Professor of Strategy and Entrepreneurship; Academic Director, Institute of Entrepreneurship and Private Capital
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Once upon a time, things were so easy. You could spot an exploitative monopoly a mile off. A company had huge market share. It jacked up its prices. The company raked in huge profits. Consumers were being gouged.
In the last decade of the 19th century, the US introduced the Sherman Anti-Trust Act and after becoming president in 1901, Theodore Roosevelt made full use of it. Monopolies and cartels in railways, beef, sugar, fertilisers were all broken up. The administration of his successor William Taft was even more aggressive: it brought 70 anti-trust cases in four years.
An important motive for breaking up monopolies was to protect consumers from being ripped off by over-mighty corporations. But a significant part of the early trust-busters’ thinking was that having economic power concentrated in a few hands was itself unhealthy. In the words of Nobel prize-winning economist Joseph Stiglitz, “it was really about the nature of our society and democracy” not just the prices being charged to consumers.
Nevertheless, over the following century, the focus has narrowed, concentrating mainly on the damage that monopolies can inflict upon consumers by profiteering through the exploitation of their market power. This approach has been appropriate and easily applied in a world where there is straightforward chain running from the supplier of raw materials to manufacturers to distributors to consumers.
But now, we live in a world where this long-established approach to tackling companies with hugely dominant market positions looks increasingly redundant.
As consumers, do we feel ripped off by Google when we use it to do an internet search? No. It’s free. Yet Google’s parent, Alphabet is vastly profitable and stock market investors value it at well over half a trillion dollars.
Do we feel upset by the amount that Facebook charges us when we log on to our account? Again, no. It doesn’t cost us a dime. And yet Facebook’s market capitalisation has risen almost four-fold in three years: it, too, is now in the half-a-trillion club.
Certainly, we are giving up information about ourselves - a welter of detail about what we want to find out about, what piques our interest and the people and organisations we wish to contact. When we signed up to Facebook, we freely consented to give the company access to all that data. But hard cash? No. We are simply handing over personal data which is hugely valuable for advertisers and for which they are prepared to pay handsomely – paying Facebook, of course, not us.
No-one can dispute the market dominance of companies such as these: Google handles 42 percent of all digital advertising in the US and has more than four-fifths of online search advertising.
And the figures for worldwide mobile advertising revenue show the power of these big two American operations: Google has a 35 percent share and Facebook 23.5 percent, according to the research company eMarketer. The only other companies to get a significant look-in are Alibaba with 11 percent, Baidu with 4.8 percent and Tencent with 3.5 percent.
But still, we, the consumers, do not feel exploited. How could we, when we are getting a service ostensibly for free?
The crucial point is this: companies such as Google and Facebook operate in a way that doesn’t fit the old supplier-manufacture-distributor-consumer model for which anti-trust legislation was designed. The more people who join Facebook or use Google, the more data the company can harvest. The economies of scale become ever greater. The world needs only one Google, only one Facebook. Indeed, from the consumer’s point of view, the bigger Facebook becomes, the better: there’s no point in being on a social media platform where you are the only member. At the last count, Facebook had more than 2 billion active monthly users. That’s 2 billion people you can see and contact. If that were to rise to 2.5 billion or 3 billion, you, as someone who has a Facebook account, should be happy. The more the merrier. To resort to economic jargon, there are “network externalities” – the value of the network for the individual user is increased by the participation of other users.
And this illustrates the conundrum: Facebook is hugely dominant; yet it is apparently giving its service away for nothing. So under established competition law, it is not acting in the way we would expect of an exploitative monopolist. There is no need to worry about any harm being suffered by end-users.
Take a different example: Amazon. Like Alphabet and Facebook, it, too, is now worth more than half a trillion dollars. We don’t complain about the service it provides, nor about the prices we pay. Yes, WalMart, Tesco, our local independent bookshop and many others may grumble because they are being undercut. But that’s life. That’s capitalism. If Amazon can provide a service at a lower price and we like having our books and groceries delivered to our door, then we, the consumers, are the ones who gain. We’re not being forced to use Amazon. We are benefiting from the company’s success in driving out inefficiencies. What’s the problem? Again, consumers don’t appear to be suffering.
