Tech and the Antitrust Hammer

The impending regulatory wave for big tech

Mikal Khoso
Oct 1, 2019 · 7 min read
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The technology industry has seen almost two decades of explosive growth after many observers predicted the industry had died after the Dotcom Bubble of 2001. In the last 20 years, a generation of superstar startups has scaled and revolutionized how we communicate, transact, find information and what devices we own and use. A lot of good has been created in this process and many have benefitted immensely, both consumers and businesses. But as the second decade of the 21st century comes to a close, the challenges and harms that these tech companies create — despite the good they are also responsible for — is becoming increasingly clear.

Sparked by the Cambridge Analytica scandal in 2016, in which millions of people’s personal data was harvested via Facebook for use in the US election cycle, the backlash against the tech industry has continued to grow rapidly. Tech companies are under attack on all fronts:

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When it rains, it pours regulation and enforcement. This barrage of investigations, requests and attention come on the back of testimonies by Facebook CEO Mark Zuckerberg and Alphabet CEO Sundar Pichai on Capitol Hill in 2018. What is driving this intense focus by regulators? Three main drivers are causing tech companies to be put in the spotlight:

  1. Privacy Concerns — The Cambridge Analytica scandal brought privacy back into the limelight given how freely Facebook allowed private companies to access personal user data and monetize and use it for gain. The major tech companies have been hoarding personal information at scale for years. Simply open your personal Google account history to see the level and depth of data just Google has on you as a user.
  2. Anti-competitive behaviour — European antitrust investigations of Google manipulating search results to privilege Google Shopping and the recent news that Amazon manipulated search results in its store to privilege products it owns is part of a pattern of increasingly brazen anticompetitive behaviour by tech companies.
  3. Market Concentration — Tech companies have monopolized key parts of the internet. Facebook has 2 billion users and is the king of social networks. Google has an incredible 90% market share in the global search market. Together, Facebook and Google are almost 60% of the global online advertising market. 1 in every 2 dollars spent online in the US is spent on the Amazon webstore. Apple’s share of the global smartphone market is over 50%.

These interlocking concerns have become increasingly prominent in recent years as these tech companies have become even bigger and impacted ever broader areas of the economy. In retail, an “apocalypse” of some sort is going on where retailers are going bankrupt and shutting stores in droves, in large part driven by the rise of eCommerce thanks to Amazon. The news industry has been put under tremendous pressure by Facebook and Google and local newspapers have been disappearing for over a decade. Apple runs the world’s largest mobile app store with a whopping 80% market share and takes a huge 30% cut of transactions coming through its store.

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Antitrust regulation and competition law is the hammer that governments — and to a larger extent, electorates — will use to try to break the seemingly insurmountable stranglehold tech has on different industries and the challenges it presents to democracy. At its heart competition, law and antitrust is focused on promoting consumer welfare. Competition law assesses three different areas in its quest to maximize consumer welfare — price, choice and innovation.

Price is the simplest and easiest example. Is a company that dominates an industry (a monopoly) or a series of companies that dominate an industry (an oligopoly) using their market power to inflate prices in the industry to increase revenue and in the process harming consumer welfare?

Choice involves ensuring that consumers have a range of diverse choices to choose from and are not constrained in their choice by the dominant players in the market. Finally, competition regulators spend a lot of time assessing whether the structure of the market and the size of the different players will continue to facilitate innovation in a specific market over time. If the answer is no, then consumer welfare is not being maximized because incumbents have little incentive to innovate and consumers aren’t benefitting from improved services driven by rapid innovation over time. Competition is a crucial driver in innovation, and innovation is critical in continuing to maximise consumer welfare over time.

Regulators worldwide and people have legitimate and well-grounded antitrust cases against the “Big Four” tech companies. Each of these companies are different in their business model and what structurally has lent them their dominance. But each of them share one critical feature — they are gatekeepers for consumer attention and dollars. Facebook is our gatekeeper for social interactions across Facebook, Instagram and WhatsApp. Google is our gatekeeper for finding information. Amazon is our gatekeeper for eCommerce. Apple is our gatekeeper for consumer applications and to some extent smartphones.

Being a gatekeeper is powerful in any industry, but the big 4 tech firms are supercharged gatekeepers and hold a level of dominance that hasn’t been seen before. The power of being a gatekeeper is simple, a gatekeeper gets to set the terms of who passes through the gate and at what cost.

Tech companies have used their power as gatekeepers to systematically push out competitors, privilege their own services and thereby maximizing their own revenue. Tech companies have been focused in the last decade on vertically integrating services in areas they predict they can capture market share. For example, if you search for a job or flight on Google today Google places its widget for Google Flights or Google Jobs above all other search results. This directs traffic away from travel websites like Expedia and Booking.com and jobs websites like Monster.com towards Google products. Google did the same thing in Europe by artificially promoting links to Google Shopping products over competitors and was fined heavily by the European Union for it.

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Amazon was recently caught doing precisely the same thing. Even more perniciously Amazon uses the data from its marketplace to identify what products are performing the best in its marketplace. It then creates its own version of that same product under the Amazon Basics brand and begins selling it on Amazon, often at a steep discount to the original product.

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Facebook has sought to vertically integrate news reporting into the Facebook platform and prevent users from clicking on external news links shared on Facebook thereby taking them to another website. Facebook soon will be launching a news tab on its platform and is licensing content from news outlets like the Wall Street Journal and New York Times. The goal of Facebook is to increase the time we spend on Facebook and therefore increase the number of ads we can be served and increase its own revenue. This will come at the expense of subscription and ads-based news sites like the Wall Street Journal.

As gatekeepers tech companies can systematically vertically integrate products, cutting off oxygen for competitors and limiting consumer choice in the process. They have been free to do that for over two decades uninhibited. But the wheels of change are beginning to turn. Overall, the world is at a turning point when it comes to the regulation of the technology industry. The freewheeling approach to privacy regulation, market concentration and antitrust is rapidly coming to an end. The antitrust hammer is going to drop on the tech industry. The question is how and what will new regulation look like?

Tech companies should no longer fight the impending wave of regulation and enforcement coming their way. The tide is simply too strong. Instead, they would benefit most by working with regulators to create regulatory frameworks that are fair and robust and aren’t crude and poorly designed as Mark Zuckerberg is doing in Washington D.C this week. Otherwise, this is going to be long, drawn-out and very painful for the tech industry.

Originally published at https://ceterisparibus.substack.com.

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Mikal Khoso

Written by

Investor @ Wavemaker interested in the intersection of politics, economics and technology. Sign up for my newsletter @ https://bit.ly/33FWVuq

Trajectory

Trajectory, a newsletter about where the world is heading, delivered straight to your inbox.

Mikal Khoso

Written by

Investor @ Wavemaker interested in the intersection of politics, economics and technology. Sign up for my newsletter @ https://bit.ly/33FWVuq

Trajectory

Trajectory, a newsletter about where the world is heading, delivered straight to your inbox.

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