Archives For big tech

[This post is the fourth in an ongoing symposium on “Should We Break Up Big Tech?“that features analysis and opinion from various perspectives.]

[This post is authored by Pallavi Guniganti, editor of Global Competition Review.]

Start with the assumption that there is a problem

The European Commission and Austria’s Federal Competition Authority are investigating Amazon over its use of Marketplace sellers’ data. US senator Elizabeth Warren has said that one reason to require “large tech platforms to be designated as ‘Platform Utilities’ and broken apart from any participant on that platform” is to prevent them from using data they obtain from third parties on the platform to benefit their own participation on the platform.

Amazon tweeted in response to Warren: “We don’t use individual sellers’ data to launch private label products.” However, an Amazon spokeswoman would not answer questions about whether it uses aggregated non-public data about sellers, or data from buyers; and whether any formal firewall prevents Amazon’s retail operation from accessing Marketplace data.

If the problem is solely that Amazon’s own retail operation can access data from the Marketplace, structurally breaking up the company and forbidding it and other platforms from participating on those platforms may be a far more extensive intervention than is needed. A targeted response such as a firewall could remedy the specific competitive harm.

Germany’s Federal Cartel Office implicitly recognised this with its Facebook decision, which did not demand the divestiture of every business beyond the core social network – the “Mark Zuckerberg Production” that began in 2004. Instead, the competition authority prohibited Facebook from conditioning the use of that social network on consent to the collection and combination of data from WhatsApp, Oculus, Masquerade, Instagram and any other sites or apps where Facebook might track them.

The decision does not limit data collection on Facebook itself. “It is taken into account that an advertising-funded social network generally needs to process a large amount of personal data,” the authority said. “However, the Bundeskartellamt holds that the efficiencies in a business model based on personalised advertising do not outweigh the interests of the users when it comes to processing data from sources outside of the social network.”

The Federal Cartel Office thus aims to wall off the data collected on Facebook from data that can be collected anywhere else. It ordered Facebook to present a road map for how it would implement these changes within four months of the February 2019 decision, but the time limit was suspended by the company’s emergency appeal to the Düsseldorf Higher Regional Court.

Federal Cartel Office president Andreas Mundt has described the kind of remedy he had ordered for Facebook as not exactly structural, but going in a “structural direction” that might work for other cases as well. Keeping the data apart is a way to “break up this market power” without literally breaking up the corporation, and the first step to an “internal divestiture”, he said.

Mundt claimed that this kind of remedy gets to “the core of the problem”: big internet companies being able to out-compete new entrants, because the former can obtain and process data even beyond what they collected on a single service that has attracted a large number of users.

He used terms like “silo” rather than “firewall”, but the essential idea is to protect competition by preventing the dissemination of certain information. Antitrust authorities worldwide have considered firewalls, particularly in vertical merger remedies, as a way to prevent the anticompetitive movement of data while still allowing for some efficiencies of business units being under the same corporate umbrella.

Notwithstanding Mundt’s reference to a “structural direction”, competition authorities including his own have traditionally classified firewalls as a behavioural or conduct remedy. They purport to solve a specific problem: the movement of information.

Other aspects of big companies that can give them an advantage – such as the use of profits from one part of a company to invest in another part, perhaps to undercut rivals on prices – would not be addressed by firewalls. They would more likely would require dividing up a company at the corporate level.

But if data are the central concern, then the way forward might be found in firewalls.

What do the enforcers say?

Germany

The Federal Cartel Office’s May 2017 guidance on merger remedies disfavours firewalls, stating that such obligations are “not suitable to remedy competitive harm” because they require continuous oversight. Employees of a corporation in almost any sector will commonly exchange information on a daily basis in almost every industry, making it “extremely difficult to identify, stop and prevent non-compliance with the firewall obligations”, the guidance states. In a footnote, it acknowledges that other, unspecified jurisdictions have regarded firewalls “as an effective remedy to remove competition concerns”.

UK

The UK’s Competition and Markets Authority takes a more optimistic view of the ability to keep a firewall in place, at least in the context of a vertical integration to prevent the use of “privileged information generated by competitors’ use of the merged company’s facilities or products”. In addition to setting up the company to restrict information flows, staff interactions and the sharing of services, physical premises and management, the CMA also requires the commitment of “significant resources to educating staff about the requirements of the measures and supporting the measures with disciplinary procedures and independent monitoring”. 

