Tech’s growing monopoly problem

When does a good monopoly become a bad one? What’s the difference between, say, Standard Oil of John D. Rockefeller’s day, the archetypal illegal monopoly, and your local airport or water company, which operate powerful monopolies with the support and encouragement of the state?

These are questions preoccupying US regulators as concerns mount over the growing size and influence of the country’s tech giants. Signals from many of Washington’s most significant lawmakers, including some close to the President suggest some form of regulation may be on the table in the near future. 

With just a handful of tech companies dominating most internet traffic, any serious regulation is likely to have a powerful impact not just on the way the world’s tech companies do business, but how we conduct our lives online. What would it look like, for example, if Alphabet were forced to break up Google search, Gmail, and YouTube?

The idea isn’t as farfetched as it sounds and it’s attracted a large amount of bipartisan support in the United States: from Elizabeth Warren, who is left of the Democratic Party to Steve Bannon, Donald Trump’s recently-exiled chief strategist.

Both sides appear to have been shocked by the 2016 election and for much the same reason: until the end of last year, it was widely assumed that tech platforms massively favoured the Democrats. 

The Democrats, who forged extensive links with the Democrat establishment in the Obama years, were surprised at the way platforms hitherto thought to be sympathetic like Facebook and Twitter were hijacked by hostile anti-Democrat interests. In 2016, 74 per cent of Silicon Valley’s US$12.3 million in congressional campaign donations was pledged to the Democrats. The two parties are linked in other ways too: between the inauguration of Barack Obama in 2009 and August 2016, 250 employees passed from Google to the White House, or vice versa leading to accusations or ‘revolving door’ croneyism. 

Warren’s beef with tech companies is that they have used their monopoly to drive out competition and to make it nearly impossible for competitors to enter the market, for example, Apple’s tendency to use its iPhone operating system, iOS to privilege its own services, like Apple Music.

Monopolies aren’t prohibited in the United States, provided they arise through legitimate means and do not use their dominant position in one market to control another. In 2001, Microsoft fell foul of the law for doing just this. It used its dominance in the PC operating system market to install crowd out competitors in the web browser market by using its operating system to favour Internet Explorer in the ‘browser wars’ of the 1990s. 

Donald Trump's former chief strategist Steve Bannon is in favour of regulating the tech industry. Photo: Getty Images

In contrast to much of the rest of the world (including New Zealand), the United States adopts a ‘consumer first’ anti-trust policy. Stemming from the thought of Robert Bork’s The Antitrust Paradox, ‘consumer first’ means that the regulators overlook enormous market concentrations provided consumers are not aversely affected by the company abusing its position to raise prices.

Republicans come at the issue from a different angle. Many on the Republican side also see the 2016 election as an anomaly and are working hard to bring the tech industry to heel while it still can. Some, like political analyst William Kristol, co-founder of the New Center bipartisan think tank, follow the Democrat position and favour a break-up of some kind. Others, however, look at America’s anti-trust laws and come to a different solution. 

Monopolies do have a certain advantage. Imagine the hassle of untangling your various accounts for services like YouTube, Gmail and messenger if Facebook or Google were broken up, not to mention the loss of synergy across different services. 

The other Republican proposal, known to be favoured by Steve Bannon, draws inspiration from the monopolies that exist for certain utilities that already exist and applying those rules to tech companies.

So how would tech as a utility actually work? One proposal is to adopt a system called  Regulated Asset Base (RAB), which regulators use to calculate the maximum income on capital.

The idea behind it is that the profits gleaned from the monopoly should not exceed those that would arise from a competitive monopoly. To implement the system, an imaginary new operator is invented, which mirrors the monopolist’s assets. This is then used to calculate the profits the new entrant would make if its returns matched its cost of capital. This is then set as the maximum amount the existing monopoly can earn. 

The Economist suggested that regulating tech in such a way could lead to profound consumer benefits. If the RAB system was accompanied by an unbundling of tech companies, it would separate their service (social, search) from the advertising business that generates nearly all their revenue. Users would be charged to use sites like Facebook and Google, but they would also be given a rebate for yielding their data to advertisers.

The magazine calculated that by setting the maximum return on capital at 12 percent, Alphabet (Google’s parent) and Facebook’s operating profits would fall by 65 percent and 81 percent respectively. The average Facebook user would pay $15 a year to use the service, but would be paid $23 for their data. A Google user would pay $37 a year, but earn $45 from advertisers. 

It’s heady stuff, but it would achieve Bannon’s goal of clipping the wings of large tech companies by emptying their coffers and potentially curtailing their political influence, whilst also returning some advertising revenue to internet users. 

With Bannon gone from the White House, however, it’s looking not certain who will harness the feeling in the senate to get the President behind the issue. Trump is reportedly still close to Peter Thiel, who advises him on technology. Thiel, an early investor in Facebook who still holds a large amount of company stock, is known to be against any tech regulation. 

The trails of big tech in Washington are only just beginning. Yesterday, representatives from Facebook, Google, and Twitter testified before Congress on how their platforms were so easily hijacked by Russia. They should be worried — their problems in Washington are just getting started.

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