The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law.
A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them.
Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.
Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust.
Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.
The letter argues that:
The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate.
Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.
The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.
Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies.
[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:
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.
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.
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.
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:
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.
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.
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.
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.
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.
In March of this year, Elizabeth Warren announced her proposal to break up Big Tech in a blog post on Medium. She tried to paint the tech giants as dominant players crushing their smaller competitors and strangling the open internet. This line in particular stood out: “More than70% of all Internet traffic goes through sites owned or operated by Google or Facebook.”
This statistic immediately struck me as outlandish, but I knew I would need to do some digging to fact check it. After seeing the claim repeated in a recent profile of the Open Markets Institute — “Google and Facebook control websites that receive 70 percent of all internet traffic” — I decided to track down the original source for this surprising finding.
Warren’s blog post links to a November 2017 Newsweek article — “Who Controls the Internet? Facebook and Google Dominance Could Cause the ‘Death of the Web’” — written by Anthony Cuthbertson. The piece is even more alarmist than Warren’s blog post: “Facebook and Google now have direct influence over nearly three quarters of all internet traffic, prompting warnings that the end of a free and open web is imminent.”
The Newsweek article, in turn, cites an October 2017 blog post by André Staltz, an open source freelancer, on his personal website titled “The Web began dying in 2014, here’s how”. His takeaway is equally dire: “It looks like nothing changed since 2014, but GOOG and FB now have direct influence over 70%+ of internet traffic.” Staltz claims the blog post took “months of research to write”, but the headline statistic is merely aggregated from a December 2015 blog post by Parse.ly, a web analytics and content optimization software company.
The Parse.ly article — “Facebook Continues to Beat Google in Sending Traffic to Top Publishers” — is about external referrals (i.e., outside links) to publisher sites (not total internet traffic) and says the “data set used for this study included around 400 publisher domains.” This is not even a random sample much less a comprehensive measure of total internet traffic. Here’s how they summarize their results: “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.”
So, using the sources provided by the respective authors, the claim from Elizabeth Warren that “more than 70% of all Internet traffic goes through sites owned or operated by Google or Facebook” can be more accurately rewritten as “more than 70 percent of external links to 400 publishers come from sites owned or operated by Google and Facebook.” When framed that way, it’s much less conclusive (and much less scary).
But what’s the real statistic for total internet traffic? This is a surprisingly difficult question to answer, because there is no single way to measure it: Are we talking about share of users, or user-minutes, of bits, or total visits, or unique visits, or referrals? According to Wikipedia, “Common measurements of traffic are total volume, in units of multiples of the byte, or as transmission rates in bytes per certain time units.”
One of the more comprehensive efforts to answer this question is undertaken annually by Sandvine. The networking equipment company uses its vast installed footprint of equipment across the internet to generate statistics on connections, upstream traffic, downstream traffic, and total internet traffic (summarized in the table below). This dataset covers both browser-based and app-based internet traffic, which is crucial for capturing the full picture of internet user behavior.
Looking at two categories of traffic analyzed by Sandvine — downstream traffic and overall traffic — gives lie to the narrative pushed by Warren and others. As you can see in the chart below, HTTP media streaming — a category for smaller streaming services that Sandvine has not yet tracked individually — represented 12.8% of global downstream traffic and Netflix accounted for 12.6%. According to Sandvine, “the aggregate volume of the long tail is actually greater than the largest of the short-tail providers.” So much for the open internet being smothered by the tech giants.
As for Google and Facebook? The report found that Google-operated sites receive 12.00 percent of total internet traffic while Facebook-controlled sites receive 7.79 percent. In other words, less than 20 percent of all Internet traffic goes through sites owned or operated by Google or Facebook. While this statistic may be less eye-popping than the one trumpeted by Warren and other antitrust activists, it does have the virtue of being true.
And if David finds out the data beneath his profile, you’ll start to be able to connect the dots in various ways with Facebook and Cambridge Analytica and Trump and Brexit and all these loosely-connected entities. Because you get to see inside the beast, you get to see inside the system.
This excerpt from the beginning of Netflix’s The Great Hack shows the goal of the documentary: to provide one easy explanation for Brexit and the election of Trump, two of the most surprising electoral outcomes in recent history.
In this article, I will review the background of the case and show seven things the documentary gets wrong about the Facebook-Cambridge Analytica data scandal.
In 2013, researchers published a paper showing that you could predict some personality traits — openness and extraversion — from an individual’s Facebook Likes. Cambridge Analytica wanted to use Facebook data to create a “psychographic” profile — i.e., personality type — of each voter and then micro-target them with political messages tailored to their personality type, ultimately with the hope of persuading them to vote for Cambridge Analytica’s client (or at least to not vote for the opposing candidate).
But how to get the Facebook data to create these profiles? A researcher at Cambridge University, Alex Kogan, created an app called thisismydigitallife, a short quiz for determining your personality type. Between 250,000 and 270,000 people were paid a small amount of money to take this quiz.
Those who took the quiz shared some of their own Facebook data as well as their friends’ data (so long as the friends’ privacy settings allowed third-party app developers to access their data).
