Further thoughts on the big technology giants and antitrust posturing

Last week I made a few brief points about the recently proposed tech antitrust bills. Given the background, and the current US political environment, they are aggressive. However, like the report, they contain a mix of real concerns, good ideas, and some pretty questionable logic. A hopeless mess. Herein, a few more thoughts.

27 June 2021 – Most technology pundits (who are honest with themselves) will agree that competition is good. In the area of Big Tech, I think most will also agree that in the context of antitrust social networks should not be allowed to acquire other social networks. The U.S. Congress, on the other hand, have presented far more wide-reaching proposals that specifically target Amazon, Apple, Facebook, and Google. And, Microsoft, too, although it was not the focus. You’ve heard the legislator mantra:

Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation. We want a government that makes sure everybody  — even the biggest and most powerful companies in America — plays by the rules. And we want to make sure that the next generation of great American tech companies can flourish. To do that, we need to stop this generation of big tech companies from throwing around their political power to shape the rules in their favor and throwing around their economic power to snuff out or buy up every potential competitor. That’s why we need to make big, structural changes to the tech sector to promote more competition — including breaking up and limiting Amazon, Apple, Facebook, and Google.

I want to start with Apple because that one is the most perplexing. The gist of the legislation is simple:

We need to break Apple apart from its App Store. It’s got to be one or the other. Either they run the platform or they play in the store. They don’t get to do both at the same time. 

Wow. Where to start. This proposal helps highlight why I say this is really a hopeless mess. These proposals will create massive new problems, have significant unintended consequences, and worst of all, not even address the issues Congress says it is concerned about. Worse, it would do so by running roughshod over the idea of judicial independence, invite endless lawsuits and bureaucratic meddling around subjective definitions, and effectively punish consumers for choosing the best option for them. Ben Thomson and Casey Newton and Mike Masnick get into many of these problems, and they conclude (this is a bit of a mash-up of their collective thought):

The packet of bills got tremendous headlines (surprise!) because so many people are reasonably angry at the power of big tech companies. But, very little in the actual plan makes much sense. The “platform utility” idea will lead to massive, wasteful, stupid lawsuits. The unwinding of old mergers will involve interfering with an independent agency, and seem unlikely to do much to change any of the main “concerns” these Congressmen raised.

And, again, none of this is to say we shouldn’t be concerned about big internet companies with too much power. It’s a perfectly reasonable concern, but just because you want to “do something” and “this is something,” doesn’t mean that it’s the something we should do.

And to cite the 1990s Microsoft case as a reason to break up Google now is ludicrous. I do not think these legislators understand tech’s history, the source of the tech giants’ power, and the fundamental nature of technology itself. All three are, unsurprisingly, interrelated, and it is impossible to craft a cogent antitrust policy without getting all of them right. Too much to cover so just a few points:

Point #1: history

A core piece of the government’s case doesn’t make any sense: of course a browser should be bundled with an operating system; a new computer without a browser would be practically useless (for one, how do you install a browser?) Moreover, Apple, not without merit, argues that restricting rendering engines to the one that ships with the OS (all browsers on iOS have no choice but to use the built-in rendering engine) has significant security benefits; this is debatable, but ultimately, most don’t care, simply because browsers are means to information, not ends.

This, crucially, is something Microsoft did not understand in the 1990s; Microsoft’s operating system monopoly was predicated on owning the APIs with which applications were built, creating both lock-in and an ever expanding network effect. Unsurprisingly, Microsoft viewed the web through this exact same lens; that meant that Netscape was a threat because it was “middleware”, a potential means to run applications that were not locked into Windows. This is true, by the way – web apps work across operating systems and browsers – but this fact has absolutely nothing to do with the rise of Google. After all, when Google IPO’d in 2004, Internet Explorer had 95% market share; a browser was a means, not an end.

