From Sen. Elizabeth Warren (D-Mass.) to Sen. Josh Hawley (R-Mo.), populist calls to “fix” our antitrust laws and the underlying Consumer Welfare Standard have found a foothold on Capitol Hill. At the same time, there are calls to “fix” the Supreme Court by packing it with new justices. The court’s unanimous decision in NCAA v. Alston demonstrates that neither needs repair. To the contrary, clearly anti-competitive conduct—like the NCAA’s compensation rules—is proscribed under the Consumer Welfare Standard, and every justice from Samuel Alito to Sonia Sotomayor can agree on that.
In 1984, the court in NCAA v. Board of Regents suggested that “courts should take care when assessing the NCAA’s restraints on student-athlete compensation.” After all, joint ventures like sports leagues are entitled to rule-of-reason treatment. But while times change, the Consumer Welfare Standard is sufficiently flexible to meet those changes.
Where a competitive restraint exists primarily to ensure that “enormous sums of money flow to seemingly everyone except the student athletes,” the court rightly calls it out for what it is. As Associate Justice Brett Kavanaugh wrote in his concurrence:
Nowhere else in America can businesses get away with agreeing not to pay their workers a fair market rate on the theory that their product is defined by not paying their workers a fair market rate. And under ordinary principles of antitrust law, it is not evident why college sports should be any different. The NCAA is not above the law.
Disturbing these “ordinary principles”—whether through legislation, administrative rulemaking, or the common law—is simply unnecessary. For example, the Open Markets Institute filed an amicus brief arguing that the rule of reason should be “bounded” and willfully blind to the pro-competitive benefits some joint ventures can create (an argument that has been used, unsuccessfully, to attack ridesharing services like Uber and Lyft). Sen. Amy Klobuchar (D-Minn.) has proposed shifting the burden of proof so that merging parties are guilty until proven innocent. Sen. Warren would go further, deeming Amazon’s acquisition of Whole Foods anti-competitive simply because the company is “big,” and ignoring the merger’s myriad pro-competitive benefits. Sen. Hawley has gone further still: calling on Amazon to be investigated criminally for the crime of being innovative and successful.
Several of the current proposals, including those from Sens. Klobuchar and Hawley (and those recently introduced in the House that essentially single out firms for disfavored treatment), would replace the Consumer Welfare Standard that has underpinned antitrust law for decades with a policy that effectively punishes firms for being politically unpopular.
These examples demonstrate we should be wary when those in power assert that things are so irreparably broken that they need a complete overhaul. The “solutions” peddled usually increase politicians’ power by enabling them to pick winners and losers through top-down approaches that stifle the bottom-up innovations that make consumers’ lives better.
Are antitrust law and the Supreme Court perfect? Hardly. But in a 9-0 decision, the court proved this week that there’s nothing broken about either.
As supporting evidence, Warren cited a Newsweek article from 2017, which in turn cited a blog post from an open-source freelancer, who was aggregating data from a 2015 blog post published by Parse.ly, a web analytics company, which said: “Today, Facebook remains a top referring site to the publishers in Parse.ly’s network, claiming 39 percent of referral traffic versus Google’s share of 34 percent.” At the time, Parse.ly had “around 400 publisher domains” in its network. To put it lightly, this is not what it means to “account for” or “control” or “directly influence” 70 percent of all internet traffic, as Warren and others have claimed.
Internet traffic measured in bytes
In an effort to contextualize how extreme Warren’s claim was, in my last post I used a common measure of internet traffic — total volume in bytes — to show that Google and Facebook account for less than 20 percent of global internet traffic. Some Warren defenders have correctly pointed out that measuring internet traffic in bytes will weight the results toward data-heavy services, such as video streaming. It’s not obvious a priori, however, whether this would bias the results in favor of Facebook and Google or against them, given that users stream lots of video using those companies’ sites and apps (hello, YouTube).
Internet traffic measured by time spent by users
As I said in my post, there are multiple ways to measure total internet traffic, and no one of them is likely to offer a perfect measure. So, to get a fuller picture, we could also look at how users are spending their time on the internet. While there is no single source for global internet time use statistics, we can combine a few to reach an estimate (NB: this analysis includes time spent in apps as well as on the web).
According to the Global Digital report by Hootsuite and We Are Social, in 2018 there were 4.021 billion active internet users, and the worldwide average for time spent using the internet was 6 hours and 42 minutes per day. That means there were 1,616 billion internet user-minutes per day.
Data from Apptopia shows that, in the three months from May through July 2018, users spent 300 billion hours in Facebook-owned apps and 118 billion hours in Google-owned apps. In other words, all Facebook-owned apps consume, on average, 197 billion user-minutes per day and all Google-owned apps consume, on average, 78 billion user-minutes per day. And according to SimilarWeb data for the three months from June to August 2019, web users spent 11 billion user-minutes per day visiting Facebook domains (facebook.com, whatsapp.com, instagram.com, messenger.com) and 52 billion user-minutes per day visiting Google domains, including google.com (and all subdomains) and youtube.com.
