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Firing a warning shot across big tech’s bows

December 15, 2020 Leave a comment Go to comments

from Jayati Ghosh

It was a long time coming, but the day of reckoning for the big digital companies may finally have arrived. Despite the growing monopoly power of big tech and their use of anti-competitive practices, earlier attempts to regulate them (such as an attempt by the U.S. Department of Justice in 1998 to rein in Microsoft) had only limited success. The novel coronavirus pandemic further enhanced the monopoly power of the big tech giants.

Timeline and actions

But now, a rash of lawsuits and regulatory moves in the United States and Europe against the big non-Chinese digital companies (particularly Facebook, Amazon, Apple and Google) suggest that the days of their easy expansion in an unregulated environment may be coming to an end. In October 2020, the U.S. Department of Justice brought a lawsuit against Google for misusing its dominant position as search engine by undermining competitors; favouring its own content in search results; doing deals with other companies to become the default search engine in many browsers and devices; and then using data on its users and competitors to reinforce its dominance and get even more revenue from advertising.

Then, in early December, the U.S. Federal Trade Commission (FTC) and 48 states, the District of Columbia, and Guam, sued Facebook, accusing it of abusing its market power in social networking to crush smaller competitors. The specific instances of Facebook’s acquisitions of WhatsApp and Instagram were cited, which apparently resulted from concerns that the growing popularity of these platforms could break the company’s hold on social media. The FTC complaint cites a Mark Zuckerberg email of June 2008: “It is better to buy than compete”; in another internal communication, he noted that Facebook “can likely always just buy any competitive startups”.

By 2012, just before buying Instagram, he said the photo and video sharing app “could be very disruptive to us”, if allowed to grow independently. The purchase of WhatsApp two years later similarly reflected concerns that the instant messaging service could become the favoured social media over Facebook.

The ‘wrath of Mark’

Why did these companies agree to be bought up? It was not the price at which they were sold ($19 billion for WhatsApp and $1 billion for Instagram) so much as Facebook’s ability to make an offer they could not refuse, Mafioso-style, by destroying their ability to expand and attract new users. “Will he go into destroy mode if I say no?” Instagram founder Kevin Systrom is cited as having asked an investor when considering Facebook’s offer. “Bottom line I don’t think we’ll ever escape the wrath of Mark … it just depends how long we avoid it.”

This wrath was expressed by using Facebook’s huge user base in a bait-and-switch, offering newer app or website developers various incentives (such as allowing them to use “like” buttons) that promoted their sites or apps to Facebook users, which also meant that Facebook could then gather more data on the online activities of those users. When the new app grew and emerged as a possible threat, Facebook would stop this access and thereby destroy its ability to attract a new user base.

Google and Facebook are hardly the only transgressors. A U.S. House Committee Report that led up to the lawsuits has major indictments of Amazon and Apple as well. Amazon “functions as a gatekeeper for e-commerce”, reducing competition and thereby also harming consumers. It has exploitative relationships with other sellers on the platform, which “live in fear of the company” and which Amazon refers to as “internal competitors”. Sellers are not allowed to contact shoppers directly, often limited in their ability to sell on other platforms, face “strong-arm tactics in negotiations” and have to choose between getting “atrocious levels of customer service” or better service for a fee. Like the other companies, Amazon profits from ideas and products developed by others, and simply buys up start-ups or even open-source cloud-software developers when it wants.

Apple also favours its own apps and seeks to put rivals at a disadvantage on its products and leaves developers with little choice for reaching consumers. Like Google, it levies high commission fees (of 30%) that end up being charged on consumers. The two companies are voracious purchasers of companies: over the past few years, Google has bought at least one firm a month; Apple buys one every two or so.

The European Union has separately filed cases again Amazon and Google. In November, it filed charges against Amazon (https://bit.ly/37htcwd), accusing the company of using its access to data from companies selling on its platform to gain unfair advantage over them.

Earlier this summer it opened two antitrust cases against Google. It is planning to change the regulatory regime to prevent the anti-competitive practices exhibited, for example, in its Android mobile operating system and its search engine.

Impact on users

The dangers of these aggressive monopolies are not confined to the competitors — users also suffer because of fewer options and weaker privacy controls. Both WhatsApp and Facebook have eroded the privacy protections that they earlier promised, by changing the terms of service communicated through long and complicated messages that most users simply do not read. All these companies hoard the data they collect, which increasingly covers all aspects of their users’ lives. For many of them, data are now the biggest source of revenues and profits. All sorts of use can be made of data: marketing and targeted advertising, influencing and manipulating political outcomes, targeting individuals based on particular criteria, enabling surveillance by both governments and private agencies.

The idea in both the U.S. and the EU is to break up these companies — for example, by forcing Facebook to divest both WhatsApp and Instagram, much as the telecom giant AT&T was forced to break up in the early 1980s. Anti-trust lawsuits are notoriously difficult to win, but many legal experts agree that these cases are very solid.

But this is only one step in the required regulatory control of these digital behemoths, which are now exercising unprecedented market power as well as other kinds of power.

More regulation is clearly required, in addition to the lawsuits.

