Archives For big tech

During last week’s antitrust hearing, Representative Jamie Raskin (D-Md.) provided a sound bite that served as a salvo: “In the 19th century we had the robber barons, in the 21st century we get the cyber barons.” But with sound bites, much like bumper stickers, there’s no room for nuance or scrutiny.

The news media has extensively covered the “questioning” of the CEOs of Facebook, Google, Apple, and Amazon (collectively “Big Tech”). Of course, most of this questioning was actually political posturing with little regard for the actual answers or antitrust law. But just like with the so-called robber barons, the story of Big Tech is much more interesting and complex. 

The myth of the robber barons: Market entrepreneurs vs. political entrepreneurs

The Robber Barons: The Great American Capitalists, 1861–1901 (1934) by Matthew Josephson, was written in the midst of America’s Great Depression. Josephson, a Marxist with sympathies for the Soviet Union, made the case that the 19th century titans of industry were made rich on the backs of the poor during the industrial revolution. This idea that the rich are wealthy due to their robbing of the rest of us is an idea that has long outlived Josephson and Marx down to the present day, as exemplified by the writings of Matt Stoller and the politics of the House Judiciary Committee.

In his Myth of the Robber Barons, Burton Folsom, Jr. makes the case that much of the received wisdom on the great 19th century businessmen is wrong. He distinguishes between the market entrepreneurs, which generated wealth by selling newer, better, or less expensive products on the free market without any government subsidies, and the political entrepreneurs, who became rich primarily by influencing the government to subsidize their businesses, or enacting legislation or regulation that harms their competitors. 

Folsom narrates the stories of market entrepreneurs, like Thomas Gibbons & Cornelius Vanderbilt (steamships), James Hill (railroads), the Scranton brothers (iron rails), Andrew Carnegie & Charles Schwab (steel), and John D. Rockefeller (oil), who created immense value for consumers by drastically reducing the prices of the goods and services their companies provided. Yes, these men got rich. But the value society received was arguably even greater. Wealth was created because market exchange is a positive-sum game.

On the other hand, the political entrepreneurs, like Robert Fulton & Edward Collins (steamships), and Leland Stanford & Henry Villard (railroads), drained societal resources by using taxpayer money to create inefficient monopolies. Because they were not subject to the same market discipline due to their favored position, cutting costs and prices were less important to them than the market entrepreneurs. Their wealth was at the expense of the rest of society, because political exchange is a zero-sum game.

Big Tech makes society better off

Today’s titans of industry, i.e. Big Tech, have created enormous value for society. This is almost impossible to deny, though some try. From zero-priced search on Google, to the convenience and price of products on Amazon, to the nominally free social network(s) of Facebook, to the plethora of options in Apple’s App Store, consumers have greatly benefited from Big Tech. Consumers flock to use Google, Facebook, Amazon, and Apple for a reason: they believe they are getting a great deal. 

By and large, the techlash comes from “intellectuals” who think they know better than consumers acting in the marketplace about what is good for them. And as noted by Alec Stapp, Americans in opinion polls consistently put a great deal of trust in Big Tech, at least compared to government institutions:

One of the basic building blocks of economics is that both parties benefit from voluntary exchanges ex ante, or else they would not be willing to engage in it. The fact that consumers use Big Tech to the extent they do is overwhelming evidence of their value. Obfuscations like “market power” mislead more than they inform. In the absence of governmental barriers to entry, consumers voluntarily choosing Big Tech does not mean they have power, it means they provide great service.

Big Tech companies are run by entrepreneurs who must ultimately answer to consumers. In a market economy, profits are a signal that entrepreneurs have successfully brought value to society. But they are also a signal to potential competitors. If Big Tech companies don’t continue to serve the interests of their consumers, they risk losing them to competitors.

Big Tech’s CEOs seem to get this. For instance, Jeff Bezos’ written testimony emphasized the importance of continual innovation at Amazon as a reason for its success:

Since our founding, we have strived to maintain a “Day One” mentality at the company. By that I mean approaching everything we do with the energy and entrepreneurial spirit of Day One. Even though Amazon is a large company, I have always believed that if we commit ourselves to maintaining a Day One mentality as a critical part of our DNA, we can have both the scope and capabilities of a large company and the spirit and heart of a small one. 

In my view, obsessive customer focus is by far the best way to achieve and maintain Day One vitality. Why? Because customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and a constant desire to delight customers drives us to constantly invent on their behalf. As a result, by focusing obsessively on customers, we are internally driven to improve our services, add benefits and features, invent new products, lower prices, and speed up shipping times—before we have to. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it. And I could give you many such examples. Not every business takes this customer-first approach, but we do, and it’s our greatest strength.

