How the big tech companies are eating free markets

UnHerd will soon be launching its technology theme with an in depth look at Zuckerberg for America. A presidential run by the Facebook founder and CEO feels an almost inevitable next step for someone already so central to the lives of millions of Americans (eight in ten online adults use his social network[1.  ‘Social Media Update 2016, Pew Research Center’, 11 November 2016]). Certainly, he has the name recognition. My colleague Nigel Cameron, however, thinks a presidential bid might just be an overreach for the 33-year-old. Then again, overreach is now a defining feature of the tech giants, with predatory behaviour at the heart of it. Something that Zuckerberg’s potential presidential rival, Democrat Senator Elizabeth Warren, has been vocal about.[2.  Elizabeth Warren, ‘Reigniting Competition in the American Economy’, Speech, 29 June 2016]

In 2014 Mark Zuckerberg argued that “every 10 or 15 years there’s a new major computing platform”. “History” he said:[3.  Ben Parfitt, ‘Oculus will be a platform for many other experiences’, MCV, 26 March 2014]

“suggests that there will be more platforms to come and that whoever builds and defines these, will not only shape all the experiences that our industry builds, but will also benefit financially and strategically.”

Tech entrepreneurs rightly extol the virtues of such disruption – from social to sharing platforms, technology has transformed our lives (and most industries). But the sheer scale of today’s tech giants means that, while the barriers to entry for digital start-ups is low, the promising companies are frequently lured off the road to maturity. Indeed, what Zuckerberg should have said was, ‘every 10 or 15 years there’s a new major platform, and Facebook will use its vast wealth to buy up new companies that threaten to disrupt us’. His actual words were, after all, uttered at Facebook’s announcement that it was purchasing Oculus, a start-up (less than two years old) making virtual-reality goggles, for $2 billion in cash and stock.[4.  Reed Albergotti and Ian Sherr, ‘Facebook to Buy Virtual Reality Firm Oculus for $2 Billion’, The Wall Street Journal, 25 March 2014]

I’ve written about the aggressive acquisition strategies of the tech giants before – comparing their monopolistic behaviour to the robber barons of the ‘gilded age’. This predatory behaviour is restricting the battle for dominance, in both existing and evolving markets, to the giants. Tech titans like Zuckerberg might like us to think there is a long line of Davids, fine-tuning their start-up weapons in their parents’ garage, but the reality is Goliath versus Goliath. Paula Dwyer, writing for Bloomberg, captures it well:[5.  Paula Dwyer, ‘Should America’s Tech Giants Be Broken Up?’, Bloomberg, 20 July 2017]

“Google often says competition is ‘one click away.’ And since consumers prefer their platforms over others’, why punish success? But when a cool innovation pops up, the superstars either acquire it or clone it. According to data compiled by Bloomberg, Alphabet, Amazon, Apple, Facebook, and Microsoft made 436 acquisitions worth $131 billion over the last decade.”

To put it in perspective, in the first half of 2016 alone, according to The Wall Street Journal, while the merger and acquisitions market generally was slowing, tech acquisitions were booming – with $260 billion of deals globally.[6.  Rolfe Winkler and Anne Steele, ‘Technology Busiest Sector in Merger Deals This Year’, The Wall Street Journal, 13 June 2016]

Dwyer goes on to quip that despite the big five’s buying binge, “Antitrust cops made nary a peep.” And therein lies the problem, and one people are increasingly highlighting: by using their huge cash piles to snap up innovative start-ups, the giants are stopping the competition from ever really becoming competition.

Of course start-ups sell up, but where are the competition watchdogs?

You can’t blame start-ups for selling out. It’s not just the purchase price, but the vast resources – cash, data, computing power – available to those working inside a Google or a Facebook. Both the founders of Deepmind (a British artificial intelligence start-up bought for around $500m) and Nest (a smart home company bought for $3.2 billion) have commented on the depth of their purchaser’s, Google’s, pockets.[7.  ‘What Deepmind brings to Alphabet’, The Economist, 15 December 2016; Victor Luckerson, ‘How Google Perfected the Silicon Valley Acquisition’, Time, 15 April 2015]

What is good for individual start-ups, however, may not be in the interest of the sector – and more importantly consumers – overall. Which brings us back to the antitrust question. Professor Daniel Zimmer, Chair of the German Monopolies Commission until March 2016, has argued that the acquisition of start-ups by “the Googles, the Amazons or whatever, which have deep pockets”, is of “particular concern if those acquirers are somehow in the same or neighbouring markets to that of the target, because then they may buy their competition or potential competition from the market.”[8.  ‘Revised transcript of evidence taken before The Select Committee on the European Union: Online Platforms and the EU Digital Single Market’, Witnesses: Professor Daniel Zimmer and Dr Thomas Weck, House of Lords, 10 November 2015] Or, as consultancy and research network e-Conomics puts it:[9.  Olga Batura, Nicolai van Gorp and Pierre Larouche, ‘E-Conomics written evidence (OPL0066), Online Platforms and the EU Digital Single Market’, 23 November 2015]

 “a powerful platform can leverage its own market power…instead of competing on merits and is likely to prevent others from competing on merits.”

The problem is distinguishing between innovative acquisitions and anti-competitive ones, but that’s what competition bodies are there to do. And it means recognising that the dynamic, digital markets they are now dealing with require a new approach. Put simply, it’s time for competition policy to catch up.

Antitrust for the digital world

Competition watchdogs need to shift their thinking: when it comes to digital, a price-centric approach is not sufficient; nor is continuing to assess single market impacts when online platforms serve multiple markets.

