Are Apple, Facebook, Google And Amazon Unstoppable?

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11.8%

Apple

5.1%

General Motors

4.9%

General Electric

4.0%

Procter & Gamble

2.9%

AT&T

1.0%

Exxon Mobil

0.5%

* Percentage is Amazon’s "technology and content" spending which is broader than just R&D

Source: FactSet via WSJ Market Data Group.​

The Antitrust Case Against Facebook, Google, Amazon and Apple

In a 2005 paper, Mr. Scherer found that Standard Oil was indeed a prolific generator of patents in its early years, but that slowed once it achieved dominance. Around 1909 Standard’s Indiana unit invented “thermal cracking” to improve gasoline refining to meet nascent demand from automobiles, but the company’s head office thought the technology too dangerous and refused to commercialize it. After the Indiana unit was spun off when the company was broken up in 1911, it commercialized the technology to enormous success, Mr. Scherer wrote.

The story of AT&T is similar. It owed its early growth and dominant market position to Alexander Graham Bell’s 1876 patent for the telephone. After the related patents expired in the 1890s, new exchanges sprung up in countless cities to compete.

Competition was a powerful prod to innovation: Independent companies, by installing twisted copper lines and automatic switching, forced AT&T to do the same. But AT&T, like today’s tech giants, had “network effects” on its side.

“Just like people joined Facebook because everyone else was on Facebook, the biggest competitive advantage AT&T had was that it was interconnected,” says Milton Mueller, a professor at the Georgia Institute of Technology who has studied the history of technology policy.

Early in the 20th century, AT&T began buying up local competitors and refusing to connect independent exchanges to its long-distance lines, arousing antitrust complaints. By the 1920s, it was allowed to become a monopoly in exchange for universal service in the communities it served. By 1939, the company carried more than 90% of calls.

Though AT&T’s research unit, Bell Labs, became synonymous with groundbreaking discoveries, in telephone innovation AT&T was a laggard. To protect its own lucrative equipment business it prohibited innovative devices such as the Hush-a-Phone, which kept others from overhearing calls, and the Carterphone, which patched calls over radio airwaves, from connecting to its network.

After AT&T was broken up into separate local and long-distance companies in 1982, telecommunication innovation blossomed, spreading to digital switching, fiber optics, cellphones—and the internet.

Just as AT&T decided what equipment could be used on the nation’s telephone systems, Google’s search algorithms determine who can be found on the internet. If you searched for a toaster online in the mid 2000s, Google would probably have taken you to comparison shopping sites such as Nextag. They pioneered features such as showing consumer ratings in search results, how popular a product was and how prices had changed over time, recalls Gary Reback, an antitrust lawyer who represented several competitors against Google.

Google’s Eric Schmidt testifying at a Senate Judiciary Committee antitrust hearing in September 2011. Google’s Eric Schmidt testifying at a Senate Judiciary Committee antitrust hearing in September 2011. Photo: Chip Somodevilla/Getty Images

But when Google launched its own comparison business, Google Shopping, those sites found themselves dropping deeper into Google’s search results. They accused Google of changing its algorithm to favor its own results. The company responded that its algorithm was designed to give customers the results they want. “If consumers don’t like the answer that Google Search provides, they can switch to another search engine with just one click,” executive chairman Eric Schmidt told Congress in 2011.

At that same hearing Jeffrey Katz, then the chief executive of Nextag, responded, “That is like saying move to Panama if you don’t like the tax rate in America. It’s a fake choice because no one has Google’s scope or capabilities and consumers won’t, don’t, and in fact can’t jump.”

In 2013 the U.S. Federal Trade Commission concluded that even if Google had hurt competitors, it was to serve consumers better, and declined to bring a case. Since then, comparison sites such as Nextag have largely faded.

Last year the European Commission went in the other direction and fined the company $2.9 billion and ordered it to change its search results.

The different outcomes hinge in part on different approaches. European regulators are more likely to see a shrinking pool of competitors as inherently bad for both competition and consumers. American regulators are more open to the possibility that it could be natural and benign.