The economics of multi-sided platforms: How Big Tech does it

Economically speaking, Big Tech companies are (mostly) multi-sided platforms. Multi-sided platforms differ from regular firms in that they have to serve two or more of these distinct types of consumers to generate demand from any of them.

Economist David Evans, who has done as much as any to help us understand multi-sided platforms, has identified three different types:

  1. Market-Makers enable members of distinct groups to transact with each other. Each member of a group values the service more highly if there are more members of the other group, thereby increasing the likelihood of a match and reducing the time it takes to find an acceptable match. (Amazon and Apple’s App Store)
  2. Audience-Makers match advertisers to audiences. Advertisers value a service more if there are more members of an audience who will react positively to their messages; audiences value a service more if there is more useful “content” provided by audience-makers. (Google, especially through YouTube, and Facebook, especially through Instagram)
  3. Demand-Coordinators make goods and services that generate indirect network effects across two or more groups. These platforms do not strictly sell “transactions” like a market maker or “messages” like an audience-maker; they are a residual category much like irregular verbs – numerous, heterogeneous, and important. Software platforms such as Windows and the Palm OS, payment systems such as credit cards, and mobile telephones are demand coordinators. (Android, iOS)

In order to bring value, Big Tech has to consider consumers on all sides of the platform they operate. Sometimes, this means consumers on one side of the platform subsidize the other. 

For instance, Google doesn’t charge its users to use its search engine, YouTube, or Gmail. Instead, companies pay Google to advertise to their users. Similarly, Facebook doesn’t charge the users of its social network, advertisers on the other side of the platform subsidize them. 

As their competitors and critics love to point out, there are some complications in that some platforms also compete in the markets they create. For instance, Apple does place its own apps inits App Store, and Amazon does engage in some first-party sales on its platform. But generally speaking, both Apple and Amazon act as matchmakers for exchanges between users and third parties.

The difficulty for multi-sided platforms is that they need to balance the interests of each part of the platform in a way that maximizes its value. 

For Google and Facebook, they need to balance the interests of users and advertisers. In the case of each, this means a free service for users that is subsidized by the advertisers. But the advertisers gain a lot of value by tailoring ads based upon search history, browsing history, and likes and shares. For Apple and Amazon they need to create platforms which are valuable for buyers and sellers, and balance how much first-party competition they want to have before they lose the benefits of third-party sales.

There are no easy answers to creating a search engine, a video service, a social network, an App store, or an online marketplace. Everything from moderation practices, to pricing on each side of the platform, to the degree of competition from the platform operators themselves needs to be balanced right or these platforms would lose participants on one side of the platform or the other to competitors. 

Conclusion

Representative Raskin’s “cyber barons” were raked through the mud by Congress. But much like the falsely identified robber barons of the 19th century who were truly market entrepreneurs, the Big Tech companies of today are wrongfully maligned.

No one is forcing consumers to use these platforms. The incredible benefits they have brought to society through market processes shows they are not robbing anyone. Instead, they are constantly innovating and attempting to strike a balance between consumers on each side of their platform. 

The myth of the cyber barons need not live on any longer than last week’s farcical antitrust hearing.

This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.

A boy throws a brick through a bakeshop window. He flees and is never identified. The townspeople gather around the broken glass. “Well,” one of them says to the furious baker, “at least this will generate some business for the windowmaker!”

A reasonable statement? Not really. Although it is indeed a good day for the windowmaker, the money for the new window comes from the baker. Perhaps the baker was planning to use that money to buy a new suit. Now, instead of owning a window and a suit, he owns only a window. The windowmaker’s gain, meanwhile, is simply the tailor’s loss.

This parable of the broken window was conceived by Frédéric Bastiat, a nineteenth-century French economist. He wanted to alert the reader to the importance of opportunity costs—in his words, “that which is not seen.” Time and money spent on one activity cannot be spent on another.

Today Bastiat might tell the parable of the harassed technology company. A tech firm creates a revolutionary new product or service and grows very large. Rivals, lawyers, activists, and politicians call for an antitrust probe. Eventually they get their way. Millions of documents are produced, dozens of depositions are taken, and several hearings are held. In the end no concrete action is taken. “Well,” the critics say, “at least other companies could grow while the firm was sidetracked by the investigation!”

Consider the antitrust case against Microsoft twenty years ago. The case ultimately settled, and Microsoft agreed merely to modify minor aspects of how it sold its products. “It’s worth wondering,” writes Brian McCullough, a generally astute historian of the internet, “how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape.” “It’s easy to see,” McCullough says, “that the antitrust trial hobbled Microsoft strategically, and maybe even creatively.”

