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This week, I read a fascinating piece of Wall Street research titled "Tech Reg: A Case Study Approach to Examining the Impact of Government Intervention" by Scott Helfstein/Sean O'Loughlin. The report aims to help investors consider the impact of potential big tech regulation.
The authors study in detail 5 different cases of previous US regulatory intervention. "A striking pattern emerges. Regulatory actions aimed at promoting competition actually had a series of tertiary repercussions that ultimately helped the existing entrenched players."
"First, government actions aimed at increasing competition always have unintended consequences. Second, legal actions that increase the cost of compliance can also serve as a constraint on new entrants and smaller companies, thereby allowing incumbents to maintain market share."
"Third, while big firms do not usually increase market share after regulatory actions, the absence of new players provides an ability to raise prices later that ultimately contributes to margin expansion."
"Fourth, attempts to regulate or even punish technology firms with dominant market position, especially those with so-called network effects, have typically backfired."
They show that in each of the previous cases, regulated companies ended up outperforming the market as a result of these issues. They then recommend you BUY the stocks of any of large tech companies that trade off on weaknesses as a result of concern about future regulation.
This is "regulatory capture" in a nutshell. It's worth reading the Wikipedia entry if you are not familiar with the concept. en.wikipedia.org/wiki/Regulator… I have always phrased it this way "regulation is the friend of the incumbent."
Perhaps the key reason Silicon Valley should be wary of U.S. regulation of big tech is that it will make it that much harder for the new startup to disrupt said incumbent.
