Have Silicon Valley’s biggest companies become too powerful? This series examines monopoly and power in the tech industry — and what, if anything, can be done.
Whether through watching Google and Facebook grapple with their global control over news and information, or seeing American cities offer to hand over control of tax spending to Amazon, or even living through the week that Apple accidentally broke the English alphabet, one thing became very clear in 2017: The biggest tech companies had grown so large, and so powerful, that even their minor business decisions could come to have huge ripple effects in society at large.
But the rise of the vast, futuristic megaplatforms of Silicon Valley has been accompanied by a resurgence of interest in a very old-fashioned counterbalance: antitrust law. After decades of reliance on less stringent antitrust standards, legal scholars and activists have been pushing lawmakers to enact and enforce a muscular antitrust regime, based on ensuring less concentration and more competition in industries like airlines, agriculture, pharmaceuticals — and, yes, technology.
The question is: How can antitrust be used to check the power of tech’s biggest companies? The new movement — dubbed “hipster antitrust” by detractors — has coalesced in a large part around the Open Markets Institute, a think tank spun off from the New America Foundation after its director, Barry Lynn, ran afoul of Google CEO (and New America donor) Eric Schmidt over criticism of Google. To kick off “Antitrust Me,” our series looking at Silicon Valley through the lens of power and consolidation, Select All asked the scholars at Open Markets to put forward a series of practical proposals to limit the power of major technology companies, and increase competition in Silicon Valley and elsewhere. What follows are six ways that lawmakers could help check the overwhelming power of the tech industry, open up competition, and make tech work for everyone.
1. Stop Facebook From Spying on Its Competitors
Before Facebook bought WhatsApp, before it bought Oculus VR and the social-media app TBH, Facebook acquired a little-known Israeli company called Onavo. Onavo’s apps are designed to protect users’ privacy and security by encrypting their mobile traffic and routing it through private servers. That’s why users have downloaded the app 24 million times. But while people use Onavo to protect themselves; Facebook uses it to spy on the rest of the internet. Most of all, Facebook uses it to spy on its rivals and as an early warning system to see what to copy and what to acquire. Here’s how it works: While Onavo may protect your data from hackers and snoopers, Onavo sees everything sent through its app. And now, because Facebook owns it, Facebook sees everything, too. That means all of the information from millions of internet users about what they’re reading, doing, and downloading goes straight into the servers of one of the biggest tech giants. When Houseparty, a group-video-chat app, saw its user growth explode, Facebook knew. When TBH, a new social-media app, became especially popular among teens, Facebook likely knew — because of Onavo. And Facebook can then use this information to keep itself on top. Facebook has copied features from Snap and Houseparty, among others, and after TBH became so popular, Facebook bought it for a little under $100 million. In this way, Facebook uses Onavo to spot, copy, and buy up any competitor that seeks to create a successful social-media service. Forcing Facebook to divest of Onavo would not end its dominance over social media, but it would take away one tool that Facebook uses to rig the market, giving young companies a better shot to expand into new corners of the social-media landscape. — Kevin Carty
2. Jail Bosses Who Use Contracts to Lock Down Workers
Economists like to talk about the “job market.” Implicit in the concept of a market is the idea that both the buyer and seller are free to do a deal, or not do a deal, as they choose. But for a growing number of American workers, that basic freedom to walk away from one job to take another job is shrinking fast.
As a recent Princeton study showed, 58 percent of the largest 156 franchisors require workers to sign “noncompete” agreements that can be used to keep them from walking away from one job to take another. As Senator Elizabeth Warren said at a recent event hosted by the Open Markets Institute, these kinds of agreements contribute to stagnating wages and diminishing opportunities up and down the income ladder. But there is more at stake here than money. What is also at stake is basic human freedoms.
This isn’t true only for the folks who work in fast food — who tend to be younger and poorer. In 2015, a number of Silicon Valley companies, including Apple, Google, Intel, and Adobe agreed to pay a $415 million civil fine for agreeing with one another not to “poach” each others’ employees. In other words, these giant corporations restricted a fundamental political liberty of some of America’s top scientists and engineers — which is to go find a different job. Much the same is true for a growing number of America’s farmers, who find themselves bound by restrictive contracts to sell their chickens and milk and pigs to one corporate processor only.
