There is something to be said for respecting natural monopoliesby Niall Ferguson / December 14, 2018 / Leave a comment
Is big tech too big? In the past year, interest has grown in the idea that the giants of Silicon Valley have morphed into monopolies. Tim Wu of Columbia Law School argues they should be broken up: Facebook should relinquish Instagram and WhatsApp; Google should give up YouTube and DoubleClick; Amazon should spin off Amazon Web Services. Such arguments have ceased to be the preserve of progressives. Even President Donald Trump is said to have “wondered aloud if there may be any way to go after Amazon with antitrust or competition law.”
We’ll hear a lot more about breaking up big tech in 2019. However, there are significant problems with anti-trust law that we would do well to note. History tells us that enforcing competition against big concentrations of capital is harder than it looks. The analogy with John D Rockefeller’s Standard Oil is often drawn (I’ve heard Google referred to as “Standard Data”). Antitrust law was developed in the US over a century ago, as a response to the rise of trusts and combinations—that is, cross-ownership and management structures facilitating collusion. At first, Standard Oil had been praised for bringing down the price of kerosene. However, in the early 1900s, journalists helped turn public opinion against Rockefeller. Supreme Court Justice Louis Brandeis coined the phrase “the curse of bigness,” arguing that firms could be too big to treat employees on equal terms, to be efficient, and to treat rivals fairly. A landmark 1911 judgment broke Standard Oil up into no less than 34 separate firms.
For half a century, Brandeis’s approach was dominant in the courts. But this view of antitrust law was challenged by Robert H Bork and Ward S Bowman of Yale Law School, who argued persuasively from the 1960s, that antitrust law could in fact harm consumer welfare by punishing aggressive pricing and preventing mergers that would reduce prices. Gradually, “consumer welfare”—often defined by low prices—came to be equated with economic efficiency in the court rooms and in public policy.
This helps explain why Microsoft was not split up by the US courts in the 1990s. The most that happened was that it was obliged to disclose details about the workings of its Windows operating system to rivals. Although the company eventually reached a settlement that left it intact, the case had a significant effect on the conduct of Bill Gates. Plans to set up Internet Explorer so that it would redirect users away from Google to MSN Search were quietly shelved.
The Borkian view of antitrust persisted through the 1990s and beyond, which explains why the law did almost nothing to stand in the way of the rapid rise of the network platforms—Amazon, Google and most recently Facebook. How could “consumer welfare” be harmed by “free” services? Where were the barriers to entry to the internet? The absence of good answers to such questions encouraged an overt defence of monopoly in Silicon Valley. During a 2011 Senate hearing, Eric Schmidt, the head of Google’s parent company, Alphabet, brushed off concerns about its overwhelming dominance: “It’s also possible to not use Google search.” PayPal founder and early Facebook investor Peter Thiel even argued that competition was for losers: only companies with a shot at establishing a monopoly were worth investing in.
More recently, however, Lina M Khan, an expert in competition law, has argued that the big tech companies have created conflicts of interest by using their dominant platforms to promote their own services. This is in line with the reasoning advanced by the European Commission when it fined Google for giving more prominence to its own shopping services in search results. Roger McNamee, one of Facebook’s earliest investors, has called for (among other things) a ban on further acquisitions by the network platforms, an insistence on more equitable license agreements with meaningful opt-out clauses, a return of data to the ownership of consumers, and—last but not least—a revival of “the country’s traditional approach to monopoly.”
Yet there are two problems with the attempt to revive pre-Bork and Bowman antitrust. First, the technical difficulties of getting intervention right, in a context where it goes against the grain. The software industry is prone to natural monopoly or oligopoly. Software reduces friction along existing value chains, often reconfiguring industries into two-sided markets, with platforms intermediating between providers and consumers. And, as the Nobel laureate Jean Tirole has shown, two-sided markets produce just a few dominant firms—an effect compounded in software markets by the aggressive use of patents and a deliberately engineered lack of interoperability.
Secondly, even supposedly successful antitrust actions in the past achieved much less than was intended. The breakup of Standard Oil made Rockefeller richer. The interoperability forced on Microsoft only made it more central to the software ecosystem. Many predicted the company’s decline. But Microsoft retained more than 90 per cent of the operating system market for desktop computers until the last few years.
Antitrust will be one of the most used words of 2019, I would predict. But don’t hold your breath for the break-up of Amazon, Google or Facebook. Paradoxically, the trust-busting revival might even turn out to be good for the tech giants and their shareholders. For “too big to fail” read “too big to bust.”