EU

The European Commission’s merger remedies notice is quite short. It does not mention firewalls or Chinese walls by name, simply noting that any non-structural remedy is problematic “due to the absence of effective monitoring of its implementation” by the commission or even other market participants. A 2011 European Commission submission to the Organisation for Economic Co-operation and Development was gloomier: “We have also found that firewalls are virtually impossible to monitor.”

US DOJ

The US antitrust agencies have been inconsistent in their views, and not on a consistent partisan basis. Under George W Bush, the Department of Justice’s antitrust division’s 2004 merger guidance said “a properly designed and enforced firewall” could prevent certain competition harms. But it also would require the DOJ and courts to expend “considerable time and effort” on monitoring, and “may frequently destroy the very efficiency that the merger was designed to generate. For these reasons, the use of firewalls in division decrees is the exception and not the rule.”

 Under Barack Obama, the Antitrust Division revised its guidance in 2011 to omit the most sceptical language about firewalls, replacing it with a single sentence about the need for effective monitoring. Under Donald Trump, the Antitrust Division has withdrawn the 2011 guidance, and the 2004 guidance is operative.

US FTC

At the Federal Trade Commission, on the other hand, firewalls had long been relatively uncontroversial among both Republicans and Democrats. For example, the commissioners unanimously agreed to a firewall remedy for PepsiCo’s and Coca-Cola’s separate 2010 acquisitions of bottlers and distributors that also dealt with rival a rival beverage maker, the Dr Pepper Snapple Group. (The FTC later emphasised the importance in those cases of obtaining industry expert monitors, who “have provided commission staff with invaluable insight and evaluation regarding each company’s compliance with the commission’s orders”.)

In 2017, the two commissioners who remained from the Obama administration both signed off on the Broadcom/Brocade merger based on a firewall – as did the European Commission, which also mandated interoperability commitments. And the Democratic commissioners appointed by President Trump voted with their Republican colleagues in 2018 to clear the Northrop Grumman/Orbital ATK deal subject to a behavioural remedy that included supply commitments and firewalls.

Several months later, however, those Democrats dissented from the FTC’s approval of Staples/Essendant, which the agency conditioned solely on a firewall between Essendant’s wholesale business and the Staples unit that handles corporate sales. While a firewall to prevent Staples from exploiting Essendant’s commercially-sensitive data about Staples’ rivals “will reduce the chance of misuse of data, it does not eliminate it,” Commissioner Rohit Chopra said. He emphasised the difficulty of policing oral communications, and said the FTC instead could have required Essendant to return its customers’ data. Commissioner Rebecca Kelly Slaughter said she shared Chopra’s “concerns about the efficacy of the firewall to remedy the information sharing harm”.

The majority defended firewalls’ effectiveness, noting that it had used them solve competition concerns in past vertical mergers, “and the integrity of those firewalls was robust.” The Republican commissioners cited the FTC’s review of the merger remedies it had imposed from 2006 to 2012, which concluded: “All vertical merger orders were judged successful.”

Republican commissioner Christine Wilson wrote separately about the importance of choosing “a remedy that is narrowly tailored to address the likely competitive harms without doing collateral damage.” Certain behavioural remedies for past vertical mergers had gone too far and even resulted in less competition, she said. “I have substantially fewer qualms about long-standing and less invasive tools, such as the ‘firewalls, fair dealing, and transparency provisions’ the Antitrust Division endorsed in the 2004 edition of its Policy Guide.”

Why firewalls don’t work, especially for big tech

Firewalls are designed to prevent the anticompetitive harm of information exchange, but whether they work depends on whether the companies and their employees behave themselves – and if they do not, on whether antitrust enforcers can know it and prove it. Deputy assistant attorney general Barry Nigro at the Antitrust Division has questioned the effectiveness of firewalls as a remedy for deals where the relevant business units are operationally close. The same problem may arise outside the merger context.

For example, Amazon’s investment fund for products to complement its Alexa virtual assistant could be seen as having the kind of firewall that is undercut by the practicalities of how a business operates. CNBC reported in September 2017 that “Alexa Fund representatives called a handful of its portfolio companies to say a clear ‘firewall’ exists between the Alexa Fund and Amazon’s product development teams.” The chief executive from Nucleus, one of those portfolio companies, had complained that Amazon’s Echo Show was a copycat of Nucleus’s product. While Amazon claimed that the Alexa Fund has “measures” to ensure “appropriate treatment” of confidential information, the companies said the process of obtaining the fund’s investment required them to work closely with Amazon’s product teams.

