Magazine | December 18, 2017, Issue

Our Digital Overlords

Big Tech is becoming a problem

The Left’s cause du jour is “monopolies.” Well, not monopolies, necessarily. The new line is that it’s inherently problematic when even as many as three or four companies dominate an industry, and that the government needs to take action, pronto.

This is an overreaction, as Robert D. Atkinson and Michael Lind have explained in this space (“The Neo-Brandeisian Attack on Big Business,” October 2, 2017). In many cases it’s actually better, for workers and consumers alike, to have a few big, highly efficient companies duking it out with one another than to have hundreds of tiny ones fumbling around in the marketplace.

But there are real monopolies in this country, and three of them — Alphabet (i.e., Google), Amazon, and Facebook — control much of our online life. They are already showing anti-competitive tendencies, as well as censoring speech, and yet there is no perfect response to such practices. These firms could do great damage if left unchecked — but then again, their market dominance might not be as secure as it seems.

It’s not time to smash these companies to pieces. But it just might be time to rein in some of their most egregious practices.

Traditionally, the case against monopolies has gone something like this. In a competitive market, companies must charge the lowest price they profitably can or else lose out to their rivals. If a company were to, say, arbitrarily hike its prices by half, the vast majority of its customers would simply head elsewhere. By contrast, if there isn’t much competition to speak of, a company can charge whatever the market will bear. It might hike its prices by half and lose only a quarter of its sales — pulling in more revenue for less effort — because customers won’t have an alternative. Their only options are to pay the new price or go without the product entirely.

This problem might then compound as the monopolist leverages its power. A company might take the extra money it makes from a monopoly on one product and use it to secure monopolies on other products — losing money at first as it sells items below cost to drive out the competition, then hiking prices. Or it might pursue “vertical integration”; the company that owns all the oil refineries might buy up the pipelines and railroad tankers as well, monopolizing the entire chain of businesses through which consumers gain access to a product. And if a monopolist doesn’t outright take over those related industries, it can use its monopoly clout to extract concessions from the other businesses it deals with, as well as from workers.

It’s not illegal simply to have a monopoly so long as it was established through legal means, but it is illegal to abuse monopoly power in various ways. And concerns about abuse cut across ideological lines. Liberals, naturally, will jump at any chance to hammer big companies. And conservatives are keenly aware that capitalism works so well thanks to the magic of competition — and cannot work without it.

Judge Learned Hand once wrote that a 90 percent market share “is enough to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three percent is not.” In practice, courts put the cutoff somewhere between 70 and 80 percent, a range in which the company is about two to four times the size of all its competitors put together.

The applicability of traditional thinking about monopolies is limited, however, when it comes to the Godzillas of tech. Google and Facebook, which monopolize online search (91 percent market share) and mobile social media (77 percent) respectively, don’t charge the end users of those products a cent. And while Amazon has a monopoly, or at least a near-monopoly, over e-book sales (70 percent), it doesn’t control the broader market of online retail, which itself is less than one-tenth of total retail in the U.S. Moreover, far from hiking prices, Amazon has gone out of its way to keep them low, earning little to no profit each year and focusing its efforts on growth. And to cap it all off, while these companies’ competitors may be tiny, all a customer has to do is type in a different Web address to access them. So what’s the problem?

Let’s take a brief look at some of these companies’ most controversial actions — and the actions they have the power to take even if they haven’t yet.

Here’s one that got Google clobbered with a $2.7 billion fine from the European Union, and it has to do with what happens when someone, well, “googles” the name of a product. Years ago, such a search would turn up some links to “comparison shopping” websites — places users could go to compare prices at different retailers. Recently, though, comparison-shopping sites have shown up on page four of the results, at best.

Why might that be? Because Google decided that what its users really wanted to do was comparison-shop among retailers who pay Google. Today, anyone searching the name of a product is first shown a selection of “sponsored” offerings, complete with pictures and prices of specific products. Below that, where the normal search results begin, there are direct links to retailers (I recently got a Home Depot link in a search for “lawnmower”) but no links to other price-comparison options. Portions of a report inadvertently leaked by the Federal Trade Commission here in the U.S. showed that Google had deliberately rigged its algorithm to penalize competing sites — leveraging its monopoly over Web search to take other companies’ business. There is also some evidence that this practice pushed up prices: The ad spots are allocated via auction, the costs of which participating retailers have to cover, and as a result the products the search engine highlights are often more expensive than what a consumer could find if he compared prices a different way.

