Focusing on Facebook and Google’s monopoly misses the point

By Noah Smith

The heads of four of the U.S.’s biggest technology companies — Alphabet Inc., Apple Inc. Facebook Inc. and Amazon.com Inc. — appeared before Congress earlier this week to respond to criticism that they have too much market power. The hearing showed that lawmakers are beginning to understand what is and isn’t important when it comes to regulating these large businesses.

And it also showed an increased focus on the most important area of antitrust policy — mergers and acquisitions and whether regulators have exercised enough vigilance.

In recent years, big tech has become ever more important to the U.S. economy and U.S. financial markets. The five biggest tech companies (the four that testified, plus Microsoft Corp.) now represent more than one-fifth of the market capitalization of the S&P 500. Their value has only risen in the coronavirus pandemic.

When a few companies get this big and dominant, it makes sense to think about how they might be using their size to unfairly control markets.

One typical defense against such allegations is that tech companies are not monopolies. Whether this is true depends on how markets are defined — for example, Google is overwhelmingly dominant among search engines, but has only about a third of digital ad revenues. Facebook Chief Executive Officer Mark Zuckerberg argued that his company faces intense competition in many markets, especially from the other top tech companies.

But focusing on whether a company is a monopoly misses the point. Oligopolies, where a few big companies dominate the market, also tend to wield some degree of market power. In theory, that can allow powerful players to jack up consumer prices, underpay workers and squeeze suppliers.

In the case of Big Tech, consumer prices are generally not the issue. Services provided to consumers by Google and Facebook tend to be free, while Apple’s fat margins stem mostly from consumer willingness to pay a lot for the brand value of an iPhone. Wages are a slightly bigger concern. Big tech companies have already been caught and fined for colluding to hold down engineers’ salaries, and there has been much attention paid to Amazon’s warehouse low pay and unpleasant working conditions.

But Big Tech ultimately doesn’t employ very many people, and its proven anti-competitive activities have largely involved highly paid workers. So while Big Tech wage suppression deserves to be monitored closely, it’s probably not yet a major threat to U.S. labor markets.

A bigger worry concerns suppliers. Platform companies depend on a network of third-party companies — merchants who sell on Amazon, websites that run Google ads, app developers who sell on Apple’s App Store and so on. The platforms’ size potentially allows them to extract a lot of value from these smaller companies, demanding a larger share of their revenue or even creating and then favoring their own competing offerings.

In the long run, as tech publisher Tim O’Reilly has argued, big tech companies would probably ossify and ultimately lose out from cannibalizing their own third-party ecosystems, but there’s always the danger that short-term profits will prove too tantalizing. Thus, it’s a good thing that Congress focused some of its attention on the need to maintain fair relationships between platforms and suppliers. Ultimately, this issue will probably have to be resolved with regulation because breaking up platform companies would eventually cause new platforms to emerge and become dominant.

Another concern is the prices that online service companies charge advertisers. By some estimates, more than half of digital ad spending now goes to either Google or Facebook, with the fastest-rising competitor being Amazon. Advertisers are the true paying customers for free online services for consumers.

This is a reason that legislators are worried about platforms buying out the competition. Facebook CEO Zuckerberg admitted in the hearing that he purchased social-networking company Instagram in 2012 as a way to head off a potential competitor. There have been allegations that the company has attempted or threatened to do the same with other young social networks, telling them that if they didn’t accept an offer, Facebook would launch a competing product and drive them out of existence.

Ultimately, that could raise prices for advertisers, if Facebook properties are the only way for them to reach social-media users. Those sorts of buyouts and buyout threats could also have a chilling effect on startup formation and economic dynamism because even the threat of competition from a dominant company can deter new entrants. Columbia Law School professor Timothy Wu has argued that such buyouts are illegal under current antitrust law.

So if there’s any case for antitrust action against Big Tech right now, it probably has to do with the acquisition of upstart competitors. Unlike most of the issues surrounding Big Tech, which are complicated and confusing because of the way online network effects change the economics of size, concern over anti-competitive mergers that jack up prices is very old and very common.

In any case, it’s a very good thing that Congress is beginning to pay more attention to the problems of industrial concentration and oligopoly in the U.S. economy. Big Tech is obviously the most well-known and popular case, but with concentration rising across most industries, these hearings will hopefully be a jumping-off point for a broader re-examination of the value of mega-mergers and huge, dominant companies.

Focusing on Facebook and Google’s monopoly misses the point Focusing on Facebook and Google’s monopoly misses the point Reviewed by TechCO on 8/02/2020 Rating: 5

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