Break Up the Tech Giants? No, Just Level the Field
(Bloomberg View) -- People in the U.S., not just in the European Union, are finally getting worried about tech sector leaders' market dominance and the political power it confers. Unfortunately, the solutions gaining traction are the kind of anti-monopoly regulations that address the symptoms of the problem, not its root cause.
Some 45 percent of American adults get news from Facebook. Google's search market share in the U.S. approaches 86 percent. About 43 percent of all online retail sales in the U.S. last year went through Amazon. So no wonder people get concerned when Facebook reports that, during the U.S. presidential campaign, hundreds of fake accounts, possibly operated from Russia, bought and ran about $100,000 worth of political ads from the social media company. It's no surprise that there's an outcry about Google's treatment of free speech inside the company and, likely, in a think tank the company funds. It's natural that Amazon's Whole Foods acquisition raises alarms.
How can these benign, universally loved innovators be stopped from turning into evil, soulless corporate behemoths? Break up companies such as Facebook, Google and Amazon, some say, or at least stop them from buying up companies that allow them to consolidate their dominance. Or perhaps recognize them as utilities -- the approach advocated by Barry Lynn, head of the Open Markets program cut loose by the New America think tank after Google executive chairman Eric Schmidt complained about Lynn's work. The catch-all name for all the proposals, popularized by George Mason University law professor Joshua Wright, is "hipster antitrust."
Neither makes sense in most cases. The European Union's antitrust commissioner Margrethe Vestager has only gotten involved with the U.S. tech giants because European monopoly and state aid law provided some relatively low-hanging fruit. That doesn't mean U.S. regulation should follow the European path of least resistance. Besides, the case for increasing the regulation of some companies is better than for others.
The fundamental problem with the tech leaders is that they have, for many years, succeeded in presenting themselves as something different than they are. Amazon (minus its commercial cloud business) is a big retailer with a strong distribution network that other retailers also choose to use. Google and Facebook are media corporations because their business model, based on selling ads, puts them squarely in that sector; it doesn't matter that they don't themselves create the content they sell to advertisers or that they collect lots of behavioral data about users -- the money-for-eyeballs model remains essentially the same as for old-school media companies. Uber is a taxi firm. Airbnb is a hospitality company.
As Robert Haslehurst and Alan Lewis of L.E.K. Consulting wrote in the Harvard Business Review last year, a market is only new if the transaction that occurs in it didn't previously exist; thus, cellular communications constituted a new market when they were first offered to consumers. But Amazon, Uber, Airbnb, and even Google and Facebook don't, as a rule, offer such fundamentally new transactions. "We believe," Haslehurst and Lewis wrote, "that these businesses have not redefined industries in a fundamental way; instead they are 'old wines in new bottles.' They have more similarities than differences with traditional businesses, and should be regulated accordingly."
The Silicon Valley firms have managed to convince regulators that they are something completely new -- platform companies that enable the transfer of goods and services. European regulators have swallowed this concept whole and are trying to define what is permissible for platforms and what's not. The argument for defining the firms as utilities, as well as the calls for Facebook and Google to maintain political neutrality, also come from this idea of "platforms": If the companies are merely facilitators and marketplaces, they should treat everything and everyone using them exactly the same.
This is an approach that could, in theory, eventually lead to the breakup of Amazon into a retail company and an eBay-like online marketplace company that also offers logistics and delivery services. It has already spawned, for example, an Indian law passed last year that only allows 100 percent foreign ownership of companies that operate mainly as a marketplace, with no more than 25 percent of their sales coming from one vendor, such as the company itself. It could also limit Google's ability to offer certain services that others advertise on its "platform" -- the next step after this year's European Commission ruling that it stop prioritizing its own shopping comparison service over others.
This, however, is also an approach that will change little for consumers or for governments in countries where these U.S. behemoths operate but pay almost no taxes. Today, consumers aren't really being price-gouged by Amazon -- quite the contrary, they often prefer it to bricks-and-mortar stores because it offers lower prices. Nor do consumers suffer from Google's comparison-shopping service. They might suffer someday if the companies become more dominant and, at the same time, greedier. But there's no point in trying to fix a nonexistent problem now.
The current problem is that, under the mantle of innovation, the companies are avoiding the strenuous regulation that their more traditional rivals have to accept. The tax schemes used by Google and Amazon allow them to pay little tax in Europe by paying large intellectual property royalties to firms in offshore areas. No "legacy" retailer or media company would be allowed to pay most of its profit to a Caribbean shell company holding the rights to a distribution scheme or an ad-selling technique. It shouldn't be allowed to "tech" companies either; otherwise, the playing field is not level and older rivals have less resources to invest in new technology to compete more effectively. This is not really about antitrust, though state aid laws in Europe are the purview of competition authorities; this is about closing obvious, well-known tax loopholes.
Treating the "platforms" as they really are would even the playing field in other ways, too. If it is recognized that Facebook is a media company, it will be legally liable for its content, and it will be forced to keep better track of fraudulent anonymous usage, like U.S. political ads placed by foreign customers. A "legacy" media company always know who has bought ads, sometimes after vetting by the legal department. Using a different ad-placement technology shouldn't absolve Facebook, or Google, from this kind of responsibility. It shouldn't worry regulators how the companies are going to enforce content control, just as it doesn't worry them in the case of a traditional publisher or TV channel. The firms will just have to figure out how to do it -- and they will be free to have an overt editorial policy, as media companies do.
It would benefit vigorous competition if Uber had to submit to all the transport regulations followed by its rivals. Subjecting Airbnb to hotel regulations would put it on a more equal footing with hotel chains that use essentially the same "asset-light" approach, owning few of their properties.
It's rather late but not too late to apply existing rules to these companies. Once that happens, competitors may start catching up in markets from media to retail, from urban transportation to hospitality, and the current "platforms'" size may cease to be such an irritant.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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