The Technology Giants - 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 generally provided free of charge for the general public - although we do in return give them lots of our collectively valuable personal data. And they compete hard to attract their paying customers, the advertisers. 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.

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

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.

Watch out, too, for UK authorities' 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 say?

Here are three articles which discuss these issues in some detail:

1. James Ball

James Ball's How to cut Big Tech down to size is a useful review of the strengths and limitations of competition law, including the interesting thought that Big tech might be forced to share their data with competitors, rather like intellectual property, or even in the way that owners cannot refuse competitors access to essential facilities such as ports and bus stations. Here is an extract from his article:

Though rarely thought of this way, big data is a close analogue of intellectual property. Society has a well-established set of rules for that, and they don’t involve giving unlimited power to the property owner; instead they balance a range of competing interests, ideally in the way that best serves the overall public good. Yes, there are rewards for innovation—that is needed to provide a spur. But if someone designs a new drug that could save millions of lives, the patent they get for that innovation is time limited. Copyright eventually runs out.

As with words, inventions and ideas, data is what economists call “non-rival in consumption”—a resource which, in principle, one person or company can use without there being any of it less available for anyone else. But unlike words and ideas, the companies that own data own it forever, and it is barely regulated beyond some easily-dodged rules on privacy and security.

The patents that powered the great revolutions of the industrial past are now long expired, available for the whole world to use. We already know that big data is set to reshape sectors from health, to transport to energy and yet we currently have no plan to ensure that it can ever be put to use for general good. Instead, the firms who own big data can milk it for all it’s worth—and stop others from doing the same. ...

Then there are privacy rules—which are very important—but they are all about protecting the rights of the individual, and information held specifically on them, against the company or the state. That is an entirely different problem from ensuring that all the companies and individuals have access to the potential public good represented by the data in aggregate. And yet, as Powles explains, this really matters: “The biggest asset for the world’s biggest companies is data, and it has [virtually] no liabilities, no value at origin—but huge value once it’s hoarded.”

Big data, especially when mined by AI, is now solving all manner of practical problems that in the past might have had to await the spark of some brilliant human invention—even if it is also creating some new ones. We should approach it in the same spirit that we have shown towards human genius in the past. Its value should, in a carefully calibrated way, be shared around. This could be achieved by putting rules on how it can and (importantly) can’t be passed on, likely including time limits on its exclusive use so that the first-mover in an industry need not be the only one.

There cannot be a free for all. There must be rewards for those with the ingenuity to build valuable stores of data in the first place, and—for privacy reasons—limits on access to specific information on individual people, and checks that data can’t be de-anonymised. But beyond that, data regulation could look at making algorithms public, and finding ways of forcing the sharing of truly anonymised data after a period of years.

There is precedent for this. Academic researchers are often granted access to medical or official records like tax, but in formats that safeguard the anonymity of the individuals involved. There is no reason in principle why this approach cannot be extended to data that is collected by big tech as opposed to the state. Indeed, there are already some examples in the private sector for regulated data sharing to improve competition. UK banks must share data to enable personal finance apps, and to make moving current accounts easy (without this, you’d have to transfer all direct debits manually). A first step in regulating big tech could be doing this with our social media data, and our online presence—making it transferable by law.

2. Douglas Heaven

Writing in the New Scientist, Douglas Heaven argued that ...

... the Tech Giant “monster looks unstoppable. Eric Schmidt, former CEO of Google’s parent company Alphabet, has said that the real threat to the company was the person working on the next big thing in a garage somewhere. But that’s become just a fairy tale, says [KCL’s Martin] Moore. “When you now have to invest upwards of £300-400 million in server farms to make your system work, it’s very hard to see anybody but the biggest people competing.” And the established giants are streets ahead at collecting and analysing the data central to their business models. If they see anything threatening it, they just copy it – or buy it.

Take Waze. In 2006, Israeli coder Ehud Shabtai launched this app as a community project to let drivers share traffic information, for example about roadworks or an accident. By 2013, 50 million people were using it around the world, so Google bought it. Similarly, Facebook bought photo-sharing app Instagram and messaging service WhatsApp. When Twitter became a competitor, Facebook made its newsfeed more Twitter-like. And when picture-messaging app Snapchat took off, Facebook added some of its popular features to its own service – so Snapchat is struggling. “Any new competitor has a real mountain to climb,” says Moore.

Sometimes this means better results for consumers. Waze’s maps, for instance, now benefit from Google’s unrivalled location data, and Waze’s alerts pop up in Google Maps. But this market-narrowing behaviour has also caught the attention of perhaps the most public face of techlash, Margrethe Vestager, the European Union’s antitrust commissioner. In July 2017, Vestager fined Google a record €2.4 billion abusing its dominance in search to promote its online shopping business. She has also ruled that Amazon’s EU tax arrangements are illegal, ordering it to pay back €250 million. Not content with that, European regulators are making noises about using antitrust laws to break up big tech companies – as are US politicians following the recent controversies about unregulated social media skewing elections.

But is that sensible? “Antitrust law is a big tool, but it’s a blunt tool,” says Moore. It was first used in the US in the late 19th century to loosen the grip of large industrial monopolies such as the Standard Oil Company and keep consumer prices low. Even just a decade or so ago, Microsoft was forced by the EU to stop bundling its Internet Explorer browser and other proprietary software with Windows, which the EU viewed as abuse of its near-monopoly of computer operating systems.

This move, ironically, gave Google and its Chrome browser its big break. The problem now is not just that the tech giants give their best products away for free, but that they are also less easily cut down to size. Android phones alongside Google Maps, Chrome, Gmail and YouTube draw on a common pool of our data. Divorce any of those services from that source and they no longer work so well, while the central data hoard itself isn’t obviously divisible. Ditto Facebook. Amazon, meanwhile, is essentially a logistics company with a vast shop window. Forcing it to stop selling certain types of product is like telling supermarkets they can sell fruit but not vegetables, says Benedict Evans, a technology analyst at venture capitalist firm Andreessen Horowitz in San Francisco."

3. Orrin Hatch

in his speech 'Antitrust in the Tech Sector' Senator Orrin Hatch argued that it is a mistake to ask competition authorities to take on extra regulatory duties which have little to do with the effectiveness of competition. See also item 14 here.

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.

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.

 

Martin Stanley

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