The Indian angle is relevant

All this has direct relevance for India, and not only because these companies are so important in India. More than 400 million of WhatsApp’s estimated 2 billion users are in India; Amazon has around one-third of the share of online retail in India, neck and neck with Flipkart that was recently acquired by Walmart; India is Facebook’s largest single market, with around 270 million accounts; Google completely dominates the search engine space in India, and most smartphones in India are Android-based. And now Facebook and Google are collaborating with India’s largest telecom company — Reliance Jio owned by Mukesh Ambani — to create a single gateway for Indians providing everything from information, news media and entertainment to daily purchases of groceries and sundry other services. Apart from their market dominance, another concern is the cosy relationship these companies have established with the ruling party in the country, and the willingness to adopt different standards of fact-checking and privacy in India, so as to benefit the powerful. Reports suggest that Facebook has been unwilling to remove incendiary and violent content for fear of backlash from Hindu nationalist politicians and stormtroopers. This is not helped by the fact that India still does not have a privacy law, even though the Supreme Court declared privacy to be a fundamental right some time ago. Even the proposed Bill is extremely weak without adequate safeguards. It is time for Indians to wake up and realise that anti-trust regulation and public control over digital companies—including home-grown ones — have become critical for them.

  1. Ken Zimmerman
    January 6, 2021 at 4:12 am
    Reply

    The US Justice Department, and others accuse Google, Apple, Amazon, etc. of maintaining a monopoly in one or more aspects of digital services and products (searching, commerce, communications) in the US. In place for over 100 years the US antitrust laws under which the DOJ is action have shown a remarkable effectiveness at holding accountable companies grabbing market power. But the laws have clear limitations and gaps. First, the process of conducting antitrust investigations and trials has historically been slow. For example, Standard Oil was broken up in 1911 because of a lawsuit brought against it by the US government in 1906 under the Sherman Antitrust Act of 1890. But in a sense Standard Oil still exists today through the continuation of several companies that were part of the trust. Over time (1980s) these companies merged with others and became part of such well-known companies as Exxon Mobil Corporation, BP PLC, and Chevron Corporation. So far none have been the subject of any antitrust filings.

    The AT&T antitrust case was even longer. The DOJ filed its antitrust case in 1974. AT&T agreed to a consent decree in 1982 whereby AT&T relinquished control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point. This effectively took the monopoly that was the Bell System and split it into entirely separate companies that would continue to provide telephone service in the regions of the US and Canada. AT&T would continue to be a provider of long-distance service, while the now-independent Regional Bell Operating Companies (RBOCs), nicknamed the ‘Baby Bells’, would provide local service, and would no longer be directly supplied with equipment from AT&T subsidiary Western Electric. This worked, at least partially until cell phones took over most of the phone use in the US. Today just over 40% of cell phones and services are provided by AT&T and all the RBOCs are once again affiliated with AT&T though not directly owned by AT&T.

    Considering the size of the services offered and revenue of Google, etc. I estimate the current case cannot be completed in less than five years. The greatly expanded litigiousness of society today and the clear indication that this case will become embroiled in each national election after its filing adds, in my view more time to its processing. Finally, since this case deals with services that have become essential parts of the lives of millions of Americans, any hint it will reduce or slow any of these services makes the case even more of a ‘hot potato.’

    Many have voiced concern that this 20th century approach to the problems of trusts and monopolies will not be effective today. I agree. After all it is the 21st century. Like them I believe changes in regulation and regulators is a fairer and more effective approach. This approach also could be implemented in a single Congressional session and be quickly adjusted over time to handle new problems as they arise. This specialist regulator focused on the major tech companies would establish and enforce a set of basic rules of conduct, which would include not allowing the companies to favor their own services, exclude competitors or acquire emerging rivals and require them to permit competitors access to their platforms and data on reasonable terms.

    The British government has already said it would create a digital markets unit, with calls for a Big Tech regulator to also be introduced in the European Union and in Australia. In the United States, recommendations for a digital markets regulator have also been made in expert reports and in congressional testimony. It could be a separate agency or perhaps a digital division inside the Federal Trade Commission.

    In testimony before Congress Jason Furman, professor at Harvard University and chair of the Council of Economic Advisers in the Obama administration said such a new regulator is essential. According to Furman, breaking up the big tech companies is a bad idea because that would risk losing some of the consumer benefits these digital utilities undeniably deliver. A regulator is necessary to police digital markets and the behavior of the tech giants, Furman said. “I’m a small ʻc’ conservative, and I’m not a fan of regulation generally but it’s needed in this space.”

    Historically, the US has created many regulatory agencies that focus on specific areas of American life (e.g., FAA, FDA, SEC) so an agency such as proposed by Furman would likely not be taken as an historical anomaly. But with the anti-regulatory turn in some parts of American politics (particularly conservative and among economists) since the 1980s, it may be viewed as a political anomaly. Particularly by investors who view ‘big’ tech companies as sources of large investment returns. And we should not forget the almost certain strong push back from ideologues of ‘free-markets,’ including some economists who will almost certainly reject any effort to add more regulation to the US economy as inevitably leading to reduction in the ‘efficiency’ of that economy and thus reduction in growth rates.

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