The reality is that Google is an operating system of sorts, but the system is not a PC but rather the entire web; what ties things together are not APIs, but links. And, crucially, the business model that makes sense is not licensing, but advertising. This is a value chain that never even occurred to Microsoft, and why would it? The entire company was predicated on controlling operating systems for physical computers, controlling the APIs on top, and earning revenue through licensing; it was fabulously profitable, and as history shows again and again, being fabulously profitable with an existing value chain is the best way to not only fail to recognize a new market opportunity (Microsoft didn’t even have a web crawler until after Google’s IPO!), but to in fact be at a massive disadvantage when you finally do so.

Look no further than mobile: Microsoft was not encumbered by antitrust when it came to their mobile ambitions, and yet they failed even more spectacularly there than they did online. In this case the company didn’t “miss” the opportunity – Windows Mobile came out back in 2000 – it was just stuck in a PC mindset when it came to product development, attached to its Windows licensing model when it came to monetization, and institutionally incapable of producing superior end user experiences thanks to the company’s traditional focus on platforms and compatibility.

In short, to cite Microsoft as a reason for antitrust action against Google in particular is to get history completely wrong: Google would have emerged with or without antitrust action against Microsoft; if anything the real question is whether or not Google’s emergence shows that the Microsoft lawsuit was a waste of time and money.

Point #2: power

The legislators get it wrong on why large tech companies are dominant. Their position is America’s big tech companies have achieved their level of dominance in part based on two strategies:

1. They use mergers to limit competition. Facebook has purchased potential competitors Instagram and WhatsApp. Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate. Google has snapped up the mapping company Waze and the ad company DoubleClick. Rather than blocking these transactions for their negative long-term effects on competition and innovation, government regulators have waved them through.

2. They use proprietary marketplaces to limit competition. Many big tech companies own a marketplace  – where buyers and sellers transact  – while also participating on the marketplace. This can create a conflict of interest that undermines competition. Amazon crushes small companies by copying the goods they sell on the Amazon Marketplace and then selling its own branded version. Google allegedly snuffed out a competing small search engine by demoting its content on its search algorithm, and it has favored its own restaurant ratings over those of Yelp.

Ok, the merger issue is a real one, but only when it comes to propagating power; Facebook was dominant before it bought Instagram and WhatsApp, Google before it bought DoubleClick or YouTube, and Amazon before it bought Diapers.com or Whole Foods. Notably, Apple has not made any major acquisitions other than Beats headphones, plus a few AI companies, but these all came well after the company had created the iPhone.

But they never explain how these companies became so big, because the reason cuts at the core of their arguments: Amazon, Apple, Facebook and Google dominate because consumers like them. Each of them leveraged technology to solve a unique user needs, acquired users, then leveraged those users to attract suppliers onto their platforms by choice, which attracted more users, creating a virtuous cycle that Ben Thompson christened “Aggregation Theory”. Specifically he has written:

Google solved search, which attracted users; Google’s supply (web pages), thanks to the fundamental nature of the web, were already effectively “on Google”, but even then web pages have worked diligently to deliver content in a way that Google expects. Why? Because users start at Google — demand is what matters.

Facebook digitized offline relationships, which attracted users, which were both consumers and suppliers of content; professional content creators followed, not only linking to their content on Facebook but creating content specifically tailored for Facebook’s audience, making Facebook that much more attractive for users. Again, what mattered was demand, not supply.

Amazon leveraged the Internet to achieve a dominant strategy of offering superior selection and the lowest price, starting with books. This gained Amazon customers, which gave the company leverage to bring on first other media like CDs and DVDs, which gained them more users, and later goods of all types; Amazon then launched the Amazon Marketplace, through which suppliers could come onto Amazon directly. Why? Because that is where demand was.

Apple defined the modern smartphone, gaining users who were blown away by Apple’s first-party apps; that attracted app developers, who were soon clamoring for access to iPhone users. Apple closed that loop by creating the App Store, which attracted more users, which attracted more developers, etc. Critically, though, the users came first; one of Microsoft’s many mobile mistakes was believing it could effectively “buy” a supply of apps and thus earn users, but that doesn’t work in a world where owning demand matters most.

