Is Tech's Antitrust Reckoning Really A Possibility This Time?

Their reasoning and philosophies may be different, but members of Congress appear to agree that the Big Four of tech - Apple, Amazon, Facebook and Google - have too much power. 

US history suggests that when their is bipartisan agreement - and the potential of a new President inclined to agree - action is taken. JL

Christopher Mims reports in the Wall Street Journal:

Agencies haven’t blocked a single one of more than 500 acquisitions made by Apple, Amazon, Facebook and Google since 1998. These four companies possess unprecedented market values and dominant positions in industries ranging from digital advertising and app distribution to online retail and mobile computing. If they are already so complex that it is prohibitively difficult to untangle them, what happens if they continue to grow unchecked for another decade? “Too complex to break up” is, like “too big to fail,” an argument in favor of doing what these companies want to avoid.

Lawmakers this week proposed breaking up Big Tech by reviving aggressive, turn-of-the-last-century-style antitrust laws and enforcement measures. Amazon, AMZN -1.98% Facebook, FB -0.30% Google and Apple, they argued, all have developed monopoly power that they use to stamp out competition and stifle innovation.

Days before, Facebook Inc. produced its own document contending that breaking it up would be a “nonstarter” for a number of reasons, including that the company’s constituent parts are already too complicated and interconnected for any of them—Instagram, WhatsApp, its ad business—to be spun off as individual companies or walled off as separate divisions.

“After many years of hard and costly work, Instagram and WhatsApp are now integrated into the same bespoke infrastructure that Facebook built from the ground up,” the company says in its report.

The House Antitrust Subcommittee report concedes Facebook’s argument that a breakup of any Big Tech company is unlikely unless Congress passes new laws. For concerned lawmakers, this only heightens the urgency to figure out how to deal with Silicon Valley’s clout.

For those who favor curbs on these companies, one question looms. These four companies already possess unprecedented market values and dominant positions in industries ranging from digital advertising and app distribution to online retail and mobile computing. If they are already so complex that it is prohibitively difficult to untangle them, what happens if they continue to grow unchecked for another decade? Collectively, these companies plan to expand into health care, cryptocurrency, brain computing, space-based telecommunications and countless other areas.

In the 2008-09 financial crisis, some argued that any bank too big to fail is, by extension, too big to be allowed to exist. As the tech giants become ever broader in the businesses they enter, and deeper in their vertical integration, many economists and activists are coming to a similar conclusion: “Too complex to break up” is, like “too big to fail,” an argument in favor of doing precisely what these companies want to avoid.

There certainly are complications. When Facebook sought to increase user engagement on Instagram, one of the company’s first steps was to port over the same algorithms that power the Facebook News Feed. In fact, Facebook says it spent the past year further integrating WhatsApp and Instagram, even rebranding them “from Facebook.” These certainly feel like defensive measures against antitrust attempts to break up the company.

Maëlle Gavet—former chief executive of Russia’s largest e-commerce site, former vice president of operations at the Priceline Group and author of a book about Big Tech’s current problems and how to fix them—says that from a technical perspective, splitting off Instagram and WhatsApp would be labor-intensive but doable. As newly independent companies, they would have to rebuild their messaging and advertising systems, and also move to a different cloud-service provider, which would degrade user experience in the short term. But such a “demerger” could be completed in a year or two, she estimates.

While Alphabet Inc.’s GOOG 0.89% Google hasn’t voiced its own “too-complex” defense, it has also deeply integrated its past acquisitions, from ad giant DoubleClick and streaming colossus YouTube to the world’s most popular mobile operating system, Android.

Splitting off any of these would be just as complicated, and could result in the same short-term problems, says Ms. Gavet. “It does not mean we should not do it,” she says. “It just means we should be ready for the pain it will cause” both users and advertisers.

“Americans simply don’t want Congress to break Google’s products or harm the free services they use every day,” the company wrote in response to the House report. “The goal of antitrust law is to protect consumers, not help commercial rivals.”

With Apple Inc., the “fault lines”—as the House report calls the seams between various potentially separable businesses—are blurrier. Much of the company’s expansion has come from growth fueled by early-stage technology acquisitions. Nevertheless, the House report was critical of Apple’s habit of operating a dominant retail platform and simultaneously competing with its vendors.

In the App Store, Apple has prioritized the company’s own apps in search. (Apple says its own tests do not support this assertion.) Apple also takes a 30% fee from transactions conducted within the third-party apps it distributes, leading many companies to attempt to work around Apple’s rules while asserting the company has become a monopolistic gatekeeper to hundreds of millions of consumers.