This process captured data on “at least 30 million identifiable U.S. consumers”, according to the FTC. For context, even if we assume all 30 million were registered voters, that means the data could be used to create profiles for less than 20 percent of the relevant population. And though some may disagree with Facebook’s policy for sharing user data with third-party developers, collecting data in this manner was in compliance with Facebook’s terms of service at the time.
What crossed the line was what happened next. Kogan then sold that data to Cambridge Analytica, without the consent of the affected Facebook users and in express violation of Facebook’s prohibition on selling Facebook data between third and fourth parties.
Upon learning of the sale, Facebook directed Alex Kogan and Cambridge Analytica to delete the data. But the social media company failed to notify users that their data had been misused or confirm via an independent audit that the data was actually deleted.
1. Cambridge Analytica was selling snake oil (no, you are not easily manipulated)
There’s a line in The Great Hack that sums up the opinion of the filmmakers and the subjects in their story: “There’s 2.1 billion people, each with their own reality. And once everybody has their own reality, it’s relatively easy to manipulate them.” According to the latest research from political science, this is completely bogus (and it’s the same marketing puffery that Cambridge Analytica would pitch to prospective clients).
The best evidence in this area comes from Joshua Kalla and David E. Broockman in a 2018 study published by American Political Science Review:
We argue that the best estimate of the effects of campaign contact and advertising on Americans’ candidates choices in general elections is zero. First, a systematic meta-analysis of 40 field experiments estimates an average effect of zero in general elections. Second, we present nine original field experiments that increase the statistical evidence in the literature about the persuasive effects of personal contact 10-fold. These experiments’ average effect is also zero.
In other words, a meta-analysis covering 49 high-quality field experiments found that in US general elections, advertising has zero effect on the outcome. (However, there is evidence “campaigns are able to have meaningful persuasive effects in primary and ballot measure campaigns, when partisan cues are not present.”)
But the relevant conclusion for the Cambridge Analytica scandal remains the same: in highly visible elections with a polarized electorate, it simply isn’t that easy to persuade voters to change their minds.
2. Micro-targeting political messages is overrated — people prefer general messages on shared beliefs
But maybe Cambridge Analytica’s micro-targeting strategy would result in above-average effects? The literature provides reason for skepticism here as well. Another paper by Eitan D. Hersh and Brian F. Schaffner in The Journal of Politics found that voters “rarely prefer targeted pandering to general messages” and “seem to prefer being solicited based on broad principles and collective beliefs.” It’s political tribalism all the way down.
A field experiment with 56,000 Wisconsin voters in the 2008 US presidential election found that “persuasive appeals possibly reduced candidate support and almost certainly did not increase it,” suggesting that “contact by a political campaign can engender a backlash.”
3. Big Five personality traits are not very useful for predicting political orientation
Or maybe there’s something special about targeting political messages based on a person’s Big Five personality traits? Again, there is little reason to believe this is the case. As Kris-Stella Trump mentions in an article for The Washington Post,
The ‘Big 5’ personality traits … only predict about 5 percent of the variation in individuals’ political orientations. Even accurate personality data would only add very little useful information to a data set that includes people’s partisanship — which is what most campaigns already work with.
The best evidence we have on the importance of personality traits on decision-making comes from the marketing literature (n.b., it’s likely easier to influence consumer decisions than political decisions in today’s increasingly polarized electorate). Here too the evidence is weak:
In this successful study, researchers targeted ads, based on personality, to more than 1.5 million people; the result was about 100 additional purchases of beauty products than had they advertised without targeting.
More to the point, the Facebook data obtained by Cambridge Analytica couldn’t even accomplish the simple task of matching Facebook Likes to the Big Five personality traits. Here’s Cambridge University researcher Alex Kogan in Michael Lewis’s podcast episode about the scandal:
We started asking the question of like, well, how often are we right? And so there’s five personality dimensions? And we said like, okay, for what percentage of people do we get all five personality categories correct? We found it was like 1%.
Eitan Hersh, an associate professor of political science at Tufts University, summed it up best: “Every claim about psychographics etc made by or about [Cambridge Analytica] is BS.”
4. If Cambridge Analytica’s “weapons-grade communications techniques” were so powerful, then Ted Cruz would be president
The Great Hack:
Ted Cruz went from the lowest rated candidate in the primaries to being the last man standing before Trump got the nomination… Everyone said Ted Cruz had this amazing ground game, and now we know who came up with all of it. Joining me now, Alexander Nix, CEO of Cambridge Analytica, the company behind it all.
Reporting by Nicholas Confessore and Danny Hakim at The New York Times directly contradicts this framing on Cambridge Analytica’s role in the 2016 Republican presidential primary:
Cambridge’s psychographic models proved unreliable in the Cruz presidential campaign, according to Rick Tyler, a former Cruz aide, and another consultant involved in the campaign. In one early test, more than half the Oklahoma voters whom Cambridge had identified as Cruz supporters actually favored other candidates.
Most significantly, the Cruz campaign stopped using Cambridge Analytica’s services in February 2016 due to disappointing results, as Kenneth P. Vogel and Darren Samuelsohn reported in Politico in June of that year:
Cruz’s data operation, which was seen as the class of the GOP primary field, was disappointed in Cambridge Analytica’s services and stopped using them before the Nevada GOP caucuses in late February, according to a former staffer for the Texas Republican.
