Impact of regulatory asymmetries in internet value chain

Abstract

PurposeThe main objective of this paper is to assess how the degree of regulation that a company has to comply with affects its profitability. There is great variation within the internet value chain in the profitability of different players. The paper aims to analyse a large sample of companies that are leaders in different internet‐based businesses (network operators, search engines and other ASP, software, electronic retailing, content delivery networks, device manufacturers …). The paper's hypothesis is that regulation plays an important role in the profitability of a company and therefore also in how the market values them.Design/methodology/approachThe methodology used to check the authors' hypothesis includes the following steps: identify leaders in the internet space; identify their core asset and group them according to it; calculate their profitability across a series of dimensions, with focus on return on fixed assets (ROFA); assess the degree of regulation of each group; and assess the statistical relationship between regulation and profitability and look for significant results.FindingsThe paper analyses the degree of regulation of the core asset of these companies and finds that is statistically related to their profitability. Companies with core assets free from regulation yield much higher profits on their investments than those with core assets curtailed by regulation.Originality/valueThis finding can cast light on some policy proposals under debate (net neutrality, access regulation, privacy …), especially how they can increase or decrease the current imbalance in the relative profitability of companies and the internet balance of payments and power between the European Union and the USA.