The Biggest Arbitrage in History
Shell, BP, ExxonMobil — all household names, all providing a product everyone is familiar with and that we all come across every day; whether we are driving cars, touching plastic containers or walking along the road. These companies have one thing, at least, in common — they pump oil from under the ground and then ultimately sell it. That resource is leased to them by sovereign governments, and, depending on where they sink a well, the costs of leases, royalties and other charges can range from 12.5% to 30% or more, before VAT and other duties begin to be applied.
Given that the asset “belongs” to the tax payers of the relevant country, each and every one of those taxpayers benefits from those payments — in effect their resource is earning them a return, and all things being equal reducing the amount of tax that they pay. And why not? After all it stands to reason that a company should pay for the raw materials that it uses to produce its goods — which farmer gets his land, livestock or seeds for free? Indeed even the poorest artist needs paint and paper (or these days perhaps a laptop or tablet powered by electricity) to begin to fashion a masterpiece.
But what of the world’s newest and fastest growing industry? What do the miners of data, the farmers of information, the drillers of details pay for their raw materials? Sure they use clever know-how to extract meaning and value, much like those genius engineers who build oil rigs that sit in thousands of feet of angry water or the farmers who irrigate parched deserts to bring forth their crops, but the big difference between the so-called Big Data firms and others is that these new industries pay zero for their raw materials.
Google offers fast and accurate search results, Facebook allows the sharing of pictures and news with anyone you want (and sometimes those that you don’t) anywhere in the world at any time, whilst Amazon suggests goods that they think you might also like to buy — and all of this done using the information that we freely surrender. Our search requests, behavioural patterns, “likes”, “friends”, Trip Advisor reviews, tweets and so on all represent the raw materials that the modern-day technology companies take, repackage and then sell on to generate their revenues and so augment their massive valuations.
This Faustian pact has allowed tech companies to create monolithic monopolies on the cheap, growing ever larger by bolting on the next new tech play so as to stifle competition and bring ever more personal data into their purview. But weekly we learn of data hacks, not just of a few credit card details here and there, but security breaches that impact millions of individuals. The Snowden revelations further give us pause for thought about our privacy and the way we nonchalantly send data across the web.
Aggregating the market capitalisations of the household names of the new economy — lets start with the holy trinity of the web — Google, Facebook and Twitter. Their combined market capitalisation is $625bn, now add in the value of Trip Advisor, Yelp, Yahoo and Linkedin and you’re up to around $715bn. And that’s before taking the value of iTunes within Apple, Amazon’s $173bn or any of the other tech companies that leverage the daily flows of free information that we push their way — think Uber, Ebay, Ocado, etc. In short, among these companies there isn’t much change from $1trn.
We are witnessing the largest arbitrage in history. Never before has there (legally) been such a gulf between the cost of a raw material and its inherent value. Whilst I’m not here to criticize those clever companies I do believe that it is inevitable that this gulf in valuation will begin to narrow. Slowly at first and then more quickly as people cotton on to the inherent value of their personal data. After all, our data can’t be priced lower than zero, its value can only go up and there are one or two straws in the wind to suggest that this change has already begun:
The recent launch of Tsu, a social network that pays users a share of advertising revenues in return for posting content , and UK startup Letyano — the feedback app that allows merchants to thank you directly for letting them know how your experience with them was. DuckDuckGo, a search engine unique in the fact that it does not track or record your searches, is one of three default search engines to choose from, alongside the usual Google and Bing in Apple’s latest OS release. Elsewhere Jaron Lanier, the man widely regarded as the father of virtual reality and something of a star in Silicon Valley has cited Instagram in his recent book “Who Owns The Future” saying that whilst the 13 staff were valued at north of $1bn when the company was purchased by Facebook, the millions of individuals who daily post their pictures on Instagram were paid zero despite the inherent value that they obviously created.
History tells us that mispriced assets tend to revert over time to their long-term mean. Whilst there is no precedent for the scale and breadth of the modern day internet, it doesn’t require a huge leap of imagination to foresee a time when companies will literally buy our profiles from us. Rewarding us directly for letting them know what we want to buy, or do and who we’d like to do it with. After all, when I fill my car up with that taxed petrol I know fairly accurately how far I can go and exactly what it costs me, surely that’s not too much to ask of the most sophisticated businesses of the 21st century?
© Guy Winterflood 2015