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Break Up Big Tech?

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eye on the news

Break Up Big Tech?

A conversation about the future of the industry September 21, 2021
Economy, finance, and budgets
Technology and Innovation
Politics and law

Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago’s Booth School of Business and a contributing editor of City Journal, joined Allison Schrager, a senior fellow at the Manhattan Institute and contributing editor of City Journal, for a conversation about the tech industry, its effects on politics, and the possibility of reform.

Allison Schrager: The FAANGs—Facebook, Amazon, Apple, Netflix, and Google—as well as Twitter have faced rising political scrutiny, which has led to to calls to regulate them. Such calls have come both from the Left, which points to their size and potential market power, and the Right, which notes their ability to control information in a way that’s biased against conservatives. In economics, these properties are hallmarks of a monopoly—a firm with too much market power. Are these companies really monopolies? If so, is their monopoly power durable? Can we expect them to stay monopolies without government intervention to break them up?

Luigi Zingales: I am going to disappoint you by giving the typical economist’s answer: it depends. It depends on how you define monopoly, the time horizon you are considering, and which company you are talking about.

Do the FAANGs have a very large market share? The answer is yes, and not by coincidence. In this sector, there are large network externalities or big economies of scale (or both). We value Facebook and Twitter because a lot of other people are on Facebook and Twitter. Google’s value comes from its superior search engine, which gets better with use. These are markets subject to tipping—i.e., when a company starts to become dominant, it quickly takes over the entire market.

More difficult is to determine whether these companies have enough market power to be considered monopolies. That’s harder to answer, especially when it comes to a market in which companies don’t charge consumers for their services. To prove that a company is a monopoly you have to show that it delivers excessively low quality. The best paper I’ve seen on this topic shows that Facebook weakened privacy standards after Myspace disappeared. This is clear evidence of Facebook abusing its monopoly power.

Given that there are many alternative social media, where does Facebook’s market power come from? A combination of inertia and network externalities. Let me explain it with an example. My high-school friends and I are in a WhatsApp chat. In late January, when WhatsApp announced its new privacy settings, many participants (myself included) wanted to switch to Signal. Most of us did it, while a few did not (mostly for inertia). As a result, for a little while there were two parallel chats. Eventually, however, everybody went back to the original one.

Schrager: What if there were a better alternative to Signal? Would that have made a difference?

Zingales: It is unlikely, because you still would have had to convince everyone to switch platforms. Major events, like Elon Musk telling everyone to use Signal, are helpful, but often not sufficient (as in this case). This is the reason why an inferior technology like VHS was able to displace a superior one like Betamax.

Schrager: Yes, but eventually VHS gave way to DVDs, then to Blu-Ray, and then to streaming.

Zingales: Now you’re getting to the next part, which is time horizon. How long will these companies’ dominant position last? It’s a good question. If they don’t get subsidies or government intervention, eventually a better technology will come along. But the important question is: how long will “eventually” take, and how much damage will be done in between?

Schrager: Traditionally, monopolies were considered worthy of regulation because they harm consumers—specifically, they charge very high prices. But many of the services we consume from the FAANGs and Twitter are free. Are there other ways besides cost in which they pose harm?

Zingales: Again, it depends—on where and how long you look. We can distinguish between potential harm and active harm. Do these companies have the potential to do harm? Absolutely. Take Google: the way it ranks news sources and search results has a big impact on what you buy and perhaps even whom you vote for. From the case against Google in Europe, we know that when the firm started its own shopping service, it de-ranked its competitors in Google search results.

Sometimes, just the threat of changing the search algorithm is enough to cause harm. If I am a politician in a competitive district, do I really want to go after Google when Google can make my life more difficult? This isn’t just an issue in the U.S. It’s true all over the world. If I am the Sri Lankan prime minister, do I want to attack Google? I think this is going on right now; we see politicians holding back.

Schrager: It hasn’t held back Elizabeth Warren from criticizing these companies, though. She has been a very vocal opponent.

Zingales: It depends on how secure your district is. In Massachusetts, it’s hard for a Democrat to lose. But take Mike Lee, a Utah Republican who changed his mind on Google and antitrust issues—I wonder why.

Schrager: Do these companies influence elections?

Zingales: I am not saying they do, but they could. If I search for “Biden” and news about Hunter Biden comes up first, I may not vote for his father. By contrast, if the bad news about Biden only shows up on the second page of search results, I might happily vote for Biden. Do you know the jokes that all the skeletons are buried in page two of the search results, because you can be sure that nobody would find them?

Then there’s the political issue. What we saw on January 10, with Facebook and Twitter’s banning of Trump, was that a few people have a disproportionate power to block the circulation of certain ideas. I do believe that businesses have the right to choose what they diffuse. But this right is compatible with a free society only if the service is provided in a competitive way. If I am the only inn in a desert, my freedom to refuse to serve you must be restricted, because it becomes my freedom to kill you.

