 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. There are very few political issues that get bipartisan support these days. Never mind consensus spanning geopolitical boundaries. But whether we're talking across the aisle or over the pond, there seems to be common agreement that the power of big tech firms should be regulated. But the government's track record when it comes to antitrust aimed at big tech is actually really mixed, mixed at best. History has shown that market forces, rather than public policy, have been much more effective at curbing monopoly power in the technology industry. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we welcome in frequent cube contributor Dave Michela, author and senior fellow at the Information Technology and Innovation Foundation. Dave, welcome, good to see you again. Hey, thanks, Dave, good to be here. So you just recently published an article, we're going to bring it up here, and I'll read the title. Theory aside, antitrust advocates should keep their big tech ambitions narrow. And in this post, you argue that big sweeping changes like breaking apart companies to moderate monopoly power in the tech industry have been ineffective compared to market forces. But you're not saying government shouldn't be involved rather you're suggesting that more targeted measures combined with market forces are the right answer. Can you maybe explain a little bit more the premise behind your research and some of your conclusions? Sure, and first to go back to that title, when I said theory aside, that is referring to a huge debate that's going on in global antitrust circles these days about whether antitrust should follow the traditional path of being invoked when there's real harm, demonstrable harm to consumers or a new theory that says that any sort of vast monopoly power inevitably will be bad for competition and consumers at some point. So you're best to intervene now to avoid harms later. And that school, which was a very minor part of the antitrust world for many, many years is now quite ascendant and the debate goes on. The matter which side of that you're on, the question sort of is there, well, all right, well, if you're going to do something to take on big tech and clearly many politicians and regulators are sort of issuing to do something, what would you actually do? And what are the odds that that'll do more good than harm? And that was really the origins of the piece and trying to take an historical view of that. I learned a new word. Thank you, Neil Brandeisian had to look it up. And but basically you're saying that traditionally it was proving consumer harm versus being proactive about the possibility or likelihood of consumer harm. Correct. And that's a really big shift that, you know, a lot of traditional antitrust people strongly object to but is now sort of the trendy and more ascendant view. Got it. Okay, let's look a little deeper to the history of tech monopolies and government action and see what we can learn from that. We put together this slide, which that we can reference. It shows the three historical targets in the tech business and now the new ones. In 1969, the DOJ went after IBM, Big Blue. And then 13 years later, it dropped its suit. And then in 1984, the government broke my bell apart and in the late 1990s went after Microsoft. I think it was 1998 and the Wintel monopoly. And recently in an interview with tech journalist, Kara Swisher, the FTC chair, Lena Kahn, claimed that the government played a major role in moderating the power of tech giants historically. And I think she even specifically referenced Microsoft or maybe Kara did and basically saved the industry and consumers from the dominance of companies like Microsoft. So Dave, let's briefly talk about, and Kara, by the way, didn't really challenge that. She kind of let it slide. But let's talk about each of these and test this concept a bit. Were the government actions in these instances necessary? What were the outcomes and the consequences? Maybe you could start with IBM and AT&T. Yeah, it's a big topic and there's a lot there and a lot of history. But I might just sort of introduce it by saying, for whatever reasons, antitrust has been part of the entire information technology industry history from main France to the current period. And that slide sort of gives you that. And the reasons for that are, I think ones that we sort of know, the economies of scale, network effects, lock-in, safe choices, lots of things that explain it. But the good bit about that is we actually have so much history of this and we can at least see what's happened in the past. And when you look at IBM and AT&T, they both were massive antitrust cases. The one against IBM was dropped. And it was dropped in, as you say, in 1980. Well, what was going on? At that time, IBM was sort of considered invincible and unbeatable. But it was 1981 that the personal computer came around and within just a couple of years, the world could see that the computing paradigm had changed from mainframes and minis to PCs, Lens, client server and what have you. So IBM in just a couple of years went from being unbeatable, you can't compete with them, we have to break up with them to being incredibly vulnerable and in trouble and never fully recovered and is sort of a shell of what it once was. And so the market took care of that and no action was really necessary just by everybody thinking there was. The case of AT&T, they did act and they broke up the company. And I would say, first question is, was that