Big Tech must stop hiding financial data

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In 2021, Alphabet (Google’s parent company), Amazon, Apple, Meta (Facebook’s new alias), and Microsoft were among the world’s largest companies by revenue and profit. These five companies alone increased their market capitalization by more than Italy’s GDP ($2.5 trillion versus $2.1 trillion). Big tech now accounts for nearly a quarter of the S&P 500 index and a quarter of research and development spending by publicly traded non-financial companies in the United States. Amazon is the world’s fifth largest employer, and it continues to grow.

What can be done about the growing dominance of these companies in the market? For starters, the situation calls for a more proactive regulatory agenda, so that public authorities are not constantly playing catch-up. What we have now is a case-by-case regulatory “war of attrition”, often waged by litigation against past business practices. After a long appeal process, the result is almost always “too little, too late”.

The problem is exacerbated by the lack of disaggregated financial disclosures from big tech companies. Their aggregated disclosures come no closer to explaining how they work. Investors and regulators need to know more. How many people use WhatsApp each month and for how many hours? What is Apple’s App Store profit margin? What is Microsoft Azure’s share of the cloud computing market?

Yes, sometimes rough answers to these questions can be found on Google search, but only when revealed by a corporate whistleblower, an unredacted court document, or a private estimate from a website traffic company. . The answers certainly can’t be found in Big Tech’s public 10-Ks, the annual financial performance reports that all publicly traded U.S. companies must file with the Securities and Exchange Commission.

These omissions stem from two features of Big Tech’s powerful platform business model. First, the usefulness of a platform often relies on “free” or subsidized products that drive user adoption. Even though these products are eventually monetized, either indirectly through advertising or directly through subscriptions, sales and fees, they do not have to be included in the 10-K as long as they remain largely “free”. for the consumer.

Consider Alphabet, which has at least nine products, including YouTube, Android, Chrome, Gmail, and Google Maps, which have over a billion active monthly users. While each product leads the global market in its industry, Alphabet’s 10-K financial information only lists an overall “advertising” category and a few limited financial metrics for YouTube and Google Cloud. This opacity has helped the company avoid regulatory scrutiny while establishing a global presence in major digital markets.

While Big Tech companies sometimes provide monthly active user numbers in their investor earnings calls, those numbers aren’t routinely disclosed in their annual 10-Ks, where the legal charge is higher. Appropriate disclosure of users’ “exploitative actions” is absolutely necessary, as the market domination by these companies and the resulting abuses of power are increasingly non-pricing in nature. At the heart of this dominance is a large user base.

A large user base in one product, such as MS Word, can allow a company to expand its dominance in other markets through aggregation (think MS Teams). The market power of Big Tech companies increasingly resides in the “ecosystems” they control, rather than in a single product. This power allows them to lock in users, eliminate competitors, and build data fortresses.

The second feature of Big Tech’s business model that promotes financial secrecy is product diversification. By diversifying their product offerings, often through new product sets, technology platforms can keep users within their ecosystems, thereby generating more sales. Yet these increasingly diffuse sources of profit are rarely disclosed in their 10-Ks. Although the current ‘segment disclosure’ rules were designed to ensure that large diversified conglomerates publish disaggregated financial information, in practice the rules leave companies with wide discretion to define what counts as an ‘operating segment’. . Apple, for example, defines its segments not by product but by geography, so it is not required to disclose App Store earnings.

This flexibility allows Big Tech companies to hide the financials of some of their flagship products, even those that technically exceed the reporting threshold because they represent 10% or more of total assets, revenue, or profit/loss. Big tech companies have become so big that even huge product segments with sales exceeding US$20 billion can be categorized in such a way that they don’t meet the threshold at all. As a result, Amazon’s entire web services appear to have been hidden from competitors for longer than should have been allowed.

The absence of detailed financial and operational information means that regulators tasked with identifying possible abuses of market power are starting from scratch for each case. To determine a firm’s power, regulators must be able to analyze the relationship between prices, costs and capital expenditures; but these factors are masked when financial data is aggregated across products. Value creation activities are regularly mixed with zero-sum value extraction activities. And even though Big Tech companies have used “free” products to become gatekeepers of entire markets, they are still only required to disclose profits and losses.

In a new report, co-authored with Tim O’Reilly and Josh Ryan-Collins, we argue that the SEC’s 10-K disclosures need an urgent update. Regulators must go beyond “profit and loss” reports to require specific non-financial operating information on all products that meet a certain threshold of monthly active users. This rule would require disaggregated exploit disclosures on products such as Alphabet’s Google Search, YouTube, Chrome and Android, or Meta’s Facebook, Instagram, WhatsApp and Messenger. Companies already use operational user data internally to evaluate product performance, so they wouldn’t be burdened with mandatory disclosure in their annual 10-Ks.

In addition, sector information rules must be “biting” and adapted to the size of the company to ensure the dissemination of the “hidden data” of the consolidated financial statements. To address both issues, companies should be required to disclose detailed financial information on any product generating at least $5 billion in annual revenue. To put that amount into context, it would trigger the disclosure of financial information about Apple’s AirPods and Microsoft’s Azure.

Just as environmental, social and governance reporting becomes essential to help navigate climate change, improved 10-K reporting is needed to reveal the nature and extent of Big Tech market dominance. Only then can we see whether these giants owe their continued growth to value creation or value extraction.

Mariana Mazzucato is Professor of Economics of Innovation and Public Value at University College London and Founding Director of the UCL Institute for Innovation and Public Purpose; and Ilan Strauss is a research associate at University College London Institute for Innovation and Public Purpose.

Copyright: Project union

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