How to Fix Big Tech Without Breaking It Up

(Bloomberg Opinion) -- Hal Singer makes his living as an expert witness in antitrust cases and teaching at Georgetown University’s McDonough School of Business. In recent years, he’s also become one of the handful of economists who are trying to shake up the once-staid world of antitrust theory. He’s testified before Congress, participated in a symposium held by the Federal Trade Commission, and made speeches in which he’s offered his own solution for how to reignite competition in the face of the power of Big Tech. Whether you agree with him or not, his ideas are being taken seriously in the halls of Congress, and have helped spark a debate that could have enormous consequences. What follows is a lightly edited and condensed version of a recent conversation we had about his ideas.

Joe Nocera: I wanted to do this interview because you’ve been very vocal about ideas for preventing the big technology companies — Amazon, Apple, Facebook and Google — from abusing their immense power. Before we get to that, let’s talk a little bit about the current antitrust standard: the so-called consumer welfare standard. Can you start by just explaining what it is?

Hal Singer: The essence of the consumer welfare standard is that antitrust should be motivated to do good by the consumer. So if we see conduct that doesn’t hurt consumers in the short run, then why bother to stop it? The reason the standard keeps an army of economists busy in antitrust cases is that it calls for something that can be measured empirically — namely, price or output effects — usually via statistical analysis or econometric analysis. But as it has become the holy grail, the consumer welfare standard has shrunk the ambit of antitrust to address only those harms that manifest themselves in a short-run price or output effect.

JN: I know you think the consumer welfare standard doesn’t make sense when evaluating tech companies, but what about other kinds of companies? For instance, the AT&T-Time Warner deal?

HS: That’s a tough one. Look at how it affected the Department of Justice in trying to block that deal. It forced the DOJ to put all of its eggs in the price-effect basket. The government felt if it could show that the merged entity would raise prices to rivals to a significant degree, that would get it across the finish line. There were observers like David Dayen who noticed that a bunch of potential harms flowing from discrimination were not pursued by the DOJ. I think the reason is that the agency felt this was their best chance of winning. The consumer welfare standard is lurking everywhere. It is influencing the types of cases the government brings; and it is influencing how it brings them.

JN: So why doesn’t the consumer welfare standard work when it comes to the tech companies?

HS: The potential harms do not manifest as short-run price or output effects. Here’s a way to think about it. Imagine a truck delivering goods to a grocery store. A group of people standing around the truck decide to tip it over, causing all the contents to spill out. The consumers standing around scoop up the contents for free. There is no doubt that under a very narrow interpretation of the consumer welfare standard, if we are just measuring the short term gain or loss to consumers, everybody getting the loot for free is technically better off than they would be if they had gone into the store and had to pay for it. But obviously that shouldn’t be the end of the story. The suppliers need to be compensated, the grocery store needs to put the goods on its shelves, and so on. Their needs can’t be ignored.

When Amazon clones merchandise that a cosmetic company is selling on the site, or when Google clones the reviews of a local search provider — when they engage in these acts of appropriation — it’s not that different. In the case of local search results, Google is effectively giving away something to consumers. Amazon could be lowering the price of its cosmetic clone. An economist who is tied to the consumer welfare standard would say, “How can you be against that?” And of course in the short run, there is a benefit to consumers. I can’t deny that. But if entrepreneurs watching this appropriation decide it’s not worth the effort to compete against the platform and throw in the towel, then how well off is the consumer in the long run?

JN: One of the things you’ve told me in the past is that venture capitalists are unwilling to fund companies that can’t answer the question: How are you going to deal with Facebook?

HS: What Facebook does is steal app functionality. They go around and figure out what you do outside of Facebook, and if you spend too much time outside, they have their engineers copy the functionality of an independent app and bring it into the mothership. Snapchat is the classic example. Again, defenders of the consumer welfare standard would say, “You are taking functionality that was viewed by millions, and now it is being viewed by billions. Isn’t that good?” But a survey Elizabeth Dwoskin did for the Washington Post a few years ago of Silicon Valley venture firms showed that the No. 1 reason for not funding a company was that they were nervous about the potential for appropriation by Facebook. So yes, there is a short run gain. But in the long run, consumers could be worse off because of fewer choices, and the eventual monopolization of the ancillary market by the platform. I should note that there are some social impacts as well. For instance, entrepreneurs and small companies bring certain benefits to the economy that wouldn’t otherwise be brought by larger companies.