There’s more where that came from. The EU is also investigating Google with regard to Android, an operating system for smartphones. Much the way Google search is free to the end user, Android is free for companies that make smartphones. And as much as one hears about each new version of the iPhone (which runs Apple’s own iOS), Android is installed on more than 80 percent of the smartphones sold today. The flipside of free is that there are strings attached: Smartphone companies must sell their phones with Google’s own apps pre-installed, “nudging” the user to use Google products across the board. (On my own Android phone, Google Play Movies & TV is mysteriously considered a “system app” and cannot be uninstalled.) This is remarkably similar to the practice that got Microsoft in hot water two decades ago, when it sold Windows, its monopoly operating system, with its own Internet browser set up as the default, doing great damage to its rival Netscape.

Back in 2013, U.S. regulators put an end to two other anti-competitive practices at Google. In addition to selling ads on its own products, Google runs AdSense, which places ads on any website that wants to participate and passes along some of the revenue; the company agreed to lift restrictions it had placed on companies that used other ad services in addition to AdSense. It also apparently needed to be told it couldn’t “scrape” user reviews from websites such as Yelp (through which people can weigh in on local restaurants and other businesses) and include those reviews on its own sites.

Google isn’t always hyper-competent when it executes these kinds of anti-competitive moves, however. In 2011 it had a meeting at Forbes in which it told the media company it would receive better search rankings if its articles included a button that readers could click to share a link on Google Plus, a social-media site. Apparently a journalist invited to the meeting wasn’t told it was confidential and wrote a piece about the practice — and despite the effort to manhandle press outlets that heavily rely on Google’s search engine for traffic, hardly anyone uses Google Plus today.

Of the three tech giants against which allegations of “monopolization” are often made, Amazon is the most interesting, as it controls less than half of the online-retail market. In a celebrated Yale Law Journal article that serves as an excellent catalogue of everything Amazon has done wrong, Lina M. Khan argued at length that the company essentially breaks the mold; regulators’ current criteria for anti-competitive behavior just don’t capture what the company has been up to. And indeed, she documents many troubling practices.

The foundation of Amazon’s business strategy, oddly enough, is an unwillingness to make a profit. The company has wound up in the black more often in recent years, but it consistently ran losses for much of its history, and generally speaking it keeps prices low and spends any extra revenue on efforts to grow. Its shareholders have been content to watch their stock gain value as the company gets bigger rather than receiving a share of any profits. And grow the company has. It doesn’t just sell stuff online; it also serves as a marketplace for other sellers, provides cloud-computing services, produces movies and TV shows, and manages a distribution chain. It now owns Whole Foods, whose stores could soon serve as distribution hubs.

In other words, Amazon has tons of money rolling in, and shareholders aren’t clamoring to see any of it, so losses are acceptable so long as they serve the purpose of growth. One thing this means is that when Amazon wants to obliterate the competition in a specific market niche, it can sell below cost like an old-fashioned monopolist. That is how it established a monopoly in e-books: It lost money on bestselling titles, and probably on the Kindle e-reader device as well. Regulators declined to step in, noting that Amazon’s e-book sales were profitable overall, even if the company was losing money on bestsellers in particular. (Incredibly, they did step in when Apple and five of the six major publishers established “agency pricing” for the iBookstore, by which books’ publishers would set whatever price they wanted on each title and Apple would take 30 percent. At the time this happened, Amazon controlled 90 percent of the e-book market.)

Once Amazon had gained such enormous market share, it had the ability to boss book publishers around. The maker of a product cannot afford to be kept away from a majority of its potential customers, and this is especially true when the monopolist ties its customers to itself through a device such as the Kindle, which gives the user direct access to the Amazon store and automatically downloads any Amazon e-books he purchases from other devices as well. (Many Kindle users don’t even know it’s possible to put non-Amazon files on the device, which is not too difficult for the tech-savvy but entails a somewhat obscure process.) Amazon is famous for yanking publishers’ catalogues from its store during negotiations.

