Amazon, Google and Facebook are as dominant as Ma Bell once was.
Are consumers harmed?
By Greg Ip
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 17, 2018).
Standard Oil Co. and American Telephone and Telegraph Co. were
the technological titans of their day, commanding more than 80% of
their markets.
Today's tech giants are just as dominant: In the U.S., Alphabet
Inc.'s Google drives 89% of internet search; 95% of young adults on
the internet use a Facebook Inc. product; and Amazon.com Inc. now
accounts for 75% of electronic book sales. Those firms that aren't
monopolists are duopolists: Google and Facebook absorbed 63% of
online ad spending last year; Google and Apple Inc. provide 99% of
mobile phone operating systems; while Apple and Microsoft Corp.
supply 95% of desktop operating systems.
A growing number of critics think these tech giants need to be
broken up or regulated as Standard Oil and AT&T once were.
Their alleged sins run the gamut from disseminating fake news and
fostering addiction to laying waste to small towns' shopping
districts. But antitrust regulators have a narrow test: Does their
size leave consumers worse off?
By that standard, there isn't a clear case for going after big
tech -- at least for now. They are driving down prices and rolling
out new and often improved products and services every week.
That may not be true in the future: If market dominance means
fewer competitors and less innovation, consumers will be worse off
than if those companies had been restrained. "The impact on
innovation can be the most important competitive effect" in an
antitrust case, says Fiona Scott Morton, a Yale University
economist who served in the Justice Department's antitrust division
under Barack Obama.
Google which has spent the past eight years in the sights of
European and American antitrust authorities, is hardly a price
gouger. Most of its products are free to consumers and the price
advertisers pay Google per click has fallen by a third the past
three years. The company remains an innovation powerhouse,
investing in new products such as its voice-activated assistant
Google Home.
Yet Google's monopoly means some features and prices that
competitors offered never made it in front of customers. Yelp Inc.,
which in 2004 began aggregating detailed information and user
reviews of local services, such as restaurants and stores, claims
Google altered its search results to hurt Yelp and help its own
competing service. While Yelp survived, it has retreated from
Europe, and several similar local search services have faded.
"Forty percent of Google search is local," says Luther Lowe, the
company's head of public policy. "There should be hundreds of
Yelps. There's not. No one is pitching investors to build a service
that relies on discovery through Facebook or Google to grow,
because venture capitalists think it's a poor bet."
There are key differences between today's tech giants and
monopolists of previous eras. Standard Oil and AT&T used
trusts, regulations and patents to keep out or co-opt competitors.
They were respected but unloved. By contrast, Google and Facebook
give away their main product, while Amazon undercuts traditional
retailers so aggressively it may be holding down inflation. None
enjoys a government-sanctioned monopoly; all invest prodigiously in
new products. Alphabet plows 16% of revenue back into research and
development; for Facebook it's 21% -- ratios far higher than other
companies. All are among the public's most loved brands, according
to polls by Morning Consult.
Yet there are also important parallels. The monopolies of old
and of today were built on proprietary technology and physical
networks that drove down costs while locking in customers, erecting
formidable barriers to entry. Just as Standard Oil and AT&T
were once critical to the nation's economic infrastructure, today's
tech giants are gatekeepers to the internet economy. If they're
imposing a cost, it may not be what customers pay but the products
they never see.
In its youth Standard Oil was as revered for its technological
and commercial brilliance as any big tech company today. John D.
Rockefeller began with a single refinery in Cleveland in 1863 and
over the next few decades acquired other, weaker refineries. Those
that wouldn't sell, he underpriced and drove out of business. By
1904, companies controlled by Standard Oil produced 87% of refined
oil output, according to Mike Scherer, a retired Harvard economist
who has written extensively on antitrust.
This wasn't superficially bad for consumers. The price of
kerosene, the principal refined product from oil, fell steadily as
Standard Oil's market share expanded, thanks to falling crude oil
prices and Standard Oil's economies of scale, bargaining power with
suppliers such as railroads, and innovation, such as the
Frasch-Burton process for deriving kerosene from high-sulfur oil in
Ohio.
When the federal government sued to break up Standard Oil, the
Supreme Court acknowledged business acumen was important to the
company's early success, but concluded that was eventually
supplanted by a single-minded determination to drive others out of
the market.
