Investors in the biggest technology issues have had a rude awakening over the past several weeks. Early this month, stories broke that U.S. government regulators, led by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC), have been preparing to launch investigations into big tech. The two agencies, which share antitrust authority, have been in talks to iron out any jurisdictional issues in advance of the probes.
Some of the best-known technology companies in the world -- Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Amazon.com (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Google parent Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) -- make up the vaunted FAANG acronym. U.S. government antitrust watchdogs are reportedly targeting four of the five, but one is curiously absent from the list -- streaming giant Netflix.
Let's see why Netflix hasn't fallen under the gaze of regulators and if that makes the stock a buy.
What the government watchdog says
In a recent speech, the DOJ's antitrust chief, Assistant Attorney General Makan Delrahim, laid out a number of factors the government can consider when deciding to bring an antitrust case. Some have suggested that current antitrust laws -- many of which were created in the early 1900s to deal with the robber barons and monopolies of the day -- are insufficient to regulate big tech in the digital age.
Delrahim disagrees, arguing, "Many recent calls for antitrust reform, or more radical change, are premised on the incorrect notion that antitrust policy is only concerned with keeping prices low."
He laid out a number of tests regulators can employ to determine if antitrust law has been violated, many of which don't involve price competition, which has been one of the primary factors in deciding if consumers have been harmed. "Price effects alone do not provide a complete picture of market dynamics, especially in digital markets in which the profit-maximizing price is zero," he said. Delrahim points out that existing antitrust rules can also rely on "non-price dimensions."
"We already have in our possession the tools we need to enforce the antitrust laws in cases involving digital technologies," he said. "U.S. antitrust law is flexible enough to be applied to markets old and new."
What the other FAANGs are doing that Netflix isn't
Perhaps the easiest way to assess why Netflix isn't being investigated is to understand why the other FAANG components are being probed.
Delrahim pointed to exclusivity agreements as evidence of anticompetitive activity: "Generally speaking, an exclusivity agreement is an agreement in which a firm requires its customers to buy exclusively from it, or its suppliers to sell exclusively to it." European regulators hit Google with a $1.7 billion fine for forbidding AdSense customers from placing advertising with competing search engines.
Another example Delrahim gave was from the Microsoft antitrust case, part of which hinged on Internet Explorer's being linked to the Windows operating system, which prevented users from uninstalling the Web browser. Similar arguments might be used in a case against Apple, which has been criticized for the rules surrounding its App Store -- which comes preinstalled on the iPhone -- and the fees it charges developers to sell apps there. In addition, the Supreme Court recently allowed an antitrust lawsuit from consumers against Apple to proceed.
Delrahim seemed to be taking potshots directly at Facebook when he said, "By protecting competition, we can have an impact on privacy and data protection." Facebook has struggled in recent years with numerous lapses in consumer data protection and faces a record fine from the FTC for its indiscretions.
While Delrahim didn't mention a specific company, he also pointed to "acquisitions of early-stage companies" as a potential stumbling block for big tech. Acquiring these nascent competitors and killing or assimilating their products essentially curtails competition by reducing consumer choices. Each transaction would be subjected to the "no economic sense test." Delrahim submitted that in some cases a decision or acquisition makes no economic sense, except to "eliminate of lessen competition." In this case, each of the FAANG stocks (save Netflix) has made any number of early-stage acquisitions, but it will be up to regulators to decide the purpose and intent of those purchases.
Recent reports suggest that the government antitrust watchdogs have resolved their jurisdictional issues, with the DOJ taking oversight authority over Google and Apple, while the FTC will probe Amazon and Facebook.
What makes Netflix different?
In stark contrast to its big tech brethren, Netflix has avoided the consumer data privacy scandals and doesn't share consumer data with advertisers or others -- but rather uses the data it collects to improve its streaming offerings. Additionally, the company has made only two acquisitions in its nearly 22-year history -- that of comic book house Millarworld and the recent addition of children's educational media brand StoryBots, neither of which reduced competition.
Even as Netflix dominates the streaming market, the company has faced increasing competition every step of the way. Existing front-runners like Amazon Prime and Hulu will soon be joined by offerings from Apple and Disney's flagship streaming service, Disney+.
At the same time, Netflix's growth continues unabated. In the first quarter, the company generated revenue of $4.5 billion, up 22% year over year, while global paid streaming memberships came in at nearly 149 million, up 25% from the prior-year quarter. Average revenue per user grew 3% year over year, in light of recent price increases that are gradually being rolled out around the world.
With solid continuing growth and the absence of scrutiny among regulatory agencies, Netflix gets you the best bang for your FAANG buck.
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