“There’s this idea that there’s a magic sauce of personality targeting that can overcome any issue, and the fact is that’s just not the case,” said the former staffer, adding that Cambridge “doesn’t have a level of understanding or experience that allows them to target American voters.”
Vogel later tweeted that most firms hired Cambridge Analytica “because it was seen as a prerequisite for receiving $$$ from the MERCERS.” So it seems campaigns hired Cambridge Analytica not for its “weapons-grade communications techniques” but for the firm’s connections to billionaire Robert Mercer.
5. The Trump campaign phased out Cambridge Analytica data in favor of RNC data for the general election
Just as the Cruz campaign became disillusioned after working with Cambridge Analytica during the primary, so too did the Trump campaign during the general election, as Major Garrett reported for CBS News:
The crucial decision was made in late September or early October when Mr. Trump’s son-in-law Jared Kushner and Brad Parscale, Mr. Trump’s digital guru on the 2016 campaign, decided to utilize just the RNC data for the general election and used nothing from that point from Cambridge Analytica or any other data vendor. The Trump campaign had tested the RNC data, and it proved to be vastly more accurate than Cambridge Analytica’s, and when it was clear the RNC would be a willing partner, Mr. Trump’s campaign was able to rely solely on the RNC.
And of the little work Cambridge Analytica did complete for the Trump campaign, none involved “psychographics,” The New York Timesreported:
Mr. Bannon at one point agreed to expand the company’s role, according to the aides, authorizing Cambridge to oversee a $5 million purchase of television ads. But after some of them appeared on cable channels in Washington, D.C. — hardly an election battleground — Cambridge’s involvement in television targeting ended.
Trump aides … said Cambridge had played a relatively modest role, providing personnel who worked alongside other analytics vendors on some early digital advertising and using conventional micro-targeting techniques. Later in the campaign, Cambridge also helped set up Mr. Trump’s polling operation and build turnout models used to guide the candidate’s spending and travel schedule. None of those efforts involved psychographics.
6. There is no evidence that Facebook data was used in the Brexit referendum
Last year, the UK’s data protection authority fined Facebook £500,000 — the maximum penalty allowed under the law — for violations related to the Cambridge Analytica data scandal. The fine was astonishing considering that the investigation of Cambridge Analytica’s licensed data derived from Facebook “found no evidence that UK citizens were among them,”according to the BBC. This detail demolishes the second central claim of The Great Hack, that data fraudulently acquired from Facebook users enabled Cambridge Analytica to manipulate the British people into voting for Brexit. On this basis, Facebook is currently appealing the fine.
7. The Great Hack wasn’t a “hack” at all
The title of the film is an odd choice given the facts of the case, as detailed in the background section of this article. A “hack” is generally understood as an unauthorized breach of a computer system or network by a malicious actor. People think of a genius black hat programmer who overcomes a company’s cybersecurity defenses to profit off stolen data. Alex Kogan, the Cambridge University researcher who acquired the Facebook data for Cambridge Analytica, was nothing of the sort.
As Gus Hurwitz noted in an article last year, Kogan entered into a contract with Facebook and asked users for their permission to acquire their data by using the thisismydigitallife personality app. Arguably, if there was a breach of trust, it was when the app users chose to share their friends’ data, too. The editorial choice to call this a “hack” instead of “data collection” or “data scraping” is of a piece with the rest of the film; when given a choice between accuracy and sensationalism, the directors generally chose the latter.
Why does this narrative persist despite the facts of the case?
The takeaway from the documentary is that Cambridge Analytica hacked Facebook and subsequently undermined two democratic processes: the Brexit referendum and the 2016 US presidential election. The reason this narrative has stuck in the public consciousness is that it serves everyone’s self-interest (except, of course, Facebook’s).
It lets voters off the hook for what seem, to many, to be drastic mistakes (i.e., electing a reality TV star president and undoing the European project). If we were all manipulated into making the “wrong” decision, then the consequences can’t be our fault!
This narrative also serves Cambridge Analytica, to a point. For a time, the political consultant liked being able to tell prospective clients that it was the mastermind behind two stunning political upsets. Lastly, journalists like the story because they compete with Facebook in the advertising market and view the tech giant as an existential threat.
There is no evidence for the film’s implicit assumption that, but for Cambridge Analytica’s use of Facebook data to target voters, Trump wouldn’t have been elected and the UK wouldn’t have voted to leave the EU. Despite its tone and ominous presentation style, The Great Hack fails to muster any support for its extreme claims. The truth is much more mundane: the Facebook-Cambridge Analytica data scandal was neither a “hack” nor was it “great” in historical importance.
The documentary ends with a question:
But the hardest part in all of this is that these wreckage sites and crippling divisions begin with the manipulation of one individual. Then another. And another. So, I can’t help but ask myself: Can I be manipulated? Can you?
No — but the directors of The Great Hack tried their best to do so.