Apple said in a written statement: “Our company does not have a dominant market share in any category where we do business… Last year in the United States alone, the App Store facilitated $138 billion in commerce with over 85% of that amount accruing solely to third-party developers. Apple’s commission rates are firmly in the mainstream of those charged by other app stores and gaming marketplaces.”

Thomas Philippon, an economist and professor of finance at New York University’s Stern School of Business who specializes in monopolies and regulation, cautions against treating Big Tech as a monolith. Even if some of the same principles can be applied to all of these companies—the House report proposes, for example, making it a universal rule that companies can’t promote their own goods on dominant platforms they own—what that means for each will necessarily vary. Splitting the App Store from Apple would be absurd, says Ms. Gavet, but it’s not clear what other regulation could curb its power.

For Amazon.com Inc., one issue is the company’s marketplace, on which some of the company’s own employees have said Amazon has used data on sales from vendors to launch competing products. (Amazon sent a letter to the House subcommittee on Oct. 4 saying that an internal investigation found no instances of its employees doing this.) Amazon has also prioritized its own products in its search engine.

Amazon might require entirely new thinking about what consumer harm means, says Ms. Gavet. While Amazon doesn’t have a dominant market share in any one area other than e-commerce, its offerings are so broad, from Alexa, Ring and Eero to Whole Foods, Amazon Logistics, Amazon Web Services and its enormously popular Prime membership services, that its ability to gather data on Americans has become comprehensive. “We intuitively feel this is a problem,” she adds, “but how do you manage a company like that from an antitrust perspective?”

In a lengthy rebuttal to the House report, Amazon called its suggestions “fringe notions” born of “regulatory spitballing.” The company went on to highlight familiar talking points, such as that Amazon commands less than 1% of global retail and 4% of retail in the U.S., numbers that can be derived only from very generous definitions of the markets in which Amazon competes. The company concluded that suggestions in the report would harm both sellers and consumers, leading to higher prices and less selection.

The argument that Facebook or any other tech giant is too complex to break up is as old as the first antitrust case, says Dr. Philippon. AT&T Inc. made the same argument many times when the government sought to break it up in the 1970s, he adds.

Regardless, opponents of Big Tech might have to wait for an act of Congress for any of these scenarios to play out. The next-best check on their power would be to approach the companies’ future acquisitions warily, says Denise Hearn, a senior fellow at the American Economic Liberties Project, a nonprofit opposed to concentrated corporate power.

‘We prefer a targeted approach, the scalpel of antitrust, rather than the chainsaw of regulation.’

— Rep. Ken Buck (R., Colo.)

“I wish regulators would be better about anticipating potential competitive threats,” she adds. In evaluating Facebook’s willingness to pay $19 billion for WhatsApp in 2014—at the time the largest-ever acquisition of a venture-backed company—she argues regulators should have asked why, exactly, Facebook was so eager to pay more than 10 times what WhatsApp had been valued at only a year before.

One answer has become evident since Facebook bought WhatsApp and used it to pilot mobile banking products in India, where the service has 400 million users. Facebook apparently viewed WhatsApp as a blank slate with which the company could expand laterally into markets completely unrelated to its core business, and then, per its usual playbook, find ways to dominate that industry. This is the same company that is also still planning to launch its own currency, expand its lead in virtual reality, and create a brain-computer interface.

The House report says that in the future, any acquisition by Big Tech should be viewed, by default, as an attempt to crush competition or gain unfair advantage. The burden to prove otherwise would then fall to the companies themselves.

This flies in the face of 50 years of antitrust enforcement. Agencies haven’t blocked a single one of more than 500 acquisitions made by Apple, Amazon, Facebook and Google since 1998, notes the House report. Since the 1970s, a steady erosion of antitrust laws and enforcement has taken place in the U.S. in the name of increasing economic dynamism, says Ms. Hearn.

From the perspective of startups, making it more difficult to become acquired could have a chilling effect on their formation, says Iain Murray, a senior fellow at the Competitive Enterprise Institute, a libertarian think tank. “Saying the only route to cashing in is to lead your company to IPO will destroy dreams and lead to a less innovative culture,” he adds.

“We are concerned that sweeping changes could lead to overregulation and carry unintended consequences for the entire economy,” wrote Rep. Ken Buck (R., Colo.), a member of the House subcommittee, in a separate report intended to complement the one written primarily by the committee’s Democratic majority. “We prefer a targeted approach, the scalpel of antitrust, rather than the chainsaw of regulation,” he adds.

Despite these misgivings, on the whole, members of the committee showed a rare bipartisan accord in concluding that Big Tech has too much power. We may be at a tipping point: If these four companies, collectively valued at more than $5 trillion, really are too complex to break up or regulate without new or revived legislation, perhaps members of Congress might at last be ready to deliver it.