December 13, 2017

Scenario Planning for Big Tech and Big Media

Peter Kennedy
Managing Principal

Big Tech is the new big tobacco in Washington. It is not a question of whether the regulatory backlash will come, but when and how.

-Edward Luce, Financial Times

Scenario planners are always on the lookout for tipping points, especially ones that have impactful consequences across a wide range industries and businesses. Events over the last several months have given us reason to suspect that we could be approaching a tipping point of sorts right now – affecting the big, brash and powerful worlds of technology, communications and social media. 

But first, a disclaimer: This essay is a thought exercise, not in any way a prediction of anything resembling a Big Tech doomsday scenario.  Far from it.  Instead our interest is in highlighting somewhat disparate trends and events and, in the spirit of scenario planning, considering how their convergence could alter the operating landscape for the tech and media worlds in surprising and, yes, unpredictable ways.

So, what might be tipping? Allowing for a sweeping generalization, what might be tipping are the extended good fortunes of the Big Tech sector (intended in this discussion to include large media and communication firms as well – “Big Media”). There are many candidate tipping-point factors: increasing industry concentration and regulatory pushback, rising privacy and cybersecurity concerns, smartphone market saturation, and changing government and public attitudes toward Big Tech – the recognition that Big Tech is at the end of the day still about making money and not necessarily committed to saving the world or for that matter ensuring the integrity of the digital universe.

There are also financial factors.  Just how much further up can tech stocks climb before a correction takes place?  At this writing the tech-heavy NASDAQ index is up 27% for the year.  Alphabet (Google) is up 30%.  Amazon is up a mind-blowing 54%.

Big Tech valuations are the least mysterious bit of speculation. That tech stock prices will eventually come down to earth is hardly newsworthy or unexpected though it is worth speculating about how hard the landing might be and about the effect this could have on financial markets generally. There’s good reason to believe that any serious correction will send shock waves across the economy, globally, given Big Tech’s heft and reach.  As the Financial Times’s Martin Wolf has pointed out:  Eight of the world’s most valuable companies are technology businesses, with a combined market capitalization of nearly $5 trillion.  Five of these firms – Apple, Alphabet (Google), Microsoft, Amazon and Facebook are from the US.

We also seem to be witnessing the start of tougher regulatory treatment of Big Tech. In some of these cases there’s a weird alignment between the Trump administration and its staunchest liberal critics.  Just one current example is the Justice Department Anti-Trust Division’s blocking of the proposed $85 billion merger of ATT and Time Warner, a deal opposed by liberal groups as anti-competitive and anti-consumer. Historically, the Justice Department has been highly tolerant of vertical plays of this nature, but the sheer scale of the ATT-Time Warner merger apparently puts it in a somewhat different, more worrisome category.

We’re most certainly not in trustbusting territory. There’s no great outcry to break up the Big Tech giants, not yet, anyway.  But serious business publications, including The Economist, have raised the possibility that in the farther-out future, some Big Tech companies might be treated like utilities – de facto monopolies that provide essential services, but are subject to government oversight and regulation.

No question, this would be a big deal, and it implies vastly different business models for companies such as Facebook.  Facebook might no longer be free, even.  And users might have to pay a subscription price in exchange for owning their own data (rather than give it away “for free” as is the case today).  This may seem like extreme scenario-planning ideation, but it’s not as far-fetched as it may seem.  All it might take is a mega privacy-breach for the citizenry to get up in arms over irresponsible levels of market power.  Even more significant perhaps is the ongoing distrust of Big Tech from Russia’s successful exploitation of social media to influence the outcome of the US 2016 presidential election.

Beyond these specific hot-buttons, there’s the broader fear of Big Tech-Big Media’s unprecedented concentration of power in the “attention economy.” The Economist sums it up neatly: “Social media companies collect data about you in order to have algorithms to determine what will catch your eye, in an ‘attention economy’ that keeps users scrolling, clicking and sharing – again, and again and again.” Television had (and continues to have) its own addictive attributes, but what’s happening today in social media is on another level entirely. And the market payoff is ultra-concentrated. According to Brian Wieser at data provider Pivotal Research, Facebook and Google alone account for about 40% of America’s digital content consumptions. Is this good for the economy? For our democratic institutions? Are current levels of digital content consumption good for the physical and emotional well-being of the citizenry?

Lawmakers are asking hard questions and, to some critics, many Big Tech execs have been curiously aloof in the face of these rising concerns from regulators, privacy hawks, citizen groups, and the public at large.  Even if fears over market concentration, privacy and foreign meddling can be effectively assuaged, Big Tech is likely to remain under scrutiny for a range of abuses of power, real or perceived.  And in the Me-Too era, widespread perceptions of sexist and boorish male behavior in the halls of Silicon Valley reinforce feelings of fear and distrust toward Big Tech among the public – and, crucially, not just among social conservatives.

But…

As scenario planners, we’re always loathe to predict any outcome as a given or most likely scenario. Any strong headwinds felt by Big Tech in the present moment do not signal an inevitable change of course or destiny. Big Tech have extraordinary financial resources and political muscle at their disposal. Beyond campaign contributions to influential legislators and armies of articulate lobbyists, Big Tech organizations have evolved into critical economic actors in the US (and globally). This is especially true in high-risk R&D, where Big Tech companies are making massive investments in everything from autonomous vehicles to space exploration. Think Google X – Alphabet’s big-project “moonshot lab.”  In the current US fiscal and political environment, there are simply no viable public-sector alternatives to the lean, fast-moving innovation projects that Big Tech is sponsoring today.  This reality would seem to be a powerful mitigating factor against any sweeping restrictions on Big Tech activities.

Stay tuned. The digital technology conversation is only going to grow more heated as artificial intelligence and virtual reality applications grow more pervasive across the US economy and society. Even if the net social benefits are positive, the disruptions they create – in manufacturing, transportation, medicine, education, media, etc., etc. – will be profound. FSG scenario consultants are tracking these developments with great interest, and we’ll be following up on these subjects with additional thought pieces in coming months.

 

 

Comments  | 

pkennedy
Since going to press with this blog piece, the FCC has voted to end net neutrality. Add that to the mix of uncertainty in the technology and media worlds. Will innovation be accelerated without net neutrality, as FCC Chairman Ajit Pai contends? Or will consumers get slammed, as broadband providers charge higher prices for preferred access to all content, including movies, social media and more? And how will content providers respond, among many unintended consequences of the repeal decision.

Thoughts?