In a 2005 paper, Mr. Scherer found that Standard Oil was indeed
a prolific generator of patents in its early years, but that slowed
once it achieved dominance. Around 1909 Standard's Indiana unit
invented "thermal cracking" to improve gasoline refining to meet
nascent demand from automobiles, but the company's head office
thought the technology too dangerous and refused to commercialize
it. After the Indiana unit was spun off when the company was broken
up in 1911, it commercialized the technology to enormous success,
Mr. Scherer wrote.
The story of AT&T is similar. It owed its early growth and
dominant market position to Alexander Graham Bell's 1876 patent for
the telephone. After the related patents expired in the 1890s, new
exchanges sprung up in countless cities to compete.
Competition was a powerful prod to innovation: Independent
companies, by installing twisted copper lines and automatic
switching, forced AT&T to do the same. But AT&T, like
today's tech giants, had "network effects" on its side.
"Just like people joined Facebook because everyone else was on
Facebook, the biggest competitive advantage AT&T had was that
it was interconnected," says Milton Mueller, a professor at the
Georgia Institute of Technology who has studied the history of
technology policy.
Early in the 20th century, AT&T began buying up local
competitors and refusing to connect independent exchanges to its
long-distance lines, arousing antitrust complaints. By the 1920s,
it was allowed to become a monopoly in exchange for universal
service in the communities it served. By 1939, the company carried
more than 90% of calls.
Though AT&T's research unit, Bell Labs, became synonymous
with groundbreaking discoveries, in telephone innovation AT&T
was a laggard. To protect its own lucrative equipment business it
prohibited innovative devices such as the Hush-a-Phone, which kept
others from overhearing calls, and the Carterphone, which patched
calls over radio airwaves, from connecting to its network.
After AT&T was broken up into separate local and
long-distance companies in 1982, telecommunication innovation
blossomed, spreading to digital switching, fiber optics, cellphones
-- and the internet.
Just as AT&T decided what equipment could be used on the
nation's telephone systems, Google's search algorithms determine
who can be found on the internet. If you searched for a toaster
online in the mid 2000s, Google would probably have taken you to
comparison shopping sites such as Nextag. They pioneered features
such as showing consumer ratings in search results, how popular a
product was and how prices had changed over time, recalls Gary
Reback, an antitrust lawyer who represented several competitors
against Google.
But when Google launched its own comparison business, Google
Shopping, those sites found themselves dropping deeper into
Google's search results. They accused Google of changing its
algorithm to favor its own results. The company responded that its
algorithm was designed to give customers the results they want. "If
consumers don't like the answer that Google Search provides, they
can switch to another search engine with just one click," Executive
Chairman Eric Schmidt told Congress in 2011.
At that same hearing Jeffrey Katz, then the chief executive of
Nextag, responded, "That is like saying move to Panama if you don't
like the tax rate in America. It's a fake choice because no one has
Google's scope or capabilities and consumers won't, don't, and in
fact can't jump."
In 2013 the U.S. Federal Trade Commission concluded that even if
Google had hurt competitors, it was to serve consumers better, and
declined to bring a case. Since then, comparison sites such as
Nextag have largely faded.
Last year the European Commission went in the other direction
and fined the company $2.9 billion and ordered it to change its
search results.
The different outcomes hinge in part on different approaches.
European regulators are more likely to see a shrinking pool of
competitors as inherently bad for both competition and consumers.
American regulators are more open to the possibility that it could
be natural and benign.
In new industries, smaller players are frequently bought up or
vanquished by deeper-pocketed, more-innovative rivals. Google's
general counsel, Kent Walker, wrote in response to the European
Commission decision that even as smaller sites have retreated,
Amazon has grown to become a huge player in comparison
shopping.
Internet platforms have high fixed and minimal operating costs,
which favors consolidation into a few deep-pocketed competitors.
And the more customers a platform has, the more useful it is to
each individual customer -- the "network effect."
But a platform that confers monopoly in one market can be
leveraged to dominate another. Facebook's existing user base
enabled it to become the world's largest photo-sharing site through
its purchase of Instagram in 2012 and the largest instant-messaging
provider through its purchase of WhatsApp in 2014. It is also
muscling into virtual reality through its acquisition of Oculus VR
in 2014 and anonymous polling with its purchase of TBH last
year.
What Facebook doesn't acquire, it copies. Snap Inc.'s Snapchat,
a fast-disappearing photo and video sharing app hugely popular with
teenagers, was widely seen as a challenger to Facebook. But in
2016, Facebook introduced its own Snapchat-like feature, Stories,
on Instagram, which now has more users and advertisers than
Snapchat. That has undercut Snap's growth and profits by reducing
the number of new users "interested in trying Snap for the first
time," says Peter Stabler, an analyst at Wells Fargo.
