Critics of big tech companies like Google and Amazon are increasingly focused on the supposed evils of “self-preferencing.” This refers to when digital platforms like Amazon Marketplace or Google Search, which connect competing services with potential customers or users, also offer (and sometimes prioritize) their own in-house products and services.
The objection, raised by several members and witnesses during a Feb. 25 hearing of the House Judiciary Committee’s antitrust subcommittee, is that it is unfair to third parties that use those sites to allow the site’s owner special competitive advantages. Is it fair, for example, for Amazon to use the data it gathers from its service to design new products if third-party merchants can’t access the same data? This seemingly intuitive complaint was the basis for the European Commission’s landmark case against Google.
But we cannot assume that something is bad for competition just because it is bad for certain competitors. A lot of unambiguously procompetitive behavior, like cutting prices, also tends to make life difficult for competitors. The same is true when a digital platform provides a service that is better than alternatives provided by the site’s third-party sellers.
It’s probably true that Amazon’s access to customer search and purchase data can help it spot products it can undercut with its own versions, driving down prices. But that’s not unusual; most retailers do this, many to a much greater extent than Amazon. For example, you can buy AmazonBasics batteries for less than half the price of branded alternatives, and they’re pretty good.
There’s no doubt this is unpleasant for merchants that have to compete with these offerings. But it is also no different from having to compete with more efficient rivals who have lower costs or better insight into consumer demand. Copying products and seeking ways to offer them with better features or at a lower price, which critics of self-preferencing highlight as a particular concern, has always been a fundamental part of market competition—indeed, it is the primary way competition occurs in most markets.
Store-branded versions of iPhone cables and Nespresso pods are certainly inconvenient for those companies, but they offer consumers cheaper alternatives. Where such copying may be problematic (say, by deterring investments in product innovations), the law awards and enforces patents and copyrights to reward novel discoveries and creative works, and trademarks to protect brand identity. But in the absence of those cases where a company has intellectual property, this is simply how competition works.
The fundamental question is “what benefits consumers?” Services like Yelp object that they cannot compete with Google when Google embeds its Google Maps box in Google Search results, while Yelp cannot do the same. But for users, the Maps box adds valuable information to the results page, making it easier to get what they want. Google is not making Yelp worse by making its own product better. Should it have to refrain from offering services that benefit its users because doing so might make competing products comparatively less attractive?
Self-preferencing also enables platforms to promote their offerings in other markets, which is often how large tech companies compete with each other. Amazon has a photo-hosting app that competes with Google Photos and Apple’s iCloud. It recently emailed its customers to promote it. That is undoubtedly self-preferencing, since other services cannot market themselves to Amazon’s customers like this, but if it makes customers aware of an alternative they might not have otherwise considered, that is good for competition.
This kind of behavior also allows companies to invest in offering services inexpensively, or for free, that they intend to monetize by preferencing their other, more profitable products. For example, Google invests in Android’s operating system and gives much of it away for free precisely because it can encourage Android customers to use the profitable Google Search service. Despite claims to the contrary, it is difficult to see this sort of cross-subsidy as harmful to consumers.
All platforms are open or closed to varying degrees. Retail “platforms,” for example, exist on a spectrum on which Craigslist is more open and neutral than eBay, which is more so than Amazon, which is itself relatively more so than, say, Walmart.com. Each position on this spectrum offers its own benefits and trade-offs for consumers. Indeed, some customers’ biggest complaint against Amazon is that it is too open, filled with third parties who leave fake reviews, offer counterfeit products, or have shoddy returns policies. Part of the role of the site is to try to correct those problems by making better rules, excluding certain sellers, or just by offering similar options directly.
Regulators and legislators often act as if the more open and neutral, the better, but customers have repeatedly shown that they often prefer less open, less neutral options. And critics of self-preferencing frequently find themselves arguing against behavior that improves consumer outcomes, because it hurts competitors. But that is the nature of competition: what’s good for consumers is frequently bad for competitors. If we have to choose, it’s consumers who should always come first.
The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law.
A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them.
Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.
Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust.
Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.
The letter argues that:
The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate.
Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.
The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.
Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies.
The Wall Street Journal reports that Amazon employees have been using data from individual sellers to identify products to compete with with its own ‘private label’ (or own-brand) products, such as AmazonBasics, Presto!, and Pinzon.
However, it is interesting to think about the underlying incentives facing Amazon here, and in particular why Amazon’s company policy is not to use individual seller data to develop products (rogue employees violating this policy, notwithstanding). One possibility is that it is a way for Amazon to balance its competition with some third parties with protections for others that it sees as valuable to its platform overall.
Amazon does use aggregated seller data to develop and market its products. If two or more merchants are selling a product, Amazon’s employees can see how popular it is. This might seem like a trivial distinction, but it might exist for good reason. It could be because sellers of unique products actually do have the bargaining power to demand that Amazon does not use their data to compete with them, or for public relations reasons, although it’s not clear how successful that has been.
But another possibility is that it may be a self-imposed restraint. Amazon sells its own private label products partially because doing so is profitable (even when undercutting rivals), partially to fill holes in product lines (like clothing, where 11% of listings were Amazon private label as of November 2018), and partially because it increases users’ likelihood to use Amazon if they expect to find a reliable product from a brand they trust. According to the Journal, they account for less than 1% of Amazon’s product sales, in contrast to the 19% of revenues ($54 billion) Amazon makes from third party seller services, which includes Marketplace commissions. Any analysis that ignores that Amazon has to balance those sources of revenue, and so has to tread carefully, is deficient.
With “commodity” products (like, say, batteries and USB cables), where multiple sellers are offering very similar or identical versions of the same thing, private label competition works well for both Amazon and consumers. By Amazon’s own rules it can enter this market using aggregated data, but this doesn’t give it a significant advantage, since that data is easily obtainable from multiple sources, including Amazon itself, which makes detailed aggregated sales data freely available to third-party retailers.
But to the extent that Amazon competes against innovative third-party sellers (typically manufacturers doing direct sales, as opposed to pure retailers simply re-selling others’ products), there is a possibility that the prospect of having to compete with Amazon may diminish their incentive to develop new products and sell them on Amazon’s platform.
This is the strongest argument that is made against private label offerings in general. When they involve some level of copying an innovative product, where the innovator has been collecting above-normal profits and those profits are what spur the innovation in the first place, a private label product that comes along and copies the product effectively free rides on the innovation and captures some of its return. That may get us less innovation than society—or a platform trying to host as many innovative products as possible—would like.
While the Journal conflates these two kinds of products, Amazon’s own policies may be tailored specifically to take account of the distinction, and maximise the total value of its marketplace to consumers.
This is nominally the focus of the Journal story: a car trunk organiser company with an (apparently) innovative product says that Amazon moving in to compete with its own AmazonBasics version competed away many of its sales. In this sort of situation, the free-rider problem described above might apply where future innovation is discouraged. Why bother to invent things like this if you’re just going to have your invention ripped off?
Of course, many such innovations are protected by patents. But there may be valuable innovations that are not, and even patented innovations are not perfectly protected given the costs of enforcement. But a platform like Amazon can adopt rules that fine-tune the protections offered by the legal system in an effort to increase the value of the platform for both innovators and consumers alike.
And that may be why Amazon has its rule against using individual seller data to compete: to allow creators of new products to collect more rents from their inventions, with a promise that, unless and until their product is commodified by other means (as indicated by the product being available from multiple other sellers), Amazon won’t compete against such sellers using any special insights it might have from that seller using Amazon’s Marketplace.
This doesn’t mean Amazon refuses to compete (or refuses to allow others to compete); it has other rules that sometimes determine that boundary, as when it enters into agreements with certain brands to permit sales of the brand on the platform only by sellers authorized by the brand owner. Rather, this rule is a more limited—but perhaps no less important—one that should entice innovators to use Amazon’s platform to sell their products without concern that doing so will create a special risk that Amazon can compete away their returns using information uniquely available to it. In effect, it’s a promise that innovators won’t lose more by choosing to sell on Amazon rather than through other retail channels..
