Finally, the anti-trust action on big tech begins

The action on anti-trust on the big tech companies in the US is gathering pace. First there was the high profile US Congressional Subcommittee on anti-trust which questioned the heads of the major American tech companies. Then came the detailed report of a US House of Representatives Panel on investigation of competition in digital markets. The Democrat led Panel's report advocated breakup of big tech, forcing separation of their dominant platforms from their other businesses. The report covered Amazon, Apple, Facebook, and Google. 

The culmination has been the executive action in the form of US Department of Justice (DoJ) along with 11 States filing an anti-trust law suit under Section 2 of Sherman Act in a federal court against Google, the first such big action since that on Microsoft in the 1990s. This is expected to be a precursor to several similar suits against big tech companies. The suit states,

Google is so dominant that “Google” is not only a noun to identify the company and the Google search engine but also a verb that means to search the internet... Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States. Largely as a result of Google’s exclusionary agreements and anticompetitive conduct, Google in recent years has accounted for nearly 90 percent of all general-search-engine queries in the United States, and almost 95 percent of queries on mobile devices.

Sample this for the dominance across devices.

The suit describes Google as "a monopoly gatekeeper for the internet", and accuses it of  suppressing competition in internet search and using a "web of exclusionary" deals to thwart competition and stifle the next wave of innovators. The suit does not specific the remedy, but calls for "structural relief", pointing to the break-up of the company. Here is an FT summary of the charge,

In a complaint that echoes the European Union’s 2016 case against Google over Android, its mobile operating system, the US government claimed the search company used its contracts with device makers to block other search engines, while also paying to put its search service in front of users on many of the most widely used smartphones and browsers. Some 60 per cent of all search queries in the US are drawn to Google thanks to this web of arrangements, according to the lawsuit. When combined with Google’s own distribution channels, such as its Chrome browser, this number rises to 80 per cent, the lawsuit alleged. The contract terms at the centre of the case include alleged provisions that prevent device makers which use Android from supporting rival versions of the open source operating system on any other devices they make. The DoJ also objected to Google requiring its search service be given a prominent position on all handsets that include its Play app store and other services. The case takes aim at payments worth billions of dollars a year — usually in the form of sharing revenue from mobile search advertising — that Google pays to handset makers, mobile phone companies and browser makers to give its search service prominence... The lawsuit argues Google’s conduct harmed consumers through quality reductions relating to “privacy, data protection, and use of consumer data” as well as “lessening choice” and “impeding innovation”.

A WSJ report tries to put some numbers on the benefits from such bilateral deals with hardware makers, especially with Apple,

It has long been known that Google relies on search traffic from Apple’s popular line of phones. Google’s flagship search engine is the preset default on Apple’s Safari phone browser, meaning that when consumers enter a term on their phone, they are automatically fed Google search results—and related advertising... Though Google and Apple have been tight-lipped on how much their deal is worth, the lawsuit projects that it accounts for between 15% and 20% of Apple’s annual profits. That means Google pays as much as $11 billion, or roughly one-third of Alphabet’s annual profits, to Apple for pole position on the iPhone. In return, Apple-originated search traffic adds up to half of Google search volume, the government says... Securing the prime piece of real estate in the Apple ecosystem has had the effect of denying competitors the ability to compete, the government alleged... In June, Toni Sacconaghi, an analyst for Bernstein, estimated Google pays Apple as much as $8 billion annually to be the default search engine for its mobile operating system and Siri, a voice assistant. Other analysts have pegged it as higher, closer to the figures cited in the government lawsuit. Mr. Sacconaghi suggested in a note to investors that Google was motivated to spend the money in part to block rival Microsoft Corp.’s Bing search engine from gaining a foothold.

While there are crucial differences in interpretations, the anti-trust action has bipartisan consensus in the US.

In the context of the Subcommittee hearings, Rana Foroohar felt that we may be entering a new era of vigorous antitrust action, especially if the Democrats win the presidential election. She also points to a new report by Institute for Local Self-Reliance (ILSR) on how consolidation of corporate power across sectors is an important contributor to major social problems in the US. 

The classical argument for anti-trust, revolving around consumer welfare, is not relevant to the current circumstances. Instead, Prosenjit Datta points to the two major areas of concern,

First, whether the big five are using their dominance to shut out rivals. Amazon has driven smaller sellers to bankruptcy by copying their stuff and introducing them at cheaper prices under home labels. Facebook bought up Instagram and WhatsApp when they were still small. Apple, Microsoft and Google all use dominance to squeeze users of their ecosystems dry. Also, while their services to consumers are often free or low priced, they collect loads of data that are then monetised leading to worries about privacy and data misuse.

