Should Big Tech be Broken Up? — Finance Memos: This post evaluates Senator Warren’s plan to break up big tech firms. The analysis presented here supports the view that some of her proposals would assist large established firms and would reduce choices for consumers. Google and Facebook have monopoly power in search and social media, but other large tech firms are capable of contesting these markets, the two firms compete with each other for ad revenue and face substantial competition in many markets from Apple, Amazon, Walmart and other firms.

Introduction:

Senator Warren proposes major changes to anti-trust law and increased enforcement against big tech firms in her article “ It’s Time to Breakup Amazon, Google and Facebook.”

Warren’s approach includes the following

She wants large companies with major Internet marketplaces to either sell only third-party goods or its own goods. Marketplaces serving third-party sellers would be set up as a regulated platform utility. The rule would require Amazon to separate Amazon Basics from Amazon marketplace, could prevent Amazon Prime and Netflix from selling the movies it produces and would require changes to the Apple Istore.

She wants the newly created platform utilities to follow a standard of fair, reasonable, and nondiscriminatory dealing with users. She also wants to restrict data transfer to third parties by platform utilities.

Separately, she would require Google to separate Google Ad sense from Google Search.

She would reverse some previous Tech mergers and make future tech mergers more difficult. Previous mergers to be reversed include — Amazon’s purchase of Whole Foods and Zappos, Facebook’s purchase of WhatsApp and Instagram, and Google’s purchase of Waze, Nest and DoubleClick.

Warren has a really clear and simple vision of the world. Google, Apple, Amazon, and Facebook all have monopoly power. All four companies use their monopoly power to obtain large profits from consumers. The solution to this problem is to break up existing firms, reverse previous mergers, prevent future mergers and increased regulation.

My view of the world is less black and white than Warren’s view. Some of the major tech firms have high market shares potentially creating substantial monopoly power. Some of the previous mergers were anti-competitive and need to be reversed but in some cases the advantages of the previous merger outweighed costs. Moreover, some future mergers and acquisitions by competitors of Google and Facebook could increase competition and expand choices for consumers.

In some cases, on-line regulation of Internet marketplaces is desirable but in other cases the regulation would leave the Internet firm at a significant disadvantage compared to traditional retailers.

Analysis:

The theoretical case for applying antitrust procedures to Internet firms differs greatly from the theoretical case associated with applying antitrust to traditional industries like steel or oil. Traditional firms attempt to get monopoly power in order to increase price and get large profits. Many Internet firms like Google and Facebook do not charge anything for their services. These firms get profit from ad revenue and from the use of their data on consumers. They are willing to spend money to attract customers because an increase in the size of their network increases the scope and value of their network.

Google and Facebook are not like swimming pools where at some point (typically pretty quickly on a hot day) additional swimmers make the pool less attractive. There is no real cost of additional users to Google and Facebook. Also, since the basic purpose of these networks is to allow people to interact and work together an increase in the size of the networks increases their value. Why are Google Docs and Microsoft Office so popular? People share documents. An increase in the number of people sharing stuff or interacting can increase the value of the software or network.

Google and Facebook have overwhelming market share and monopoly power in search and social media respectively. Both firms have higher profitability levels than they would if the industry was competitive. Google’s dominance in search allows it to manipulate results and favor certain sellers or merchants over other sellers and merchants. The unchecked and unregulated power of Facebook has led to privacy violations, misuse of data and political manipulation of Democratic elections by bad actors. The manipulation of consumers by Facebook may have resulted in Donald Trump being elected president and may similarly impact the 2020 presidential race.

High market share is an important indicator of potential monopoly power and is of great concern to industrial organization economists. However, high market share does not automatically lead to monopoly power when markets are contestable. The theory of contestable markets created by William Baumol asserts that high concentration may not lead to problems associated with monopoly if there are low barriers to entry and exit. The implication of this theory for Big Tech is that the way to deal with the potential search and social media monopolies is to facilitate the entry of additional competitors.

One of the reasons why Google has a monopoly position in search is that both Google Android and Apple phones default to the Google search engine. Google pays Apple a whole lot of money to make google search the default on its phone. This side payment is basically an incentive to not compete and is in my view illegal collusion under existing antitrust law. Warren did not flag this problem in her article. Anti-trust authorities should end this arrangement. This change would make the market for search not only contestable but actively contested.

The problem of Google’s monopoly power in search cannot be resolved by separating Google search from Google ads. Google makes no money from search. Virtually all of Google’s entire revenue is from its ad division. A separate Google search division with no ad revenue would probably not be financially viable.

Believers in the theory of contestable markets assert that the key to taking on the Google and Facebook monopolies is to encourage entry and greater competition from existing tech firms. Microsoft with its unsuccessful Bing search engine and with its LinkedIn social network is already in competition with both Google and Facebook. Ironically, Microsoft could more actively compete with both Google and Facebook by purchasing firms an activity that would be restricted by the adoption of Warren’s approach.

For example, Microsoft could more easily compete with Google by purchasing Yelp and integrating Yelp with its search engine Bing. Yelp may be receptive to a partnership with Microsoft because it has accused Google of anticompetitive behavior. Microsoft would also have to purchase or develop a mapping company to compete with Google Maps, Waze and Apple Maps.