Like other platforms, to maximise its profits Amazon needs to strike a balance between being an attractive place for third party merchants to sell their goods, and being attractive to consumers by offering as many inexpensive, innovative, and reliable products as possible. Striking that balance is challenging, but a rule that restrains the platform from using its unique position to expropriate value from innovative sellers helps to protect the income of genuinely innovative third parties, and induces them to sell products consumers want on Amazon, while still allowing Amazon (and third-party sellers) to compete with commodity products.
The fact that Amazon has strong competition online and offline certainly acts as an important constraint here, too: if Amazon behaved too badly, third parties might not sell on it at all, and Amazon would have none of the seller data that is allegedly so valuable to it.
But even in a world where Amazon had a huge, sticky customer base that meant it was not an option to sell elsewhere—which the Journal article somewhat improbably implies—Amazon would still need third parties to innovate and sell things on its platform.
What the Journal story really seems to demonstrate is the sort of genuine principal-agent problem that all large businesses face: the company as a whole needs to restrain its private label section in various respects but its agents in the private label section want to break those rules to maximise their personal performance (in this case, by launching a successful new AmazonBasics product). It’s like a rogue trader at a bank who breaks the rules to make herself look good by, she hopes, getting good results.This is just one of many rules that a platform like Amazon has to preserve the value of its platform. It’s probably not the most important one. But understanding why it exists may help us to understand why simple stories of platform predation don’t add up, and help to demonstrate the mechanisms that companies like Amazon use to maximise the total value of their platform, not just one part of it.
These days, lacking a coherent legal theory presents no challenge to the would-be antitrust crusader. In a previous post, we noted how Shaoul Sussman’s predatory pricing claims against Amazon lacked a serious legal foundation. Sussman has returned with a new post, trying to build out his fledgling theory, but fares little better under even casual scrutiny.
According to Sussman, Amazon’s allegedly anticompetitive
conduct not only cemented its role as the primary destination for consumers that shop online but also helped it solidify its power over brands.
Further, the company
was willing to go to great lengths to ensure brand availability and inventory, including turning to the grey market, recruiting unauthorized sellers, and even selling diverted goods and counterfeits to its customers.
Sussman is trying to make out a fairly convoluted predatory pricing case, but once again without ever truly connecting the dots in a way that develops a cognizable antitrust claim. According to Sussman:
Amazon sold products as a first-party to consumers on its platform at below average variable cost and  Amazon recently began to recoup its losses by shifting the bulk of the transactions that occur on the website to its marketplace, where millions of third-party sellers pay hefty fees that enable Amazon to take a deep cut of every transaction.
Sussman now bases this claim on an allegation that Amazon relied on “grey market” sellers on its platform, the presence of which forces legitimate brands onto the Amazon Marketplace. Moreover, Sussman claims that — somehow — these brands coming on board on Amazon’s terms forces those brands raise prices elsewhere, and the net effect of this process at scale is that prices across the economy have risen.
As we detail below, Sussman’s chimerical argument depends on conflating unrelated concepts and relies on non-public anecdotal accounts to piece together an argument that, even if you squint at it, doesn’t make out a viable theory of harm.
Conflating legal reselling and illegal counterfeit selling as the “grey market”
The biggest problem with Sussman’s new theory is that he conflates pro-consumer unauthorized reselling and anti-consumer illegal counterfeiting, erroneously labeling both the “grey market”:
Amazon had an ace up its sleeve. My sources indicate that the company deliberately turned to and empowered the “grey market“ — where both genuine, authentic goods and knockoffs are purchased and resold outside of brands’ intended distribution pipes — to dominate certain brands.
By definition, grey market goods are — as the link provided by Sussman states — “goods sold outside the authorized distribution channels by entities which may have no relationship with the producer of the goods.” Yet Sussman suggests this also encompasses counterfeit goods. This conflation is no minor problem for his argument. In general, the grey market is legal and beneficial for consumers. Brands such as Nike may try to limit the distribution of their products to channels the company controls, but they cannot legally prevent third parties from purchasing Nike products and reselling them on Amazon (or anywhere else).
This legal activity can increase consumer choice and can lead to lower prices, even though Sussman’s framing omits these key possibilities:
In the course of my conversations with former Amazon employees, some reported that Amazon actively sought out and recruited unauthorized sellers as both third-party sellers and first-party suppliers. Being unauthorized, these sellers were not bound by the brands’ policies and therefore outside the scope of their supervision.
In other words, Amazon actively courted third-party sellers who could bring legitimate goods, priced competitively, onto its platform. Perhaps this gives Amazon “leverage” over brands that would otherwise like to control the activities of legal resellers, but it’s exceedingly strange to try to frame this as nefarious or anticompetitive behavior.
Of course, we shouldn’t ignore the fact that there are also potential consumer gains when Amazon tries to restrict grey market activity by partnering with brands. But it is up to Amazon and the brands to determine through a contracting process when it makes the most sense to partner and control the grey market, or when consumers are better served by allowing unauthorized resellers. The point is: there is simply no reason to assume that either of these approaches is inherently problematic.
Yet, even when Amazon tries to restrict its platform to authorized resellers, it exposes itself to a whole different set of complaints. In 2018, the company made a deal with Apple to bring the iPhone maker onto its marketplace platform. In exchange for Apple selling its products directly on Amazon, the latter agreed to remove unauthorized Apple resellers from the platform. Sussman portrays this as a welcome development in line with the policy changes he recommends.
But news reports last month indicate the FTC is reviewing this deal for potential antitrust violations. One is reminded of Ronald Coase’s famous lament that he “had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.” It seems the same is true for Amazon and its relationship with the grey market.
Amazon’s incentive to remove counterfeits
What is illegal — and explicitly against Amazon’s marketplace rules — is selling counterfeit goods. Counterfeit goods destroy consumer trust in the Amazon ecosystem, which is why the company actively polices its listings for abuses. And as Sussman himself notes, when there is an illegal counterfeit listing, “Brands can then file a trademark infringement lawsuit against the unauthorized seller in order to force Amazon to suspend it.”
Sussman’s attempt to hang counterfeiting problems around Amazon’s neck belies the actual truth about counterfeiting: probably the most cost-effective way to stop counterfeiting is simply to prohibit all third-party sellers. Yet, a serious cost-benefit analysis of Amazon’s platforms could hardly support such an action (and would harm the small sellers that antitrust activists seem most concerned about).
But, more to the point, if Amazon’s strategy is to encourage piracy, it’s doing a terrible job. It engages in litigation against known pirates, and earlier this year it rolled out a suite of tools (called Project Zero) meant to help brand owners report and remove known counterfeits. As part of this program, according to Amazon, “brands provide key data points about themselves (e.g., trademarks, logos, etc.) and we scan over 5 billion daily listing update attempts, looking for suspected counterfeits.” And when a brand identifies a counterfeit listing, they can remove it using a self-service tool (without needing approval from Amazon).
Any large platform that tries to make it easy for independent retailers to reach customers is going to run into a counterfeit problem eventually. In his rush to discover some theory of predatory pricing to stick on Amazon, Sussman ignores the tradeoffs implicit in running a large platform that essentially democratizes retail:
Indeed, the democratizing effect of online platforms (and of technology writ large) should not be underestimated. While many are quick to disparage Amazon’s effect on local communities, these arguments fail to recognize that by reducing the costs associated with physical distance between sellers and consumers, e-commerce enables even the smallest merchant on Main Street, and the entrepreneur in her garage, to compete in the global marketplace.
In short, Amazon Marketplace is designed to make it as easy as possible for anyone to sell their products to Amazon customers. As the WSJ reported:
Counterfeiters, though, have been able to exploit Amazon’s drive to increase the site’s selection and offer lower prices. The company has made the process to list products on its website simple—sellers can register with little more than a business name, email and address, phone number, credit card, ID and bank account—but that also has allowed impostors to create ersatz versions of hot-selling items, according to small brands and seller consultants.
The existence of counterfeits is a direct result of policies designed to lower prices and increase consumer choice. Thus, we would expect some number of counterfeits to exist as a result of running a relatively open platform. The question is not whether counterfeits exist, but — at least in terms of Sussman’s attempt to use antitrust law — whether there is any reason to think that Amazon’s conduct with respect to counterfeits is actually anticompetitive. But, even if we assume for the moment that there is some plausible way to draw a competition claim out of the existence of counterfeit goods on the platform, his theory still falls apart.
