“The successful competitor, having been urged to
compete, must not be turned upon when he wins.” Judge Learned Hand, United
States v. Aluminum Company of America (1945).
On Monday, July 27th, the House Judiciary
Antitrust Subcommittee will be questioning the CEOs of Amazon, Facebook,
Google, and Apple on their digital platform business practices. The hearing is in addition to probes launched
more than a year ago by the DOJ, FTC, and several state attorney generals that
may eventually lead to lawsuits being filed.
A sub-plot to the Hearing (and possible lawsuits) is
the interpretation and enforcement of the United States’ antitrust laws,
specifically Section 2 of the Sherman Act.
The law makes it illegal to acquire, maintain, or enhance monopoly power
through improper means.[i] To be found guilty of
monopolization, a firm must have substantial, non-fleeting, market power in the
defined relevant market AND be engaged in anticompetitive (e.g. exclusionary or
predatory) conduct.[ii]
Simple enough. But, when the Sherman Act was crafted in 1890
and applied by the Courts in the 130 years that followed, digital trade did not
exist or had not reached maturity.
Competition remains the ideal, the poster child of how
we would like markets to operate because of the existence of productive and
allocative efficiency and a normal profit for numerous sellers. Yet, under certain market conditions, such as
when significant economies of scale exist, it may be most efficient to have a
few large firms (or even just one) supply the lion’s share of the output. This is the situation for many digital
intermediaries who operate two-sided markets.
A two-sided market is one in which two separate groups
interact on a platform and the decisions of each group affect the outcomes of
the other.[iii] Netflix is a classic example. On its digital streaming platform, it brings
together consumers of video content and the creators of that content. The more consumers who subscribe to be on the
platform the more interest there is among producers of movies and television
shows to supply content to Netflix. The
more content on the platform, the more interest there is among consumers to
join the platform or maintain their subscription. Netflix took advantage of being first and
scaled its platform. In a matter of
twelve years, it grew its customer base from zero to over 167 million
worldwide. It ended 2019 with over $20 billion in revenue, earned mostly from
monthly streaming subscriptions.
Although part of FAANG, Reed Hastings, Netflix’s CEO,
was not “invited” to speak at the July 27th Congressional hearing.[iv] Why not?
In spite of its long-standing dominance in streaming, Netflix’s pricing
and non-pricing behavior do not appear to be anticompetitive. Its subscription
prices cover its per unit costs (heavily weighed as fixed). In spite of increasing the amount spent on
original content over the years, it does not favor its own content over that supplied
by others. And, lately, its success has
prompted others, including Disney and Apple, to enter the streaming market
unopposed.
Unlike Netflix, Facebook, Amazon, Apple, and Google are
not single-play businesses. With the exception of Facebook, their size and
scope allow them to favor their own products, including bundling complementary
products (as promotional or free add-ons), foreclosing rivals’ access to
distribution, contractually requiring exclusive dealings with other business
units, and/or extracting monopoly rents for use of their platforms.[v] See Exhibit 1.
Size and the possibility of bad behavior, however, do
not make a firm guilty. Consider the
flip side. These firms are innovative,
long-term focused, risk-takers, unconventional (Google) and customer obsessed
(Amazon). They warn of complacency and
incremental thinking (Google). They
have grown organically and through [big and small] acquisitions, all along not
afraid of failure. They recognize the
importance of scale, brand loyalty, and direct and indirect network
externalities (e.g. Amazon’s flywheel). These
“successful competitors” have been rewarded for their efforts.
However, if success came or was accelerated because of
illegitimate acts that prevented “unfettered competition as the rule of trade,”
then the firms have to answer for it.[vi] It’s a big IF though. Those trying to build a case against the
firms, have to demonstrate that the firm have monopoly power in the relevant
markets and their actions harmed the competitive process, not just a single
competitor.[vii] See Exhibit 2.
In the case where
users are paying a price of zero for shopping online, searching, connecting
with friends, or using smartphone apps, it is difficult to understand the
source of the harm. Consumers love the
convenience, the ease of use, the connections, and the “value”. They are locked into these services, yet they
don’t realize it or don’t care – consider the tie-in of apps to smartphones,
free shipping and video streaming with prime membership, and the time that
would be needed to transfer personal data from one online platform to another. Consumers do not [fully] consider the value
of the personal and behavioral data they share with the intermediaries. So, they stay. Inadvertently, they make it difficult for new
entrants to amass enough platform participants to gain traction. Competition fizzles. Is this the fault of the incumbent? If competition was possible and was
illegally stymied, then there was damage to the competitive process. Consumers were harmed without realizing
it. Again, it’s a big IF.