In this context, here is a list of related stories which have accumulated in recent couple of months:

1. For anti-trust agencies, Dina Srinivasan points to Google's naked manipulation of the advertising market.

Approximately 86% of online display advertising space in the U.S. is bought and sold in real-time on electronic trading venues, which the industry calls "advertising exchanges." With intermediaries that route buy and sell orders, the structure of the ad market is similar to the structure of electronically traded financial markets. In advertising, a single company, Alphabet (“Google”), simultaneously operates the leading trading venue, as well as the leading intermediaries that buyers and sellers go through to trade. At the same time, Google itself is one of the largest sellers of ad space globally. This Paper explains how Google dominates advertising markets by engaging in conduct that lawmakers prohibit in other electronic trading markets: Google’s exchange shares superior trading information and speed with the Google-owned intermediaries, Google steers buy and sell orders to its exchange and websites (Search & YouTube), and Google abuses its access to inside information. In the market for electronically traded equities, we require exchanges to provide traders with fair access to data and speed, we identify and manage intermediary conflicts of interest, and we require trading disclosures to help police the market.

So Google sells advertisement space in a market where it is also the leading trading venue and the leading intermediaries!

2. On to Apple next. The European Union has launched two anti-trust cases against it. John Thornhill writes,

The first concerns the operations of Apple’s App Store following complaints from Spotify, the music-streaming service, and Kobo, the ebook business. Each has attacked the company for demanding an initial 30 per cent cut of the subscription fee from all customers who sign up via the App Store, while promoting its own rival music and books services. Margrethe Vestager, EU vice-president in charge of competition policy, said Apple appeared to be acting as a discriminatory “gatekeeper” controlling the distribution of apps while keeping most of the data derived from them. “We need to ensure that Apple’s rules do not distort competition in markets where Apple is competing with other app developers,” she said. The second investigation focuses on whether Apple unfairly denies Apple Pay’s “tap and go” functionality on iPhones to rival payments companies.

The Economist adds about the reasons for the discontent of the likes of Spotify and Kobo,

They are unhappy about rules that force app-makers that sell digital services on Apple devices to use Apple’s own system for handling purchases made in their apps. Apple takes a cut of up to 30% from each such transaction. At the same time the rules limit firms’ ability to guide users to other payment options (via their websites, for instance). Since the App Store is the only way to sell software to iPhone users, the firms allege that Apple’s rules amount to an abuse of its control over the platform.

As Thornhill writes, Apple's logic on competition goes like this and looks compelling, even benign,

The company argues that it invented and built the App Store that now reaches 1.5bn device users. If developers do not like its rules then they do not have to play. Millions of developers, who have made a lot of money from the App Store, are happy with the way it operates and comforted by the security it offers. Besides, Apple charges no fees on the 85 per cent of apps that are free to users.

This is a case of throwing a few crumbs which will keep most stakeholders satisfied, while ensuring that no real competitor emerges. For the vast numbers of small developers, Apple provides an unmatchable platform to peddle their wares. For Apple, these millions of developers and their customers enrich the network and increase its liquidity. Apple knows that it can always squeeze out the odd developer who becomes very successful on its platform. In the absence of competing counterfactuals, customers will not feel that they are losing out on something by being yoked to Apple. All this takes care of US regulators who prioritise consumer welfare over all else.

The App market, while small today, is the future for Apple which may now be facing the other side of peak-iPhone.

See also this article on Tim Sweeney and his company Epic Games (of "Fortnite" fame). He has been waging a battle against Apple and Google for the 30% cut they take for digital transactions that happen using its Apps, and in case of Apple, the mandatory nature of all App purchases on iPhone and iPad to be done through Apple Store. Also this editorial which describes the commissions as a "digital rent" and this article which has a good overview of the issue. This blog post is about Apple's battle with Epic

3. The US anti-trust action comes amidst some encouraging news from Germany. In a significant judgement with implications on how anti-trust cases will come to be be examined, the German Federal Court of Justice upheld the German competition agency's decision on Facebook that excessive data collection can be a form of anti-competitive conduct.

Describing the agency's ruling, Anne Witt writes,

On February 6, 2019, in the first case of its kind, the Bundeskartellamt had found Facebook guilty of abusing its dominant position in the German market for private social networks, pursuant to sec. 19(1) of the German Competition Act (GWB). In essence, the agency ruled that Facebook, which has held a steady market share of over 90 percent in this market since 2011, used its market power to force unfair data collection terms upon consumers. While the Bundeskartellamt did not question Facebook’s right to collect user data from the social network itself, it objected to Facebook’s practice of combining user data collected from a multitude of different sources—i.e., Facebook.com, any Facebook-owned service (such as Instagram), and any of the millions of third-party website worldwide that use “Facebook business tools” for the purpose of profiling their users...

