Certain crowds are calling for the breakup of Big Tech companies. This visual shows the evolution of Standard Oil’s companies post-breakup in 1911.
From the Archives
The book that helped bring down Standard Oil.
I do not think that there is a better description for what markets are like today than this excerpt from an article written over a century ago in 1890:
The events and headlines of this week feel like a microcosm of financial markets for the last decade, and certainly the last 7 months. There was a congressional anti-trust hearing with four of the big tech companies that have powered markets higher, Robinhood traders and retail speculators found a newly beloved stock in Kodak, and GDP data again reminded us just how detrimental COVID-19 has been to the economy.
Big Tech has been a dominant force for the last decade in a myriad of ways. In the stock market, the so called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) have powered major indices like the S&P 500 to new highs, and have seemed unstoppable at times. Just look at the chart below comparing returns of FAANG stocks, the S&P 500, and the S&P 500 Ex-FAANG:
These mega cap tech names have played such a key part in driving markets higher that many investors have become increasingly concerned about their dominance in major indices like the S&P 500, where FAANGM (including Microsoft) stocks represent 25% of the index’s market capitalization. This begs the question, what has market concentration at the top looked like throughout history? This chart provides a helpful summary:
Outside of markets, however, these companies have also played a major role in our personal lives. Whether it’s the line items for Amazon purchases that show up on our bank statements, using Google to answer all of our questions, or the dominance of Facebook / Twitter in the weekly screen-time reports provided on our Apple iPhones, it’s hard to escape big tech.
For the House Judiciary committee’s antitrust subcommittee, that could be a problem.
On Wednesday, four of these big tech companies were summoned for a congressional anti-trust hearing in which the chairman of the antitrust subcommittee set the day’s tone by opening with “Our founders would not bow before a king. Nor should we bow before the emperors of the online economy.” Lawmakers repeatedly accused the leaders of Facebook, Amazon, Google, and Apple of engaging in anti-competitive and monopolistic practices that pose a threat to free markets.
Many of the articles in today’s post will look at the history of technology and stock markets, but more importantly the role of anti-trust and regulation.
Kodak and Speculation
This week perfectly summarized why markets in 2020 are so bizarre. On the one hand, we received awful GDP numbers:
“The U.S. economy suffered its sharpest downturn since at least the 1940s in the second quarter, highlighting how the pandemic has ravaged businesses across the country and left millions of Americans out of work. Gross domestic product shrank 9.5% in the second quarter from the first, a drop that equals an annualized pace of 32.9%, the Commerce Department’s initial estimate showed on Thursday. That’s the steepest annualized decline in quarterly records dating back to 1947 and compares with analyst estimates for a 34.5% contraction.”
On the other hand, unabated speculation from retail investors continued in random stocks like Eastman Kodak, the 132-year-old photography-turned-cryptocurrency-turned-bankrupt-turned-pharmaceutical-company. At one point during the week, shares of Kodak were up an astonishing 2,760%. Why, you may rightly ask? As Bloomberg describes it:
“Eastman Kodak Co. shares more than tripled Tuesday on a $765 million government loan to help produce ingredients used in key generic medicines to fight the coronavirus.
The development bank loan is the first of its kind under the Defense Production Act in collaboration with the U.S. Department of Defense. It’s intended to speed production of drugs in short supply and those considered critical to treat Covid-19, including hydroxychloroquine, the controversial antimalarial drug touted by President Donald Trump.
The money could provide a lifeline to Kodak, the storied photography giant whose business and shares were devastated by the switch to filmless cameras. Once a stalwart of American industry with a market capitalization above $30 billion, the company declared bankruptcy in 2012, forcing it into a series of attempted reinventions including forays into printers, film for movies and, briefly, cryptocurrencies.”
And yes, you can probably imagine what I am going to say next… Robinhood traders loved this!
“As of 3:30 p.m. in New York on Wednesday, almost 79,000 users of the investing app had added Kodak to their accounts in some form over the past 24 hours, according to website Robintrack.net, which aggregates data from the brokerage but isn’t affiliated with it. The activity was 15 times more than the next most-popular stock, Heat Biologics Inc. Roughly 34,000 of the additions came over the latest four-hour span.”
It’s a weird time to be an investor, that is for sure.
