Big Tech - Regulation

A separate web page summarises the many concerns about the power and behaviour of huge technology companies such as:

This page examines the technical and practical problems associated with regulating such companies.  A separate page summarises how governments and regulators have responded to such challenges.

By way of introduction. let us note that politicians hesitate to impose regulation on these companies because:

a) the companies are immensely powerful, and their founders are politically powerful,
b) politicians would be accused of limiting freedom of speech, and
c) internet-based applications and communications are a real and very valuable force for good, both economically and politically (in the way in which they facilitate political and social engagement).

These constraints are particularly acute in the USA.  The platforms are, for a start, given a very wide-ranging exemption from legal challenge by these famous twenty-six words in Section 230 of the 1996 Communications Decency Act;

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

Jeff Kosseff's The Twenty-Six Words That Created The Internet provides a very readable and interesting history of this legislation and the litigation that cemented its power.

And then, more recently, writing in the FT in 2018, Rana Foroohar argued that:

Facebook, Apple, Amazon, Netflix and Google — known collectively as the FAANGs — are case studies in how the network effect supports dominant players and allows them to ringfence users and their data. Google’s claim that “competition is only a click away” rings hollow — if for some reason the site went down, we would all be more likely to take a coffee break and wait for it to come back online than seek out a competitor.

Another reason for the concentration of corporate power is political capture. Americans invented modern antitrust policy, and love to rail against “statist” old Europe. But a fascinating study by academics Germán Gutiérrez and Thomas Philippon shows that EU markets are, in fact, more competitive. They have lower levels of concentration, lower excess profits, and lower regulatory barriers to entry. The study points to a huge rise in US political lobbying as the key reason that levels of concentration between the two regions have diverged since the 1990s. “European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did,” it says.

Two days later, in the same paper, Paul Myers argued that:

Average Americans may think the US has the most competitive economy, but they’re looking in the rear-view mirror. Magical thinking suffuses what used to be a pretty pragmatic republic. The concentration of economic power goes hand-in-hand with the concentration of wealth and income to create an entirely new constellation of power controlling the governance of advanced, and supposedly democratic, economies. I would expect to watch icebergs float past Mar-a-Lago before I should see the FTC chief or the DOJ anti-trust chief do anything effective on economic and market concentration. The reality may be that the European Union is the last major functioning democratic government in the world today. Interesting that the Anglo-Saxon countries are in such a hurry to get away from it. Trump gets the hives when he enters EU airspace.

And even if appropriate laws are in place, the companies' huge size and international reach make it very difficult for any individual regulator to tackle them with any prospect of success, partly because their businesses are so complex and partly because their resources enable them to out-gun all but the most persistent and well-funded regulators.

There is also a common belief that we should all be grateful that so many companies provide us with so many free products. Indeed, John Newman points out that legal institutions have already begun to grant an (in his view) undeserved protected status to the suppliers of 'Free' products. Here is his introduction to his longer paper The Myth of Free.

Myths matter. This Article is the first to confront a powerful myth that pervades modern economic, technological, and legal discourse: the Myth of Free. The prevailing view is that consumers capture massive welfare surplus from a flood of innovative new products that are offered free of charge. Economists, legal scholars, and industry stakeholders created an origin story—a myth—to explain how these products became “Free.”

But that orthodox origin story is fatally flawed. This Article formalizes, then debunks, the Myth of Free and its underlying assumptions. The Myth is riddled with internal inconsistencies, logical errors, and factual inaccuracies. In their place, this Article provides a revisionist history of Free, one that offers greater descriptive and predictive accuracy. Along the way, it solves several puzzles: Why has Free become the default online business model? Why does the age of abundance—so often predicted—always fail to materialize? And why is society nonetheless drawn to such predictions?

The task is urgent: the Myth of Free is not benign. It has misled courts into granting protected legal status to Free-product suppliers in cases ranging from contract disputes to antitrust and privacy litigation. It has also motivated policy proposals that call for eliminating market interventions—or competitive markets themselves—without adequate justification in either case. Moreover, policies designed for a post-scarcity world necessarily overlook the persistent problems attendant to scarcity, thereby creating substantial allocative inefficiencies. This Article seeks to dispel the Myth of Free before it can wreak further harm to societal welfare and the rule of law.

Many suspect that Helen Clark was correct when she asserted that, if Big Tech were to put as much effort into algorithms for preventing the spread of hate material as they put into targeted advertising, they could easily solve that problem.