There is both theoretical and empiricalevidence for why Amazon is likely not engaged in the conduct Sussman describes. As a platform owner involved in a repeated game with customers, sellers, and developers, Amazon has an incentive to increase trust within the ecosystem. Counterfeit goods directly destroy that trust and likely decrease sales in the long run. If individuals can’t depend on the quality of goods on Amazon, they can easily defect to Walmart, eBay, or any number of smaller independent sellers. That’s why Amazon enters into agreements with companies like Apple to ensure there are only legitimate products offered. That’s also why Amazon actively sues counterfeiters in partnership with its sellers and brands, and also why Project Zero is a priority for the company.
Sussman relies on private, anecdotal claims while engaging in speculation that is entirely unsupported by public data
Much of Sussman’s evidence is “[b]ased on conversations [he] held with former employees, sellers, and brands following the publication of [his] paper”, which — to put it mildly — makes it difficult for anyone to take seriously, let alone address head on. Here’s one example:
One third-party seller, who asked to remain anonymous, was willing to turn over his books for inspection in order to illustrate the magnitude of the increase in consumer prices. Together, we analyzed a single product, of which tens of thousands of units have been sold since 2015. The minimum advertised price for this single product, at any and all outlets, has increased more than 30 percent in the past four years. Despite this fact, this seller’s margins on this product are tighter than ever due to Amazon’s fee increases.
Needless to say, sales data showing the minimum advertised price for a single product “has increased more than 30 percent in the past four years” is not sufficient to prove, well, anything. At minimum, showing an increase in prices above costs would require data from a large and representative sample of sellers. All we have to go on from the article is a vague anecdote representing — maybe — one data point.
Not only is Sussman’s own data impossible to evaluate, but he bases his allegations on speculation that is demonstrably false. For instance, he asserts that Amazon used its leverage over brands in a way that caused retail prices to rise throughout the economy. But his starting point assumption is flatly contradicted by reality:
To remedy this, Amazon once again exploited brands’ MAP policies. As mentioned, MAP policies effectively dictate the minimum advertised price of a given product across the entire retail industry. Traditionally, this meant that the price of a typical product in a brick and mortar store would be lower than the price online, where consumers are charged an additional shipping fee at checkout.
Sussman presents no evidence for the claim that “the price of a typical product in a brick and mortar store would be lower than the price online.” The widespread phenomenon of showrooming — when a customer examines a product at a brick-and-mortar store but then buys it for a lower price online — belies the notion that prices are higher online. One recent study by Nielsen found that “nearly 75% of grocery shoppers have used a physical store to ‘showroom’ before purchasing online.”
In fact, the company’s downward pressure on prices is so large that researchers now speculate that Amazon and other internet retailers are partially responsible for the low and stagnant inflation in the US over the last decade (dubbing this the “Amazon effect”). It is also curious that Sussman cites shipping fees as the reason prices are higher online while ignoring all the overhead costs of running a brick-and-mortar store which online retailers don’t incur. The assumption that prices are lower in brick-and-mortar stores doesn’t pass the laugh test.
Sussman can keep trying to tell a predatory pricing story about Amazon, but the more convoluted his theories get — and the less based in empirical reality they are — the less convincing they become. There is a predatory pricing law on the books, but it’s hard to bring a case because, as it turns out, it’s actually really hard to profitably operate as a predatory pricer. Speculating over complicated new theories might be entertaining, but it would be dangerous and irresponsible if these sorts of poorly supported theories were incorporated into public policy.
[This post is the seventh in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]
[This post is authored by Alec Stapp, Research Fellow at the International Center for Law & Economics]
Should we break up Microsoft?
In all the talk of breaking up “Big Tech,” no one seems to mention the biggest tech company of them all. Microsoft’s market cap is currently higher than those of Apple, Google, Amazon, and Facebook. If big is bad, then, at the moment, Microsoft is the worst.
Apart from size, antitrust activists also claim that the structure and behavior of the Big Four — Facebook, Google, Apple, and Amazon — is why they deserve to be broken up. But they never include Microsoft, which is curious given that most of their critiques also apply to the largest tech giant:
Microsoft is big (current market cap exceeds $1 trillion)
Microsoft is dominant in narrowly-defined markets (e.g., desktop operating systems)
Microsoft is simultaneously operating and competing on a platform (i.e., the Microsoft Store)
Microsoft is a conglomerate capable of leveraging dominance from one market into another (e.g., Windows, Office 365, Azure)
Microsoft has its own “kill zone” for startups (196 acquisitions since 1994)
Microsoft operates a search engine that preferences its own content over third-party content (i.e., Bing)
Microsoft operates a platform that moderates user-generated content (i.e., LinkedIn)
To be clear, this is not to say that an antitrust case against Microsoft is as strong as the case against the others. Rather, it is to say that the cases against the Big Four on these dimensions are as weak as the case against Microsoft, as I will show below.
Big is bad
Tim Wu published a book last year arguing for more vigorous antitrust enforcement — including against Big Tech — called “The Curse of Bigness.” As you can tell by the title, he argues, in essence, for a return to the bygone era of “big is bad” presumptions. In his book, Wu mentions “Microsoft” 29 times, but only in the context of its 1990s antitrust case. On the other hand, Wu has explicitly called for antitrust investigations of Amazon, Facebook, and Google. It’s unclear why big should be considered bad when it comes to the latter group but not when it comes to Microsoft. Maybe bigness isn’t actually a curse, after all.
As the saying goes in antitrust, “Big is not bad; big behaving badly is bad.” This aphorism arose to counter erroneous reasoning during the era of structure-conduct-performance when big was presumed to mean bad. Thanks to an improved theoretical and empirical understanding of the nature of the competitive process, there is now a consensus that firms can grow large either via superior efficiency or by engaging in anticompetitive behavior. Size alone does not tell us how a firm grew big — so it is not a relevant metric.
Microsoft is also dominant in the “professional networking platform” market after its acquisition of LinkedIn in 2016. And the legacy tech giant is still the clear leader in the “paid productivity software” market. (Microsoft’s Office 365 revenue is roughly 10x Google’s G Suite revenue).
The problem here is obvious. These are overly-narrow market definitions for conducting an antitrust analysis. Is it true that Facebook’s platforms are the only service that can connect you with your friends? Should we really restrict the productivity market to “paid”-only options (as the EU similarly did in its Android decision) when there are so many free options available? These questions are laughable. Proper market definition requires considering whether a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price (SSNIP). If not (which is likely the case in the narrow markets above), then we should employ a broader market definition in each case.
Simultaneously operating and competing on a platform
Elizabeth Warren likes to say that if you own a platform, then you shouldn’t both be an umpire and have a team in the game. Let’s put aside the problems with that flawed analogy for now. What she means is that you shouldn’t both run the platform and sell products, services, or apps on that platform (because it’s inherently unfair to the other sellers).
Warren’s solution to this “problem” would be to create a regulated class of businesses called “platform utilities” which are “companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties.” Microsoft’s revenue last quarter was $32.5 billion, so it easily meets the first threshold. And Windows obviously qualifies as “a platform for connecting third parties.”
Just as in mobile operating systems, desktop operating systems are compatible with third-party applications. These third-party apps can be free (e.g., iTunes) or paid (e.g., Adobe Photoshop). Of course, Microsoft also makes apps for Windows (e.g., Word, PowerPoint, Excel, etc.). But the more you think about the technical details, the blurrier the line between the operating system and applications becomes. Is the browser an add-on to the OS or a part of it (as Microsoft Edge appears to be)? The most deeply-embedded applications in an OS are simply called “features.”
Even though Warren hasn’t explicitly mentioned that her plan would cover Microsoft, it almost certainly would. Previously, she left Apple out of the Medium post announcing her policy, only to later tell a journalist that the iPhone maker would also be prohibited from producing its own apps. But what Warren fails to include in her announcement that she would break up Apple is that trying to police the line between a first-party platform and third-party applications would be a nightmare for companies and regulators, likely leading to less innovation and higher prices for consumers (as they attempt to rebuild their previous bundles).
