Big Tech - Regulation

A separate web page summarises the many concerns about the power and behaviour of huge technology companies such as (Alphabet-owned) Google/YouTube, Facebook/Instagram/WhatsApp, Twitter, Airbnb and Uber.

This page discusses how regulation might best tackle the problems.

By way of introduction. let us note that politicians hesitate to impose regulation on these companies because:

a) the companies are immensely powerful, and their founders are politically powerful,

b) politicians would be accused of limiting freedom of speech, and

c) internet-based applications and communications are a real and very valuable force for good, both economically and politically (in the way in which they facilitate political and social engagement).

These constraints are particularly acute in the USA. Writing in the FT in 2018, Rana Foroohar wrote that:

Facebook, Apple, Amazon, Netflix and Google — known collectively as the Faangs — are case studies in how the network effect supports dominant players and allows them to ringfence users and their data. Google’s claim that “competition is only a click away” rings hollow — if for some reason the site went down, we would all be more likely to take a coffee break and wait for it to come back online than seek out a competitor.

Another reason for the concentration of corporate power is political capture. Americans invented modern antitrust policy, and love to rail against “statist” old Europe. But a fascinating study by academics Germán Gutiérrez and Thomas Philippon shows that EU markets are, in fact, more competitive. They have lower levels of concentration, lower excess profits, and lower regulatory barriers to entry. The study points to a huge rise in US political lobbying as the key reason that levels of concentration between the two regions have diverged since the 1990s. “European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did,” it says.

Two days later, in the same paper, Paul Myers argued that:

Average Americans may think the US has the most competitive economy, but they’re looking in the rear-view mirror. Magical thinking suffuses what used to be a pretty pragmatic republic. The concentration of economic power goes hand-in-hand with the concentration of wealth and income to create an entirely new constellation of power controlling the governance of advanced, and supposedly democratic, economies. I would expect to watch icebergs float past Mar-a-Lago before I should see the FTC chief or the DOJ anti-trust chief do anything effective on economic and market concentration. The reality may be that the European Union is the last major functioning democratic government in the world today. Interesting that the Anglo-Saxon countries are in such a hurry to get away from it. Trump gets the hives when he enters EU airspace.

And even if appropriate laws are in place, the companies' huge size and international reach make it very difficult for any individual regulator to tackle them with any prospect of success, partly because their businesses are so complex and partly because their resources enable them to out-gun all but the most persistent and well-funded regulators.

There is also a common belief that we should all be grateful that so many companies provide us with so many free products. Indeed, John Newman points out that legal institutions have already begun to grant an (in his view) undeserved protected status to the suppliers of Free products. Here is his introduction to his longer paper The Myth of Free.

Myths matter. This Article is the first to confront a powerful myth that pervades modern economic, technological, and legal discourse: the Myth of Free. The prevailing view is that consumers capture massive welfare surplus from a flood of innovative new products that are offered free of charge. Economists, legal scholars, and industry stakeholders created an origin story—a myth—to explain how these products became “Free.”

But that orthodox origin story is fatally flawed. This Article formalizes, then debunks, the Myth of Free and its underlying assumptions. The Myth is riddled with internal inconsistencies, logical errors, and factual inaccuracies. In their place, this Article provides a revisionist history of Free, one that offers greater descriptive and predictive accuracy. Along the way, it solves several puzzles: Why has Free become the default online business model? Why does the age of abundance—so often predicted—always fail to materialize? And why is society nonetheless drawn to such predictions?

The task is urgent: the Myth of Free is not benign. It has misled courts into granting protected legal status to Free-product suppliers in cases ranging from contract disputes to antitrust and privacy litigation. It has also motivated policy proposals that call for eliminating market interventions—or competitive markets themselves—without adequate justification in either case. Moreover, policies designed for a post-scarcity world necessarily overlook the persistent problems attendant to scarcity, thereby creating substantial allocative inefficiencies. This Article seeks to dispel the Myth of Free before it can wreak further harm to societal welfare and the rule of law.

Could Competition Law be Brought to Bear?

Google apart, Competition law has its limitations. As noted above, the companies' services are often provided free of charge to the general public - although we do in return give them lots of our collectively valuable personal data. And they compete hard with each other to attract users, and to attract their paying customers, the advertisers. So the companies are not, at first sight, doing anything to damage consumer welfare - which is what competition authorities generally worry about. 

