Traditional conglomerates such as GE, J&J and Toshiba are moving in a new direction

Last November, three major conglomerates – General Electric, Johnson & Johnson, and Toshiba – all revealed plans to break themselves up in an effort to maximize shareholder value. They won’t be the last to do it.

Conglomerates are large parent companies made up of smaller business units that operate across multiple markets in an effort to diversify the risk of being in a single market. The financial health of a conglomerate is difficult to discern, as the parent company reports results on a consolidated basis. Recall the key role GE Capital played for many years as the catalyst for growth and profitability at General Electric.

Johnson & Johnson (J&J), the biggest pharmaceutical company in the U.S. based on market cap of $435 billion, announced its intent to break off its consumer health division in the next 18 to 24 months. J&J is the 36th largest company in the U.S. based on total revenue, according to the 2021 Fortune 500 list.

It will spin off its consumer business, which includes such brands as Band-Aid, Tylenol, Nicorette, and Neutrogena, into a new publicly traded company by November 2023. Its prescription drug and medical device businesses will continue to operate under its banner.

What is behind these break-ups? There is an argument that these firms have all become too diversified, complicated and grown too challenging to manage efficiently.

The recent history of all three has also been tumultuous. General Electric was nearly taken down during the financial meltdown in 2008. J&J is facing over 20,000 lawsuits related to claims that its baby powder causes cancer and for its role in the opioid crisis. The firm took a hit when the Centers for Disease Control and Prevention recommended that Americans not receive its COVID vaccine because of adverse side effects. Toshiba is still trying to recover from a massive 2015 accounting scandal.

A different approach for Amazon, Facebook, Microsoft and Apple

At first blush it would appear that the era of the conglomerate and the notion that brilliant management can successfully run businesses in varied industries is over. While traditional industrial corporate conglomerates may be pushing up daises, the success of tech giants such as Amazon, Facebook (parent Meta), Microsoft, Apple, and Alphabet as modern-day conglomerates should be noted.

These firms are not throwbacks to the traditional conglomerate model whose main purpose was to allocate financial capital across various businesses and rebalance the portfolio through acquisitions and divestments.

Take Amazon for example. While the company does not describe itself as a conglomerate, it operates online and brick-and-mortar retail stores, sells outsourced computing services, runs global logistics operation, produces movies, and the beat goes on.

These tech conglomerates do differ from traditional industrial conglomerates. They have created platforms that knit together and support the varied businesses. Put differently, the businesses in these companies rely on a common infrastructure to provide the unifying thread.

A platform is essentially a marketplace that connects the supply side and the demand side. Amazon links shoppers and sellers, producers and consumers in high value exchanges. The company enables Prime members to order Whole Food deliveries on the Amazon website.

The spectacular growth of these businesses has been explained by network effects. The value of a platform depends in large part on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, leading even more people to use it. This allows business to scale up quickly and creates a competitive advantage. The tech companies are exploiting the power of platforms and the relatively low capital investment they require. These network effects are the driving force behind every successful platform.

It’s time to hold social media accountable for what appears on their platforms

Large social media platforms such as Alphabet (Google), Facebook (now Meta) and Twitter like having it both ways when it comes to taking responsibility for the content on their platforms.

On one hand, they say they are merely platforms for people who post content, and as platform providers are not responsible for what appears. On the other hand (isn’t there always), they actively determine what appears on their platforms, in the same way newspapers decide what stories to run.

Can social media platforms really say with a straight face that they are not responsible for what appears on their platforms when they determine what constitutes suitable content?

Internet social media platforms are granted broad safe harbor protections against legal liability for any content users post on their platforms. The arguments these platforms make for escaping legal liability are spelled out in one sentence in Section 230 of the 1996 Communications Decency Act: “No provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In essence, Section 230 gives websites immunity from liability for what their users post.

As Congress considers amending or repealing Section 230, perhaps one immediate step should be to give the Federal Communications Commission oversight of the platforms’ content decisions.

The Communications Decency Act passed in 1996 when the Internet was in its infancy and Congress was concerned that subjecting hosting platforms to the same civil liability as all other businesses would retard their growth. It was written before Facebook and Google existed.

In effect, big tech companies benefit from a federal law that specifically protects them. The same sweetheart deal is not available to traditional media companies and publishers. When you grant platforms complete immunity for the content their users post, you also reduce their incentives to remove content that causes social harm.

Congress’s expectation in enacting Section 230 was at least two-fold. First, it hoped protection from civil suits would provide an incentive for websites to create a family-friendly online environment that would shield children, hence the Good Samaritan title of this section. Second, Congress hoped it would promote the growth of the fledgling Internet economy by giving it partial protection from federal and state regulation.

Fast forward 25 years and things look a whole lot different than they did in 1996. The Section 230 protections are now desperately out of date. The largest and most powerful companies today are big tech companies that have enormous resources and advanced algorithms they use to help them moderate content. It is time to rethink and revise the protections.

