May 2, 2018

Big Tech may have a lower-profit future

Illustration: Rebecca Zisser/Axios

With a black eye and a sullied reputation, Big Tech may be entering an age of tapered profits, the victim of much-reduced public tolerance for the industry's free ride, say U.S. and European industry leaders, analysts and academics.

Why it matters: Google, Facebook, Amazon and other major platforms are symbols of U.S. tech prowess and are expected to be among the country's most vibrant engines of future economic growth and jobs. But the new public zeitgeist casts doubt on how they have achieved their heights, and senior leaders at some of the companies themselves are internally rethinking their business models.

Quick take: Facebook and Google have built themselves up by offering free access to their platforms, while marshaling customer data into blockbuster, AI-driven machines that allow advertisers to micro-target customers. But Europe is about to activate new rules governing data, a shift that Citi, in a new report, calls "a game changer" that could spread around the world and wreak unknown financial havoc.

  • The first rules, called the General Data Protection Regulation (GDPR), take effect May 25 and give consumers greater rights to control who gets their data.
  • Later this year or in 2019, a second set of rules, called the ePrivacy Regulation, will put in place much more rigid requirements for individual consent for the sale and use of customer data.
  • ePrivacy regulation is creating the greatest uncertainty. "The potential regulation could be watered down yet, but if this does not happen it could have a devastating impact on the online advertising industry and future innovation as consent becomes the be all and end all," Citi said.

Citi cites forecasts that ePrivacy could trigger a 70% reduction in European display ad revenue, and a 33% cut in digital ad budgets, either of which could eviscerate Facebook and Google, at least under their current business model.

  • "The Europeans have wanted this for a long time and they are not going to let it go until they've milked it," Steen Thomsen, a professor at the Copenhagen Business School, tells Axios.

Dean Garfield, president of the Information Technology Industry Council, which represents tech companies in Washington, D.C., said changes to the industry will probably cut revenue in the short term but improve profitability further in the future.

  • One big change: Tech companies no longer boast of being "disruptive," which has assumed a more pejorative meaning than it previously carried, Garfield said.

What happens if the tech backlash spreads: It could take different forms, says Shivaram Rajgopal, a professor at Columbia University's business school. Among potential radical changes:

  • Treating them as utilities with, say, a 12% guaranteed return, "which is a huge amount," Rajgopal tells Axios.
  • Create an auction model, in which a handful or more search platforms compete for people's data.

What could be coming next: Whatever changes are made, Rajgopal says, history shows that it's best if the companies do them mostly voluntarily. "If you impose anything, the compliance mindset kicks in — the mindset of doing something intrinsically good goes away," he said. "It leads to gaming and transaction structuring."

But but but ... Arik Ben-Zvi, executive managing director of the Glover Park Group, a communications consulting firm, rejects the forecasts of doom to Big Tech's advertising model, and if he is right, "as long as they are ad-driven, their profit will be unbelievable."

Go deeper: Google founder Sergey Brin's annual letter to employees skips over the surface, calling for the "need for tremendous thoughtfulness and responsibility as technology is deeply and irrevocably interwoven into our societies." But he does not mention potential oversight.

Go deeper still: Facebook's next big headache.

Go deeper

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