If you add up all app and web user-minutes for Google and Facebook, the total is 338 billion user minutes per day. A staggering number. But as a share of all internet traffic (in this case measured in terms of time spent)? Google- and Facebook-owned sites and apps account for about 21 percent of user-minutes.
Internet traffic measured by “connections”
In my last post, I cited a Sandvine study that measured total internet traffic by volume of upstream and downstream bytes. The same report also includes numbers for what Sandvine calls “connections,” which is defined as “the number of conversations occurring for an application.” Sandvine notes that while “some applications use a single connection for all traffic, others use many connections to transfer data or video to the end user.” For example, a video stream on Netflix uses a single connection, while every item on a webpage, such as loading images, may require a distinct connection.
Cam Cullen, Sandvine’s VP of marketing, also implored readers to “never forget Google connections include YouTube, Search, and DoubleClick — all of which are very noisy applications and universally consumed,” which would bias this statistic toward inflating Google’s share. With these caveats in mind, Sandvine’s data shows that Google is responsible for 30 percent of these connections, while Facebook is responsible for under 8 percent of connections. Note that Netflix’s share is less than 1 percent, which implies this statistic is not biased toward data-heavy services. Again, the numbers for Google and Facebook are a far cry from what Warren and others are claiming.
Internet traffic measured by sources
I’m not sure whether either of these measures is preferable to what I offered in my original post, but each is at least a plausible measure of internet traffic — and all of them fall well short of Waren’s claimed 70 percent. What I do know is that the preferred metric offered by the people most critical of my post — external referrals to online publishers (content sites) — is decidedly not a plausible measure of internet traffic.
In defense of Warren, Jason Kint, the CEO of a trade association for digital content publishers, wrote, “I just checked actual benchmark data across our members (most publishers) and 67% of their external traffic comes through Google or Facebook.” Rand Fishkin cites his own analysis of data from Jumpshot showing that 66.0 percent of external referral visits were sent by Google and 5.1 percent were sent by Facebook.
In another response to my piece, former digital advertising executive, Dina Srinivasan, said, “[Percentage] of referrals is relevant because it is pointing out that two companies control a large [percentage] of business that comes through their door.”
In my opinion, equating “external referrals to publishers” with “internet traffic” is unacceptable for at least two reasons.
First, the internet is much broader than traditional content publishers — it encompasses everything from email and Yelp to TikTok, Amazon, and Netflix. The relevant market is consumer attention and, in that sense, every internet supplier is bidding for scarce time. In a recent investor letter, Netflixsaid, “We compete with (and lose to) ‘Fortnite’ more than HBO,” adding: “There are thousands of competitors in this highly fragmented market vying to entertain consumers and low barriers to entry for those great experiences.” Previously, CEO Reed Hastings had only half-jokingly said, “We’re competing with sleep on the margin.” In this debate over internet traffic, the opposing side fails to grasp the scope of the internet market. It is unsuprising, then, that the one metric that does best at capturing attention — time spent — is about the same as bytes.
Second, and perhaps more important, even if we limit our analysis to publisher traffic, the external referral statistic these critics cite completely (and conveniently?) omits direct and internal traffic — traffic that represents the majority of publisher traffic. In fact, according to Parse.ly’s most recent data, which now includes more than 3,000 “high-traffic sites,” only 35 percent of total traffic comes from search and social referrers (as the graph below shows). Of course, Google and Facebook drive the majority of search and social referrals. But given that most users visit webpages without being referred at all, Google and Facebook are responsible for less than a third of total traffic.
It is simply incorrect to say, as Srinivasan does, that external referrals offers a useful measurement of internet traffic because it captures a “large [percentage] of business that comes through [publishers’] door.” Well, “large” is relative, but the implication that these external referrals from Facebook and Google explain Warren’s 70%-of-internet-traffic claim is both factually incorrect and horribly misleading — especially in an antitrust context.
It is factually incorrect because, at most, Google and Facebook are responsible for a third of the traffic on these sites; it is misleading because if our concern is ensuring that users can reach content sites without passing through Google or Facebook, the evidence is clear that they can and do — at least twice as often as they follow links from Google or Facebook to do so.
As my colleague Gus Hurwitz said, Warren is making a very specific and very alarming claim:
There may be ‘softer’ versions of [Warren’s claim] that are reasonably correct (e.g., digital ad revenue, visibility into traffic). But for 99% of people hearing (and reporting on) these claims, they hear the hard version of the claim: Google and Facebook control 70% of what you do online. That claim is wrong, alarmist, misinformation, intended to foment fear, uncertainty, and doubt — to bootstrap the argument that ‘everything is terrible, worse, really!, and I’m here to save you.’ This is classic propaganda.
