Breach of Trust

One of the surprising aftereffects of the digital technology revolution, which so upended business as usual across vast swathes of the economy, has been the emergence of titanic firms with monolithic shares of various markets: Google in search; Amazon in retail; Facebook in social; Netflix in streaming. These giants of the digital era, collectively known as FANG or FAAMG companies (from the initials of their constituents: Facebook, Amazon, Netflix, Apple, Microsoft, and Google) draw fire from a number of sources on the Left and Right over various alleged acts of economic perfidy.

A possible risk that rises from this situation is potential anti-trust actions taken against these big players. This is not merely speculation. For the E.U. operations of these companies, it is increasingly becoming a jurisdictional certainty. Google, which is in the middle of appealing a record fine of $2.4 billion euros over the way it displays search results, faces it as an ugly reality. The rising tide of anti-corporate, populist political sentiment might well be raising that risk profile.

We spoke with Herbert Hovenkamp, the leading legal anti-trust expert in the U.S., about this question. “U.S. anti-trust laws are extremely broad,” he told us. “They don't have a lot of detail; they go after things with scary names like monopolization, and that has always made them subject to claims that they should be used for a broader set of purposes. To fix political systems, or as a cure for false and misleading claims, or for fraud. The attractiveness of that is that if you can take advantage of the highly general anti-trust language, you could do that without having to go to Congress in the U.S. and get something more specific.”

That, luckily, has not happened very often here, noted Hovenkamp. “We've always focused on market competition as economically defined,” he said. “We don't use anti-trust proceedings as a substitute for copyright law or trademark law and we don't use them as a device for correcting things like false and misleading advertising. We've got lots of bodies of law to deal with these other things, and we've also got legislative bodies that are supposed to be capable of acting and doing something about them. Yes, there is a left wing in anti-trust that wants to do more and to the extent they've gotten anybody's attention it's within the Democratic Party, but I think right now it's still a small element. I think it's not holding up well under the light, and I think we'll see under Trump — if anything, in fact, changes — a restoration of anti-trust policy to be more like it was during the Obama administration with the added likelihood that it will be a bit more aggressive towards big mergers.”

This does not, however, mean that these U.S.-based giants are entirely safe. As Hovenkamp notes, the E.U. is developing as a center of this kind of risk. “I think the biggest past change in the past five years,” he told us, “has been a more aggressive attitude in Europe, with different countries taking actions against highly innovative firms — nearly all of which are American. In the next five years, we may see a little blowback on that, depending on what happens with the Google search appeal. I think American merger enforcement may be picking up a little bit. It's a little bit too early to say. Mr. Trump is a wild card in this, and I've so far not made any money predicting what he's going to do next. This is a European risk accruing to U.S. firms.”

How do the constituents of FANG rank as risks for potential anti-trust activities, be they stateside or in Europe? Hovenkamp sees Amazon as the safest. “Amazon is great for consumers,” he notes. “If low prices and high output are what you're looking for, Amazon is always in the upper list of firms in terms of customer satisfaction. Today, there's this growing concern about wealth redistribution, that margins are getting a lot higher than they were 20 years ago. But Amazon is not a contributor to that. Amazon operates on razor-thin margins — the kinds of margins we generally expect from retailing, or even more so. Amazon is not causing consumer harm based on what it's doing. Is it causing harm to competitors? Yes — whether it's competitive harm or not is a different story. Yes, there are small firms that have lost a lot of business; there are a few that have gone out of business. But this always happens under intense competition, and retailing is a very rapid-turnover industry overall. On the other hand, Amazon has created avenues for tons of firms to have a low-cost place to sell. The complaints come mainly from competitors, once again. It has that in common with Google. Amazon makes almost nothing. They have a little bit of a footprint in their reading and Echo technology, but for the most part Amazon buys stuff and resells it.” It should be noted here that while Amazon does indeed do little manufacturing, its web services business is in wide consumer use.

Still, as Hovenkamp puts it, “when we think of dominant firms we generally think of chemical companies, or companies that have major patent portfolios. Amazon is not one of those. I don't think there's any predatory pricing claims on the horizon, because Amazon survives only as long as its prices stay low.”

Google, however, looks to Hovenkamp like a far more significant risk — both in terms of its bottom line and in terms of damage possibly done to its products. The fine they are currently appealing is by no means the end of their struggles against anti-trust actions in Europe.

“This fine doesn't end it, if the course of the commission is not changed,” he told us. “I think Google has to face the prospect that, unless something changes, it's going to have to submit its search strategies to review forever. And in the review process, the biggest voice — or at least one of the very big voices — determining what those search strategies are will be Google's competitors. The biggest threat here is not the money so much as the ongoing threat to Google search. Do we want Google search to be a utility where the competitors determine what goes into it? That's, I think, the scarier thing for Google from the E.U. litigation. The sad thing is there are much better ways to address this problem. A widely cited problem is that Google search is a default search engine on Android devices. But the operative word here is 'default.' Most people who are above the kindergarten level in technology capabilities know how to substitute search engines. Purely by choice Google is a preferred search engine on a fair number of domestic computers, but if you want to download a couple of other search engines you can. As soon as you install Microsoft Windows on a computer you also get Microsoft's search engine, so people can flip back and forth. There are things that the E.U. could do that would be a whole lot less disruptive for search than what it's currently doing.”