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Does Political Power Follow Economic Power?

Geoffrey Manne & Alec Stapp —  30 December 2019

[TOTM: The following is the third in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Geoffrey A. Manne, president and founder of the International Center for Law & Economics, and Alec Stapp, Research Fellow at the International Center for Law & Economics.

Source: The Economist

Is there a relationship between concentrated economic power and political power? Do big firms have success influencing politicians and regulators to a degree that smaller firms — or even coalitions of small firms — could only dream of? That seems to be the narrative that some activists, journalists, and scholars are pushing of late. And, to be fair, it makes some intuitive sense (before you look at the data). The biggest firms have the most resources — how could they not have an advantage in the political arena?

The argument that corporate power leads to political power faces at least four significant challenges, however. First, the little empirical research there is does not support the claim. Second, there is almost no relationship between market capitalization (a proxy for economic power) and lobbying expenditures (a, admittedly weak, proxy for political power). Third, the absolute level of spending on lobbying is surprisingly low in the US given the potential benefits from rent-seeking (this is known as the Tullock paradox). Lastly, the proposed remedy for this supposed problem is to make antitrust more political — an intervention that is likely to make the problem worse rather than better (assuming there is a problem to begin with).

The claims that political power follows economic power

The claim that large firms or industry concentration causes political power (and thus that under-enforcement of antitrust laws is a key threat to our democratic system of government) is often repeated, and accepted as a matter of faith. Take, for example, Robert Reich’s March 2019 Senate testimony on “Does America Have a Monopoly Problem?”:

These massive corporations also possess substantial political clout. That’s one reason they’re consolidating: They don’t just seek economic power; they also seek political power.

Antitrust laws were supposed to stop what’s been going on.

* * *

[S]uch large size and gigantic capitalization translate into political power. They allow vast sums to be spent on lobbying, political campaigns, and public persuasion. (emphasis added)

Similarly, in an article in August of 2019 for The Guardian, law professor Ganesh Sitaraman argued there is a tight relationship between economic power and political power:

[R]eformers recognized that concentrated economic power — in any form — was a threat to freedom and democracy. Concentrated economic power not only allowed for localized oppression, especially of workers in their daily lives, it also made it more likely that big corporations and wealthy people wouldn’t be subject to the rule of law or democratic controls. Reformers’ answer to the concentration of economic power was threefold: break up economic power, rein it in through regulation, and tax it.

It was the reformers of the Gilded Age and Progressive Era who invented America’s antitrust laws — from the Sherman Antitrust Act of 1890 to the Clayton Act and Federal Trade Commission Acts of the early 20th century. Whether it was Republican trust-buster Teddy Roosevelt or liberal supreme court justice Louis Brandeis, courageous leaders in this era understood that when companies grow too powerful they threatened not just the economy but democratic government as well. Break-ups were a way to prevent the agglomeration of economic power in the first place, and promote an economic democracy, not just a political democracy. (emphasis added)

Luigi Zingales made a similar argument in his 2017 paper “Towards a Political Theory of the Firm”:

[T]he interaction of concentrated corporate power and politics is a threat to the functioning of the free market economy and to the economic prosperity it can generate, and a threat to democracy as well. (emphasis added)

The assumption that economic power leads to political power is not a new one. Not only, as Zingales points out, have political thinkers since Adam Smith asserted versions of the same, but more modern social scientists have continued the claims with varying (but always indeterminate) degrees of quantification. Zingales quotes Adolf Berle and Gardiner Means’ 1932 book, The Modern Corporation and Private Property, for example:

The rise of the modern corporation has brought a concentration of economic power which can compete on equal terms with the modern state — economic power versus political power, each strong in its own field. 

Russell Pittman (an economist at the DOJ Antitrust Division) argued in 1988 that rent-seeking activities would be undertaken only by firms in highly concentrated industries because:

if the industry in question is unconcentrated, then the firm may decide that the level of benefits accruing to the industry will be unaffected by its own level of contributions, so that the benefits may be enjoyed without incurrence of the costs. Such a calculation may be made by other firms in the industry, of course, with the result that a free-rider problem prevents firms individually from making political contributions, even if it is in their collective interest to do so.

For the most part the claims are virtually entirely theoretical and their support anecdotal. Reich, for example, supports his claim with two thin anecdotes from which he draws a firm (but, in fact, unsupported) conclusion: 

To take one example, although the European Union filed fined [sic] Google a record $2.7 billion for forcing search engine users into its own shopping platforms, American antitrust authorities have not moved against the company.

Why not?… We can’t be sure why the FTC chose not to pursue Google. After all, section 5 of the Federal Trade Commission Act of 1914 gives the Commission broad authority to prevent unfair acts or practices. One distinct possibility concerns Google’s political power. It has one of the biggest lobbying powerhouses in Washington, and the firm gives generously to Democrats as well as Republicans.

