Investing Based on Regulations: A Look at the Tech Industry

This hasn’t happened much in North America yet, but all over Europe, we are starting to see calls for regulation of the big tech companies.

Part of this comes from the perspective that they are getting all the downsides and none of the upsides (tax money). Anti-trust regulations are starting to become necessary, and with recent issues regarding the Christchurch shootings footage, governments are starting to put the burden of preventing these videos from being seen on the tech companies.

Market Inefficiencies

The real problem with the market is that it is set up to benefit the company and split the attributes of stakeholders. The attention going towards inappropriate videos comes from the users, and they aren’t leaving the platform any time soon. At the same time, advertisers will stand by the platform because there are so many users there. The system never gets naturally disrupted, so no change comes naturally to the content management.

The main issue with regulations being proposed is the anti-competitive climate they create. If companies need to have a certain “duty of care” for their clients, the technology required to support this could be prohibitive for some smaller players. Competition shouldn’t disappear just because it is artificially expensive to play in that market.

A second concern arises regarding freedom of speech and the preservation of users’ privacy. If you have a platform trying to prevent you from posting something inappropriate, they will likely need to go through your stuff.

It is proving difficult to find a method that allows regulation of disturbing content to occur while not making it so freedom of speech is infringed upon. Setting up the regulations so big tech companies can afford to handle them properly is essentially what already occurred with GDPR. Now with Google allegedly spending $100 million developing their most recent content filter, it seems like providing simple video hosting services is become a truly onerous business.

Investing Based on Regulations

These mostly concern Facebook and Google (YouTube), but every company is affected in its own way, as they all host different types of content and products. From an investor’s point of view, there are a few ways to price in regulations. If the regulations are going to be expensive for the tech giants to absorb, then you know that means their competition just got even smaller. This is why they would technically be “for” more regulation in some circumstances.

The second type to think about is antitrust laws that want to see big companies like Amazon broken up. The combination of Amazon Web Services with the e-commerce platform is a dangerous one.

You can look at any of the former type of regulations as giving you a bullish outlook for the companies it affects. The same applied when we saw how the biggest tech companies were approaching net neutrality. Anything that creates barriers to entry is good for them and helps preserve the relative monopoly they have over certain spaces.

However, where antitrust laws are being enforced, that represents the opposite of a barrier to entry (a port of entry?) and will likely result in the long-term harm of the company’s prospects.

So taking all of this, it is reasonable to make bets on bigger tech companies based on the types of regulations they are going to be subjected to. There’s no reason why you couldn’t extrapolate this method onto other industries, but the tech industry does tend to move the fastest, so you would see results the soonest.

Featured image courtesy of Shutterstock.