Assif Shameen: Why breaking up Big Tech is hard to do
In late July, the CEOs of four of the five largest tech firms in the US — Mark Zuckerberg of social media giant Facebook Inc; Sundar Pichai of dominant search engine operator Google; Jeff Bezos of e-commerce behemoth Amazon.com; and Tim Cook of iPhone maker Apple Inc — testified before a Congressional committee looking into their abuse of monopoly powers. Two decades earlier, Microsoft Corp, the third most valuable tech firm, was investigated for violating anti-trust laws and using its monopoly powers. On Oct 6, the US House of Representatives committee investigating Big Tech dropped its bombshell 449-page report. Its conclusion: All four companies are “monopolies” in one way or another that stifle competition and hurt consumers.
Indeed, the subcommittee on Anti-Trust, Commercial and Administrative Law of the Committee on the Judiciary went as far as to urge aggressive regulation of their monopolistic behaviour and call for “structural separations”— a euphemism for a “break-up” of the firms — which could “require divestiture and separate ownership of each business”. Though it fell short of specifically calling for the breaking up of any one of them, the committee recommended prohibiting “certain dominant platforms from operating in adjacent lines of business”. That means prohibiting Amazon from selling its own goods in competition with third-party sellers on its marketplace or preventing Google from favouring its own services through its search engine or, indeed, stopping Apple from showing preference to its own services sold through its App Store or forcing Facebook to divest Instagram and WhatsApp.
Facebook and Google have “monopoly power,” whereas Apple and Amazon have “significant and durable market power”, the report noted. It faulted Facebook for gobbling up potential competitors with impunity, and said Google had improperly scraped rivals’ websites and forced its technology on others to solidify its pole position in search and advertising. Amazon and Apple were criticised for exerting “monopoly power” to protect and grow their own corporate footprints. As operators of major online marketplaces — a world-leading shopping site for Amazon and the powerful App Store for Apple — have for years set rules that essentially put smaller, competing sellers and developers at a disadvantage.
The Congressional committee mainly targeted Facebook and Google. The search engine and social network are not free. They have just made you and me their product. We pay for them with our personal data, the most valuable thing there is. And even though we are the product, we get nothing in return. Facebook has maintained its monopoly through a series of anti-competitive business practices, investigators noted. “The social network has used its data advantage to create superior market intelligence to identify nascent competitive threats and then acquire, copy or kill these firms,” they said. “Once dominant, Facebook selectively enforced its platform policies based on whether it perceived other companies as competitive threats.” In the absence of competition, Facebook’s quality has deteriorated over time, the report noted, “resulting in worse privacy protections for its users and a dramatic rise in misinformation on its platform”.
Search giant Google’s “dominance is protected by high entry barriers, including its clickand-query data and the extensive default positions that Google has obtained across most of the world’s devices and browsers”, the report notes. “A significant number of entities — spanning major public corporations, small businesses and entrepreneurs — depend on Google for traffic, and no alternate search engine serves as a substitute.” Google has maintained its monopoly over general search through a series of anti-competitive tactics. “These include an aggressive campaign to undermine vertical search providers, which Google viewed as a significant threat. Each of its services provides Google with a trove of user data, reinforcing its dominance across markets and driving greater monetisation through online ads,” the committee report said. By linking these services together, Google increasingly functions “as an ecosystem of interlocking monopolies”, it noted.
“To put it simply, companies that once were scrappy, underdog start-ups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons,” the subcommittee said. “Although these firms have delivered clear benefits to society, the dominance of Amazon, Apple, Facebook and Google has come at a price,” the report said. The Big Tech firms “typically run the marketplace while also competing in it — a position that enables them to write one set of rules for others, while they play by another, or to engage in a form of their own private quasi regulation that is unaccountable to anyone but themselves”.
As the US continues to shift its work, commerce and communications online in the post-Covid-19 era, the Big Tech firms are becoming even more interwoven into the fabric of the American economy and lives. “Just a decade into the future, 30% of the world’s gross economic output may lie with these firms, and just a handful of others,” it predicted.
The way the subcommittee saw it, although the four giants — whose combined market valuation was over US$5.3 trillion ($7.2 trillion) last week — differ in important ways, their business practices reveal common problems. “Each platform now serves as a gatekeeper over a key channel of distribution,” its report said. By controlling access to markets, they can pick winners and losers throughout the US economy, it noted. “They not only wield tremendous power, but they also abuse it by charging exorbitant fees, imposing oppressive contract terms, and extracting valuable data from the people and businesses that rely on them.”