While the Kodak story is crazy and one of the articles in today’s post will look at the company’s storied history, the majority of today’s links will focus on the primary story of the week: Big Tech Regulation and Anti-Trust. Let’s get to it!
On the day of the congressional hearing this week, CNBC displayed the stock prices of all four companies in order to gauge investor’s real time sentiments about the prospects of each company ahead of their appearances before congress. In that same vein, this paper looks at how investors reacted to anti-trust news and enforcement in the early 20th century.
Like CNBC on Wednesday, the paper even provides the daily returns on days where major events related to anti-trust occurred. For example, we can see that on the day that the Standard Oil investigation was announced, the Dow Jones fell -1.89%. The worst daily decline in the table below, however, was after President Roosevelt issued a directive to the Interstate Commerce Commission to investigate the railroads on March 14th. On that day, the Dow Jones fell -8.65%.
“The turn-of-the-century struggle over trusts and corporations gave birth to industrial economics. In fact, that era’s hotly debated questions—predation, merger, vertical restrictions, federal incorporation, and patent licensing—have an eerie familiarity. But one topic has never been followed up: did trust-busting hurt the stock market, as many critics claimed at the time?
At one level, the answer is clear. Filing suits against large corporations and threatening to break them up and force changes in the way they do business is bound to lower their value. The stock prices of actual defendants, likely targets, and firms whose business plans or hopes of merger are spoiled should all drop. The idea also has a stellar endorsement: Irving Fisher chalked up the boom market of the 1920s to restrained antitrust.1 But today the notion seems bold, bizarre, and obviously false. To many economists, antitrust is a sometimes misguided but basically sound and minor part of government economic policy.
The statistical work in this article links federal antitrust filings and ten stock-price indexes over the period 1904-14, from the revival of antitrust under Teddy Roosevelt to the passage of the Clayton Act and the Federal Trade Commission (FTC) Act. My strategy is to exploit the instability of enforcement in the intervening years, an instability that seems to have been generated by the volatile politics of the trust question.”
The Big Tech hearings this week on anti-trust / monopolies sparked comparisons with the breakup of Standard Oil, and many argued that “data is the new oil”. If data is in fact the new oil, then Global Financial Data is the John D. Rockefeller of financial history, with financial data stretching back over 1,000 years.
This article is interesting for two reasons. First, as clearly demonstrated by the chart from earlier in today’s post that compared returns for FAANG Stocks and the S&P 500 Ex-FAANG, an index’s returns can be heavily influenced by just a few stocks. Using their extensive data on historical returns for individual stocks, GFD was able to study how just one stock may impact an index (or not, in this example).
“One of the long-term components of the Dow Jones Industrial Average has been IBM. The company was originally added to the Dow Jones Industrials on March 26, 1932 in a reshuffle involving eight stocks including Coca-Cola, Nash Motors (later American Motors) and Proctor & Gamble. On March 13, 1939, however, both IBM and Nash Motors were removed from the average and replaced by American Telephone & Telegraph and United Aircraft Corp. (now United Technologies).
AT&T was in the Dow Jones Utilities Average until June 1, 1938. Until then, the Dow committee had interpreted utilities in a broader sense to include electric, gas, and communications companies as providers of essential services. In 1938, the Dow Jones committee decided to restrict membership in the Utilities Average to power utilities.
The resulting reshuffle removed nine stocks, including AT&T, International Telephone & Telegraph, and Western Union, all of which were communications utilities rather than power utilities, from the Dow Jones Utilities Average. Since AT&T was such a huge company, it was moved over to the Dow Jones Industrial Average which required that another stock be removed to make room for AT&T. Thus, IBM was kicked out of the Dow Jones Industrial Average.”
To summarize, changes to the Dow Jones Utilities Average requirements kicked out AT&T. Since it was such a large company, and now suddenly eligible for the Dow Jones Industrial Average, IBM was booted from the DJIA in order to substitute in AT&T. Well, we’ve seen how much of an influence 5 FAANG stocks can have on the S&P 500’s returns, but what was the impact of a single stock, replacing IBM with AT&T?
