In 2021, Alphabet (Google’s parent), Amazon, Apple, Meta (Facebook’s new alias) and Microsoft were among the world’s largest companies in terms of revenue and profit. These five companies alone increased their market capitalisation by an amount greater than Italy’s GDP(US$2.5 trillion versus US$2.1 trillion). Big Tech now accounts for nearly a quarter of the S&P 500’s index and a quarter of research and development spending by US publicly listed non-financial firms. Amazon is the world’s fifth-largest employer, and it is still growing.
What can be done about these firms’ growing market dominance? For starters, the situation demands 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”, frequently waged by litigation against past business practices. After a lengthy appeals process, the result almost always amounts to “too little, too late”.
The problem is exacerbated by a lack of disaggregated financial disclosures from the Big Tech companies. Their aggregated disclosures no longer come close to explaining how they operate. Investors and regulators need to know more. How many people use WhatsApp each month, and for how many hours? What is the Apple App Store’s profit margin? What is Microsoft Azure’s share of the cloud computing market?
Yes, sometimes one can find approximate answers to such questions on Google Search, but only when they have been revealed by a company whistleblower, an unredacted court document, or a private estimate from a website traffic company. The answers certainly cannot be found in Big Tech’s public 10-Ks, the annual financial performance reports that all US publicly listed companies must file with the Securities and Exchange Commission.
These omissions follow from two features of Big Tech’s powerful platform business model. First, a platform’s utility is often underpinned by “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” to the consumer.
Consider Alphabet, which owns at least nine products, including YouTube, Android, Chrome, Gmail and Google Maps, that have more than one billion active monthly users. Although each product dominates the global market in its sector, Alphabet’s 10-K financial disclosures list only an aggregate “advertizing” 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 foothold in key digital markets.
While Big Tech firms sometimes provide monthly active user counts in their earnings calls to investors, these figures are not disclosed systematically in their annual 10-Ks, where the legal onus is higher. A proper disclosure of user “operating metrics” is sorely needed, because these firms’ market domination, and related abuses of power, is increasingly of a non-price nature. Central to this dominance is a large user base.
A large user base in one product, such as MS Word, can allow a firm to extend its dominance to other markets through bundling (think of MS Teams). Big Tech companies’ market power increasingly lies in the “ecosystems” they control, rather than in a single product. That power allows them to lock in users, squeeze out competitors and build data fortresses.
The second feature of Big Tech’s business model that aids financial opacity is product diversification. By diversifying their product offerings, often through new product bundles, tech platforms can keep users within their ecosystems, generating more sales. Yet, these increasingly diffuse sources of profits are rarely disclosed in their 10-Ks. Although the current “segment reporting” rules were designed to ensure that large, diversified conglomerates release disaggregated financial information, in practice the rules give companies 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 profits.
This flexibility allows Big Tech companies to hide the financials of some of their leading products, even those that technically exceed the reporting threshold because they account for 10% or more of total assets, revenues or profit/loss. Big Tech firms have become so large that even enormous product segments with sales exceeding US$20 billion can be classified in such a way that they do not meet the threshold at all. Hence, the full scale of Amazon Web Services appears to have been kept hidden from competitors for longer than should have been permitted.
The absence of detailed financial and operating information means that regulators tasked with identifying possible abuses of market power are effectively starting from scratch with each case. To determine a firm’s power, regulators must be able to analyze the relationship between prices, costs and capital outlays; but these factors are obscured when financials are aggregated across products. Value-creating activities are routinely blended with zero-sum value-extractive activities. And even though Big Tech companies have used “free” products to become gatekeepers to entire markets, they still are required to disclose only 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 urgent updating. Regulators must go beyond “profit and loss” reporting to require specific non-financial operating disclosures on all products that meet a certain threshold of monthly active users. This rule would require disaggregated operating disclosures on products like Alphabet’s Google Search, YouTube, Chrome, and Android, or Meta’s Facebook, Instagram, WhatsApp and Messenger. The firms already use operating data on users internally to assess product performance, so they would not be burdened by mandatory disclosure in their annual 10-Ks.
Moreover, the segment reporting rules need to be given “teeth”, and they need to scale with firm size to ensure the release of “hidden data” from consolidated financial statements. To tackle both issues, companies should be required to disclose detailed financials on any product with at least $5 billion in annual revenues. To put that amount into context, it would trigger disclosure of financial information on Apple’s AirPods and Microsoft’s Azure.
Just as environmental, social and governance reporting is becoming essential to help navigate climate change, enhanced 10-K reporting is necessary to reveal the nature and extent of Big Tech’s market dominance. Only then can we see if these giants owe their continued growth to value creation or to value extraction.
Mariana Mazzucato is a professor in the economics of innovation and public value at University College London and the founding director of the UCL Institute for Innovation and Public Purpose; and Ilan Strauss is a research associate at the University College London Institute for Innovation and Public Purpose.
Copyright: Project Syndicate