[This post is the seventh in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]
[This post is authored by Alec Stapp, Research Fellow at the International Center for Law & Economics]
Should we break up Microsoft?
In all the talk of breaking up “Big Tech,” no one seems to mention the biggest tech company of them all. Microsoft’s market cap is currently higher than those of Apple, Google, Amazon, and Facebook. If big is bad, then, at the moment, Microsoft is the worst.
Apart from size, antitrust activists also claim that the structure and behavior of the Big Four — Facebook, Google, Apple, and Amazon — is why they deserve to be broken up. But they never include Microsoft, which is curious given that most of their critiques also apply to the largest tech giant:
Microsoft is big (current market cap exceeds $1 trillion)
Microsoft is dominant in narrowly-defined markets (e.g., desktop operating systems)
Microsoft is simultaneously operating and competing on a platform (i.e., the Microsoft Store)
Microsoft is a conglomerate capable of leveraging dominance from one market into another (e.g., Windows, Office 365, Azure)
Microsoft has its own “kill zone” for startups (196 acquisitions since 1994)
Microsoft operates a search engine that preferences its own content over third-party content (i.e., Bing)
Microsoft operates a platform that moderates user-generated content (i.e., LinkedIn)
To be clear, this is not to say that an antitrust case against Microsoft is as strong as the case against the others. Rather, it is to say that the cases against the Big Four on these dimensions are as weak as the case against Microsoft, as I will show below.
Big is bad
Tim Wu published a book last year arguing for more vigorous antitrust enforcement — including against Big Tech — called “The Curse of Bigness.” As you can tell by the title, he argues, in essence, for a return to the bygone era of “big is bad” presumptions. In his book, Wu mentions “Microsoft” 29 times, but only in the context of its 1990s antitrust case. On the other hand, Wu has explicitly called for antitrust investigations of Amazon, Facebook, and Google. It’s unclear why big should be considered bad when it comes to the latter group but not when it comes to Microsoft. Maybe bigness isn’t actually a curse, after all.
As the saying goes in antitrust, “Big is not bad; big behaving badly is bad.” This aphorism arose to counter erroneous reasoning during the era of structure-conduct-performance when big was presumed to mean bad. Thanks to an improved theoretical and empirical understanding of the nature of the competitive process, there is now a consensus that firms can grow large either via superior efficiency or by engaging in anticompetitive behavior. Size alone does not tell us how a firm grew big — so it is not a relevant metric.
Microsoft is also dominant in the “professional networking platform” market after its acquisition of LinkedIn in 2016. And the legacy tech giant is still the clear leader in the “paid productivity software” market. (Microsoft’s Office 365 revenue is roughly 10x Google’s G Suite revenue).
The problem here is obvious. These are overly-narrow market definitions for conducting an antitrust analysis. Is it true that Facebook’s platforms are the only service that can connect you with your friends? Should we really restrict the productivity market to “paid”-only options (as the EU similarly did in its Android decision) when there are so many free options available? These questions are laughable. Proper market definition requires considering whether a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price (SSNIP). If not (which is likely the case in the narrow markets above), then we should employ a broader market definition in each case.
Simultaneously operating and competing on a platform
Elizabeth Warren likes to say that if you own a platform, then you shouldn’t both be an umpire and have a team in the game. Let’s put aside the problems with that flawed analogy for now. What she means is that you shouldn’t both run the platform and sell products, services, or apps on that platform (because it’s inherently unfair to the other sellers).
Warren’s solution to this “problem” would be to create a regulated class of businesses called “platform utilities” which are “companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties.” Microsoft’s revenue last quarter was $32.5 billion, so it easily meets the first threshold. And Windows obviously qualifies as “a platform for connecting third parties.”
Just as in mobile operating systems, desktop operating systems are compatible with third-party applications. These third-party apps can be free (e.g., iTunes) or paid (e.g., Adobe Photoshop). Of course, Microsoft also makes apps for Windows (e.g., Word, PowerPoint, Excel, etc.). But the more you think about the technical details, the blurrier the line between the operating system and applications becomes. Is the browser an add-on to the OS or a part of it (as Microsoft Edge appears to be)? The most deeply-embedded applications in an OS are simply called “features.”
Even though Warren hasn’t explicitly mentioned that her plan would cover Microsoft, it almost certainly would. Previously, she left Apple out of the Medium post announcing her policy, only to later tell a journalist that the iPhone maker would also be prohibited from producing its own apps. But what Warren fails to include in her announcement that she would break up Apple is that trying to police the line between a first-party platform and third-party applications would be a nightmare for companies and regulators, likely leading to less innovation and higher prices for consumers (as they attempt to rebuild their previous bundles).
Leveraging dominance from one market into another
The core critique in Lina Khan’s “Amazon’s Antitrust Paradox” is that the very structure of Amazon itself is what leads to its anticompetitive behavior. Khan argues (in spite of the data) that Amazon uses profits in some lines of business to subsidize predatory pricing in other lines of businesses. Furthermore, she claims that Amazon uses data from its Amazon Web Services unit to spy on competitors and snuff them out before they become a threat.