Should we really be glad that an antitrust dispute “distracted” and “hobbled” Microsoft? What would a focused and unfettered Microsoft have achieved? Maybe nothing; incumbents often grow complacent. Then again, Microsoft might have developed a great search engine or social-media platform. Or it might have invented something that, thanks to the lawsuit, remains absent to this day. What Microsoft would have created in the early 2000s, had it not had to fight the government, is that which is not seen.

But doesn’t obstructing the most successful companies create “room” for new competitors? David Cicilline, the chairman of the House’s antitrust subcommittee, argues that “just pursuing the [Microsoft] enforcement action itself” made “space for an enormous amount of additional innovation and competition.” He contends that the large tech firms seek to buy promising startups before they become full-grown threats, and that such purchases must be blocked.

It’s easy stuff to say. It’s not at all clear that it’s true or that it makes sense. Hindsight bias is rampant. In 2012, for example, Facebook bought Instagram for $1 billion, a purchase that is now cited as a quintessential “killer acquisition.” At the time of the sale, however, Instagram had 27 million users and $0 in revenue. Today it has around a billion users, it is estimated to generate $7 billion in revenue each quarter, and it is worth perhaps $100 billion. It is presumptuous to declare that Instagram, which had only 13 employees in 2012, could have achieved this success on its own.

If distraction is an end in itself, last week’s Big Tech hearing before Cicilline and his subcommittee was a smashing success. Presumably Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg would like to spend the balance of their time developing the next big innovations and staying ahead of smart, capable, ruthless competitors, starting with each other and including foreign firms such as ByteDance and Huawei. Last week they had to put their aspirations aside to prepare for and attend five hours of political theater.

The most common form of exchange at the hearing ran as follows. A representative asks a slanted question. The witness begins to articulate a response. The representative cuts the witness off. The representative gives a prepared speech about how the witness’s answer proved her point.

Lucy Kay McBath, a first-term congresswoman from Georgia, began one such drill with the claim that Facebook’s privacy policy from 2004, when Zuckerberg was 20 and Facebook had under a million users, applies in perpetuity. “We do not and will not use cookies to collect private information from any users,” it said. Has Facebook broken its “promise,” McBath asked, not to use cookies to collect private information? No, Zuckerberg explained (letting the question’s shaky premise slide), Facebook uses only standard log-in cookies.

“So once again, you do not use cookies? Yes or no?” McBath interjected. Having now asked a completely different question, and gotten a response resembling what she wanted—“Yes, we use cookies [on log-in features]”—McBath could launch into her canned condemnation. “The bottom line here,” she said, reading from her page, “is that you broke a commitment to your users. And who can say whether you may or may not do that again in the future?” The representative pressed on with her performance, not noticing or not caring that the person she was pretending to engage with had upset her script.

Many of the antitrust subcommittee’s queries had nothing to do with antitrust. One representative fixated on Amazon’s ties with the Southern Poverty Law Center. Another seemed to want Facebook to interrogate job applicants about their political beliefs. A third asked Zuckerberg to answer for the conduct of Twitter. One representative demanded that social-media posts about unproven Covid-19 treatments be left up, another that they be taken down. Most of the questions that were at least vaguely on topic, meanwhile, were exceedingly weak. The representatives often mistook emails showing that tech CEOs play to win, that they seek to outcompete challengers and rivals, for evidence of anticompetitive harm to consumers. And the panel was often treated like a customer-service hotline. This app developer ran into a difficulty; what say you, Mr. Cook? That third-party seller has a gripe; why won’t you listen to her, Mr. Bezos?

In his opening remarks, Bezos cited a survey that ranked Amazon one of the country’s most trusted institutions. No surprise there. In many places one could have ordered a grocery delivery from Amazon as the hearing started and had the goods put away before it ended. Was Bezos taking a muted dig at Congress? He had every right to—it is one of America’s least trusted institutions. Pichai, for his part, noted that many users would be willing to pay thousands of dollars a year for Google’s free products. Is Congress providing people that kind of value?

The advance of technology will never be an unalloyed blessing. There are legitimate concerns, for instance, about how social-media platforms affect public discourse. “Human beings evolved to gossip, preen, manipulate, and ostracize,” psychologist Jonathan Haidt and technologist Tobias Rose-Stockwell observe. Social media exploits these tendencies, they contend, by rewarding those who trade in the glib put-down, the smug pronouncement, the theatrical smear. Speakers become “cruel and shallow”; “nuance and truth” become “casualties in [a] competition to gain the approval of [an] audience.”