necessary? Well, lots of countries didn't do that. And the reality is, 1980, breaking it up into long distance in regional may have made some sense. But by the 1990, it was pretty clear that the telecom world was going to change dramatically from long distance and fixed wire services to internet services, data services, wireless services and all of these things that were going to restructure the industry anyways. But AT&T one to me is very interesting because of the unintended consequences. And I would say the main unintended consequence of that was that America's competitiveness and telecommunications took a huge hit. And today, to this day, telecommunications is dominated by European, Chinese and other firms. And the big American sort of players of the time, AT&T, which Western Electric became Lucent, Lucent is now owned by Nokia and is really out of it completely. And most notably and compellingly, Bell Labs. The Bell Labs, once the world's most prominent research institution, now also a shell of itself and as it was part of Lucent is also now owned by the Finnish company, Nokia. So that restructuring greatly damaged America's core strength in telecommunications, hardware and research. And one can argue we've never recovered right through this sort of 5G today. So it's a very good example of the market taking care of the big problem, but meddling, leading to some unintended consequences that have hurt the American competitiveness. And as we'll talk about probably later, you can see some of that going on again today and in the past with Microsoft and Intel. Right, yeah, Bell Labs was an American gem, kind of like Xerox Park and basically gone now. Okay, you mentioned Intel and Microsoft, Microsoft and Intel. Many, as many people know, some young people don't. IBM unwittingly handed its monopoly to Intel and Microsoft by outsourcing the microprocessor and operating system respectively. Those two companies ended up with IBM ironically agreeing to take OS2, which was its proprietary operating system and giving Intel, I mean, Microsoft Windows not realizing that its ability to dominate a new disruptive market like PCs and operating systems had been vaporized to your earlier point by the new Intel ecosystem. Now Dave, the government wanted to break Microsoft apart and split its OS business from its application software. In the case of Intel, Intel only had one business. You pointed out microprocessors, so couldn't bust it up. But take us through the history here and the consequences of each. Well, the Microsoft one is sort of a classic because the antitrust case, which was raging in the sort of mid 90s and 1998 when it finally ended, those were the very, once again, everybody said Bill Gates was unstoppable, no one could compete with Microsoft. They'd buy them, destroy them, predatory pricing, whatever they were accusing of the attacks on Netscape, all these sort of things. But those were the very years where it was becoming clear first that Microsoft basically missed the early big years of the internet. And that again, later missed all the early years of the mobile phone business going back to Blackberries and Pilots and all those sorts of things. So here we are, the government making the case that this company is unstoppable and you can't compete with them. The very moment, they're entirely on the defensive. And therefore wasn't surprising that that suit eventually was dropped with some minor concessions about Microsoft making it a little bit easier for third parties to work with them and treating people a little bit more even handily, perfectly good things that they did. But again, the market took care of the problem far more than the antitrust activities did. The Intel one is also interesting because it's sort of like the AT&T one. On the one hand, antitrust actions made Intel much more likely and in fact required to work with AMD enough to keep that company in business and having AMD lowered prices for consumers, certainly probably sped up innovation in the personal computer business and appeared to have a lot of benefits for those early years. But when you look at it from a longer point of view and particularly when you look at it again from a global point of view, you see that, well, and not so clear because the very presence of AMD meant that there's a lot more pressure on Intel in terms of its pricing, its profitability, its flexibility and its volumes. All the things that have made it harder for them to A, compete with chips made in Taiwan let alone build them in the United States. And therefore that long-term effect of essentially requiring Intel to allow AMD to exist has undermined Intel's position globally and arguably it's undermined America's position in the long run. And certainly Intel today is far more vulnerable to an arm and Nvidia, to other specialized chips to China, to Taiwan, all of these things are going on out there. They're less capable of resisting that than they would have been otherwise. So you thought we had some real benefits with AMD and lower prices for consumers, but the long-term unintended consequences are arguably pretty bad. Yeah, that's why we recently wrote the Intel II strategic to fail, we'll see. Okay, now we come to 2022 and there are five companies with antitrust targets on their backs. Although Microsoft seems to be the least susceptible to U.S. government, ironically, intervention at this point, but maybe not. And we show the Cinco Comas Club in an homage to Russ Henneman who shows Silicon Valley, Apple, Microsoft, Google, and Amazon