Once shielded by the logic of Silicon Valley’s relentless churn of innovation – which dictated that no reigning tech empire could rule for long before going the way of Yahoo and AOL – tech giants like Facebook, Amazon and Google have been subjected to intensifying anti-trust pressure – Elizabeth Warren’s “Break up Big Tech”s billboard is only the latest example. Indeed, big tech trust-busting has become one of the few issues in contemporary Washington that garners genuine bipartisan support.

Since the Trump administration swept into power two years ago in spite of thinly veiled opposition from Silicon Valley – as it was later revealed, big tech effectively conspired with the Clinton campaign to hurt Trump’s chances – the drumbeat of unprecedented anti-trust scrutiny has grown steadily louder, facilitated by the president’s own publicly-voiced suspicions.

And on Friday, the levee finally broke.

Just before midnight on Friday, at the close of what was a hectic month for markets, WSJ dropped a bombshell of a story: The paper reported that the DoJ has opened an anti-trust investigation of Alphabet Inc., which could “present a major new layer of regulatory scrutiny for the search giant, according to people familiar with the matter.” The report was sourced to “people familiar with the matter,” but was swiftly corroborated by the New York Times, Bloomberg and others.

For months now, the FTC has appeared to be gearing up for a showdown with big tech. The agency – which shares anti-trust authority with the DoJ – has created a new commission that could help undo big-tech tie-ups like Facebook’s acquisition of Instagram, and hired lawyers who have advanced new anti-monopoly theories that would help justify the breakup of companies like Amazon.

But as it turns out, the Trump administration’s first salvo against big tech didn’t come from the FTC; instead, this responsibility has been delegated to the DoJ, which has reportedly been tasked with supervising the investigation into Google.

That’s not super surprising, since the FTC already had its chance to nail Google with an anti-monopoly probe back in 2013. But the agency came up short. From what we can tell, it appears the administration will divvy up responsibility for any future anti-trust investigations between the two agencies, which means the FTC – which is already reportedly preparing to levy a massive fine against Facebook – could end up taking the lead in those cases.

Though WSJ didn’t specify which aspects of Google’s business might come under the microscope, a string of multi-billion-euro fines recently levied by the EU might offer some guidance. The bloc’s anti-trust authority, which has been far more eager to take on American tech giants than its American counterpart (for reasons that should be obvious to all), has fined Google over its practice of bundling software with its standard Android license, the way its search engine rankings favor its own product listings, and ways it has harmed competition in the digital advertising market.

During the height of the controversy over big tech’s abuses of sensitive user data last year, the Verge published a story speculating about how the monopolistic tendencies of each of the dominant Silicon Valley tech giants could be remedied. For Google, the Verge argued, the best remedy would be a ban on acquisitions – a strategy that has been bandied about in Congress.

Our best model for tech antitrust is the Department of Justice’s anti-bundling case against Microsoft in the ’90s, which argued that Microsoft was using its control over the PC market to force out competing operating systems and browsers. If you’re looking for a contemporary equivalent, Google is probably the closest fit. On a good day, Google (or Alphabet, if you prefer) is the most valuable company in the world by market cap, with dozens of different products supported by an all-encompassing ad network. Google also has clear and committed enemies, with Microsoft, Oracle, Yelp, and even the Motion Picture Association of America calling for restrictions on the company’s power. But according to Open Markets’ Matthew Stoller, the best long-term remedy for Google’s dominance has more to do with Google’s acquisitions. “If you’re looking for a silver bullet, probably the best thing to do would be to block Google from being able to buy any companies,” says Stoller. “Suddenly, you have to compete with Google, you can’t just be bought out by Google.” That might sound tame compared to Europe’s billion-dollar fines, but it cuts to the core of how Google is organized. The company has acquired more than 200 startups since it was founded, including central products like YouTube, Android, and DoubleClick. The company’s modular structure is arguably a direct result of that buying spree, and it’s hard to imagine what Google would look like without it. More recent buys like Nest have fallen under the broader Alphabet umbrella, but the core strategy hasn’t changed. Would Google still be an AI giant if it hadn’t bought DeepMind? Probably, but everyone involved would have had to work a lot harder. Even better, anti-monopoly activists would have a bunch of different ways to block those acquisitions. The Department of Justice’s antitrust division hasn’t contested Google’s acquisitions so far, but it could always change its approach. The strongest fix would come from Congress, where Sen. Amy Klobuchar (D-MN) has introduced a bill that would place an outright ban on acquisitions by any company with a market cap higher than $100 billion. (As of press time, Google is worth roughly $840 billion.)