Unlike Section 2 of the Sherman Antitrust Act, the competition laws of the EU and its Member States prohibit both exclusionary and exploitative abuses. While the term “exclusionary abuse” refers to a practice through which a dominant undertaking (or company) uses its market power to exclude competitors from the market, thereby further reducing competition to the detriment of consumers, an exploitative abuse consists of the dominant undertaking harming consumers directly by using its market power to extract “unfair” contractual conditions that it could not have achieved in a competitive market. Historically, the great majority of exploitative abuse cases have concerned instances of excessive pricing by dominant firms... All three of the European Commission’s abuse cases against Google, for example—Google Search (Shopping), Google Android, and Google Search (AdSense)—pursued exclusionary conduct...

The Bundeskartellamt deemed Facebook’s data collection unfair because it invaded its users’ constitutional right to privacy, which it inferred from the fact that the practice violated the European Union’s General Data Protection Regulation (GDPR). In the court’s view, users had not freely consented to the transfer of data when they ticked the box acknowledging Facebook’s data collection policy, because they had had no real choice in the matter: if they wanted to use a social network of reasonable scope, they had to accept Facebook’s terms, as there was simply no alternative to Facebook. According to the Bundeskartellamt, this was a prime example of the “privacy paradox”—the inconsistency between people’s concerns regarding privacy and their actual behavior—in action... Without explicitly rejecting the Bundeskartellamt’s privacy-based theory of harm, the Federal Court of Justice considered that the main problem was that Facebook was denying consumers the choice between the use of (1) a highly personalized social network service, which might indeed require extensive data collection from all three sources, or (2) a less personalized service that relied only on the data users chose to disclose on Facebook.com. It was thus also preventing the emergence of a service for which there was demand, and which a competitive market would likely have provided.

4. In this context, a New York Times investigation of the Global Anti-Trust Institute at George Mason University, which is almost completely financed by tech companies facing anti-trust accusations, is instructive,

The long era of restraint in antitrust enforcement in the United States can be traced back, in part, to an ideology that tied economic analysis to legal cases. The view was that it’s not enough for a company to dominate a market and crush competitors, there must be evidence of so-called consumer harm — usually in the form of higher prices. That notion permeated through the American judicial system with the aid of economics seminars for federal judges funded by corporate donors. The Manne Economics Institute for Federal Judges, which ran from 1976 to 1999, was organized by the Law and Economics Center — now housed at George Mason University’s law school. By 1990, about 40 percent of all sitting federal judges had attended one of these seminars, according to the program’s director. Researchers found that judges who attended the seminars were more likely to approve mergers, rule against environmental protections and organized labor, and use economic language in rulings compared to judges who did not attend, according to an academic study looking at the effects of the program.

The Global Antitrust Institute, which was established in 2014 as part of George Mason University’s Law and Economics Center, has taken a page from the success of the federal judges program and adapted it for an international audience. It is also starting to offer an economics program for U.S. federal judges, with one scheduled for October in Napa, Calif... it had already trained more than 850 foreign judges and regulators... The institute does not disclose the source of its funding, but The New York Times obtained copies of the group’s annual budgets and donation checks in document requests. It is funded almost entirely by companies and foundations affiliated with companies.

In other words, a systematic attempt to establish the hegemony of a particular narrative on anti-trust actions! It is encouraging that a counter-narrative is now taking hold. What happens in the US has ramifications far beyond its borders and will set the trend for actions elsewhere and also hasten the EU's own set of actions. 

5. From India, the spectacular emergence of Reliance Jio, while advancing the cause of Digital India, also comes with several concerns,

Jio’s entry saw tariff wars that greatly reduced prices and benefited the consumers at great detriment to its competitors. The expansion of Jio platforms might portend similar benefits for consumers in the short-haul. However, the longer-term ramifications are uncertain. The concentration of such clout in India’s digital economy in a single entity might eventually influence or even restrict the choices of consumers. In the run-up to the Jio deal, Facebook floated a new wholly-owned subsidiary called “Jaadhu Holdings, Llc" in March 2020. The entire investment was routed through Jaadhu, and Facebook was able to able to declare that Jaadhu “is not engaged in any business in India or anywhere in the world", therefore denying any plausible collusion. As tech giants become more creative to skirt anti-competition arrangement, CCI will have to become savvier.

This is a good summary of the market capture ambitions of the company across several sectors. 

Update 1 (26.10.2020)

Rana Faroohar points to how big tech collude to retain their monopoly over markets. NYT has this story of the Google-Apple deal and how co-opetition is not uncommon in Silicon Valley.