Brexit, Ocado Trading and Facebook Law Suit

As I expected Boris Johnson’s visit to Brussels did not produce a positive outcome. A firm deadline of Sunday has been set for concluding discussions. I suspect that will be another deadline passed, and it won’t be the end of talks completely. In the meantime, the EU has unveiled plans to prevent chaos in case of a no-deal Brexit. Specifically planes between the UK and Europe will continue to fly and trucks will be able to continue crossing the Channel. The EU is also proposing temporary measures on fishing rights. These temporary measures could last for many months I suspect.

Good results from Ocado (OCDO) this morning in terms of revenue, driven by the epidemic encouraging internet food shopping. With three new warehouses opening in 2021, which will ultimately give the company 40% more capacity to the business, that is a positive trend as customers have been hampered by limited delivery slots. But they are finding it difficult to sell their technology solutions it seems because of the travel restrictions on which much of the future value of the company depends. The share price has fallen by 6% at the time of writing.

The real big news on the financial scene though is the law suit launched by the US Federal Trade Commission against Facebook. They allege the company has demonstrated anti-competitive behaviour particularly by the acquisition of Instagram and WhatsApp who were potential competitors. But it cites other issues as in addition. They wish to break up the company. The legal action is supported by attorney generals in individual states.

The big problem is that Facebook is a natural monopoly as more people are attracted to the biggest network. So it’s rather like AT&T and the Bell operating companies who used to have a monopoly over US phone traffic and were broken up in the 1970s by an anti-trust law suit.

Also it’s reminiscent of the break-up of Standard Oil even earlier who developed such a dominant control of oil production, refineries and even rail transit lines that they could force competitors out of business. Google (Alphabet) is also facing a big anti-trust lawsuit because of its very dominant position in the search engine market.

Comment:  These lawsuits will probably take years to come to a conclusion but they are clearly a major threat to Facebook and Google. Regrettably it’s probably a case of power going to the heads of the chief executives of these companies where they think they can do no wrong. In the case of Standard Oil and Rockefeller he argued, unsuccessfully, that their monopolistic position was for the good of their customers because it avoided wasteful competition and enabled products to be delivered at the lowest possible prices. No doubt Zuckerberg may use similar arguments which may not get upheld by the courts, but it’s not easy to see how the core Facebook product could be broken up.

The dominant positions of Facebook and Google in internet advertising should be the bigger target though which is what is generating most of their profits. There are surely some solutions to that such as price controls or giving other companies the ability to piggy-back on the companies’ software platforms. Lawyer’s can get very creative on possible solutions.

Note: I hold a few shares in Ocado, but not many because the valuation of the company looks like it is based on future hope that it will be a world beater rather than actual short term financial data. I do not hold Facebook or Alphabet, but no doubt like many readers, do hold them indirectly because of holdings in funds. The threat to their finances may be long-term rather than short-term, particularly bearing in mind how long anti-trust law suits take to run through the courts.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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