Leveraging dominance from one market into another
The core critique in Lina Khan’s “Amazon’s Antitrust Paradox” is that the very structure of Amazon itself is what leads to its anticompetitive behavior. Khan argues (in spite of the data) that Amazon uses profits in some lines of business to subsidize predatory pricing in other lines of businesses. Furthermore, she claims that Amazon uses data from its Amazon Web Services unit to spy on competitors and snuff them out before they become a threat.
Of course, this is similar to the theory of harm in Microsoft’s 1990s antitrust case, that the desktop giant was leveraging its monopoly from the operating system market into the browser market. Why don’t we hear the same concern today about Microsoft? Like both Amazon and Google, you could uncharitably describe Microsoft as extending its tentacles into as many sectors of the economy as possible. Here are some of the markets in which Microsoft competes (and note how the Big Four also compete in many of these same markets):
What these potential antitrust harms leave out are the clear consumer benefits from bundling and vertical integration. Microsoft’s relationships with customers in one market might make it the most efficient vendor in related — but separate — markets. It is unsurprising, for example, that Windows customers would also frequently be Office customers. Furthermore, the zero marginal cost nature of software makes it an ideal product for bundling, which redounds to the benefit of consumers.
The “kill zone” for startups
In a recent article for The New York Times, Tim Wu and Stuart A. Thompson criticize Facebook and Google for the number of acquisitions they have made. They point out that “Google has acquired at least 270 companies over nearly two decades” and “Facebook has acquired at least 92 companies since 2007”, arguing that allowing such a large number of acquisitions to occur is conclusive evidence of regulatory failure.
Microsoft has made 196 acquisitions since 1994, but they receive no mention in the NYT article (or in most of the discussion around supposed “kill zones”). But the acquisitions by Microsoft or Facebook or Google are, in general, not problematic. They provide a crucial channel for liquidity in the venture capital and startup communities (the other channel being IPOs). According to the latest data from Orrick and Crunchbase, between 2010 and 2018, there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion.
By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. Making it harder for a startup to be acquired would not result in more venture capital investment (and therefore not in more IPOs), according to recent research by Gordon M. Phillips and Alexei Zhdanov. The researchers show that “the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment.”
As investor and serial entrepreneur Leonard Speiser said recently, “If the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.”
Search engine bias
Google is often accused of biasing its search results to favor its own products and services. The argument goes that if we broke them up, a thousand search engines would bloom and competition among them would lead to less-biased search results. While it is a very difficult — if not impossible — empirical question to determine what a “neutral” search engine would return, one attempt by Josh Wright found that “own-content bias is actually an infrequent phenomenon, and Google references its own content more favorably than other search engines far less frequently than does Bing.”
The report goes on to note that “Google references own content in its first results position when no other engine does in just 6.7% of queries; Bing does so over twice as often (14.3%).” Arguably, users of a particular search engine might be more interested in seeing content from that company because they have a preexisting relationship. But regardless of how we interpret these results, it’s clear this not a frequent phenomenon.
So why is Microsoft being left out of the antitrust debate now?
One potential reason why Google, Facebook, and Amazon have been singled out for criticism of practices that seem common in the tech industry (and are often pro-consumer) may be due to the prevailing business model in the journalism industry. Google and Facebook are by far the largest competitors in the digital advertising market, and Amazon is expected to be the third-largest player by next year, according to eMarketer. As Ramsi Woodcock pointed out, news publications are also competing for advertising dollars, the type of conflict of interest that usually would warrant disclosure if, say, a journalist held stock in a company they were covering.
Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”
Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.
[This post is the sixth in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]
[This post is authored by Thibault Schrepel, Faculty Associate at the Berkman Center at Harvard University and Assistant Professor in European Economic Law at Utrecht University School of Law.]
The pretense of ignorance
Over the last few years, I have published a series of antitrust conversations with Nobel laureates in economics. I have discussed big tech dominance with most of them, and although they have different perspectives, all of them agreed on one thing: they do not know what the effect of breaking up big tech would be. In fact, I have never spoken with any economist who was able to show me convincing empirical evidence that breaking up big tech would on net be good for consumers. The same goes for political scientists; I have never read any article that, taking everything into consideration, proves empirically that breaking up tech companies would be good for protecting democracies, if that is the objective (please note that I am not even discussing the fact that using antitrust law to do that would violate the rule of law, for more on the subject, click here).
This reminds me of Friedrich Hayek’s Nobel memorial lecture, in which he discussed the “pretense of knowledge.” He argued that some issues will always remain too complex for humans (even helped by quantum computers and the most advanced AI; that’s right!). Breaking up big tech is one such issue; it is simply impossible simultaneously to consider the micro and macro-economic impacts of such an enormous undertaking, which would affect, literally, billions of people. Not to mention the political, sociological and legal issues, all of which combined are beyond human understanding.
Ignorance + fear = fame
In the absence of clear-cut conclusions, here is why (I think), some officials are arguing for breaking up big tech. First, it may be possible that some of them actually believe that it would be great. But I am sure we agree that beliefs should not be a valid basis for such actions. More realistically, the answer can be found in the work of another Nobel laureate, James Buchanan, and in particular his 1978 lecture in Vienna entitled “Politics Without Romance.”
In his lecture and the paper that emerged from it, Buchanan argued that while markets fail, so do governments. The latter is especially relevant insofar as top officials entrusted with public power may, occasionally at least, use that power to benefit their personal interests rather than the public interest. Thus, the presumption that government-imposed corrections for market failures always accomplish the desired objectives must be rejected. Taking that into consideration, it follows that the expected effectiveness of public action should always be established as precisely and scientifically as possible before taking action. Integrating these insights from Hayek and Buchanan, we must conclude that it is not possible to know whether the effects of breaking up big tech would on net be positive.
The question then is why, in the absence of positive empirical evidence, are some officials arguing for breaking up tech giants then? Well, because defending such actions may help them achieve their personal goals. Often, it is more important for public officials to show their muscle and take action, rather showing great care about reaching a positive net result for society. This is especially true when it is practically impossible to evaluate the outcome due to the scale and complexity of the changes that ensue. That enables these officials to take credit for being bold while avoiding blame for the harms.
But for such a call to be profitable for the public officials, they first must legitimize the potential action in the eyes of the majority of the public. Until now, most consumers evidently like the services of tech giants, which is why it is crucial for the top officials engaged in such a strategy to demonize those companies and further explain to consumers why they are wrong to enjoy them. Only then does defending the breakup of tech giants becomes politically valuable.
Some data, one trend
In a recent paper entitled “Antitrust Without Romance,” I have analyzed the speeches of the five current FTC commissioners, as well as the speeches of the current and three previous EU Competition Commissioners. What I found is an increasing trend to demonize big tech companies. In other words, public officials increasingly seek to prepare the general public for the idea that breaking up tech giants would be great.
In Europe, current Competition Commissioner Margrethe Vestager has sought to establish an opposition between the people (referred under the pronoun “us”) and tech companies (referred under the pronoun “them”) in more than 80% of her speeches. She further describes these companies as engaging in manipulation of the public and unleashing violence. She says they, “distort or fabricate information, manipulate people’s views and degrade public debate” and help “harmful, untrue information spread faster than ever, unleashing violence and undermining democracy.” Furthermore, she says they cause, “danger of death.” On this basis, she mentions the possibility of breaking them up (for more data about her speeches, see this link).
In the US, we did not observe a similar trend. Assistant Attorney General Makan Delrahim, who has responsibility for antitrust enforcement at the Department of Justice, describes the relationship between people and companies as being in opposition in fewer than 10% of his speeches. The same goes for most of the FTC commissioners (to see all the data about their speeches, see this link). The exceptions are FTC Chairman Joseph J. Simons, who describes companies’ behavior as “bad” from time to time (and underlines that consumers “deserve” better) and Commissioner Rohit Chopra, who describes the relationship between companies and the people as being in opposition to one another in 30% of his speeches. Chopra also frequently labels companies as “bad.” These are minor signs of big tech demonization compared to what is currently done by European officials. But, unfortunately, part of the US doctrine (which does not hide political objectives) pushes for demonizing big tech companies. One may have reason to fear that such a trend will grow in the US as it has in Europe, especially considering the upcoming presidential campaign in which far-right and far-left politicians seem to agree about the need to break up big tech.