Three things are true at once. First, Haidt and Rose-Stockwell have a point. Second, their point goes only so far. Social media does not force people to behave badly. Assuming otherwise lets individual humans off too easy. Indeed, it deprives them of agency. If you think it is within your power to display grace, love, and transcendence, you owe it to others to think it is within their power as well.

Third, if you really want to see adults act like children, watch a high-profile congressional hearing. A hearing for Attorney General William Barr, held the day before the Big Tech hearing and attended by many of the same representatives, was a classic of the format.

The tech hearing was not as shambolic as the Barr hearing. And the representatives act like sanctimonious halfwits in part to concoct the sick burns that attract clicks on the very platforms built, facilitated, and delivered by the tech companies. For these and other obvious reasons, no one should feel sorry for the four men who spent a Wednesday afternoon serving as props for demagogues. But that doesn’t mean the charade was a productive use of time. There is always that which is not seen.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Across the globe, millions of people are rapidly coming to terms with the harsh realities of life under lockdown. As governments impose ever-greater social distancing measures, many of the daily comforts we took for granted are no longer available to us. 

And yet, we can all take solace in the knowledge that our current predicament would have been far less tolerable if the COVID-19 outbreak had hit us twenty years ago. Among others, we have Big Tech firms to thank for this silver lining. 

Contrary to the claims of critics, such as Senator Josh Hawley, Big Tech has produced game-changing innovations that dramatically improve our ability to fight COVID-19. 

The previous post in this series showed that innovations produced by Big Tech provide us with critical information, allow us to maintain some level of social interactions (despite living under lockdown), and have enabled companies, universities and schools to continue functioning (albeit at a severely reduced pace).

But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

One of the most underappreciated ways in which technology (mostly pioneered by Big Tech firms) is helping the world deal with COVID-19 has been a rapid shift towards contactless economic transactions. Not only are consumers turning towards digital goods to fill their spare time, but physical goods (most notably food) are increasingly being exchanged without any direct contact.

These ongoing changes would be impossible without the innovations and infrastructure that have emerged from tech and telecommunications companies over the last couple of decades. 

Of course, the overall picture is still bleak. The shift to contactless transactions has only slightly softened the tremendous blow suffered by the retail and restaurant industries – some predictions suggest their overall revenue could fall by at least 50% in the second quarter of 2020. Nevertheless, as explained below, this situation would likely be significantly worse without the many innovations produced by Big Tech companies. For that we would be thankful.

1. Food and other goods

For a start, the COVID-19 outbreak (and government measures to combat it) has caused many brick & mortar stores and restaurants to shut down. These closures would have been far harder to implement before the advent of online retail and food delivery platforms.

At the time of writing, e-commerce websites already appear to have witnessed a 20-30% increase in sales (other sources report 52% increase, compared to the same time last year). This increase will likely continue in the coming months.

The Amazon Retail platform has been at the forefront of this online shift.

  • Having witnessed a surge in online shopping, Amazon announced that it would be hiring 100.000 distribution workers to cope with the increased demand. Amazon’s staff have also been asked to work overtime in order to meet increased demand (in exchange, Amazon has doubled their pay for overtime hours).
  • To attract these new hires and ensure that existing ones continue working, Amazon simultaneously announced that it would be increasing wages in virus-hit countries (from $15 to $17, in the US) .
  • Amazon also stopped accepting “non-essential” goods in its warehouses, in order to prioritize the sale of household essentials and medical goods that are in high demand.
  • Finally, in Italy, Amazon decided not to stop its operations, despite some employees testing positive for COVID-19. Controversial as this move may be, Amazon’s private interests are aligned with those of society – maintaining the supply of essential goods is now more important than ever. 

And it is not just Amazon that is seeking to fill the breach left temporarily by brick & mortar retail. Other retailers are also stepping up efforts to distribute their goods online.

  • The apps of traditional retail chains have witnessed record daily downloads (thus relying on the smartphone platforms pioneered by Google and Apple).
  •  Walmart has become the go-to choice for online food purchases:

(Source: Bloomberg)

The shift to online shopping mimics what occurred in China, during its own COVID-19 lockdown. 

  • According to an article published in HBR, e-commerce penetration reached 36.6% of retail sales in China (compared to 29.7% in 2019). The same article explains how Alibaba’s technology is enabling traditional retailers to better manage their supply chains, ultimately helping them to sell their goods online.
  • A study by Nielsen ratings found that 67% of retailers would expand online channels. 
  • One large retailer shut many of its physical stores and redeployed many of its employees to serve as online influencers on WeChat, thus attempting to boost online sales.
  • Spurred by compassion and/or a desire to boost its brand abroad, Alibaba and its founder, Jack Ma, have made large efforts to provide critical medical supplies (notably tests kits and surgical masks) to COVID-hit countries such as the US and Belgium.