This is too narrow a view. Stick with Amazon for a moment.
Don’t forget that for much of its life, Amazon has lost money. When the company’s founder, Jeff Bezos, appeared at World Economic Forum gatherings in the Nineties, he had to cope with jibes that the company’s lack of profitability meant it should be rebranded Amazon.org. In 1999, the American business magazine Barrons ran a cover story under the title Amazon.bomb. As recently as 2014, the company lost $241m.
Amazon has focused single-mindedly on growth rather than profits and steadily expanded well beyond its original operation as an online bookseller. As well as being a retailer, it is now a marketing platform; it has a delivery and logistics network; it has a payments service and provides credit; it publishes its own books; it produces television programmes and films; it manufactures hardware and it is a leading host of cloud server space. This is an organisation of phenomenal power and scope.
Again, what’s the problem? Well, there are implications for communities: do they want to see their high streets boarded up? (Of course, an economic purist would argue that this is simply the market acting as it should: shops are just so last century; inefficient bricks-and-mortar retailers are being driven out by a super-efficient online distributor.) There are also job implications: Amazon is not noted for its benevolence as an employer, and it has aggressively pushed automation in its logistics operations.
But perhaps more importantly, Amazon is now so big that no competitor or potential competitor has a chance of getting a look-in. No-one can hope to compete against a corporation with the advantages that come from its ownership of vast amounts of data – plus a comprehensive distribution system.
Amazon’s economies of scale are huge and become ever larger as it grows. Hence innovation by others is strangled at – or perhaps before – birth. Indeed, the fact it has bled so much money since Jeff Bezos started selling books in 1994 may suggest that Amazon has deliberately priced its services below cost in order to deprive potential challengers of financial oxygen.
Furthermore, in many cases where some internet upstart has tried to develop a business in or adjacent to Amazon’s space, then Amazon has simply gobbled it up. Since 2005, the tech giant has bought more than 60 companies, including some that were at first reluctant to sell, such as Quidsi, on online nappy retailer and Zappos, selling shoes. (Amazon would offer a counter-argument – that by providing a platform for third-party sellers, it is facilitating, not inhibiting, innovation.)
Facebook, too, has been hugely acquisitive. It bought WhatsApp and Instagram and owns five of the ten most popular apps. It tried (twice) to buy Snapchat, and having been rebuffed it is now doing its utmost to squeeze this emerging competitor by copying all its best product features.
To quote Joseph Stiglitz again, when regulators assess a takeover, “the presumption against predatory behaviour needs to be reversed. Pre-emptive acquisitions – acquiring potential competitors before they become a threat – need to be questioned.” It is surprising, to say the least, that Facebook’s acquisition of WhatsApp didn’t come under closer scrutiny from the competition authorities.
As things stand, however, none of Amazon’s corporate behaviour falls foul of an anti-trust regime which measures “consumer welfare” by short-term price effects. Is this test sufficient in the second decade of the 21st century? We would suggest not. It’s too crude.
What about Facebook? As outlined above, the billions of Facebook users can’t complain: they can show pictures of their new-born baby to relatives on the other side of the world and it costs them nothing.
Advertisers could argue that they have a legitimate beef: in the world of social media, Facebook is one of the very few shows in town and it is by far the biggest. So, advertisers could argue, Facebook can – and does – charge whatever it likes. Consumers may not feel they are being exploited, but advertisers think they are being overcharged.
Well, as Evelyn Waugh might have said, up to a point, Lord Copper. After all, advertisers do have a choice: they can always spend their money with other media. If they feel Facebook is too expensive, they can choose to put an ad in Lord Copper’s Daily Beast. Or, indeed buy time on a vast range of TV channels.
All this raises tricky questions. In Europe, regulators have shown a greater willingness to challenge the tech giants than have their counterparts in the US. (Maybe we shouldn’t be surprised: after all, Facebook, Alphabet and Amazon are American, so the spoils of their endeavours go back to the US.) But in any case, in the context of corporations worth half a trillion dollars or more, the sort of punishments meted out by European regulators are pretty modest.