JN: So now let’s get down to it. How would you fix the problem?

HS: I want to steal a page from the way Congress dealt with a nearly identical appropriation by the dominant platform of a different era, the cable companies of the 1980s. Congress saw that there was a series of independent networks whose ideas were appropriated by the platform, most famously the Home Shopping Network. A vertically integrated cable company decided to start its own shopping network (QVC) and then decided to give favorable treatment to QVC and unfavorable treatment to Home Shopping Network. In the 1992 Cable Act, Congress created a venue inside the Federal Communications Commission where independent networks that felt their content had been appropriated could bring a discrimination complaint. And a neutral arbitrator determined whether there had been a violation of the nondiscrimination requirement. If so, the cable operator was required to stop discriminating and pay back any lost profits to the independent network that could be attributed to the discrimination.

The antitrust laws existed in 1992; in fact, they had more teeth than they have now. But Congress still decided to create a regime that would police discrimination by vertically integrated platforms that were trying to leverage their power into the content space. Sound familiar? And they decided they would do this outside of antitrust. There was no tweaking of the antitrust law. You could still sue a cable operator under the antitrust law. This didn’t weaken the antitrust laws in any way. With respect to this kind of conduct, which is the stealing, the self-dealing, the favoritism, this became the venue. What’s more, these protections were predicated not on an econometric proof of innovation harms but a political preference. It is a legitimate political response to say we are going to create breathing room for content creators because we think that independent content creators are some of the best sources of creativity in our economy. So we are just going to create a space for them.

JN: So now let’s apply this to Amazon, Google, Apple and Facebook.

HS: There is a very easy application of this nondiscrimination regime that you can apply to Amazon, Google and Apple. (We’ll get to Facebook in a minute.) Yelp complains that Google has inserted itself as the only possible answer in the main box for local search. Google used to serve up 10 blue links with Yelp near the top, and now you get one box and Google populates it exclusively with Google’s own content. Under a nondiscrimination regime, you would create a venue, most likely inside the Federal Trade Commission, where Yelp could bring a discrimination claim before an independent fact-finder. Yelp would bear the burden of proof. And if we were to literally import the evidentiary standard from cable world, that proof would consist of three parts. First, you would have to prove that your content is similarly situated to the content that is being favored by the platform. Second, that the reason you are getting unfavorable treatment is your lack of affiliation with the platform. And third, as a result of one and two, you are materially impaired in your ability to compete effectively. The decision would be subject to appeal, of course. But to me that is how it would work. You would use the same process if a third-party seller felt discriminated against by Amazon, or an app company felt discriminated by Apple.

JN: What about Facebook?

HS: The Facebook problem is a little different. When it appropriates someone else’s functionality, it’s not someone who wants to ride on top of Facebook’s platform. It’s just some poor schmuck who operates somewhere on the web, and Facebook has decided to steal its functionality. So the fact pattern doesn’t line up for Facebook the way it does for Google, Amazon and Apple.

JN: So what’s your solution? Should we break up Facebook?

HS: I think so. I think that not doing anything is more troublesome than being overly invasive in this instance. If you have investors saying they are shying away from entrepreneurs because of the threat of appropriation by Facebook, it seems to me that is severe enough that we need to move now. I don’t love the idea of jumping straight to a structural remedy, because I think it is fairly invasive. But to me, unfortunately, I think it is the only viable option when it comes to Facebook.

JN: You’ve been talking about these ideas for a while, including discussing them with congressional staff and testifying at FTC events. Do you think that these new ideas that go beyond the consumer welfare standard are gaining ground?

HS: I do. There is certainly entrenched opposition from the platforms and their think tanks. But it is very encouraging that Senator Mark Warner and Congressman David Cicilline, among others, have accepted the idea that there is a problem, and that the current lens of antitrust is inadequate. I am fairly hopeful that something is going to happen. The fact that it is the same solution that has been implemented before on a very similar problem should give people confidence. In fact, the number of independent cable networks exploded after the protections were put in place. It really worked. And it can work again.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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