And yet, let’s remember that no-one has any documented, tangible, and reproducible evidence that breaking up tech giants would be good for consumers, or societies at large, or, in fact, for anyone (even dolphins, okay). It might be a good idea; it might be a bad idea. Who knows? But the lack of evidence either way militates against taking such action. Meanwhile, there is strong evidence that these discussions are fueled by a handful of individuals wishing to benefit from such a call for action. They do so, first, by depicting tech giants as representing the new elite in opposition to the people and they then portray themselves as the only saviors capable of taking action.
Epilogue: who knows, life is not a Tarantino movie
For the last 30 years, antitrust law has been largely immune to strategic takeover by political interests. It may now be returning to a previous era in which it was the instrument of a few. This transformation is already happening in Europe (it is expected to hit case law there quite soon) and is getting real in the US, where groups display political goals and make antitrust law a Trojan horse for their personal interests.The only semblance of evidence they bring is a few allegedly harmful micro-practices (see Amazon’s Antitrust Paradox), which they use as a basis for defending the urgent need of macro, structural measures, such as breaking up tech companies. This is disproportionate, but most of all and in the absence of better knowledge, purely opportunistic and potentially foolish. Who knows at this point whether antitrust law will come out intact of this populist and moralist episode? And who knows what the next idea of those who want to use antitrust law for purely political purposes will be. Life is not a Tarantino movie; it may end up badly.
Treasury Secretary Steve Mnuchin recently claimed that Amazon has “destroyed the retail industry across the United States” and should be investigated for antitrust violations. The claim doesn’t pass the laugh test. What’s more, the allegation might more rightly be levelled at Mnuchin himself.
Mnuchin. Is. Wrong.
First, while Amazon’s share of online retail in the U.S. is around 38 percent, that still only represents around 4 percent of total retail sales. It is unclear how Mnuchin imagines a company with a market share of 4 percent can have “destroyed” its competitors.
Second, nearly 60 percent of Amazon’s sales come from third party vendors — i.e. other retailers — many of whom would not exist but for Amazon’s platform. So, far from destroying U.S. retail, Amazon arguably has enabled U.S. online retail to thrive.
Third, even many of the brick-and-mortar retailers allegedly destroyed by Amazon have likely actually benefited from its innovative, cost-cutting approaches, which have reduced the cost of inputs. For example, in its Business Prime Program, Amazon offers discounts on a large array of goods, as well as incentives for bulk purchases, and flexible financing offers. Along with those direct savings, it also allows small businesses to use its analytics capabilities to track and manage the supply chain inputs they purchase through Amazon.
It’s no doubt true that many retailers are unhappy about the price-cutting and retail price visibility that Amazon (and many other online retailers) offer to consumers. But, fortunately, online competition is a fact that will not go away even if Amazon does. Meanwhile, investigating Amazon for antitrust violations — presumably with the objective of imposing some structural remedy? — would harm a truly great American innovator. And to what end? To protect inefficient, overpriced retailers?
Indeed, the better response, for retailers, is not to gripe about Amazon but to invest in better ways to serve consumers in order more effectively to compete. And that’s what many retailers are doing: Walmart, Target and Kroger are investing billions to improve both their brick-and-mortar retail businesses and their online businesses. As a result, each of them still sell more, individually, than Amazon
It is ironic that Steve Mnuchin should claim that Amazon has “destroyed” U.S. retail, given his support for the administration’s tariff policy, which is actuallyseverely harming U.S. retailers. In the apparel industry, “[b]usinesses have barely been able to survive the 10 percent tariff. [The administration’s proposed] 25 percent is not survivable.” Low-margin retailers like Dollar Tree suffered punishing hits to stock value in the wake of the tariff announcements. And small producers and retailers would face, at best, dramatic income losses and, at worst, the need to fold up in the face of the current proposals.
So, if Mr Mnuchin is actually concerned about the state of U.S. retail, perhaps he should try to persuade his boss to stop with the tariff war instead of attacking a great American retailer.
[This post is the first in an ongoing symposium on “Should We Break Up Big Tech?” that will feature analysis and opinion from various perspectives.]
[This post is authored by Randal C. Picker, James Parker Hall Distinguished Service Professor of Law at The University of Chicago Law School]
The European Commission just announced that it is investigating Amazon. The Commission’s concern is that Amazon is simultaneously acting as a ref and player: Amazon sells goods directly as a first party but also operates a platform on which it hosts goods sold by third parties (resellers) and those goods sometimes compete. And, next step, Amazon is said to choose which markets to enter as a private-label seller at least in part by utilizing information it gleans from the third-party sales it hosts.
Assuming there is a problem …
Were Amazon’s activities thought to be a problem, the natural remedies, whether through antitrust or more direct sector, industry-specific regulation, might be to bar Amazon from both being a direct seller and a platform. India has already passed a statute that effectuates some of those results, though it seems targeted at non-domestic companies.
A broad regulation that barred Amazon from being simultaneously a seller of first-party inventory and of third-party inventory presumably would lead to a dissolution of the company into separate companies in each of those businesses. A different remedy—a classic that goes back at least as far in the United States as the 1887 Commerce Act—would be to impose some sort of nondiscrimination obligation on Amazon and perhaps to couple that with some sort of business-line restriction—a quarantine—that would bar Amazon from entering markets though private labels.
But is there a problem?
Private labels have been around a long time and large retailers have faced buy-vs.-build decisions along the way. Large, sophisticated retailers like A&P in a different era and Walmart and Costco today, just to choose two examples, are constantly rebalancing their inventory between that which they buy from third parties and that which they produce for themselves. As I discuss below, being a platform matters for the buy-vs.-build decision, but it is far from clear that being both a store and a platform simultaneously matters importantly for how we should look at these issues.
Of course, when Amazon opened for business in July 1995 it didn’t quite face these issues immediately. Amazon sold books—it billed itself as “Earth’s Biggest Bookstore”—but there is no private label possibility for books, no effort to substitute into just selling say “The Wit and Wisdom of Jeff Bezos.” You could of course build an ebooks platform—call that a Kindle—but that would be a decade or so down the road. But as Amazon expanded into more pedestrian goods, it would, like other retailers, naturally make decisions about which inventory to source internally and which to buy from third parties.
In September 1999, Amazon opened up what was being described as an online mall. Amazon called it zShops and the idea was clear: many customers came to Amazon to buy things that Amazon wasn’t offering and Amazon would bring that audience and a variety of transaction services to third parties. Third parties would in turn pay Amazon a monthly fee and a variety of transaction fees. Amazon CEO Jeff Bezos noted (as reported in The Wall Street Journal) that those prices had been set in a way to make Amazon generally “neutral” in choosing whether to enter a market through first-party inventory or through third-party inventory.
Note that a traditional retailer and the original Amazon faced a natural question which was which goods to carry in inventory? When Amazon opened its platform, Amazon changed powerfully the question of which goods to stock. Even a Walmart Supercenter has limited physical shelf space and has to take something off of the shelves to stock a new product. By becoming a platform, Amazon largely outsourced the product selection and shelf space allocation question to third parties. The new Amazon resellers would get access to Amazon’s substantial customer base—its audience—and to a variety of transactional services that Amazon would provide them.
An online retailer has some real informational advantages over physical stores, as the online retailer sees every product that customers search for. It is much harder, though not impossible, for a physical store to capture that information. But as Amazon became a platform it would no longer just observe search queries for goods but it would see actual sales by the resellers. And a physical store isn’t a platform in the way that Amazon is as the physical store is constrained by limited shelf space. But the real target here is the marginal information Amazon gets from third-party sales relative to what it would see from product searches at Amazon, its own first-party sales and from clicks on the growing amount of advertising it sells on its website.