Of course, this is similar to the theory of harm in Microsoft’s 1990s antitrust case, that the desktop giant was leveraging its monopoly from the operating system market into the browser market. Why don’t we hear the same concern today about Microsoft? Like both Amazon and Google, you could uncharitably describe Microsoft as extending its tentacles into as many sectors of the economy as possible. Here are some of the markets in which Microsoft competes (and note how the Big Four also compete in many of these same markets):
What these potential antitrust harms leave out are the clear consumer benefits from bundling and vertical integration. Microsoft’s relationships with customers in one market might make it the most efficient vendor in related — but separate — markets. It is unsurprising, for example, that Windows customers would also frequently be Office customers. Furthermore, the zero marginal cost nature of software makes it an ideal product for bundling, which redounds to the benefit of consumers.
The “kill zone” for startups
In a recent article for The New York Times, Tim Wu and Stuart A. Thompson criticize Facebook and Google for the number of acquisitions they have made. They point out that “Google has acquired at least 270 companies over nearly two decades” and “Facebook has acquired at least 92 companies since 2007”, arguing that allowing such a large number of acquisitions to occur is conclusive evidence of regulatory failure.
Microsoft has made 196 acquisitions since 1994, but they receive no mention in the NYT article (or in most of the discussion around supposed “kill zones”). But the acquisitions by Microsoft or Facebook or Google are, in general, not problematic. They provide a crucial channel for liquidity in the venture capital and startup communities (the other channel being IPOs). According to the latest data from Orrick and Crunchbase, between 2010 and 2018, there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion.
By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. Making it harder for a startup to be acquired would not result in more venture capital investment (and therefore not in more IPOs), according to recent research by Gordon M. Phillips and Alexei Zhdanov. The researchers show that “the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment.”
As investor and serial entrepreneur Leonard Speiser said recently, “If the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.”
Search engine bias
Google is often accused of biasing its search results to favor its own products and services. The argument goes that if we broke them up, a thousand search engines would bloom and competition among them would lead to less-biased search results. While it is a very difficult — if not impossible — empirical question to determine what a “neutral” search engine would return, one attempt by Josh Wright found that “own-content bias is actually an infrequent phenomenon, and Google references its own content more favorably than other search engines far less frequently than does Bing.”
The report goes on to note that “Google references own content in its first results position when no other engine does in just 6.7% of queries; Bing does so over twice as often (14.3%).” Arguably, users of a particular search engine might be more interested in seeing content from that company because they have a preexisting relationship. But regardless of how we interpret these results, it’s clear this not a frequent phenomenon.
So why is Microsoft being left out of the antitrust debate now?
One potential reason why Google, Facebook, and Amazon have been singled out for criticism of practices that seem common in the tech industry (and are often pro-consumer) may be due to the prevailing business model in the journalism industry. Google and Facebook are by far the largest competitors in the digital advertising market, and Amazon is expected to be the third-largest player by next year, according to eMarketer. As Ramsi Woodcock pointed out, news publications are also competing for advertising dollars, the type of conflict of interest that usually would warrant disclosure if, say, a journalist held stock in a company they were covering.
Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”
Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.
[This post is the sixth in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]
[This post is authored by Thibault Schrepel, Faculty Associate at the Berkman Center at Harvard University and Assistant Professor in European Economic Law at Utrecht University School of Law.]
The pretense of ignorance
Over the last few years, I have published a series of antitrust conversations with Nobel laureates in economics. I have discussed big tech dominance with most of them, and although they have different perspectives, all of them agreed on one thing: they do not know what the effect of breaking up big tech would be. In fact, I have never spoken with any economist who was able to show me convincing empirical evidence that breaking up big tech would on net be good for consumers. The same goes for political scientists; I have never read any article that, taking everything into consideration, proves empirically that breaking up tech companies would be good for protecting democracies, if that is the objective (please note that I am not even discussing the fact that using antitrust law to do that would violate the rule of law, for more on the subject, click here).
This reminds me of Friedrich Hayek’s Nobel memorial lecture, in which he discussed the “pretense of knowledge.” He argued that some issues will always remain too complex for humans (even helped by quantum computers and the most advanced AI; that’s right!). Breaking up big tech is one such issue; it is simply impossible simultaneously to consider the micro and macro-economic impacts of such an enormous undertaking, which would affect, literally, billions of people. Not to mention the political, sociological and legal issues, all of which combined are beyond human understanding.
Ignorance + fear = fame
In the absence of clear-cut conclusions, here is why (I think), some officials are arguing for breaking up big tech. First, it may be possible that some of them actually believe that it would be great. But I am sure we agree that beliefs should not be a valid basis for such actions. More realistically, the answer can be found in the work of another Nobel laureate, James Buchanan, and in particular his 1978 lecture in Vienna entitled “Politics Without Romance.”
In his lecture and the paper that emerged from it, Buchanan argued that while markets fail, so do governments. The latter is especially relevant insofar as top officials entrusted with public power may, occasionally at least, use that power to benefit their personal interests rather than the public interest. Thus, the presumption that government-imposed corrections for market failures always accomplish the desired objectives must be rejected. Taking that into consideration, it follows that the expected effectiveness of public action should always be established as precisely and scientifically as possible before taking action. Integrating these insights from Hayek and Buchanan, we must conclude that it is not possible to know whether the effects of breaking up big tech would on net be positive.
