I was deeply influenced by an Economist article written all the way back in 2018, comparing the big tech to the East Indian company. The important paragraph is reproduced below.
A few years later I successfully shorted Chinese tech names, as the government decided to reign them in and regulate them. While this is portrayed very negatively by western media, much of the regulation was extremely sensible. Data harvested from consumers could only be used for the purpose it was given. Platforms could not favour companies they had a commercial interest in. Payment systems needed to be opened up. The Chinese tech sector never recovered. For me, this meant that the “flywheel” for tech companies can go into reverse.
As the Economist article pointed out, profit expectations for big tech were very high 2018, but have been met. But as the article makes clear, Apple in 2018 was getting into comparisons with Standard Oil and the East India Company. I could have added Amazon, Nvidia and Meta into the analysis, and we are apparently living in an era of not just one East India Company, but five or six. Is it possible to have a number of huge commercially dominant companies?
So there are some caveats. First of all, using US GDP probably does not make sense. All of the big tech companies work on a global scale. Using global GDP, it does push them back profits back to 0.1% of GDP, but then amalgamating their profits does push them back to 0.5% of global GDP. So big tech would be on a scale of influence in line with Standard Oil or the East India Company but on a truly global sense. This also makes them more of a comparison with Chinese tech, which have tended to be domestically dominant. I thought the big tech companies would see their dominance ended in one of three ways. One, new technology would come along and disrupt the current system. Two, foreign competition would undercut the US giants. And thirdly, that the US political system would move to restore balance. None of this has happened, or looks likely to happen.
Firstly, the closest thing we have seen to new technology is the appearance of ChatGPT and AI. On current forecasts, Nvidia looks to be joining the “East India Club” in the not to distant future, with profits of USD 120bn predicted for 2026. The AI revolution does not seem to be disrupting the existing players - even though Google search would seem to be most at risk. Microsoft has seemingly been able to join forces with OpenAI. The AI revolution seems to require huge stores of data, which only the incumbent tech firms seem to be able to supply. The only loser from the move to GPU from CPU seems to be Intel.
Chinese tech companies such as Huawei and Xiaomi seemingly offered competition to the Apple model, but have been neutered in the US and other Western nations due to security concerns. TikTok offered competition to both Alphabet and Meta - but again faces security concerns. Security concerns have allowed the US government to try and slow the development of Chinese semiconductor industry, and allow the build up a virtual monopoly position by US firms. The share price of SMIC - China’s semiconductor champion, is more Intel than Nvidia.
Thirdly, and most likely in my view, was that the US political system would move to counter tech dominance. The appointment of Lina Khan to the FTC, as well as Biden’s guidance to regulatory authorities to promote competition all pointed to a Chinese style regulatory backlash. However, in many cases, the legal system has acted to blunt government policy. Courts have become a battleground for politics in the US. Both Donald Trump and Joe Biden has sought to appoint far more judges that their immediate predecessors. Biden has appointed 43, while Trump appointed 53. Noticeably, both Biden and Trump have acted to leave no vacant positions, unlike the usual practice.
Regulatory and judicial stalemate probably suits large US tech companies as they benefit from many policies that were originally put in place in the 1990s to promote tech industry. The only way to make sense of US tech in the same terms as the East India Company is to think of US tech as a branch of the US government - just as the East India Company ruled India on behalf of the UK government. 20 years ago, in European and Asian markets, domestic operators dominated in the media, retail and often electronics space. Now US tech companies dominated in all these areas, and pay little to no tax in overseas markets, just as the East India Company paid little to no tax to India. I do not like this analysis or conclusion, but it does not mean its wrong.
The digital revolution has seen US tech emerge as the dominant players - and have seen them use their influence over tax and regulatory authority to continue to grow profits. This is at one with the idea of shareholder value led capitalism. Corporates are expected to game the system to maximise profits. There are two things that I dislike about this conclusion. First, US tech have an inordinate power over my life, but I, and the UK or Australia government that is meant to represent me has no power over them. This can only end one way - with the rejection of US corporate power also seen as a rejection of US power. Certainly I find high taxes in the UK, and the zero taxes paid by US tech deeply infuriating. Politically, this tension is more and more visible, but can the West survive if it rejects US corporate practice and governance?
Secondly, US corporate dominance has no natural end, only a political end when a coalition comes together to end it, just as happened eventually with British rule of India. The problem I have with this is that I have little faith this happens within the US political system. But the alternatives are grim too. I feel this is classic US business practice - make all alternatives so unattractive so you are forced to stay with a system that does not work for you either. What does this mean from an investing perspective? Well the one trade that has worked me is long GLD/short TLT. Looking at the long term chart, I assumed this was a move to back to a pro-labour inflationary era.
But if I was using an big tech as Empire analysis, the move in GLD/TLT reflect now a political turn towards labour - but the fact that the most powerful government the world has ever known, is in fact unable to control the most powerful companies ever known. Or as I have said before, the S&P 500 is the risk-free asset, and the US treasury is the risky asset. Corporate control of the US government would explain why despite Biden’s best efforts, real wages seem to be going nowhere. I know there is a widely held view in the US that corporates control is better than government control, and the power of the US government and corporates is slowly but surely forcing that view on to the rest of the world. The only place where that is not happening is China, which may be why Chinese government bonds have held their value. Or in other words, shareholder led capitalism ultimately leads to the destruction of modern government?
TECHNOLOGY AND EMPIRE