There is growing consensus for updating Section 230. Both Democrats and Republicans apparently agree that these companies should not receive this government subsidy free of any responsibility and that they should moderate content in a politically neutral manner to provide “a forum for a true diversity of political discourse”.  During his presidential campaign, President Biden said Section 230 should be “revoked, immediately.” Senator Lindsey Graham (R-SC) has said: “Section 230 as it exists today has got to give.”

Before amending Section 230, Congress should make sure that changing it won’t do more harm than good. While lawmakers argue about whether Section 230 should be amended or indeed repealed, one simple and immediate step toward making big tech companies more transparent would be to require them to submit to an external audit conducted by the Federal Communications Commission.

Such an approach is not perfect, of course, but it would force the network platform companies to have to prove that their algorithms and content-removal practices moderate content in a politically neutral manner, not partisan instruments and prioritize truthfulness and accuracy over user engagement.

This would be consistent with one of Congress’s findings when it enacted Section 230: “The Internet and other interactive computer services offer a forum for a true diversity of political discussion, unique opportunities for cultural development, and myriad avenues for intellectual activity.”

Electric cars one of several disruptions that will steer auto industry

Electric vehicles, driverless cars, ridesharing, changing patterns of vehicle ownership and use, and the recognition that climate change poses an existential threat are just a few of the major disruptions that may force automakers to modify their current business models.

Climate scientists contend that electric vehicles are one of the best ways to reduce greenhouse gas emissions, most of which come from cars and trucks. In the United States, the transportation sector is the largest source of emissions, and the automobile industry is under great pressure to meet regulatory emissions targets and do its bit for the planet. Automobile firms, their suppliers. and other mobility players must adapt to an emerging future that threatens their existing business models.

For example, car sharing may undermine the pattern of single-family ownership that has been fundamental to automobile firms’ business model for over a century. If a ride sharing company such as Lyft or Uber is able to send a fully self-driving vehicle to customers’ doors and take them wherever they want to go on command, those customers may be most closely connected to that service, not the automaker.

Electric vehicles will also impact the traditional business model. For starters, there is a dramatic increase in new entrants into the market, and sales and distribution channels are moving from physical dealerships to online stores. Service requirements for electric vehicles are less than for the gas-powered internal combustion engine because of their simplicity, and gross margins may shrink due to much higher competition and lower pricing for electric vehicles over time. In addition, policy makers in Washington will continue to promote and support faster electric vehicle adoption to deal with climate change.

Increasing electric vehicle ownership is at the heart of the Biden administration’s $2.3 trillion infrastructure package. It would provide $174 billion to spur development and adoption of electric vehicles including incentives to buy them and to get more EV charging stations installed across the country – 500,000 of them by 2030 – so people will feel confident they won’t run out of juice. There are currently about 41,000 charging stations in the U.S., compared to more than 136,000 gas stations.

Surveys indicate that while consumers’ appetite for electric vehicles has grown significantly, they remain concerned about the price of battery-powered cars, which can cost up to $10,000 more than conventional vehicles. But total operating costs for electric vehicles may well be less than for conventional ones. Fewer maintenance and charging costs may offset the higher upfront price over time. Electric vehicles also have fewer moving parts and they don’t require oil changes.

The hope is that federal largesse will push the growth of electric vehicles, which currently make up just 2 percent of the new car market and 1 percent of all cars, sport-utility vehicles, vans, and pickup trucks on the road, according to the Department of Energy.

Autonomous or fully self-driving vehicles represent perhaps even greater disruption for the automotive industry, although there remains considerable uncertainty around fully self-driving vehicles, despite considerable investment in them. It is difficult for potential customers to imagine what a community in which these are a viable transportation option would look like.

Even once fully self-driving cars are available, it is extremely difficult to predict their rate of proliferation.  It remains unclear whether they are five, 10, or 15 years away. In any case, they may lead to declining traditional car sales.

All these factors are significantly altering the auto manufacturing landscape. Incumbents will be forced to change their business model, leading to wholesale modifications in their manufacturing base, the closure of current facilities, adjustments to their dealership network and fundamental changes to their overall cost structure.  This kind of disruption does not come easy to large, mature companies.

One thing is certain: How people move from one location to another affects numerous aspects of daily life along with hundreds of related industries, and it will be changing in the near future.

Metro Transport Corporations: A New Model for Managing the Surface Transportation Revolution

Abstract: The benefits of a coming revolution that will be marked by the rise of shared, electric autonomous vehicles (AVs) and the transition from vehicle ownership to a transportation-as-a-service model can only be captured if the transformation is properly managed. To maximize these potential benefits, we propose replacing traditional departments of transportation with quasi-public or quasi-private Metro Transport Corporations that would oversee all surface transportation in a metropolitan area.

Maximizing economic, environmental and quality-of-life benefits will require putting customers first, traditionally not an area in which government agencies excel. It will necessitate culture changes that may well be beyond the grasp of political leaders, bureaucrats and unions that too often view transportation agencies first and foremost as a source of jobs.

Under our proposal, municipalities would deed their transportation assets to the Metro Transport Corporations in exchange for ownership shares. The public sector would continue to hold the largest share, but would be joined by two other classes of owners: companies such logistics and retail companies, as well as banks, whose success is heavily dependent on rising levels of economic activity in the region, and investors simply seeking dividend income.