The question then is why, in the absence of positive empirical evidence, are some officials arguing for breaking up tech giants then? Well, because defending such actions may help them achieve their personal goals. Often, it is more important for public officials to show their muscle and take action, rather showing great care about reaching a positive net result for society. This is especially true when it is practically impossible to evaluate the outcome due to the scale and complexity of the changes that ensue. That enables these officials to take credit for being bold while avoiding blame for the harms.
But for such a call to be profitable for the public officials, they first must legitimize the potential action in the eyes of the majority of the public. Until now, most consumers evidently like the services of tech giants, which is why it is crucial for the top officials engaged in such a strategy to demonize those companies and further explain to consumers why they are wrong to enjoy them. Only then does defending the breakup of tech giants becomes politically valuable.
Some data, one trend
In a recent paper entitled “Antitrust Without Romance,” I have analyzed the speeches of the five current FTC commissioners, as well as the speeches of the current and three previous EU Competition Commissioners. What I found is an increasing trend to demonize big tech companies. In other words, public officials increasingly seek to prepare the general public for the idea that breaking up tech giants would be great.
In Europe, current Competition Commissioner Margrethe Vestager has sought to establish an opposition between the people (referred under the pronoun “us”) and tech companies (referred under the pronoun “them”) in more than 80% of her speeches. She further describes these companies as engaging in manipulation of the public and unleashing violence. She says they, “distort or fabricate information, manipulate people’s views and degrade public debate” and help “harmful, untrue information spread faster than ever, unleashing violence and undermining democracy.” Furthermore, she says they cause, “danger of death.” On this basis, she mentions the possibility of breaking them up (for more data about her speeches, see this link).
In the US, we did not observe a similar trend. Assistant Attorney General Makan Delrahim, who has responsibility for antitrust enforcement at the Department of Justice, describes the relationship between people and companies as being in opposition in fewer than 10% of his speeches. The same goes for most of the FTC commissioners (to see all the data about their speeches, see this link). The exceptions are FTC Chairman Joseph J. Simons, who describes companies’ behavior as “bad” from time to time (and underlines that consumers “deserve” better) and Commissioner Rohit Chopra, who describes the relationship between companies and the people as being in opposition to one another in 30% of his speeches. Chopra also frequently labels companies as “bad.” These are minor signs of big tech demonization compared to what is currently done by European officials. But, unfortunately, part of the US doctrine (which does not hide political objectives) pushes for demonizing big tech companies. One may have reason to fear that such a trend will grow in the US as it has in Europe, especially considering the upcoming presidential campaign in which far-right and far-left politicians seem to agree about the need to break up big tech.
And yet, let’s remember that no-one has any documented, tangible, and reproducible evidence that breaking up tech giants would be good for consumers, or societies at large, or, in fact, for anyone (even dolphins, okay). It might be a good idea; it might be a bad idea. Who knows? But the lack of evidence either way militates against taking such action. Meanwhile, there is strong evidence that these discussions are fueled by a handful of individuals wishing to benefit from such a call for action. They do so, first, by depicting tech giants as representing the new elite in opposition to the people and they then portray themselves as the only saviors capable of taking action.
Epilogue: who knows, life is not a Tarantino movie
For the last 30 years, antitrust law has been largely immune to strategic takeover by political interests. It may now be returning to a previous era in which it was the instrument of a few. This transformation is already happening in Europe (it is expected to hit case law there quite soon) and is getting real in the US, where groups display political goals and make antitrust law a Trojan horse for their personal interests.The only semblance of evidence they bring is a few allegedly harmful micro-practices (see Amazon’s Antitrust Paradox), which they use as a basis for defending the urgent need of macro, structural measures, such as breaking up tech companies. This is disproportionate, but most of all and in the absence of better knowledge, purely opportunistic and potentially foolish. Who knows at this point whether antitrust law will come out intact of this populist and moralist episode? And who knows what the next idea of those who want to use antitrust law for purely political purposes will be. Life is not a Tarantino movie; it may end up badly.
[This post is the fifth in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]
[This post is authored by William Rinehart, Director of Technology and Innovation Policy at American Action Forum.]
Back in May, the New York Times published an op-ed by Chris Hughes, one of the founders of Facebook, in which he called for the break up of his former firm. Hughes joins a growing chorus, including Senator Warren, Roger McNamee and others who have called for the break up of “Big Tech” companies. If Business Insider’s polling is correct, this chorus seems to be quite effective: Nearly 40 percent of Americans now support breaking up Facebook.
Hughes’ position is perhaps understandable given his other advocacy activities. But it is also worth bearing in mind that he likely was never particularly familiar with or involved in Facebook’s technical backend or business development or sales. Rather, he was important in setting up the public relations and feedback mechanisms. This is relevant because the technical and organizational challenges in breaking up big tech are enormous and underappreciated.
