Big Tech exists because the companies that make up this refined group built the best products in their fields. There were social media networks before Facebook, known now as Meta (US:FB), search engines before Google, now under the Alphabet (US:GOOGL) umbrella, phones before Apple (US:AAPL) created the iPhone, and e-commerce before Amazon (US:AMZN). At the time of these products’ creation no one had a problem. Capitalism creates winners and they were the winners. The issue now is that dominance of one specific product has enabled monopoly rents like the in other markets, like Apple taking a 30 per cent cut of the price of every application sold in its App Store.
Google has 93 per cent of the search engine market and subsequently dominates every layer of the digital advertising stack – which drives up the cost of advertising for every business that operates online.
Governments in the US and Europe are finally cottoning on and readying legislative firepower. Bills in the US and Europe could cut Big Tech margins and put more pressure on companies reeling from the selloff in the recent months, knocking hundreds of billions from market capitalisations. In May, The Competition and Transparency in Digital Advertising Act was introduced into Congress in the US to prevent tech companies from owning multiple parts of the advertising stack. The bill was introduced by senators Amy Klobuchar, Richard Blumenthal, Mike Lee and Ted Cruz – two Democrats and two Republicans.
"Monopoly rents are being imposed upon every website that is ad-supported and every company—small, medium, or large—that relies on internet advertising to grow its business," Lee said in a statement. "It is essentially a tax on thousands of American businesses, and thus a tax on millions of American consumers."
A cross party bill called the American Innovation and Choice Online Act has also been introduced into Congress. This legislation would bar platforms from giving “preference” to their products or services, meaning Google and Amazon would not be allowed to promote their products ahead of competitors' or bundle their products together. The fact this would have an impact is clear from the tech giants' reaction, which includes mention of national security and saying people would feel the new rules in their hip pockets. "Congress’s attempt to regulate the market and to create winners and losers has resulted in legislation that would benefit foreign competitors and harm consumers," said Krisztian Katona from the Computer & Communications Industry Association, a tech lobby group. Google's chief economist said the new rules would even disturb a "startup-friendly economic ecosystem".
EU leading the way
The EU has been ahead of the game when it comes to legislation. EU competition commissioner Margrethe Vestager has become the figure head of the global anti-monopoly movement after going after Google, Amazon and others, handing out billions in fines.
To improve transparency and fill in the moats around these digital giants, the EU is now set to pass the Digital Markets Act (DMA). Earlier this year, the European Council and Parliament came to a provisional agreement on the DMA. The legislation will only apply to “gatekeepers” which means companies with EU revenue over €7.5bn (£6.4bn) and more than 45mn monthly users.
The headlines are that gatekeepers will need to share all advertising information with advertisers and publishers so they can make “their own independent verification of their advertisements”. Gatekeepers must also allow third parties to install apps or app stores that inter operate with their services. If companies break these rules they could be fined up to 6 per cent of their global revenue.
If the legislation is enacted perfectly, this means that Google should lose the monopoly rents it generates in advertising but it also might have to bring down the fees it charges from its app store to stop users downloading apps elsewhere. This will also apply to Apple, which takes around a 30 per cent cut from third parties when apps are downloaded on iPhones. In the first quarter of this year Apple made $19.8bn (£16.4bn) from digital services, equal to 26 per cent of total sales.
The company most under threat from the digital advertising bill is Google – which is part of a duopoly (alongside Facebook) of the advertising industry. The company dominates the search engine market with a 93 per cent share. On top of this, Google Ad Manager is used by 90 per cent of large publishers.
It owns every part of the ad tech stack: the buyside, the sell side and the exchange. An analogy is if Goldman or Citi owned the New York Stock Exchange. A report published by Senator Lee’s department said Google’s monopoly rents functioned as a tax of "upwards of 40%—on every ad supported website and every business that advertises online”.
The dominance of Facebook and Google is made clear by average advertising revenue per user (ARPU). In the first quarter of the year, Google’s was $13, Facebook’s $9 while Snapchat (US:SNAP) lagged on $3. Twitter (US:TWTR) was only slightly better on $5.
UK regulators are also taking on Google’s advertising dominance. The Competition and Markets Authority (CMA) is investigating Google as it is concerned the company has “limited the interoperability of its ad exchange with third-party publishers”. It has also released a report identifying Apple and Google as having a duopoly of the smartphone market. The analysis "suggests that between them, Apple and Google were able to earn more than £4 billion of profits in the 2021 from their mobile businesses in the UK over and above what was required to sufficiently reward investors with a fair return".
