It is ironic that while Silicon Valley giants tend to be Democrat, they are probably rooting for a Donald Trump victory now. Breaking up Big Tech—Google, Facebook, Apple and Amazon—will take more than the Democrats even winning the Senate as there will be big court battles, but a Biden win will quicken the process if the 449-page report by the antitrust committee of the House Judiciary Committee is anything to go by.
Certainly, it looks scary when four firms account for a fourth of the market-cap of the S&P 500 and when there are few aspects of our daily lives that they do not impact. Not surprising, the report took more than a year to finalise, and the panel analysed 1.3 mn documents before concluding abuse of dominance. A research paper by respected academics like former RBI Governor Raghuram Rajan along with Sai Krishna Kamepalli and Luigi Zingales is also cited by the report to buttress its findings of the chilling impact of their monopoly.
Given their products are free—in the case of Amazon, deeply discounted over competing products—it is difficult to argue that consumer welfare is being hurt by their monopolies; to that extent, any attempt to either break them up or subject them to more antitrust activity can end up costing consumers billions of dollars. And when you look at the work Google has done to shake up the mobile phone market with its Android, or the advances in the use of artificial intelligence that took place with Siri, Alexa and OK Google, the impact on stifling tech innovation and R&D can be huge.
Rajan’s paper—called “Kill Zone”— argues the opposite, that while consumers are benefiting from free e-mail/maps/social media right now, they lose from the fall in innovation in the long-run. In their words, “the number and the dollar value of new start-ups in the social media space have dropped dramatically in the last few years … normalized VC investments in start-ups in the same space as the company acquired by Google and Facebook drop by over 40% and the number of deals falls by over 20% in the three years following an acquisition. In comparison, a similar calculation for other acquisitions in the software industry suggests that normalized VC investments in start-ups in the same space as the company acquired goes up (not down) by over 40 percent, while the number of deals goes up slightly in the three years following an acquisition”.
It is not clear how significant this is, though, in terms of stifling overall tech-spend; in 2018, with a budget of $16.2 bn, Google’s parent Alphabet was the 2nd-highest spender on R&D and Amazon was the top-spender with an R&D budget of $22.6 bn. In other words, breaking up these tech firms can have serious consequences for overall R&D-spend. By the way, Rajan’s paper talks of similar “killer acquisitions” when pharma firms take over rivals.
While stories of Google favouring its advertisers are legion, it is not clear whether the solutions the House report proposes will necessarily work. Nor do all the findings appear consistent. Amazon is supposed to have “monopoly power over many small- and medium-sized businesses”, but, the report adds, “that do not have a viable alternative to Amazon for reaching online consumers … Amazon has 2.3 million active third-party sellers on its marketplace …” Surely Amazon giving small sellers access to markets is a good thing?
The report comes down on Apple for its high fees of 30% of what apps make—PayTM chief Vijay Shekhar Sharma makes a similar point about Google’s Play Store—but as Apple argues, 84% of apps distributed on its App Store pay nothing, and the 30% commission is lower than what was charged by brick-and-mortar retailers that dominated the market in the pre-App Store days. As this newspaper has argued in the context of Google, apart from the commission applying to just a small fraction of apps, this is really a payment for a big distribution—and billing/collection—network that the app stores provide.
Certainly, checks are required to ensure dominant positions are not abused, and there are several instances of this; shockingly, the report says, “of Facebook’s nearly 100 acquisitions, the Federal Trade Commission engaged in an extensive investigation of just one acquisition: Facebook’s purchase of Instagram in 2012.” If competition authorities are asleep, anyone will abuse dominance. Search-neutrality has to be ensured in the case of a Google, and if an Amazon uses consumer data that others don’t have to fine-tune its production strategy, this is worrying.
But breaking up tech firms is not going to fix this. Zachary Karabell (bit.ly/2GN2zom) argued in Wired that previous attempts at breaking up monopolies—in telecom, oil—ended up with market power remaining as concentrated after a few decades; indeed, the House panel report itself says “certain features of digital markets—such as network effects, switching costs, the self-reinforcing advantages of data, and increasing returns to scale—make them prone to winner-take-all economics.” In which case, is the solution to keep breaking up tech giants every few years?
Indeed, the talk of how these big tech firms have wielded their dominance to “erode entrepreneurship, degrade Americans’ privacy online, and undermine the vibrancy of the free and diverse press” suggests several issues are getting conflated with the problems associated with social media and fake news and election-manipulation on platforms like Facebook. But, as Infosys co-founder Nandan Nilekani argues, this may have to do with the fact that, unlike media firms, social media is not held responsible for what is posted on it; start treating/suing Facebook like a traditional media firm and some of this may start changing.
The last line of the Rajan paper is worth keeping mind: “it is dangerous to apply twentieth century economic intuitions to twenty first century economic problems”. Antitrust is a 20th century institution. In fact, taking its cue from this, the House panel also speaks of interoperability and data portability as solutions to the issue of dominance.
Just as compulsory interconnection finished off monopoly powers in telecom networks several decades ago, Zingales (nyti.ms/3iKvZAP) has argued for data portability in networks; if users can take their entire location history or social media posts from Google Maps or Facebook to MyMaps or MyBook—Google Takeout, it so happens, offers precisely this—a lot of the monopoly power that Google, etc, have goes away. Indeed, India cut into the monopoly powers of
Mastercard and Visa by creating a government-funded open-architecture UPI payments system. The scope for abuse also gets reduced once users can sell their data as everyone will then have equal access; India’s non-personal data Bill even proposes sharing of anonymised data like that from GST authorities, traffic patterns, etc. The House report is correct when it talks of abuse by Big Tech firms, even though it is guilty of gross exaggeration in places; but a 21st century technology problem can only be solved by a 21st century technology response.