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4 December 2020

The secret to Big Tech’s triumph over the high street

Ultra-low interest rates and quantitative easing have aided tech companies’ extractive business model.

By James Meadway

The collapse of Philip Green’s Arcadia group, threatening 13,000 jobs across the UK, has been seen as emblematic of the decline of the traditional high street. It’s clear, as Arcadia’s CEO says, that the pandemic has turbocharged the consumer shift to online shopping, leaving conventional stores trailing. But high street retailers have been caught in a pincer movement over the past decade – from the data economy and its inseparable partner, the ultra-loose monetary policy environment.

Amazon, Apple and Facebook have all reported extraordinary revenue increases over this year as the pandemic accelerated the rise of the digital economy. The six largest US tech companies saw their market valuation rise by 38 per cent over the first half of the year, adding $1.71trn to their value – even as the rest of the global economy was ravaged. 

For Big Tech, the pandemic has been business as usual, only more so. Share buybacks, in which a company uses its free cash to repurchase its own shares, have become an integral part of the tech business model over the last ten years, with buybacks among the US giants continuing even as the crisis forced the rest of the corporate sector to rein in spending.

Buybacks are an attractive option for companies (and their shareholders) when they have large amounts of cash. And the money hoards built up by corporations across the world have been extraordinary, with the US leading the way: US non-financial corporations had $4trn in their bank accounts at the start of the year, up from $2.7trn  a decade before. This hoarding is concentrated in a limited number of multinational companies, and Big Tech is at the front – squirrelling away cash in non-US jurisdictions to exploit the tax advantages open to companies heavily invested in intellectual property. 

[See also: Philip Green: the emperor runs out of clothes

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But to hoard money on this scale, there needs to be more of it around, and it is the ballooning of quantitative easing (QE) that explains this. QE, introduced across major Western economies during the 2008 financial crisis, was intended to depress interest rates further and so stimulate market activity through central banks issuing more money, and using it to buy assets in the wider economy. Central banks concentrated their newly issued QE money on buying government bonds, on the grounds that this would have the most impact on broader interest rates, and that the QE programmes were intended to be temporary. Since government bonds from major economies are about the most liquid – easily bought and sold – among available assets, this argument made sense at the time: QE could be quickly and easily reversed, or “unwound”, by selling the bonds back to the markets, sucking the money back out of the system. 

There are no signs of this unwinding happening in a serious fashion any time soon. But that means the money-rich environment is likely to continue – at least if you’re a major multinational. And Big Tech companies have benefited the most because their business models push them this way: the raw economics of data – in which any piece of data is worth more if it is combined with any other, creating economies of scale – hand a huge advantage to those companies which moved first to exploit it, allowing them to grow rapidly to dominate their markets and hoover up available cash in the rest of the economy. Pressure on their own revenues had risen in recent years, as their existing markets became saturated, but the pandemic has revitalised them as more spending migrates online. 

Ultra-low interest rates, meanwhile, have also encouraged extraordinary levels of corporate borrowing, with US corporate borrowing exceeding $10trn. This isn’t so bad if you’re a cash-rich tech multinational, since your balance sheet will still look healthy, but other firms face an immense challenge.

[See also: What Facebook’s empty campus says about the post-Covid world]

In the UK, already high levels of corporate debt have risen during the pandemic, with financial services lobbyist TheCityUK estimating that up to £70bn could be “unsustainable” by March next year. And for those companies, like Arcadia, with pension obligations, low interest rates have meant low returns to their pension funds, worsening their deficits and encouraging a shift into riskier investments. Green’s draining of funds from Arcadia looks even more scandalous in this context. 

On one side, QE and low interest rates have helped make a particular kind of extractive business model very attractive – Big Tech, and its cash-rich data-guzzling. For more conventional businesses, lacking the same near-monopoly powers to corner markets in a time of low wage growth, low interest rates have encouraged borrowing and risky speculation. For high street retailers, rising debts and deficits have coincided with the disintegration of their own business model. 

Disentangling QE from its Big Tech partner should be a defining ambition for the US Federal Reserve; for Britain, the priority should be restoring life to high streets, and repurposing them. Future rounds of QE funding by the Bank of England should direct money into public investments across the country – either under its auspices or, preferably, through new accountable and locally managed regeneration funds targeting smaller-scale investments. 

Arcadia’s failure doesn’t have to signal the end of the high street. But it will require decisive action from the government to halt the long decline. 

[See also: Leader: Reimagine the high street]