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Is It Time to Break-Up Big Tech?

Irwin M. Stelzer

Uber comes along and ends the rainy days and nights of waving fruitlessly at cabs with flashing “off duty” signs, and governments respond to pressures from threatened incumbents by making life difficult or impossible for the welfare-enhancing newcomer.

Amazon spares consumers the chore of driving to malls, picking through racks, and perhaps finding a tolerable substitute for what they really, really want, and the tax man and the regulator come sniffing around.

Google puts the world’s intellectual output at everyone’s disposal, Apple puts enormous communicating power in citizens’ pockets, and Facebook links far-flung people with similar interests, only to find that the power their successes convey prompts governments to search for new constraints. And a cut of the revenues.

Unfortunately for the tax collectors, they are forced to play whack-a-mole with the Internet giants who can always find another way of moving profits from the greediest of their pursuers. Until the tax men accept the fact that they will always be one step behind the lawyers and accountants who shield their clients’ well-gotten gains from the pursuers, the profit-mole will never get whacked.

The obvious solution is to tax revenues in the country in which they are earned—it is a lot easier to total up sales receipts, and tax them, than to try to estimate the reasonableness of fees an international company charges itself for use of its own intellectual property, lodged in the sunny Caribbean or rainy Ireland.

But the taxation problem is the least of the worries of what we might call this era’s Fab Four—Amazon, Apple, Google, and Facebook. (The New York Times’ Farhad Manjoo includes Microsoft in what he calls The Frightful Five). They are now seen by critics as simply too big and, with the exception of Apple (which faces stiff competition) possessing market power that exceeds that of companies that competition authorities in days past dismembered—Rockefeller’s Standard Oil being the most notable of the old giants cut down to size by regulators.

The solution being mooted in academic seminars and the halls of Congress (when its members are not busy dodging presidential tweets) is utility-style regulation of the prices and the soaring profits of these companies. That solution is still a gleam in the eye of some politicians, right and left: they are reluctant to take steps that might curb the activities of businesses enormously popular with the public. But it is now a policy goal of companies who compete with the Internet giants on what they deem an unlevel playing field. At minimum, they are turning to the courts for relief: Yelp, the site on which you can express your pleasure with, or hurl brickbats at, businesses you patronize, has filed an antitrust action against Google, making much the same claims as produced the search-engine’s creator whopping fine in Europe.

Regulation is a tempting goal for policy makers here and in the European Union who feel it essential that they gain control over how people will use the internet to shop, travel, date, learn, and interact in the future. This is especially compelling for E.U. regulators, who feel that unless they somehow control the business practices of leading Internet companies the (ugh) Americans will have too much power in Europe.

I have been involved in regulation for enough decades to know the slowing-to-deadening effect regulation can have on innovation and customer service—not as bad as unregulated monopoly, but nowhere near as good for consumers as competition. Try hard to remember when the pre-break-up AT&T would not allow you even to attach a shoulder cradle to your phone—it being classified as a “foreign attachment”—and compare that with the range of communications devices available since the monopoly’s break-up. Or consider the quality of service you get from your quasi-monopoly cable company, at bundled prices bordering on the absurd, which is why, given the chance, millions are cutting the cord as competition rears its lovely head in the entertainment business.

Better to nourish competition in these new markets than to call in the regulators. Which is what the European Commission says it is trying to do. It has decided that Google has a dominant position in search—a finding with which the company, which I once served as a consultant, disagrees—and fined it $2.7 billion for favoring its own services when consumers search for maps, or shopping sites.

That’s a rather standard application of competition policy to the activities of companies found to be using their power in one market to disadvantage competitors in others. The EC decision raised hackles at Google’s Mountain View, California headquarters, and raised eyebrows in America because of the size of the fine and because once again the Brussels crowd has targeted an American company. Whether the newly installed Trump antitrust team will agree with the EC that Google possesses sufficient market power to warrant similar action is uncertain.

Amazon presents a different problem. It is big and getting bigger. The new $5 billion ancillary headquarters for which it is site-searching will employ a staff of 50,000 workers, supplemented at Christmas by some of the 120,000 Amazon recruits to cope with the Christmas rush. Some 238 cities and regions are offering gifts of taxpayer cash in the hope of persuading Jeff Bezos that his company will live happily ever after in their domain. Amazon now controls half of all internet retail business. But only 8 percent of all retail sales are transacted over the Internet, meaning that Bezos’ half represents only 4 percent of all retail sales. As Manjoo puts it, “Amazon . . . is still a minor satellite compared with Walmart’s sun.” So what’s the problem?

For one thing, that 4 percent share of the total retail market can mask Amazon’s devastating effect on specific market segments: think what has happened to bookstores faced with Amazon’s huge inventory and low prices. More worrying, Amazon has the power to strangle a potential rival in their cradles. Shortly after Blue Apron took its food-kit service public, Amazon filed to trademark a copycat service. Blue Apron shares immediately plunged 12 percent on investor fears that Amazon would eat Blue Apron’s lunch. A possible remedy would be to consider an established antitrust interdiction that, in certain circumstances, prohibits pre-announcements that contribute to the maintenance of market power.

Better that than having a utility-style regulatory commission deciding whether Prime service is fairly priced, or whether plans to provide customers with a special lock and Amazon employees with a camera-monitored key so they can deliver packages when the customer is not home is a good idea, rather than leaving it to customers to decide.

For now, I leave it to the political class to cope with the power these companies seem to have over the nature and reliability of the news they purvey. And to the sociologists to take on Facebook, and the cultural effects of all those friendships formed without even so much as a face-to-face hello, air kiss, or man hug.

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