All of that might matter for running product and inventory experiments and the corresponding pace of learning what goods customers want at what price. A physical store has to remove some item from its shelves to experiment with a new item and has to buy the item to stock it, though how much of a risk it is taking there will depend on whether the retailer can return unsold goods to the inventory supplier. A platform retailer like Amazon doesn’t have to make those tradeoffs and an online mall could offer almost an infinite inventory of items. A store or product ready for every possible search.
A possible strategy
All of this suggests a possible business strategy for a platform: let third parties run inventory experiments where the platform gets to see the results. Products that don’t sell are failed experiments and the platform doesn’t enter those markets. But when a third-party sells a product in real numbers, start selling that product as first-party inventory. Amazon then would face buy vs. build on that and that should make clear that the private brands question is distinct from the question of whether Amazon can leverage third-party reseller information to their detriment. It can certainly do just that by buying competing goods from a wholesaler and stocking that item as first-party Amazon inventory.
If Amazon is playing this strategy, it seems to be playing it slowly and poorly. Amazon CEO Jeff Bezos includes a letter each year to open Amazon’s annual report to shareholders. In the 2018 letter, Bezos opened by noting that “[s]omething strange and remarkable has happened over the last 20 years.” What was that? In 1999, the relevant number was 3%; five years later, in 2004, it was 25%, then 31% in 2009, 49% in 2014 and 58% in 2018. These were the percentage of physical gross merchandise sales by third-party sellers through Amazon. In 1993, 97% of Amazon’s sales were of its own first-party inventory but the percentage of third-party sales had steadily risen over 20 years and over the last four years of that period, third-party inventory sales exceeded Amazon’s own internal sales. As Bezos noted, Amazon’s first-party sales had grown dramatically—a 25% annual compound growth rate over that period—but in 2018, total third-party sales revenues were $160 billion while Amazon’s own first-party sales were at $117 billion. Bezos had a perspective on all of that—“Third-party sellers are kicking our first party butt. Badly.”—but if you believed the original vision behind creating the Amazon platform, Amazon should be indifferent between first-party sales and third-party sales, as long as all of that happens at Amazon.
This isn’t new
Given all of that, it isn’t crystal clear to me why Amazon gets as much attention as it does. The heart of this dynamic isn’t new. Sears started its catalogue business in 1888 and then started using the Craftsman and Kenmore brands as in-house brands in 1927. Sears was acquiring inventory from third parties and obviously knew exactly which ones were selling well and presumably made decisions about which markets to enter and which to stay out of based on that information. Walmart, the nation’s largest retailer, has a number of well-known private brands and firms negotiating with Walmart know full well that Walmart can enter their markets, subject of course to otherwise applicable restraints on entry such as intellectual property laws.
As suggested above, I think that is possible to tease out advantages that a platform has regarding inventory experimentation. It can outsource some of those costs to third parties, though sophisticated third parties should understand where they can and cannot have a sustainable advantage given Amazon’s ability to move to build-or-bought first-party inventory. We have entire bodies of law— copyright, patent, trademark and more—that limit the ability of competitors to appropriate works, inventions and symbols. Those legal systems draw very carefully considered lines regarding permitted and forbidden uses. And antitrust law generally favors entry into markets and doesn’t look to create barriers that block firms, large or small, from entering new markets.
There is a great deal more to say about a company as complex as Amazon, but two thoughts in closing. One story here is that Amazon has built a superior business model in combining first-party and third-party inventory sales and that is exactly the kind of business model innovation that we should applaud. Amazon has enjoyed remarkable growth but Walmart is still vastly larger than Amazon (ballpark numbers for 2018 are roughly $510 billion in net sales for Walmart vs. roughly $233 billion for Amazon – including all 3rd party sales, as well as Amazon Web Services). The second story is the remarkable growth of sales by resellers at Amazon.
If Amazon is creating private-label goods based on information it sees on its platform, nothing suggests that it is doing that particularly rapidly. And even if it is entering those markets, it still might do that were we to break up Amazon and separate the platform piece of Amazon (call it Amazon Platform) from the original first-party version of Amazon (say Amazon Classic) as traditional retailers have for a very, very long time been making buy-vs.-build decisions on their first-party inventory and using their internal information to make those decisions.
In 2014, Benedict Evans, a venture capitalist at Andreessen Horowitz, wrote “Why Amazon Has No Profits (And Why It Works),” a blog post in which he tried to explain Amazon’s business model. He began with a chart of Amazon’s revenue and net income that has now become (in)famous:
A question inevitably followed in antitrust circles: How can a company that makes so little profit on so much revenue be worth so much money? It must be predatory pricing!
Predatory pricing is a rather rare anticompetitive practice because the “predator” runs the risk of bankrupting itself in the process of trying to drive rivals out of business with below-cost pricing. Furthermore, even if a predator successfully clears the field of competition, in developed markets with deep capital markets, keeping out new entrants is extremely unlikely.
Nonetheless, in those rare cases where plaintiffs can demonstrate that a firm actually has a viable scheme to drive competitors from the market with prices that are “too low” and has the ability to recoup its losses once it has cleared the market of those competitors, plaintiffs (including the DOJ) can prevail in court.
In other words, whoa if true.
Khan’s Predatory Pricing Accusation
In 2017, Lina Khan, then a law student at Yale, published “Amazon’s Antitrust Paradox” in a note for the Yale Law Journal and used Evans’ chart as supporting evidence that Amazon was guilty of predatory pricing. In the abstract she says, “Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead.”
But if Amazon is selling below-cost, where does the money come from to finance those losses?
In her article, Khan hinted at two potential explanations: (1) Amazon is using profits from the cloud computing division (AWS) to cross-subsidize losses in the retail division or (2) Amazon is using money from investors to subsidize short-term losses:
Recently, Amazon has started reporting consistent profits, largely due to the success of Amazon Web Services, its cloud computing business. Its North America retail business runs on much thinner margins, and its international retail business still runs at a loss. But for the vast majority of its twenty years in business, losses—not profits—were the norm. Through 2013, Amazon had generated a positive net income in just over half of its financial reporting quarters. Even in quarters in which it did enter the black, its margins were razor-thin, despite astounding growth.
Just as striking as Amazon’s lack of interest in generating profit has been investors’ willingness to back the company. With the exception of a few quarters in 2014, Amazon’s shareholders have poured money in despite the company’s penchant for losses.
Revising predatory pricing doctrine to reflect the economics of platform markets, where firms can sink money for years given unlimited investor backing, would require abandoning the recoupment requirement in cases of below-cost pricing by dominant platforms.
Below-Cost Pricing Not Subsidized by Investors
But neither explanation withstands scrutiny. First, the money is not from investors. Amazon has not raised equity financing since 2003. Nor is it debt financing: The company’s net debt position has been near-zero or negative for its entire history (excluding the Whole Foods acquisition):
As Priya Anand observed in a recent piece for The Information, since Amazon started breaking out AWS in its financials, operating income for the North America retail business has been significantly positive:
But [Khan] underplays its retail profits in the U.S., where the antitrust debate is focused. As the above chart shows, its North America operation has been profitable for years, and its operating income has been on the rise in recent quarters. While its North America retail operation has thinner margins than AWS, it still generated $2.84 billion in operating income last year, which isn’t exactly a rounding error compared to its $4.33 billion in AWS operating income.
Below-Cost Pricing in Retail Also Known as “Loss Leader” Pricing
Okay, so maybe Amazon isn’t using below-cost pricing in aggregate in its retail division. But it still could be using profits from some retail products to cross-subsidize below-cost pricing for other retail products (e.g., diapers), with the intention of driving competitors out of business to capture monopoly profits. This is essentially what Khan claims happened in the Diapers.com (Quidsi) case. But in the retail industry, diapers are explicitly cited as a loss leader that help retailers to develop a customer relationship with mothers in the hopes of selling them a higher volume of products over time. This is exactly what the founders of Diapers.com told Inc Magazine in a 2012 interview (emphasis added):
We saw brick-and-mortar stores, the Wal-Marts and Targets of the world, using these products to build relationships with mom and the end consumer, bringing them into the store and selling them everything else. So we thought that was an interesting model and maybe we could replicate that online. 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.
