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Big tech must stop hiding

In 2021, Alphabet (Google’s parent company), Amazon, Apple, Meta (Facebook’s new alias), and Microsoft were one of the largest revenue and profit companies in the world. These five companies alone have significantly increased their market capitalization over Italy’s GDP ($ 2.5 trillion vs. $ 2.1 trillion). Big Tech currently occupies almost a quarter of the S & P 500 index and accounts for a quarter of the R & D spending by listed non-financial companies in the United States. Amazon is the fifth largest employer in the world and is still growing.

What can these companies do about their growing market power? For starters, the situation demands a more aggressive regulatory agenda, so public agencies will not always catch up. What we have now is a case-by-case regulatory war of attrition, often caused by proceedings against past business practices. After a long appeal process, the result is almost always “too little, too late”.

This problem is exacerbated by the lack of fragmented financial disclosure from big tech companies. Their aggregated disclosures are no longer close to explaining how they work. Investors and regulators need to know more. How many people use WhatsApp each month and how many hours do they use it? What is the profit margin of the Apple App Store? What is Microsoft Azure’s share of the cloud computing market?

Yes, you may be able to find an approximate answer to such a question on Google Search, which is revealed by company whistleblowers, unedited court documents, or personal quotes from website traffic companies. Only if it is set to. The answer is certainly not in Big Tech’s Public 10-K. This is an annual financial performance report that all US listed companies must submit to the Securities and Exchange Commission (SEC).

These omissions are due to two features of Big Tech’s powerful platform business model. First, platform utilities are often backed by “free” or subsidized products that drive user adoption. These products will eventually be monetized indirectly through advertising or directly through subscriptions, sales and fees, but they don’t need to be included in 10-K as long as they are almost “free” to consumers.

Consider Alphabet, which owns at least nine products, including YouTube, Android, Chrome, Gmail, and Google Maps, and has more than a billion monthly active users. Although each product dominates the global market for that sector, Alphabet’s 10-K financial disclosure only lists the YouTube and Google Cloud “Advertising” categories and a few limited financial indicators. This opacity helped companies avoid regulatory scrutiny while establishing a global foothold in major digital markets.

Big Tech companies may provide monthly active user numbers in a call for return to investors, but these numbers are systematically disclosed in the legally responsible annual 10-K. not. The market power (and related abuse of power) of these companies is increasing by nature other than price, so proper disclosure of user’s “operational indicators” is very necessary. At the heart of this advantage is a large user base.

The large user base of one product, such as MS Word, allows enterprises to extend their advantage to other markets through bundles (think MS Teams). The market power of big tech companies is increasingly dependent on the “ecosystem” they control, rather than a single product. With that power, you can lock in users, squeeze out competitors, and build data fortresses.

The second characteristic of Big Tech’s business model that supports financial uncertainty is product diversification. By diversifying product offerings through new product bundles, technology platforms can often keep users within the ecosystem and generate more sales. However, these increasingly diffuse sources of profit are rarely disclosed in 10-K. The current “Segment Reporting” rules are designed to ensure that large and diverse conglomerates publish fragmented financial information, but in reality the rules are counted as “business segments” by companies. Gives a wide range of discretion in defining things. For example, Apple defines that segment by region rather than product, so you don’t need to disclose App Store profits.

With this flexibility, Big Tech companies account for more than 10% of total assets, revenues, or profits and losses, so even products that technically exceed reporting thresholds can finance some of their key products. You can hide it. Big tech companies have grown so large that even huge product segments with sales of over $ 20 billion can be categorized so that they never meet the threshold. Therefore, the full scale of Amazon Web Services seems to have been hidden from competitors for longer than it should have been allowed.

The lack of detailed financial and operational information means that regulators tasked with identifying potential abuses of market power are starting from virtually zero in each case. To determine the power of a company, regulators must be able to analyze the relationship between price, cost and capital spending. However, these factors become obscured when treasury is aggregated across the product. Value creation activities are routinely blended with zero sum value extraction activities. Big tech companies have become the gatekeeper of the entire market with “free” products, but still need to disclose only profits and losses.

A new report, co-authored with Tim O’Reilly and Josh Ryan-Collins, argues that the SEC’s 10-K disclosure needs to be urgently updated. Regulators must go beyond the P & L report to require specific non-financial business disclosures for all products that meet specific thresholds for active users each month. This rule requires a separate operational disclosure of Alphabet’s Google Search, YouTube, Chrome, Android, or Meta’s Facebook, Instagram, WhatsApp, Messenger, and other products. Companies are already using user operational data internally to evaluate product performance, so there is no burden of forced disclosure at 10-K per year.

In addition, segment reporting rules need to be given “teeth” and must be scaled to the size of the company to ensure the release of “hidden data” from the consolidated financial statements. To address both issues, companies need to disclose detailed financial information for products with at least $ 5 billion in annual revenue. Putting that amount in context triggers the disclosure of financial information about Apple’s AirPods and Microsoft’s Azure.

Just as environmental, social and governance reports are becoming essential for navigating climate change, an enhanced 10-K report is needed to uncover the nature and extent of Big Tech’s market power. .. Only then can we know if these giants owe their continuous growth to value creation or value extraction.

Quote: The market power of big tech companies is increasingly dependent on the “ecosystem” they control, rather than a single product. With that power, you can lock in users, squeeze out competitors, and build data fortresses.

Mariana Mazzucato, a professor of innovation and economics of public value at University College London, is the founding director of the UCL Institute for Innovation and Public Purposes.

Ilan Strauss is a Research Associate at the UCL Institute for Innovation and Public Purpose.

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