Big Tech’s Irish finances are as illusory as Celtic Tiger house prices and we all know it

There is a simple reason why the lay-offs at the Irish operations of internet giants Meta, Twitter and Stripe have stoked such media and political skittishness: most of us understand that the economics of the global tech sector, which is so invested in the Republic, are full of fiction. We know it could all come crashing down like Celtic Tiger property values. That fear that this reality could hit us makes us nervous.

Many of the largest tech multinationals were never going to be able to sustain the stratospheric valuations that have allowed them, in recent years, to raise mountains of cheap cash which was then deployed to fund bloated operations in investment locations such as Dublin. It let them pay for all the mind-boggling salaries, the endless capital investment, the lavish staff facilities and free meals.

Everybody has understood for years that the revenues and profits run by some of Silicon Valley’s biggest players through their Irish accounts are distorted and illusory. There is simply no way that the employees of those Irish operations could ever be that productive – the numbers are too off-the-wall. Some of the most egregious financial tricks, such as the double-Irish tax sorcery, have stopped. But others have since taken their place.

Big Tech’s financial pre-eminence became even more exaggerated during the pandemic, when most facets of business and social life shifted online and the sector’s biggest stars made hay while the virus shined. But why did anyone think those trend lines would prevail as economies normalised? Even Mark Zuckerberg, the recently-chastened founder of Facebook owner Meta, acknowledged as much this week as he announced 11,000 job cuts globally, including about 350 in Dublin.

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The State has always played along with Big Tech’s fiscal cabaret even though, in its gut, it knows the numbers are sexed up. Just as people instinctively understood 15 years ago that the average taxi driver shouldn’t be able to afford a portfolio of buy-to-lets in Kusadasi, we all must know now that Facebook’s Irish operation can’t sustain endless growth to an Irish payroll on mean average remuneration packages of close to €170,000 each. Not when it has to start living in the real world.

Nobel economist Paul Krugman warned years ago about our “leprechaun economics”. A correction in our market of extravagance surely was always on the cards. Ireland just has to roll with it now. The Republic’s colours are nailed to Silicon Valley’s mast and it is too late to change this.

The Central Statistics Office earlier this year produced a report on the technology sector – Information and Communications Technology: Value Chain 2019 – which should have commanded more attention. It laid out in black and white the mad numbers swirling around the industry here.

Distorted by the revenues and capital flowing through the Irish accounts of multinationals, it calculated labour productivity in the Republic’s software sector at about €1.1 million per worker. This made it the most productive part of the economy by a farcical margin – for example, the figures suggested Irish software workers were six times as productive as those in insurance and finance.

The numbers were badly skewed by big tech employers with more than 250 staff, which includes all the major Silicon Valley multinationals, such as those that are now laying off staff. Productivity per employee at the biggest firms was, when measured as gross valued added, about 10 times as high as at the sector’s smaller, mostly indigenous, companies.

How can this crevasse in productivity rates be explained? Is it because Facebook’s staff work 10 times harder than the rest? Is it because it is 10 times as brilliant as its rivals and, therefore, its dominance will never be in doubt? Or, more credibly, is it because it has chosen Ireland as the low-tax location through which it can bounce billions of euro worth of revenue and profits?

What if, because of basic economic gravity and also fresh competition from the likes of TikTok, the intangible technology assets that the US multinationals have stuffed into their Irish operations are worth nowhere near as much as they think?

The CSO’s statisticians spotted another truth. They wrote in their report that the crazily-high productivity ascribed to technology workers in Ireland is explained not by their work but by the “extremely high concentration of intangible assets” held in Ireland by their multinational employers. They shifted all their algorithms here and charge their foreign subsidiaries through the nose for using them. This has made Ireland hugely profitable on paper and operations in other locations far less so.

Big tech multinationals shifted more than €40 billion worth of intellectual property to this State in 2019 alone. By the time the pandemic hit, they had plonked close to €90 billion of intellectual property on their Irish balance sheets. Then the world was locked down for coronavirus and all of those algorithms and other bits of IP were sweated to the maximum. Cash seemed to be raining down on the Irish operations and, as a consequence, on the State exchequer that taxes them.

But what if those IP valuations are all bloated? What if, because of basic economic gravity and also fresh competition from the likes of TikTok, the intangible technology assets that the US multinationals have stuffed into their Irish operations are worth nowhere near as much as they think? This means the rates the Irish operations can charge their foreign sister companies for using them could come under pressure. That potentially casts a pall over the economics of the sector here in the long term.

For close to 20 years now, the Republic has surfed the wave of money thrown off by the pioneers of the internet age. But all waves have to crash on the shore eventually. Platforms such as Google, Amazon and Facebook became so financially powerful because they were seizing ground in the new online economy before anybody else in the world really understood what was going on.

But others were always going to catch up on them and a correction was inevitable. For Ireland’s sake, let’s hope that it is, as it seems, just a correction and not a crash.