Quidsi, which operated several retail websites, including Diapers.com, also got a taste of what it means to go up against Amazon. When the smaller company rebuffed the bigger one’s attempt to purchase it, Amazon slashed prices on baby products by up to 30 percent. It set up digital “bots” that monitored prices on Diapers.com and automatically undercut them every time they changed, and it started services that gave regular baby-products customers even deeper discounts. Quidsi alleged that the strategy would cause Amazon to lose $100 million over three months, losses a smaller company could not sustain. Quidsi finally sold to Amazon, which responded to its new freedom from competition by raising prices and scaling back discounts.

This isn’t “creative destruction”; Amazon didn’t come up with a better way to sell people diapers. It just kept sustaining losses until its smaller competitor gave up.

Then there’s the fact that, in addition to selling products itself, Amazon serves as a platform for other sellers — many product pages show multiple offers, and some products are available only through non-Amazon sellers. In a sense this is admirably pro-competitive, as Amazon is giving smaller sellers a way to reach its huge user base (for a fee). But there’s a downside for other companies that succeed through Amazon’s infrastructure: Amazon sees all their sales data, meaning the entire third-party Amazon marketplace is basically a big test lab for Amazon proper. If another company’s product succeeds, Amazon can in short order start offering a similar product itself at the same price (or less). Some Amazon sellers have accused the company of doing just that, even with rather distinctive products such as pillows modeled after football mascots.

There are two other threats the tech monopolies pose that are worth briefly discussing: They are in a good position to maintain their dominance, and their dominance brings with it an extraordinary power to shape public discourse.

It’s well known that older companies gradually lose their mojo, making them vulnerable to ambitious start-ups. Recently I was surprised to learn, for example, that a higher percentage of adolescents use Instagram (a photo-centric social-media site) than use Facebook. Then I learned that Facebook has owned Instagram since 2012. Facebook has also persistently tried to buy Snapchat, another photo app popular with teens.

Acquisition is a common way for tech monopolies to entrench their position, and it normally doesn’t require the sort of strong-arm tactics that Amazon employed against Quidsi. Alphabet, Google’s parent corporation, has purchased more than 200 companies over its lifespan, integrating its purchases into its various offerings. It’s hardly any surprise that by one analysis, from Google critic Scott Cleland, the company leads in 13 of the Internet’s 14 key “commercial web functions of the Internet data economy,” the exception being social media: “data collection, search, tracking-analytics, digital advertising, mobile, video, location, browser, Internet Infrastructure, consumer-Internet of Things, Apps store, translation, & email.”

Some major tech products, including Google Docs, were acquired at the start rather than developed in-house. “Initial public offerings” of start-up companies have declined in recent years, perhaps in part because so many companies work toward the goal of being bought up by a giant rather than succeeding on their own.

And today, an incredible proportion of the information driving public discourse runs through Google and Facebook. To be clear, this does not pose any sort of First Amendment issue — these are private companies, and the Constitution does not dictate how they program their search algorithms or decide which stories appear on users’ news feeds. But the potential for political meddling is substantial and troubling when a single company controls a key way that Americans across the political spectrum find their information.

Russian bots famously were designed to spread breathless “fake news” on Facebook in the runup to the 2016 election, a problem the company is now looking to fix. Last year, some former Facebook employees told the tech site Gizmodo that they had, at their superiors’ request, deliberately kept conservative topics such as the annual CPAC gathering out of Facebook’s “Trending Topics” section. Google’s YouTube has banned or “demonetized” (refused to run ads on, depriving the creators of revenue) videos created by various right-wing figures, including Michelle Malkin. One study suggested that if Google deliberately tweaked search results to favor a candidate, it could influence about 2 percent of votes, enough to sway close elections.

Google has also made itself a powerful player in the D.C. think-tank world, funding a variety of institutions on the right and left alike. The company has never hidden these efforts, and they fall well within its rights, but they burst into the public consciousness earlier this year when the left-leaning New America Foundation parted ways with its Open Markets Institute. The latter’s head, Barry Lynn, had praised the aforementioned EU ruling against Google — which generously funded other projects at New America.

