Consumer trust and privacy, not antitrust law, will determine regulatory consequences
July 3 2019
by Joshua Levine
On June 12, the US House Judiciary Committee held its inaugural hearing on anti-competitive practices among 'big tech.' It's the first step in a broader investigation into dominance in digital markets by Amazon, Google, Facebook and Apple. The investigation, which enjoys political backing from both sides of the aisle, is the first congressional probe into allegations that the companies are engaged in anti-competitive behavior. Leading Democratic and Republican politicians are raising the volume of their criticism against the firms, which control digital platforms and operate businesses they believe are monopolistic, lacking in transparency and, as Speaker Nancy Pelosi recently said, "dangerous to democracy." Separating the politics and gamesmanship from the hard economic and technological realities will be challenging for everyone who has a stake in the proceedings.
It is not clear how many additional hearings are in the works, what the topics will be, or who will testify. But the new scrutiny comes as the Federal Trade Commission (FTC) and the Department of Justice (DoJ) launch their own antitrust inquiries, and states consider action of their own. Tech's Big Four may not be sovereign nations, but their almost $3 trillion in combined market value exceeds many countries' gross domestic product, and their power to determine what people read, watch and buy is immense. Efforts to slow or even reverse the march of the Big Four represent the closest thing to bipartisanship in Washington today.
The 451 Take
With the US government moving ahead to trim the wings of the biggest tech companies, few specifics are clear as the first Congressional hearings begin. On the critical questions of price and competition, the dominant firms in social media, digital advertising, e-commerce, search and mobile apps – which offer many services free to end users – control technologies and operating models not well understood by Congressional members and the public. Trust and privacy, however, are far less ambiguous. Our findings suggest these latter issues, which reflect increasing suspicion and lack of confidence in the enterprises controlling vast amounts of personal data, will be at the forefront of the proceedings and will heavily influence any new regulations introduced by US lawmakers.
Trust and data privacy winds blow against big tech, according to our findings
A primary concern for regulators is that anticompetitive behavior could negatively impact consumer privacy. Our 451 Research Connected Customer, Consumer Representative, 2H 2018 study, which examines the attitudes and behavior of retail customers and digital application usage, addresses issues such as sensitivity to targeted ads. Findings there and in other studies on connected users highlighted below indicate that enterprises must strike a healthier balance between consumers' trust/privacy and their commitment to exploiting massive datasets. At risk is the long-term relationship the Big Four have successfully forged with customers.
Figure 1: Questions of trust and privacy
451 Research's Consumer Spending, May 2019
Although nearly one-half of consumers report that they lack control over their personal data, usage of the services provided by Amazon, Google, Facebook, Apple and other digital leaders continues to expand in many of their lives. Interestingly, we found that younger, digitally savvy consumers – generally those with better capabilities to adjust data privacy – rated substantially higher in the degree of control they cited. It appears that the Big Four could alleviate considerable pressure from regulators by giving consumers greater transparency around their data and enhanced ability to manage it. Under those circumstances, however, it would be necessary for these firms to realign their business models with consumers' needs, likely lowering expectations for shareholders and investors.
Figure 2: Customers don't feel in control of their personal data
451 Research's Connected Customer, Consumer Representative, 2H 2018
Economics of big data alters monopoly game
The economic environment of the tech giants is different from that of legacy industrial firms – from Standard Oil in the early 20th century to Monsanto in the agricultural market today – that depended on physical capital to build their monopolies. Prior to the emergence of the digital economy, manufacturing was the primary producer, and the scale achieved to dominate industries derived from construction of massive physical enterprises. In contrast, Amazon, Facebook and Google collect a lot of data, use that data across services to improve tools and keep growing, and stifle competitors. The network effect plays a role, too. If everyone else already uses Facebook, joining a new network seems pointless. They also compile some of this data by acquiring smaller companies.
The most important consideration of antitrust law is unfair pricing, and it's difficult to make the case that customers of these tech giants are being exploited since the target companies do not charge consumers for many of their services. Yet there is a growing consensus among economists and the public that it is misleading to call services such as Google and Facebook 'free.' Essentially, consumers are bartering with their data in exchange for a service. We agree with those who argue that it is increasingly important to ask about the non-price components of competition, like privacy. This relates to access to data and how that data can help the company obtain or maintain its dominance. What makes the antitrust case so challenging is that these components are harder to measure than simply pricing.
Like most law, antitrust is rooted in history and is vast, complex and nuanced. Simply dominating a market isn't against the law. A firm can gain a monopoly just by being a good competitor, and that's fine. Under current precedent, the DoJ and the FTC also need to show that consumers are being harmed – something that in recent decades has typically been measured by whether prices are going up and innovation is slowing.
The biggest antitrust case involving a major tech firm occurred under the Clinton Administration. From 1992 to 2001, the DoJ investigated whether Microsoft was abusing its market power by leveraging the dominant Windows operating system to push consumers to use its Internet Explorer web browser. The case fizzled out as Microsoft missed some key changes in how consumers use technology – such as the shift to mobile – in the early 2000s. Unlike the FTC and the DoJ, Congress has no enforcement power on antitrust violations. But that doesn't mean its investigation into the Big Four won't matter.
The House investigation could help build support to change antitrust laws in order to give regulators more power to go after tech monopolies, create new regulatory agencies to oversee Silicon Valley companies, or even just to give the management of these firms second thoughts about their next acquisition or strategic advance. For tech enterprises, from emerging to midmarket, any path taken by the upcoming investigations and actions by the US government could provide opportunities to capture additional market share and shape new business development and messaging for customers. Importantly, issues relating to transparency, data protection and security will be especially valuable to integrate into all strategies – things that Apple itself has successfully done.
Risks of overreach and controlling public opinion
The threat of US antitrust scrutiny for Amazon, Facebook, Google and Apple, no matter the eventual outcome, could have serious consequences for the tech industry and the overall economy. This quartet alone accounts for just over 11% of the S&P 500 and funds substantial research and development across a host of critical emerging digital technologies. New regulation will almost certainly emerge out of what will likely be a long excursion through the court system. What has some on Wall Street and in Silicon Valley worried is that too much regulation could threaten US preeminence in new technologies: if access and usage of big data is restricted too much, efforts in artificial intelligence and machine learning could be hampered. Such an outcome would also narrow the performance gap between the US and global markets – reducing the edge for the US versus China and other competitors.
For tech enterprises attempting to plan long-term capital projects, this is a real problem. Amazon CEO Jeff Bezos has noted that the company's most recent quarterly earnings report is a function of the investments made three years earlier. It's risky to make multibillion-dollar investments if there's a chance regulators or antitrust oversight may declare that business activity problematic three years down the road. Gauging the political and regulatory winds over the next few years presents yet another challenge among a host of pressing macroeconomic issues – from trade wars to the monetary policy of central banks to rising global populism – that already require deft navigational skills.
Despite the unknowns, the four biggest technology companies are ready for an epic fight over their futures. They will also be prepared for the court of public opinion, having amassed an army of lobbyists. The four firms spent a combined $55m on lobbying last year, doubling their combined spending of $27.4m in 2016, and some are spending at a higher rate so far this year. That puts them on par with long-established lobbying powerhouses like the defense, automobile and banking industries. Ultimately the most precious asset is time, and the Big Four have it on their side. If Microsoft and other antitrust episodes are any indication, the digital economy and its technologies will change enough in the next few years to render many of today's most urgent questions irrelevant.