It’s time for enhanced disclosures on Big Tech’s sources of profits and monetization
“Industry estimates”, “redacted” and “analysts estimate”. These are the typical phrases you will find when trying to find out what the product market shares of Big Tech firms are across a range of sectors such as cloud computing, social networking, digital apps and advertising.
Why must investors and the wider public rely on private estimates for the true monthly active users on Facebook’s WhatsApp, or the profit margins of Apple and Alphabet’s App Stores? Why don’t Big Tech release these figures themselves?
In a new policy report by the UCL Institute for Innovation and Public Purpose (IIPP), ‘Crouching Tiger, Hidden Dragons: How 10-K disclosure rules help Big Tech conceal market power and expand platform dominance’, we explain how Big Tech are able to disclose so little about their products and platforms, the dire consequences of this for fair competition and regulatory oversight, and what policymakers can do about it. We show that this disclosures void has helped Big Tech conceal market power, increase profit margins, and expand their digital platform dominance.
The reporting obligations at the Securities and Exchange Commission (SEC) — the primary financial markets regulator in the U.S. — have not kept pace with Big Tech’s diversified platform business model. This business model has two key features which require unpacking if disclosures are to improve.
The first is the digital platform ecosystem, reliant on a critical mass of users to make it worthwhile to be on the ‘network’. Users are on the platform to check their emails, send a message to a friend, search for directions, buy a new t-shirt, download an app, or subscribe to a new music service. Producers are on the platform to make money from these needs directly or through the sale of advertising. The so-called ‘monetization’ of users, often through product bundling and complex cross-subsidization, defines these platforms’ business models. The company’s user base truly underpins its potential for revenue and profit growth through its platform ecosystem, even if it is not monetized yet. But from a disclosures perspective, little of this user operating data is revealed to investors and the public.
User-based operating metrics define the narratives sold to investors. Yet only aggregate financials are released in Big Tech’s 10-K reports, without the constituent operating metrics required to properly evaluate their business prospects and market shares. Facebook (now called ‘Meta Platforms’), for example, does not release its monthly active user (MAU) numbers separately by each of its platform and products (such as WhatsApp, Instagram, Facebook, Messenger, etc.). Facebook doesn’t release this data perhaps because it knows then the FTC might have a better idea of what its market share in specific product markets might be.
Similarly, Alphabet owns at least nine products — including Google Maps, Chrome, Android, Gmail, and YouTube — each with more than one billion active monthly users and dominant global market shares, but with minimal 10-K disclosure requirements since they are provided ‘free’ to the consumer and often monetized only indirectly (through their user data helping improve monetization on other products). This has allowed Alphabet to gain dominant footholds in these key global digital markets while avoiding regulatory scrutiny.
Alphabet’s YouTube product has such a large and engaged user base that its potential for direct monetization is seemingly unlimited now that most of its viable competition has been squashed (the rise of Tik Tok notwithstanding). Yet 10-K SEC disclosure rules have no specific obligations which would require Alphabet to file operating or financial metrics on YouTube — unless its direct monetization generates enough revenue to meet a segment reporting threshold. The SEC did its best to compel Alphabet to release YouTube as its own operating segment. But at the end of the day all it could get was one or two headline financial figures on YouTube when Sundar Pichai became CEO in Q4 2021.
The second feature of Big Tech’s business model which requires proper disclosure is its diversified product offerings, undertaken to retain users within their platform’s ecosystem. Big Tech has diversified massively, with all five companies now offering everything from credit cards, advertising, and App Stores, to hardware, cloud computing, gaming, home security, digital home assistants, streaming entertainment, and more. This means the sources of profits and revenues, and how users are monetized, are rapidly evolving within these ecosystems. Yet on paper none of the financial (or operating) data on this diversification is reported because segment reporting isn’t working (see Figure 1 below).
‘Segment rules’ are what should ensure Big Tech publicly reveal financials on any product with more than 10% of total segment assets, revenue, or profit/loss. In practice, segment reporting fails since management can define an operating segment pretty much as it sees fit. And Big Tech have become so big that enormous product segments of theirs, with sales in excess of $20 billion, might still fail to meet segment reporting’s 10% threshold to be disclosed as an independent operating segment.
As a result, Big Tech choose to report themselves as single or two segment companies, despite having up to a dozen of products with major user bases and/or revenue streams. Apple only disaggregates its financials by geography. Facebook was a single segment company until it changed to Meta Platforms. Alphabet still does not reveal its financials and operating metrics by product in any meaningful detail.
Figure 1. Big Tech’s Reported Sales by Segments Over Time (US$ Millions, Alphabet on log scale).
Such a highly aggregated level of financial reporting is appropriate for a mom and pop shop perhaps, but not some of the largest (and most diversified) companies in the world by market capitalization.
Moreover, few financial details are provided by segment. Profit margins, for example, a useful measure of market power, cannot be calculated on a company’s products without a measure of profit, cost, and assets being disclosed on a disaggregated product-by-product basis. And without these disclosures regulators are left to rely on whistle-blowers and litigation for such detailed data.
In “Crouching Tiger, Hidden Dragons”, we detail how Big Tech uses this disclosures flexibility as a weapon to expand their product and platform dominance and to maintain high profit margins. We carefully reconstruct Amazon’s historical 10-K reporting to show that it may have intentionally withheld Amazon Web Services’ (AWS) stand-alone product financials from its 10-K report, despite triggering segment reporting rules, to extend its first mover advantage in cloud computing. Similarly, Apple relied on segment disclosure rules in its trial against Epic Games to claim that the profit margin of its App Store did not exist, withholding a key piece of (potentially incriminating) evidence on its marker power: “We don’t have a separate profit and loss statement for the App Store,” argued Apple’s chief compliance officer.
Reforms to disclosure and reporting rules
What can be done to ensure Big Tech discloses the financial and operating metrics needed for the public to understand and regulate Big Tech’s diversified platforms? It is becoming increasingly clear that fighting antitrust on a case by case basis, while necessary, cannot be the sole basis upon which to achieve the antimonopoly goals of society.
To avoid an overreliance on the courts and litigation for information on Big Tech’s business activities, which should already be publicly available, we propose modernizing the existing SEC 10-K disclosures for the era of big digital platform conglomerates. This could help antitrust authorities do their jobs better, encourage new entrants to compete with Big Tech, and help investors allocate capital better.
A modernized 10-K reporting framework requires establishing a tech-specific SEC disclosures framework focused on the multi-sided digital platforms. The Big Tech five account for 20–25% of R&D by all non-financial public firms in the U.S. and a similar amount of the S&P 500’s market capitalization (pre-Tesla’s Q3 2021 boom). The business model of Big Tech increasingly drives swings in the U.S. economy and capital markets, but remains invisible on paper.
We have two specific recommendations to make Big Tech’s business model visible in their 10-K paper filings. The first is mandatory 10-K reporting on Big Tech’s user operating metrics (e.g., monthly active users by product and platform) on products with a minimum number of end-users and business users (‘gatekeeper provisions’), along with a detailed narrative about the monetization of those products in other parts of the business. The second is enhanced disaggregation of company financials for any product with $5 billion or more in annual revenues. If enforced and undertaken carefully, we believe these reforms could have far-reaching impacts.
By itself such disclosures won’t change market structures and lead to new regulations. But by shining a light on what remains hidden, enhanced public disclosures can provide a basis for regulators, competitors, and investors to do their jobs much more effectively.