all with trillion-dollar plus valuations, but Metta, well, it briefly crossed that threshold, like Mr. Henneman lost a comma and is now well under that market cap, probably around five or 600 million. Sorry, billion. But under serious fire, nonetheless, Dave, people often don't realize the immense monopoly power that IBM had, which, relatively speaking, when measured its percent of industry revenue or profit, dwarf that of any company in tech ever, but the industry is much smaller than no internet, no cloud. Does it call for a different approach this time around? How should we think about these five companies, their market power, the implications of government action, and maybe what you suggested, more narrow action versus broad sweeping changes? Yeah, there's a lot there. I mean, if you go back to the old days, IBM had, what, 70% of the computer business globally, and AT&T had 90% or so of the American telecom market. So market shares that today's players can only dream of. Intel and Microsoft had 90% of the personal computer market. And then you look at today, the big five, and as wealthy and as incredibly successful as they've been, you sort of have almost the argument that's wrong on the face of it. How can five companies, all of which compete with each other to at least some degree, how can they all be monopolies? And the reality is that they're not monopolies, they're oligopolies, they're very powerful firms, but none of them have an outright monopoly on anything. There are competitors in all the spaces that they're in and probably increasingly so. And so, yeah, I think people conflate the extraordinary success of the companies with this belief that therefore they are monopolists and I think they're far less so than those in the past. Great. I want to do a quick drill down into cloud computing. It's a key component of digital business infrastructure in his book, seeing digital Dave Michela coined a term, the matrix or the key, which is really referred to the key technology platforms on which people are going to build digital businesses. Dave, we joke, you should have called it the metaverse. You were way ahead of your time. But I want to look at this ETR chart. We show spending momentum or net score in the vertical axis, market share or pervasiveness in the data set on the horizontal axis. We show this view a lot. We put a dotted line at the 40% mark, which indicates highly elevated spending. And you can sort of see Microsoft in the upper right. It's so far up to the right, it's hidden behind the January 22 and AWS is right there. Those two dominate the cloud far ahead of the pack including Google Cloud, Microsoft and to a lesser extent, AWS. They dominate in a lot of other businesses, productivity, collaboration, database, security, video conferencing, Mar-Tech with LinkedIn, PC software, et cetera, et cetera. Googles or alphabets business of course is ads and we don't have similar spending data on Apple and Facebook, but we know these companies dominate their respective businesses. But just to give you a sense of the magnitude of these companies, here's some financial data that's worth looking at briefly. The table ranks companies by market cap in trillions, that's the second column and then everyone in the club but meta. And each has revenue well over $100 billion Amazon approaching half a trillion dollars in revenue. The operating income and cash positions are just mind boggling and the cash equivalents are comparable or well above the revenues of highly successful tech companies like Cisco, Dell, HPE, Oracle and Salesforce. They're extremely profitable from an operating income standpoint with the clear exception of Amazon and we'll come back to that in a moment. And we show the revenue multiples in the last column, Apple, Microsoft and Google just insane. And Dave, there are other equally important metrics. Cap X is one which kind of sets the stage for future scale and there are other measures. Yeah, including our research and development where those companies are spending hundreds of billions of dollars over the years. And I think it's easy to look at those numbers and just say, this doesn't seem right. How can any companies have so much and spend so much? But if you think of what they're actually doing those companies are building out the digital infrastructure of essentially the entire world. And I remember once meeting some folks at Google and they said, you know, beyond AI, beyond search beyond Android, beyond all the specific things we do the biggest thing we're actually doing is building a physical infrastructure that can deliver search results on any topic in microseconds and the physical capacity that they built costs those sorts of money. And when people start saying, well we should have lots and lots of smaller companies. Well, that sounds good, but you have to, where are those companies going to get the money to build out what needs to be built out? And, you know, every country in the world is trying to build out its digital infrastructure and some are going to do it much better than others. I want to just come back to that chart in Amazon for a bit. You know, notice they're comparatively tiny operating profit as a percentage of revenue. Amazon is like Bezos giant lifestyle business. It's really never been that profitable. Like most retail, however, there's one other financial data point about around Amazon's business that we want to share. And this chart here shows Amazon's operating profit in the blue bars and AWS's in the orange. And the gray line is the