By Christopher Mims
Over the past two years, Facebook and Google have taken fire for
their roles in everything from eroding democratic institutions to
damaging mental health to undermining our collective immunity to
preventable diseases.
Those flaws could be seen as the reckless mistakes of callow
disrupters. But here's another way to look at them: They're the
price of free.
As U.S. antitrust regulators and lawmakers gear up for a probe
into Alphabet Inc.'s Google and divvy up responsibility for
investigating Facebook Inc. and other tech giants, one issue they
might assess is how to weigh consumer harm. By traditional
measures, Facebook and Google have been a boon to consumers, going
from one service to another -- search, email, messaging, maps,
photo sharing -- and serving up easy-to-use, zero-cost
offerings.
In reality, these services are anything but free. We just don't
pay for them in the way we're used to.
In fact, most of the ills traced to these companies are a direct
consequence of their "free" business models, which compel them to
suck up our personal data and prioritize user growth over the
health and privacy of individuals and society, all so they can sell
more advertisements. They make money from the attention and in some
cases the hard work -- all those status updates, videos and likes
are also a kind of uncompensated labor, if you think about it -- of
their most devoted users.
What's more, their success has given them the power to block
upstarts that might have competed against them with different
approaches.
These costs can be harder to quantify than the traditional
measure of higher prices associated with anticompetitive behavior.
What dollar value do you assign to misinformation that undermined
the national discourse around the 2016 U.S. election, and how do
you count that versus the convenience of sharing with friends and
family, or watching fun videos?
But understanding those costs is critical as authorities try to
assess whether the economy is better off with the internet giants
as they are or whether they need to be curbed or even -- as many
critics and presidential contenders have argued -- broken up.
How Free Harms Competition
Coupling apparent consumer benefit to monumental revenue is what
allowed these companies to balloon to their current size and power.
This has led to what critics argue are classically anticompetitive
practices, such as buying up rivals, as Facebook did with
Instagram, and fighting other competitors by copying them and then
beating them with superior scale and resources, as Facebook
subsequently used Instagram to do to Snapchat.
Consider if Facebook had never been allowed to buy Instagram or
the messaging app WhatsApp in the first place. It isn't so
far-fetched since the result is Facebook at its current size: 2
billion-plus users and a market value approximately equal to that
of AT&T and Verizon combined. (Outside the realm of tech,
regulators are currently hesitating to approve the merger of
distant third- and fourth-place wireless companies Sprint and
T-Mobile, which feels like a double standard.)
As it happened, younger people migrated en masse from Facebook
to Instagram. If the two companies had remained apart, we might
have seen heightened competition between them. And the innovative
upstart Snapchat might have been able to hold on to attention and
users.
Google has used similar tactics in advertising, search and maps.
The company has been fined three times by the European Union since
2017, for a total bill of about $9.3 billion, for various
anticompetitive practices in search and Android. The company is
also the largest seller of advertising in the world and owns two of
the top three mobile-mapping and navigation services -- Google Maps
and Waze, which it acquired in 2013.
Google has been the subject of some sort of federal inquiry on
nine occasions, some of which, like the Federal Trade Commission's
2012 examination of the company's privacy practices, resulted in
relatively small fines. When the FTC approved Google's acquisition
of advertising giant DoubleClickin 2007, the commission said the
deal wouldn't "substantially lessen competition." Congress now has
the opportunity to revisit this conclusion.
Whether or not Google and Facebook are on balance creating more
innovation in tech will probably be the subject of debate even
decades hence. But when academics have studied other industries,
they've found a consistent pattern, says Anne Marie Knott, a
professor of business at Washington University in St. Louis who
invented the measure, called RQ, of the amount of bang per buck
companies get from R&D spending.
As companies grow, they pump out more innovations, because being
bigger has many advantages, from the scale required to
support-related functions like manufacturing and distribution, to a
lower fixed cost of R&D relative to their revenue. Facebook
executive Nick Clegg has echoed this argument, writing that the
company's size gives it the resources to innovate.
The problem is that they lose motivation to innovate once they
become a monopoly and lack competition, Prof. Knott says.
"Monopolists will only innovate to the point at which they have
brought in the monopoly number of customers, whereas if you have
competition," she adds, "you're also continually trying to bring
back share you've lost."
What's unclear at present -- and what regulators and Congress
will have to assess -- is where exactly in this transition from
usefully big to actually a monopolist Google and Facebook are in
their many lines of business.
