunzl are trying to make your life easier by guiding you to financial fluency. However you should be cautious. Tech giants are taking over the world because they make our lives easier, more entertaining, and realize services that were inconceivable not long ago. However, they come with risks such as monopolizing industries, which ultimately hurts the consumer more than anyone. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.