And it is not just retail that is adapting to the outbreak. Many restaurants are trying to stay afloat by shifting from in-house dining to deliveries. These attempts have been made possible by the emergence of food delivery platforms, such as UberEats and Deliveroo. 

These platforms have taken several steps to facilitate food deliveries during the outbreak.

  • UberEats announced that it would be waiving delivery fees for independent restaurants.
  • Both UberEats and Deliveroo have put in place systems for deliveries to take place without direct physical contact. While not entirely risk-free, meal delivery can provide welcome relief to people experiencing stressful lockdown conditions.

Similarly, the shares of Blue Apron – an online meal-kit delivery service – have surged more than 600% since the start of the outbreak.

In short, COVID-19 has caused a drastic shift towards contactless retail and food delivery services. It is an open question how much of this shift would have been possible without the pioneering business model innovations brought about by Amazon and its online retail platform, as well as modern food delivery platforms, such as UberEats and Deliveroo. At the very least, it seems unlikely that it would have happened as fast.

The entertainment industry is another area where increasing digitization has made lockdowns more bearable. The reason is obvious: locked-down consumers still require some form of amusement. With physical supply chains under tremendous strain, and social gatherings no longer an option, digital media has thus become the default choice for many.

Data published by Verizon shows a sharp increase (in the week running from March 9 to March 16) in the consumption of digital entertainment, especially gaming:

This echoes other sources, which also report that the use of traditional streaming platforms has surged in areas hit by COVID-19.

  • Netflix subscriptions are said to be spiking in locked-down communities. During the first week of March, Netflix installations increased by 77% in Italy and 33% in Spain, compared to the February average. Netflix app downloads increased by 33% in Hong kong and South Korea. The Amazon Prime app saw a similar increase.
  • YouTube has also witnessed a surge in usage. 
  • Live streaming (on platforms such as Periscope, Twitch, YouTube, Facebook, Instagram, etc) has also increased in popularity. It is notably being used for everything from concerts and comedy clubs to religious services, and even zoo visits.
  • Disney Plus has also been highly popular. According to one source, half of US homes with children under the age of 10 purchased a Disney Plus subscription. This trend is expected to continue during the COVID-19 outbreak. Disney even released Frozen II three months ahead of schedule in order to boost new subscriptions.
  • Hollywood studios have started releasing some of their lower-profile titles directly on streaming services.

Traffic has also increased significantly on popular gaming platforms.

These are just a tiny sample of the many ways in which digital entertainment is filling the void left by social gatherings. It is thus central to the lives of people under lockdown.

2. Cashless payments

But all of the services that are listed above rely on cashless payments – be it to limit the risk or contagion or because these transactions take place remotely. Fintech innovations have thus turned out to be one of the foundations that make social distancing policies viable. 

This is particularly evident in the food industry. 

  • Food delivery platforms, like UberEats and Deliveroo, already relied on mobile payments.
  • Costa coffee (a UK equivalent to starbucks) went cashless in an attempt to limit the spread of COVID-19.
  • Domino’s Pizza, among other franchises, announced that it would move to contactless deliveries.
  • President Donald Trump is said to have discussed plans to keep drive-thru restaurants open during the outbreak. This would also certainly imply exclusively digital payments.
  • And although doubts remain concerning the extent to which the SARS-CoV-2 virus may, or may not, be transmitted via banknotes and coins, many other businesses have preemptively ceased to accept cash payments

As the Jodie Kelley – the CEO of the Electronic Transactions Association – put it, in a CNBC interview:

Contactless payments have come up as a new option for consumers who are much more conscious of what they touch. 

This increased demand for cashless payments has been a blessing for Fintech firms. 

  • Though it is too early to gage the magnitude of this shift, early signs – notably from China – suggest that mobile payments have become more common during the outbreak.
  • In China, Alipay announced that it expected to radically expand its services to new sectors – restaurants, cinema bookings, real estate purchases – in an attempt to compete with WeChat.
  • PayPal has also witnessed an uptick in transactions, though this growth might ultimately be weighed-down by declining economic activity.
  • In the past, Facebook had revealed plans to offer mobile payments across its platforms – Facebook, WhatsApp, Instagram & Libra. Those plans may not have been politically viable at the time. The COVID-19 could conceivably change this.

In short, the COVID-19 outbreak has increased our reliance on digital payments, as these can both take place remotely and, potentially, limit contamination via banknotes. None of this would have been possible twenty years ago when industry pioneers, such as PayPal, were in their infancy. 

