As the Big Tech World Turns
Apple, Google, Facebook, and Amazon are in a soap opera for world domination. Apple decided to knife Facebook and share the surveillance ad revenue with Google.
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Over the past few weeks, earnings from a number of big tech firms have come out. For years, firms blew out their numbers, earning far more than analysts expected. These are monopolies, after all, they can pretty much pick their revenue and earnings. The narrative has been ‘see antitrust doesn’t matter’ as Apple, Google, Facebook, Amazon, and Microsoft flit with market values in the trillions.
This week, however, Facebook did a big face-plant.
Of course face-plant doesn’t mean they did badly - $33.7 billion in revenue in one quarter is more than any firm in history, until recently. And their margins are insane, as Zuckerberg spent $10 billion on the metaverse, with no financial return, and his firm still made more than $10 billion in the quarter. But investors drove the stock down by $200 billion or so, again the largest single drop in market value by any company ever. (I’m tired of the superlatives…)
Meanwhile, Apple, Google, Microsoft, and Amazon continued their rise, with Google growing its advertising by 32% to a mindboggling $276 billion annual revenue rate.
What happened? A few things. The first is that Facebook is now besieged by antitrust enforcement, and it cannot buy any significant firms to extend its business now that its core enterprise - Facebook, WhatsApp, and Instagram - have saturated the market. It couldn’t enter payments in any meaningful way, it can’t buy Roblox, it has to invest in its own products to take on the challenge of TikTok. TikTok is a competitor for ad dollars to teens, but not for social networking/communications or for the attention of older demographics. But Zuckerberg is going to start making significant changes to the core products to try and get back the youth market, and he’s also investing in virtual reality to create a new computing platform. That’s good. It shows that prohibiting mergers forces firms to change behavior.
Far more significantly in terms of revenue, Apple, which is a key gatekeeper for Facebook because it controls the devices on which Facebook’s most profitable users access services, chose to stab Facebook by preventing tracking of users by apps on their mobile devices. The inability of Facebook to grab as much data as they want meant they couldn’t figure out if their ads worked, and so they had to reduce the price of ads to advertisers. What’s important here is that Apple didn’t reduce tracking for everyone, their new privacy changes don’t impact Safari, which is where most iPhone users search for things, aka use Google.
This picking and choosing mattered. Here’s Ben Thompson analyzing Google’s earnings a few days ago.
It’s not simply the fact that Google benefited from the overall increase in digital advertising: the company was almost certainly a benefactor of Apple’s ATT changes which hurt the Facebook-centric third-party advertising economy; advertising doesn’t disappear, it just flows to the places with better ROI.
Why would Apple exempt Google and not Facebook? It’s simple. Google pays Apple $15 billion a year, or more, to be the default search engine on Safari, because it splits ad revenue. That’s at the heart of the Department of Justice antitrust suit filed in 2020.
Apple, in other words, is a prime beneficiary of Google’s surveillance advertising, but it doesn’t make anything from Facebook’s data harvesting. So it kneecapped Facebook (and everyone else who harvests data), but it preserved its own revenue stream. Apple was the ‘good guy’ in tech, but that reputation is quickly eroding. Yesterday, the Senate Judiciary Committee passed a bill to force competition in app stores by 20-2, which is an astonishingly lopsided vote.
Meanwhile, Amazon blew out earnings, and its stock has popped. The infrastructure giant disclosed that its “advertising” revenues are now at $31 billion, which if taken separately is probably more profitable than any other part of the firm.
But of course, this isn’t really advertising money, it’s what are called ‘slotting fees,’ or payment for digital shelf space. As I pointed out last May based on an antitrust case by D.C. Attorney General Karl Racine, Amazon Prime is a mechanism for Amazon to control customer behavior, and then use that power to extract fees from sellers on its platform. It's wrong to say that Amazon has an advertising business, it has an online retail business and it charges fees for getting your goods in front of customers.
As ILSR noted, “This year, sellers will give Amazon an average of 4.6 percent of their sales revenue to pay for ad space, we estimate. That’s up from 3.4 percent in 2020, and 1.1 percent in 2016.” Firms don’t pay slotting fees because they want to, they pay because they have to, as consumer goods companies noted.
Enforcers are getting closer to unraveling what Amazon is doing, but we’re not there yet.
And so the soap opera continues…