“What if IBM had stayed in the Dow Jones Industrial Average between March 13, 1939 when it was removed and June 29, 1979 when IBM replaced Chrysler in the Dow Jones Industrials? Obviously, the Dow Jones Industrials would be higher than it is today, but how much higher?
… IBM has been one of the best performers on the stock exchange in history. If you had invested $1 in IBM when it started trading OTC in August 1911, it would have grown to $40,000 today on a price basis. If you had reinvested your dividends, your $1 investment would have grown to $1,434,300. In the past 100 years, IBM has given over a million-fold return…
AT&T incorporated in New York on March 3, 1885 and began trading on the NYSE in May 1900 after it had acquired American Bell Telephone Co. in March 1900. The company was forced to split up into “Ma Bell” and the “Baby Bells” by the U.S. Government on December 31, 1983. On November 18, 2005, AT&T Corp. (“Ma Bell”) was acquired by one of the Baby Bells, SBC Communications, which then changed its name to AT&T Inc. in a reverse acquisition.
AT&T has not performed as well as IBM over the past 100 years. If you had invested $1 in AT&T in May 1900, your investment would have grown to only $4.26 on a price basis, or $639 if you had reinvested all of your dividends back in the company, by the time AT&T was broken up in February 1984.
So what if the Dow Jones Committee had kept IBM in the Dow Jones Average between March 1939 and June 1979 and had never admitted AT&T, keeping it in the Utilities Average? What would the result have been?… The DJIA stood at 151.1 on March 14, 1939 and 841.98 on June 29, 1979. Since the DJIA is price weighted, you can remove the impact of AT&T on the DJIA by subtracting out the price of AT&T allowing for the splits, and replacing this amount with the value of IBM stock, allowing for the splits in IBM. If you do this, you would find that the DJIA would have been at 23,582 in June 1979, not 841.98. In other words, IBM would have added 22,740 points to the DJIA had it never been removed.”
So, a pretty big impact, right? This brings me to the second reason why this article is interesting and relevant: innovation and competition.
Global Financial Data’s long-term returns for IBM clearly show that the stock was a power-house, and more generally, IBM was once a leading technology company that was considered forward-thinking and innovative. In the company’s more recent history, however, “Big Blue” has lagged behind while other tech giants have dominated. While it is a complicated issue, I think that IBM is an example of how a company that can appear unassailable, can be disrupted by other innovators. Just as it’s hard for any of us to imagine a scenario where Amazon isn’t dominating the world, many would have said the same thing about Sears. Food for thought.
While the innovations and technological advancements of modern big tech companies are new, this relationship between “technological revolutions” and stock prices is not. This article looks at the railroad industry of the 19th century, and compares it with the internet boom over a century later.
“We develop a general equilibrium model in which stock prices of innovative firms exhibit “bubbles” during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting “bubbles” in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model’s predictions in 1830–1861 and 1992–2005 when the railroad and Internet technologies spread in the United States.”
The Internet Age
The Railroad Boom
READ. THIS. ARTICLE.
It is absolutely fascinating, and embodies many of the major arguments / themes repeated throughout the hearing on Wednesday by looking at the Standard Oil case of 1911, and its implications for Google (and Big Tech generally) today. Here is an excerpt, which is lengthy, but so good:
“A number of observers have been sounding the alarm recently about the growth of monopoly power in the US economy. Expressions of concern have issued from all parts of the political spectrum, but the most sustained warnings have come from the self-proclaimed “New Brandeisians,” a group of scholars for whom the title of Louis Brandeis’s famous essay, “A Curse of Bigness”, has become a potent rallying cry. Members of this group claim that Google, Amazon, and other giant tech firms are exploiting blatantly anti-competitive practices to block potential rivals—and getting away with it by manipulating the political system. They are particularly worried that current antitrust orthodoxy, which is preoccupied with the issue of harms to consumers, has left the country all but defenseless against bigness’s other ills.
The New Brandeisians argue that the country has entered a second Gilded Age, and certainly the concerns they express are much the same as those prompted by the rise of the Standard Oil Trust in that earlier period of turmoil. To late nineteenth-century Americans, Standard was a monster that corrupted politicians and laid waste its competitors. Legislators responded to the mounting pressure to take action by passing antitrust laws at both the state and federal levels beginning in the late 1880s, but these statutes did not prevent other large firms from amassing positions of dominance in most important sectors of the economy over the next two decades. Some of the new giants followed Standard’s example and achieved their market power by acquiring competitors. Others grew large by innovating, devising new products or new ways of producing that yielded significant economies of scale. Regardless of the route these firms took to bigness, their sheer size and sudden emergence awoke fears that, unless the government did something fast to prevent it, the giants would entrench themselves by nefarious means.