3. High speed internet access

Similarly, it goes without saying that none of the above would be possible without the tremendous investments that have been made in broadband infrastructure, most notably by internet service providers. Though these companies have often faced strong criticism from the public, they provide the backbone upon which outbreak-stricken economies can function.

By causing so many activities to move online, the COVID-19 outbreak has put broadband networks to the test. So for, broadband infrastructure around the world has been up to the task. This is partly because the spike in usage has occurred in daytime hours (where network’s capacity is less straine), but also because ISPs traditionally rely on a number of tools to limit peak-time usage.

The biggest increases in usage seem to have occurred in daytime hours. As data from OpenVault illustrates:

According to BT, one of the UK’s largest telecoms operators, daytime internet usage is up by 50%, but peaks are still well within record levels (and other UK operators have made similar claims):

Anecdotal data also suggests that, so far, fixed internet providers have not significantly struggled to handle this increased traffic (the same goes for Content Delivery Networks). Not only were these networks already designed to withstand high peaks in demand, but ISPs have, such as Verizon, increased their  capacity to avoid potential issues.

For instance, internet speed tests performed using Ookla suggest that average download speeds only marginally decreased, it at all, in locked-down regions, compared to previous levels:

However, the same data suggests that mobile networks have faced slightly larger decreases in performance, though these do not appear to be severe. For instance, contrary to contemporaneous reports, a mobile network outage that occurred in the UK is unlikely to have been caused by a COVID-related surge. 

The robustness exhibited by broadband networks is notably due to long-running efforts by ISPs (spurred by competition) to improve download speeds and latency. As one article put it:

For now, cable operators’ and telco providers’ networks are seemingly withstanding the increased demands, which is largely due to the upgrades that they’ve done over the past 10 or so years using technologies such as DOCSIS 3.1 or PON.

Pushed in part by Google Fiber’s launch back in 2012, the large cable operators and telcos, such as AT&T, Verizon, Comcast and Charter Communications, have spent years upgrading their networks to 1-Gig speeds. Prior to those upgrades, cable operators in particular struggled with faster upload speeds, and the slowdown of broadband services during peak usage times, such as after school and in the evenings, as neighborhood nodes became overwhelmed.

This is not without policy ramifications.

For a start, these developments might vindicate antitrust enforcers that allowed mergers that led to higher investments, sometimes at the expense of slight reductions in price competition. This is notably the case for so-called 4 to 3 mergers in the wireless telecommunications industry. As an in-depth literature review by ICLE scholars concludes:

Studies of investment also found that markets with three facilities-based operators had significantly higher levels of investment by individual firms.

Similarly, the COVID-19 outbreak has also cast further doubts over the appropriateness of net neutrality regulations. Indeed, an important criticism of such regulations is that they prevent ISPs from using the price mechanism to manage congestion

It is these fears of congestion, likely unfounded (see above), that led the European Union to urge streaming companies to voluntarily reduce the quality of their products. To date, Netflix, Youtube, Amazon Prime, Apple, Facebook and Disney have complied with the EU’s request. 

This may seem like a trivial problem, but it was totally avoidable. As a result of net neutrality regulation, European authorities and content providers have been forced into an awkward position (likely unfounded) that unnecessarily penalizes those consumers and ISPs who do not face congestion issues (conversely, it lets failing ISPs off the hook and disincentivizes further investments on their part). This is all the more unfortunate that, as argued above, streaming services are essential to locked-down consumers. 

Critics may retort that small quality decreases hardly have any impact on consumers. But, if this is indeed the case, then content providers were using up unnecessary amounts of bandwidth before the COVID-19 outbreak (something that is less likely to occur without net neutrality obligations). And if not, then European consumers have indeed been deprived of something they valued. The shoe is thus on the other foot.

These normative considerations aside, the big point is that we can all be thankful to live in an era of high-speed internet.

 4. Concluding remarks 

Big Tech is rapidly emerging as one of the heroes of the COVID-19 crisis. Companies that were once on the receiving end of daily reproaches – by the press, enforcers, and scholars alike – are gaining renewed appreciation from the public. Times have changed since the early days of these companies – where consumers marvelled at the endless possibilities that their technologies offered. Today we are coming to realize how essential tech companies have become to our daily lives, and how they make society more resilient in the face of fat-tailed events, like pandemics.

The move to a contactless, digital, economy is a critical part of what makes contemporary societies better-equipped to deal with COVID-19. As this post has argued, online delivery, digital entertainment, contactless payments and high speed internet all play a critical role. 