A clearer example of an abuse of power was revealed last November when the New York Times reported that Facebook executives withheld evidence of Russian activity on their platform far longer than previously disclosed.

Even more disturbing, Facebook employed a political opposition research firm to discredit critics. How long will it be before Facebook uses its own data and platform against critics? Or before potential critics are silenced even by the possibility? As the Times’s investigation made clear, economic power cannot be separated from political power. (emphasis added)

The conclusion — that “economic power cannot be separated from political power” — simply does not follow from the alleged evidence. 

The relationship between economic power and political power is extremely weak

Few of these assertions of the relationship between economic and political power are backed by empirical evidence. Pittman’s 1988 paper is empirical (as is his previous 1977 paper looking at the relationship between industry concentration and contributions to Nixon’s re-election campaign), but it is also in direct contradiction to several other empirical studies (Zardkoohi (1985); Munger (1988); Esty and Caves (1983)) that find no correlation between concentration and political influence; Pittman’s 1988 paper is indeed a response to those papers, in part. 

In fact, as one study (Grier, Muger & Roberts (1991)) summarizes the evidence:

[O]f ten empirical investigations by six different authors/teams…, relatively few of the studies find a positive, significant relation between contributions/level of political activity and concentration, though a variety of measures of both are used…. 

There is little to recommend most of these studies as conclusive one way or the other on the question of interest. Each one suffers from a sample selection or estimation problem that renders its results suspect. (emphasis added)

And, as they point out, there is good reason to question the underlying theory of a direct correlation between concentration and political influence:

[L]egislation or regulation favorable to an industry is from the perspective of a given firm a public good, and therefore subject to Olson’s collective action problem. Concentrated industries should suffer less from this difficulty, since their sparse numbers make bargaining cheaper…. [But at the same time,] concentration itself may affect demand, suggesting that the predicted correlation between concentration and political activity may be ambiguous, or even negative. 

* * *

The only conclusion that seems possible is that the question of the correct relation between the structure of an industry and its observed level of political activity cannot be resolved theoretically. While it may be true that firms in a concentrated industry can more cheaply solve the collective action problem that inheres in political action, they are also less likely to need to do so than their more competitive brethren…. As is so often the case, the interesting question is empirical: who is right? (emphasis added)

The results of Grier, Muger & Roberts (1991)’s own empirical study are ambiguous at best (and relate only to political participation, not success, and thus not actual political power):

[A]re concentrated industries more or less likely to be politically active? Numerous previous studies have addressed this topic, but their methods are not comparable and their results are flatly contradictory. 

On the side of predicting a positive correlation between concentration and political activity is the theory that Olson’s “free rider” problem has more bite the larger the number of participants and the smaller their respective individual benefits. Opposing this view is the claim that it precisely because such industries are concentrated that they have less need for government intervention. They can act on their own to gamer the benefits of cartelization that less concentrated industries can secure only through political activity. 

Our results indicate that both sides are right, over some range of concentration. The relation between political activity and concentration is a polynomial of degree 2, rising and then falling, achieving a peak at a four-firm concentration ratio slightly below 0.5. (emphasis added)

Despite all of this, Zingales (like others) explicitly claims that there is a clear and direct relationship between economic power and political power:

In the last three decades in the United States, the power of corporations to shape the rules of the game has become stronger… [because] the size and market share of companies has increased, which reduces the competition across conflicting interests in the same sector and makes corporations more powerful vis-à-vis consumers’ interest.

But a quick look at the empirical data continues to call this assertion into serious question. Indeed, if we look at the lobbying expenditures of the top 50 companies in the US by market capitalization, we see an extremely weak (at best) relationship between firm size and political power (as proxied by lobbying expenditures):

Of course, once again, this says little about the effectiveness of efforts to exercise political power, which could, in theory, correlate with market power but not expenditures. Yet the evidence on this suggests that, while concentration “increases both [political] activity and success…, [n]either firm size nor industry size has a robust influence on political activity or success.” (emphasis added). Of course there are enormous and well-known problems with measuring industry concentration, and it’s not clear that even this attribute is well-correlated with political activity or success (and, interestingly for the argument that profits are a big part of the story because firms in more concentrated industries from lax antitrust realize higher profits have more money to spend on political influence, even concentration in the Esty and Caves study is not correlated with political expenditures.)

Indeed, a couple of examples show the wide range of lobbying expenditures for a given firm size. Costco, which currently has a market cap of $130 billion, has spent only $210,000 on lobbying so far in 2019. By contrast, Amgen, which has a $144 billion market cap, has spent $8.54 million, or more than 40 times as much. As shown in the chart above, this variance is the norm. 

However, discussing the relative differences between these companies is less important than pointing out the absolute levels of expenditure. Spending eight and a half million dollars per year would not be prohibitive for literally thousands of firms in the US. If access is this cheap, what’s going on here?