But regulators are beginning to assert that the FAANGS are abusing their dominant position in various ways.  Google, for instance, has been accused by the European Commission of abusing its dominant position in 'search'. and squashing potential competitors before they grow to a decent size. More detail is here. And Spotify has complained to the European Commission about the behaviour of Google.

And the German competition regulator - which tends to be a bit tougher than some others - has determined that Facebook has a dominant position in social media, and that the consent that the user gives for his/her data to be exploited is no longer voluntary. The Times' report of the decision noted that "The watchdog ruled that Facebook users effectively had no choice but to allow the network to collect an “almost unlimited amount of any type of user data” from other sites and combine it with their profiles. The cartel office gave the company a year to come up with a way of letting German users surf the wider internet without their movements being traced back to their profiles. “In view of Facebook’s superior market power, an obligatory tick on the box to agree to the company’s terms of use is not an adequate basis for such intensive data processing,” Andreas Mundt, the regulator’s president, said. “The only choice the user has is either to accept the comprehensive combination of data or to refrain from using the social network. In such a difficult situation the user’s choice cannot be referred to as voluntary consent

In the USA, Democratic presidential hopeful Elizabeth Warren argued for carving out the tech platforms and treating them as regulated utilities, as part of a wider break-up of Big Tech, arguing that this has been a model for dealing with “natural monopolies” in other industries, from electricity transmission to railways. App stores, search engines and ecommerce platforms (Amazon) would all be forced to give equal treatment to all-comers, rather than favouring in-house products and services.

Building on this, maybe the industries themselves need to be analysed in a different way? Rather than worrying about concentration in particular markets, such as search, maybe regulators should be concerned about customer lock-in - the unattractive obverse of strong network effects. And interoperability? Should we be worried, for instance, that customers are increasingly committed to one or other of the Apple and Android domains.

The other side of the argument was nicely summarised in the FT in April 2019.

... What many in both the US and Europe ignore is the negative impact of containing the growth of technology companies too early in the technological cycle. Amazon is a good example in this respect. It is a formidable company. It is jostling with Apple and Microsoft for the title of the world’s most valuable company by market capitalisation and its founder, Jeff Bezos, is the richest person on earth. Amazon now employs more than 600,000 workers worldwide and accounts for almost 50 per cent of US online sales. But viewed from another angle, Amazon looks rather less mighty: its business represents only 5 per cent of the total US retail market. While the technology companies appear to be giants, the sector as a whole is still dwarfed by legacy industries. This should be taken into account before we decide that it is time to slow down the growth of these companies.

If we want to take advantage of new technology in order to tackle rent-seeking, rein in financialisation and create more jobs, we need more capital deployed for the purpose of bringing that technology to legacy industries. And allowing Amazon some room for manoeuvre might make a real difference here. There can be significant benefits in letting tech-centric companies expand into other industries. However, the only way a large player such as Amazon will be able to do that is by using the power it has accumulated in retail as leverage to tackle activities with higher barriers to entry.

Take healthcare, for example, where Amazon has announced a joint venture with Berkshire Hathaway and JPMorgan Chase. It is easy to see that it might require the customer-driven attitude of Amazon to shake up the healthcare industry in the interest of the public. But if we weaken the company by breaking it up, the consequence could be to allow the entrenched, rent-seeking healthcare industry to breathe easier.

Indeed, before they can enter “hard” industries such as healthcare, tech companies must first accumulate power in “easy” ones. Chinese companies Tencent and Alibaba entered financial services only after they prospered in online content and retail, respectively. If they had gone straight for the banking industry, they surely would have been overcome by entrenched incumbents. The same is true of Alphabet, which diversified into mobility and autonomous vehicles only after having triumphed in online search and advertising.

Technology companies currently pose significant challenges for policymakers. But the latter must be clear-headed in finding satisfactory solutions to those issues. Their goal should be to avoid the stagnation that has afflicted so many industries over the past decade, rather than exacerbating it. Instead of trying to curb Big Tech, governments around the world should see these companies as allies and try to harness their power in order to rein in old, predatory cartels. That is the best way of kick-starting the engine of inclusive economic growth.

