Do Digital Technology Firms Earn Excess Profits? An Alternative Perspective

53 Pages Posted: 15 Dec 2020 Last revised: 18 Mar 2021

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Anup Srivastava

University of Calgary - Haskayne School of Business

Rong Zhao

University of Calgary

Date Written: March 12, 2021

Abstract

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.

Keywords: Internal Rate of Return, Economic Profitability, Digital Giants, Anticompetitive Practices, Technology, Abnormal Profits, Amazon, Google, Microsoft, Apple

JEL Classification: D43, L1, M21, M41

Suggested Citation

Rajgopal, Shivaram and Srivastava, Anup and Zhao, Rong, Do Digital Technology Firms Earn Excess Profits? An Alternative Perspective (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3739037 or http://dx.doi.org/10.2139/ssrn.3739037

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Rong Zhao

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-2568 (Phone)
403-210-2217 (Fax)

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