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11 December 2020

Donald Trump started a war with Big Tech. Will Joe Biden call it off?

The US president-elect faces a dilemma: support the break-up of America's most valuable companies, or endure the wrath of his party.

By Oscar Williams

On 6 October, less than four weeks before the US election, the House of Representatives’ antitrust subcommittee presented a striking prediction of what might happen if the data economy is allowed to run its course. The committee concluded the four companies it had investigated – Google, Amazon, Apple and Facebook – had “captured control over key channels of distribution and have come to function as gatekeepers. Just a decade into the future, 30 per cent of the world’s gross economic output may lie with these firms.”

The publication of the report delighted those who have long been calling for a reckoning for Google and its fellow tech giants. Barry Lynn, who has, as director of the Open Markets Institute, been pushing for reform of the tech sector for more than a decade, told me he sees it as “the single most important congressional investigation into private power since the Pujo Committee”, which was convened 108 years ago and is credited, among other things, with the creation of US antitrust law and the Federal Reserve, the adoption of federal income tax, and the death of JP Morgan.     

Three weeks after the committee’s report, the US Department of Justice (DoJ) filed narrow but carefully considered charges against Google, which it claims illegally compels smartphone manufacturers that use its Android software (as three quarters of the world’s smartphones do) to make its search engine the default option on their devices. Google also pays Apple billions of dollars a year to do the same thing with iPhones.

Rumours swirled that other tech firms would soon find themselves within the US government’s sights. But few anticipated just how radical the forthcoming legal action would be.

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On 9 December, less than two months from the end of Trump’s presidency, the Federal Trade Commission (FTC) announced it is suing Facebook. According to the competition authority, Mark Zuckerberg’s $787bn (£592bn) social network has “engaged in a systematic strategy […] to eliminate threats to its monopoly”. 

Working in partnership with the attorneys general of 46 states, the FTC is seeking a number of remedies in court to address the company’s monopolistic behaviour. It wants to “prohibit Facebook from imposing anticompetitive conditions on software developers”, ensure the company seeks “prior notice and approval for future mergers and acquisitions”, and, most dramatically, to “require divestitures of assets, including Instagram and WhatsApp”.

In other words, the Trump administration wants to force the world’s largest social network to sell off two of its most valuable assets. But how likely is it that the FTC will succeed in court? What are the chances of the DoJ securing a victory against Google? And is this a war in which Joe Biden, who served as vice-president in Barack Obama’s notoriously pro-tech administration, will seek peace rather than victory?

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Since the 1980s, US antitrust action has been underpinned by the concept of consumer welfare. Robert Bork, who wrote the seminal 1978 text The Antitrust Paradox, pioneered a laissez-faire approach to competition enforcement that prioritises “economic efficiency” above all else. Corporate mergers were to be welcomed, Bork argued, because they led to streamlining and lower overheads, which resulted in cheaper prices for consumers. At least, that was the theory, and it has been widely disputed, but Bork’s approach prevailed and the adverse effects of extreme consolidation often went overlooked.

If consumer welfare is the object, the FTC and DoJ’s cases might seem ambitious. The Facebook and Google services in question are, after all, offered to their users free of charge. But the “customers” of these services aren’t the users, but the advertisers who want to reach those users. The users are the product. It’s for this reason that the FTC’s case alleges that Facebook’s anticompetitive behaviour “harms competition, leaves consumers with few choices for personal social networking, and deprives advertisers of the benefits of competition”.

The wording of the DoJ’s lawsuit suggests it, too, is motivated by a broader definition of consumer welfare than Bork initially envisaged. It sets out several ways in which Google’s market dominance is damaging. “Advertisers must pay a toll to Google’s search advertising and general search text advertising monopolies; American consumers are forced to accept Google’s policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google’s long shadow.”

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Google is likely to contend that it would retain its position in the market without its default search position deals, a defence the DoJ will have to disprove if its case is to succeed, as Tech Monitor reports. The company’s lawyers have already argued that the agreements don’t stifle competition because users can simply select a rival search engine, such as Microsoft’s Bing or the privacy-focused DuckDuckGo, as their default provider.

But legal experts are sceptical of this argument. “The competitor might be a click away, but competition isn’t,” says Ariel Ezrachi, professor of competition law at Oxford University. “If I put a default in front of you, behavioural economics shows us the majority of people will stick with the default, which explains why it is worth so much money.” Last year, the auctioning of default search positions on the iPhone’s Safari web browser earned Apple £1.2bn in the UK alone. According to the UK’s Competition and Markets Authority, a “substantial majority” of that income came from Google.

Although the DoJ hasn’t yet presented its proposed remedies for Google, it has urged the court to “enter structural relief as needed to cure any anticompetitive harms”. Some lawyers are doubtful, however, that the case has been modelled in a way that would warrant breaking up the company. 