Why is there so little money in US politics?

The Tullock paradox asks why, if the return to rent-seeking is so high — which it plausibly is because the government spends trillions of dollars each year — is so little money spent on influencing policymakers?

Considering the value of public policies at stake and the reputed influence of campaign contributors in policymaking, Gordon Tullock (1972) asked, why is there so little money in U.S. politics? In 1972, when Tullock raised this question, campaign spending was about $200 million. Assuming a reasonable rate of return, such an investment could have yielded at most $250-300 million over time, a sum dwarfed by the hundreds of billions of dollars worth of public expenditures and regulatory costs supposedly at stake.

A recent article by Scott Alexander updated the numbers for 2019 and compared the total to the $12 billion US almond industry:

[A]ll donations to all candidates, all lobbying, all think tanks, all advocacy organizations, the Washington Post, Vox, Mic, Mashable, Gawker, and Tumblr, combined, are still worth a little bit less than the almond industry.

Maybe it’s because spending money on donations, lobbying, think tanks, journalism and advocacy is ineffective on net (i.e., spending by one group is counterbalanced by spending by another group) and businesses know it?

In his paper on elections, Ansolabehere focuses on the corporate perspective. He argues that money neither makes a candidate much more likely to win, nor buys much influence with a candidate who does win. Corporations know this, which is why they don’t bother spending more. (emphasis added)

To his credit, Zingales acknowledges this issue:

To the extent that US corporations are exercising political influence, it seems that they are choosing less-visible but perhaps more effective ways. In fact, since Gordon Tullock’s (1972) famous article, it has been a puzzle in political science why there is so little money in politics (as discussed in this journal by Ansolabehere, de Figueiredo, and Snyder 2003).

So, what are these “less-visible but perhaps more effective” ways? Unfortunately, the evidence in support of this claim is anecdotal and unconvincing. As noted above, Reich offers only speculation and extremely weak anecdotal assertions. Meanwhile, Zingales tells the story of Robert (mistakenly identified in the paper as “Richard”) Rubin pushing through repeal of Glass-Steagall to benefit Citigroup, then getting hired for $15 million a year when he left the government. Assuming the implication is actually true, is that amount really beyond the reach of all but the largest companies? How many banks with an interest in the repeal of Glass-Steagall were really unlikely at the time to be able to credibly offer future compensation because they would be out of business? Very few, and no doubt some of the biggest and most powerful were arguably at greater risk of bankruptcy than some of the smaller banks.

Maybe only big companies have an interest in doing this kind of thing because they have more to lose? But in concentrated industries they also have more to lose by conferring the benefit on their competitors. And it’s hard to make the repeal or passage of a law, say, apply only to you and not everyone else in the industry. Maybe they collude? Perhaps, but is there any evidence of this? Zingales offers only pure speculation here, as well. For example, why was the US Google investigation dropped but not the EU one? Clearly because of White House visits, says Zingales. OK — but how much do these visits cost firms? If that’s the source of political power, it surely doesn’t require monopoly profits to obtain it. And it’s virtually impossible that direct relationships of this kind are beyond the reach of coalitions of smaller firms, or even small firms, full stop.  

In any case, the political power explanation turns mostly on doling out favors in exchange for individuals’ payoffs — which just aren’t that expensive, and it’s doubtful that the size of a firm correlates with the quality of its one-on-one influence brokering, except to the extent that causation might run the other way — which would be an indictment not of size but of politics. Of course, in the Hobbesian world of political influence brokering, as in the Hobbesian world of pre-political society, size alone is not determinative so long as alliances can be made or outcomes turn on things other than size (e.g., weapons in the pre-Hobbesian world; family connections in the world of political influence). 

The Noerr–Pennington doctrine is highly relevant here as well. In Noerr, the Court ruled that “no violation of the [Sherman] Act can be predicated upon mere attempts to influence the passage or enforcement of laws” and “[j]oint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition.” This would seem to explain, among other things, the existence of trade associations and other entities used by coalitions of small (and large) firms to influence the policymaking process.

If what matters for influence peddling is ultimately individual relationships and lobbying power, why aren’t the biggest firms in the world the lobbying firms and consultant shops? Why is Rubin selling out for $15 million a year if the benefit to Citigroup is in the billions? And, if concentration is the culprit, why isn’t it plausibly also the solution? It isn’t only the state that keeps the power of big companies in check; it’s other big companies, too. What Henry G. Manne said in his testimony on the Industrial Reorganization Act of 1973 remains true today: 

There is simply no correlation between the concentration ratio in an industry, or the size of its firms, and the effectiveness of the industry in the halls of Government.

In addition to the data presented earlier, this analysis would be incomplete if it did not mention the role of advocacy groups in influencing outcomes, the importance and size of large foundations, the role of unions, and the role of individual relationships.

Maybe voters matter more than money?

