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Big Tech under pressure

 

The four winds of change

Silicon Valley is shaken. Don’t be distracted by the confidence with which Big Tech representatives have been testifying to Congress about Russian influence in the US electoral process. Nor by the latest top tech results. It is indisputable that the “gorillas” beat earnings expectations last week, leading shares of companies like Amazon, Twitter and Alphabet up sharply, that the S&P 500 Technology Index has gained more than 30% this year, and that Mark Zuckerberg may end up as US President in 2024.

But the breeze of change is turning into a proper wind and it will do more than just ruffle the feathers of Big Tech.

Big Tech believes its own story, best exemplified by the Google founders’ mantra “Don’t be evil.” But it goes further than that in a quasi-religious faith that its products make consumers’ lives better at no cost, that it creates wealth for the many who invest in its equity, and that when founders cash out they spend it on philanthropy to solve the world’s major problems.

There is another story. That they abuse their dominant positions and use their monstrous cash piles to buy up any competitors, thus denying choice to consumers. That their disruption of sectors like retail leads to ever increasing job losses, which their investments in and worship of Artificial Intelligence will only make worse. That their platforms are useful mechanisms for evil doers to up-end our political process. That they are gathering so much information on each of us that George Orwell’s Big Brother in his novel 1984 looks like a rank amateur. That their belief that, in Leona Helmsley’s immortal words, “Only the little people pay taxes” is insidiously undermining society: the most valuable companies of the 21st century pay piddling taxes which are not enough to maintain infrastructure, police, city administration and a host of other crucial societal services.

There is a reason why the Universal Basic Income theory is popular in Silicon Valley. Give a hand out to the disadvantaged members of society and you can wash your hands of them. In fact, put on a pair of VR (Virtual Reality) glasses and you won’t have to see the obese, the left-behinds, the technologically incompetent.

You may think, gentle reader, that the last line is a touch harsh. But remember that your average denizen of Silicon Valley spends time principally with like-minded folk (they recruit in their own image). They share tremendous intelligence and, most likely, a touch to a strong dose of autism. Out of these ingredients can come mind-blowing, revolutionary products or gobsmacking, disconnected howlers. To advertise their latest VR, Mark Zuckerberg’s avatar teleported to Puerto Rico to see the hurricane devastation. With real life wrecked homes in flood waters as a backdrop, he blithely says: “One of the things that is really magical about virtual reality is that you can get the feeling that you’re really in a place.”

One can only hope that the Facebook CEO and other founders will use AI to insert some emotional intelligence into themselves, for their world class public relation advisors are either not up to the job or, more likely, being ignored.

Here are four indicators of how the tide is turning.

1. Shareholders – Despite Big Tech giving equity holders returns of unparalleled juiciness, they are stirring, and discovering they have clout. Note the ousting of UBER’s CEO Travis Kalantick by shareholders on the back of various scandals including a culture that condoned sexual harassment.

Meanwhile, Zuckerberg’s plan to reclassify some shares to retain control of the listed company, resulting in an estimated loss of $10bn for public shareholders due to stock depreciation, was stopped in its tracks by a lawsuit lead by a Swedish national pension fund and others with shares in the company. As tax, regulation and a government backlash chip away at Big Tech’s returns, their vulnerability to shareholder activism will rise.

2. Tax – The tech companies are losing the battle because they have abused the system, indebted governments in the developed world need funds, and there is a limit to how far taxes can be raised on hard-pressed voters.

Big Tech have not just broken the spirit of the law, they have smashed it, and thus the PR battle is lost. Headlines in the media attest to this. The British arm of e-Bay paid £1.6million in corporation tax last year despite revenues of over a billion, an outcome that is grossly unfair when their lack of profitability is nothing but a sleight of hand to do with IP and other tax jurisdictions.

The European Commission has been a leader in tackling the issue. Amazon has been ordered to pay about €250m for back taxes in Luxembourg after benefiting from illegal state aid, while Ireland is being forced to collect €13bn in taxes owed by Apple. The EC is considering a tax on turnover or a levy on online ads or another form of tax and expects to table a proposal by next spring. Although it would be more effective if the US and other nations agreed on a method under the umbrella of the OECD, it is doubtful this will happen any time soon.

But that doesn’t mean there is no action in the US, where the tax reform package touted by the government would see tech giants repatriate a portion of their funds currently stashed overseas. Apple, for instance, holds 94% or $231bn of its cash overseas. And this summer Donald Trump attacked Amazon in a tweet: “Amazon is doing great damage to tax paying retailers.” I would expect to see more action on this front from the US government.

3. Regulation – There is movement on both sides of the Atlantic. Recently, a bipartisan group in Congress proposed the Honest Ads Act, which would make online political advertising subject to the same rules of disclosure as those on television, print and radio. As more revelations of Russia’s involvement in the 2016 U.S. election come to light through Big Tech’s testimony to Congress, the political urge for change increases.

Meanwhile, a former head of GCHQ, the UK surveillance agency, suggested tech companies might have to be regulated. Robert Hannigan said they had been naïve about fake news and their interference in the democratic process. At the end of June Germany passed the Network Enforcement Law which imposes steep fines (€5m to €50m) on platform companies if they don’t remove hate and other detrimental speech within 24 hours.

Anti-trust law or other regulation will probably be used at some point on Facebook and Google due to their oligopolistic dominance of the digital ad market. They control 60% of it between them and, of even more concern, around 85% of all new digital advertising revenue. Competitors barely make a dent before they are gobbled up.

4. Political backlash – Governments are expending huge effort to tackle economic inequality, one of the biggest issues of our time – once they and the media understand Big Tech’s contribution to it, there is bound to be legislation.

A bit of background: in a pioneering study, Professor Beverly Skeggs at the London School of Economics used software to track the trackers, mainly Facebook, and analyse the use of data. Bids for the data of High Net Worth individuals and their network – that means you, dear reader – are made 50 billion times a day. With the January implementation of PSD2, a European directive that aims to increase consumer financial choice, Facebook and other tech giants will have access to even more of our financial data.

The bigger scandal lies in who else is being targeted. Professor Skeggs points out that the poor and the vulnerable are sold to advertisers – they are peddled debt, predatory lending, scams like Trump university. With more than eight million adults in the UK living with problem debt, US consumer debt levels at record highs and interest rates set to rise, those struggling will face even more adversity. Governments will need to respond. Big Tech would make a convenient – and justified – target.

German Justice Minister Heiko Maas summarised Big Tech’s attitude to the intrusion of the real world in a speech a few months ago:

“Experience has shown that, without political pressure, the large platform operators will not fulfill their obligations…”

A number of factors are coming together. As knowledge of the modus operandi of Big Tech becomes more widespread, politicians and the media will feed off each other. The headlines and the political wins will result in fines and laws which should make Big Tech more accountable.

Shareholders will also be more active, not least because of the changes to the tech business model. More staff to monitor posts, more staff to lobby politicians and more staff to communicate with the outside world…this sounds not entirely unlike the journey banks undertook post the financial crisis. But banks realised their culture needed to change as well. Big Tech is just starting to realise this. The EQ of Silicon Valley has yet to match its IQ.

 

 
catherine phelps