Trust-Busting in the Internet Age
 
Over the past 120 years, trust-busting regulators have disrupted vast monopolies enjoyed by the likes of Standard Oil, IBM, and AT&T.  And now, they appear poised to roll-out a comparable offensive designed for the Internet age.

FACEBOOK, AMAZON, Apple, Google, and Netflix are likely to face aggressive trust-busting enforcement, especially if Donald Trump serves two terms.

During the Obama years the largest Silicon Valley firms carefully courted the people in the White House, even as their down-ballot allies were decimated.  Today, the “Internet Robber Barons” have dramatically fewer powerful friends left in Washington or most of the state capitals.  Their best friends in Congress are in the minority.  Friendly regulators are being rapidly replaced by those who have little reason to give them the “benefit of the doubt.”  And, with many vacancies to be filled, the judiciary is taking on a less friendly demeanor as each day passes. 

Outside the United States, the regulatory environment has been less-than-friendly for some time.  On June 27, 2017 the EU fined Google $2.7 billion for alleged monopolistic or unfair trade practices. Google has appealed and is now preparing its defense.

The EU’s case asserts, among other things, that Google unfairly exploits its dominance in search engines and smartphone operating systems to restrict competition in shopping services, ad placement services, and smartphone app store markets.

Furthermore, today’s monopolies are not just pushing hard against the traditional metrics used by trust-busters, but they are building new 21st century “info monopolies” that regulators are almost certain to challenge.  According to experts at the Boston Consulting Group, “the coming battle in antitrust will not be about controlling markets in the traditional sense. It will be about the battle for control over consumer information. The tech titans are currently in a race to see which of them can build a better digital replica of their consumers, which means finding a way not just to collect user data but also to make it harder for competitors to do so. Tomorrow’s monopolies won’t be able to be measured just by how much they sell us.  They’ll be based on how much they know about us and how much better they can predict our behavior than competitors.”

The new battle is for control of the digital replica of every individual.  Google, Facebook, Amazon, Apple and other such “digital titans” are already battling for dominance in this realm, fighting over who possesses a more complete digital replica of the most individuals. As this battle intensifies, even the titans themselves may not have the necessary metrics to accurately gauge their relative dominance. And antitrust enforcers are a long way from being equipped to guard against its potential anti-competitive effects. Yet this is where the digital world is taking us.

When Google developed its search engine, it probably never thought that it would start a journey toward building digital replicas for individuals. Yet, every search a consumer conducts offers select facets of his persona to Google. Similarly, every movie we watch through Netflix, every question we ask Alexa or Siri, and every interaction we have with our friends on Facebook imparts different slices of our persona, each contributing to a full digital replica of ourselves built by a digital titan. It is not surprising that these titans are trying everything they can think of to capture different facets of our personas. This in part explains many of their recent forays outside of traditional tech services into domains such as automobiles and health care.  A car can provide a treasure trove of information about our behavior. A digital titan such as Amazon is interested in how we interact with a whole host of appliances and other objects in our homes through Alexa.

Historically, many firms have had deep knowledge about only specific facets of an individual’s life. For example, financial institutions knew the financial lives of their customers; retailers accumulated knowledge about their customers’ buying habits; and even libraries had information on users’ reading habits. What they lacked, however, was a composite knowledge about individuals that came through the pooling of such information. Since competition was sector-by-sector, firms did not have the incentive to pool such information. Moreover, pooling disparate information was an onerous task, and no firm had the desire to expend resources on such an effort. In other words, the analog versions of digital replicas were only partial pictures of individuals possessed by different market participants.

But now, the arrival of the digital age has changed this picture completely.

Digital titans like Google, Amazon, and Facebook now recognize that having a complete digital replica is not only desirable but also feasible. It is desirable because of enormous cross-selling and cross-advertising opportunities that will accrue for the firm that gets there ahead of others. And it is becoming feasible because of how digitization has enveloped our lives, how we routinely leave digital traces as we interact in the digital world, and through technologies, such as APIs, that are making it easier for companies to share or access different slices of information that they possess.

If access to high-quality data on customer preferences is what companies are seeking, the ability to collect, connect, and integrate data from various sources will become the new competitive barrier. This barrier will restrict other competitors from gaining access to and control over individual digital replicas. Such new-age monopolies may not be visible through traditional industry concentration measures, but they will wield tremendous influence over consumers. Their allure will be their ability to provide unprecedented personalization based on the information they hold. Yet with such personalization customers may be restricted to see only what the provider wants them to see.