Look at “Aggregation Theory” as a whole and it is the reason why all of these companies have escaped antitrust scrutiny to date in the U.S.: here antitrust law rests on the consumer welfare standard, and the entire reason why these companies succeed is because they deliver consumer benefit.

NOTE: the European Union does have a different standard, rooted in a drive to preserve competition; given that the virtuous cycle described by Aggregation Theory does tend towards winner-take-all effects, it is not a surprise that Google in particular has faced multiple antitrust actions from the European Commission. Even the EU standard, though, struggles with the real consumer benefits delivered by aggregators.

Point #3: what is tech?

In my view the worst bits involve Apple. A mash-up of statements from various Congressmen:

Pulling that apart, the App Store is the method by which Apple keeps the iPhone secure. It’s integrated into the platform. How would you propose that Apple and Google distribute apps if they don’t run the store?

Well, are they in competition with others who are developing the products? That’s the problem all the way through this, and it’s what you have to keep looking for. If you run a platform where others come to sell, then you don’t get to sell your own items on the platform because you have two comparative advantages. One, you’ve sucked up information about every buyer and every seller before you’ve made a decision about what you’re going to sell. And second, you have the capacity — because you run the platform — to prefer your product over anyone else’s product. It gives an enormous comparative advantage to the platform.

This would not be the first time in US history that this kind of arrangement had to be broken up. Back when the railroads were dominant, and you had to get steel or wheat onto the railroad, there was a period of time when the railroads figured out that they could make money not only by selling tickets on the railroad, but also by buying the steel company and then cutting the price of transporting steel for their own company and raising the price of transporting steel for any competitors. And that’s how the giant grows.

The problem is that’s not competition. That’s just using market dominance, not because they had a better product or because they were somehow more customer-friendly or in a better place. It’s just using market dominance. So my principle is exactly the same: what was applied to railroad companies more than a hundred years ago, we need to now look at those tech platforms the same way.

Do consumers not matter at all here? No, according to Congress. Is Congress seriously proposing that a smartphone be sold with no apps at all? Yes. Was Apple breaking the law when they shipped the first iPhone with only first-party apps? Yes says Congress.

At what point did delivering an acceptable consumer experience out-of-the-box cross the line into abusing a dominant position? This argument may make sense in theory but it makes zero sense in reality.

What is even more striking, though, is that the App Store does have a massive antitrust problem. It is not Apple unfairly competing with app developers. It is Apple unfairly imposing massive complexity and extracting 30% of revenue with its contractual requirement, enforced by App Review, that developers use Apple’s payment mechanism. It’s why the Epic case in the U.S. and the EU Commission investigations of Apple’s App Store just might yield findings that Apple’s policies are anticompetitive and (in the U.S.) may even be a per se antitrust tying violation.

Point #4: the big take-away

But the most important takeaway for is the degree to which Congress missed the point: there is significant consumer benefit both to having preinstalled apps and also to Apple controlling the installation of apps. There is a big benefit to suppliers (app developers) as well: the app market on PCs died in large part due to security concerns, which Apple obviated with the App Store to the tremendous benefit of every participant in the ecosystem. The legislative proposals would make the App Store worse for everyone.

And that leads to a broader point: “tech” is not simply another category, like railroads or telecom. Tech is a means, not an end, but the Congressional approach presumes the latter. That is why it proposes the same set of rules for the sale of toasters and the sale of apps, and everything in between. The truth is that Amazon is a retailer; Apple a combination of hardware maker and platform makers. Google is a search and advertising company, and Facebook a publishing and advertising company. They all have different value chains and different ways of impacting competition, both fairly and unfairly, and to fail to appreciate just how different they are is a great way to make bad laws that not only fail to fix problems but also create entirely new ones.