Moreover, “each platform uses its gatekeeper position to maintain its market power”, it noted. “By controlling the infrastructure of the digital age, they have surveilled other businesses to identify potential rivals and have ultimately bought out, copied or cut off their competitive threats.” The report noted that the firms “have abused their role” as intermediaries to “further entrench and expand” their own dominance. “Whether through self-preferencing, predatory pricing or exclusionary conduct, the dominant platforms have exploited their power in order to become even more dominant.”
Economy and democracy at stake
Though Amazon, Facebook, Google and Apple are still years away from a break-up even if Congress enacts a law soon, analysts say the report itself could help frame the ongoing debate on regulation of the tech giants and revisions to antitrust laws in the US and regulatory practices including competition policies and current enforcement levels. The subcommittee collected extensive evidence — including a treasure trove of 1.3 million documents — from the tech companies themselves as well as from third parties as part of its 15-month-long examination of the dominance of the four firms and their business practices and to determine how their power affects the US economy and its democracy. “These firms have too much power, and that power must be reined in and subject to appropriate oversight and enforcement. Our economy and democracy are at stake,” the report said.
So, what’s next? Most analysts believe that beyond a lot of huffing and puffing in the Congress, little will get done and, like IBM and Microsoft before them, the targets will somehow manage to avoid a forced break-up. “I’ll bet money that they will not be broken up,” former Microsoft CEO Steve Ballmer said in a TV interview. The subcommittee’s report was signed by only the Democrats, who have a clear majority in the House. Republicans, who are a minority in the House, refused to sign it. To enforce some or all of the recommendations and turn them into law, the Democrats would need to have majority support for the move in the Senate, where the Republicans currently have a 5347 majority, though the Democrats are poised to take control in fiercely fought elections.
Though regulating Big Tech is not really a partisan issue, for years now the Republicans have been more focused on what they see as the anti-conservative bias of the tech firms. Republican lawmakers both in the House as well as the Senate clearly share concerns about the tech giants but disagree with the far-reaching recommendations of the subcommittee that is dominated by Democrats. Ahead of the elections next month, the Republicans clearly do not want to be seen as supporting the Democrats on anything, let alone the issue of reining in the Big Tech firms that they themselves have railed against for years.
For their part, the Big Tech firms have vigorously defended themselves. For years, Facebook has resorted to fear mongering arguing that breaking it up will only help China’s tech champions such as Alibaba Group Holding, Tencent Holdings, Meituan Dianping and Bytedance. “Facebook is an American success story,” the firm said in response to the report. The Consumer Technology Association, an industry lobby group, said the tech sector is “the reason for America’s global innovation leadership and powers our economy”. It warned against action targeting tech giants, the country’s most successful firms. “To undercut our nation’s ‘crown jewel’ companies would take our competitiveness out at the knees,” it argued.
Investors will gain from break-up
If you are an investor in Facebook and Alphabet or, indeed, Amazon and Apple, any break-up will not dramatically affect you over the long run. If Amazon is broken up into two distinct companies — the cloud giant AWS and the e-commerce firm — and Facebook into three — Instagram, WhatsApp and the remaining assets including the core Facebook — you would get shares in two or three separate firms instead of just one.
While the broken-up smaller units will not have the synergies and power of the larger entities, they are likely to be valued far higher over time as separate entities than they are currently as a single behemoth, once the conglomerate discount is removed. Standard Oil was broken up into 34 smaller oil firms but, in the long run, investors made out like bandits, though, more recently, Exxon, the biggest of the units, has started to lose its lustre. Giant telco AT&T once known as Ma Bell, was broken up into “Baby Bells”. If you had kept shares in all seven units, you would have done very well as an investor.
There is no reason that the shareholders of Facebook, Alphabet or Amazon will not do far better in the 10 years after a break-up than Standard Oil and AT&T shareholders did in the first 10 years after their forced split decades ago. That Big Tech has become too big and powerful is not in doubt. But more likely than not, the four giants will only get a slap on the wrist as regulations are tightened to prevent them from abusing their powers rather than be broken up. In 2001, Microsoft settled with the Department of Justice to prevent the company from being forced to split its Internet Explorer browser from Windows. The DOJ is expected to present its antitrust case against Google’s power over internet search in the coming weeks. It is likely that Google will take a leaf from Microsoft’s playbook and settle its case rather than drag it out for years and see itself broken up by regulators. While the jury is still out on whether Big Tech is guilty of preventing competition, hurting small businesses, Facebook and its ilk, continue to stifle innovation. As they rein in Tech behemoths, regulators need to be mindful that their actions might further undermine innovation.