Antitrust action has historically focused on price as a proxy for consumer welfare. If a company’s behaviour, as a result of a dominant market position, is likely to lead to increased prices, competition authorities kick in to action. And rightly so. The problem, as a 2015 European Parliament paper points out, is that “when services are offered at a zero price” – think Google and Facebook – “competition authorities often argue that where there is no price, there is no market.”[10.  Nicolai Van Gorp and Dr Olga Batura, ‘Challenges for Competition Policy in a Digitalised Economy’, European Parliament, July 2015] This is an unbelievably naïve position to take.

Just last week, Acting Chairman of the US Federal Trade Commission (FTC), Maureen Ohlhausen, delivered a speech on ‘Antitrust enforcement in the digital age’. She took a swipe at those who “want to rewrite the modern rules of antitrust enforcement” in order to “pursue a wide variety of goals other than consumer welfare.”[11.  Maureen Ohlhausen, ‘Antitrust enforcement in the digital age’, Federal Trade Commission, 12 September 2017] Which is an embarrassingly antiquated perspective given, as Rana Foroohar argues in The Financial Times, “free is not free when you consider that we are not paying for these services in dollars, but in data”, which is being “lavishly monetised by the richest companies on the planet”.[11.  Rana Foroohar, ‘Big Tech makes vast gains at our expense’, The Financial Times, 17 September 2017]

Data hoarding is the new price hike – or at least the new means to monopoly. The more data a tech company has, the better it can target its products, and those of the companies paying to advertise (few of us consumers really understand the data-use we ‘agree’ to in the small print). When Facebook bought Whatsapp in 2014, the messaging service barely made money, but its price tag was $19 billion – that’s the value of data. And it is precisely why the European Commission is reviewing its rules on merger referral, recognising that a turnover-based threshold misses that commercial value.[12.  Evaluation of procedural and jurisdictional aspects of EU merger control, European Commission, 3 August 2016] The EU is, in fact, pushing much harder than America to modernise their antitrust model.[13.  Nitasha Tiku, ‘Digital Privacy is making antirust exciting again’, Wired, 6 April 2014] The European effort is being led (as UnHerd has spotlighted) by EU competition commissioner Margrethe Vestager, who in May fined Facebook almost $122 million for providing ‘misleading’ information during the merger review of their Whatsapp takeover.

That wealth of data also enables the giants to identify trends before anyone else. Dr Thomas Weck, lead analyst at the German Monopolies Commission, has flagged the potential competition risk of a company combining data across multiple markets:[14.  ‘Revised transcript of evidence taken before The Select Committee on the European Union: Online Platforms and the EU Digital Single Market’, Witnesses: Professor Daniel Zimmer and Dr Thomas Weck, House of Lords, 10 November 2015]

“The company may find out, ‘The markets I am in will develop in a certain direction. If I want to block arising competition, I have to expand into this or that market’, just based on the data the company has access to. Then the question really is, what kind of animal is this? Is this just innovative behaviour, because the company is following market developments and creating new products, or is it not really foreclosure, based on data access?”

Each and every one of the big five – Alphabet (Google’s parent company), Facebook, Amazon, Apple and Microsoft – are extending their reach into new markets, from entertainment to health to transport. And yes, in each area their disruption is delivering positive consumer gains, but we need to be confident that the source of those gains is not unequal access to market information – without which the giants’ dominance would be usurped by the very upstarts they are currently gobbling up.

You can’t protect consumers if you don’t understand the market

Which brings us back to the multiple markets issue. As academics at the University of Florence put it, properly defining the market is “the founding stone on which an antitrust case…is built”.[15.  Lapo Filistrucchi, Damian Geradin, Eric Van Damme and Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, University of Florence, April 2013] However the market complexity of the business model used by digital platforms makes this very difficult. Regulators must understand the market between the user and the platform, and the market between the advertiser and the platform, as well as how the networking effect of platforms connect the two. They must then factor in how data collected from those two sides may also be applied to other markets that the platform provider operates in (for example in entertainment or news). And to complicate it further, many of the market interactions will be non-transactional (i.e. involve no fees). Currently, the authorities seem to be trying to regulate this multi-sided market as if it were a conventional single-sided market.

When Google bought DoubleClick (a web advertising delivery service) in 2007, the FTC cleared the merger, but one commissioner dissented. She did so in part because of “the tremendous additional network effects the transaction will generate”. That is, the combination of data from the two companies would enable Google to improve its targeting algorithms, which drives greater traffic, and thus attracts more advertising – lessening competition. And that richer data picture obtained through the acquisition would enable Google both to improve its search and advertisement offers across its multiple platforms. That may have been a decade ago, but the acting chairman’s speech this week shows the FTC still has some way to go in grasping these challenges. In the meantime, consumers lose out.

Elizabeth Warren understands that: “Concentration threatens our markets, threatens our economy, and threatens our democracy.”[16.  Elizabeth Warren, ‘Reigniting Competition in the American Economy’, Speech, 29 June 2016] And standing tall against anticompetitive mergers, she argues, is core to ensuring more competition. The guardians of competition must ensure their antitrust models are fit for an era of networked platforms, fuelled by ‘free’ data. Would Candidate Zuckerberg be willing to get behind that?

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FURTHER READING

Jonathan Taplin, ‘Is it time to break up Google?’, The New York Times, 22 April 2017

Nitasha Tiku, ‘Digital Privacy is making antirust exciting again’, Wired, 6 April 2014

Farhad Manjoo, ‘Tech Giants Seem Invincible. That Worries Lawmakers’, The New York Times, 4 January 2017

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