13 March 2019

The trouble with breaking up the tech giants

By

Beware simple solutions to complicated problems. A tweet from a16z’s Benedict Evans sums it up: “The slogan ‘Break up Amazon!’ (or Google or Facebook) reminds me of ‘Brexit’ – it sounds simple until you ask, well, ‘into what?’”.

Simple slogans are, however, effective politics. It should come as no surprise then to see a chorus of politicians calling for Amazon, Google, and Facebook to be torn apart. Just this past week, we’ve seen two Democrats propose radical antitrust action.

It started with Representative David Cicilline, Chair of the House subcommittee on antitrust. He called for a Glass-Steagall-style law. In referencing the Depression-era US law that separated retail and investment banking, he proposed forcing social media companies to run their platforms entirely separately from the parts of their business that ‘sell customer data’.

The ‘into what?’ part gets a bit complicated. Unlike investment and commercial banking, Facebook and Google’s ad-funded business models can’t be straightforwardly split in two.

One glaring problem is externalities and spillovers. Improvements in the newly separate platform business (e.g. Newsfeed or Google Search) will be in part captured by the newly separate data business. This would weaken the incentive for Google or Facebook to invest in improving the service.

Elizabeth Warren’s plan is, to its credit, clearer. Her proposals to break up America’s tech giants consists of two reforms. First, she would classify tech platforms with an annual revenue of $25bn or more as ‘Platform Utilities’. In her own words:

“These companies would be prohibited from owning both the platform utility and any participants on that platform. Platform utilities would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users. Platform utilities would not be allowed to transfer or share data with third parties.”

Google would be forced to spin-off Google Search and its ad-exchange. Google wouldn’t be able to favour its own products such as Google Flights, Google Maps, and Google Shopping. When I Google “Places to eat in Westminster’ a Google Maps box won’t pop-up with a list of restaurants and reviews, instead I’ll be given a link to Yelp or TripAdvisor.

Warren also suggests restricting Amazon’s ability to sell its own-brand ‘Basics’ line. It’s worth noting two things, she doesn’t suggests a similar rule applying to Walmart or Target and in her post she confuses Amazon (big warehouses and superfast delivery) with Amazon Marketplace (third party sellers using the website).

The other plank of Warren’s plan is to undo anti-competitive mergers. Facebook would be forced to sell off Instagram and WhatsApp, Amazon would lose Whole Foods, and Google would be forced to sell Nest and Waze.

Warren, again to her credit, at least understands what she’s trying to do. Often ‘breaking up big tech’ is meant to solve fake news, support local journalism, strengthen data privacy, and stop naughty people from sharing bad content.

Warren’s concern is that Big Tech is the cause of a fall in American economic dynamism. She cites data showing a decline in the number of high-growth tech startups and argues it’s down to anti-competitive tactics from Google, Amazon and Facebook.

She argues they’re buying up the competition before they can gain a foothold and they’re using their proprietary marketplaces to undermine the competition. For instance, she says, “Amazon crushes small companies by copying the goods they sell on the Amazon Marketplace and then selling its own branded version. Google allegedly snuffed out a competing small search engine by demoting its content on its search algorithm, and it has favored its own restaurant ratings over those of Yelp.”

Yet, the link between the decline in the number of high-growth startups and the dominance of Big Tech doesn’t add up.

First, Amazon through AWS has massively reduced the cost of starting a new business by offering low-cost cloud services, while Google and Facebook have made it much easier to acquire new customers through better quality ads.

Second, the prospect of selling up to a tech giant should spur on would-be entrepreneurs to set-up competing businesses. Third, she neglects how consumers benefit when Amazon and its ilk enter a new market. Take the acquisition of Whole Foods: it led to other supermarkets in the US partnering with delivery startup Instacart or launching their own online services. Consumers also got cheaper avocados, which is nice.

If innovation is your aim then breaking up Big Tech and treating Google and Amazon as public utilities like roads, water, and railways (sewer services as Alec Stapp and Geoff Manne put it) is an extremely high-risk tactic. Regulated public utilities don’t tend to innovate, Big Tech does. Google and Amazon are America’s two biggest R&D spenders. Recent developments in driverless cars (Waymo), voice recognition (Siri, Alexa) and logistics (same day delivery) are testament to that.

Now, maybe Warren is right; Google, Apple and Amazon may have made the same investments in R&D if they were forced to split apart and modify their business model. But there’s a good chance they wouldn’t have. Google’s investments in voice recognition, maps, and Android squeeze more value out of Google’s traditional Search service. Without that incentive and with a utility regulator breathing over their shoulder, it’s easy to imagine innovation suffering.

This isn’t to say more competition in tech wouldn’t be a good thing. Instead of risking killing the goose that laid the golden egg, we should mount an aggressive assault on the barriers to entry that stifle tech entrepreneurship.

Let’s release more public datasets and create a new fair use copyright exemption for training AIs. Let’s reform the immigration system to make it easier for startups to compete with the tech giants for talent in AI and data science. Let’s make it cheaper to live in tech hubs by reforming outdated land-use regulations so people can afford to work for a startup on a lower salary in the hope of a big payoff in the long-run.

There are plenty of ways to promote tech entrepreneurship: why start by placing the world’s most innovative companies under the thumb of a utilities regulator?

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Sam Dumitriu is Research Director at The Entrepreneurs Network.