How to Curb Silicon Valley Power—Even With Weak Antitrust Laws

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How to Curb Silicon Valley Power—Even With Weak Antitrust Laws

By Nitasha Tiku, WIRED

January 5, 2018

Technology companies with unprecedented power to sway consumers and move markets have done the unthinkable: They’ve made trust-busting sound like a good idea again.

The concentration of wealth and influence among tech giants has been building for years—90 percent of new online-ad dollars went to either Google or Facebook in 2016; Amazon is by far the largest online retailer, the third-largest streaming media company, and largest cloud-computing provider. Silicon Valley titans coasted to the top of the economy with little government oversight on the backs of incredibly convenient products, a killer backstory, shrewd lobbying, and our personal data. They were allowed to grow unfettered in part because of a nearly-40-year-old interpretation of US antitrust law that views anticompetitive behavior primarily through the prism of the effect on consumers. In that light, the tech industry’s cheap products and free services fell somewhere between benign and benevolent.

Last year, though, the real-world consequences of unregulated internet platforms became undeniable, from facilitating Russian interference in the presidential election to aiding foreign despots by spreading fake news to building surveillance infrastructure that monitors our daily activities to hijacking our minds with invisible persuasion techniques, to automating racist advertising and displaying content that exploits children.

This left lawmakers and the media primed for the populist message from advocates like the Open Markets Institute, which pitched antitrust enforcement as the antidote to downsides of consolidation in the tech sector, such as job losses in traditional industries and income inequality. “Before the question was: ‘Why would we even need to break them up? They’re so great!’ ” says Lina Khan, Open Markets’ director of legal policy. “The debate has moved on to recognize that there is a problem.”

In Europe, regulators have moved beyond debates to serious sanctions, like the €2.4 billion fine levied against Google in June for privileging its own products in search. In part, such moves reflect Europe’s stricter laws around companies abusing their dominance.

By contrast, the US’s focus on consumer welfare has made it harder for antitrust enforcers at the Federal Trade Commission and Department of Justice to pursue claims against tech giants. Many of these companies’ offerings are free, or cheaper than competitors’, and make daily life more convenient, so what’s the harm? Uncertainty about whether the tech backlash will extend beyond elites to ordinary citizens adds to the political complexity, and officials’ caution.

Still, advocates and students of antitrust point to several strategies that could curb tech company dominance. Here are some:

Sweat the Small Stuff

Carl Shapiro, a UC Berkeley economist who previously worked in the Justice Department’s antitrust division and has consulted for Google, recently identified a common pattern: When large incumbent companies acquire “highly capable” companies in an adjacent market, competition declines. This is particularly common in tech, Shapiro said, citing examples like Google buying YouTube and DoubleClick, Facebook buying Instagram and Oculus, and Microsoft buying LinkedIn. In a November paper called “Antitrust in the Time of Populism,” Shapiro argued that lenient merger guidelines adopted by the DOJ in the 1980’s are a likely culprit for the past few decades of increased market concentration.

To revive competition, Shapiro says that enforcers should get tougher on mergers, particularly when big companies buy small ones. He urged agencies to look at deals where the smaller company, if left to grow, could ultimately challenge the incumbent. If watchdogs are concerned that tech companies are “occupying spaces that are hard to attack,” then expanding the type of deals that get reviewed is the obvious place to start, Shapiro told WIRED.

Two 2017 deals seem to illustrate Shapiro’s point: Amazon’s purchase of Whole Foods and Facebook’s acquisition of tbh, a social-media app embraced by teens for its positivity. Neither deal prompted a detailed review by regulators, who evaluate proposed mergers based on a set of standards, such as combined market share. Even with Whole Foods, for example, Amazon accounts for only about 4 percent of the US grocery market.

US Representative Ro Khanna (D-California), who represents a portion of Silicon Valley and recently started the Congressional Antitrust Caucus, says the approval process for Whole Foods should have also factored in potential loss of jobs and the impact on wages and innovation. “My wife and I use Amazon all the time. Our life would be made easier if there are Amazon groceries,” Khanna says, but there should be other considerations beyond convenience.

When it comes to tbh, analyst Ben Thompson says antitrust officials fail to appreciate the powerful network effects of allowing social networks to merge, pointing out that when Facebook bought Instagram in 2012, the FTC saw Instagram as a photo app with no revenue stream. Thompson argues that Facebook’s dominance in digital advertising was a result of consolidating attention through its purchase of other networks, like Instagram and WhatsApp. Thompson urged the FTC to investigate the tbh deal, even if Facebook paid less than $80.8 million, a threshold for tougher regulatory review.

Anant Raut, a former FTC lawyer, says reforming merger analysis should also involve paying attention to red flags that may not necessarily violate antitrust law, but nonetheless indicate anticompetitive behavior. For instance, he says enforcers might want to consider whether a merger between two popular social-media apps could harm competition if it means one company now takes up 30 minutes of your day.

