Is big tech now just too big to stomach?

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The Covid crisis has turbo-charged profits and share prices. But are the big six now too powerful for regulators to ignore?

 

 From left: Jeff Bezos, Elon Musk, and Phoebe Dynevor in the hit Netflix show Bridgerton. Composite: Getty

 

The coronavirus pandemic has wrought economic disruption on a global scale, but one sector has marched on throughout the chaos: big tech.

 

Further evidence of the industry’s relentless progress has come in recent weeks with the news that Apple and Amazon both raked in sales of $100bn (£72bn) over the past three months – 25% more than Tesco brings in over a full year.

 

Amazon also revealed that its founder, Jeff Bezos, is to step down as chief executive. It was a big moment for the company founded in Seattle 26 years ago. But the shares barely stuttered, and few expect the company to, either.

 

The relentless rise of the big six tech firms - Facebook, Amazon, Netflix, Google owner Alphabet, Apple and Microsoft, now known as the Fangam stocks – powered US markets last year.

 

The S&P index – the barometer of corporate America – ended the year up more than 18%, an extraordinary outcome given the market crash of March. But two-thirds of that gain was entirely down to the increases in value registered by the six Fangam stocks.

 

The gains are eye-watering. Amazon’s share price is up 62% over the past year, valuing the business at $1.7tn, $650m more than a year ago. Apple stock is up 70% over the same period, an increase which has taken its valuation up by more than $1tn, to $2.3tn.

 

Results published so far in 2021 show no sign that the gains will let up. Apple in January reported its most profitable quarter ever, and Facebook also said the pandemic had helped it grow.

 

Amazon recorded sales of more than $100bn for the first time in the last quarter of 2020 – allowing Bezos to sound a positive note as he changed roles to focus on his ambitions in space, his Earth Fund and his ownership of the Washington Post – and Alphabet posted record revenues for the second successive quarter.

 

The eye-catching performance of big tech has prompted increased political scrutiny and the threat of heightened regulation from Washington, especially now that the Democrats have won control of the Senate.

 

There is now a real possibility that President Biden will take on tech companies over issues such as privacy, liability and market dominance. And such is the collective scale of the US tech titans, it will be difficult for them to hide.

How big is big tech?

Apple became the world’s first trillion-dollar company in August 2018 (barring a few state-owned oil companies whose true valuations remain murky). Just over two years later – in the midst of the pandemic in August 2020 – Apple notched up the $2tn (£1.5tn) milestone.

The extraordinary size of these companies can be difficult to comprehend. Alphabet’s $162bn of revenues outweighed the size of Hungary’s economy in 2019.

 

Apple’s $67bn earnings before tax from its last financial year would pay for the UK government’s combined spending on defence and transport.

 

Amazon’s army of workers worldwide now numbers 1.2 million and it is rated the third biggest employer in the world, after Walmart and the China Petroleum & Chemical Corporation.

 

A late (and perhaps debatable) entrant to the big tech ranks is Tesla. Investors appear to be valuing the US electric car manufacturer more like a tech platform, in the hope it will use its brand and nascent autonomous driving software to dominate transportation in the future.

 

That logic has propelled it into the ranks of the world’s most valuable companies (and has recently made its chief executive, Elon Musk, the world’s richest man). Its shares have rocketed from $86 at the start of 2020 to $845 now, with some investors fearing it is in the throes of an investment bubble.

 

So, how did big tech get so big?

One common complaint about the stock market is that it is disconnected from economic reality, with booming growth in share prices even as economies suffer historic recessions.

 

The flip side is the argument that these companies are more connected to our new reality than ever before: in fact, between them the big tech companies are involved in a huge proportion of human interactions with digital tech every day, from mobile phones for locked down families to the computers used in businesses all over the world.

 

The electric car technology pioneered by Tesla will play a key role in fighting the climate crisis – and investors have belatedly got on board.

 

But big tech’s fate has become disconnected from the rest of the corporate world. As Jeremy Grantham, a high-profile investor, pointed out last month, Tesla’s stock market value is equal to about $1.25m for every car it sells over a year. At rival carmaker General Motors, the company is valued at $9,000 per car.

 

Tech’s rise has meant the concentration of market value in the five biggest companies has returned to levels last seen in the early 1970s.

 

Back then the stock market was dominated by the old industrial economy: photographic film company Eastman Kodak, ExxonMobil predecessor Standard Oil, and General Motors were in the top five, along with IBM and AT&T. Big tech has completely displaced older industries in the top five.

 

Who benefits from the share price surge?

The rise of big tech has created the biggest personal fortunes ever seen, and a new class of hyper-rich: the centibillionaires. Almost all of that wealth comes from shares retained by founders of the business.

 

During the pandemic that wealth has increased at a phenomenal rate: in 2020 both Bezos and Musk gained more than $100bn apiece – or about $3,000 per second.

