The Antitrust Case Against Facebook, Google, Amazon and Apple

01/16/18 12:07 PM EST
By Greg Ip 

Standard Oil and Co. and American Telephone and Telegraph Co. were the technological titans of their day, commanding more than 80% of their markets.

Today's tech giants are just as dominant: In the U.S., Alphabet Inc.'s Google drives 89% of internet search; 95% of young adults on the internet use a Facebook Inc. product; and Inc. now accounts for 75% of electronic book sales. Those firms that aren't monopolists are duopolists: Google and Facebook absorbed 63% of online ad spending last year; Google and Apple Inc. provide 99% of mobile phone operating systems; while Apple and Microsoft Corp. supply 95% of desktop operating systems.

A growing number of critics think these tech giants need to be broken up or regulated as Standard Oil and AT&T once were. Their alleged sins run the gamut from disseminating fake news and fostering addiction to laying waste to small towns' shopping districts. But antitrust regulators have a narrow test: Does their size leave consumers worse off?

By that standard, there isn't a clear case for going after big tech -- at least for now. They are driving down prices and rolling out new and often improved products and services every week.

That may not be true in the future: if market dominance means fewer competitors and less innovation, consumers will be worse off than if those companies had been restrained. "The impact on innovation can be the most important competitive effect" in an antitrust case, says Fiona Scott Morton, a Yale University economist who served in the Justice Department's antitrust division under Barack Obama.

Google which has spent the past eight years in the sights of European and American antitrust authorities, is hardly a price gouger. Most of its products are free to consumers and the price advertisers pay Google per click has fallen by a third the past three years. The company remains an innovation powerhouse, investing in new products such as its voice-activated assistant Google Home.

Yet Google's monopoly means some features and prices that competitors offered never made it in front of customers. Yelp Inc., which in 2004 began aggregating detailed information and user reviews of local services, such as restaurants and stores, claims Google altered its search results to hurt Yelp and help its own competing service. While Yelp survived, it has retreated from Europe, and several similar local search services have faded.

"Forty percent of Google search is local," says Luther Lowe, the company's head of public policy. "There should be hundreds of Yelps. There's not. No one is pitching investors to build a service that relies on discovery through Facebook or Google to grow, because venture capitalists think it's a poor bet."

There are key differences between today's tech giants and monopolists of previous eras. Standard Oil and AT&T used trusts, regulations and patents to keep out or co-opt competitors. They were respected but unloved. By contrast, Google and Facebook give away their main product, while Amazon undercuts traditional retailers so aggressively it may be holding down inflation. None enjoys a government-sanctioned monopoly; all invest prodigiously in new products. Alphabet plows 16% of revenue back into research and development; for Facebook it's 21% -- ratios far higher than other companies. All are among the public's most loved brands, according to polls by Morning Consult.

Yet there are also important parallels. The monopolies of old and of today were built on proprietary technology and physical networks that drove down costs while locking in customers, erecting formidable barriers to entry. Just as Standard Oil and AT&T were once critical to the nation's economic infrastructure, today's tech giants are gatekeepers to the internet economy. If they're imposing a cost, it may not be what customers pay but the products they never see.

In its youth Standard Oil was as revered for its technological and commercial brilliance as any big tech company today. John D. Rockefeller began with a single refinery in Cleveland in 1863 and over the next few decades acquired other, weaker refineries. Those that wouldn't sell, he underpriced and drove out of business. By 1904, companies controlled by Standard Oil produced 87% of refined oil output, according to Mike Scherer, a retired Harvard economist who has written extensively on antitrust.

This wasn't superficially bad for consumers. The price of kerosene, the principle refined product from oil, fell steadily as Standard Oil's market share expanded, thanks to falling crude oil prices and Standard Oil's economies of scale, bargaining power with suppliers such as railroads, and innovation, such as the Frasch-Burton process for deriving kerosene from high-sulfur oil in Ohio.

