The Antitrust Quagmire
The all-out offensive against Big Tech might be justified — at least to some extent — but the outdated modus operandi of antitrust is a recipe for a failure.
Google will fight tooth and nail to counter all of the lawsuits that flared up in recent weeks. Altogether, Alphabet is facing major actions from 38 states, and the Department of Justice. Aside from its ongoing investigations, the European Union also just came up with a brand new legal framework: the Digital Markets Act (DMA) and Digital Services Act (DSA).
All of these legal shots are aimed at the big four of technology: Google, Facebook, Apple, and Amazon. Microsoft is also in the crosshairs due to its size, but it is a secondary target.
I’m not going into the details of these different offensives. Here are some useful links:
• The DOJ Complaint against Google is here (PDF, 64 pages) ;
• The complaint filed by Texas Attorney General is here: PDF, 130 pages, heavily redacted);
• On the European side, the original text of the Digital Market Act is here, its available in multiple formats and is 81-page long; the EU Digital Services Act is here in an FAQ form.
For excellent coverage and analysis, I will refer to my favorites publications and authors: Casey Newton’s Platformer, Ben Thomson’s Stratechery, and Benedict Evans’ newsletter.
Now, let’s focus on the flaws of this messy and politically loaded legal blitz.
1 . A disconnection from Internet Time
In the blockbuster suit in the U.S., the whole process will take at least three years. According to the Wall Street Journal:
“U.S. District Judge Amit Mehta in Washington set a tentative trial date of Sept. 12, 2023. (…)The proposed schedule in the Justice Department case includes about 450 days for both sides to engage in the legal discovery process of gathering information and exchanging materials about evidence that may be presented at trial. The schedule also includes months for the parties to develop and exchange reports from their economic experts, and it builds in a time window in which Google will have the opportunity to seek a ruling against the government’s case before trial. The Justice Department estimated that the eventual trial could take 10 to 12 weeks. Google’s legal team said it expected any trial to be considerably shorter.”
As for the EU, procedures can be even longer. Margrethe Vestager’s previous office that monitored competition was known for legal actions that can drag for five or more years. By the time the fines are levied, problems have been corrected by the defendants (and some new ones will have come up).
The three years envisioned in the US by Judge Metha will leave Alphabet and Facebook plenty of time for either solidifying their position — for instance further intermingling their infrastructure to make a breakup more complicated — or partially solve the issues.
2 . A focus on areas where there are real competitors
A key argument for the defendants will be the existence of fierce competition between these companies (chart lifted from Alec Stapp’s Twitter feed):
• One of the highlights of the DOJ lawsuit features the agreement between Google and Apple to favor Google’s search engine as a default in Apple’s browser Safari. The agreement is reportedly worth $8bn to $12bn a year paid by Google to Apple (see below).
However, the DOJ will have a hard time proving that there is a conspiracy to evict other search engines. “Microsoft could have made an offer to have Bing featured as the default search engine in Safari!”, said a source close to Google’s defense team. Alphabet made a cost vs. benefit analysis: how much traffic will be sent to Google Search via the 1.5 billion iPhone users searching the web on Google, how much this incoming traffic is worth (and more crucially, how helpful is it for Google to maintain its supremacy on search). Here is what’s at stake:
Google’s team will try to demonstrate the fairness of the negotiation process with Apple and will defend its ability to conclude commercial dealings. The result could be the unchecking of the box that warrant’s Google’s position and, instead, giving the consumer a choice between about 40 to 50 search engines operating in English as, yes, there are already many alternatives to Google in search.
3. E-Commerce
• Amazon is another target of regulators, though again is competing in an arena that does not totally dominate. It is the largest online seller worldwide, but it is far from controlling the market: when looking at the entire US retail, its market share is about 6%, much smaller than Walmart for instance. Customers can buy goods in many online places. Third-party vendors also have choices of other platforms, as shown by the staggering growth of the Canadian marketplace Shopify, whose profits are almost doubling on a year-on-year basis (about Shopify, listen to this episode of Reid Hoffman’s podcast featuring Tobi Lütke, its founder and CEO).
I recently spoke with the owner of a small business, a 60-year-old American woman who found a successful niche in the arts and craft segment. She is netting about $200k a year, not bad for a 12-hour a week job, paying some astute geek to help her with the technicalities of the platform; she does the marketing by herself (through newsletters, mostly), enjoying a direct and invaluable relationship with her global base of customers. However, she has done this while being outside of Amazon’s gravitational field and choosing its competitor, Shopify. She told me recently: “Shopify is as good as Amazon without the inconveniences.” She meant: no massive data collection that could turn against the vendor, no near-mandatory ad purchases to avoid falling into the depths of Amazon’s unfathomable catalog, no Amazon avoiding responsibility in case something happens to the inventory, and no arbitrary and opaque decisions that could kill her business without warning.
This is an example where upstarts can challenge the giants, though the focus of some leading the charge is against Big Tech as a whole rather than examining the specific business that they employ. Thierry Breton, the EU commissioner in charge of the domestic market, has made the Digital Markets Act and the Digital Services Act the cornerstone of his political agenda and is holding the banner of the anti-Big Tech ideology that is unfurling itself across Europe.
Last week, Breton was on every possible media outlet, hammering home the message that the digital and physical world must be aligned when it comes to what is allowed and what is forbidden. Except that there are some places where they already are aligned, such as in the bad practices that the big offline retailers and Amazon share. For instance: forcing the purchase of expensive promotions to have a product put forward, or opaque and crushing handling fees are part of life offline.
Even the infamous private label practices often used to single out Amazon (promoting its own products on its site above competitors) are far worse in the physical retail world. The chart below (highlighted by Ben Evans) shows the penetration of private labels by types of retailers:
… and Amazon’share of private labels over its sales is in fact negligible compared to other retailers, especially in the UK:
… This is not to underestimate Amazon’s ability to churn out its profitable “Amazon Basics” at a high pace, which is unprecedented (see The Wall Street Journal investigation on the subject). The e-commerce giant has the power to make this practice more granular and eventually more widespread than in the physical world. As this presents a new kind of worry, it should be contained. Lawmakers and regulators are better served focusing on tactics and bad business practices like this than crusading against the idea of Big Tech.
4. The need for efficiency over politics and ideology
There is no doubt that internet giants need to be scrutinized and regulated. But the Standard Oil or AT&T approaches might not be the most efficient as tech companies are making tweaks to the way that their systems work.
As I said earlier, the time scale is vastly different. That’s why a more “surgical strikes” tactic would be far better. One of the interesting arguments this past week was the one from the Texas suit about the alleged collusion between Google and Facebook over ad placement. It relates to the opaque (and not so fair) advertising auction mechanisms that have made Google and Facebook so efficient — and so devastating, for other media like the publishing industry, as detailed in last week’s Monday Note. On this, Google might be more vulnerable than for its search business. Alphabet will invoke regular commercial dealings while Texas AG will oppose a de facto eviction of the competition. Regulators could also investigate the generalized arm-twisting tactics inflicted by Amazon on its suppliers and third-party vendors. This could translate into corrective measures with a much shorter-term impact. But it would require less of a political obsession and more technical competencies to venture into what really matters.
frederic.filloux@mondaynote.com
PS: I will take some time off and be back on January 4. Once again, I am immensely grateful to you, dear readers, and I wish you a great year 2021.