To think that we receive some of these services for free…

Last year, Erik Brynjolfsson, Avinash Collins and Felix Eggers published a paper in PNAS, showing that consumers were willing to pay significant sums for online goods they currently receive free of charge. One can only imagine how much larger those sums would be if that same experiment were repeated today.

Even Big Tech’s critics are willing to recognize the huge debt we owe to these companies. As Stephen Levy wrote, in an article titled “Has the Coronavirus Killed the Techlash?”:

Who knew the techlash was susceptible to a virus?

The pandemic does not make any of the complaints about the tech giants less valid. They are still drivers of surveillance capitalism who duck their fair share of taxes and abuse their power in the marketplace. We in the press must still cover them aggressively and skeptically. And we still need a reckoning that protects the privacy of citizens, levels the competitive playing field, and holds these giants to account. But the momentum for that reckoning doesn’t seem sustainable at a moment when, to prop up our diminished lives, we are desperately dependent on what they’ve built. And glad that they built it.

While it is still early to draw policy lessons from the outbreak, one thing seems clear: the COVID-19 pandemic provides yet further evidence that tech policymakers should be extremely careful not to kill the goose that laid the golden egg, by promoting regulations that may thwart innovation (or the opposite).

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Fellow of Law & Economics, International Center for Law & Economics).]

Republican Senator Josh Hawley infamously argued that Big Tech is overrated. In his words:

My biggest critique of big tech is: what big innovation have they really given us? What is it now that in the last 15, 20 years that people who say they are the brightest minds in the country have given this country? What are their great innovations?

To Senator Hawley these questions seemed rhetorical. Big Tech’s innovations were trivial gadgets: “autoplay” and “snap streaks”, to quote him once more.

But, as any Monty Python connoisseur will tell you, rhetorical questions have a way of being … not so rhetorical. In one of Python’s most famous jokes, members of the “People’s Front of Judea” ask “what have the Romans ever done for us”? To their own surprise, the answer turns out to be a great deal:

This post is the first in a series examining some of the many ways in which Big Tech is making Coronavirus-related lockdowns and social distancing more bearable, and how Big Tech is enabling our economies to continue functioning (albeit at a severely reduced pace) throughout the outbreak. 

Although Big Tech’s contributions are just a small part of a much wider battle, they suggest that the world is drastically better situated to deal with COVID-19 than it would have been twenty years ago – and this is in no small part thanks to Big Tech’s numerous innovations.

Of course, some will say that the world would be even better equipped to handle COVID-19, if Big Tech had only been subject to more (or less) regulation. Whether these critiques are correct, or not, they are not the point of this post. For many, like Senator Hawley, it is apparently undeniable that tech does more harm than good. But, as this post suggests, that is surely not the case. And before we do decide whether and how we want to regulate it in the future, we should be particularly mindful of what aspects of “Big Tech” seem particularly suited to dealing with the current crisis, and ensure that we don’t adopt regulations that thoughtlessly undermine these.

1. Priceless information 

One of the most important ways in which Big Tech firms have supported international attempts to COVID-19 has been their role as  information intermediaries. 

As the title of a New York Times article put it:

When Facebook Is More Trustworthy Than the President: Social media companies are delivering reliable information in the coronavirus crisis. Why can’t they do that all the time?

The author is at least correct on the first part. Big Tech has become a cornucopia of reliable information about the virus:

  • Big Tech firms are partnering with the White House and other agencies to analyze massive COVID-19 datasets in order to help discover novel answers to questions about transmission, medical care, and other interventions. This partnership is possible thanks to the massive investments in AI infrastructure that the leading tech firms have made. 
  • Google Scholar has partnered with renowned medical journals (as well as public authorities) to guide citizens towards cutting edge scholarship relating to COVID-19. This a transformative ressource in a world of lockdows and overburdened healthcare providers.
  • Google has added a number of features to its main search engine – such as a “Coronavirus Knowledge Panel” and SOS alerts – in order to help users deal with the spread of the virus.
  • On Twitter, information and insights about COVID-19 compete in the market for ideas. Numerous news outlets have published lists of recommended people to follow (Fortune, Forbes). 

    Furthermore – to curb some of the unwanted effects of an unrestrained market for ideas – Twitter (and most other digital platforms) links to the websites of public authorities when users search for COVID-related hashtags.
  • This flow of information is a two-way street: Twitter, Facebook and Reddit, among others, enable citizens and experts to weigh in on the right policy approach to COVID-19. 

    Though the results are sometimes far from perfect, these exchanges may prove invaluable in critical times where usual methods of policy-making (such as hearings and conferences) are mostly off the table.
  • Perhaps most importantly, the Internet is a precious source of knowledge about how to deal with an emerging virus, as well as life under lockdown. We often take for granted how much of our lives benefit from extreme specialization. These exchanges are severely restricted under lockdown conditions. Luckily, with the internet and modern search engines (pioneered by Google), most of the world’s information is but a click away.

