Balancing profitability against regulatory scrutiny

The recent eye-catching figures from Alphabet (the parent company of Google) have opened a very interesting debate regarding balancing profitability against regulatory scrutiny. Recent Alphabet profits hit $9 billion and already they have prompted calls for regulators to become more involved with the sector. We have seen this time and time again with other companies such as Microsoft, IBM and many more. So, is there really a balancing act between profitability and regulatory scrutiny?

Encouraging growth

When the likes of Google and Microsoft were relatively small but fast-growing companies they were the darling of the political scene. They were put forward as the next generation of technology companies which would literally change the way we operate on a day-to-day basis. Fast forward a few years, the companies have grown, profits have mushroomed and they have to a certain extent become a law unto themselves. So, while the politicians are happy to encourage and in some ways assist with growth in the early days they like to rein it in further down the line.

Why stamp down with regulations?

When you read regulations you should read more tax income. There is no doubt politicians see dollars before their eyes when a company is growing and making profits, especially a company which has grown like Google. Forget the billions of dollars they have invested; forget the way that they have changed the market completely and forget the way they have opened the door for competitors to create new income streams.

No doubt we will hear rumours of anti-trust regulations, increased taxation for “technology companies” and stipulations on how some of their money should be spent.

Is this fair?

In a similar fashion to those who are self-employed and looking for mortgage funding, on one hand you need to play down your profitability to reduce your taxes while increasing your income so you can maximise your mortgage funding. Companies such as Alphabet do walk a tightrope keeping investors happy while also playing down their influence and their profitability. Is it fair?

The simple answer is, no. You never hear politicians quoting the amount of jobs these companies create, the household incomes they support or the government tax streams they built from nothing. They all seem to focus on the influence these companies have over their markets, potential anti-trust issues and even in some cases price-fixing. When the pupil becomes more important than the teacher that is when the trouble starts!

Factoring in political interference

When leading lights such as Google began to take a greater hold of the market, enjoy a growing influence and vastly improved profitability, political interference does become a factor when looking at an investment. Time and time again we have seen share prices hit by anti-trust investigations, new regulations and even specific taxes targeting fast-growing industries. While many of these battles head to the High Court and can last for years, no party ever benefits from focus being taken away from the main business.

Summary

So, there is a balancing act between profitability and regulatory interference, politicians will befriend fast-growing influential companies until they become too big. Then, bang, in come the investigations, tax demands and ever-growing political interference. Unfortunately, political interference happens in every area of life, both private life and commercial. Will it ever change?

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