The National Rifle Association spends very little on direct lobbying efforts (less than $10 million over the most recent two-year cycle). The organization’s total annual budget is around $400 million. In the grand scheme of things, these are not overwhelming resources. But the NRA is widely-regarded as one of the most powerful political groups in the country, particularly within the Republican Party. How could this be? In short, maybe it’s not Sturm Ruger, Remington Outdoor, and Smith & Wesson — the three largest gun manufacturers in the US — that influence gun regulations; maybe it’s the highly-motivated voters who like to buy guns. 

The NRA has 5.5 million members, many of whom vote in primaries with gun rights as one of their top issues  — if not the top issue. And with low turnout in primaries — only 8.7% of all registered voters participated in 2018 Republican primaries — a candidate seeking the Republican nomination all but has to secure an endorsement from the NRA. On this issue at least, the deciding factor is the intensity of voter preferences, not the magnitude of campaign donations from rent-seeking corporations.

The NRA is not the only counterexample to arguments like those from Zingales. Auto dealers are a constituency that is powerful not necessarily due to its raw size but through its dispersed nature. At the state level, almost every political district has an auto dealership (and the owners are some of the wealthiest and best-connected individuals in the area). It’s no surprise then that most states ban the direct sale of cars from manufacturers (i.e., you have to go through a dealer). This results in higher prices for consumers and lower output for manufacturers. But the auto dealership industry is not highly concentrated at the national level. The dealers don’t need to spend millions of dollars lobbying federal policymakers for special protections; they can do it on the local level — on a state-by-state basis — for much less money (and without merging into consolidated national chains).

Another, more recent, case highlights the factors besides money that may affect political decisions. President Trump has been highly critical of Jeff Bezos and the Washington Post (which Bezos owns) since the beginning of his administration because he views the newspaper as a political enemy. In October, Microsoft beat out Amazon for a $10 billion contract to provide cloud infrastructure for the Department of Defense (DoD). Now, Amazon is suing the government, claiming that Trump improperly influenced the competitive bidding process and cost the company a fair shot at the contract. This case is a good example of how money may not be determinative at the margin, and also how multiple “monopolies” may have conflicting incentives and we don’t know how they net out.

Politicizing antitrust will only make this problem worse

At the FTC’s “Hearings on Competition and Consumer Protection in the 21st Century,” Barry Lynn of the Open Markets Institute advocated using antitrust to counter the political power of economically powerful firms:

[T]he main practical goal of antimonopoly is to extend checks and balances into the political economy. The foremost goal is not and must never be efficiency. Markets are made, they do not exist in any platonic ether. The making of markets is a political and moral act.

In other words, the goal of breaking up economic power is not to increase economic benefits but to decrease political influence. 

But as the author of one of the empirical analyses of the relationship between economic and political power notes the asserted “solution” to the unsupported “problem” of excess political influence by economically powerful firms — more and easier antitrust enforcement — may actually make the alleged problem worse:

Economic rents may be obtained through the process of market competition or be obtained by resorting to governmental protection. Rational firms choose the least costly alternative. Collusion to obtain governmental protection will be less costly, the higher the concentration, ceteris paribus. However, high concentration in itself is neither necessary nor sufficient to induce governmental protection.

The result that rent-seeking activity is triggered when firms are affected by government regulation has a clear implication: to reduce rent-seeking waste, governmental interference in the market place needs to be attenuated. Pittman’s suggested approach, however, is “to maintain a vigorous antitrust policy” (p. 181). In fact, a more strict antitrust policy may exacerbate rent-seeking. For example, the firms which will be affected by a vigorous application of antitrust laws would have incentive to seek moderation (or rents) from Congress or from the enforcement officials.

Rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration. And imbuing antitrust with an ill-defined set of vague political objectives (as many proponents of these arguments desire), would also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so. 

And if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? With an expanded basis for increased enforcement, the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might find that we end up with even more concentration because the exceptions could subsume the rules. All of which of course highlights the fundamental, underlying irony of claims that we need to diminish the economic content of antitrust in order to reduce the political power of private firms: If you make antitrust more political, you’ll get less democratic, more politically determined, results.

In Amazon, Antitrust & Competition, Antitrust Division, Corporate & Securities Law, European Union, Exemptions, Facebook, Federal Trade Commission, Google, International, International Center for Law & Economics, Justice Department, Platforms, Section 5, The Politicization of Antitrust, Truth on the Market , , , , , ,
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This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable

Geoffrey Manne & Alec Stapp —  1 April 2019
Source: Benedict Evans

[N]ew combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; … in general it is not the owner of stagecoaches who builds railways. – Joseph Schumpeter, January 1934

Elizabeth Warren wants to break up the tech giants — Facebook, Google, Amazon, and Apple — claiming they have too much power and represent a danger to our democracy. As part of our response to her proposal, we shared a couple of headlines from 2007 claiming that MySpace had an unassailable monopoly in the social media market.