percentage of Amazon's overall operating profit that comes from AWS. That's the right most access. So last quarter, we were well over 100% underscoring the power of AWS and the horrendous margins in retail. But AWS is essentially funding Amazon's entrance into new markets, whether it's grocery or movies, Bezos moves into space. So Dave, a while back you collaborated with us and we asked our audience, what could disrupt Amazon? We came up with your detailed help, a number of scenarios as shown here. And we asked the audience to rate the likelihood of each scenario in terms of its likelihood of disrupting Amazon with a 10 being highly likely. And on average, the score was six with complacency, arrogance, blindness, you know, self-inflicted wounds really taking the top spot with 6.5. So Dave is breaking up Amazon the right formula in your view. Why or why not? Yeah, there's a couple of things there. The first is sort of the irony that when people in the sort of regulatory world talk about the power of Amazon, they almost always talk about their power in consumer markets, whether it's books or retail or impact on malls or you know, main street shops or whatever. And as you say, they make very little money doing that. The interest people almost never look at the big cloud battle between Amazon, Microsoft, on a lesser extent, Google or Alibaba or others, even though that's where they're by far highest market share and pricing power and all those things are. So the regulatory focus is sort of weird, but you know, the consumer stuff obviously gets more appeal to the general public. But that survey you referred to to me was interesting because one of the challenges I sort of sent myself is like, okay, well, if I'm gonna say that IBM's case, AT&T's case, Microsoft's case, in all those situations, the market was the one that actually minimized the power of those firms and therefore the antitrust stuff wasn't really necessary. Well, how true is that going to be again? Just as it's been true in the past, doesn't mean it's true now. So you know, one of the possible scenarios over the 2020s that might make it all happen again. And so each of those were sort of questions that we put out to others. But the ones that to me, but by far are the most likely, I mean, they have the traditional one of company cultures sort of getting fat and happy and all that. That's always the case. But the more specific ones, first of all, by far I think is China. You know, Amazon retail is a low margin business. It would be vulnerable if it didn't have the cloud profits behind it. But imagine a year from now, two years from now, trade tensions with China get worse. And you know, some Christmas comes along and China just says, well, you know, American consumers, if you want that new exercise bike or you know, that new shoes or clothing, well, anything that we make, well, actually that's not available on Amazon right now, but you can get that from Alibaba. And you know, maybe in America, that's a little more far-fetched, but in many countries around the world it's not far-fetched at all. And so the retail division's vulnerability to China is just seems pretty obvious. You know, another possible disruption, you know, Amazon has spent billions and billions with their warehouses and their robots and their automated inventory systems and all the efficiencies that they've done there. But you know, you could argue that maybe someday that's not really necessary that you know, you have search which finds where a good is made and a logistical system that picks that up and delivers it to customers. And why do you need all those warehouses anyways? So those are probably the two top ones, but you know, there are others. I mean, you know, a lot of retailers as they get stronger online, maybe they start pulling back some of the premium products from Amazon. Amazon takes their cut of whatever, 30% or so. People might want to keep more of that in the house. You see some of that going on today. So the idea that, you know, the Amazon is invulnerable disruption is probably wrong. And it's part of the work that I'm doing is part of the stuff I'll do with Dave and Silke. So in angle is, you know, how's that true for the others too? What's one of the scenarios for Google or Apple or Microsoft and the scenarios are all there. And so, you know, will these companies be disrupted if they have in the past? Well, you can't say for sure, but the scenarios are certainly plausible and I certainly wouldn't bet against it. And that's what history tells us. And it could easily happen once again. And therefore, you know, and you trust people to at least be cautionary and humble and realize that maybe they don't need to act as much as they think. And now one of the things that you mentioned in your piece was, you felt like narrow remedies were more logical. So you're not arguing for totally laissez faire. You're pushing for remedies that are more targeted in scope. And while the EU just yesterday announced new rules to limit the power of tech companies and we showed the article and some comments here, the regulators, they took the social media to announce a victory and they had a press conference. I know you watched that. It was sort of a back slapping fest. The comments, however, that we've sort of listed here are mixed. Some people applauded, but we saw many comments that were, hey, this is a horrible idea. This was rushed together and these are going to result, as you say, in unintended consequences. This is serious stuff. They're talking about applying