Cross Asset Research 18 July 2019 FOCUS Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. FOR ANALYST CERTIFICATION(S) PLEASE SEE PAGE 36. FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 36. FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 37. Restricted - Internal U.S. Internet Breaking Up Is Hard to Do Anti-trust bark louder than bite, but regulatory risks are real: Calls to break up the largest internet companies have become louder recently, amid a general rise in concerns about the potential market power these firms may have accumulated. We do not believe that attempts to break up these companies would be successful, nor would they mitigate the detrimental effects of market power. Given current antitrust law, the bar to prove consumer harm is quite high, and at a macro level, the business practices and organizational structure of companies such as Google, Amazon and Facebook would be difficult to challenge, at least in the US. Any cases will likely take a decade or longer to play out; meanwhile, the companies would continue to operate. Further, the risk of targeting the wrong companies is real. Both media and retail have been singled out as industries becoming dominated by internet giants. Indeed, our Barclays Competitiveness Indicator (BCI) suggests that competition in media has fallen, likely due to the rise of digital media. However, according to our BCI, competition in retail is healthy, suggesting that economies of scale are driving consumer surplus and that breaking up Amazon would only further entrench other large retailers. Data portability is a risk: New regulations targeting technology companies are also being discussed. Approaches designed to keep dominant companies from abusing their positions could actually work in favor of incumbents by raising new barriers to entry. Changing the ownership structure of consumer data could allow platforms to retain network effects, economies of scale and monetization opportunities while allowing competitors to leverage data collected on a given platform at de minimis cost. Much like the PSD2 regulations in banking, such a move could minimize unintended consequences, with a higher chance of levelling the playing field and may present a challenge to today’s winners. Where we could be wrong: The FTC’s $5bn Facebook fine was a “slap on the wrist” relative to the company’s $585bn market cap. Google’s $9bn in EU fines similarly pale in comparison to its $800bn market cap. However, similar to what occurred in banking from 2009 to today, at some stage the fines could become material enough to matter for stock prices. Banks have paid an aggregate $150bn in fines worldwide since 2009, and this has weighed meaningfully on certain names. BAC and JPM have paid 15-20% of their market cap in fines, respectively. If regulators were to fine large tech in that neighborhood as a percentage of market cap, investors would likely feel it. Who benefits from big tech regulation? If Google were required to roll back some of the bias on SERP, the primary beneficiaries would be TripAdvisor, Booking.com, Kayak, Skyscanner (CTRP), and Expedia in the travel categories. In mobile advertising, data portability would likely close the competitive advantage ARPU between Google and Facebook’s smaller advertising/mobile companies. We see SNAP, TWTR and PINS as primary beneficiaries on data portability. INDUSTRY UPDATE Equity Research Ross Sandler +1 415 263 4470 ross.sandler@barclays.com BCI, US Deepak Mathivanan +1 415 274 5351 deepak.mathivanan@barclays.com BCI, US FICC Research Jeffrey Meli * +1 212 412 2127 jeff.meli@barclays.com BCI, US James K Martin * + 1 212 412 2345 james.k.martin@barclays.com BCI, US *This author is a member of the Fixed Income, Currencies and Commodities Research department and is not an equity research analyst. Barclays | U.S. Internet 18 July 2019 2 CONTENTS FICC RESEARCH ................................................................................................. 3 ANTITRUST IS UNLIKELY, BUT REGULATORS HAVE OPTIONS ................ 3 EQUITY RESEARCH ........................................................................................... 7 ASSESSING THE REGULATORY RISKS .......................................................... 7 Alphabet (GOOGL, OW, PT: $1,315) ......................................................................................................... 8 Possible Changes to Business Practices ................................................................................................... 9 Google’s Anti-Competitive Behaviour to Date (according to the EU) ........................................... 12 Google...
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