Saturday, January 23, 2021

OPINION AND ANALYSIS | 28-07-2018 08:49

Blood in Silicon Valley

No longer are we amazed at the incredible growth of these fast-paced startups that promised to disrupt our world.

Over the past week, the duopoly that effectively controls the internet announced their impressive second quarter financial results. Interestingly, though, both Google and Facebook proved they are no longer invincible, as anti-trust regulators hone in on their abusive business practices and global scandals like the Cambridge Analytica affair put a dent on growth. Their financial power is such, though, that both of these missteps will do little to curb their ambitions and the voracity with which they will defend their position.

The numbers are truly stunning. Facebook saw its second quarter revenues skyrocket 42 percent to US$13.2 billion — still, investors complained about deceleration — while Google declared a 26% jump to US$32.7 billion in the three months to June. Consider, for example, how much cash these two giants have with a sovereign state like Argentina. While the Central Bank (BCRA) currently led by Luis “Toto” Caputo is sitting on some US$58.8 billion in reserves, Facebook’s cash stash hit US$42.3 billion by the end of the second quarter, while Google’s parent company Alphabet had US$102.3 billion in the bank, most of it in Ireland in order to pay “optimise” its tax payments.

Despite those outrageous figures, something was different this time around. For the first time, both Google and Facebook are feeling the heat. The social media giant run by Mark Zuckerberg saw its shares plummet 19 percent after presenting their earnings, wiping out US$120 billion from Facebook’s market capitalisation, the largest drop in the history of the US market. Indeed, the drop was so steep that it represented a value greater than the market capitalisation of McDonald’s or Nike. With 2.5 billion people around the world using one of Facebook’s main applications — Facebook, Instagram, Messenger, and WhatsApp — the company remains the fifth largest company by market cap, only behind its tech colleagues Microsoft, Amazon, AlphabetGoogle, and Apple.

Google, on the other hand, didn’t see its shares fall of a cliff. Instead, it added a line to its income statement for “European Commission Fines,” which this quarter had a US$5.1- billion impact on the bottom line. While the fine is the largest ever issued by the EU’s anti-trust watchdog, it would take Google just a couple of weeks to make it back. With an air of invulnerability, Google’s CEO Sundar Pichai didn’t even mention the fines in his post-earnings conference call.

Yet, something has really changed. As has been explained in these columns several times, Google and Facebook are the backbone of the internet as we know it. We access almost all of the information available in the Internet through web searches on Google’s search engine, normally on a Chrome browser and increasingly through an Android-powered smartphone. We even navigate the real world using Google Maps or Waze. And, of course, communicate via email through Gmail. All of these products are supposedly free.

Facebook’s dominance is similar in scope. Practically every adult that is connected to the internet in Europe and North America has a Facebook account, while almost every youngster (and most adults) scroll through Instagram obsessively throughout the day while chatting via WhatsApp. All of these beautiful products didn’t cost us a dime. The only thing our Silicon Valley friends wanted in exchange was our personal data. Without knowing it, we also handed over what was left of our privacy.

While both companies had a benign mission initially, the smell of cash quickly pushed them into leveraging top-tier technology to create a digital advertising ecosystem based on user manipulation. Given that Google and Facebook know everything about our digital lives, they’ve scaled their ad models to the point where they vacuum somewhere between 70 percent and 80 percent of digital advertising globally. This level of market domination has come at the expense of traditional media companies, but it is also hurting players in every sector where competition has been stifled. In its ruling, the EU’s Competition Commissioner Margrethe Vestager noted Google abused its Android operating system to “cement its dominant position” by essentially forcing phone manufacturers and mobile network operators to pre-install its search and browser products. The real power comes with their Play app store, though, which proves that Android is not really an open source platform, as Google claims. The company was recently fined for favouring its own e-commerce products to the tune of US$2.8 billion, and Commissioner Vestager is looking into their AdSense digital advertising business.

Both companies are now paying a small price tag for the abuse of their market dominance. With Facebook, it was investors, not regulators, who hit hard. Facebook was used to manipulate the US electorate during the 2016 presidential elections that took Donald Trump to the White House. The US intelligence community knows Russian agents were behind the move, and have indicated Vladimir Putin knew. The Cambridge Analytica scandal blew the lid off how programmatic advertising through Facebook’s platform allowed political strategists to target the fears and insecurities of undecided voters. Finally, the spread of fake news, which in turn filled Facebook’s coffers, grew out of proportion. Part of the massive drop in Facebook’s shares has to do with Zuckerberg indicating thy would spend billions of dollars on security and hire some 20,000 people to review content in their battle against fake news.

The blood has reached the river in Silicon Valley. No longer are we amazed at the incredible growth of these fastpaced startups that promised to disrupt our world, but horrified at the constant ethical violations that society is only beginning to understand. As Argentine Supreme Court President Ricardo Lorenzetti explained, technology companies were subsidized in regulatory and judicial terms, as society preferred to reap the benefits of their innovation. The tables have turned, but it won’t be economic penalties alone that will lead to a fair market, but also a deep change in our digital habits now that we are no longer as naive. Or so I hope.

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Agustino Fontevecchia

Agustino Fontevecchia


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