Could Competition Law be Brought to Bear?

Google apart, competition law has its limitations, for a number of reasons.

  1. Social media platforms tend to spiral towards monopoly without needing mergers which might be prohibited by the authorities.  You need to be on the same platform as your friends.  It might be hard for a search engine to displace Google but it is not inconceivable.  But if I am tempted by an alternative social media platform, I don't need to persuade my friends and family to move too.
  2. UK market investigation legislation would in theory allow the CMA to force Facebook, for instance, to sell WhatsApp and Instagram - or - more radically - to require social media platforms to improve interoperability and data sharing - so I could sit on one platform and message etc. friends on another one. But this powerful legislation is not available in most other countries.
  3. As noted above, the companies' services are often provided free of charge to the general public - although we do in return give them lots of our collectively valuable personal data. And they compete hard with each other to attract users, and to attract their paying customers, the advertisers. So the companies are not, at first sight, doing anything to damage consumer welfare - which is what competition authorities generally worry about. 
  4. The larger companies often buy innovative smaller companies before they become a threat.  It is very difficult, verging on impossible, to attack this behaviour as an abuse of dominance.
  5. Also as noted above, the larger social media etc, companies are politically and economically extremely powerful.

Some jurisdictions have therefore been forced to develop laws to control the FAANGS, hence the EU's Digital Markets Act.  This is, on the face of it, very powerful legislation which allows the Commission to act to improve competition and prohibit bad behaviour even before it takes place ('ex ante').  It catches only the very largest companies and contains very wide powers similar to the UK's market investigation legislation. 

In the USA, Democratic presidential hopeful Elizabeth Warren argued for carving out the tech platforms and treating them as regulated utilities, as part of a wider break-up of Big Tech, arguing that this has been a model for dealing with “natural monopolies” in other industries, from electricity transmission to railways. App stores, search engines and ecommerce platforms (Amazon) would all be forced to give equal treatment to all-comers, rather than favouring in-house products and services.

But competition law has been deployed to some effect.

Building on Elizabeth Warren's thinking (see above), maybe the industries themselves need to be analysed in a different way? Rather than worrying about concentration in particular markets, such as search, maybe regulators should be concerned about customer lock-in - the unattractive obverse of strong network effects. And interoperability? Should we be worried, for instance, that customers are increasingly committed to one or other of the Apple and Android domains.

The other side of the argument was nicely summarised in the FT in April 2019.

... What many in both the US and Europe ignore is the negative impact of containing the growth of technology companies too early in the technological cycle. Amazon is a good example in this respect. It is a formidable company. It is jostling with Apple and Microsoft for the title of the world’s most valuable company by market capitalisation and its founder, Jeff Bezos, is the richest person on earth. Amazon now employs more than 600,000 workers worldwide and accounts for almost 50 per cent of US online sales. But viewed from another angle, Amazon looks rather less mighty: its business represents only 5 per cent of the total US retail market. While the technology companies appear to be giants, the sector as a whole is still dwarfed by legacy industries. This should be taken into account before we decide that it is time to slow down the growth of these companies.

If we want to take advantage of new technology in order to tackle rent-seeking, rein in financialisation and create more jobs, we need more capital deployed for the purpose of bringing that technology to legacy industries. And allowing Amazon some room for manoeuvre might make a real difference here. There can be significant benefits in letting tech-centric companies expand into other industries. However, the only way a large player such as Amazon will be able to do that is by using the power it has accumulated in retail as leverage to tackle activities with higher barriers to entry.

Take healthcare, for example, where Amazon has announced a joint venture with Berkshire Hathaway and JPMorgan Chase. It is easy to see that it might require the customer-driven attitude of Amazon to shake up the healthcare industry in the interest of the public. But if we weaken the company by breaking it up, the consequence could be to allow the entrenched, rent-seeking healthcare industry to breathe easier.

Indeed, before they can enter “hard” industries such as healthcare, tech companies must first accumulate power in “easy” ones. Chinese companies Tencent and Alibaba entered financial services only after they prospered in online content and retail, respectively. If they had gone straight for the banking industry, they surely would have been overcome by entrenched incumbents. The same is true of Alphabet, which diversified into mobility and autonomous vehicles only after having triumphed in online search and advertising.

