Offline markets are tech giants’ next quest

The combined quarterly revenue of a handful of Internet companies is staggering. As the recent financial results have shown, the $142 billion figure is a 12-fold increase over the companies’ revenue 10 years ago.
 

This is not surprising, as the Big 5 Internet companies – Google, Amazon, Apple, Facebook, and Microsoft – have been amassing their wealth for many years. With their innovative online business models, they have acquired tangible and intangible wealth, and taken over promising start-ups in multi-million-dollar deals.

Online companies exploring offline markets

Typically operating in the online markets, these five companies have recently been seeking offline ventures. Apple has diversified its products to launch watches and televisions and has invested in solar energy in solar farms in California and Nevada. The company is now experimenting with electric cars, and aims to launch driverless cars by 2020.

The second-largest Internet company, Amazon, which relies heavily on postal services to deliver purchases to its customers, has been expanding its logistics branch. It acquired its own ocean shipping licence to handle maritime freight forwarding, arguably to gain more control over its shipments.

The company also has a handful of physical book stores (although it does not intend to further expand in this area), and a string of award-winning films and upcoming television series. What has solidified its physical merchant status is the company’s acquisition of Whole Foods, an upscale grocery chain, known for its self-created quality standards.

Internet giant Google has invested in renewable energy generation. It has also launched its own delivery service to compete with Amazon; it gains its edge by teaming up with offline retailers who have not yet embraced e-commerce. The company is now experimenting with drones and the drone delivery market, and with self-driving cars.

Microsoft’s diversification portfolio is not as vast as those of the other companies. Yet its video gaming brand Xbox and its successors generate substantial revenues for the company. Facebook is also exploring  opportunities offered by drones. Last year, its lightweight, solar-powered drone completed its first test flight. The company’s aim is to deliver Internet access through its high-altitude drones.

Implications for growth

As The Economist rightly asks, just how much bigger can these companies get? Unprecedented growth is arguably a regulatory concern, as authorities have to contend with market dominance, tax avoidance, labour issues, and the ire of traditional businesses. Yet, governments are not watching quietly. Instead, they are flexing their regulatory muscles, scrutinising the companies, and imposing fines on illegal practices.

1. Market dominance

The market shares enjoyed by large companies lead to substantial dominance in a number of markets. One such case involves Google, which ended up in hot water with European regulators over antitrust practices, giving impetus to a wave of criticism by businesses who felt they were being trampled on.

The company recently lost a seven-year case when EU regulators fined it €2.4 billion for violating competition rules. According to EU Commissioner Margrethe Vestager, ‘Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.’ The ruling was triggered by complaints from European and US  retailers who claimed that the company abused its search market dominance to give its Google Shopping service an advantage over other retailers, thus creating a monopoly.

Among other investigations is the scrutiny Amazon underwent by EU regulators over e-book deals with publishers. The investigation, which examining ‘whether Amazon’s contracts prevent[ed] competitors from developing new products and limit[ed] competition between sellers of e-books’, ended in a settlement.

2. Tax avoidance

Four years ago, the French government’s proposal to fiscalise the Internet triggered a wave of discussions. It was possibly one of the first signals that governments were moving closer to taxing Internet businesses, which represented an untapped source for empty government coffers in a time of economic crisis.

It has, however, been an uphill battle for governments. The annual study by the US Public Interest Research Group confirmed that three of the Big 5 were among the top 10 US companies with most money held offshore. The economic contribution of the Internet industry to providing social stability and cohesion has, in fact, been limited.

In the light of the large revenues, certain practices do not go down well with authorities. A year ago this month, the European Commission ordered Apple to pay Ireland €13 billion in taxes, after an investigation into Apple’s ‘sweetheart tax’ deal granted by the Irish state. A flurry of similar investigations – some of which are ongoing – were initiated in Indonesia (Google), Italy (Google), the UK (Facebook), and the USA (Amazon) as  governments are increasingly taxing the Internet industry.

Yet, it is not always straightforward for the authorities. Google dodged €1.1 billion in taxes after a Parisian court last month ruled that the company did not have a permanent establishment or sufficient taxable presence in the country to justify being taxed there.

3. Jobs and job creation

Based on the latest data, the five companies employ almost 700,000 people. This is in addition to jobs which they help sustain indirectly. Contributions to the labour force are welcomed by governments.

When it comes to corporate decisions, however, companies take many other considerations into account. Apple’s letter to the public, published right after the European Commission’s ‘sweetheart deal’ €13 billion fine, was quite clear: ‘At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money… Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe.’

4. A threat to traditional players

Traditional taxi companies and hoteliers worldwide are familiar with the threat which Internet companies represent. On one hand, innovation is largely encouraged, and the Internet offers a vast sandbox for testing and marketing new ideas.

On the other, this can quickly lead to growth, and turn a company’s humble beginnings into substantial market shares. In particular, companies such as Uber and Airbnb, which have flourished in the sharing economy market, represent a threat to traditional players. But so do large firms with enormous purchasing powers who are able to close multi-billion-dollar deals, such as Amazon’s $13.4 billion Whole Foods acquisition.

The continued growth of Internet companies will keep putting existing rules – and the governments’ need to control them – to the test. The main issue is whether the pressure wielded by authorities will manage to keep the unprecedented growth under control.

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