Consequences for Big Tech
Estimating the impact all this legislation would have on big tech’s revenue is tricky. One avenue is to look at how aggressively these companies have been lobbying the White House the last few years. Between 2017 and 2021, Google, Apple, Amazon, Microsoft and Meta spent $336mn in total on lobbying, this was 50 per cent more than the previous five years. Clearly it is important to them.
In 2021, it was Google and Amazon that increased lobbying spend the most rising, 27 per cent and 35 per cent respectively to $9.6mn and $24mn. For comparison, Walmart (US:WMT) spent $6.95mn on lobbying last year. The retailer generated revenue of $142bn in the last quarter, compared to $55bn at Google and $116bn at Amazon.
The other way to think about the impact is to take the 40 per cent monopoly rents estimated by Senator Lee at face value. What Lee is saying is that Google’s market dominance allows it to charge 40 per cent over the market rate for advertising space.
Last quarter, Google made $45bn from advertising which was 80 per cent of its total sales. If advertising revenue were to fall even by half (to a 20 per cent 'tax' to use Lee's language) off the back of this legislation that would mean $9bn less in revenue and have a significant impact on its profit. This seems fanciful, but Snapchat and Twitter – who both have large loyal userbases – show how tricky is to generate profit from advertising when you don’t control the whole advertising stack.
The General Data Protection Regulation (GDPR) regulations that came into force in the EU in 2018 suggest it won’t be easy to enforce this legislation even if it is passed. For GDPR regulations, the complaints must be handled where each company’s European headquarters are located. Luxembourg handles Amazon, while the Netherlands deals with Netflix (US:NFLX), Sweden Spotify(US:SPOT) and Ireland has the unenviable tasking of managing Apple, Facebook, Microsoft and Twitter.
The Irish Data Protection Commission (DPC) has received 969 GDPR complaints since 2018 where it was the lead supervisory authority. Confusing the situation further, more than half of these were cross border complaints and the DPC has only been able to resolve 65 per cent of them. A quarter of complaints lodged in 2019 are still outstanding.
Basically, regulating these hugely complicated businesses is difficult, expensive and time consuming. It shouldn’t be a reason for not trying if governments think it is the right thing to do. But if the Irish are still working through GDPR complaints from 2018, a whole new stack of advertising competition complaints is not going to help the situation.
The political case for these regulations is that it will lower the cost of advertising for almost every business that advertises online. This is well timed given almost all other costs are rising – although none of these laws will be implemented until at least next year.
Interoperable apps should also allow new start-ups to compete more easily without paying large fees to app stores to give them access to the millions of iPhone and Android users. The CMA, said that "weak competition in mobile ecosystems is acting as a brake on innovation across the sector, reducing incentives for Apple, Google and potential competitors to invest".
When competition has arisen historically, Big Tech has usually just acquired it. It’s more profitable for start-up founders to sell their companies than try to compete when the rules are stacked in the giants' favour. Facebook acquired both Instagram and WhatsApp while Amazon bought streaming company Twitch and e-commerce giant Zappos. In total since 2011, Facebook, Google and Amazon have made over 350 acquisitions between them, according to data from Refinitiv.
What are the arguments against regulation?
Ironically, just as this regulation is being pushed through the European Parliament and Congress the dominance of Big Tech has started to wane. In the fourth quarter of last year, Facebook’s monthly active users fell for the first time in 15 years. Meta chief executive Mark Zuckerberg said on the analyst call that “people have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly”.
Advertising revenue growth has also stalled. Zuckerberg was clearly aware this was on the horizon hence his decision to rebrand the company as Meta Platforms and to invest billions of dollars into VR technology.
Similarly, at Amazon North American retail generated a loss for the first time since 2015. During the pandemic, it lost online market share to retailers Walmart and Target that have invested heavily in digital capabilities. Facebook and Amazon would argue if they truly had a monopoly then their profits would be growing rather than falling.
Despite Zuckerberg’s claim he is facing more competition, it seems inevitable that further regulation is coming. It is rare in the US that there is cross party consensus on anything – but this is one area where Democrats and Republicans seem to align. While in the EU, the DMA has already passed through the European Parliament.
For investors in these companies this looks like bad news. Market dominance has enabled these companies to generate outsized returns on capital and if the regulators have their way this will eventually be a thing of the past. However, there could be a silver lining, if it forces the tech giants to sell off parts of their businesses. “When companies are broken up, the constituent parts are usually worth more than the whole,” said Blue Whale Growth fund manager Stephen Yiu. The next steps - maybe some years away given the tech giants' keenness to fight new rules in court - could see greater value for shareholders if they can pick and choose exactly which parts of these business offer the best returns.
