Congress made a lousy case for breaking up Big Techon October 9, 2020 at 4:50 pm

The report also recommends requiring the FTC to collect more data and report on the state of competition in various sectors. And it says the FTC should conduct retrospectives to study whether its past decisions to approve or block mergers were correct. These kinds of studies are also long overdue and would make enforcement officials better at their jobs.

The FTC is currently engaged in a special review of every acquisition by the Big Five tech companies (those listed above, plus Microsoft) over the last decade. That process should be extended to other sectors and repeated on a regular basis.

Lastly, the report’s proposals for how to increase data portability might work very well for simple forms of data (such as a user’s social graph), which are easier to standardize. If consumers can easily take their data along with them, it will be easier for them to switch to new platforms, giving startups more incentive to enter the market.

The bad

Unfortunately, the report’s primary recommendations would do far more harm than good. The signature proposal is to force dominant platforms to separate their business lines. Chairman David Cicilline, a Rhode Island Democrat, has called this a “Glass-Steagall for the internet,” referring to the 1933 US law (repealed in 1999) that divided commercial from investment banking.

In effect, this proposal would break up tech companies by separating the underlying platform from the products and services sold on it. Google could no longer own Android and offer apps like Gmail, Maps, and Chrome. Amazon could no longer own the Amazon Marketplace and sell its own private-label goods. Apple could no longer own iOS and offer products like Safari, Siri, or Find My iPhone. Facebook could no longer own social-media platforms and use personal data to target ads to users. The upshot is that these moves would destroy tech companies’ carefully constructed ecosystems and make their current business models unviable.

Of course, if this proposal is adopted, there will be many edge cases. Is the iPhone’s flashlight feature part of the operating system or is it more akin to an app? At this point, a flashlight feels like a standard feature of any phone. But not long ago, users had to download third-party apps to achieve that functionality.

As research from Wen Wen and Feng Zhu shows, when an operating system owner like Apple enters a product vertical (such as flashlight apps), third-party developers shift their efforts to other, more difficult-to-replicate app categories. So is adding a flashlight to the OS really anticompetitive behavior from a dominant platform, or is it pro-consumer innovation that leads to better allocation of developers’ time?

The consumer

To justify its proposals, the report would have needed to find a smoking gun (or two). It didn’t. In general, the leading tech companies produce enormous benefits for consumers.

In general, the leading tech companies produce enormous benefits for consumers.

Prices for digital ads have fallen by more than 40% over the last decade, and those savings flow through to consumers in the form of lower prices for goods and services. Prices for books have fallen by more than 40% since Amazon’s IPO in 1997. And Apple’s App Store takes the exact same cut (30%) as other platforms, including PlayStation, Xbox, and Nintendo. In fact, once you account for free apps, effective commission rates in the App Store are in the range of 4% to 7%.

The report’s authors massage the statistics to make tech companies look like monopolies even though they’re not by conventional measures (defined as having greater than two-thirds market share, according to the Department of Justice). They’re all very large businesses, but generally accepted data shows they don’t meet that standard. Amazon has 38% of the e-commerce market. Fewer than half of new smartphones sold in the US are iPhones. In the digital ad market, Google has a 29% share, Facebook has 23%, and Amazon has 10%.

What’s more, consumers themselves say they benefit greatly from the products and services that these companies build. Research in the Proceedings of the National Academy of Sciences has shown that, on average, consumers would need to be paid $17,530 per year to give up search engines, $8,414 per year to give up email, and $3,648 per year to give up digital maps. Meanwhile, the price to access these services is typically zero.

The competition

One of the main themes of the report is that these platforms have become so powerful no new companies dare to challenge them (and no venture capitalists dare to fund potential competitors). Several recent examples belie that notion.

Shopify, which is mentioned only in passing, is a $130 billion e-commerce company that powers more than one million online businesses. The company was founded in 2006, and the stock has risen roughly 1,000% over the last three years. Its most recent earnings report (pdf) showed that total gross merchandise volume on the platform is more than doubling year over year. (By contrast, Amazon’s GMV is growing by about 20% annually.)

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