Ian Cowie: the threat to tech I am keeping an eye on

Our columnist explains why the tech giants face their biggest threat since the dot.com bubble burst 20 years ago. 

Technology giants are big beneficiaries of the coronavirus crisis, but now face their biggest threat since the dot.com bubble burst 20 years ago. Online shopping and working from home are both boosting ‘Big Tech’ at the expense of bricks and mortar rivals, prompting talk about de-populated cities and the end of the high street.

To use an analogue age analogy, it is an ill wind that blows no good. This individual investor is sad to see jobs being lost as familiar shops close but glad I began investing in Polar Capital Technology (LSE:PCT) more than a decade ago. 

PCT, whose half-year results were published on 11 December, is the third most valuable holding in my ‘forever fund’, following Apple (NASDAQ:AAPL) andITM Power (LSE:ITM). The trust reported a net asset value per share rise of 28.1% versus 23.9% for the benchmark, during the six-month period to the end of October. 

It is a measure of the explosive growth of technology that PCT’s total returns of 50% over the last year; 270% over the last five years and 515% over the last decade are only enough to earn second place in its sector. According to Morningstar, Allianz Technology Trust (LSE:ATT) is top dog with total returns of 82%, 367% and 793% over the same three periods.

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The threat the tech giants face 

Now powerful enemies are threatening to pull the plug on the tech giants. Cash-strapped countries around the globe see tighter regulation, enforced with eye-watering fines, as a way to raise revenue from digital giants in a way that conventional taxes failed to do.

This week the British government proposed multi-billion pound penalties if harmful content is not removed rapidly from social media. Online safety legislation sets out a new “duty of care” for platforms such as Facebook (NASDAQ:FB) - and its subsidiaries Instagram and WhatsApp - or Google (NASDAQ:GOOGL) - and its subsidiary YouTube.

In addition, last week the American Federal Trade Commission and a group of 48 attorneys-general hit Facebook with the first antitrust charges laid against it on home soil. If regulators can prove that the social media network deliberately acted anti-competitively when it acquired Instagram and WhatsApp, they could break up the business.

Anyone who doubts that such a thing can happen in a country committed to capitalism, red in tooth and claw, had better read about the break-up of Standard Oil a century ago. Now similar statutory intervention is being discussed by the European Union, where proposals include forcing Big Tech to sell subsidiaries.

Before your eyes glaze over, bear in mind Britain’s proposed new legislation is backed with fines equal to 10% of a company’s annual global turnover. That’s more than twice as tough as the 4% maximum fine originally proposed.

In hard cash terms, a penalty equal to 10% of Facebook’s global turnover last year would add up to $7bn (£5.2bn). Few folk are likely to shed many tears if its founder, Mark Zuckerberg, is taken down a peg or three billion and even fewer would argue against tougher laws to prevent terrorists and pederasts posting online.

If such statutory intervention happened to raise billions for cash-strapped governments, struggling to recover from the coronavirus crisis, then I suspect many could cope with their grief. Even if it hurt shareholders in Big Tech and investment trusts in this sector. 

Against all that, more of us are spending more time and money online - for business, consumption or entertainment - and it is often a good idea for investors to follow the cash. I cannot see consumers shunning the convenience of online shopping or many workers willing to surrender the freedom of working from home in favour of a return to over-crowded commuting and over-priced lunch.

So I believe the ‘new normal’ will continue after the coronavirus has been defeated, with all the unexpected economic consequences which flow from that. Either way, it would be a good idea for digital giants to defer to democratic governments, pay their taxes and seek more ‘friends’ or ‘likes’.

Ian Cowie is a shareholder in Apple (AAPL), ITM Power (ITM) and Polar Capital Technology Trust (PCT) as part of a diversified portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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