So what’s the solution? The most draconian option would be to just start busting up these companies. Last year in Washington Monthly, Lynn and his New America colleague Phillip Longman called for the government to “break up Amazon, Facebook, Google, Comcast, and any other essential network monopoly by banning them from owning companies that depend on their services.” In the blog post that presaged his departure from New America, Lynn called on U.S. regulators to “cleanly separate ownership of the network from ownership of the products and services sold on that network, as they did in the original Microsoft case of the late 1990s.” (Before the ultimate settlement, a court ruling would have broken up the maker of Windows.)

The Microsoft example is instructive: No one is very afraid of the company these days even though the government failed to break it up, opting instead to gently restrict its business practices. The company is doing well financially, largely owing to its cloud-computing services, but the monopoly worries have faded: PC sales have dropped off thanks to the rise of smartphones and tablets, an attempt to put Windows on mobile phones flopped, Microsoft’s Internet browsers are just a fifth of the market, and its search engine is an afterthought. It’s perfectly conceivable that today’s seemingly secure tech monopolies will lose their grip over time too.

But gentler approaches are available to address more immediate problems, starting with the EU’s strategy for comparison-shopping sites, which in that same post Lynn described as “requiring that Google give equal treatment to rival services instead of privileging its own.” One could also imagine requiring companies such as Amazon to keep other companies’ sales data private, though that would be difficult to enforce, or banning companies that reach a certain market share from selling below cost, especially in a concentrated effort to destroy a competitor. (Indeed, this is already illegal in some circumstances, though the law is rarely enforced.) In a similar vein, Jonathan Taplin, author of Move Fast and Break Things, has suggested stopping the tech monopolies from acquiring still more small ventures, requiring them to operate as public utilities (such as by licensing their patents for a set fee), and mandating that they take greater steps to prevent intellectual-property infringement on their networks.

Regarding this last item, companies such as Google and Facebook are currently given “safe harbor” under a law passed 20 years ago, when the Internet was a fledgling technology in need of special legal protections — essentially meaning they can’t be held liable for their users’ piracy, or for pointing users to pirated material in search results, unless a creator has specifically requested the removal of an infringing post or link. There are limits to how much we can expect search engines and social networks to fight piracy, of course, even if they’re huge monopolies. But the first Google result for “nirvana smells like teen spirit mp3” should not be a bare-bones website that helps users download songs for free from mysterious, unnamed sources rather than hosting the files itself, as it was when I searched those words recently. If these companies are going to control a huge part of our lives without facing competition, they can do a better job of respecting others’ rights.

Speaking of which, Jeremy Carl of Stanford’s Hoover Institution has suggested basically applying the First Amendment to these companies. Google (and its YouTube), Facebook (and its Instagram), and any future monopolies could be prohibited from banning, censoring, or demonetizing any speech that is legal. They would act as common carriers available to all.

Some mix of the above measures might preserve a competitive marketplace without a heavy-handed government assault on private businesses. But as yet, it’s unclear how the Trump administration will approach the issue of tech monopolies and antitrust law more generally, and to what extent Congress is open to these ideas.

The administration has recently sued to block the merger of AT&T and Time Warner, an aggressive move but one that (ostensibly) relies on age-old antitrust concerns. It’s an example of “vertical integration” between two companies that are large but not monopolies: Time Warner owns television networks such as HBO and TNT, while AT&T distributes those networks through products such as DirecTV. In theory, the two combined could benefit from charging AT&T’s competitors artificially high rates for Time Warner’s content, harming consumers in the process. The other possible rationale is that Trump is merely trying to punish Time Warner, which owns his media archenemy, CNN.

Either way, the suit doesn’t provide much of a signal as to how the administration sees Google. But there’s certainly a populist angle to keeping a check on enormous companies when no competitors are around to do so — and a conservative angle to ensuring that competition flourishes online.

In This Issue

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Politics & Policy

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Books

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Politics & Policy

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Culture

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