Not everyone agrees Google and Facebook even qualify as
monopolies. Neither company lacks competitors, whether it's Bing,
Baidu and Yandex in search or whatever the latest thing teens are
on in social media, says Kim Wang, an assistant professor of
strategy and international business at Suffolk University's Sawyer
Business School, who researches competition among technology firms.
"Even if Google and its peers do seem to possess monopolistic
power, fast-paced technological change likely makes the power
short-lived," she adds.
One thing that's become clear is that these companies' sizes and
tendency to eliminate the competition while poaching its talent
have created what analysts call an "investment kill zone."
"We know of instances where tech giants emulated and then
crushed young upstarts, and some prominent venture capitalists have
expressed apprehension about funding companies that compete
directly against these platforms," says economist Ian Hathaway,
research director for the Center for American Entrepreneurship.
Google's YouTube is the 800-pound gorilla in user-generated
video, but it's worth considering its surviving competitors:
There's the Facebook/Instagram conglomerate, there's Amazon.com
Inc.-owned Twitch, and there's TikTok. The hugely popular site --
which consists almost entirely of short, song-driven clips -- is
the product of the merger of two Chinese startups, Shanghai-based
Musical.ly and TikTok, owned by ByteDance Ltd., one of China's most
valuable startups. Arguably, TikTok is thriving because it escaped
Big Tech's kill zone.
Google and Facebook now make up about 60% of the U.S.
digital-advertising pie, which in 2019 is projected to exceed the
total ad spend on TV for the first time. In the last three months
of 2018, Facebook pulled in about $30 in ad revenue for each user
in the U.S. This is why economists are starting to argue that
consumers are being taken for a ride by these "free" services.
But if our data is so valuable, why aren't Facebook competitors
lining up to write us checks for it?
"If these industries were more competitive, a consumer might
actually be paid in terms of better services or even cash to use
the site," said Jason Furman, a former White House chief economist
who recently wrote a report for the U.K. government about
competition in digital markets. A lack of alternatives is further
evidence of the harmful monopoly of Google and Facebook, he
adds.
How Free Harms Us
When an online service must be paid for solely through
advertising, the company's overriding incentive is to increase
engagement with it: Users see and click on more ads. This drives
all sorts of unexpected outcomes. Owing to its
engagement-maximizing algorithms, Facebook appears to bear, by its
own admission, some responsibility for a genocide in Myanmar.
Other well-documented ills that may have been exacerbated by
Facebook include the erosion of global democracy, the resurgence of
preventable childhood diseases and what the company itself
acknowledges may be wide-ranging deleterious effects on the mental
health of millions.
On YouTube, Google's engagement-maximizing algorithm has been
recommending material that denies the Holocaust, Sandy Hook and
other tragedies, as well as white-supremacist content and other
forms of hate speech, a policy the company on Wednesday pledged to
redress. Over the years, YouTube has been criticized for other
practices, from driving viewers to the internet's darkest corners
to pushing questionable content on children. Meanwhile, the
globally dominant Google search engine has had a hard time avoiding
accusations of bias in its results.
What Can Regulators Do
In recent history, regulators have clipped the wings of tech
giants rather than breaking them up. In Microsoft Corp.'s 2001
settlement with the Justice Department, the company agreed to
external oversight and opening up more of Windows to developers,
rather than shedding its Internet Explorer browser.
Facebook seems well aware of this history, with Chief Executive
Mark Zuckerberg telling regulators that his company welcomes more
regulation -- but not, of course, being broken up.
"Because these platforms are so multifaceted and involved in all
these different lines of business, there is not just one problem,
there are many problems," says Lina Khan, an academic fellow at
Columbia Law School and an adviser to the U.S. House of
Representatives subcommittee now examining the monopoly issue in
Big Tech. "I don't think a regulatory approach and a breakup
approach are mutually exclusive," she adds.
In a forthcoming paper, Ms. Khan chronicles historical antitrust
efforts against banks, TV networks, railroads and
telecommunications companies. In each of these industries,
regulators aimed to prevent companies from expanding into lines of
business that would compete with their own customers.
Taken to the extreme, such logic would dictate that Google would
have to stop making its own apps, since they compete with
developers that publish in its Google Play app store, Facebook
would have to stop copying or buying up companies that use its
services and rely on it for advertising revenue, and all tech
giants would have to curtail their tendency to pile into pretty
much every business on the planet.
Write to Christopher Mims at christopher.mims@wsj.com
(END) Dow Jones Newswires
June 08, 2019 00:14 ET (04:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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