It’s time that America’s law enforcers start treating labor cartels, wage-fixing, and arbitrary restrictions on movement as the crimes they are under the Sherman Act, and impose punishments that actually change behavior. For much of the 20th century, antitrust enforcers and states Attorneys General did just that. As Thurman Arnold, the Department of Justice Antitrust chief during the New Deal, explained, “[W]ithout this kind of deterrent the antitrust laws are useless,” and civil prosecutions “assume almost the appearance of unemployment relief for attorneys.”
When executives are caught interfering in labor markets, they should not only be fined, they should be jailed. — Matt Stoller
3. Stop Amazon From Selling Books — or Anything Else — Below Cost
In 2009, Amazon executives realized that another company was winning the diapers market. Diapers.com — a subsidiary of Quidsi — offered young parents a range of baby products, and soon became one of the fastest-growing online retailers in the country. When the founders declined an offer by Amazon to buy up the company, Amazon settled on another tactic to tame its rival: drive it into the ground. Amazon began slashing prices on baby products, pricing goods below the cost of production. Over the course of months, Amazon lost millions. While Quidsi initially tried to keep up, the relative newcomer lacked Amazon’s almost endless ability to absorb losses. Soon, Quidsi’s investors began to panic, and when Amazon then made another bid, the start-up’s founders conceded. Once it had Quidsi in it’s grip, Amazon first jacked prices back up and scaled back loyalty programs. Then it shut down the operation completely.
Though technically illegal, predatory pricing is a routine way for Silicon Valley firms to squash nascent competitors. Flush with cash and backed by investors who prioritize growth over profits, big tech firms can capture almost any market simply by bleeding rivals dry. This tactic is especially common online, where firms like Uber and Apple have relied on predatory pricing tactics to establish dominance and fend off rivals.
Predatory pricing is a standard trick from the monopolist’s playbook: Both Standard Oil and the A&P grocery chain priced below cost to drive out rivals. For most of the 20th century, courts recognized predatory pricing as a violation of our antitrust laws. But in the late 1980s and early 1990s, the Supreme Court — under the influence of libertarian Chicago School philosophy — made it all but impossible to win a predatory-pricing case, under the theory that predatory pricing is irrational. Yet as Amazon and other online giants have proven repeatedly, predatory pricing is, in fact, highly rational conduct. That’s why it’s time to go back to enforcing anti-predatory-pricing laws, in ways that level the playing field between massively capitalized chains and your local bookstore. — Lina Khan
4. Stop Mastercard From Robbing Main Street
The farmers, butchers, and bakers who sell at farmers’ markets in D.C., where I live, prefer cash over card. That’s not because they’re low-tech or old-fashioned. No, they prefer cash over card because the big credit-card companies are trying to rob them blind, and going cash-only or cash-preferred is the only way to fight back.
Visa and Mastercard control nearly 85 percent of credit cards and nearly 100 percent of debit cards. In addition to profiting from high interest rates levied on indebted consumers, they also make their money by charging businesses for the privilege of accepting their cards. Those fees don’t sound like much — say, 2 or 3 percent of overall transactions — but this system of private taxation falls especially hard on small and independently owned businesses. The pig farmer at my local farmers’ market is likely to pay a much higher credit-card fee than his competitors down the road at Amazon–Whole Foods, which has the power to negotiate much better rates. Not only does this raise the price of his goods; it provides a systematic advantage to the biggest businesses in our economy, effecting a wealth transfer from small, Main Street businesses toward the owners of Mastercard, Visa, and American Express, to the tune of billions of dollars (the credit-card industry earned over $42 billion from interchange fees in 2016). It also helps account for the widespread shuttering of retail storefronts across New York City, where independent businesses can no longer keep up with soaring rents.
Fortunately, there is an alternative. Other countries have much, much lower credit-card fees — because of government action. Last year, the European Union capped the rates at 0.3 percent for credit cards and 0.2 percent for debit cards. The United States could easily follow suit. Even a cap of 0.5 percent would be a drastic change from the current rates of 2 and 3 percent. That would help level the playing field between your local bodega and Walmart, and promote a diverse and vibrant economy. — Kevin Carty
5. Stop Amazon From Selling Groceries
Amazon’s purchase of Whole Foods in August surprised many. What could possibly unite a high-end grocery store and an e-commerce giant?