Tommaso Valletti, the chief economist of the Directorate-General for Competition (DG COMP) of the European Commission, said, in what we assume was a reference to our posts, “they go on and on with that single example to claim that [Facebook] and [Google] are not a problem 15 years later … That’s not what I would call an empirical regularity.”

We appreciate the invitation to show that prematurely dubbing companies “unassailable monopolies” is indeed an empirical regularity.

It’s Tough to Make Predictions, Especially About the Future of Competition in Tech

No one is immune to this phenomenon. Antitrust regulators often take a static view of competition, failing to anticipate dynamic technological forces that will upend market structure and competition.

Scientists and academics make a different kind of error. They are driven by the need to satisfy their curiosity rather than shareholders. Upon inventing a new technology or discovering a new scientific truth, academics often fail to see the commercial implications of their findings.

Maybe the titans of industry don’t make these kinds of mistakes because they have skin in the game? The profit and loss statement is certainly a merciless master. But it does not give CEOs the power of premonition. Corporate executives hailed as visionaries in one era often become blinded by their success, failing to see impending threats to their company’s core value propositions.

Furthermore, it’s often hard as outside observers to tell after the fact whether business leaders just didn’t see a tidal wave of disruption coming or, worse, they did see it coming and were unable to steer their bureaucratic, slow-moving ships to safety. Either way, the outcome is the same.

Here’s the pattern we observe over and over: extreme success in one context makes it difficult to predict how and when the next paradigm shift will occur in the market. Incumbents become less innovative as they get lulled into stagnation by high profit margins in established lines of business. (This is essentially the thesis of Clay Christensen’s The Innovator’s Dilemma).

Even if the anti-tech populists are powerless to make predictions, history does offer us some guidance about the future. We have seen time and again that apparently unassailable monopolists are quite effectively assailed by technological forces beyond their control.

PCs

Source: Horace Dediu

Jan 1977: Commodore PET released

Jun 1977: Apple II released

Aug 1977: TRS-80 released

Feb 1978: “I.B.M. Says F.T.C. Has Ended Its Typewriter Monopoly Study” (NYT)

Mobile

Source: Comscore

Mar 2000: Palm Pilot IPO’s at $53 billion

Sep 2006: “Everyone’s always asking me when Apple will come out with a cellphone. My answer is, ‘Probably never.’” – David Pogue (NYT)

Apr 2007: “There’s no chance that the iPhone is going to get any significant market share.” Ballmer (USA TODAY)

Jun 2007: iPhone released

Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)

Sep 2013: “Microsoft CEO Ballmer Bids Emotional Farewell to Wall Street” (Reuters)

If there’s one thing I regret, there was a period in the early 2000s when we were so focused on what we had to do around Windows that we weren’t able to redeploy talent to the new device form factor called the phone.

Search

Source: Distilled

Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)

Once upon a time, Yahoo! was an Internet search site with mediocre technology. Now it has a market cap of $2.8 billion. Some people say it’s the next America Online.

Sep 1998: Google founded

Instant Messaging

Sep 2000: “AOL Quietly Linking AIM, ICQ” (ZDNet)

AOL’s dominance of instant messaging technology, the kind of real-time e-mail that also lets users know when others are online, has emerged as a major concern of regulators scrutinizing the company’s planned merger with Time Warner Inc. (twx). Competitors to Instant Messenger, such as Microsoft Corp. (msft) and Yahoo! Inc. (yhoo), have been pressing the Federal Communications Commission to force AOL to make its services compatible with competitors’.

Dec 2000: “AOL’s Instant Messaging Monopoly?” (Wired)

Dec 2015: Report for the European Parliament

There have been isolated examples, as in the case of obligations of the merged AOL / Time Warner to make AOL Instant Messenger interoperable with competing messaging services. These obligations on AOL are widely viewed as having been a dismal failure.

Oct 2017: AOL shuts down AIM

Jan 2019: “Zuckerberg Plans to Integrate WhatsApp, Instagram and Facebook Messenger” (NYT)

Retail

Source: Seeking Alpha

May 1997: Amazon IPO

Mar 1998: American Booksellers Association files antitrust suit against Borders, B&N

Feb 2005: Amazon Prime launches

Jul 2006: “Breaking the Chain: The Antitrust Case Against Wal-Mart” (Harper’s)

Feb 2011: “Borders Files for Bankruptcy” (NYT)

Social

Feb 2004: Facebook founded

Jan 2007: “MySpace Is a Natural Monopoly” (TechNewsWorld)

Seventy percent of Yahoo 360 users, for example, also use other social networking sites — MySpace in particular. Ditto for Facebook, Windows Live Spaces and Friendster … This presents an obvious, long-term business challenge to the competitors. If they cannot build up a large base of unique users, they will always be on MySpace’s periphery.