CNBC contrasted with Intel Capital – a division of the technology company that manages venture capital and investment – where a former managing director said he and his colleagues “tried to be extra careful not to let trade secrets flow across the firewall into its parent company”.

Firewalls are commonplace to corporate lawyers, who instill temporary blocks to prevent transmission of information in a variety of situations, such as during due diligence on a deal. This experience may lead such attorneys to put more faith in firewalls than enforcement advocates do.

Diana Moss, the president of the American Antitrust Institute, says that like other behavioral remedies, firewalls “don’t change any incentive to exercise market power”. In contrast, structural remedies eliminate that incentive by removing the part of the business that would make the exercise of market power profitable.

No internal monitoring or compliance ensures the firewall is respected, Moss says, unless a government consent order installs a monitor in a company to make sure the business units aren’t sharing information. This would be unlikely to occur, she says.

Moss’s 2011 white paper on behavioural merger remedies, co-authored with John Kwoka, reviews how well such remedies have worked. It notes that “information firewalls in Google-ITA and Comcast-NBCU clearly impede the joint operation and coordination of business divisions that would otherwise naturally occur.” 

Lina Khan’s 2019 Columbia Law Review article, “The Separation of Platforms and Commerce,” repeatedly cites Moss and Kwoka in the course of arguing that non-separation solutions such as firewalls do not work.

Khan concedes that information firewalls “in theory could help prevent information appropriation by dominant integrated firms.” But regulating the dissemination of information is especially difficult “in multibillion dollar markets built around the intricate collection, combination, and sale of data”, as companies in those markets “will have an even greater incentive to combine different sets of information”.

Why firewalls might work, especially for big tech

Yet neither Khan nor Moss points to an example of a firewall that clearly did not work. Khan writes: “Whether the [Google-ITA] information firewall was successful in preventing Google from accessing rivals’ business information is not publicly known. A year after the remedy expired, Google shut down” the application programming interface, through which ITA had provided its customisable flight search engine.

Even as enforcement advocates throw doubt on firewalls, enforcers keep requiring them. China’s Ministry of Commerce even used them to remedy a horizontal merger, in two stages of its conditions on Western Digital’s acquisition of Hitachi’s hard disk drive.

If German courts allow Andreas Mundt’s remedy for Facebook to go into effect, it will provide an example of just how effective a firewall can be on a platform. The decision requires Facebook to detail its technical plan to implement the obligation not to share data on users from its subsidiaries and its tracking on independent websites and apps.

A section of the “frequently asked questions” about the Federal Cartel Office’s Facebook case includes: “How can the Bundeskartellamt enforce the implementation of its decision?” The authority can impose fines for known non-compliance, but that assume it could detect violations of its order. Somewhat tentatively, the agency says it could carry out random monitoring, which is “possible in principle… as the actual flow of data eg from websites to Facebook can be monitored by analysing websites and their components or by recording signals.”

As perhaps befits the digital difference between Staples and Facebook, the German authority posits monitoring that would not be able to catch the kind of “oral communications” that Commissioner Chopra worried about when the US FTC cleared Staples’ acquisition of Essendant. But the use of such high-monitors could make firewalls even more appropriate as a remedy for platforms – which look to large data flows for a competitive advantage – than for old economy sales teams that could harm competition with just a few minutes of conversation.

Rather than a human monitor installed in a company to guard against firewall breaches, which Moss said was unlikely, software installed on employee computers and email systems might detect data flows between business units that should be walled off from each other. Breakups and firewalls are both longstanding remedies, but the latter may be more amenable to the kind of solutions that “big tech” itself has provided.

Big Tech and Antitrust

John Lopatka —  19 July 2019

[This post is the third 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 John E. Lopatka, Robert Noll Distinguished Professor of Law, School of Law, The Pennsylvania State University]

Big Tech firms stand accused of many evils, and the clamor to break them up is loud.  Should we fetch our pitchforks? The antitrust laws are designed to address a range of wrongs and authorize a set of remedies, which include but do not emphasize divestiture.  When the harm caused by a Big Tech company is of a kind the antitrust laws are intended to prevent, an appropriate antitrust remedy can be devised. In such a case, it makes sense to use antitrust: If antitrust and its remedies are adequate to do the job fully, no legislative changes are required.  When the harm falls outside the ambit of antitrust and any other pertinent statute, a choice must be made. Antitrust can be expanded; other statutes can be amended or enacted; or any harms that are not perfectly addressed by existing statutory and common law can be left alone, for legal institutions are never perfect, and a disease can be less harmful than a cure.