    For example, Facebook Groups have been employed by users of the social media platform in order to better coordinate necessary activity among community members — like giving blood — while still engaging in social distancing.

In short, search engines and social networks have been beacons of information regarding COVID-19. Their mostly bottom-up approach to knowledge generation (i.e. popular topics emerge organically) is essential in a world of extreme uncertainty. This has ultimately enabled these players to stay ahead of the curve in bringing valuable information to citizens around the world.

2. Social interactions

This is probably the most obvious way in which Big Tech is making life under lockdown more bearable for everyone. 

  • In Italy, Whatsapp messages and calls jumped by 20% following the outbreak of COVID-19. And Microsoft claims that the use of Skype jumped by 100%.
  • Younger users are turning to social networks, like TikTok, to deal with the harsh realities of the pandemic.
  • Strangers are using Facebook groups to support each other through difficult times.
  • And institutions, like the WHO, are piggybacking on this popularity to further raise awareness about COVID-19 via social media. 
  • In South Africa, health authorities even created a whatsapp contact to answer users questions about the virus.
  • Most importantly, social media is a godsend for senior citizens and anyone else who may have to live in almost total isolation for the foreseeable future. For instance, nursing homes are putting communications apps, like Skype and WhatsApp, in the hands of their patients, to keep up their morale (here and here).

And with the economic effects of COVID-19 starting to gather speed, users will more than ever be grateful to receive these services free of charge. Sharing data – often very limited amounts – with a platform is an insignificant price to pay in times of economic hardship. 

3. Working & Learning

It will also be impossible to effectively fight COVID-19 if we cannot maintain the economy afloat. Stock markets have already plunged by record amounts. Surely, these losses would be unfathomably worse if many of us were not lucky enough to be able to work, and from the safety of our own homes. And for those individuals who are unable to work from home, their own exposure is dramatically reduced thanks to a significant proportion of the population that can stay out of public.

Once again, we largely have Big Tech to thank for this. 

  • Downloads of Microsoft Teams and Zoom are surging on both Google and Apple’s app stores. This is hardly surprising. With much of the workforce staying at home, these video-conference applications have become essential. The increased load generated by people working online might even have caused Microsoft Teams to crash in Europe.
  • According to Microsoft, the number of Microsoft Teams meetings increased by 500 percent in China.
  • Sensing that the current crisis may last for a while, some firms have also started to conduct job interviews online; populars apps for doing so include Skype, Zoom and Whatsapp. 
  • Slack has also seen a surge in usage, as firms set themselves up to work remotely. It has started offering free training, to help firms move online.
  • Along similar lines, Google recently announced that its G suite of office applications – which enables users to share and work on documents online – had recently passed 2 Billion users.
  • Some tech firms (including Google, Microsoft and Zoom) have gone a step further and started giving away some of their enterprise productivity software, in order to help businesses move their workflows online.

And Big Tech is also helping universities, schools and parents to continue providing coursework and lectures to their students/children.

  • Zoom and Microsoft Teams have been popular choices for online learning. To facilitate the transition to online learning, Zoom has notably lifted time limits relating to the free version of its app (for schools in the most affected areas).
  • Even in the US, where the virus outbreak is currently smaller than in Europe, thousands of students are already being taught online.
  • Much of the online learning being conducted for primary school children is being done with affordable Chromebooks. And some of these Chromebooks are distributed to underserved schools through grant programs administered by Google.
  • Moreover, at the time of writing, most of the best selling books on Amazon.com are pre-school learning books:

Finally, the advent of online storage services, such as Dropbox and Google Drive, has largely alleviated the need for physical copies of files. In turn, this enables employees to remotely access all the files they need to stay productive. While this may be convenient under normal circumstances, it becomes critical when retrieving a binder in the office is no longer an option.

4. So what has Big Tech ever done for us?

With millions of families around the world currently under forced lockdown, it is becoming increasingly evident that Big Tech’s innovations are anything but trivial. Innovations that seemed like convenient tools only a couple of days ago, are now becoming essential parts of our daily lives (or, at least, we are finally realizing how powerful they truly are). 

The fight against COVID-19 will be hard. We can at least be thankful that we have Big Tech by our side. Paraphrasing the Monty Python crew: 

Q: What has Big Tech ever done for us? 

A: Abundant, free, and easily accessible information. Precious social interactions. Online working and learning.

Q: But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

For the answer to this question, I invite you to stay tuned for the next post in this series.

[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.