On April 15 1994, the chief executives of America’s seven largest tobacco companies were hauled to Washington to appear before US politicians. In front of a Congressional committee on health, the “seven dwarfs” faced a humbling moment, a sign that regulators had turned on cigarettes.
Each of them swore that nicotine was not addictive, presenting a united front against a hostile committee. It did not work: four years later, the tobacco industry agreed a $206bn (£162bn) settlement to resolve dozens of government lawsuits.
On Wednesday, similar attention will be turned towards today’s corporate bogeyman: Silicon Valley. Apple’s Tim Cook, Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos and Google’s Sundar Pichai are due to appear in front of Congress’s antitrust subcommittee.
The hearing, orginally due to be held tomorrow, was postponed because of plans to honour Representative John Lewis, the civil rights icon who died earlier this month.
On Wednesday, the four horsemen of tech could avoid the courtroom drama of standing to take oaths, since they have the option of testifying by video call, but the companies’ antagonists hope the hearing, which is expected to take place on Aug 3, will be a moment similar to that when the tobacco industry was brought to heel.
The timing couldn’t be worse. Next week, all four of the tech giants are expected to provide fresh evidence of their power when they report their quarterly results.
Amazon and Apple in particular, which both report results on Thursday, are expected to be lifted by demand for products and services from people staying at home during the pandemic.
Apple, which generated sales of $124bn in the six months ending March 28, is forecast to beat Wall Street expectations on Thursday. Katy Hubery, an analyst at Morgan Stanley, says strong product revenues and growth from its services division will help it beat forecasts. She expects the company to report revenue of $55.1bn, compared with $58.3bn in the second quarter of the year.
Amazon, meanwhile, is expected to avoid posting its first quarterly loss in five years on Thursday week despite earlier warnings over heavy spending, thanks to major gains in users of its one-day delivery service and cloud capabilities. Bezos had told investors in April that normally the company would “expect to make some $4bn or more in operating profit” in the second quarter.
Apple’s 32pc surge in 2020 increased its market capitalisation to $1.61 trillion, while Amazon is at $1.49 trillion. The big tech companies together are now worth $5.85 trillion – nearly treble the combined market valuation of all the companies in the FTSE 100, which stands at £1.7 trillion ($2.1 trillion).
Over a grilling expected to take several hours, the executives of these tech giants will have to convince the committee that they do not deserve to have their power curtailed.
It is two decades since the US government took on Microsoft over allegations it illegally crushed competition, a case credited with opening the market for the iPhone and Google. Since then, America has employed a light-touch approach to tech monopolies.
Deals such as Facebook’s acquisition of Instagram and Google’s of YouTube received little attention. The most high-profile investigation, into Google’s search results, ended in 2013 with no charges.
Silicon Valley’s main competition watchdog has instead been Europe. EU commissioner Margrethe Vestager has pursued multiple cases resulting in fines of billions of euros. Regulators in Germany, France, and most recently the UK’s Competition and Markets Authority (CMA), have also studied the companies.
They have done little to stop their rise, but Maurice Stucke, a former US Justice Department prosecutor now at the University of Tennessee, says that the investigations have all laid the groundwork for US prosecutions.
“The French and German inquiries helped inform the CMA,” he said. “The CMA says its findings could help inform [others], so they’re building a foundation on each other’s work. The agencies don’t have to recreate the wheel.”
The US’s hands-off approach is changing. The Department of Justice is expected to charge Google within weeks in a case expected to focus on its giant advertising business, which accounted for $135bn of the company’s $161bn total revenues last year.
The Federal Trade Commission, America’s other competition authority, is investigating Facebook’s dominance of social media, estimated at 80pc of industry revenues. A joint probe by 48 of America’s 50 states is also focused on the two companies.
The investigations are believed to have closely followed that of the CMA, which concluded last month that Facebook and Google “are now protected by such strong incumbency advantages… that potential rivals can no longer compete on equal terms”, and that remedies could include splitting the companies up.
America has a history of break-ups, most famously Standard Oil and the telecoms monopoly AT&T. Similar measures against tech giants are not out of the question.
Google could be forced to spin off parts of a complex chain of businesses that allows it to dominate each stage of how adverts are bought, sold and placed online. “Google has made the most of these opportunities… to engage in arbitrage and rent-seeking,” says a report published by the Omidyar Network.
Facebook, meanwhile, could be forced to undo its takeovers of Instagram and WhatsApp, an idea that has even been backed by one of its co-founders, Chris Hughes.
Amazon and Apple occupy a second tier of interest for regulators. “We believe federal and state antitrust enforcers right now are more concerned about Google, and to some extent Facebook,” researchers at Beacon Policy Advisors said in a note.
But scrutiny is growing. Cook has insisted that Apple’s minority share of smartphone sales means it is not a monopoly, but the company’s shift from relying on hardware sales to digital media such as apps, music and news increasingly puts it at odds with suppliers of those services.
Last week, Apple felt compelled to release a report defending the 30pc commission it charges developers for purchases made on its App Store.
Mark Thompson, the outgoing chief executive of the New York Times and former director general of the BBC, last month pulled the US newspaper’s material from Apple News, the iPhone maker’s news aggregation app. News publishers say Apple demands too much control over the presentation of their journalism and too great a share of subscription revenue in exchange for easier access to iPhone users.
“It is entirely reasonable that authorities on both sides of the Atlantic should ask all the right questions about these gigantic companies,” says Thompson, although he is wary that regulation risks making news publishers financially dependent on rules set by politicians. “My blood really runs cold when I hear the future could be a kind of government-regulated subsidy from Silicon Valley companies into publishers.”
Amazon also disputes claims it is a monopoly, saying last year it represented just 4pc of US retail sales. But sellers that rely on its website have alleged that it unfairly uses data about their sales to launch copycat products.
Bezos’s Washington grilling will be his first. A feud with Donald Trump, stemming from his ownership of the Washington Post, means the world’s richest man could face more heat than his rivals.
Investigators will fear the possibility of the hearing descending into political theatre, instead of surgical questioning. Republicans made a last-minute attempt to add Jack Dorsey, Twitter’s chief executive, to the roster last week. His company is a minnow compared to the other four, but has been a target after recent decisions to censor Trump’s tweets.
Zuckerberg and Pichai would prefer to play a different political game, one they believe could shield them from heavy-handed regulation. In recent months, Facebook and Google have said hurting them only aids the rise of China by letting its biggest internet companies grow without competition.
Stucke, the former prosecutor, says this is unlikely to be a winning strategy. “There’s always the argument that we need national champions to compete on a world stage. We’ve seen that before, and it fails.”
If the four horsemen expect patriotism to protect them from being broken up, the hostile reception they are likely to face from Washington tomorrow might change their mind. After all, America’s tobacco executives might have expected the same thing.
Additional reporting by Christopher Williams