Facebook may not be so lucky. The FTC’s case specifically focuses on the acquisitions of Instagram and WhatsApp, which it sees as anticompetitive behaviour. The proposed remedy of selling them off might seem radical, but if those acquisitions are deemed illegal, it is also logical.

But the case may not be so clear-cut. “The transactions were approved,” explains Ezrachi, “so a break-up will have implications which also affect merger control, and go beyond the issue of market power.” Rather than actually splitting the company apart, he says, it may be that the court forces Facebook to separate its data and limits what the company can do with it.

The idea of forcing Facebook to ring-fence, rather than sell off, Instagram and WhatsApp might sound like a light-touch approach, but would strike at the heart of Facebook’s value. Facebook depends on the interconnectedness of its portfolio of platforms to extract as much value as possible from each of the 2.7 billion people who access it each month.

There is also the question, however, of how enforceable such actions are. When Facebook acquired WhatsApp for $19bn in 2014, it promised the European Commission that it would not be possible to link users of the messaging service to their Facebook accounts. But within two years of the acquisition being approved, that’s exactly what it did. Facebook later agreed to stop harvesting European WhatsApp data. As WhatsApp itself generates very little data on its users, this made it almost impossible to monetise the platform. Only this week, as the FTC’s lawsuit emerged, has Facebook unveiled plans for how it intends to make money on WhatsApp.

Instagram, on the other hand, makes money in its own right. But a separation of Instagram and Facebook would also be hugely damaging. As Facebook’s user numbers have stagnated in recent years, Instagram’s have continued to grow, thanks in part to its aggressive cloning of rivals’ products.

Network effects also play a role here: the more people there are who use one of Facebook’s platforms, the more people will want to use those platforms, and the more valuable they become to advertisers. This is particularly relevant now, as Facebook is in the process of unifying the technology underpinning Facebook Messenger, WhatsApp and Instagram Direct to create a series of interoperable platforms. If Facebook was forced to ring-fence WhatsApp and Instagram, it would be significantly harder to link those systems together and give advertisers the ability to reach users, no matter where they are within the Facebook ecosystem.

Ezrachi says the case tells us something about the knowledge gap between governments and technologies. “It highlights what has been argued by many for some time now – that at the time of the mergers, the agencies failed to fully appreciate the value of data and the impact of network effects,” he says. “The approval of the transactions was based on misguided assumptions as to the dynamics of digital competition, the self-correctness of the markets, and the impact of data concentration. 

“The reality is that network effects, big data and big analytics naturally lead to tipping of markets. When you enhance these effects by allowing takeovers that eliminate important competitive forces, you further increase concentration […] We end up with limited competition that enables the companies to downgrade our privacy settings, extract our data and control the ecosystem.”

***

Antitrust action against Big Tech has to date largely been a left-wing cause, popularised by Democrats such as Elizabeth Warren and Bernie Sanders. But it is under the Trump administration, which has regularly claimed that firms such as Facebook and Google have an anti-conservative bias, that the war on Big Tech has been waged. Under Obama, the White House was comparatively soft on the sector, and it was especially close to Google. During Obama’s presidency, nearly 250 people passed through the revolving door between the White House and the Silicon Valley giant.

Reports that Biden could give jobs to more than a dozen tech executives have raised concerns of a return to that era. In the days after this year’s presidential election, Eric Schmidt – the former chief executive of Google – was tipped as the front-runner to lead Biden’s technology task force. Such an appointment would prove controversial. Although Schmidt left the company earlier this year, he still owns 4.1 million Google shares, worth more than $7bn. He is also seen within the industry as the architect of the tech giant’s huge lobbying operation. 

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Barry Lynn says appointing Schmidt would delight conservative commentators such as Sean Hannity, whose “shtick is to paint the Democrats as stooges of Google”. But he also warns that such an appointment, and a softening of the government’s stance on Big Tech, would set Biden up for a fight against members of his own party, many of whom believe Facebook aided Donald Trump’s rise to power in 2016. 

Biden himself has made few public statements on the matter, and those he has made are largely non-committal. In 2019, he told the Associated Press that breaking up Facebook is “is something we should take a really hard look at”. But Lynn notes that “even if he wanted to help get [Facebook] out of the hot seat, when you’ve got 46 states plus Guam and DC taking a case against Facebook, you’d be foolish to [go against them]”.

Competition experts such as Ezrachi expect that protracted litigation will be “inevitable” for Google and Facebook in the months and years ahead. But while there are clear concerns about the efficiency of these tussles, particularly in light of the US government’s failed attempt to break up Microsoft in the Nineties and Noughties, not everyone is so downbeat. After all, it was during that period that a distracted Microsoft lost its hold on the technology market and other, leaner, tech firms emerged. As lawyers often remind us, Google and Facebook were chief among them.