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Don’t Break Up Big Tech

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Don’t Break Up Big Tech

The monopolistic power of today’s Internet companies is overstated. July 30, 2020
Economy, finance, and budgets
Technology and Innovation

The chief executives of Amazon, Apple, Facebook, and Google (part of the group, along with Netflix, known as the FANGs) were questioned this week by the House Judiciary Antitrust Subcommittee on the question of the companies’ size and influence. Reining in big tech may not seem like the most pressing issue facing the U.S. economy, but a movement has been building among high-profile journalists, lawyers, activists, some economists, and President Trump to do something about it. These critics maintain, variously, that the firms are monopolies that abuse their market position by exploiting customers’ personal data and crush competition. Some argue that the FANGs don’t do enough to police controversial speech that feeds conspiracy theories and disseminates false narratives; others believe that the tech giants already have entirely too much power to do precisely that.

Even if one agreed with any of these particular criticisms, antitrust action may do more harm than good in addressing them. Monopolies usually arise because barriers keep other firms from competing. Perhaps a large fixed cost, like building a power grid, keeps others from entering the industry, or extensive regulations make entering the business unprofitable. Tech monopolies retain their position through the size of their networks—social media is only useful if everyone uses it—and the FANGs appear to have a lock on their networks. Google accounts for 73 percent of the search ad market because so many people use its products. Facebook, Instagram, WhatsApp, and Messenger together boast 2.2 billion active users. Apple and Amazon are where people many people go to buy apps and goods. Amazon, before Covid-19, accounted for half of ecommerce and 5 percent of all retail sales domestically. The FANGs also dominate cloud technology. Amazon holds nearly half of global public cloud services. Critics argue that largeness not only shuts out competition but also captures data, which confers an unfair advantage because tech firms can use that data to make their products better and more useful to advertisers.

Traditionally, economists worried about monopolies because when a single firm dominates a market, it can abuse workers and overcharge its customers. But today’s monopolies often provide their services for very little money, or even for free. Amazon is associated with downward price pressure for all kinds of goods. In the past, the case for antitrust enforcement required the demonstration of consumer harm, specifically consumers paying too much because of lack of competition. But breaking up big tech will require consumers to pay more.

Critics counter by arguing that Google, Facebook, and Amazon are much more expensive than they seem because we’re “paying” for their services by giving them our data. But the personal consumption, search, and viewing data of any individual is virtually worthless; it becomes valuable when aggregated among many millions of users. Even if you got paid for your individual data, it is probably worth less than the value of using Google Maps.

The primary harm that FANG critics point to is the lack of competition. Competition is important, as it encourages innovation and entrepreneurship. And indeed, the number of IPOs has been declining for years, though few can argue Silicon Valley does not innovate or encourage entrepreneurship. Innovation frequently comes from smaller startups that get acquired by large firms, a system of R&D not necessarily better or worse than small firms growing into large companies organically. It may even be the optimal method because success in a technological global economy requires scaling up and gaining access to many customers quickly. Economist Jean Tirole argues that multiple products means more data, which helps tech firms innovate and offer more competitive products. Big firms are better able to deliver and scale new innovation. Jeff Bezos and Tim Cook argue, for instance, that their marketplaces allow small vendors to reach more customers than in the days of brick-and-mortar stores and permit specialized stores or producers to reach broad distribution instantly.

Large, market-dominating giants are not unique to technology. Economists have estimated that large firms dominate most industries. These firms tend to be more productive, pay their employees more, and offer better products. They also squeeze out smaller, less efficient players. It’s not clear whether this is a market failing or just a structural change in the economy, where technology offers better returns to firms that can optimize and compete globally. More than ever, dominating the domestic market is less meaningful: Mark Zuckerberg argues that shrinking Facebook will give an advantage only to China.

Proposals to cut the FANGs down to size echo traditional antitrust reactions from an economy that no longer exists. These include breaking up big tech into smaller components, unwinding mergers, or even regulating the firms like public utilities to reduce their profits. But breaking up the FANGs will not change the structure of the economy; it will only put U.S. companies at a disadvantage to their foreign rivals. Nor will breaking up big tech eliminate Internet conspiracy theories or quack medical advice. New platforms create more places for “toxic” ideas to grow and find an audience, and they’re harder to monitor.

There is certainly scope for regulation. For example, Apple and Amazon are accused of featuring their products more prominently, putting smaller retailers at a disadvantage. Google allegedly privileges its own sites in searches. These abuses can be regulated, but regulation should be implemented carefully; when Europe put restrictions on data usage, it only made it harder for small tech firms to compete.

We should be grateful for the FANGs. Throughout the Covid-19 pandemic, they provided a lifeline—Amazon delivered goods, social media and search helped us feel connected, and streaming media entertained us. The size and scope of these firms meant that we could move our lives online in ways that were unimaginable even ten years ago. And the breakout star of the pandemic suggests that competition is not dead: Zoom prevailed over more established technology companies like Skype, Gchat, or Microsoft Teams to emerge as the critical technology that made work and even social events possible.

The Zoom story demonstrates that a large network is not a durable market advantage the way that a power grid is. Users are fickle; it’s not hard to find another search engine, social media platform, or video chat interface if a better one is available. If a firm fails to innovate and offer a superior product, the market will eventually shrink it. A few years ago, everyone, especially Europeans, worried that Microsoft had too much monopoly power. Despite many lawsuits, eventually it was the market, or better products from competitors, that reduced the feared reach of Bill Gates. Facebook is already dwindling. Young people don’t use it. Ever since data-usage scandals emerged, I and many of my “friends” log in less frequently. As people post less content, they use the platform less, and the “network effect” diminishes. Facebook’s other products will experience the same fate as users age and new ones avoid their parents’ network.

Even Amazon’s future is not assured. Just 20 years ago, it was unthinkable that any retailer could displace Walmart, which was criticized as monopolistic. Walmart still brings in more revenue than Amazon, but no one today would characterize it as a monopoly. Amazon’s share of the e-commerce market is much larger and growing, but there is no guarantee that the next generation will be dependent on it to the same degree.

Market concentration poses risks, and more can be done to encourage competition in terms of product placement and search results. Fewer firms leave our economy more dependent, less diversified, and more vulnerable. But breaking up big tech is an old solution to an old problem. In a new economy, we need new forms of regulation—and we should proceed with caution.

Photo by Mandel Ngan-Pool/Getty Images

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