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Good morning. There are two more weeks of summer. Read this, and then for goodness sake go enjoy yourself. And email me if you wish at: robert.armstrong
The FTC’s new, improved lawsuit against Facebook
The Federal Trade Commission sued Facebook a while ago, alleging that the company abused its dominance of the social media market. In June, a judge told the FTC their suit stank, but said they could refile. The FTC refiled on Thursday; the new complaint is here.
Facebook has been an awesome investment, and its peer “Faangs”, which also are in antitrust regulators’ sights, have been awesome investments, too. They are at the core of nearly all US equity portfolios. If the government can change the way these companies operate, that could matter a lot to investors.
Reading the refiled suit, it seems to me that the key question in the case is very simple, even if hard to decide.
We know that in the industries where the Faangs compete — social media, cloud computing, search, mobile computing, ecommerce — there are powerful network effects, and very dominant companies are sure to establish themselves. Only occasionally does a rival emerge with a new idea that poses a genuine threat to one of the leaders.
The simple question is: at the point when a rival does emerge, is it OK for the dominant company to buy the innovator, eliminating the competitive threat? That is to say, should Facebook have been allowed to buy Instagram and WhatsApp, or not?
I don’t know any of the legal niceties here, but from a philosophical/ social/ economic point of view, everything else in the case is either obvious or a detail.
The idea that we have to argue about whether Facebook (or Google, Amazon, Apple and Microsoft) is dominant strikes me as absurd. Of course they are; look at the numbers. It is equally absurd to suggest that the WhatsApp or Instagram acquisitions were not about eliminating competition. Not only is that how every sane person saw those acquisitions at the time, but chief executive Mark Zuckerberg framed the issue in exactly that way. Here he is, in an internal email:
The basic plan would be to buy these companies and leave their products running while over time incorporating the social dynamics they’ve invented into our core products. One thing that may make [buying competitors] more reasonable here is that there are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic [such as photo sharing] it’s difficult for others to supplant them without doing something different. It’s possible someone beats Instagram by building something that is better to the point that they get network migration, but this is harder as long as Instagram keeps running as a product . . . one way of looking at this is that what we’re really buying is time. Even if some new competitors spring up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.
Allowing dominant companies in the Faang industries to acquire competition out of existence may or may not make us poorer, less innovative, or less free. Maybe having tons of young venture capital-backed companies trying to get just big enough to be bought generates all the innovation society needs, for example. But there is no need to overcomplicate the issues. This case is about merger policy in industries dominated by network effects.
People have strong feelings about ageing and inflation
Unhedged has never received more mail than it did in response to Thursday’s discussion of the Goodhart and Pradhan inflation thesis. I’m a little startled by this, given how long the theory has been kicking around and how much attention it has already received from Wall Street hacks like me.
As a reminder, G&P think that in an ageing world the scarcity of workers will push wages up, and the dis-savings of the old will lower the global savings/investment ratio. Both changes will push interest rates and inflation up.
Several readers replied that technology will more than compensate for the coming decline in the labour supply. Sahil Mahtani, a strategist at Ninety One asset management, emailed that:
Technology . . . is improving supply by seemingly curbing price rises in some goods and permanently removing some middlemen. Jan Hatzius estimated in 2017 that the Amazon effect was removing 23bp from goods inflation every year . . . If you add in the impact of new tools like Airbnb, which increases the returns on unoccupied personal property and reduces hotel investment; or online buying and selling platforms like Grail, which allow users to monetise the goods they have at home; or online freelancing platforms like Upwork which enable the globalisation of services, you can see that aggregate supply has increased dramatically as a result of technological change. If inflation is going to be a race between technology and demographics, it’s not clear ex ante why you would privilege one over the other.
It is probably worth noting what G&P themselves say about technology. Here is Pradhan:
[Critics say that] technology will cause us to run out of jobs . . . what we argue is that people have not yet factored in — perhaps because it’s moving so slowly — the fact that, as our societies age, the demand for workers to look after the elderly is going to be gigantic . . . we are going to need more people [to care for the old], which means that we do need machines to destroy jobs in other places to allow for . . . reallocation of labour from one place to the other.
Other common objections included the view that more older people would remain in the workforce as the years pass, dulling the labour supply shock; that the demographic changes won’t be big enough to have the effects G&P foresee; and that G&P are wrong to think the globalisation of goods production could be the root cause of the disinflation in advanced economies, which are dominated by services.
But the most common response was to point to a speech given last month by Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee. It’s really good (by which I mean that even I could follow the argument, and that it is short).
Vlieghe’s case goes like this. Yes, as people retire, they start to spend down their savings, and when the global stock of savings falls, that pushes up interest rates. But there is a counteracting factor, which at this point in history and for decades to come will be much stronger: people in their fifties and sixties tend to rapidly accumulate wealth, driving the stock of savings up and rates down.
So when you take the average asset portfolios people hold at different ages, and then model how many people will be in each age cohort in the years to come, you get a picture of the total savings or wealth stock of the population across time that looks like this, in the case of the UK:
Other advanced countries look much the same. So, given the number of people worldwide who are going into their savings-maximising years over the next three decades, we can expect there to be tons of savings flowing into every place where savings can be invested — which is what creates low rates and disinflation.
Vlieghe makes another very interesting point, too, about the mix of assets old people hold and what that means for asset pricing:
Older people hold not only more assets, but more safe assets relative to risky assets. This could explain why we have not observed a uniform fall in all rates of return, as the simple model predicts, but instead we have observed a fall in risk-free rates of return, while risk premia have been persistent.
That’s such a nice explanation of observed phenomena that it makes me slightly suspicious. The paper also includes some very crisp stuff about how income and wealth inequality depresses rates. You should read it.
One good read
Two years ago, the Business Roundtable released a much-hyped “statement on the purpose of a corporation” that ushered in a new era of stakeholder capitalism. Predictably, the statement has had no significant effect on how its corporate signatories operate their businesses.