We feel it’s no exaggeration to say that this is only the beginning of what could become an epoch-defining story arch. And like every good story, this one will have main characters and bit players. As far as we can tell, one of the leading roles will likely be played by Justice Department antitrust chief Makan Delrahim, a previously obscure Trump Administration official who is now in charge of one of the most consequential investigations in recent memory.

Setting aside what it might mean for Silicon Valley, the investigation will also have major ramifications for markets, since shares of the big tech companies have been at the vanguard of the torrid post-crisis bull market. Though the influence of FANG stocks on overall market performance has waned this year, they remain hugely influential.

Tech giants are far and away the biggest contributors to SPX sales growth…

…and they have generated nearly all SPX after-tax adjusted profit margin since the crisis.

If the DOJ going after $GOOG is (1) real and (2) indicative of anti trust being back and DC going after SF, SAAS is fucked. These names are all trading on bets that they get to some scale where they’re intrenched and then get bought out. — MUGATU (@SuperMugatu) June 1, 2019

Everyone in the business, myself included, will spend the weekend trying to figure out (1) and (2), but it’s curious that $GOOG is the name and not $FB or others. An argument could be made that it’s more ominous, as any progress against $GOOG would likely be easy to carry over. — MUGATU (@SuperMugatu) June 1, 2019

Regarding SAAS, the ownership concentration in high sales multiple names across sectors is fairly extreme. Damage to IPO pipeline, bullshit like $BYND or $TLRY (Basically, Cowen’s 2019 banking business) could be severe. — MUGATU (@SuperMugatu) June 1, 2019

So many portfolios in hedge funds and retail are so insanely overweight 1-3 factors here, this could cause some very serious cascading unwinds. Not saying it will, but the market structure set up is *nasty*, and could become self fulfilling. pic.twitter.com/Zeg41lQ0BN — MUGATU (@SuperMugatu) June 1, 2019

Serious thought needs to be given to:

1) what if big tech is out?

2) what’s priced in?

3) who owns what? Correlation?

4) loss tolerance of those pools?

5) if that stuff unwinds, what becomes unfundable? What does it do to demand for IPOs, etc of the large Private VC/growth books? — MUGATU (@SuperMugatu) June 1, 2019

A lesson I’ve learned the hard way before: when the growth guys are forced out, it’s a long way down until the value guys step in. But this is across not just A sector, but “the sector of the future.” A senior guy at Blackrock told me there was no reason to look anything but SAAS — MUGATU (@SuperMugatu) June 1, 2019

Also, IMHO Trumo’s DOJ doing this (if true) the day after engaging in a second trade war sort of takes the probability of him being a complete fucking idiot to 90+% and completely eliminated any “he’s actually got a plan” permutations. Or he’s legit a world champ Jenga player. — MUGATU (@SuperMugatu) June 1, 2019

Also would note active managers vol tolerance is at all time lows and many / most face existential firm risk after the last few years. They’re not going to gut our major uncertainty here. Especially with a decent start to 2019 and macro + cycle ????? — MUGATU (@SuperMugatu) June 1, 2019

As a counterpoint, it’s worth remembering that the presence of two new business-friendly conservative judges on the Supreme Court will make the DoJ’s job that much harder, and could ultimately tip the scales in favor of Big Tech winning this battle.

News of the investigation could adversely impact shares of the big tech companies, which will in turn create a serious drag for the major indexes. For investors, it will be one more threat to a bull market which is already teetering thanks to President Trump’s trade war with China (and now Mexico).

We imagine we’ll be hearing more about the probe through both official and unofficial channels in the coming weeks.

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