The government-appointed Digital Competition Expert Panel (aka the Furman Review) published its report - Unlocking Digital Competition - in March 2019. It shied away from recommending a break-up of the big US digital groups, believing that this was something for the American political process to determine and would involve costs as well as benefits for consumers. Instead it recommended that the UK should create a digital markets unit, which could sit within the Competition and Markets Authority or a sector regulator, to supervise companies deemed to have “strategic market status”. The unit would enforce a code of conduct as well as open, shared standards ant make it easier for people to move their personal data from one digital platform to another and improve general access to non-personal or anonymised data. The need to do this arose because large companies benefit from their ability to accumulate and combine user data. This creates a significant barrier to new entry in digital markets so we need data openness and enhanced interoperability to help new entrants compete.

The review also said that there was a strong case for updating merger and antitrust policy to make competition assessments more forward-looking. So far, the major platforms have been able to gobble up potential competitors unchecked by any competition authorities.   The report quotes Facebook’s purchases of WhatsApp and Instagram, and Google’s acquisitions of YouTube, Nest and DeepMind as some of the best known out of hundreds of examples. Finally, the competition authorities were said to need more powers to take interim measures in fast-moving markets, more scope to exercise judgment about potential economic harms, and a faster, better-targeted process.

The CMA published its Digital Markets Strategy later in 2019, foreshadowing the development of new tools and new remedies such as data interoperability, data mobility/portability and data openness. suggesting new rights for consumers around use of their 'consumer data', mobility of such data to new providers of tech services (similar to mobility requirements already in place in the energy and banking sectors) and interoperability between different providers of tech services. The proposals also suggest an openness to exploring recent proposals to foster or mandate providing access to anonymised data between businesses as a remedy to boost competition in some markets.

The CMA also began a market study on online platforms and digital advertising.  This was focused on the UK market but as the reach of many market players is global, the CMA will look for opportunities to work collaboratively with other competition agencies as work progresses. The CMA is interested in a number of areas including the perceived market power of digital platforms; the degree of consumer control over data; and competition in the supply of digital advertising.

Although not highlighted in its strategy,  it is worth remembering the CMA's ability to mount Market Investigations. These are hugely powerful weapons, dating back to post-war cartel-busting legislation., and they are not available to most (all?) other competition authorities. Maybe, just maybe, a Market Investigation could be used to constrain the tech giants in some way?

The EU's DG-Competition requisitioned a very thoughtful and detailed report, published in 2019:- Competition Policy for the Digital Era.

And the US Department of Justice announced in July 2019 that it would start an antitrust review into how the internet giants had accumulated market power and whether they had acted to reduce competition.  Similar inquiries were already underway in the Federal Trade Commission which shares antitrust responsibilities with the DoJ.

See also my separate web page about Big Tech 'Platforms' & Two-Sided Markets as well as three articles - on a separate web page - which discuss these issues in some detail:

Platforms or Publishers?

Google/YouTube, Facebook, Twitter etc. all claim to be mere platforms, passively hosting content that they are unwilling to assess. Their great fear, of course, is that they would open themselves up to endless and expensive litigation if they were to admit to being publishers. Active (as distinct from responsive) moderation of their content might open Facebook, for instance, to potentially massive legal liabilities. They assert that they "enforce our policies rigorously and when a violation is brought to our attention we take swift action". But they do not proactively look for violations. Their algorithms to some extent choose what their readers get to see, and the companies are financed by advertising, much like traditional media companies.

Technical Complexity

The companies claim that it would be too technically complex to tackle their content problems effectively, arguing that they cannot be expected to vet/censor everything that it posted on their sites. Here are some thoughts on this tricky issue:

Censorship and Free Speech

The right to free speech is not unlimited. No-one, it is often pointed out, has the right to shout 'FIRE" in a crowded cinema.

Equally, Facebook, YouTube, Twitter and the rest are privately owned companies. They can choose what content they allow on their sites, just as can a newspaper or TV station.

The issue came to a bit of a head in 2018 when - after considerable delay - YouTube and other channels removed material featuring the revolting conspiracy theorist Alex Jones. Twitter was even slower to act but eventually did so. It was nevertheless sadly true that social media channels had enabled him to build a huge following. By the time YouTube reacted, his videos had been viewed 15 billion times. Then, in February 2019, Facebook banned Stephen Yaxley-Lennon (aka Tommy Robinson) - the founder of 'the English Defence League' - followed in April 2019 by a wider ban of a number of British far right leaders and groups.