Feb 2007: “Will Myspace Ever Lose Its Monopoly?” (Guardian)

Jun 2011: “Myspace Sold for $35m in Spectacular Fall from $12bn Heyday” (Guardian)

Music

Source: RIAA

Dec 2003: “The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model, and it might not be successful.” – Steve Jobs (Rolling Stone)

Apr 2006: Spotify founded

Jul 2009: “Apple’s iPhone and iPod Monopolies Must Go” (PC World)

Jun 2015: Apple Music announced

Video

Source: OnlineMBAPrograms

Apr 2003: Netflix reaches one million subscribers for its DVD-by-mail service

Mar 2005: FTC blocks Blockbuster/Hollywood Video merger

Sep 2006: Amazon launches Prime Video

Jan 2007: Netflix streaming launches

Oct 2007: Hulu launches

May 2010: Hollywood Video’s parent company files for bankruptcy

Sep 2010: Blockbuster files for bankruptcy

The Only Winning Move Is Not to Play

Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions. The authors just cannot help themselves. A March 2012 BBC article “The Future of Technology… Who Knows?” derided the naysayers who predicted doom for Apple’s retail store strategy. Its kicker?

And that is why when you read that the Blackberry is doomed, or that Microsoft will never make an impression on mobile phones, or that Apple will soon dominate the connected TV market, you need to take it all with a pinch of salt.

But Blackberry was doomed and Microsoft never made an impression on mobile phones. (Half credit for Apple TV, which currently has a 15% market share).

Nobel Prize-winning economist Paul Krugman wrote a piece for Red Herring magazine (seriously) in June 1998 with the title “Why most economists’ predictions are wrong.” Headline-be-damned, near the end of the article he made the following prediction:

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

Robert Metcalfe himself predicted in a 1995 column that the Internet would “go spectacularly supernova and in 1996 catastrophically collapse.” After pledging to “eat his words” if the prediction did not come true, “in front of an audience, he put that particular column into a blender, poured in some water, and proceeded to eat the resulting frappe with a spoon.”

A Change Is Gonna Come

Benedict Evans, a venture capitalist at Andreessen Horowitz, has the best summary of why competition in tech is especially difficult to predict:

IBM, Microsoft and Nokia were not beaten by companies doing what they did, but better. They were beaten by companies that moved the playing field and made their core competitive assets irrelevant. The same will apply to Facebook (and Google, Amazon and Apple).

Elsewhere, Evans tried to reassure his audience that we will not be stuck with the current crop of tech giants forever:

With each cycle in tech, companies find ways to build a moat and make a monopoly. Then people look at the moat and think it’s invulnerable. They’re generally right. IBM still dominates mainframes and Microsoft still dominates PC operating systems and productivity software. But… It’s not that someone works out how to cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose mainframes and Microsoft didn’t lose PC operating systems. Instead, those stopped being ways to dominate tech. PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well. Unless you think tech progress is over and there’ll be no more cycles … It is deeply counter-intuitive to say ‘something we cannot predict is certain to happen’. But this is nonetheless what’s happened to overturn pretty much every tech monopoly so far.

If this time is different — or if there are more false negatives than false positives in the monopoly prediction game — then the advocates for breaking up Big Tech should try to make that argument instead of falling back on “big is bad” rhetoric. As for us, we’ll bet that we have not yet reached the end of history — tech progress is far from over.

 

In Amazon, Antitrust & Competition, Antitrust Division, Apple, Corporate & Securities Law, European Union, Facebook, Federal Communications Commission, Federal Trade Commission, Google, International, Monopolization, Platforms, Telecommunications, Truth on the Market, Twitter , , , , , , , , , , , , , , , , , , , ,
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Elizabeth Warren wants to turn the internet into a literal sewer (service)

Geoffrey Manne & Alec Stapp —  9 March 2019

Near the end of her new proposal to break up Facebook, Google, Amazon, and Apple, Senator Warren asks, “So what would the Internet look like after all these reforms?”

It’s a good question, because, as she herself notes, “Twenty-five years ago, Facebook, Google, and Amazon didn’t exist. Now they are among the most valuable and well-known companies in the world.”

To Warren, our most dynamic and innovative companies constitute a problem that needs solving.

She described the details of that solution in a blog post:

First, [my administration would restore competition to the tech sector] by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.

* * *

For smaller companies…, their platform utilities would be required to meet the same standard of fair, reasonable, and nondiscriminatory dealing with users, but would not be required to structurally separate….

* * *
Second, my administration would appoint regulators committed to reversing illegal and anti-competitive tech mergers….
I will appoint regulators who are committed to… unwind[ing] anti-competitive mergers, including:

– Amazon: Whole Foods; Zappos;
– Facebook: WhatsApp; Instagram;
– Google: Waze; Nest; DoubleClick

Elizabeth Warren’s brave new world

Let’s consider for a moment what this brave new world will look like — not the nirvana imagined by regulators and legislators who believe that decimating a company’s business model will deter only the “bad” aspects of the model while preserving the “good,” as if by magic, but the inevitable reality of antitrust populism.  

