Opinion: Taxation, regulation & competition — how FAANG’s growth may be controlled.

I recently wrote an article discussing the reasons why FAANG will benefit from the current climate. I want to provide my opinion to the flip side of that argument. Yes — COVID-19 has arguably put these businesses in a very strong position. With their stockpiles of cash and market leading positions in their respective industries, they will be well placed to capitalise in this unprecedented time of uncertainty. 

There are however a few reasons which will give smaller, more innovative and plucky start-ups some hope. I will break these down into three main categories: Taxation, Regulation & Increased Competition. 

Taxation: Amazon, Apple, Facebook, Google & Netflix

As we re-emerge from lockdown and COVID-19, one thing will be certain across the EU — there will be a substantial amount of debt which will need to be recouped. The UK has announced more than ￡330B in government-backed loans and guarantees to help support the country through the crisis. France, who have also been hit hard, have announced a support package to a similar value. 

Over the coming years, countries will be forced to evaluate the most effective ways of recovering this debt. One of those options is taxation — with the respective regions implementing new corporate tax legislation, as well as closing current loopholes.. Previously, these businesses have used tax havens to setup their European headquarters — including Ireland (Facebook, Google and Amazon), Luxembourg (Amazon) and Amsterdam (Netflix). This has allowed them to shift profits to lower tax locations — in turn reducing their tax liabilities in the UK.

This fact is highlighted if we look at the corporation tax paid by each of the aforementioned businesses in the UK in 2018. See details below (revenues in brackets):

• Facebook: ￡28M (￡1.6B)
• Amazon: ￡14.7M (￡2.3B)
• Apple: ￡3.8M (￡1.2B)
• Google: ￡66.8M (￡1.4B — this figure does not include ad revenue which is estimated to be more than ￡5B)
• Netflix: ￡0 — they actually received a tax rebate of ￡51K (￡700M)

Collectively these businesses paid ￡113M in tax on ￡7.2B in revenue in 2018 — or roughly 1.57%. 

These figures are astonishing and illustrate the need to review and implement new tax legislation in the near future. The UK has already taken steps and implemented a new Digital Services Tax, which came into effect on 1st April 2020. The additional tax will be charged at a rate of 2% on revenues driven from search engines, social media platforms and online marketplaces which derive value from UK users. Based on previous behaviour there will likely be ways to reduce this liability using new loopholes. 

When we emerge from this crisis I will not be surprised when governments begin to explore the existing tax rules — with them hopefully rolling out new legislation which ensures that these businesses start paying their fair share of tax in the region.

Regulation: Facebook, Amazon, Google

These businesses are already behemoths in their respective industries — Google owns more than 90% of the UK search market; Facebook is the clear leader in social and makes up 28% of the ad market; Amazon already owns more than a 30% share in the UK e-commerce market — more than three times their next rival. 

There were strong arguments before COVID-19 to break big tech up — creating legislation to ‘split-up’ their current operations into two or more independent, separately run companies (e.g. Facebook and Instagram OR Amazon Web Services and Amazon Retail). 

What would be the advantage of breaking these companies up? Just a few pros would include the reduction of monopolistic activity, an increase in innovation, the provision of a higher quality of goods and services and promoting the growth of smaller companies. 

And there is more of an argument to break these businesses up in Europe. Google and Facebook are more dominant here than they are in the US — beyond any competition in the market from a search and social perspective.

Once broken up, there would be more of a chance for smaller businesses to compete for ad dollars (in search and social), more new market entrants into the e-commerce/retail space and perhaps a few more social network alternatives.

There have also been strong calls to regulate these businesses more closely. Facebook, for example, has been the centre of a number of data related scandals in the recent past (Cambridge Analytica, 2016 US Election). Elizabeth Warren, a US senator, has been leading the charge calling for four main areas where regulation is needed including harmful content, election integrity, privacy and data portability. 

Implementation of regulation, whether it be breaking them up or implementing stricter operational rules will likely impact the growth of these businesses in the future.

Increased Competition: Netflix

Netflix is the clear market leader in the streaming space with a 19% share. Each year they are adding new, high-quality content — in 2020 they are expected to spend more than $17B on new shows and movies. That may sound impressive, however in 2015 they had a market share of 43% — which has been steadily dropping over the past 5 years. Why the change?

Put simply, there has been a significant increase in competition in the streaming market. Amazon has spent heavily on their Prime Video proposition in the past few years, and has comfortably taken up the number 2 position in the space. There has also been new market entrants such as Disney+ — who have now removed most of their owned and operated content from Netflix. Apple TV+ has launched, and whilst they are behind others in the content game, they have another clear advantage. Their app is preloaded on all new Apple iPhones providing consumers with easier access. 

And then there are smaller players such as HBO Max (due to launch in May & are creating unique content), Hulu and hayu. who are vying for market share in an increasingly cluttered ecosystem. 

In many cases these platforms are walled gardens, protecting the integrity and ownership of their own content. As a consumer you will be able to pick and choose which platforms and content you ultimately subscribe to. For most, the cost will be too high to subscribe to all platforms which will lead to a knock on effect for Netflix — with a potential reduction in growth or a loss of subscribers over time. 

And as Netflix funds their content predominately by raising debt, the increased competition and related impact will put them in a much riskier and unpredictable position in the near future. 

Conclusion

We are in unprecedented times and FAANG, with all of their might and money, will likely use their market dominance to great effect once we move past the COVID-19 crisis. With their position in their respective markets, they are likely to innovate, acquire businesses and grow their revenues significantly in the near future.

There is hope however for small business and consumers — governments need to start addressing the current issues which relate to these corporations. In times of chaos or shock, there is always opportunity — it is time for our elected officials to capitalise on this opportunity and implement change for the future of each respective industry. Netflix is already on that path with market competition increasing — thus providing the consumer with more choice. 

It will be interesting to see how this plays out in the months and years to come.