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Is anti-trust the next big risk for digital giants?

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.”

He provided an example — consider a new phone with preinstalled software. “When you buy a new Android phone in either the U.S. or E.U.,” he said, “you get a set of welcome screens. One thing they could do is include in that set of welcome screens a screen where you select your search engine, and Google could be on that, Yahoo could be on that, Microsoft Bing could be on it. But Google’s competitors say, ‘No, no, that won’t work, because Google already has such a big advantage.’ The whole idea here is that consumers apparently are not aware that they’re being injured because they’re being ‘steered’ towards Google search. They seem to be fine with Google search results, but what the E.U. wants is to favor Google’s competitors at Google’s expense, and I’m fearful that it will be done in a way that harms consumers. If we can degrade the results of Google search and make Bing or Yahoo more attractive by comparison, we may be helping their competitors in terms of search share but we are not doing consumers any good. My solution to this problem would be one that has more to do with giving consumers more visible choices, and perhaps removing the default. A more neutral playing field. If from that field they pick Google, then I think the anti-trust authority has done all that it can do.”

Hovenkamp sees activity beyond this boundary as somewhat questionable. “It’s not our job,” he argues, “to tell consumers which search engine they should be using. It is our job to guarantee that they have a choice of search engines. But that’s not the tack that the E.U. is taking right now. That’s why I think this bodes poorly for Google’s prospects in Europe in the future. I think it bodes poorly for the E.U. in another way. There’s been a widespread observation that the rate of innovation in the European Union is much, much lower than it is in the United States. I think this case against Google virtually ensures that. Who wants to develop a highly innovative technology in a hostile market? Especially if you can develop in a market like the U.S., which is more welcoming of highly creative technologies. Russia and China tend to be home-court referees, they tend to favor their domestic firms over the U.S. firms. I don’t think the E.U. is doing that, but I think it’s creating a minefield for highly innovative firms by telling them, ‘If you become successful, and you get a large market share because of this innovation you have to understand that we may try to take it all away from you by means of a competition lawsuit.’ That’s why I totally supported the Federal Trade Commission in the United States when they looked at Google search — as they should have, they had complaints and their job is to investigate. But then they decided not to go forward.”

One interesting and necessary historical perspective on this question comes via the Berkeley economist Carl Shapiro. Shapiro, in a 2017 academic article, pointed out that upsurges in political populism are sometimes accompanied by attempts to broaden the scope and focus of anti-trust law. We spoke to Shapiro about the historical roots of this process and what it might mean in today’s context — as well as his concerns about it.

“U.S. anti-trust laws have their roots in the populism of the 19th century,” Shapiro noted. “The Sherman Act dates to 1890. The other key statutes, the Federal Trade Commission Act and the Clayton Act of 1914, come from around the time of Teddy Roosevelt and trust-busting where these similar sentiments were very strong, in large part because we started to have a national economy and thus firms that were national and much larger than anything we really saw in the 19th century. It took some time to get accustomed to that. Now we’re about 100 years later. 50 years ago, right in the middle of that century span, we had a surge not in populism, I would say, but in concern about industrial concentration. This brought forth proposals to de-concentrate and the very aggressive enforcement and implementation of anti-trust law. We’re back in a period where there’s a lot of talk, at least, about taking a much more aggressive stance in anti-trust against either dominant firms or consolidation and mergers. In anti-trust, I think it’s fair to say that in the late 1970’s and early 80’s, there was a substantial shift. There was a recognition across the board that some of the anti-trust precedents and enforcement had gone too far. And it wasn’t just the Chicago School economists. There was also the Harvard School, of which Stephen Breyer was a part. I think economists generally agreed with that and were part of that rethinking.”

The idea that the change in anti-trust enforcement is part of a move by right-wing political and economic thinkers, Shapiro says, is a “misimpression.” “It really was a correction that was viewed as necessary in a bipartisan, or widespread, manner,” he notes, “and then it really came into fruition with the Reagan administration, when Bill Baxter was running the anti-trust division. There were new merger guidelines; there was a series of Supreme Court cases cutting back on anti-trust. So there is a real change that occurred at that time, and now I think one way to view the discussion today is: did we go too far? Possibly. One can point to Supreme Court cases that have been, I think, overly restrictive on the Sherman Act — trimming it back too far — and I think we could be and should be somewhat more aggressive in terms of preventing or blocking certain mergers. I don’t want to be misunderstood on this, though: I’m talking about a significant but not radical turning-up of the dial in terms of horizontal merger enforcement. The other thing that’s very important here is I would like to see all that done consistently with the widely accepted principle that we’re trying to control mergers when they reduce competition. When they harm customers and ultimately final consumers. Not for some other purpose for which anti-trust laws are not well-suited.”

Indeed, Shapiro — who has consulted for Google — describes himself as firmly in the camp believing that the goal of anti-trust is to promote competition. “Sometimes,” he notes, “that means that large firms are efficient with low prices and superior products and they drive smaller firms out of the market. That is part of the competitive process. I don’t think anti-trust should be used to protect smaller firms, inefficient firms, local firms. I would add that this position has had bipartisan support for decades. There’s a general temptation to want to protect some competitors. Maybe it’s small businesses, maybe it’s local firms, and that to me is not what anti-trust is supposed to do. We have been successful in really convincing other countries that that is not the proper goal or application of anti-trust or what we generally around the world we call the competition policy. We’ve exported that idea successfully, and whether it’s a mantra or a catchphrase, anti-trust is about protecting competition — not competitors. I think that’s a big success and I don’t want to see us retreating on that front.”