Economy & Business

Should Tech Companies Be Broken Up?

Facebook CEO Mark Zuckerberg testifies before the House Energy and Commerce Committee, April 11, 2018. (Leah Millis/Reuters)
No — antitrust regulation isn't the best way to foster competition.

The most recent Facebook consumer-privacy scandal has raised the specter of new regulations on big technology firms, but to respond with antitrust action now would be imprudent.

Gone are the days when the pundit class speculated that Mark Zuckerberg or Sheryl Sandberg would seek the White House; the Cambridge Analytica scandal harmed their company’s public image. And just as Facebook’s stock price had rebounded, new troubles intervened when its Silicon Valley rivals piled on this week. At a tech conference in California, Snap CEO Evan Spiegel took a dig at his competitor’s indiscretion with user data, quipping that Facebook ought to copy his company’s privacy policy. And on Tuesday, Apple unveiled a feature for its Safari web browser that would prevent the data created by buttons on social networks from being shared across different websites. “Yeah, we’re shutting that down,” said the company’s software chief, to applause — the message, punctuated with a Facebook comment thread onscreen, was lost on no one.

These executives echoed the prevailing public attitude toward personal privacy. Their comments came amid troubling reports that Facebook had shared user data with 60 device manufacturers, including Huawei, a Chinese telecommunications firm with close ties to the Chinese military. No doubt, the potential for espionage is worrisome. As Axios editor Mike Allen put it, this development moved the Facebook brand “from toxic to radioactive” for folks in D.C.

Could Facebook’s series of mishaps lead to a successful campaign for new antitrust legislation? Probably not anytime soon — few of America’s lawmakers truly understand how the tech giants work, let alone support new antitrust measures — but the New York Times, joining a bipartisan chorus, declared its assent for unspecified antitrust action by government agencies, in an editorial following the news about Huawei. Even Zuckerberg admits that he supports oversight “if it’s the right regulation.”

The regulatory frenzy hasn’t charmed only progressives and European technocrats, the usual suspects for government supervision of big business. Count senators Lindsey Graham and Ted Cruz as antitrust-curious. Last month, when Mark Zuckerberg testified on the Hill, Graham pressed the Facebook CEO on his company’s lack of competition. Cruz, meanwhile, raised the specter of antitrust action to correct the platform’s purported left-wing bias, during a Breitbart interview.

Is the status quo locked in by a shifting slate of alliances between oligopolistic super-firms? Do the tech conglomerates foster the innovation that drives the modern American economy? The complicated reality is that both are true.

Though interested in antitrust for different reasons, the Times and the senators are onto something. Several big-tech firms indeed dominate their respective markets. Facebook owns four of the five major social-media apps, including Instagram, WhatsApp, and its Messenger platform. Amazon, because it relies on a business model of growth rather than immediate profitability, can outcompete threatening rivals by lowering prices to unprofitable levels until they relent — an anti-competitive advantage it has long exploited. Today’s digital-technology landscape, some say, is far less open than it could be. Conventional wisdom, which idolizes Silicon Valley as the contemporary heart of American innovation, might betray this truth, but the rate of new startups in the United States has barely recovered from a recent slump and is half of what it once was.

Some experts are loath to join the antitrust camp. These holdouts, such as the American Enterprise Institute’s James Pethokoukis, argue that the current big firms are not guaranteed to maintain their dominance — ever heard of AOL or Myspace? In fact, Facebook’s and Google’s digital-advertising market share declined last year, while Amazon’s and Snap’s rose. And no wonder Apple’s making a fuss about Facebook’s privacy concerns — it’s reentering the digital-advertising fray.

Is the status quo locked in by a shifting slate of alliances between oligopolistic super-firms, or do the tech conglomerates foster the innovation that drives the modern American economy? The complicated reality is that these notions are concurrently true.

Scholars Robert D. Atkinson and Michael Lind argue that bigger is, counterintuitively, better: Bigger firms compensate their workers generously and make a significant contribution to productivity growth. To boot, they’re the ultimate bulwark against encroaching Chinese technology companies. Better that advancements in AI are made by a few concentrated American leviathans than an arm of the Chinese state.

Indeed, innovation thrives when tech subsidiaries pool resources. SoftBank CEO Masayoshi Son’s establishment of a $100 billion private-equity juggernaut to invest in emerging technologies is a reflection of the times; a diverse basket of holdings in virtual reality, biotechnology, co-working, and agro-technology, among other fields, creates links that allow these ventures to break into new markets, with a partner’s foot already in the door. Frank Pasquale, out with a debate-shifting piece on tech regulation, in American Affairs, calls this a key benefit of a Hamiltonian, or centralized, approach — groundbreaking projects pursued by big tech (such as Amazon’s research into curing cancer) can justify the damage to competition.

Pasquale’s framework splits advocates of tech regulation into two categories, the aforementioned Hamiltonians (Atkinson and Lind are two examples) and their devolutionary Jeffersonian counterparts, who support antitrust action designed to distribute market share among a number of smaller firms. Each persuasion carries its own poison pill: The Jeffersonians sacrifice the progress that comes from concentration, presumably yielding it to America’s adversaries, while the Hamiltonians advocate for a utility-style regulation of technology firms that requires government intervention in the economy.

Pasquale proposes a synthesis of the two approaches: Use competition law to block mergers à la Facebook, WhatsApp, and Instagram; regulate technology companies as though they were utilities; and limit profits for large platforms such as Amazon and Uber. But that is an unattractive approach. It would grant government an outsized role in policing the Web and unfathomable power over industry. Such policies could turn the largest technology firms into instruments of government bureaucracy.

We ought to to examine a balanced medley of pro-competition ideas while defending free markets.

Even if we don’t adopt his conclusions, we should listen to Pasquale’s reasoning. He is right that context matters, and rather than talking about breaking up these firms in absolute terms, we ought to to examine a balanced medley of pro-competition ideas. Senator Graham’s line of questioning during the Facebook hearing, for instance, was a promising acknowledgment of the competition problem that exists, but his comparison of Facebook to Ford and Chevy exposed a misunderstanding of the business model. The monopolized product is not Facebook itself but rather the constellation of different services that it offers. Potential future antitrust action, which is too early to dismiss, will have to treat these firms delicately on a market-by-market basis.

For now, lawmakers and regulators should focus on ensuring consumer privacy in a way that doesn’t curb competition. The European Union’s General Data Protection Regulation (GDPR), implemented last month, is esteemed by privacy advocates as the gold standard of data protection, but U.S. officials should be wary of its halting effects on competition. Prohibitive compliance costs mean that only the Googles and Facebooks of the world can afford to meet these requirements and thus remain in the European market. A bipartisan consumer-privacy bill, introduced last month in the Senate by senators John Kennedy (R., La.) and Amy Klobuchar (D., Minn.), that would give users more power — especially in the case of data breaches as in the Cambridge Analytica incident — without creating massive barriers to market entry for new firms seems to be a good first step.

The time for robust antitrust action against the big technology companies has yet to arrive — and it might never come. Still, this week’s round of the Facebook data-privacy saga shows that these ideas are gaining traction. Defenders of free markets can only hope that they will be implemented with precision and an intimate understanding of the new economy.

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