When the federal government sued to break up Standard Oil, the Supreme Court acknowledged business acumen was important to the company's early success, but concluded that was eventually supplanted by a single-minded determination to drive others out of the market.

In a 2005 paper, Mr. Scherer found that Standard Oil was indeed a prolific generator of patents in its early years, but that slowed once it achieved dominance. Around 1909 Standard's Indiana unit invented "thermal cracking" to improve gasoline refining to meet nascent demand from automobiles, but the company's head office thought the technology too dangerous and refused to commercialize it. After the Indiana unit was spun off when the company was broken up in 1911, it commercialized the technology to enormous success, Mr. Scherer wrote.

The story of AT&T is similar. It owed its early growth and dominant market position to Alexander Graham Bell's 1876 patent for the telephone. After the related patents expired in the 1890s, new exchanges sprung up in countless cities to compete.

Competition was a powerful prod to innovation: Independent companies, by installing twisted copper lines and automatic switching, forced AT&T to do the same. But AT&T, like today's tech giants, had "network effects" on its side.

"Just like people joined Facebook because everyone else was on Facebook, the biggest competitive advantage AT&T had was that it was interconnected," says Milton Mueller, a professor at the Georgia Institute of Technology who has studied the history of technology policy.

Early in the 20th century, AT&T began buying up local competitors and refusing to connect independent exchanges to its long-distance lines, arousing antitrust complaints. By the 1920s, it was allowed to become a monopoly in exchange for universal service in the communities it served. By 1939, the company carried more than 90% of calls.

Though AT&T's research unit, Bell Labs, became synonymous with groundbreaking discoveries, in telephone innovation AT&T was a laggard. To protect its own lucrative equipment business it prohibited innovative devices such as the Hush-a-Phone, which kept others from overhearing calls, and the Carterphone, which patched calls over radio airwaves, from connecting to its network.

After AT&T was broken up into separate local and long-distance companies in 1982, telecommunication innovation blossomed, spreading to digital switching, fiber optics, cellphones -- and the internet.

Just as AT&T decided what equipment could be used on the nation's telephone systems, Google's search algorithms determine who can be found on the internet. If you searched for a toaster online in the mid 2000s, Google would probably have taken you to comparison shopping sites such as Nextag. They pioneered features such as showing consumer ratings in search results, how popular a product was and how prices had changed over time, recalls Gary Reback, an antitrust lawyer who represented several competitors against Google.

But when Google launched its own comparison business, Google Shopping, those sites found themselves dropping deeper into Google's search results. They accused Google of changing its algorithm to favor its own results. The company responded that its algorithm was designed to give customers the results they want. "If consumers don't like the answer that Google Search provides, they can switch to another search engine with just one click," executive chairman Eric Schmidt told Congress in 2011.

At that same hearing Jeffrey Katz, then the chief executive of Nextag, responded, "That is like saying move to Panama if you don't like the tax rate in America. It's a fake choice because no one has Google's scope or capabilities and consumers won't, don't, and in fact can't jump."

In 2013 the U.S. Federal Trade Commission concluded that even if Google had hurt competitors, it was to serve consumers better, and declined to bring a case. Since then, comparison sites such as Nextag have largely faded.

Last year the European Commission went in the other direction and fined the company $2.9 billion and ordered it to change its search results.

The different outcomes hinge on whether reduced competition is seen as natural and benign, or deliberate and malign. In new industries, smaller players are frequently bought up or vanquished by deeper-pocketed, more-innovative rivals. Google's general counsel, Kent Walker, wrote in response to the European Commission decision that even as smaller sites have retreated, Amazon has grown to become a huge player in comparison shopping. Internet platforms have high fixed and minimal operating costs, which favors consolidation into a few deep-pocketed competitors. And the more customers a platform has, the more useful it is to each individual customer -- the "network effect."

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January 16, 2018 12:07 ET (17:07 GMT)

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