Antitrust scrutiny on tech giants deserves greater investor attention

IN THE 1990s, Microsoft was riding high as one of the most successful software companies at the time.

It had grown its dominant position in the personal computing market with its Windows operating system, which ran on over 90 per cent of PCs in 1994.

By the end of the decade, it was the S&P 500’s largest company by market capitalisation.

However, the company would later fall behind and underperform its tech peers in the 2000s.

Between 1999 and 2009, Microsoft would see minus 3.9 per cent in annual total returns, versus a minus 1.4 per cent return of the S&P 500.

In contrast, Apple saw total annual returns of 23.6 per cent over the same period, while Google gained 34.2 per cent per year after its listing on Aug 19, 2004.

Some would argue that the antitrust pressure that Microsoft faced from the United States government led to this underperformance.

This same pressure is now being placed on Google and Apple, and could have far-reaching implications on their financial performance in the years to come.

At the time, Microsoft was accused of abusing its market position to crush competition and control access to the Internet by giving away the Internet Explorer browser for free, while its competitors, such as Netscape, provided paid apps.

Among other actions, the company was also accused of crippling developer access to programs such as WordPerfect, a word-processing software that was in competition with its own Office suite.

In 2001, Microsoft settled its case with the government. While the government had originally called for Microsoft to be broken up, it instead placed restrictions on the company to prevent it from engaging in monopolistic actions.

These curbs arguably gave other companies the chance to build the next generation of digital tools, such as Apple’s iTunes and Google’s Chrome web browser.

Yet, these companies are now in the government’s crosshairs too.

Google has been accused of abusing its position as a dominant search engine to smother competition and buy up companies, such as ad-serving services firm DoubleClick, thus cementing its own advertising empire.

Notably, it was revealed in court in May that Google paid Apple US$20 billion in 2022 to remain as Safari’s default search engine.

Meanwhile, Apple has also been accused of making its products, such as the iPhone, less useful for users to maintain its dominance. This includes restricting the interoperability of messages between iOS’s iMessage and Android, as well as curbing the availability of so-called superapps through its App Store.

Microsoft has even been targeted by the European Union. It could face hefty fines if it is found to have illegally bundled its chat and video app Teams and given it an unfair advantage over other apps such as Slack.

It is striking that these companies, which engendered a lot of goodwill from their stakeholders in the past, have so quickly burnt those bridges to defend their own interests.

These fights could potentially have financial impacts for these companies too.

In a bid to regulate tech companies with dominant market positions, the EU’s Digital Markets Act (DMA) became applicable in May this year.

In June, the EU charged Apple with breaking DMA rules that required it to allow app developers to charge for services outside of the App Store without paying the company.

Currently, Apple charges larger app developers on its App Store a 30 per cent tax on in-app purchases. The law directly threatens Apple’s financial performance since the tax contributes to the company’s services top line.

This is a segment that is continuing to see significant growth.

In the quarter ended Mar 30, 2024, Apple’s services business grew 14 per cent year on year to US$23.9 billion. This compares to Apple’s total revenue of US$90.8 billion, down 4 per cent from the same period a year ago.

While the impact of antitrust lawsuits on these tech giants is still unknown, the souring relationship between them and their stakeholders could weigh on them for years to come.

In response to greater news-publisher pressure to share more of its ad revenue, Google agreed to pay Canadian news publishers C$100 million (S$99 million) annually to continue sharing news content on its platforms as part of the country’s Online News Act.

Beyond any immediate financial impact, the companies’ executives could be distracted by these lawsuits and regulations, potentially causing them to lose focus on innovation and be disrupted.

In the 2000s, Microsoft’s lost decade was characterised by its inability to keep up with the shift to mobile devices, among its other missteps.

In 2019, the company’s co-founder Bill Gates said his “greatest mistake ever” was for Microsoft to miss the opportunity to compete effectively against Apple’s iOS operating system.

“There’s room for exactly one non-Apple operating system and what’s that worth? Four hundred billion US dollars that would be transferred from company G to company M,” he said.

Investors should not get too comfortable with any company’s outperformance, especially if it is built on anti-competitive behaviour. Disruption always follows close behind.