A comprehensive list of the myriad and changing attacks on Big Tech firms would be difficult to compile.  Indeed, the identity of the offenders is not self-evident, though Google (Alphabet), Facebook, Amazon, and Apple have lately attracted the most attention.  The principal charges against Big Tech firms seem to be these: 1) compromising consumer privacy; 2) manipulating the news; 3) accumulating undue social and political influence; 4) stifling innovation by acquiring creative upstarts; 5) using market power in one market to injure competitors in adjacent markets; 6) exploiting input suppliers; 7) exploiting their own employees; and 8) damaging communities by location choices.

These charges are not uniform across the Big Tech targets.  Some charges have been directed more forcefully against some firms than others.  For instance, infringement of consumer privacy has been a focus of attacks on Facebook.  Both Facebook and Google have been accused of manipulating the news. And claims about the exploitation of input suppliers and employees and the destruction of communities have largely been directed at Amazon.

What is “Big Tech”?

Despite the variance among firms, the attacks against all of them proceed from the same syllogism: Some tech firms are big; big tech firms do social harm; therefore, big tech firms should be broken up.   From an antitrust perspective, something is missing. Start with the definition of a “tech” firm. In the modern economy, every firm relies on sophisticated technology – from an auto repair shop to an airplane manufacturer to a social media website operator.  Every firm is a tech firm. But critics have a more limited concept in mind. They are concerned about platforms, or intermediaries, in multi-sided markets. These markets exhibit indirect network effects. In a two-sided market, for instance, each side of the market benefits as the size of the other side grows.  Platforms provide value by coordinating the demand and supply of different groups of economic actors where the actors could not efficiently interact by themselves. In short, platforms reduce transaction costs. They have been around for centuries, but their importance has been magnified in recent years by rapid advances in technology.  Rational observers can sensibly ask whether platforms are peculiarly capable of causing harm. But critics tend to ignore or at least to discount the value that platforms provide, and doing so presents a distorted image that breeds bad policy.

Assuming we know what a tech firm is, what is “big”?  One could measure size by many standards. Most critics do not bother to define “big,” though at least Senator Elizabeth Warren has proposed defining one category of bigness as firms with annual global revenue of $25 billion or more and a second category as those with annual global revenue of between $90 million and $25 billion.  The proper standard for determining whether tech firms are objectionably large is not self-evident. Indeed, a size threshold embodied in any legal policy will almost always be somewhat arbitrary. That by itself is not a failing of a policy prescription. But why use a size screen at all? A few answers are possible. Large firms may do more harm than small firms when harm is proportionate to size.  Size may matter because government intervention is costly and less sensitive to firm size than is harm, implying that only harm caused by large firms is large enough to outweigh the costs of enforcement. And most important, the size of a firm may be related to the kind of harm the firm is accused of doing. Perhaps only a firm of a certain size can inflict a particular kind of injury. A clear standard of size and its justification ought to precede any policy prescription.

What’s the (antitrust) beef?

The social harms that Big Tech firms are accused of doing are a hodgepodge.  Some are familiar to antitrust scholars as either current or past objects of antitrust concern; others are not.  Antitrust protects against a certain kind of economic harm: The loss of economic welfare caused by a restriction on competition.  Though the terms are sometimes used in different ways, the core concept is reasonably clear and well accepted. In most cases, economic welfare is synonymous with consumer welfare.  Economic welfare, though, is a broader concept. For example, economic welfare is reduced when buyers exercise market power to the detriment of sellers and by productive inefficiencies.  But despite the claim of some Big Tech critics, when consumer welfare is at stake, it is not measured exclusively by the price consumers pay. Economists often explicitly refer to quality-adjusted prices and implicitly have the qualification in mind in any analysis of price.  Holding quality constant makes quantitative models easier to construct, but a loss of quality is a matter of conventional antitrust concern. The federal antitrust agencies’ horizontal merger guidelines recognize that “reduced product quality, reduced product variety, reduced service, [and] diminished innovation” are all cognizable adverse effects.  The scope of antitrust is not as constricted as some critics assert. Still, it has limits.