That list, however, leaves out the company’s backend AI platform, known as Horizon. As Christopher Mims reported in the Wall Street Journal, Facebook put serious resources into creating Horizon and it has paid off. About a fourth of the engineers at the company were using this platform in 2017, even though only 30 percent of them were experts in it. The system, as Joaquin Candela explained, is powerful because it was built to be “a very modular layered cake where you can plug in at any level you want.” As Mim was careful to explain, the platform was designed to be “domain-specific,” or highly modular. In other words, Horizon was meant to be useful across a range of complex problems and different domains. If WhatsApp and Instagram were separated from Facebook, who gets that asset? Does Facebook retain the core tech and then have to sell it at a regulated rate?
Lessons from Attempts to Manage Competition in the Tobacco Industry
For all of the talk about breaking up Facebook and other tech companies, few really grasp just how lackluster this remedy has been in the past. The classic case to study isn’t AT&T or Standard Oil, but American Tobacco Company.
The American Tobacco Company came about after a series of mergers in 1890 orchestrated by J.B. Duke. Then, between 1907 and 1911, the federal government filed and eventually won an antitrust lawsuit, which dissolved the trust into three companies.
Duke was unique for his time because he worked to merge all of the previous companies into a working coherent firm. The organization that stood trial in 1907 was a modern company, organized around a functional structure. A single purchasing department managed all the leaf purchasing. Tobacco processing plants were dedicated to specific products without any concern for their previous ownership. The American Tobacco Company was rational in a way few other companies were at the time.
These divisions were pulled apart over eight months. Factories, distribution and storage facilities, back offices and name brands were all separated by government fiat. It was a difficult task. As historian Allan M. Brandt details in “The Cigarette Century,”
It was one thing to identify monopolistic practices and activities in restraint of trade, and quite another to figure out how to return the tobacco industry to some form of regulated competition. Even those who applauded the breakup of American Tobacco soon found themselves critics of the negotiated decree restructuring the industry. This would not be the last time that the tobacco industry would successfully turn a regulatory intervention to its own advantage.
So how did consumers fare after the breakup? Most research suggests that the breakup didn’t substantially change the markets where American Tobacco was involved. Real cigarette prices for consumers were stable, suggesting there wasn’t price competition. The three companies coming out of the suit earned the same profit from 1912 to 1949 as the original American Tobacco Company Trust earned in its heyday from 1898 to 1908. As for the upstream suppliers, the price paid to tobacco farmers didn’t change either. The breakup was a bust.
The difficulties in breaking up American Tobacco stand in contrast to the methods employed with Standard Oil and AT&T. For them, the split was made along geographic lines. Standard Oil was broken into 34 regional companies. Standard Oil of New Jersey became Exxon, while Standard Oil of California changed its name to Chevron. In the same way, AT&T was broken up in Regional Bell Operating Companies. Facebook doesn’t have geographic lines.
The Lessons of the Past Applied to Facebook
Facebook combines elements of the two primary firm structures and is thus considered a “matrix form” company. While the American Tobacco Company employed a functional organization, the most common form of company organization today is the divisional form. This method of firm rationalization separates the company’s operational functions by product, in order to optimize efficiencies. Under a divisional structure, each product is essentially a company unto itself. Engineering, finance, sales, and customer service are all unified within one division, which sits separate from other divisions within a company. Like countless other tech companies, Facebook merges elements of the two forms. It relies upon flexible teams to solve problems that tend to cross the normal divisional and functional bounds. Communication and coordination is prioritized among teams and Facebook invests heavily to ensure cross-company collaboration.
Advocates think that undoing the WhatsApp and Instagram mergers will be easy, but there aren’t clean divisional lines within the company. Indeed, Facebook has been working towards a vast reengineering of its backend for some time that, when completed later this year or early 2020, will effectively merge all of the companies into one ecosystem. Attempting to dismember this ecosystem would almost certainly be disastrous; not just a legal nightmare, but a technical and organizational nightmare as well.
Much like American Tobacco, any attempt to split off WhatsApp and Instagram from Facebook will probably fall flat on its face because government officials will have to create three regulated firms, each with essentially duplicative structures. As a result, the quality of services offered to consumers will likely be inferior to those available from the integrated firm. In other words, this would be a net loss to consumers.
[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.
Last week, I objected to Senator Warner relying on the flawed AOL/Time Warner merger conditions as a template for tech regulatory policy, but there is a much deeper problem contained in his proposals. Although he does not explicitly say “big is bad” when discussing competition issues, the thrust of much of what he recommends would serve to erode the power of larger firms in favor of smaller firms without offering a justification for why this would result in a superior state of affairs. And he makes these recommendations without respect to whether those firms actually engage in conduct that is harmful to consumers.
In the Data Portability section, Warner says that “As platforms grow in size and scope, network effects and lock-in effects increase; consumers face diminished incentives to contract with new providers, particularly if they have to once again provide a full set of data to access desired functions.“ Thus, he recommends a data portability mandate, which would theoretically serve to benefit startups by providing them with the data that large firms possess. The necessary implication here is that it is a per se good that small firms be benefited and large firms diminished, as the proposal is not grounded in any evaluation of the competitive behavior of the firms to which such a mandate would apply.