IF any of the firms
are found guilty, forcing the sale of a business unit or two is not the answer.[viii] After all, size was never the issue. Instead, require the firms to alter business
practices by mandating conduct remedies (e.g. sharing data with others or placing
restrictions on how used), and to pay fines, much like the $9.3 billion imposed
by the European Commission against Google in three recent cases.[ix]
With all of this said, we are a long way away from seeing
if Section 2 of the Sherman Act is robust enough to fully evaluate the conduct
of these firms. Let us see what unfolds
in the weeks (and years) ahead.
Exhibit
1
Amazon
|
Facebook
|
Google
|
Apple
|
|
Year
Founded
|
1994
|
2004
|
1998
|
1976
|
Net
Sales ($M)
|
280,522
|
70,697
|
161,857
|
260,174
|
Net
Income ($M)
|
11,588
|
18,485
|
34,343
|
55,256
|
Market
Leadership
|
e-commerce
|
social media
|
internet search
|
comm. electronics (iPhone)
|
Related Businesses
|
||||
Cloud
and/or network
|
AWS
|
XX
|
Android, Google cloud, Google Apps
|
iCloud, iOS, App Store
|
Devices
|
Kindle, Fire, Echo, Ring
|
XX
|
Chrome, Nest, Waze
|
AirPods, Apple TV, Apple Watch, Beats,
HomePod
|
Other
(among hundreds)
|
Whole Foods
Video Prime
|
WhatsApp
Instagram
|
YouTube
Google Fiber
|
Apple Pay
Apple TV+
|
Fiscal
year ending 12/31/2019, except for Apple, Inc. which was 9/28/2019
|
||||
Exhibit 2
In
the January, the House Judiciary Antitrust Subcommittee heard from four small
competitors. A summary of some of their
accusations is provided in the table below.[x]
Accuser
|
Line of Business
|
Accused
|
Claim
|
Sonos
|
Voice-controlled wireless
speakers
|
Google (Home)
Amazon (Echo)
|
Using dominance in
one market, namely search (Google) and e-commerce (Amazon), to predatory
price in another (speakers).
|
PopSockets
|
Online retailer –
phone accessory
|
Amazon
|
Corporate bullying
because of power asymmetry. Pressured
firm to lower price to keep product on platform.
|
Basecamp
|
Web-based project
management tool
|
Google
|
Monopoly rent –
allowing competitors to pay Google to appear as the first listing in search
results.
|
Tile
|
Bluetooth trackers
|
Apple
|
Tile needs to be
paired with an app on a smartphone or tablet.
Competing against Apple’s “Find My” tracking app which is given
preferential treatment.
|
[i] The United States Department of
Justice, “Chapter 1 - Single-Firm Conduct and Section 2 of the Sherman Act: An
Overview,” accessed July 20, 2020, https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1#:~:text=Section%202%20of%20the%20Sherman%20Act%20makes%20it%20unlawful%20for,foreign%20nations%20.%20.%20.%20.%22.
[ii] Ibid.
[iii] Marc Rysman, “The Economics of
Two-Sided Markets,” Journal of Economic Perspectives, 23 (3), 125-143.
[iv] FAANG stands for Facebook, Apple,
Amazon, Netflix, and Google.
[v] For example, Spotify and Microsoft
have complained about the high revenue share percentage (“tax”) on in-app purchases
and the forced tie-in to use Apple Pay.
[vi] DOJ, Chapter 1, op. cit.
[vii] A
finding of monopoly power is consistent with possession of a large share in the
relevant market and protection by entry barriers. All else equal, the narrower the market
definition (e.g. online market for diapers) the greater the shares of the included
firms.
[viii] Elizabeth Warren proposed that the
big tech firms who participate on their own platforms should be forced to spin
off those platforms (e.g. Google Search and Amazon’s Marketplace). She also called for the reversal of mergers,
such as Whole Foods by Amazon, WhatsApp and Instagram by Facebook, and Waze and
Nest by Google.
[ix] Adam Satariano, “Google Fined $1.7
Billion by E.U. for Unfair Advertising Rules,” New York Times, March 20,
2019, https://www.nytimes.com/2019/03/20/business/google-fine-advertising.html.
[x] Jason Del Rey, “6 Reasons Smaller
Companies Want to Break Up Big Tech,” Vox, January 22, 2020, https://www.vox.com/recode/2020/1/22/21070898/big-tech-antitrust-amazon-apple-google-facebook-house-hearing-congress-break-up.