Check Up on Past Promises

Here’s a European tactic US regulators may want to emulate: showing follow-through on deals that have already been approved.

In May, the EU fined Facebook $122 million for misleading regulators about its 2014 acquisition of WhatsApp, by claiming it could not combine data from Facebook and WhatsApp accounts. Facebook did not appeal the fine and said the error was unintentional, but the probe may have inspired French privacy regulators to re-scrutinize the deal as well.

Maurice Stucke, a co-founder of The Konkurrenz Group and a law professor at the University of Tennessee, says Facebook’s statements about WhatsApp “did not add up.” Facebook promised to run WhatsApp separately. “So then you wonder why they’re spending all this money for a company where they’re not going to get any efficiencies and they’re not going to get any market power,” he says.

In the US, the Electronic Privacy Information Center filed a complaint with the FTC, claiming Facebook’s move to link WhatsApp accounts violated a 2011 settlement with the agency over privacy concerns.

Advocates say monitoring is particularly vital considering that consumer rights can be eroded in stages. For instance, in late 2016, two nonprofit consumer advocacy groups, Consumer Watchdog and Privacy Rights Clearinghouse, filed a complaint with the FTC after Google quietly combined its own personally identifiable information about users with a massive database of web searches from DoubleClick, an ad-tech company that Google acquired in 2007. The complaint alleged that this combination violated both antitrust law protecting consumers from deceptive practices, as well as a consent decree that Google signed in 2011, after claims of deceptive privacy practices related to its social network Google Buzz. Google has done incrementally and furtively what would plainly be illegal if done all at once,” the complaint alleged.

Corporation, Split Thyself

One indication that the worm has turned on Silicon Valley super-platforms? Calls to break them up are coming from their own admirers. NYU professor Scott Galloway, author of The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google, thinks that tech CEOs should preemptively break their companies apart to stave off further public backlash and to “guard against ham-handed regulation that might be imposed.” Given the industry’s desire to self-police in lieu of government regulation, the idea of extreme preventive measures doesn’t seem that far-fetched.

Companies could be spin off divisions with user bases and infrastructure to stand alone before regulators come knocking, says Galloway. Facebook could spin off WhatsApp and Instagram. Amazon could divest Amazon Web Services, Apple could split off iTunes. “Breaking up the big tech isn’t meant to destroy them, but to repair the markets that are failing,” Galloway says. “Instead of four firms, there could be 10, and we would have an ecosystem to stimulate job growth and shareholder value, inspire more [mergers and acquisitions], and investment, broaden the tax base.”

Change the Law, or the Interpretation of the Law

As unlikely as immediate changes seem now, the law does shift over time, in part in response to popular opinion. In a recent Harvard Business Review article, Stucke argued that movements that have stirred the public’s “agitation and imagination” have also played a vital role in strengthening enforcement. He sees the potential for another shift now, when there is political pressure from both the left and the right, “not just the usual suspects.”

Antitrust is back in the headlines in part because younger scholars like Khan have synthesized their argument into something consumers can understand. Some of that populist momentum could even translate into new legislation. In the past five months, the Senate Judiciary antitrust subcommittee met to discuss whether the consumer welfare standard was outdated and three bills have been proposed that could pave the way for stronger enforcement. Representative Keith Ellison (D-Minnesota), also a co-founder of the Antitrust Caucus, proposed forming a commission to study concentration in different markets modeled after an initiative launched by President Franklin D. Roosevelt in 1941. Senator Amy Klobuchar (D-Minnesota) introduced a bill that would make it easier to challenge mergers.

Raut believes Congress could tinker with the law governing predatory pricing, which the Supreme Court tightly limited in a 1993 case. Congress could help agencies get around that roadblock with new guidelines about how to enforce the statute in data-driven digital markets where products and services may be free. For example, legislators could address the recoupment test for predatory pricing that looks at the ways companies gain back the losses from offering products below cost. “Getting a bunch of market share and figuring out how to monetize those customers later is still recoupment. Getting a bunch of market share and selling out once you’ve driven out your competitors is recoupment,” says Raut.

The Trump administration’s posture toward the tech giants is still as unpredictable as the rest of the president’s actions. In November, the Justice Department sued to block AT&T’s planned acquisition of Time Warner. Makan Delrahim, the department’s top antitrust enforcer, has argued that structural remedies—such as requiring companies to sell or spin off units—are more effective than behavioral remedies—asking companies to promises to play fair. But the administration has not yet been tested with a case involving a tech giant.

Stucke notes that courts, too, have changed their view of antitrust law over time. He points to a Depression Era case about the coal industry that allowed price fixing in depressed industries. “So there are opportunities for the court to reorient itself when it has gone off course, but it really is going to depend on the composition of the court, and who is going to seek the intellectual mantle,” he says.

Consumer Watchdog
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