Big Tech is playing a financial shell game


We know companies like Alphabet, Amazon, Meta (aka Facebook) and even Microsoft track many things about us. What is less certain is how they monetise that information across all the various platforms that they own — from search and ecommerce, to social media and cloud computing. This information asymmetry is one of the core criticisms of Big Tech.

Regulators on both sides of the Atlantic are investigating how platform companies exploit this to create an uneven playing field between themselves and consumers or enterprise customers. A new report from University College London’s Institute for Innovation and Public Purpose adds to the case against Big Tech, arguing that such companies are also using information asymmetry to navigate Securities and Exchange Commission 10-K disclosure rules that would otherwise require them to provide far more detailed financial data.

The year-long Omidyar network-funded research project, led by UCL scholars Ilan Strauss, Tim O’Reilly, Mariana Mazzucato and Josh Ryan-Collins, examined how existing SEC disclosure rules squared with the data monetisation business model of Big Tech. Answer: not well. Just as existing antitrust case law in the US (which considers consumer prices the measure of monopoly power) is ill suited to an era of digital barter transactions, existing SEC disclosure rules are inadequate for the age of surveillance capitalism.

The gulf has to do with two things. First is the fact that while platforms depend on “free” products to capture more and more users, and thus create the network effects that they can monetise across all their products and services, financial regulators concentrate mostly on concrete financial disclosures. This allows Big Tech to conceal market power, increase profit margins and expand their platforms’ dominance in unfair ways.

Second, existing SEC rules around segment disclosures within diversified conglomerates like Big Tech platforms are missing the huge, hidden value contained in the data that platforms extract, since reporting rules are limited to products that generate revenue directly. As anyone who understands Big Tech knows, the value is in the aggregation and monetisation of data.

Current 10K disclosure requirements largely ignore the user side of the market, as well as the “key operating metrics that these firms themselves use to monitor their products’ progress and future potential”, according to the report. As any number of public and private transcriptions, conference calls and disclosures show, the people running these companies spend much of their time thinking about “monthly active users”, “user engagement”, “customer acquisition costs (CAC)” and “lifetime value (LTV)”, because these metrics drive revenue growth.

That’s true even if they don’t disclose such information to investors at a segment level. Currently SEC guidelines require companies to define operating segments based on business activities that generate revenue and incur expenses; are regularly reviewed by the chief executive; and for which discrete financial information is available. If such a division makes up at least 10 per cent of unaffiliated profits/losses, revenues or assets of all combined operating segments, the company has to give regulators more financial information.

Big Tech is using these caveats to evade the spirit, perhaps even the letter, of the law. Alphabet’s historic defence for not calling YouTube a separate division was that its CEO didn’t review these results. Does anyone actually think that the largest video platform in the world isn’t subject to C-suite attention? Apple, meanwhile, says “discrete financial information” for the profitability of the App Store “doesn’t exist”. Yet the company regularly cites how it created an entirely new industry of app developers.

What’s more, regulation hasn’t “scaled with company size”, as the UCL report points out. While all companies with $100m or more in revenue are subject to the same SEC rules, platform giants have entire divisions that are among the largest 100 companies in the US. Many single product lines in Big Tech may be only 1 per cent of overall sales for the parent company, yet still dominate their given market.

The bottom line is that an outdated set of regulations is making it much harder for regulators, investors, customers and citizens to really understand the individual market positions of the tech giants. That makes it impossible to protect markets — or democracy.

So what is to be done? The report’s authors have a number of proposals, including mandatory 10K reporting of user operating metrics for products with a minimum number of monthly active end users and business users. This dovetails with the EU’s proposed rules about platform “gatekeepers”, but makes them applicable at the product level, around the world.

They also recommend detailed standalone segment financials for any product line with $5bn or more in annual revenue, or profit and loss. The idea is to get rid of management discretion to decide what should be labelled a segment. This is long overdue considering the growth of corporate concentration in our economy over the last 20 years, in technology and in other sectors.

Finally, the UCL report calls for a tech-specific SEC disclosures framework that considers the unique business model of digital giants. It’s a good idea. Data is an asset and should be counted as such.


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