Monopolies in traditional markets are easy to detect. But a monopoly in who gets access to how individuals think, behave, and make day-to-day decisions is not. Individuals getting lured into providing monopoly access to their digital replicas because of the convenience of personalized services may never realize that their choices are being made not by them but by their providers.

In sum, data acquisition for digital replicas can manifest itself in many forms. These quests for data may pose major challenges for regulatory authorities keen on maintaining a well-functioning market system. As digital titans expand their reach and ownership of data across multiple domains, they may create a world where the atomistic competition so beloved by economists may become impossible.

Regardless of the more complex dynamics of this new environment, it’s already clear that Google’s anti-competitive use of its monopoly power is real and actionable. As a result, the European Union is still conducting serious antitrust investigations into Google’s abuse of its monopoly power based on at least three lines of reasoning.

For one, Google uses its monopoly position in internet search markets to systematically favor its own products in its search results. People assume that Google’s search service uses an objective algorithm that gives them the most relevant responses to their search inquiries. What really happens is that Google shows its own products in the most prominent positions on the screen in order to artificially divert traffic from rival services to Google’s own.  As former Google designer Tristan Harris describes it, “if you control the menu, you control the choices.”

Second, Google uses its monopoly position in mobile operating systems (Android is dominant worldwide) to preserve and strengthen its dominance in general internet search and over consumer data collection in three ways:

1. Forcing manufacturers to pre-install Google Search and Google’s Chrome browser and set Google Search as the default search service on their devices as a condition to licensing Google’s proprietary apps;

2. Blocking manufacturers from selling mobile devices that use competing operating systems that are based on Android’s supposedly “open source” code (like Amazon’s Kindle Fire); and

3. Giving financial incentives to manufacturers and mobile network operators on condition that they exclusively pre-install Google Search on their devices (a form of paid prioritization).

Google uses these tactics to ‘control the menu’ on the vast majority of the world’s mobile devices like Google controls the menu on its search products themselves.
And, the third, tactic Google uses is its dominant position in internet advertising to favor its own search and advertising services. A substantial portion of Google’s revenue from search advertising comes from a limited number of third-parties with whom Google has exclusive deals. For a decade, these deals required third-parties to:

- Refuse to source search ads from Google’s competitors,

- Take a minimum number of ads from Google and reserve premium space for Google search ads, and

- Obtain approval from Google before making any changes to the display of competing search ads.

In the US, a Federal Trade Commission staff report found that Google intentionally engaged in discriminatory conduct that has strengthened its monopoly power and caused “real harm to consumers and to innovation” that “will have lasting negative effects on consumer welfare.” But, in spite of that finding, the U.S. closed its investigation of Google after giving it little more than a slap on the wrist.

In its investigative report of the closed FTC investigation, the Wall Street Journal noted that an antitrust lawsuit against Google would have pitted the Obama administration against one of its closest corporate allies, who “was the second-largest corporate source of campaign donations to President Barack Obama’s re-election effort.” This awkward situation could explain why the Obama administration gave Google a corporate pass, but that’s not the only possibility.

Google’s practice of censoring ideas and suppressing viewpoints that differ from their viewpoint,  offers an equally powerful rationale for the Google “boosterism” by both the Obama administration, and the Democratic Party generally, during the Obama years.  Though the Federal Trade Commission’s findings focused on commercial speech, overwhelming evidence exists that Google manipulates its search results for ideological reasons as well; that is, to suppress “nonpolitically correct” thought and support progressive causes. This is likely only the tip of the iceberg.

Eric Schmidt, Google’s Chairman, openly admits that search engines can “detect malicious, misleading and incorrect information [as defined by Google] and essentially have you not see it.… just take it off the page… Put it somewhere else. Make it harder to find.”  For the Obama administration, prosecuting Google would have been akin to biting the hand that feeds them.

Moreover, during the Obama years, politicians on both sides of the aisle were complicit in ignoring the competitive and consumer harms that Google’s monopoly abuses caused, let alone the threat Google posed to American ideals and political candidates it does not favor.