Google and Facebook do account for a 59 percent (and declining) share of US digital advertising. But that’s not what Warren said (nor would anyone try to claim with a straight face that “volume of advertising” was the same thing as “internet traffic”). And if our concern is with competition, it’s hard to look at the advertising market and conclude that it’s got a competition problem. Prices are falling like crazy (down 42 percent in the last decade), and volume is only increasing. If you add in offline advertising (which, whatever you think about market definition here, certainly competes with online advertising at the very least on some dimensions) Google and Facebook are responsible for only about 32 percent.
In her comments criticizing my article, Dina Srinivasan mentioned another of these “softer” versions:
Also, each time a publisher page loads, what [percentage] then queries Google or Facebook servers during the page loads? About 98+% of every page load. That stat is not even in Warren or your analysis. That is 1000% relevant.
It’s true that Google and Facebook have visibility into a great deal of all internet traffic (beyond their own) through a variety of products and services: browsers, content delivery networks (CDNs), web beacons, cloud computing, VPNs, data brokers, single sign-on (SSO), and web analytics services. But seeing internet traffic is not the same thing as “account[ing] for” — or controlling or even directly influencing — internet traffic. The first is a very different claim than the latter, and one with considerably more attenuated competitive relevance (if any). It certainly wouldn’t be a sufficient basis for advocating that Google and Facebook be broken up — which is probably why, although arguably accurate, it’s not the statistic upon which Warren based her proposal to do so.
[N]ew combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; … in general it is not the owner of stagecoaches who builds railways. – Joseph Schumpeter, January 1934
Elizabeth Warren wants to break up the tech giants — Facebook, Google, Amazon, and Apple — claiming they have too much power and represent a danger to our democracy. As part of our response to her proposal, we shared a couple of headlines from 2007 claiming that MySpace had an unassailable monopoly in the social media market.
Tommaso Valletti, the chief economist of the Directorate-General for Competition (DG COMP) of the European Commission, said, in what we assume was a reference to our posts, “they go on and on with that single example to claim that [Facebook] and [Google] are not a problem 15 years later … That’s not what I would call an empirical regularity.”
We appreciate the invitation to show that prematurely dubbing companies “unassailable monopolies” is indeed an empirical regularity.
It’s Tough to Make Predictions, Especially About the Future of Competition in Tech
No one is immune to this phenomenon. Antitrust regulators often take a static view of competition, failing to anticipate dynamic technological forces that will upend market structure and competition.
Scientists and academics make a different kind of error. They are driven by the need to satisfy their curiosity rather than shareholders. Upon inventing a new technology or discovering a new scientific truth, academics often fail to see the commercial implications of their findings.
Maybe the titans of industry don’t make these kinds of mistakes because they have skin in the game? The profit and loss statement is certainly a merciless master. But it does not give CEOs the power of premonition. Corporate executives hailed as visionaries in one era often become blinded by their success, failing to see impending threats to their company’s core value propositions.
Furthermore, it’s often hard as outside observers to tell after the fact whether business leaders just didn’t see a tidal wave of disruption coming or, worse, they did see it coming and were unable to steer their bureaucratic, slow-moving ships to safety. Either way, the outcome is the same.
Here’s the pattern we observe over and over: extreme success in one context makes it difficult to predict how and when the next paradigm shift will occur in the market. Incumbents become less innovative as they get lulled into stagnation by high profit margins in established lines of business. (This is essentially the thesis of Clay Christensen’s The Innovator’s Dilemma).
Even if the anti-tech populists are powerless to make predictions, history does offer us some guidance about the future. We have seen time and again that apparently unassailable monopolists are quite effectively assailed by technological forces beyond their control.
Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)
Sep 2013: “Microsoft CEO Ballmer Bids Emotional Farewell to Wall Street” (Reuters)
If there’s one thing I regret, there was a period in the early 2000s when we were so focused on what we had to do around Windows that we weren’t able to redeploy talent to the new device form factor called the phone.
Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)
Once upon a time, Yahoo! was an Internet search site with mediocre technology. Now it has a market cap of $2.8 billion. Some people say it’s the next America Online.
AOL’s dominance of instant messaging technology, the kind of real-time e-mail that also lets users know when others are online, has emerged as a major concern of regulators scrutinizing the company’s planned merger with Time Warner Inc. (twx). Competitors to Instant Messenger, such as Microsoft Corp. (msft) and Yahoo! Inc. (yhoo), have been pressing the Federal Communications Commission to force AOL to make its services compatible with competitors’.
Dec 2000: “AOL’s Instant Messaging Monopoly?” (Wired)
There have been isolated examples, as in the case of obligations of the merged AOL / Time Warner to make AOL Instant Messenger interoperable with competing messaging services. These obligations on AOL are widely viewed as having been a dismal failure.