Finally, we, the consumers, pay the cost of advertising. If the FAANGs influence the price of advertising, this will show up in the final price of goods. There’s no evidence yet that they do, but it’s not out of the question. It’s something we should pay attention to.

Schrager: So what can be done? Do you suggest breaking the FAANGs up?

Zingales: No. I think the problem is that we treat Big Tech as one big issue, and we say we need to break them up. Rather, what we should do depends on what we want to accomplish, and what sector in the industry we’re taking about.

Let’s start with social media. I think the government should have tried to stop Facebook’s acquisition of Instagram and WhatsApp, but I am not sure that breaking them up now would make a difference in the long term. If there are big network externalities, separating Facebook from Instagram would be just a temporary measure, because eventually only one of the two will prevail.

While I wouldn’t go as far as breaking the FAANGs up, there is one thing I’d love to see. Why can’t I have software that monitors both Signal and WhatsApp and can receive and send data to both at the same time? In 2008, a company called Power Ventures did just that, but Facebook sued the hell out of it and established a principle in U.S. courts that if I give you my Facebook log-in credentials and you download data with my consent, then you are committing a federal crime and should go to jail. I think this is crazy, and it’s one of many legal issues making solutions difficult.

I also like one of Francis Fukuyama’s proposals: that we should separate the two key functions Facebook performs: sharing of information and editing of information. Facebook and Twitter allow me to share a photo with everyone who follows me. Yet, Facebook also decides whether all my followers will see the picture at the top of their feed, at the bottom, or not at all, if their feed is clogged with other posts. Facebook can also decide whether to promote my picture to lots of people I don’t know. The first function does not involve any editing; the second is editing. Furthermore, the first function has big network externalities, the second not. This distinction has two important consequences.

First, we should separate the editorial role from the sharing role. In the editorial role, where there are no network externalities, we can have competition. I can have a University of Chicago editor, and another person could have Jacobin as editor. Newspapers can redefine their role as editors. I could subscribe to the Wall Street Journal editorial-selection services: the Wall Street Journal would edit and select from the web the articles or tweets I want to read. For example, I hate it when people talk about their lives on Twitter; other people love that. There should be free competition on curating these information feeds.

By contrast, the sharing function (which benefits from network externalities) should be considered a common carrier, with the restrictions typical of a common carrier, including universal service. Everyone should be allowed to post on Facebook, unless she violates the law.

In the same way, the sharing function of Facebook should retain protection from legal liability, while the editorial function should not. Think about Reddit. You can write posts on Reddit, and Reddit doesn’t promote those posts, so Reddit should be free from editorial liability. The moment Twitter or Facebook choose what post to promote to keep users more engaged, they become editors and should be liable for content.

Schrager: You mention legal liability. Section 230 of the Communications Decency Act of 1996 grants information service providers certain immunities for content posted to their networks, or for removing content. What are your thoughts on that law? And in light of the GameStop incident, should Section 230’s protections also apply to, say, stock investing and financial advice?

Zingales: Again, we must distinguish between editing and posting. We can get into regulating posting, but it becomes burdensome. It’s a lot to say that Reddit is responsible for everything posted on its forums.

Consider a phone company. Do you know how many crimes are committed over the phone? Are phone companies responsible for those? You could wiretap every conversation, but no one would even consider that possibility. Unlike phone companies, Facebook, Twitter, and YouTube promote the content posted on their networks. Recently, I wanted to watch a YouTube video of Noam Chomsky, and I immediately got all these recommendations for this strange TV channel. When I started to investigate, I discovered that it came from Venezuela. Venezuela has a very radical, left-wing channel that broadcasts in English for the American market. YouTube promotes the channel, and makes money off promoting it, because it wants to keep viewers like me attached to their service as much as it can. And the way to keep us engaged is to give us more and more radical stuff that stimulates us more and more. The problem isn’t social media; it’s the business model, which is to get people addicted to platforms.

Schrager: Would reforming Section 230 help?

Zingales: It could, but I’ve never heard anyone at the highest level make my point. Rather than keeping the law as it is or abolishing it, we should change it. If a service is not in the business of promoting content—the editorial function—then Section 230’s protections should apply. But if I start promoting users’ content to everyone, then I shouldn’t be exempt from liability, because I’m in the business of editing, of selecting. If you profit from having Nazi videos, you should be liable for them.

Schrager: Like, if Reddit featured r/WallStreetBets, the forum whose users gravitated toward GameStop stock, more prominently . . .

Zingales: Exactly. If I held a class and someone takes the microphone and says something crazy, I should not be liable. But if I promote that video, then I should be liable.

Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images

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