Last summer, the European Commission slapped €2.4 billion fine on Google for manipulating its search engine to boost its own comparison-shopping business. In October, the commission ordered Amazon to pay €250m in taxes. A case involving Ireland is still being argued over: the sum at stake is €13bn.
European regulators fined Facebook for reneging on a promise not to integrate WhatsApp data with that of its main app. But the bill was a trifling $112m – no more than a rounding error for a company with revenues of $800m a week.
However, these are not anti-trust issues in a narrow sense. Judged by the old-style measure of whether consumers are suffering because they are being charged too much, it is far harder to make the case against the tech giants.
Nevertheless, we are undeniably seeing a shift in the mood on both sides of the Atlantic. There is a growing sense of unease about the tech giants’ power.
Facebook has a particular problem – its refusal to acknowledge that it is a publisher. A newspaper or a TV network would not be able to carry fake news – fake news that may have had important political consequences – with impunity. Facebooks has. It keeps pornography off its platform, so why can’t it also bar ISIS videos and false and malicious stories planted by hostile powers that poison the political process in democracies?
But again, this is not an economic issue. There is a far more general unease: if we leave the tech giants unchecked and allow them to exploit their vast reservoirs of data about us in hitherto unimagined ways, where will we end up?
There are stirrings. In the US, there has been a perceptible change of mood. In November, Josh Hawley, Missouri’s attorney-general, launched in investigation into Google to establish whether it had broken anti-trust and consumer protection laws. Other states are looking at the power that Google accumulates by collecting consumer data.
Joseph Simons, Donald Trump’s choice to head the Federal Trade Commission (FTC) is no softy when dealing with monopolists: he used to run the FTC’s antitrust division, and, it is predicted, will take an aggressively activist approach in tackling companies with dominant positions.
In the old world of commerce, the solution was easy: if a company was too big, break it up. That happened with Standard Oil in 1911 and AT&T in 1982.
But in truth, it is much harder to see how – if we are genuinely concerned about their power – behemoths such as Amazon and Facebook can be tackled. Are we really going to insist that Amazon should be dismantled when it would make it less efficient and would most likely lead to its charging higher prices with poorer service?
And if you meet someone at the gym and want to bring them into your social media circle, will you have to ask if they are on Facebook, NewFacebook or NewNewFacebook?
Luigi Zingales and Guy Rolnik of the Chicago Booth School of Business have floated the idea that draws on same principle under which we can keep our own phone number when we move from one carrier to another. If I am on Vodafone, but think EE is offering a better-value package, I can move from one to the other without having to tell all my friends that I have a new number. They won’t even know I’ve switched. This principle of number portability encourages competition between networks. Consumers gain.
In a similar vein, Zingales and Rolnik propose a Social Graph Portability Act – where “social graph“ is a record of all the digital connections made by an individual.
In essence, Zingales’s proposed legislation would give ownership of this digital record to the person who created it. Social media platforms would be connected though a single network. So an individual could choose to sign in with one of a range of providers – Facebook or a new competitor – and make contact with anyone whose chosen platform was also connected to the network.
With this network in place, and with ownership of personal data – and the value that has - now being owned by the individual, rivals to Facebook would be created. There would be competition. At the moment, we are not putting a price on the information about ourselves we give away. By my clicks on a computer and the things that I view, I have created a profile about myself that has a value and I should be allowed to sell it.
Could the Zingales/Rolnik idea work in practice? Impossible to say for sure, and it would require creative and dedicated effort by the regulatory authorities. But at least it shows the sort of lateral thinking that is vital for tackling the tech giants that now loom so large in our lives.
There is a nagging worry that the economics of business have been rewritten and these companies that enjoy increasing returns as they become ever larger have the potential to encroach on huge areas of the business world, stifling competition and innovation as they go. But we don’t know where it will end up. At the very least, policymakers and competition authorities need to become rather more thoughtful about where the lines should be drawn. This is a new world. We need new institutions to deal with it.
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