There's nothing wrong with copying, especially if the copy is
better than the original. Snapchat's app was originally difficult
to use, says Mr. Stabler, and "you can't discount [Facebook's]
quality of execution." Moreover, even as Facebook copies its
competitors, it continues to expand and enhance its own services
such as Pages, which 70 million businesses world-wide have used to
design their own webpages on Facebook.
Snap's shares have sunk below the price at which the company
went public last March as losses have mounted, which won't
encourage new entrants. Once a company like Google or Facebook has
critical mass, "the venture capital looks elsewhere," says Roger
McNamee of Elevation Partners, a technology-focused private-equity
firm. "There's no point taking on someone with a three or four
years head start."
Amazon hasn't yet reached the same market share as Google or
Facebook but its position is arguably even more impregnable because
it enjoys both physical and technological barriers to entry. Its
roughly 75 fulfillment centers and state-of-the art logistics
(including robots) put it closer, in time and space, to customers
than any other online retailer.
The company says size makes it possible to deliver millions of
items free of shipping charges to isolated communities with little
retail presence. Amazon makes that network available to third-party
merchants who pay a 15% commission and, typically, a $3
pick-pack-and ship-fee, says Greg Mercer, founder of Jungle Scout
Inc. which advises third-party merchants how to sell on Amazon. "We
have tons of examples of small entrepreneurial-type people who are
really good at creating new inventions but have no idea how to
distribute to the masses," he says. "They create products and
Amazon can take care of the rest."
As the dominant platform for third-party online sales, Amazon
also has access to data it can use to decide what products to sell
itself. In 2016 Capitol Forum, a news service that investigates
anticompetitive behavior, reported that when a shopper views an
Amazon private-label clothing brand, the accompanying list of items
labeled "Customers Who Bought This Item Also Bought," is also
dominated by Amazon's private-label brands. This, it says,
restricts competing sellers' access to a prime marketing space
Mr. Mercer says he doesn't see Amazon favoring its own products,
and indeed his own firm helps merchants target profitable niches on
Amazon. Nonetheless, he says many would prefer to sell through
their own sites, but with so many shoppers searching first on
Amazon, they feel they have little choice.
In the face of such accusations, the probability of regulatory
action -- for now -- looks low, largely because U.S. regulators
have a relatively high bar to clear: Do consumers suffer?
"We think consumer welfare is the right standard," Bruce
Hoffman, the FTC's acting director of the bureau of competition,
recently told a panel on antitrust law and innovation. "We have
tried other standards. They were dismal failures."
Still, Ms. Scott Morton notes, "the consumer welfare standard
covers today and tomorrow," and the potential loss of innovation is
something both the law and the courts can and have weighed in an
antitrust case. The Justice Department sued Microsoft to ensure
that an innovation, the internet browser, remained a potential
competitor to Microsoft's monopoly over the user's interface with
the personal computer.
What would remedies look like? Since Big Tech owes its network
effects to data, one often-proposed fix is to give users ownership
of their own data: the "social graph" of connections on Facebook,
or their search history on Google and Amazon. They could then take
it to a competitor.
A more drastic remedy would be to block acquisitions of
companies that might one day be a competing platform. British
regulators let Facebook buy Instagram in part because Instagram
didn't sell ads, which they argued made them different businesses.
In fact, Facebook used Instagram to engage users longer and thus
sell more ads, Ben Thompson, wrote in his technology newsletter
Stratechery. Building a network is "extremely difficult, but, once
built, nearly impregnable. The only possible antidote is another
network that draws away the one scarce resource: attention." Thus,
maintaining competition on the internet requires keeping "social
networks in separate competitive companies."
How sound are these premises? Google's and Facebook's access to
that data and network effects might seem like an impregnable
barrier, but the same appeared to be true of America Online's
membership, Yahoo's search engine and Apple's iTunes store, note
two economists, David Evans and Richard Schmalensee, in a recent
paper. All saw their dominance recede in the face of disruptive
competition. If someone launched a clearly superior search engine,
social network or online store, consumers could switch more easily
than they could telephone or oil companies a century ago. Microsoft
has long dominated desktop operating systems but has failed to
extend that dominance to internet search or to mobile operating
systems.
It's possible Microsoft might have become the dominant company
in search and mobile without the scrutiny the federal antitrust
case brought. Throughout history, entrepreneurs have often needed
the government's help to dislodge a monopolist -- and may one day
need it again.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
January 17, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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