what appear to be, to your point, your prescription, more narrowly defined restrictions, although a lot of them, to any company with a market cap of more than 75 billion euro or turnover of more than 7.5 billion euro, which is a lot of companies. And opposing huge penalties for violations, up to 20% of annual revenue for repeat offenders. Wow. Again, you've taken a brief look at these developments. You watched the press conference. What do you make of this? This is an application of more narrow restrictions, but in your quick assessment, did they get it right? Yeah, let's break that down a little bit, start a little bit of history again and then get to Europe, because although big sweeping breakups of the type that were proposed for IBM, Microsoft, weren't necessary, that doesn't mean that the government didn't do some useful things because they did. In the case of IBM, government forces in Europe and America basically required IBM to make it easier for companies to make peripherals, tape drives, disk drives, printers that worked with IBM mainframes. They made them unbundle their software pricing that made it easier for database companies and others to sell their products. With AT&T, it was the government that required AT&T to actually allow other phones to connect to the network, something they argued at the time would destroy security or whatever. It was the government that required them to allow MCI, the long distance carrier, to connect to the AT network for local deliveries. And with Microsoft and Intel, the government required them to at least treat their suppliers more evenly and handily in terms of pricing and policies and support and such things. So the lessons out there is the big stuff wasn't really necessary, but the little stuff actually helped a lot. And I think you can see the scenarios and argue in the piece that there's little stuff that can be done today. In all the cases for the big five, there are things that you might wanna consider. The companies aren't saints, they take advantage of their power, they use it in ways that sometimes can be reined in and make for better off overall. And so that sort of brings us to the European piece of it. And to me, the European piece is much more the bad scenario of doing too much than the wiser course of trying to be narrow and specific. What they've basically done is they have a whole long list of narrow things that they're all trying to do at once. So they want Amazon not to be able to share data about its selling partners and they want Apple to do, open up the app store and they don't want Google to be able to share data across its different services and Android search, mail or whatever. And they don't want Facebook to be able to, they want to force Facebook to open up to other messaging services. And so, and they wanna do all these things for all the big companies, all of which are American and they wanna do all that starting next year. And to me, that looks like a scenario of a lot of difficult problems done quickly, all of which might have some value have done really, really well, but all of which have all kinds of risks for the unintended consequence we've talked before. And therefore they seem to me, being too much too soon and the sort of problems we've seen in the past. And frankly, to really say that, I mean, the Europeans would never have done this to the companies if they're European firms. They're doing this because they're all American firms and the sort of frustration of Americans firms dominance of the European tech industry has always been there going back to IBM, Microsoft, Intel and all of them. But it's particularly strong now because the tech business is so big. And so I think the politics of this, of at a time where we're supposedly all this great unity of America and NATO and Europe in regards to Ukraine, having the Europeans essentially go after the most important American industry brings in the geopolitics in a, I think an unavoidable way. And I would think this story is going to get pretty tense over the next year or so. And as you say, the Europeans think that they're taking massive actions. They think they're doing the right thing. They think this is the natural follow on to the GDPR stuff and even a bigger version of that. And they think they have more to come and they see themselves as the people taming big tech, not just within Europe, but for the world and absent any other rules that they may pull that off. I mean, GDPR has indeed spread despite all of its flaws. So the European thing, which it doesn't necessarily get huge attention here in America is certainly getting attention around the world. And I would think it'd get more, even more going forward. And the caution there is the US public policy makers, maybe they can provide, they will provide a tailwind, not maybe it's a blind spot for them. And it could be a template, like you say, just like GDPR. Okay, Dave, we got to leave it there. Thanks for coming on the program today. Always appreciate your insight and your views. Thank you. Dave, thanks a lot Dave. All right, don't forget these episodes are all available as podcasts wherever you listen. All you got to do is search breaking analysis podcast, check out ETR's website at etr.ai. We publish every week on wikibon.com and siliconangle.com. And you can email me david.volante at siliconangle.com or DM me at dvolante. Comment on my LinkedIn post. This is Dave Vellante for Dave Michela for theCUBE Insights, powered by ETR. Have a great week, stay safe, be well, and we'll see you next time.