An anticompetitive scheme could be built into such bundling, but in many if not the overwhelming majority of these cases, consumers are the beneficiaries of lower prices and expanded output produced by these arrangements. It’s hard to definitively say whether any given firm that discounts its products is actually pricing below average variable cost (“AVC”) without far more granular accounting ledgers than are typically maintained. This is part of the reason why these cases can be so hard to prove.
A successful predatory pricing strategy also requires blocking market entry when the predator eventually raises prices. But the Diapers.com case is an explicit example of repeated entry that would defeat recoupment. In an article for the American Enterprise Institute, Jeffrey Eisenach shares the rest of the story following Amazon’s acquisition of Diapers.com:
Amazon’s conduct did not result in a diaper-retailing monopoly. Far from it. According to Khan, Amazon had about 43 percent of online sales in 2016 — compared with Walmart at 23 percent and Target with 18 percent — and since many people still buy diapers at the grocery store, real shares are far lower.
In the end, Quidsi proved to be a bad investment for Amazon: After spending $545 million to buy the firm and operating it as a stand-alone business for more than six years, it announced in April 2017 it was shutting down all of Quidsi’s operations, Diapers.com included. In the meantime, Quidsi’s founders poured the proceeds of the Amazon sale into a new online retailer — Jet.com — which was purchased by Walmart in 2016 for $3.3 billion. Jet.com cofounder Marc Lore now runs Walmart’s e-commerce operations and has said publicly that his goal is to surpass Amazon as the top online retailer.
Sussman argues that the company has been inflating its free cash flow numbers by excluding “capital leases.” According to Sussman, “If all of those expenses as detailed in its statements are accounted for, Amazon experienced a negative cash outflow of $1.461 billion in 2017.” Even though it’s not dispositive of predatory pricing on its own, Sussman believes that a negative free cash flow implies the company has been selling below-cost to gain market share.
2. Amazon Recoups Losses By Lowering AVC, Not By Raising Prices
Instead of raising prices to recoup losses from pricing below-cost, Sussman argues that Amazon flies under the antitrust radar by keeping consumer prices low and progressively decreasing AVC, ostensibly through using its monopsony power to offload costs on suppliers and partners (although this point is not fully explored in his piece).
But Sussman’s argument contains errors in both legal reasoning as well as its underlying empirical assumptions.
While there are many different ways to calculate the “cost” of a product or service, generally speaking, “below-cost pricing” means the price is less than marginal cost or AVC. Typically, courts tend to rely on AVC when dealing with predatory pricing cases. And as Herbert Hovenkamp has noted, proving that a price falls below the AVC is exceedingly difficult, particularly when dealing with firms in dynamic markets that sell a number of differentiated but complementary goods or services. Amazon, the focus of Sussman’s article, is a useful example here.
When products are complements, or can otherwise be bundled, firms may also be able to offer discounts that are unprofitable when selling single items. In business this is known as the “razor and blades model” (i.e., sell the razor handle below-cost one time and recoup losses on future sales of blades — although it’s not clear if this ever actually happens). Printer manufacturers are also an oft-cited example here, where printers are often sold below AVC in the expectation that the profits will be realized on the ongoing sale of ink. Amazon’s Kindle functions similarly: Amazon sells the Kindle around its AVC, ostensibly on the belief that it will realize a profit on selling e-books in the Kindle store.
Yet, even ignoring this common and broadly inoffensive practice, Sussman’s argument is odd. In essence, he claims that Amazon is concealing some of its costs in the form of capital leases in an effort to conceal its below-AVC pricing while it works to simultaneously lower its real AVC below the prices it charges consumers. At the end of this process, once its real AVC is actually sufficiently below consumers prices, it will (so the argument goes) be in the position of a monopolist reaping monopoly profits.
The problem with this argument should be immediately apparent. For the moment, let’s ignore the classic recoupment problem where new entrants will be drawn into the market to win some of those monopoly prices based on the new AVC that is possible. The real problem with his logic is that Sussman basically suggests that if Amazon sharply lowers AVC — that is it makes production massively more efficient — and then does not drop prices, they are a “predator.” But by pricing below its AVC in the first place, consumers in essence were given a loan by Amazon — they were able to enjoy what Sussman believes are radically low prices while Amazon works to actually make those prices possible through creating production efficiencies. It seems rather strange to punish a firm for loaning consumers a large measure of wealth. Its doubly odd when you then re-factor the recoupment problem back in: as soon as other firms figure out that a lower AVC is possible, they will enter the market and bid away any monopoly profits from Amazon.
Sussman’s Technical Analysis Is Flawed
While there are issues with Sussman’s general theory of harm, there are also some specific problems with his technical analysis of Amazon’s financial statements.
Capital Leases Are a Fixed Cost
First, capital leases should be not be included in cost calculations for a predatory pricing case because they are fixed — not variable — costs. Again, “below-cost” claims in predatory pricing cases generally use AVC (and sometimes marginal cost) as relevant cost measures.
Capital Leases Are Mostly for Server Farms
Second, the usual story is that Amazon uses its wildly-profitable Amazon Web Services (AWS) division to subsidize predatory pricing in its retail division. But Amazon’s “capital leases” — Sussman’s hidden costs in the free cash flow calculations — are mostly for AWS capital expenditures (i.e., server farms).
According to the most recent annual report: “Property and equipment acquired under capital leases was $5.7 billion, $9.6 billion, and $10.6 billion in 2016, 2017, and 2018, with the increase reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS, which investments we expect to continue over time.”
In other words, any adjustments to the free cash flow numbers for capital leases would make Amazon Web Services appear less profitable, and would not have a large effect on the accounting for Amazon’s retail operation (the only division thus far accused of predatory pricing).
Look at Operating Cash Flow Instead of Free Cash Flow
Again, while cash flow measures cannot prove or disprove the existence of predatory pricing, a positive cash flow measure should make us more skeptical of such accusations. In the retail sector, operating cash flow is the appropriate metric to consider. As shown above, Amazon has had positive (and increasing) operating cash flow since 2002.
Your Theory of Harm Is Also Known as “Investment”
Third, in general, Sussman’s novel predatory pricing theory is indistinguishable from pro-competitive behavior in an industry with high fixed costs. From the abstract (emphasis added):
[N]egative cash flow firm[s] … can achieve greater market share through predatory pricing strategies that involve long-term below average variable cost prices … By charging prices in the present reflecting future lower costs based on prospective technological and scale efficiencies, these firms are able to rationalize their predatory pricing practices to investors and shareholders.
“’Charging prices in the present reflecting future lower costs based on prospective technological and scale efficiencies” is literally what it means to invest in capex and R&D.
Sussman’s paper presents a clever attempt to work around the doctrinal limitations on predatory pricing. But, if courts seriously adopt an approach like this, they will be putting in place a legal apparatus that quite explicitly focuses on discouraging investment. This is one of the last things we should want antitrust law to be doing.
One of the main concerns I had during the IANA transition was the extent to which the newly independent organization would be able to behave impartially, implementing its own policies and bylaws in an objective and non-discriminatory manner, and not be unduly influenced by specific “stakeholders”. Chief among my concerns at the time was the extent to which an independent ICANN would be able to resist the influence of governments: when a powerful government leaned on ICANN’s board, would it be able to adhere to its own policies and follow the process the larger multistakeholder community put in place?
It seems my concern was not unfounded. Amazon, Inc. has been in a long running struggle with the countries of the Amazonian Basin in South America over the use of the generic top-level domain (gTLD) .amazon. In 2014, the ICANN board (which was still nominally under the control of the US’s NTIA) uncritically accepted the nonbinding advice of the Government Advisory Committee (“GAC”) and denied Amazon Inc.’s application for .amazon. In 2017, an Independent Review Process panel reversed the board decision, because
[the board] failed in its duty to explain and give adequate reasons for its decision, beyond merely citing to its reliance on the GAC advice and the presumption, albeit a strong presumption, that it was based on valid and legitimate public policy concerns.
Accordingly the board was directed to reconsider the .amazon petition and
make an objective and independent judgment regarding whether there are, in fact, well-founded, merits-based public policy reasons for denying Amazon’s applications.