 

But there are other beneficiaries. Among the biggest shareholders in all of them are Wall Street and City investment companies such as BlackRock, Vanguard and Legal & General. While those asset managers earn juicy fees by charging clients such as pension funds a percentage of stock market gains from the growth of big tech, their growth also benefits the ultimate owners – including the pension funds providing for hundreds of millions of people saving for retirement.

 

UK fund manager Baillie Gifford’s investments in Tesla have made an extraordinary $29bn (£21bn) for investors including pension funds, foundations and charities, according to figures released to the Guardian. Scottish Mortgage Investment Trust, which is managed by Baillie Gifford, began buying Tesla heavily in 2013 when the shares were changing hands at about $6 each, compared with today’s $840. That soaring share price led Scottish Mortgage to be admitted into the FTSE 100 index of the UK’s biggest listed companies in 2017 and last year the price rise made Scottish Mortgage the best-performing company in the FTSE 100.

Why is size a problem?

With size comes power. A simple change in an algorithm can wipe out smaller companies reliant on tech companies’ platforms or even nascent industries. Changes to Facebook’s algorithm in 2018 hit some viral publishers’ revenues hard, while the complexities of negotiating Amazon’s search rankings have spawned an advisory industry.

 

And the companies have also sought increasingly to influence politics. Google overtook Goldman Sachs as the biggest spender on political donations for the first time in 2014. The six tech companies’ total spend on lobbying in the US had risen to $64m in 2019, according to the US Center for Responsive Politics. While that amount is tiny compared with the companies’ profits, its rapid rise represents big tech’s increasing attempts to influence policy directly.

 

Big tech’s increasing size gives it another big advantage: the bigger it becomes, the harder it is to challenge.

 

This has always been a problem with dominant companies, who are able to use their scale to win better deals and lower prices. But with the tech platforms such as social networks or Amazon’s retail network, the more users they have, the faster their value grows. It is what economists call the network effect.

Where could big tech fall foul of regulators?

Some of the big tech companies have been able to avoid any major competition enquiries in part because they offer consumers cheaper services than ever before. However, there is increasing scrutiny of monopolistic practices.

 

One area of focus has been their willingness to pay what seemed like very high prices for fast-growing competitors.

 

Emails unearthed by US Congress showed that Mark Zuckerberg said Facebook should buy Instagram in part to neutralise its threat. Facebook has – contravening previous pledges – started to slowly combine Instagram’s messaging technology with its other social network, Whatsapp.

 

Google faces intense antitrust scrutiny in the US over its dominance of internet search, which the EU in 2017 found it had abused by boosting results for its own services.

 

Apple is facing a growing backlash by companies trying to sell services to iPhone users. Epic Games, the maker of the wildly popular Fortnite franchise, and music streaming platform Spotify have both launched legal complaints against Apple’s insistence that it takes a 30% cut of all sales made through the app store – including music streaming subscriptions that Spotify and many other third-party app developers have long complained is an unfair “tax”.

And tax? How much do they pay?

One controversy is common to all of the US tech companies (although by no means confined to them): tax avoidance techniques that critics see as aggressive and unfair to smaller competitors.

 

All of the big tech companies use subsidiaries in low-tax countries such as Luxembourg, Bermuda and Ireland to sell services to end markets such as the UK. Fair Tax Mark, a non-governmental organisation, last year singled out Amazon in particular for its opaque tax structures and low amounts of tax paid relative to profits.

 

Globally, Fair Tax Mark calculated, the six big tech companies had paid $100bn less cash in taxes over a decade than they had provided for in their accounts, primarily by shifting profits to tax havens and using creative accounting techniques that are legal, but are usually unavailable to smaller companies.

 

The companies paid $155bn less than might be expected under headline tax rates – money that could have been used to fund public services and infrastructure around the world.

 

Complex legal structures make it impossible to work out precisely how much profit the big tech companies shift out of individual countries, but Tax Watch UK, a campaign group, estimated that Google, Facebook, Apple and Microsoft, as well as network tech company Cisco, avoided £5bn in UK corporation tax between 2012 and 2017.

 

None of the companies have confirmed such data, although all have said their tax structures follow the law.

 

Can they be forced to pay more?

World leaders are acutely aware of tax issues in particular, and there has been some progress on moving towards a global tax regime to reduce profit shifting from country to country. The US government has up until now looked askance at efforts coordinated by the Organisation for Economic Cooperation and Development to allow other countries to tax American tech champions more. However, a Biden administration may make a limited deal more likely.

 

Individual countries have tried to target big tech, including the UK with its digital services tax. But Amazon’s revelation that it will not itself pay the levy – but will pass it on to other sellers which use its platform – shows how difficult it is for one country to strike out on its own.

 

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