Technology companies currently pose significant challenges for policymakers. But the latter must be clear-headed in finding satisfactory solutions to those issues. Their goal should be to avoid the stagnation that has afflicted so many industries over the past decade, rather than exacerbating it. Instead of trying to curb Big Tech, governments around the world should see these companies as allies and try to harness their power in order to rein in old, predatory cartels. That is the best way of kick-starting the engine of inclusive economic growth.

And here are some extracts from another article written by someone rather sceptical about the pursuit of Google:

All Google-related cases are essentially variations on the same theme:  The question is whether – and why – it is an abuse for an integrated firm to favour its own activities. The case law does not support the idea that dominant firms are bound by a general duty of non-discrimination. … Clarity in this sense is indispensable, as the positions hinted at by the Commission in the press release are potentially far-reaching. For instance, they suggest that a TV channel could be abusing its dominant position by keeping its advertising space and revenues for itself, or that supermarkets may be bound by a duty of non-discrimination when placing goods on their shelves.

The industry has changed a great deal since 2010:  The Google Search case has been going on for a very long time. This is always dangerous in EU competition law, and even more so in dynamic industries. It is obvious that end-users’ habits have changed a great deal since 2010. Firms’ behaviour and strategies have also changed. As the press release shows, this is something that promises to be contentious in the case. Amazon and eBay look more like price comparison websites. And Google Shopping looks more like them. …

It is not clear that there is a causal link between Google’s practices and the abuse claims:  When the industry changes significantly during a period of time, the exclusion of some firms may very well be the natural consequence of the evolution of the market. … this is where ‘Streetmap’ failed.  Mr Justice Roth [in the CAT] concluded that the decline of that firm would have happened anyway, and was not attributable to Google.

It is also worth remembering the CMA's ability to mount Market Investigations. These are hugely powerful weapons, dating back to post-war cartel-busting legislation., and they have not previously been available to most (all?) other competition authorities.  But the EU's Digital Markets Act gives the European Commission very similar powers.

The LSE published a very clear analysis of Competition Policy in the Digital Age in 2019.

Platforms or Publishers?

Google/YouTube, Facebook, Twitter etc. all claim to be mere platforms, passively hosting content that they are unwilling to assess. Their great fear, of course, is that they would open themselves up to endless and expensive litigation if they were to admit to being publishers. Active (as distinct from responsive) moderation of their content might open Facebook, for instance, to potentially massive legal liabilities. They assert that they "enforce our policies rigorously and when a violation is brought to our attention we take swift action". But they do not proactively look for violations. Their algorithms to some extent choose what their readers get to see, and the companies are financed by advertising, much like traditional media companies.

Technical Complexity

The companies claim that it would be too technically complex to tackle their content problems effectively, arguing that they cannot be expected to vet/censor everything that it posted on their sites. Here are some thoughts on this tricky issue:

Could Customers or Advertisers Act as a Regulator?

Optimists have suggested that the companies' consumers may become a sort of regulator if they begin to desert the platforms in protest against their content or behaviour. But there is little sign of this happening, and many users are in effect locked into the products as a result of the strong network effects mentioned above. It can only add to commentators' concerns that it is well known in Silicon Valley that 'If you are not paying for it then you are the product'.

But pressure is now being applied by the companies that fund the Giants via advertisements etc. There were two particularly interesting developments in the Summer of 2017. First, Google and Facebook admitted that they could if necessary remove unpleasant content, particularly in order to ensure that it did not appear next to advertisements from its blue-chip advertisers. Second, they discovered that they could, after all, remove illegal streaming of football matches, as well as 30,000 video clips, when required to do so by a court order sought by the Premier League. So 'the Giants' can censor when necessary. It remains to be seen whether the UK or any other government will have the temerity to make similar demands to those made by large commercial interests.

And Parliament's Intelligence and Security Committee suggested in late 2018 that advertisers should boycott companies such as Facebook and Google until they showed that they were serious about tackling the 'scandal' of online terrorist material.

A Data Dividend?

I have seen suggestions that Big Tech, who make huge profits out of monetising users' personal data, might be requited to pay a 'data dividend' to consumers.  It sounds like one of those neat ideas that would be beset by technical difficulties.

Further Reading

See also my separate web page about Big Tech 'Platforms' & Two-Sided Markets as well as three articles - on a separate web page - which discuss these issues in some detail.

 

Martin Stanley

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