There was general agreement that Standard had grown large by pursuing anti-competitive practices and should be broken up, and in 1911 the US Supreme Court issued the necessary order. The knottier problem was how to deal with “trusts” (as big businesses were generically called) that acquired their market power by innovating. Although contemporaries tried, following President Theodore Roosevelt’s lead, to sort the trusts into “good” and “bad” categories, this exercise in classification turned out to have severe limitations. Because firms always pursue a mix of strategies to “escape from equilibrium,” in Levenstein’s apt phrase, deciding which behaviors were pro- and which were anti-competitive was a difficult task. Not only did “good” trusts sometimes resort to “bad” practices to preserve their advantages, but there were many cases in which it was not at all easy to distinguish actions that were anti-competitive in their purpose and effect from those that improved productivity and brought real benefits to consumers. During the so-called Progressive Period—that is, from the turn of the twentieth century to the outbreak of First World War—policymakers struggled with this problem. The solution they arrived at was to write a set of specific prohibitions into the Clayton Antitrust Act of 1914 and simultaneously to create a new regulatory agency, the Federal Trade Commission (FTC), empowered to define and police the boundary.
The boundary between anti-competitive practices and those that enhanced efficiency nonetheless remained difficult to draw. Firms continuously sought new ways to increase their market power, and regulators just as continuously sought new ways to make their efforts illegal. The line between behaviors seen as violating the law and those viewed as legally acceptable shifted back and forth; regulators were excessively vigilant in some periods and excessively lax in others. During the late 1930s, however, in the context of a revival of anti–big business sentiment during the late New Deal, antitrust officials abandoned the attempt to draw the line and instead defined bigness itself as the problem. Their success in inducing the courts to impose antitrust remedies on firms that had not been found guilty of anti-competitive conduct provoked a counter-reaction by a group of economic and legal scholars, dubbed the “Chicago School,” who in turn prevailed in the courts once economic conditions deteriorated in the 1970s. Advocates of the Chicago School sought to shift the focus of inquiry from whether large firms had market power to whether the market power they possessed had been detrimental to consumers. Like the aggressive trust-busters they opposed, however, they emphatically rejected the preoccupation with conduct that early twentieth-century policymakers had built into the law—just in time for a new wave of giant innovative firms to behave in ways that reanimated those very concerns.”
There is no way that I could ignore the absolute insanity that was Kodak’s stock price this week…
While everyone is talking about Kodak today, many are unaware of just how old the company truly is, stretching back to the 19th century. The company’s origins are truly impressive, and this article does an excellent job documenting the life of the founder: George Eastman.
“The technologies of today are built upon those of the past, and the superstars of our era would be nothing without the great leaders of the past. We often discuss our favorite “tech” entrepreneurs. Steve Jobs, Bill Gates, Elon Musk, and many other names arise. Too often these discussions lack historical perspective. Here we build a case for George Eastman as the greatest technology entrepreneur. Why does he deserve such a high ranking?
George Eastman, or “GE” as he was called most of his life, was born to a reasonably prosperous family, but his father died in 1862 when the boy was seven years old, forcing his mother to fend for herself and her three children. He became interested in the emerging field of photography and went on to “father” amateur photography with his Kodak cameras and film. Under his leadership, his Eastman Kodak company became a global powerhouse, perhaps still unequaled in its global reach and dominance of an important field.
The company’s innovations led to mass consumer photography, aerial photography, medical x-rays, and the development of the movie industry, precursors to today’s selfies and even YouTube. Eastman was the “total entrepreneur”—marketing genius, financial wizard, great employer, both a visionary and a hands-on inventor and designer. Over the years, he became one of the most important philanthropists in American history, perhaps foreshadowing Bill Gates’s diverse interests. Above all else, George Eastman was “his own man”—a unique personality of independent mind. This is his story.”
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