A useful search engine must be complemented by mapping software for cases where the customer needs to move towards the item or business being searched. The primary purpose of Google’s purchase of Waze was to prevent another firm from integrating Waze with their search algorithm. Waze is now experiencing a slow death. I agree with Warren that Google’s purchase of Waze was anti-competitive and should be reversed. This type of antitrust action might prompt Apple or Microsoft to start competing with Google on search.

Microsoft’s ability to compete with Facebook would similarly be enhanced if it purchased the blog platform Medium and integrated it with is social network LinkedIn. This move would increase the number of LinkedIn members and would also increase activity by current users.

The case for reversing previous acquisitions made by Facebook is weak. Prior to their purchase, Instagram and WhatsApp had fairly low revenue and income. These firms may not have been viable on their own and other social media companies including Twitter and Snap did not have the money to make these acquisitions.

These acquisitions did expand Facebook’s monopoly in social media, but the acquisitions also increased the ability of Facebook to compete with Amazon and Google for ad revenue. I am unsure how the courts would weigh the benefits and harm of these mergers. I am pretty sure that prohibiting these mergers would have reduced growth in Silicon Valley, stifled innovation and reduced tax revenues and charitable giving.

The case for breaking up Amazon is also weak at best. Amazon is huge and has disrupted many industries and firms but large size without abnormal profits is not a reason for antitrust enforcement. Amazon, aside from the cloud computing division the company, has low profits margins. Amazon is in stiff competition with many brick and mortgage retail firms including Walmart, Target, CVS and other drug companies. Many of these competitors have higher profit margins than Amazon.

Sometimes it appears as though the established firm uses anticompetitive methods to prevent competition from an on-line competitor owned by Amazon. CVS and Target are refusing to honor their customer’s valid requests to transfer prescription to PillPack and Express Scripts has removed PilPack from its network.

The acquisition of Whole Foods by Amazon resulted in a huge shakeup in the grocery industry decreasing stock prices of several firms. However, Whole Foods only had slightly more than 1 percent of the U.S. grocery market at the time it was acquired by Amazon, hardly a reason for concern.

Warren’s plan potentially treats a large retail firm like Walmart or Kroger differently than Amazon. Inside a Walmart and Kroger one can find name-brand products and products produced by the store side by side. Presumably, the same arrangement would be available on the store web page. Under Warren’s rule, Amazon would not be allowed to put its own brands up next to a competitor’s brands. Why should it permissible for Walmart to list name and Walmart options on the same shelf or web page and impermissible for Amazon to do the same?

The growth of Amazon by increasing competition has reduced prices to consumers and has kept inflation low. The growth of Amazon has hurt some retailers but has helped the economy in many other ways. An antitrust action against Amazon would do more to strengthen many of Amazon’s large competitors and would not clearly benefit consumers who benefit from the low prices offered by Amazon.

One of the most interesting and innovative aspect of Warren’s anti-trust approach involves regulation of platform utilities, companies that arrange sales from third parties to customers. Warren, when explaining the platform utility regulation, says companies should not be allowed to umpire and play in the same game.

The largest adverse impact of the regulation of platform utilities involves competition in the entertainment industry. The proposal to regulate Internet marketplaces as platform utilities favors the cable industry, Disney, and network TV over Amazon Prime, Apple, itunes, and Hulu and potentially Netflix. Many of the best current movies and television shows are now produced by Netflix, Amazon and Apple. These streaming services have increased choices for consumers and have allowed some people to cut the cord with local cable company monopolies.

Streaming companies are constantly looking for high quality material from independent producers. These company gets a fixed monthly fee from consumers who buy a subscription. They don’t appear to guide people away from independently produced shows and movies towards content they finance. I am not sure what could be gained from preventing companies from distributing their own films.

Another area where Warren’s proposal could have a large impact is in competition for Internet related devises inside a home. Google purchased Nest but there are still several other makers of smart thermostats. Amazon own Ring but there are still several other makers of smart doorbells. There seems to be plenty of competition in this area and little need for an intervention by antitrust authorities.

Concluding Thoughts:

The growth of companies on the Internet has created a lot of competition for older established companies in the brick and mortar economy. Consumers have often benefited through lower prices and the introduction of new products.

Two companies, Google and Facebook, have a significant monopoly position in their respective fields. Both companies have used their monopoly power to obtain abnormal profits, have not properly safeguarded consumer information and have at times used their power to impede competitors.

Warren’s stringent antitrust approach would curb the power of large Internet firms but would also favor large traditional established companies. In some cases, it is the large established firm that engages in anticompetitive behavior. Some restrictions on large Internet companies could result in higher prices and fewer choices for consumers.

A more effective strategy for expanding competition in the Internet industry involves creating incentives for existing large tech firms to compete with Google on search and incentives for existing large tech firms to compete with Facebook on Social Media.

David Bernstein is an economist living in Colorado and the author of a policy primer addressing issues pertaining to student debt, health insurance and retirement income called “ Defying Magnets: Centrist Policies in a Polarized World.”

Originally published at https://financememos.com on November 6, 2019.

Written by

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store