Amazon’s past behavior hints at the answer. The company has made slow advances on the grocery retail sector for some time. It launched its AmazonFresh grocery-delivery service for Prime members in March. It built brick-and-mortar grocery stores in Seattle. It’s selling private-label pantry items.
And by selling food online, Amazon is tackling one of the biggest white whales in e-commerce. Since the famous collapse of Webvan during the dot-com bubble, dozens of start-ups have tried to get customers to buy groceries online. The high costs of warehousing and trucking, along with shoppers’ lifelong habits, have thwarted most comers.
With its takeover of Whole Foods, Amazon bought a national network of stores and warehouses that hugely expands its existing web of warehouses, trucks, and drivers. Amazon also bought Whole Foods’ high-income customer base, made up of the same sort of people who have most readily adopted Instacart and other online grocery tools.
Amazon will argue that selling groceries online will ease the lives of many, including lower-income shoppers who face poorer food options, in inner city and exurban food “deserts.” Indeed, the company offers a discounted Prime membership for customers who use Electronic Benefit Transfer cards (an ATM card for government cash benefits) and has testified on the Hill to argue for why Supplemental Nutrition Assistance Program benefits, or food stamps, should be accepted online.
Yet the exact opposite is likely to prove true. Just as the giant corporation has used its power to engage in predatory pricing and to avoid paying sales tax to drive thousands of retail stores across America out of business, it could now do the same to many local and regional groceries. This would result both in greater concentration of power over food retailing, and even fewer physical stores. Both of those outcomes would disproportionately hurt lower-income shoppers, while lining the pockets of one of the richest men in the world.
To prevent these harms, Amazon should not only be blocked from future grocery acquisitions but its purchase of Whole Foods should be unwound. And while regulators at the Federal Trade Commission are taking care of this business, they should also ban Amazon from engaging in any price discrimination in food products, anywhere, ever. Without these safeguards, we risk handing over a huge swath of our food economy to one giant corporation, and having that giant harm our well-being in fundamental ways. — Leah Douglas
6. Stop Google From Steering You to Its Own Apps
Retailers have made and sold “store branded” items for decades. As long at the corporation selling the store brand is not a monopoly, this can be a great benefit for customers. When Starbucks stores sell Starbucks roasted beans, for instance, the home coffee brewer can buy a sack, or walk down the street and easily find another company’s roast. But when a company has dominant control over some marketplace, store brands can become a big problem. Any such dominant company will tend to use its power to steer buyers away from other company’s products to its own wares. And it may be hard or even impossible for the customer to find an alternative, or to even recognize that he is being steered.
This was at the heart of the European Commission’s decision last June to fine Google $2.7 billion for favoring its own shopping comparison engine over those run by rivals. By promoting its own shopping price-comparison service in its results — and demoting competing price-comparison services — Google “denied other companies the chance to compete on the merits and to innovate,” said EU Commissioner Margrethe Vestager upon issuing the decision. “And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.” Similarly, this thinking was at the heart of the Justice Department’s antitrust case against Microsoft back in the late 1990s, when the software giant was found to be illegally favoring its own browser over those of rivals.
But in recent years in the United States, enforcers have stepped away from such thinking. This has allowed Amazon to use its power over the book market to steer readers away from books published by independent companies like Simon & Schuster and toward books published by Amazon-owned imprints. Similarly, it has allowed Google to steer users away from products provided by companies such as Honeywell and Casio to Google-owned products such as Nest thermostats and Android smartwatches.
This conduct unfairly penalizes independent companies and lets the giant platforms tilt the playing field every day more in their favor.
The best way to preserve fair and open competition is to make sure that the internet titans do not face any such conflict of interest. In the American tradition, the traditional way to do this is simply to completely ban any network monopolist from owning businesses that place it in competition with the companies that depend on it to reach market. This is what previous generations did with railways and banks and electricity corporations. It’s what we must now do with Google, Amazon, and other online monopolists. — Lina Khan