Warner also proposes an “interoperability” requirement on “dominant platforms” (which I criticized previously) in situations where, “data portability alone will not produce procompetitive outcomes.” Again, the necessary implication is that it is a per se good that established platforms share their services with start ups without respect to any competitive analysis of how those firms are behaving. The goal is preemptively to “blunt their ability to leverage their dominance over one market or feature into complementary or adjacent markets or products.”
Perhaps most perniciously, Warner recommends treating large platforms as essential facilities in some circumstances. To this end he states that:
Legislation could define thresholds – for instance, user base size, market share, or level of dependence of wider ecosystems – beyond which certain core functions/platforms/apps would constitute ‘essential facilities’, requiring a platform to provide third party access on fair, reasonable and non-discriminatory (FRAND) terms and preventing platforms from engaging in self-dealing or preferential conduct.
But, as i’ve previously noted with respect to imposing “essential facilities” requirements on tech platforms,
[T]he essential facilities doctrine is widely criticized, by pretty much everyone. In their respected treatise, Antitrust Law, Herbert Hovenkamp and Philip Areeda have said that “the essential facility doctrine is both harmful and unnecessary and should be abandoned”; Michael Boudin has noted that the doctrine is full of “embarrassing weaknesses”; and Gregory Werden has opined that “Courts should reject the doctrine.”
Indeed, as I also noted, “the Supreme Court declined to recognize the essential facilities doctrine as a distinct rule in Trinko, where it instead characterized the exclusionary conduct in Aspen Skiing as ‘at or near the outer boundary’ of Sherman Act § 2 liability.”
In short, it’s very difficult to know when access to a firm’s internal functions might be critical to the facilitation of a market. It simply cannot be true that a firm becomes bound under onerous essential facilities requirements (or classification as a public utility) simply because other firms find it more convenient to use its services than to develop their own.
The truth of what is actually happening in these cases, however, is that third-party firms are choosing to anchor their business to the processes of another firm which generates an “asset specificity” problem that they then seek the government to remedy:
A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control.
This is naturally a calculated risk that a firm may choose to make, but it is a risk. To pry open Google or Facebook for the benefit of competitors that choose to play to Google and Facebook’s user base, rather than opening markets of their own, punishes the large players for being successful while also rewarding behavior that shies away from innovation. Further, such a policy would punish the large platforms whenever they innovate with their services in any way that might frustrate third-party “integrators” (see, e.g., Foundem’s claims that Google’s algorithm updates meant to improve search quality for users harmed Foundem’s search rankings).
Rather than encouraging innovation, blessing this form of asset specificity would have the perverse result of entrenching the status quo.
In all of these recommendations from Senator Warner, there is no claim that any of the targeted firms will have behaved anticompetitively, but merely that they are above a certain size. This is to say that, in some cases, big is bad.
Senator Warner’s policies would harm competition and innovation
As Geoffrey Manne and Gus Hurwitz have recently noted these views run completely counter to the last half-century or more of economic and legal learning that has occurred in antitrust law. From its murky, politically-motivated origins through the early 60’s when the Structure-Conduct-Performance (“SCP”) interpretive framework was ascendant, antitrust law was more or less guided by the gut feeling of regulators that big business necessarily harmed the competitive process.
Thus, at its height with SCP, “big is bad” antitrust relied on presumptions that large firms over a certain arbitrary threshold were harmful and should be subjected to more searching judicial scrutiny when merging or conducting business.
A paradigmatic example of this approach can be found in Von’s Grocery where the Supreme Court prevented the merger of two relatively small grocery chains. Combined, the two chains would have constitutes a mere 9 percent of the market, yet the Supreme Court, relying on the SCP aversion to concentration in itself, prevented the merger despite any procompetitive justifications that would have allowed the combined entity to compete more effectively in a market that was coming to be dominated by large supermarkets.
As Manne and Hurwitz observe: “this decision meant breaking up a merger that did not harm consumers, on the one hand, while preventing firms from remaining competitive in an evolving market by achieving efficient scale, on the other.” And this gets to the central defect of Senator Warner’s proposals. He ties his decisions to interfere in the operations of large tech firms to their size without respect to any demonstrable harm to consumers.
To approach antitrust this way — that is, to roll the clock back to a period before there was a well-defined and administrable standard for antitrust — is to open the door for regulation by political whim. But the value of the contemporary consumer welfare test is that it provides knowable guidance that limits both the undemocratic conduct of politically motivated enforcers as well as the opportunities for private firms to engage in regulatory capture. As Manne and Hurwitz observe:
Perhaps the greatest virtue of the consumer welfare standard is not that it is the best antitrust standard (although it is) — it’s simply that it is a standard. The story of antitrust law for most of the 20th century was one of standard-less enforcement for political ends. It was a tool by which any entrenched industry could harness the force of the state to maintain power or stifle competition.
While it is unlikely that Senator Warner intends to entrench politically powerful incumbents, or enable regulation by whim, those are the likely effects of his proposals.
Antitrust law has a rich set of tools for dealing with competitive harm. Introducing legislation to define arbitrary thresholds for limiting the potential power of firms will ultimately undermine the power of those tools and erode the welfare of consumers.