Seventy percent of Yahoo 360 users, for example, also use other social networking sites — MySpace in particular. Ditto for Facebook, Windows Live Spaces and Friendster … This presents an obvious, long-term business challenge to the competitors. If they cannot build up a large base of unique users, they will always be on MySpace’s periphery.
Feb 2007: “Will Myspace Ever Lose Its Monopoly?” (Guardian)
Jun 2011: “Myspace Sold for $35m in Spectacular Fall from $12bn Heyday” (Guardian)
Dec 2003: “The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model, and it might not be successful.” – Steve Jobs (Rolling Stone)
Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions. The authors just cannot help themselves. A March 2012 BBC article “The Future of Technology… Who Knows?” derided the naysayers who predicted doom for Apple’s retail store strategy. Its kicker?
And that is why when you read that the Blackberry is doomed, or that Microsoft will never make an impression on mobile phones, or that Apple will soon dominate the connected TV market, you need to take it all with a pinch of salt.
But Blackberry was doomed and Microsoft never made an impression on mobile phones. (Half credit for Apple TV, which currently has a 15% market share).
Nobel Prize-winning economist Paul Krugman wrote a piece for Red Herring magazine (seriously) in June 1998 with the title “Why most economists’ predictions are wrong.” Headline-be-damned, near the end of the article he made the following prediction:
The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.
Robert Metcalfe himself predicted in a 1995 column that the Internet would “go spectacularly supernova and in 1996 catastrophically collapse.” After pledging to “eat his words” if the prediction did not come true, “in front of an audience, he put that particular column into a blender, poured in some water, and proceeded to eat the resulting frappe with a spoon.”
A Change Is Gonna Come
Benedict Evans, a venture capitalist at Andreessen Horowitz, has the best summary of why competition in tech is especially difficult to predict:
IBM, Microsoft and Nokia were not beaten by companies doing what they did, but better. They were beaten by companies that moved the playing field and made their core competitive assets irrelevant. The same will apply to Facebook (and Google, Amazon and Apple).
Elsewhere, Evans tried to reassure his audience that we will not be stuck with the current crop of tech giants forever:
With each cycle in tech, companies find ways to build a moat and make a monopoly. Then people look at the moat and think it’s invulnerable. They’re generally right. IBM still dominates mainframes and Microsoft still dominates PC operating systems and productivity software. But… It’s not that someone works out how to cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose mainframes and Microsoft didn’t lose PC operating systems. Instead, those stopped being ways to dominate tech. PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well. Unless you think tech progress is over and there’ll be no more cycles … It is deeply counter-intuitive to say ‘something we cannot predict is certain to happen’. But this is nonetheless what’s happened to overturn pretty much every tech monopoly so far.
If this time is different — or if there are more false negatives than false positives in the monopoly prediction game — then the advocates for breaking up Big Tech should try to make that argument instead of falling back on “big is bad” rhetoric. As for us, we’ll bet that we have not yet reached the end of history — tech progress is far from over.
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:
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.
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.
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:
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”:
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.
Johnson’s concerns are, as he presents them, just political. After pointing out his own bottom line (“it would be a complete travesty not to put the strongest possible regulator in change of protecting consumers” [that means Elizabeth Warren, by the way]), he assesses the implications of the decision:
This can now go only one of two ways.
Elizabeth Warren gets the job. Bridges are mended and the White House regains some political capital. Secretary Geithner is weakened slightly but he’ll recover.
Someone else gets the job, despite Treasury’s claims that Elizabeth Warren was not blocked. The deception in this scenario would be nauseating – and completely blatant. “Everyone was considered on their merits” and “the best candidate won” will convince who [sic] exactly?
Despite the growing public reaction, outcome #2 is the most likely and the White House needs to understand this, plain and clear – there will be complete and utter revulsion at its handling of financial regulatory reform both on this specific issue and much more broadly. The administration’s position in this area is already weak, its achievements remain minimal, its speaking points are lame, and the patience of even well-inclined people is wearing thin.
Failing to appoint Elizabeth Warren would be the straw that breaks the camel’s back. It will go down in the history books as a turning point – downwards – for this administration.
What galls me about this kind of assessment is that it is, well, “nauseating – and completely blatant.” It’s not an assessment, really. It’s a threat. It’s an effort to paint the politics of the situation in a way that makes the speaker’s preferred outcome (admittedly possibly arrived at in an intellectually-honest and sincere fashion) the only politically-viable outcome, in the process stripping all of the intellectual content out of the discussion and forcing intellectually-honest opponents of the speaker’s view to choose between intellectual honesty and, for example, the willful destruction of the entire Democratic agenda. Hardly an environment for honest debate, but then I suppose that’s not really the goal.