Leveraging market power is standard antitrust fare, though it is not nearly as prevalent as once thought.  Horizontal mergers that reduce economic welfare are an antitrust staple. The acquisition and use of monopsony power to the detriment of input suppliers is familiar antitrust ground.  If Big Tech firms have committed antitrust violations of this ilk, the offenses can be remedied under the antitrust laws.

Other complaints against the Big Tech firms do not fit comfortably or at all within the ambit of antitrust.  Antitrust does not concern itself with political or social influence. Influence is a function of size, but not relative to any antitrust market.  Firms that have more resources than other firms may have more influence, but the deployment of those resources across the economy is irrelevant. The use of antitrust to attack conglomerate mergers was an inglorious period in antitrust history.  Injuries to communities or to employees are not a proper antitrust concern when they result from increased efficiency. Acquisitions might stifle innovation, which is a proper antitrust concern, but they might spur innovation by inducing firms to create value and thereby become attractive acquisition targets or by facilitating integration.  Whether the consumer interest in informational privacy has much to do with competition is difficult to say. Privacy in this context means the collection and use of data. In a multi-sided market, one group of participants may value not only the size but also the composition and information about another group. Competition among platforms might or might not occur on the dimension of privacy.  For any platform, however, a reduction in the amount of valuable data it can collect from one side and provide to another side will reduce the price it can charge the second side, which can flow back and injure the first side. In all, antitrust falters when it is asked to do what it cannot do well, and whether other laws should be brought to bear depends on a cost/benefit calculus.

Does Big Tech’s conduct merit antitrust action?

When antitrust is used, it unquestionably requires a causal connection between conduct and harm.  Conduct must restrain competition, and the restraint must cause cognizable harm. Most of the attacks against Big Tech firms if pursued under the antitrust laws would proceed as monopolization claims.  A firm must have monopoly power in a relevant market; the firm must engage in anticompetitive conduct, typically conduct that excludes rivals without increasing efficiency; and the firm must have or retain its monopoly power because of the anticompetitive conduct.

Put aside the flaccid assumption that all the targeted Big Tech platforms have monopoly power in relevant markets.  Maybe they do, maybe they don’t, but an assumption is unwarranted. Focus instead on the conduct element of monopolization.  Most of the complaints about Big Tech firms concern their use of whatever power they have. Use isn’t enough. Each of the firms named above has achieved its prominence by extraordinary innovation, shrewd planning, and effective execution in an unforgiving business climate, one in which more platforms have failed than have succeeded.  This does not look like promising ground for antitrust.

Of course, even firms that generally compete lawfully can stray.  But to repeat, monopolists do not monopolize unless their unlawful conduct is causally connected to their market power.  The complaints against the Big Tech firms are notably weak on allegations of anticompetitive conduct that resulted in the acquisition or maintenance of their market positions.  Some critics have assailed Facebook’s acquisitions of WhatsApp and Instagram. Even assuming these firms competed with Facebook in well-defined antitrust markets, the claim that Facebook’s dominance in its core business was created or maintained by these acquisitions is a stretch.  

The difficulty fashioning remedies

The causal connection between conduct and monopoly power becomes particularly important when remedies are fashioned for monopolization.  Microsoft, the first major monopolization case against a high tech platform, is instructive.  DOJ in its complaint sought only conduct remedies for Microsoft’s alleged unlawful maintenance of a monopoly in personal computer operating systems.  The trial court found that Microsoft had illegally maintained its monopoly by squelching Netscape’s Navigator and Sun’s Java technologies, and by the end of trial DOJ sought and the court ordered structural relief in the form of “vertical” divestiture, separating Microsoft’s operating system business from its applications business.  Some commentators at the time argued for various kinds of “horizontal” divestiture, which would have created competing operating system platforms. The appellate court set aside the order, emphasizing that an antitrust remedy must bear a close causal connection to proven anticompetitive conduct. Structural remedies are drastic, and a plaintiff must meet a heightened standard of proof of causation to justify any kind of divestiture in a monopolization case.  On remand, DOJ abandoned its request for divestiture. The evidence that Microsoft maintained its market position by inhibiting the growth of middleware was sufficient to support liability, but not structural relief.

