The Economist - UK (2022-04-30)

TheEconomistApril30th 2022 Business 59

made  up  more  than  90%  of  revenue  (see
chart  2).  Retail,  entertainment  and  con­
sumer­goods firms splurged most.
Concentration is also present at the lev­
el of “impressions”, as each incident of an
advert  appearing  on  a  user’s  screen  is
known in the business. That was one find­
ing  of  internal  research  by  Google,  which
was  unearthed  as  part  of  a  case  bought
against the tech giant by another group of
American state attorneys­general. The stu­
dy  found  that  in  America  20%  of  all  im­
pressions produce 80% of web publishers’
ad  revenue.  High­value  impressions  are
ones  aimed  at  users  likely  to  make  a  pur­
chase.  Google  referred  to  this  phenome­
non internally as “cookie concentration”.
Besides  a  heavy  reliance  on  a  few  big
profit  generators,  another  undisclosed
weakness  is  customer  churn.  Tech  giants’
customers are often assumed to be devoted
to  their  products  and  services—or  even
hooked.  The  companies  do  not  challenge
this assumption in public, because it con­
veys  the  sense  of  captive  markets,  which
are beloved of investors. In fact, their mar­
kets may not be quite so captive. 
The  Epic  case  revealed  that  roughly
20%  of  iPhone  users  who  bought  a  new
phone in 2019 and 2020 switched to anoth­
er  smartphone.  Leaked  documents  from
Meta show that fewer teenagers are signing
up  to  Facebook  and  those  that  do  are
spending  less  time  on  it.  Even  Instagram,
Meta’s youth­friendlier platform, is losing
out to rivals. A leaked internal report from
March last year found that teenagers were
spending more than twice as much time on
TikTok, a hipper short­video app. 
Young people are not the only custom­
ers  beginning  to  retreat  from  the  plat­
forms.  So  are  young  companies.  Last  year
was  a  bonanza  for  startups.  Global  ven­
ture­capital funding reached $621bn, more
than  double  the  previous  year’s  total.  Ac­
cording  to  a  report  by  Bridgewater  Asso­
ciates, the world’s largest hedge fund, of all
the money invested in early­stage compa­
nies about a fifth is spent on cloud servic­
es, a market dominated by Alphabet, Ama­

zonandMicrosoft.Anothertwo­fifthsgoes

onmarketing,whichinthedigitalrealmis

dominatedbyAlphabet,Metaand,increas­

ingly,Amazon.Bridgewaterestimatesthat,

alltold,around10%ofthetotalrevenueof

Alphabet, Amazon and Meta is derived

fromthestartup ecosystem.That isthe

equivalentof$84bneachyear.

That flow of money may be ebbing.

Fearsaboutrisinginflation,Russia’swarin

Ukraineandthechanceofa recessionhas

sentthesharepricesoftechfirmstum­

bling.Thenasdaq, a tech­heavyindex,has

fallenby20%fromitspeakinNovember.

Fallsinpublicmarketsarefilteringdown

tothestartupworld.OnMarch24thInsta­

cart,agrocery­deliveryfirm,cutitsown

valuationby38%.Lowervaluationswillin

turn make it harder for firms to raise capi­

tal.  Investors  say  they  expect  to  see  start­

ups  tightening  their  belts  in  the  coming

months. That means less spending on the

cloud and ads.

What do all these vulnerabilities add up

to?  In  the  worst­case  scenario,  where  the

toughest­talking  regulators  in  America,

Britain and the euget their way, the answer

is  an  awful  lot.  Europe  poses  the  biggest

threat.  The  Digital  Markets  Act  (dma)  is  a

sweeping  new  set  of  eurules  designed  to

rein  in  big  tech  that  was  finalised  last

month.  It  will  only  affect  some  business

units and is targeted at tech’s European op­

erations. Bernstein, a broker, finds that Al­

phabet,  Apple,  Amazon  and  Meta  make

$267bn  of  revenue,  about  a  fifth  of  their

combined  total,  in  Europe.  A  back­of­the­

envelope calculation by The Economistsug­

gests the dmaputs perhaps 40% of the four

firms’ European sales at risk. 

Globally, Alphabet is the most exposed,

with  nearly  90%  of  European  revenues

(equivalent  to  27%  of  its  global  revenues)

in danger. In America Google’s search mo­

nopolyisbeingtargetedina casebrought

bya teamofstateattorneys­general.The

DepartmentofJustice isthinking about

followingsuit.ThatputsAmericansearch

revenueof$70bn,a quarterofAlphabet’s

total,atriskofantitrustaction.IfAlphabet

reducedits commissionon in­app pay­

mentsfrom30%to11%—theshareagreed

inadealbetweenGoogleandSpotifyon

March23rd—Americanapp­storerevenues

wouldplummetfrom$11bnto$4bn.To­

gethertheseactionscouldimperilperhaps

$150bn of Alphabet’s revenue, or about

60%ofitsglobaltotal.

Manyappyreturns

Apple’sworst­caseexposureissmallerbut

stillsignificant.If trustbustersputa stopto

its sweetheart search deal with Google, that

would  imperil  $8bn­12bn  a  year.  Should

Apple  follow  Alphabet’s  lead  and  slash

app­store commissions, or be forced to do

so  by  new  laws,  its  app­related  earnings

would  also  drop,  from  about  $25bn  to

$9bn.  Apple’s  total  exposure  would  be

roughly $35bn, or a tenth of global revenue.

Amazon  stands  to  lose  up  to  $77bn  per

year, or 16% of global revenue, if it is barred

from mixing its own retail operations with

those of third parties on Marketplace. 

Some  lawmakers  and  regulators  have

been murmuring about breaking up Ama­

zon altogether, into a retailer and a cloud­

computing  provider,  for  example.  The

rump Amazon would either be deprived of

its e­commerce sales (about 70% of current

revenues) or its cloud profits (about three­

quarters of its profits). The same voices are

calling  to  split  Meta.  If  America’s  Federal

Trade  Commission  got  its  way  and  forced

the social­media conglomerate to hive off

Instagram  and  WhatsApp,  the  company

could  lose  $42bn  in  revenues  from  Insta­

gram and another $2bn from WhatsApp—

or two­fifths of its total.

All  told,  if  everything  went  against  big

tech, perhaps $330bn in revenues would be

at risk, or about a quarter of the total for Al­

phabet,  Amazon,  Apple  and  Meta.  That  is

before  including  the  two  antitrust  bills

making their way through America’s Con­

gress.  Among  other  things,  these  aim  to

stop  platform  owners,  such  as  app  stores

and  search  engines,  giving  preferential

treatment  to  their  own  products.  The  fi­

nancial  impact  of  such  rules  is  hazy  but

could, as in Europe, be substantial.

This catastrophic case for big tech is un­

likely  to  materialise.  Many  attempts  to

check  the  power  of  the  platforms  have

gone nowhere. The current crop is likely to

be  watered  down  and  could  take  years  to

take effect. But a few successful tech­bash­

ing  efforts  could  make  a  meaningful  dent

in  the  firms’  prospects.  And  by  lifting  the

veil on tech titans’ secret finances, theyare

already  alerting  challengers  to  whereex­

actly margins are ripest for eating into.n

The minus of ads

Advertising revenue by size of advertiser

Britain, 2019

Source:CompetitionandMarketsAuthority

2

501 100

Advertiserpercentile,100=largest

Alphabet^100

80

60

40

20

0

501 100

Meta

Cumulative

share, %