By Alexander Jones, International Banker
With debilitating economic headwinds persisting throughout much of 2022, the tech industry could not have experienced a more decisive end to its unprecedented 15-year bull run. But while the deteriorating economic landscape was certainly pivotal in preparing the unforgiving conditions for such substantial losses, the pursuit by authorities to regulate big tech seems to have also played an important role—one that will only intensify further this year.
Indeed, tech ended up suffering its worst year since the dark days of 2008, with the S&P 500’s (Standard and Poor’s 500) Information Technology sector notching up a 30-percent loss across the 12 months. Even the tech behemoths could not escape the rout, with Apple, Amazon, Alphabet, Microsoft and Meta losing a whopping $3.9 trillion in combined market value. And although surging inflation and mounting fears of a recession have undoubtedly underpinned much of the gloom, an expanding regulatory mandate has significantly contributed to big tech’s sharp reversal of fortune.
Indeed, the increasing frequency with which regulatory intervention in big tech activity is occurring these days underscores the growing political appetite within the United States and the European Union (EU) to rein in the invariably anti-competitive practices of tech giants. On December 8, for instance, the US consumer-protection agency, the Federal Trade Commission (FTC), filed a lawsuit to block Microsoft’s $69-billion acquisition of video game-maker Activision Blizzard, which would be both Microsoft’s and the video-gaming industry’s largest-ever deal.
The suit also sought to block Activision’s blockbuster gaming franchises, such as Call of Duty, on the grounds that the deal would enable the tech giant to suppress competitors to its Xbox gaming consoles and rapidly growing subscription-content and cloud-gaming businesses. “Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, director of the FTC’s Bureau of Competition. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”
On the same day, moreover, the FTC attempted to use a novel legal argument in court against Facebook’s parent company, Meta, to prevent the company’s $400-million deal to acquire the virtual-reality (VR) start-up Within. The scarcely used strategy was to argue that the deal would damage potential competition in the potentially robust future market for virtual-reality products (rather than most antitrust cases that have typically focused on competition in markets that are already mature). While a federal judge eventually rejected the FTC’s attempt to block the deal, the case demonstrates the lengths to which the US government is willing to go to not only prevent big tech’s potential anti-competitiveness but also expand the ways in which antitrust laws can conceivably be applied.
And why not, particularly as the US public seems to be on board with more oversight being enacted against big tech? A May 2022 Pew Research Center survey found that 44 percent of Americans think major technology companies should be regulated more than they are now. And although this figure was down from the 56 percent that Pew recorded in April 2021, the share of Americans who want less government regulation of such companies was at around 20 percent. Morning Consult’s tracking of consumer attitudes toward regulating big tech, meanwhile, demonstrates considerable bipartisan support for more regulation. “Since at least August, more people—Democrats and Republicans alike—support greater government regulation of major technology companies than oppose it,” the market-intelligence firm noted in January. “This net support notably rose among Democrats in November following major Democratic wins in the Senate, as well as Elon Musk’s Oct. 27 takeover of Twitter, which had a significant polarizing effect on the brand.”
Such figures lend considerable support for Washington extending its tentacles further into the often-opaque activities of big tech. But even with this renewed fervour, is the current approach towards big tech regulation proving sufficient or, indeed, effective? As far as anti-competitive behaviour is concerned, steps are demonstrably being taken to remedy the threats of excessively unfair monopolistic practices. But shortcomings remain, particularly regarding financial services, such as payments, deposit-taking and insurance underwriting, that are being carried out within broader, more diversified big tech ecosystems and end up being underregulated at the consolidated level.
“In the case of big techs, most of the risks arise from their ability to leverage on a common infrastructure—notably large amounts of client data—that helps them gain a competitive advantage in a wide variety of non-financial and financial services and create substantial network externalities,” an October 2022 paper from the Bank for International Settlements (BIS) noted. “Big tech business models entail complex interdependences between commercial and financial activities and can lead to an excessive concentration in the provision of both financial services to the public and technology services to financial institutions; consequently, big techs could pose a threat to financial stability in some situations.”
The BIS also highlighted some of the most pressing regulatory shortcomings that persist when addressing big tech:
- Regulatory approach: The BIS noted that financial regulations are often geared towards reducing the risks posed by the performances of specific activities, such as payments or wealth-management services. But they tend to ignore potential spillover effects from other activities that big tech groups perform. They also fall short of addressing the different challenges associated with large platform companies that benefit from the “data-network-activities” loop, which could have implications for financial stability, such as the concentration of market power and data governance.
- Scope of application: The regulatory perimeter, at best, extends to a subgroup of entities within the overall big tech group. Even if a banking entity exists within the group, the existing banking regulations do not apply to the wider big tech group. As such, the enforcement powers authorities possess tend to reflect only the objectives of sectoral regulations (such as the protection of depositors, insurance policyholders or investors) and may prove insufficient in addressing all relevant risks posed by big tech.
- Supervision: Big techs may contain non-financial entities within their groups that are closely tied to regulated financial entities of the group (such as subsidiaries or affiliates) and work together to support the digital-platform ecosystem. Some of these entities may not be subject to specific oversight when the supervisor does not have the authority to obtain the information necessary to evaluate the risks posed by the non-regulated entities.
- Transparency: While authorities can impose reporting and disclosure requirements on regulated entities, they may not be effective due to the:
- cross-sectoral and cross-border nature of big tech activities;
- centrality of data flows and cutting-edge technology within the digital-platform ecosystem;
- large number and variety of entities within big tech groups, arranged in complex, layered organisational structures, making it challenging for financial authorities to understand their inner workings deeply.
But while identifying areas for improvement is one thing, putting them into practice is quite another, particularly when different countries have different relationships with—and varying reliance on—big tech. Ireland, the country responsible for regulating tech in the European Union regarding data protection, has been accused by the European Data Protection Board (EDPB) in Brussels, Belgium, of taking a far too liberal approach to big tech entities operating across the bloc. In response, Ireland’s Data Protection Commission (DPC) announced plans in January to sue the EDPB for “overreach” of its authority.
“The strength of the DPC’s statement, notably the reference to ‘overreach’ by the EDPB, is striking and is indicative of a long-running tension,” Jonathan Kirsop, a partner at London, England, law firm Pinsent Masons, told UK news publication The Telegraph in early January. “Although the DPC has recently been imposing significant fines, particularly on technology companies, it has been criticised by other authorities for not being strong enough.”
Dr. Johnny Ryan of the Irish Council for Civil Liberties (ICCL) has also been critical of Ireland’s regulatory efforts, or lack thereof. “The object of Europe’s landmark law—the GDPR [General Data Protection Regulation]—was to finally stop the data free-for-all within and between these companies, and that law put the onus on Ireland’s authority—the DPC—to police it,” Ryan explained to economics-focused outlet Marketplace. “But in my view, it’s the DPC that is paralyzing Europe’s enforcement against big tech. It’s isolated in Europe. There’s clearly a problem at the commission.”