The court’s trepidation was well-founded.  Divestiture makes sense when monopoly power results from acquisitions, because the mergers expose joints at which the firm might be separated without rending fully integrated operations.  But imposing divestiture on a monopolist for engaging in single-firm exclusionary conduct threatens to destroy the integration that is the essence of any firm and is almost always disproportional to the offense.  Even if conduct remedies can be more costly to enforce than structural relief, the additional cost is usually less than the cost to the economy of forgone efficiency.   

The proposals to break up the Big Tech firms are ill-defined.  Based on what has been reported, no structural relief could be justified as antitrust relief.  Whatever conduct might have been unlawful was overwhelmingly unilateral. The few acquisitions that have occurred didn’t appreciably create or preserve monopoly power, and divestiture wouldn’t do much to correct the misbehavior critics see anyway.  Big Tech firms could be restructured through new legislation, but that would be a mistake. High tech platform markets typically yield dominant firms, though heterogeneous demand often creates space for competitors. Markets are better at achieving efficient structures than are government planners.  Legislative efforts at restructuring are likely to invite circumvention or lock in inefficiency.

Regulate “Big Tech” instead?

In truth, many critics are willing to put up with dominant tech platforms but want them regulated.  If we learned any lesson from the era of pervasive economic regulation of public utilities, it is that regulation is costly and often yields minimal benefits.  George Stigler and Claire Friedland demonstrated 57 years ago that electric utility regulation had little impact. The era of regulation was followed by an era of deregulation.  Yet the desire to regulate remains strong, and as Stigler and Friedland observed, “if wishes were horses, one would buy stock in a harness factory.” And just how would Big Tech platform regulators regulate?  Senator Warren offers a glimpse of the kind of regulation that critics might impose: “Platform utilities would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users.” This kind of standard has some meaning in the context of a standard-setting organization dealing with patent holders.  What it would mean in the context of a social media platform, for example, is anyone’s guess. Would it prevent biasing of information for political purposes, and what government official should be entrusted with that determination? What is certain is that it would invite government intervention into markets that are working well, if not perfectly.  It would invite public officials to tradeoff economic welfare for a host of values embedded in the concept of fairness. Federal agencies charged with promoting the “public interest” have a difficult enough time reaching conclusions where competition is one of several specific values to be considered. Regulation designed to address all the evils high tech platforms are thought to perpetrate would make traditional economic or public-interest regulation look like child’s play.

Concluding remarks

Big Tech firms have generated immense value.  They may do real harm. From all that can now be gleaned, any harm has had little to do with antitrust, and it certainly doesn’t justify breaking them up.  Nor should they be broken up as an exercise in central economic planning. If abuses can be identified, such as undesirable invasions of privacy, focused legislation may be in order, but even then only if the government action is predictably less costly than the abuses.

Source: Benedict Evans

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

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

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

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

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

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

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

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

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

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

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

PCs

Source: Horace Dediu

Jan 1977: Commodore PET released

Jun 1977: Apple II released

Aug 1977: TRS-80 released

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

Mobile

Source: Comscore

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

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

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

Jun 2007: iPhone released

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

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

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

Search

Source: Distilled

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

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

Sep 1998: Google founded

Instant Messaging

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

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

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

Dec 2015: Report for the European Parliament

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

Oct 2017: AOL shuts down AIM

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

Retail

Source: Seeking Alpha

May 1997: Amazon IPO

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

Feb 2005: Amazon Prime launches

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

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

Social

Feb 2004: Facebook founded

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

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

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

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

Music

Source: RIAA

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

Apr 2006: Spotify founded

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

Jun 2015: Apple Music announced

Video

Source: OnlineMBAPrograms

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

Mar 2005: FTC blocks Blockbuster/Hollywood Video merger

Sep 2006: Amazon launches Prime Video

Jan 2007: Netflix streaming launches

Oct 2007: Hulu launches

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

Sep 2010: Blockbuster files for bankruptcy

The Only Winning Move Is Not to Play

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

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

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

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

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

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

A Change Is Gonna Come

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

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

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

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

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

 

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

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

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

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

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

* * *

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

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

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

Elizabeth Warren’s brave new world

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

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

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

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

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

Source: Free Software Magazine

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

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

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

Source: Web Design Museum  

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

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

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

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

Breaking business models

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

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

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

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

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

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

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

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

Source: WSJ

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

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

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

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

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

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

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

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

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

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

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

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