Study says SEC 10-K not fit for purpose when it comes to Big Tech, and the companies are using that to their advantage

Regulatory body needs method to account for business models that monetize free services

Current US Securities and Exchange Commission (SEC) disclosures have not evolved to capture new Big Tech business models and thus allow the world's megacorps to dodge antitrust rules, with the integrity of the market policed only by whistleblowers, according to a recent study.

"Public investors, regulators and competitors simply do not know how exactly Big Tech creates and extracts value from the ecosystems that it has come to dominate," said the University College London (UCL) report's authors, who explained the lapse in transparency leads to the obscuring of a company's business outlook as well as of any abuses of market power.

The job of alerting stakeholders – the public, investors, and competitors – of problems within the system then falls to whistleblowers.

The five out of six largest companies in the United States named in the UCL Institute for Innovation and Public Purpose report, Crouching tiger, hidden dragons: How 10-K disclosure rules help Big Tech conceal market power and expand platform dominance report, are Big Tech's Alphabet, Amazon, Apple, Meta Platforms (formerly Facebook), and Microsoft.

The regulatory body's inability to account for a business model reliant on free services is what lies at the heart of the obfuscation, according to the researchers. While user engagement of free products generates significant revenue when monetized by advertising or subscriptions, the user metrics disclosures on the SEC's 10-k reports are minimal and discretionary. This is true despite factors like average monthly usage (AMU) being a major metric when companies measure their business health internally.

Moreover, Big Tech presents themselves on the 10-K as if they operate in one or two product segments, when in reality they are increasingly diversified across products and monetisation schemes. Yet they get away with not reporting the complete financial picture.

The job of alerting stakeholders – the public, investors, and competitors – of problems within the system then falls to whistleblowers

For example, Google's parent company Alphabet offers nine free products with over one billion AMUs but have minimal 10-K disclosure requirements since the services are free. When the SEC pushed for more financial details, the company returned with short answers to few questions.

Similarly, Amazon withheld its Amazon Web Services (AWS) financials from its public 10-K for longer than it was supposed to, which the authors reckon hindered competition "by raising barriers to entry and delaying new entrants."

The authors had three recommendations for improving disclosure manipulation. For one, they suggested mandatory reporting of user operating metrics to the SEC, which will assist heavily in antitrust investigations as they usually represent a product's market share.

The researchers also suggest requiring detailed standalone segment financials in the 10-K report for any product with $5bn or more in annual revenues or profits and losses. This requirement would remove some reporting loopholes for segments that fall below a company's claimed asset percentage.

Last of all, the UCL team proposed a specific SEC framework for digital platforms that accounts for Big Tech's nuances and industry-specific intangible assets.

"It is a peculiar feature of our times that these organisations, with such considerable global impact, are not subject to rigorous and comprehensive financial and business reporting frameworks," wrote the authors, who included a dramatic quote from Deng Xiaoping within the report:

Hide your strength, bide your time.

The year-long research project was supported by a grant from the Omidyar Network, a self-described "social change venture" from eBay founder Pierre Omidyar and his spouse Pam. The venture is also providing financial support to Facebook whistleblower Frances Haugen. ®