Does DoJ versus Apple signal a market top?

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Well Swampians, I hardly know where to begin with the Apple vs Department of Justice antitrust mega-case, which came down last week and will probably run for years.

The headlines and key points you probably already know: Justice is trying to open up digital markets at a crucial inflection point, the same way they did by taking on Microsoft back in the 1990s (back then, the pivot was desktop to mobile, now it’s mobile to everything else). The DoJ is accusing Apple of violating the Sherman Act by purposefully making it difficult for users to shift out of their digital ecosystem, or for content and app creators that don’t follow their terms to get on to the platform. It’s a classic case of how tech giants use network power to maintain monopolies in ways that reduce innovation (Apple of course says all this is nonsense).  

I’ll be looking at the competition case in many future columns I expect, but for now, I want to point Swamp Notes readers to page 11 of the DoJ’s complaint, where you’ll find a small but telling paragraph:

While Apple’s anti-competitive conduct arguably has benefited its shareholders to the tune of over $77 billion in stock buybacks in its 2023 fiscal year alone — it comes at a great cost to consumers. Some of those costs are immediate and obvious, and they directly affect Apple’s own customers: Apple inflates the price for buying and using iPhones while preventing the development of features like alternative app stores, innovative super apps, cloud-steaming games, and secure texting.

What the DoJ is talking about here is financialisation, in this case the use of spare cash to orchestrate buybacks to bolster share prices, rather than to invest in innovation. The former is something Apple has always been a market leader on (the introductory chapter to my 2016 book Makers and Takers, which is all about financialisation, led with Carl Icahn’s pushing Tim Cook to do more buybacks). This tactic used to be considered market manipulation, but was made legal in the 80s; buybacks then radically increased in the 1990s as Silicon Valley wanted to create more paper money to pay talent, and California politicians wanted to please potential donors.

Buybacks aren’t part of the monopoly case. But I find it interesting that the DoJ chose to flag the issue given the market moment, in which years of easy money and buybacks have supported an ever more financialised economy in which the tail is truly wagging the dog. Boeing, another company in which financial engineering has replaced the real kind, is a timely case in point. It’s also interesting that the White House just appointed Mike Konczal, a financialisation expert and former Roosevelt Institute director, as a member of the National Economic Council.

I wonder if the Apple case could be where the rubber meets the road on tech euphoria and financialisation. As my column today argues, while the trigger for the latest round of US share price records was the Fed signal that we can expect more rate cuts this year, the underlying story is tech hype. Basically, investors think that the combination of cash on the balance sheet at the Magnificent 7 firms, coupled with the euphoria over AI, is a reason to think that we aren’t in the market bubble of all time. 

But that story only holds if you believe two things — AI will transform everything (I’m not so sure about that, as per my column), and Big Tech business models won’t be disrupted. Market history tells us that isn’t so. As a February Morgan Stanley Asset Management report put it:

Index concentration has historically proved self-correcting, with some combination of regulatory, market and competitive forces, along with business cycle dynamics, undermining static leadership. In fact, our analysis suggests that equity returns have typically struggled following peaks in concentration, with non-megacap equities and core fixed income typically outperforming.

While the MS report acknowledges that the sheer size and power of these firms means that this time could be different, I’m inclined to think that we are headed sooner rather than later to a pretty big correction. Perhaps we’ll remember this moment in antitrust as a harbinger of that. Peter, would you agree?

Recommended reading

• I thought Federal Trade Commission chair Lina Khan did a great job laying out her case for why “national champions” are a losing proposition (think Boeing), and why we actually need a greater number of players in crucial markets in order to avoid another supply chain crisis, in this Foreign Policy feature. The piece was based on the one-on-one interview that I did with her last week at the Carnegie Institute.

• We all know that the medium is the message, and this really terrific New Yorker feature by Jay Caspian Kang illustrates how social media is changing not only our politics, but our emotional and even our literal landscapes. Highly, highly recommend. I’m putting this author on my must read list for the future.

• Former leadership consultant Ashley Goodall is so right that change isn’t the same as improvement, something reflected in the churn in Silicon Valley right now. I blurbed his upcoming book and will have more to say about these topics in a future column.

• In the FT, love him or loath him (guess which camp I fall into?) you can’t miss Lunch with Nelson Peltz, who in keeping with his tribe would rather be rich than right. 

Peter Spiegel responds

Rana, you’ve argued that the Apple antitrust case may be the harbinger of what Morgan Stanley sees as an inevitable “undermining” of the “static leadership” of the current Big Tech giants. 

But I’d argue something close to the exact opposite: if Morgan Stanley is right that “index concentration has historically proved self-correcting” — which I think is accurate — then why do we need an Apple antitrust case? 

You and I argued about this a couple of weeks ago, in the context of whether US competition authorities should be fighting against the “bigger is better” ethos of Silicon Valley. I’ll restate my position: I think the federal government has a spotty record when it comes to shaping a very complicated private marketplace.

The Morgan Stanley report gets to the heart of why the justice department and Federal Trade Commission often miss their targets. Even as they bring their cases, the “market and competitive forces” they cite are already changing the landscape that regulators are trying to shape, using far more blunt instruments. 

Let’s take Apple itself as an example. It started as an insurgent start-up that soon became the darling of the nascent computing scene. Then Microsoft, in partnership with IBM and the PC clones that soon proliferated, unseated Apple from its perch and the company began to flounder, ultimately deciding to force out Steve Jobs. Apple got lost in the wilderness for a decade, and almost went bankrupt — and brought back Jobs. A decade later, it introduced the iPhone. And now, according to the justice department, it is so powerful that the federal government needs to intervene to protect consumers and competitors. 

Let’s put aside the fact that Google’s Android mobile operating system controls 70 per cent of the market worldwide (and 40 per cent in the US). The brief history I just laid out sounds to me like a company that has been buffeted by market and competitive forces, and is likely to be so again. Competition between the tech giants is ruthless, and new technologies — especially AI — are likely to reshape the industry in ways we can’t even imagine. 

To me, the history of Apple shows us Morgan Stanley is right: the tech market self-corrects. I’m not sure the justice department needs to help out.

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And now a word from our Swampians . . .

In response to “The loneliness of Mike Pence”:
“While some corporations may revel in Biden’s industrial policy and the funds that it brings, genuine capitalists have no more use for this than they do for the regulatory capture brought about by corporate lobbying which is the definition of corporatism and which is carried out by managements who do not have the innate skill to compete in the marketplace.” — Henry Wolfe