Utilities? Are you kidding? For an overview of what the future of tech would look like under Warren’s “Platform Utility” policy, take a look at your water, electricity, and sewage service. Have you noticed any improvement (or reduction in cost) in those services over the past 10 or 15 years? How about the roads? Amtrak? Platform businesses operating under a similar regulatory regime would also similarly stagnate. Enforcing platform “neutrality” necessarily requires meddling in the most minute of business decisions, inevitably creating unintended and costly consequences along the way.

Network companies, like all businesses, differentiate themselves by offering unique bundles of services to customers. By definition, this means vertically integrating with some product markets and not others. Why are digital assistants like Siri bundled into mobile operating systems? Why aren’t the vast majority of third-party apps also bundled into the OS? If you want utilities regulators instead of Google or Apple engineers and designers making these decisions on the margin, then Warren’s “Platform Utility” policy is the way to go.

Grocery Stores. To take one specific case cited by Warren, how much innovation was there in the grocery store industry before Amazon bought Whole Foods? Since the acquisition, large grocery retailers, like Walmart and Kroger, have increased their investment in online services to better compete with the e-commerce champion. Many industry analysts expect grocery stores to use computer vision technology and artificial intelligence to improve the efficiency of check-out in the near future.

Smartphones. Imagine how forced neutrality would play out in the context of iPhones. If Apple can’t sell its own apps, it also can’t pre-install its own apps. A brand new iPhone with no apps — and even more importantly, no App Store — would be, well, just a phone, out of the box. How would users even access a site or app store from which to download independent apps? Would Apple be allowed to pre-install someone else’s apps? That’s discriminatory, too. Maybe it will be forced to offer a menu of all available apps in all categories (like the famously useless browser ballot screen demanded by the European Commission in its Microsoft antitrust case)? It’s hard to see how that benefits consumers — or even app developers.

Source: Free Software Magazine

Internet Search. Or take search. Calls for “search neutrality” have been bandied about for years. But most proponents of search neutrality fail to recognize that all Google’s search results entail bias in favor of its own offerings. As Geoff Manne and Josh Wright noted in 2011 at the height of the search neutrality debate:

[S]earch engines offer up results in the form not only of typical text results, but also maps, travel information, product pages, books, social media and more. To the extent that alleged bias turns on a search engine favoring its own maps, for example, over another firm’s, the allegation fails to appreciate that text results and maps are variants of the same thing, and efforts to restrain a search engine from offering its own maps is no different than preventing it from offering its own search results.

Nevermind that Google with forced non-discrimination likely means Google offering only the antiquated “ten blue links” search results page it started with in 1998 instead of the far more useful “rich” results it offers today; logically it would also mean Google somehow offering the set of links produced by any and all other search engines’ algorithms, in lieu of its own. If you think Google will continue to invest in and maintain the wealth of services it offers today on the strength of the profits derived from those search results, well, Elizabeth Warren is probably already your favorite politician.

Source: Web Design Museum  

And regulatory oversight of algorithmic content won’t just result in an impoverished digital experience; it will inevitably lead to an authoritarian one, as well:

Any agency granted a mandate to undertake such algorithmic oversight, and override or reconfigure the product of online services, thereby controls the content consumers may access…. This sort of control is deeply problematic… [because it saddles users] with a pervasive set of speech controls promulgated by the government. The history of such state censorship is one which has demonstrated strong harms to both social welfare and rule of law, and should not be emulated.

Digital Assistants. Consider also the veritable cage match among the tech giants to offer “digital assistants” and “smart home” devices with ever-more features at ever-lower prices. Today the allegedly non-existent competition among these companies is played out most visibly in this multi-featured market, comprising advanced devices tightly integrated with artificial intelligence, voice recognition, advanced algorithms, and a host of services. Under Warren’s nondiscrimination principle this market disappears. Each device can offer only a connectivity platform (if such a service is even permitted to be bundled with a physical device…) — and nothing more.

But such a world entails not only the end of an entire, promising avenue of consumer-benefiting innovation, it also entails the end of a promising avenue of consumer-benefiting competition. It beggars belief that anyone thinks consumers would benefit by forcing technology companies into their own silos, ensuring that the most powerful sources of competition for each other are confined to their own fiefdoms by order of law.

Breaking business models

Beyond the product-feature dimension, Sen. Warren’s proposal would be devastating for innovative business models. Why is Amazon Prime Video bundled with free shipping? Because the marginal cost of distribution for video is close to zero and bundling it with Amazon Prime increases the value proposition for customers. Why is almost every Google service free to users? Because Google’s business model is supported by ads, not monthly subscription fees. Each of the tech giants has carefully constructed an ecosystem in which every component reinforces the others. Sen. Warren’s plan would not only break up the companies, it would prohibit their business models — the ones that both created and continue to sustain these products. Such an outcome would manifestly harm consumers.

