Do Digital Technology Firms Earn Excess Profits? An Alternative Perspective

Regulators have alleged that digital giants (Alphabet, Facebook, Microsoft, Apple, and Amazon) have misused their market power to earn abnormal profits. Research that systematically documents whether technology firms earn abnormal profits is limited, arguably because (i) U.S. GAAP based accounting rate of return (ARR) expenses R&D and other intangibles lowering ARRs for growth firms; and (ii) ARR provides a single-period measure of performance that ignores the long-gestational payoffs associated with many of today’s investments. We use a new measure of economic profitability, the internal rate of return (IRR), that equates long-term payback to current investments, inclusive of capitalized intangibles. We find, unlike for ARRs, increasing values of IRRs for technology companies over time, particularly for digital giants. Their IRRs range between 30% and 50% since 2008, which, coupled with the declined cost of capital, could point to abnormal profits. We provide an alternative perspective on technology firms’ abnormal profits, which should likely interest regulators and policy makers