This issue has a good way to run before it is resolved to most people's satisfaction. but we will need to take care not to over-react to hate speech, false news and the rest. It could be that - in the long term - most of us will learn to discount or ignore it. "Sticks and stones may break my bones but words will never hurt me"? On the other hand - in the long term, we are of course all dead.

Here is a link to a 2018 blog by Mike Masnick which summarises the issues very well. He made the following points particularly strongly:

Could Customers or Advertisers Act as a Regulator?

Optimists have suggested that the companies' consumers may become a sort of regulator if they begin to desert the platforms in protest against their content or behaviour. But there is little sign of this happening, and many users are in effect locked into the products as a result of the strong network effects mentioned above. It can only add to commentators' concerns that it is well known in Silicon Valley that 'If you are not paying for it then you are the product'.

But pressure is now being applied by the companies that fund the Giants via advertisements etc. There were two particularly interesting developments in the Summer of 2017. First, Google and Facebook admitted that they could if necessary remove unpleasant content, particularly in order to ensure that it did not appear next to advertisements from its blue-chip advertisers. Second, they discovered that they could, after all, remove illegal streaming of football matches, as well as 30,000 video clips, when required to do so by a court order sought by the Premier League. So 'the Giants' can censor when necessary. It remains to be seen whether the UK or any other government will have the temerity to make similar demands to those made by large commercial interests.

And Parliament's Intelligence and Security Committee suggested in late 2018 that advertisers should boycott companies such as Facebook and Google until they showed that they were serious about tackling the 'scandal' of online terrorist material.

Internet Harm/Safety

There is already a lot of activity aimed at forcing Facebook etc. to avoid causing harm to those accessing their sites. Follow this link for much more detail.

It's early days as yet, but it will be interesting to see whether Australia's eSafety Commissioner is successful. The Office was established in 2015 with a mandate to coordinate and lead online safety efforts across government, industry and the not-for profit community. It takes a particular interest in cyber-bullying:- "If you are under 18 we can help you make a complaint, find someone to talk to and provide advice and strategies for dealing with these issues".

Taxation

The taxation of large multinational companies is discussed on international taxation web page.

See also my web page discussing the regulation of communications.

Facebook's About Turn ?

Facebook's Mark Zuckerberg - probably influenced by his new British 'Head of Global Affairs',Nick Clegg - called for more regulation of internet companies in late March 2019. But his intervention was met with scepticism.

He set out four areas he said needed to be regulated: privacy, election integrity, harmful content and data portability. His recommendations include updating rules around online political advertising, and rolling out a global framework for privacy and data protection regulation, where companies that fail to follow the rules can be sanctioned. But he failed to explain why the industry in general - or his company in particular - were unwilling to regulate themselves.

One commentator :said “They should step out of the way as they’ve lost the trust of the public to be involved in how it’s actually done.” David Cicilline, the Democratic chair of the House of Representatives’ antitrust subcommittee, wrote on Twitter: “Mark Zuckerberg doesn’t get to make the rules any more. Facebook is under criminal and civil investigation. It has shown it cannot regulate itself. Does anyone even want his advice?” Other critics argued that Mr Zuckerberg was trying to shift responsibility. “It’s designed to lock in the current business model and transfer the blame to governments,” said one. Others thought it came down to a matter of dollars and cents. Online platforms were designed to stir up strong reactions in their users. The most controversial content plays a key role in provoking the powerful responses from users that enable them to model and predict human behaviour. “The problem with hate speech is that it is fundamental to the business model of Google and Facebook."

Mr Zuckerberg's campaign was continued by Nick Clegg when he toured Europe in June 2019.  But critics were not impressed.  Damian Collins, chairman of the digital, culture, media and sport committee said the company was seeking regulation to evade wider responsibility for the problems that it was creating.  He told Today on BBC Radio 4: “What they’re saying to parliaments and governments is, ‘Well you make things illegal and we’ll obey your laws but other than that don’t expect us to exercise any judgment about how people use our services’.”

And Jim Steyer, chief executive of Common Sense Media, an American charity, said: “Facebook has a history of choosing growth over all else, without regard to the consequences, be they to democracies or the wellbeing of children. But ask any parent, teacher or anyone that works with kids every day and they will tell you, without any hesitation, that media and tech is definitely affecting the social, emotional and cognitive development of kids.”


 

Martin Stanley

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