Both of Warren’s policy “solutions” are misguided and will lead to higher prices and less innovation. Her cause for alarm is built on a multitude of mistaken assumptions, but let’s address just a few (Warren in bold):

  • “Nearly half of all e-commerce goes through Amazon.” Yes, but it has only 5% of total retail in the United States. As my colleague Kristian Stout says, “the Internet is not a market; it’s a distribution channel.”
  • “Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate.” The real story, as the founders of Diapers.com freely admitted, is that they sold diapers as what they hoped would be a loss leader, intending to build out sales of other products once they had a base of loyal customers:

And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.

Like all entrepreneurs, Diapers.com’s founders took a calculated risk that didn’t pay off as hoped. Amazon subsequently acquired the company (after it had declined a similar buyout offer from Walmart). (Antitrust laws protect consumers, not inefficient competitors). And no, this was not a case of predatory pricing. After many years of trying to make the business profitable as a subsidiary, Amazon shut it down in 2017.

  • “In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government’s antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.” The government’s settlement with Microsoft is not the reason Google and Facebook were able to emerge. Neither company entered the browser market at launch. Instead, they leapfrogged the browser entirely and created new platforms for the web (only later did Google create Chrome).

    Furthermore, if the Microsoft case is responsible for “clearing a path” for Google is it not also responsible for clearing a path for Google’s alleged depredations? If the answer is that antitrust enforcement should be consistently more aggressive in order to rein in Google, too, when it gets out of line, then how can we be sure that that same more-aggressive enforcement standard wouldn’t have curtailed the extent of the Microsoft ecosystem in which it was profitable for Google to become Google? Warren implicitly assumes that only the enforcement decision in Microsoft was relevant to Google’s rise. But Microsoft doesn’t exist in a vacuum. If Microsoft cleared a path for Google, so did every decision not to intervene, which, all combined, created the legal, business, and economic environment in which Google operates.

Warren characterizes Big Tech as a weight on the American economy. In fact, nothing could be further from the truth. These superstar companies are the drivers of productivity growth, all ranking at or near the top for most spending on research and development. And while data may not be the new oil, extracting value from it may require similar levels of capital expenditure. Last year, Big Tech spent as much or more on capex as the world’s largest oil companies:

Source: WSJ

Warren also faults Big Tech for a decline in startups, saying,

The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.

But this trend predates the existence of the companies she criticizes, as this chart from Quartz shows:

The exact causes of the decline in business dynamism are still uncertain, but recent research points to a much more mundane explanation: demographics. Labor force growth has been declining, which has led to an increase in average firm age, nudging fewer workers to start their own businesses.

Furthermore, it’s not at all clear whether this is actually a decline in business dynamism, or merely a change in business model. We would expect to see the same pattern, for example, if would-be startup founders were designing their software for acquisition and further development within larger, better-funded enterprises.

Will Rinehart recently looked at the literature to determine whether there is indeed a “kill zone” for startups around Big Tech incumbents. One paper finds that “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.” Another shows an inverse correlation across 50 countries between GDP and entrepreneurship rates. Robert Lucas predicted these trends back in 1978, pointing out that productivity increases would lead to wage increases, pushing marginal entrepreneurs out of startups and into big companies.

It’s notable that many in the venture capital community would rather not have Sen. Warren’s “help”:

Arguably, it is also simply getting harder to innovate. As economists Nick Bloom, Chad Jones, John Van Reenen and Michael Webb argue,

just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.

If this assessment is correct, it may well be that coming up with productive and profitable innovations is simply becoming more expensive, and thus, at the margin, each dollar of venture capital can fund less of it. Ironically, this also implies that larger firms, which can better afford the additional resources required to sustain exponential growth, are a crucial part of the solution, not the problem.

Warren believes that Big Tech is the cause of our social ills. But Americans have more trust in Amazon, Facebook, and Google than in the political institutions that would break them up. It would be wise for her to reflect on why that might be the case. By punishing our most valuable companies for past successes, Warren would chill competition and decrease returns to innovation.

Finally, in what can only be described as tragic irony, the most prominent political figure who shares Warren’s feelings on Big Tech is President Trump. Confirming the horseshoe theory of politics, far-left populism and far-right populism seem less distinguishable by the day. As our colleague Gus Hurwitz put it, with this proposal Warren is explicitly endorsing the unitary executive theory and implicitly endorsing Trump’s authority to direct his DOJ to “investigate specific cases and reach specific outcomes.” Which cases will he want to have investigated and what outcomes will he be seeking? More good questions that Senator Warren should be asking. The notion that competition, consumer welfare, and growth are likely to increase in such an environment is farcical.

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