What investors should watch out for in big tech regulation?

We have known for a while that the relatively lenient regulatory environment for big tech companies is coming to an end.

While western governments have encouraged growth of these companies through a soft approach to taxation and user rights, they are now making moves to crack down on the skewed distribution of power between tech giants, their competitors and users.

The issue is now overlaid by ongoing US-EU trade tensions as a result of US President Donald Trump’s threat of sanctions on key EU exports. Big tech companies – mostly the ‘big four’ (Google, Facebook, Apple, Amazon) – have been targeted on a number of fronts by EU regulators. Unsurprisingly the US administration argues these actions unfairly target US companies.

Although changes in regulation are mostly designed to target the largest players, investors interested in tech companies of all sizes should be aware of the policy backdrop – especially the transnational impact of regulation – and consider the fallout for their assets over the coming years.

In the context of Brexit, investors should watch for signs of whether future governments will seek to follow the EU’s lead in this area or diverge from it.

There are three main areas to watch for developments:

Consumer protection

This is progressing in a number of forms: censorship and removal of inappropriate content; data protection/privacy; and copyright.

The latest push in the wake of revelations about the US election and Brexit referendum is to tackle the spread of disinformation online. In September 2018 large internet platforms signed up to a voluntary code of practice with the EU committing to take action on fake news, but this has had mixed success and the incoming EU Commission may yet seek to regulate.

In the US Facebook Chief Executive Mark Zuckerberg appeared before the US Congress in April to answer questions on how the platform is tackling disinformation. Similar concerns were raised in a wide-ranging series of hearings on big tech held by members of Congress this month.

Although this action in the US represents a significant shift in its treatment of big tech, serious regulation is likely to be a way off and will be bitterly contested when compared to the EU.

Elsewhere businesses are getting used to the requirements of GDPR, which reformed consumer’s data rights in the EU. The next challenge for internet platforms will be complying with the new EU Copyright Directive, approved by a narrow margin in February, which makes platforms legally responsible for copyright-protected material uploaded by users.

Anti-competition

Big tech has been a target of the EU Commission’s competition body under head  Margrethe Vestager, who has issued $9.25 billion in fines against Alphabet Inc.’s Google since assuming office in 2014.

Other members of the big four have also come under EU scrutiny: in March 2019 music streaming service Spotify filed a complaint with the EU about the behaviour of Apple, claiming it unfairly charged competitors to appear on the App Store; and in July the Commission announced it would be investigating Amazon over use of data from sellers on its marketplace to achieve a competitive advantage for its own products.

US authorities are also taking an interest in this area. In June the Federal Trade Commission agreed to investigate possible anti-competitive behaviour by Facebook and Amazon (and has already issued Facebook a $5bn fine for mishandling personal information) while the Justice Department will oversee investigations relating to Google and Apple. On 23 July the DoJ also announced it was launching a broad investigation into whether online platforms are illegally harming their competitors and stifling innovation.

US politicians including presidential hopeful Senator Elizabeth Warren (Democrat) have spoken out about the issue. Warren has even proposed breaking up Amazon and unwinding its acquisition of supermarket Whole Foods, though in practice this is unlikely to be achievable.

Taxation

It has been a sore point for major EU economies that despite serving and collecting data from customers across Europe, big tech has been able to pay the bulk of its tax in countries like Ireland which offer favourable tax terms for headquartering there.

A number of countries, as well as the EU, have proposed introducing a levy on the revenues of large tech companies generated in their territory to resolve the problem. Although initial EU wide proposals for a tech tax stalled earlier this year, new Commission President Ursula von der Leyen has indicated she would like to re-open the debate.

In July the French parliament became the first to approve such a measure – a 3 per cent tax on local revenues of digital companies with revenues of more than €750 million, where €25m or more is generated in France. In response the US has launched an investigation into the tax, a step which could ultimately result in tariff imposition.

Chancellor Philip Hammond announced a similar scheme in the Autumn 2018 budget. However the sensitivity of the US-UK relationship in the context of Brexit makes it doubtful whether this will be implemented in the near future.

 

See more articles by Olivia Rohll