Big Tech Fraud Alert (4 min read)

When it comes to Facebook, Amazon, Apple, Netflix, Google, and Microsoft – or the FAANG+M complex – most of us love (or at least can’t live without) their products. Yet their uncanny ability to track our behaviour online and their sheer economic heft also leaves many of us concerned.

Now, at last, politicians and regulators are beginning to take notice. For example, the Federal Trade Commission is starting an anti-trust investigation of Facebook, and the Justice Department is initiating one of Amazon. But what can we expect from these?

Anti-Trust Actions Won’t Work

Don’t hold your breath. Anti-trust law in the US is a notorious tangle of provisions aimed at various aspects of anti-competitive behaviour. But the bottom line is that only effective strategy with these provisions appears to prosecute companies for using their substantial market power to set prices higher than they would be in a more competitive market. Even then, proving that such is the case is all but impossible. The last three big anti-trust trials (AT&T, IBM, and Microsoft) took years to litigate and achieved, at best, ambiguous outcomes.

Still, even if the anti-trust approach did manage to force these mega companies to break up, it probably wouldn’t address the real underlying problem – namely the inability of these companies to control the ‘anything-goes’ ethos of their platforms. If recent news stories are a good indication, this problem may be getting worse. And it is this, not anti-trust issues, that investors should be concerned about.

Fake News, Fake Products, and Fake Businesses

Recently, for example, the New York Times published a front page article reporting that Amazon is being overrun by counterfeit and plagiarized books. These are often nothing more than simple scans of originals that sell well but with a slightly different cover and title, and, of course, author. Often they also come with obviously faked reviews. Typically, the original authors only find out what’s going on when sales of their books fall sharply and they poke around to figure out why. Once they find the culprit their only recourse currently seems to be to report the problem and hope Amazon removes the offensive materials. To its credit, Amazon usually does. But Amazon has few checks or safeguards to prevent counterfeit materials from being marketed on its site in the first place, perhaps because there’s little incentive. Indeed, both the company and the fake authors make money until the bad materials are removed.

In another front page article, this time from the Wall Street Journal, it was revealed that Google Maps is listing thousands of fake businesses that lure people into various kinds of scams. Over the past couple of years, Google has been integrating Google Maps into its advertising platform so that when someone searches for a local service a map may pop up to mark the location and contact details for relevant businesses. People have come up with a variety of scams to take advantage of this feature, such as hijacking the name and address of a legitimate business but posting the scammer’s phone number. In other instances, an out-of-town company may create fake local addresses to give the impression that it is nearby.

Google has procedures to try to weed out unauthentic listings before they go live, but it is easy to run circles around them. One enterprising fraudster can generate upward of 3,800 fake listings a day, reportedly taking in $8,599 for a hundred-pack of listings. Like Amazon, Google removes fake listings if someone reports them – but until then, Google and the scammer can earn substantial amounts, apparently with impunity.

Both Google and Amazon say that fake listings comprise only a small fraction of their total offerings, but some independent analysts reportedly disagree. And while both companies say that they are committed to fixing these problems – the fact that the problems seem to be growing suggests even more resources than currently committed will have to be devoted to solve them.

Policy Tools Not Ready (Yet)

Don’t look to anti-trust law to address this kind of fraud. Much of the law and regulation that addresses plagiarism or false advertising has a number of problems. For example, it is typically limited to the state or local level, or it is too focused on specific types of fraud. Further, the fraud itself is often very difficult to prove, or it simply doesn’t amount to significant enough material damage at the individual level to merit prosecution. Whether by design or not, Amazon and Google are driving a big truck through a multitude of legal loopholes, and caveat emptor has become effectively the law of the land.

But although they may be getting away with it for now, it is this kind of consumer abuse – rather than anti-trust or even privacy concerns – that may prove to be the Achilles heel of the FAANG+M complex. If they can’t stop scammers, they may eventually find themselves on the wrong side of new laws and regulations that hold them accountable for what appears on their platforms.

The costs of compliance in terms of deterrence and foregone business opportunities would do more to crush their business models than any anti-trust settlement could.

Granted, this brand of regulation is currently little more than a whisper as many pin their hopes on the anti-trust tack. While developments on this front may lead to some headline risk or even a meaningful selloff at times, these episodes will probably present attractive buying opportunities. It’s the other potential regulatory developments somewhere over the horizon that merit ongoing vigilance.

 

 

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role. He can be reached here.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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