In fact, researchers have shown that Google can use its search results to influence voter behavior and, at least in theory, determine the outcome of political elections. The results of five double-blind, randomized controlled experiments published in a Proceedings of the National Academy of Sciences research paper, demonstrated that “biased search rankings can shift the voting preferences of undecided voters by 20 percent or more” with voters showing “no awareness of the manipulation.”  The paper’s results suggest that a dominant search engine, like Google’s, “has the power to influence the results of a substantial number of elections with impunity.”

Furthermore, Google’s power to influence the media goes well beyond its search engine.  Google’s DoubleClick service dominates the ad server market.  DoubleClick serves ads to 75 percent of all websites that use ad servers. Google serves ads to the vast majority of digital newspaper and local television websites through relationships with entities like the Local Media Consortium, Gannett, and the New York Times.  Because newspapers rely heavily on advertising revenue, Google’s control over digital advertising gives Google control over journalism’s primary revenue stream.  As Gannet, the publisher of USA Today and scores of other newspapers around the globe, noted in its 2016 Annual Report, its local advertising service could be adversely affected by “any new developments or rumors of developments regarding Google’s business practices that affect the local online advertising industry.”
 
This is not a new concern.  Way back in 1999, the founders of DoubleClick recognized the danger of assembling numerous publications into a single advertising network ? that it could become more powerful than the media and ad agencies for whom it works. They dismissed the problem by asserting that they would never compete with their clients in content. “That’s just a line” that shouldn’t have been crossed, they said. But thanks to lax antitrust enforcement, Google crossed that line when it to acquired DoubleClick in 2008 and AdMob in 2010.

Fortunately, despite its enormity, Google’s power to stamp out ideas and competitors is limited.  And the antitrust laws offer a remedy.  For example, the courts might undo Google’s acquisitions of DoubleClick and AdMob by breaking up Google.  Only time will tell.

Given this trend, we offer the following forecasts for your consideration,

First, by the fall of 2018, major antitrust investigations will be announced by the FTC and the Justice Department.

FACEBOOK, AMAZON, Apple, and Google are the most likely targets.  The most likely outcome is a set of consent decrees by 2022 opening on-line advertising and e-commerce, as well as streaming video & music to greater competition.

Second, it’s quite possible that platforms like Google and Facebook will be regulated like public utilities.

The rationale is that a search engine or a social network should be “fair and balanced,” giving the end-user the results that best fit his or her criteria, without subjective “value judgments.”  This is very likely the kind of issue that can only be decided by the Supreme Court.  And.

Fourth, as this trust-busting takes shape, existing powerhouses will be disrupted and new winners will be created.

In sectors ranging from oil to computing to telecom, trust-busting presaged a period of radical innovation and explosive growth.   The same thing will happen as new innovators are able to commercialize cyber-space, without being strangled by today’s mega-players.  When the investigations are announced, the stocks of Amazon, Google, Facebook and others will take a hit.  However, value across the entire sector will end up increasing as new, even more innovative players, enter the arena.

References
1. The New York Times. JUNE 27, 2017. Google Fined Record $2.7 Billion in E.U. Antitrust Ruling by MARK SCOTT.

https://www.nytimes.com/2017/06/27/technology/eu-google-fine.html?_r=0

2. Wall Street Journal. March 19, 2015. Inside the U.S. Antitrust Probe of Google by Brody Mullins, Rolfe Winkler and Brent Kendall. 

https://www.wsj.com/articles/inside-the-u-s-antitrust-probe-of-google-1426793274

3. The search engine manipulation effect (SEME) and its possible impact on the outcomes of elections by Robert Epstein and Ronald E. Robertson. (Proceedings of the National Academy of Sciences 2015, vol. 112 no. 33,  E4512?E4521, doi: 10.1073/pnas.1419828112.)

http://www.pnas.org/content/112/33/E4512.full

4. Wall Street Journal. Nov. 21, 2016. Google Search Results Can Lean Liberal, Study Finds by Jack Nicas.

https://www.wsj.com/articles/google-search-results-can-lean-liberal-study-finds-1479760691

5. Hollywood Reporter, Feb. 21, 2017. Michael Wolff on Trumps Tech War and How Big Media Benefits by Michael Wolff.

http://www.hollywoodreporter.com/news/michael-wolff-trumps-tech-war-how-big-media-benefits-977254