In the two years since that decision, a number of proposals were discussed between Amazon Inc. and the Amazonian countries as they sought to reach a mutually agreeable resolution to the dispute, none of which were successful. In March of this year, the board acknowledged the failed negotiations and announced that the parties had four more weeks to try again and if no agreement were reached in that time, permitted Amazon Inc. to submit a proposal that would handle the Amazonian countries’ cultural protection concerns.
Predictably, that time elapsed and Amazon, Inc. submitted its proposal, which includes a public interest commitment that would allow the Amazonian countries access to certain second level domains under .amazon for cultural and noncommercial use. For example, Brazil could use a domain such as http://www.br.amazon to showcase the culturally relevant features of the portion of the Amazonian river that flows through its borders.
Prime facie, this seems like a reasonable way to ensure that the cultural interests of those living in the Amazonian region are adequately protected. Moreover, in its first stated objection to Amazon, Inc. having control of the gTLD, the GAC indicated that this was its concern:
[g]ranting exclusive rights to this specific gTLD to a private company would prevent the use of this domain for purposes of public interest related to the protection, promotion and awareness raising on issues related to the Amazon biome. It would also hinder the possibility of use of this domain to congregate web pages related to the population inhabiting that geographical region.
Yet Amazon, Inc.’s proposal to protect just these interests was rejected by the Amazonian countries’ governments. The counteroffer from those governments was that they be permitted to co-own and administer the gTLD, that their governance interest be constituted in a steering committee on which Amazon, Inc. be given only a 1/9th vote, that they be permitted a much broader use of the gTLD generally and, judging by the conspicuous lack of language limiting use to noncommercial purposes, that they have the ability to use the gTLD for commercial purposes.
This last point certainly must be a nonstarter. Amazon, Inc.’s use of .amazon is naturally going to be commercial in nature. If eight other “co-owners” were permitted a backdoor to using the ‘.amazon’ name in commerce, trademark dilution seems like a predictable, if not inevitable, result. Moreover, the entire point of allowing brand gTLDs is to help responsible brand managers ensure that consumers are receiving the goods and services they expect on the Internet. Commercial use by the Amazonian countries could easily lead to a situation where merchants selling goods of unknown quality are able to mislead consumers by free riding on Amazon, Inc.’s name recognition.
This is a big moment for Internet governance
Theoretically, the ICANN board could decide this matter as early as this week — but apparently it has opted to treat this meeting as merely an opportunity for more discussion. That the board would consider not following through on its statement in March that it would finally put this issue to rest is not an auspicious sign that the board intends to take its independence seriously.
An independent ICANN must be able to stand up to powerful special interests when it comes to following its own rules and bylaws. This is the very concern that most troubled me before the NTIA cut the organization loose. Introducing more delay suggests that the board lacks the courage of its convictions. The Amazonian countries may end up irritated with the ICANN board, but ICANN is either an independent organization or its not.
Amazon, Inc. followed the prescribed procedures from the beginning; there is simply no good reason to draw out this process any further. The real fear here, I suspect, is that the board knows that this is a straightforward trademark case and is holding out hope that the Amazonian countries will make the necessary concessions that will satisfy Amazon, Inc. After seven years of this process, somehow I suspect that this is not likely and the board simply needs to make a decision on the proposals as submitted.
The truth is that these countries never even applied for use of the gTLD in the first place; they only became interested in the use of the domain once Amazon, Inc. expressed interest. All along, these countries maintained that they merely wanted to protect the cultural heritage of the region — surely a fine goal. Yet, when pressed to the edge of the timeline on the process, they produce a proposal that would theoretically permit them to operate commercial domains.
This is a test for ICANN’s board. If it doesn’t want to risk offending powerful parties, it shouldn’t open up the DNS to gTLDs because, inevitably, there will exist aggrieved parties that cannot be satisfied. Amazon, Inc. has submitted a solid proposal that allows it to protect both its own valid trademark interests in its brand as well as the cultural interests of the Amazonian countries. The board should vote on the proposal this week and stop delaying this process any further.
(The following is adapted from a recent ICLE Issue Brief on the flawed essential facilities arguments undergirding the EU competition investigations into Amazon’s marketplace that I wrote with Geoffrey Manne. The full brief is available here. )
Amazon has largely avoided the crosshairs of antitrust enforcers to date. The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares worldwide), and it consistently provides access to a wide array of affordable goods. Yet, even with Amazon’s obvious lack of dominance in the general retail market, the EU and some of its member states are opening investigations.
Commissioner Margarethe Vestager’s probe into Amazon, which came to light in September, centers on whether Amazon is illegally using its dominant position vis-á-vis third party merchants on its platforms in order to obtain data that it then uses either to promote its own direct sales, or else to develop competing products under its private label brands. More recently, Austria and Germany have launched separate investigations of Amazon rooted in many of the same concerns as those of the European Commission. The German investigation also focuses on whether the contractual relationships that third party sellers enter into with Amazon are unfair because these sellers are “dependent” on the platform.
One of the fundamental, erroneous assumptions upon which these cases are built is the alleged “essentiality” of the underlying platform or input. In truth, these sorts of cases are more often based on stories of firms that chose to build their businesses in a way that relies on a specific platform. In other words, their own decisions — from which they substantially benefited, of course — made their investments highly “asset specific” and thus vulnerable to otherwise avoidable risks. When a platform on which these businesses rely makes a disruptive move, the third parties cry foul, even though the platform was not — nor should have been — under any obligation to preserve the status quo on behalf of third parties.
Essential or not, that is the question
All three investigations are effectively premised on a version of an “essential facilities” theory — the claim that Amazon is essential to these companies’ ability to do business.
There are good reasons that the US has tightly circumscribed the scope of permissible claims invoking the essential facilities doctrine. Such “duty to deal” claims are “at or near the outer boundary” of US antitrust law. And there are good reasons why the EU and its member states should be similarly skeptical.
Characterizing one firm as essential to the operation of other firms is tricky because “[c]ompelling [innovative] firms to share the source of their advantage… may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” Further, the classification requires “courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.”
The key difficulty is that alleged “essentiality” actually falls on a spectrum. On one end is something like a true monopoly utility that is actually essential to all firms that use its service as a necessary input; on the other is a firm that offers highly convenient services that make it much easier for firms to operate. This latter definition of “essentiality” describes firms like Google and Amazon, but it is not accurate to characterize such highly efficient and effective firms as truly “essential.” Instead, companies that choose to take advantage of the benefits such platforms offer, and to tailor their business models around them, suffer from an asset specificity problem.
A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control.
Third-party sellers that rely upon Amazon without a contingency plan are engaging in a calculated risk that, as business owners, they would typically be expected to manage. The investigations by European authorities are based on the notion that antitrust law might require Amazon to remove that risk by prohibiting it from undertaking certain conduct that might raise costs for its third-party sellers.
Implications and extensions
In the full issue brief, we consider the tensions in EU law between seeking to promote innovation and protect the competitive process, on the one hand, and the propensity of EU enforcers to rely on essential facilities-style arguments on the other. One of the fundamental errors that leads EU enforcers in this direction is that they confuse the distribution channel of the Internet with an antitrust-relevant market definition.
A claim based on some flavor of Amazon-as-essential-facility should be untenable given today’s market realities because Amazon is, in fact, just one mode of distribution among many. Commerce on the Internet is still just commerce. The only thing preventing a merchant from operating a viable business using any of a number of different mechanisms is the transaction costs it would incur adjusting to a different mode of doing business. Casting Amazon’s marketplace as an essential facility insulates third-party firms from the consequences of their own decisions — from business model selection to marketing and distribution choices. Commerce is nothing new and offline distribution channels and retail outlets — which compete perfectly capably with online — are well developed. Granting retailers access to Amazon’s platform on artificially favorable terms is no more justifiable than granting them access to a supermarket end cap, or a particular unit at a shopping mall. There is, in other words, no business or economic justification for granting retailers in the time-tested and massive retail market an entitlement to use a particular mode of marketing and distribution just because they find it more convenient.
[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.
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.
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.
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)
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.
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)
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)
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.