In new industries, smaller players are frequently bought up or vanquished by deeper-pocketed, more-innovative rivals. Google’s general counsel, Kent Walker, wrote in response to the European Commission decision that even as smaller sites have retreated, Amazon has grown to become a huge player in comparison shopping. Internet platforms have high fixed and minimal operating costs, which favors consolidation into a few deep-pocketed competitors. And the more customers a platform has, the more useful it is to each individual customer—the “network effect.”

But a platform that confers monopoly in one market can be leveraged to dominate another. Facebook’s existing user base enabled it to become the world’s largest photo-sharing site through its purchase of Instagram in 2012 and the largest instant-messaging provider through its purchase of WhatsApp in 2014. It is also muscling into virtual reality through its acquisition of Oculus VR in 2014 and anonymous polling with its purchase of TBH last year.

Facebook founder Mark Zuckerberg speaks at a developers conference last year in San Jose, Calif. Facebook founder Mark Zuckerberg speaks at a developers conference last year in San Jose, Calif. Photo: Stephen Lam/REUTERS

What Facebook doesn’t acquire, it copies. Snap Inc.’s Snapchat, a fast-disappearing photo and video sharing app hugely popular with teenagers, was widely seen as a challenger to Facebook. But in 2016, Facebook introduced its own Snapchat-like feature, Stories, on Instagram, which now has more users and advertisers than Snapchat. That has undercut Snap’s growth and profits by reducing the number of new users “interested in trying Snap for the first time,” says Peter Stabler, an analyst at Wells Fargo.

A Century of Techopoly

Today's tech companies enjoy market shares similar to monopolies of earlier eras.

Electric lamps

General Electric & Westinghouse*

(1896)

75%

Refined oil products

Standard Oil

(1904)

87%

Cellophane

E. I. du Pont de Nemours

(1930s - 40s)

25%

75%

Sylvania**

Phone calls***

AT&T

(1939)

93%

Digital computer installations

International Business Machines

(1955)

75%

Photocopier sales & leases

Xerox

(1971)

86%

Desktop operating systems

Microsoft †

(1999)

80%

Internet search

Google

(2017)

89%

Online commerce

Amazon

(2017)

44%

Electronic books

Amazon

(2017)

75%

Share of mobile operating systems

Apple

(2017)

45%

54%

Google

Share of online advertising revenue

Google

(2017)

21%

42%

Facebook

Share of social media account holders with a Facebook property account

Facebook‡

(2017)

94%

*GE cross-licensed its patents with Westinghouse **Sylvania was licensed by du Pont ***Market share among carriers reporting to the Federal Communications Commission †Federal district court put Microsoft's share of Intel and Mac-based desktop operating systems at "well above 80%" ‡Total social media platform market shares exceed 100% because many people have more than one account

Sources: Michael Scherer, Harvard University; Federal district court; Statcounter; eMarketer; Global Web Index; Codex Group.

The Antitrust Case Against Facebook, Google, Amazon and Apple

There’s nothing wrong with copying, especially if the copy is better than the original. Snapchat’s app was originally difficult to use, says Mr. Stabler, and “you can’t discount [Facebook’s] quality of execution.” Moreover, even as Facebook copies its competitors, it continues to expand and enhance its own services such as Pages, which 70 million businesses world-wide have used to design their own webpages on Facebook.

Snap’s shares have sunk below the price at which the company went public last March as losses have mounted, which won’t encourage new entrants. Once a company like Google or Facebook has critical mass, “the venture capital looks elsewhere,” says Roger McNamee of Elevation Partners, a technology-focused private-equity firm. “There’s no point taking on someone with a three or four years head start.”

Amazon hasn’t yet reached the same market share as Google or Facebook but its position is arguably even more impregnable because it enjoys both physical and technological barriers to entry. Its roughly 75 fulfillment centers and state-of-the art logistics (including robots) put it closer, in time and space, to customers than any other online retailer.

The company says size makes it possible to deliver millions of items free of shipping charges to isolated communities with little retail presence. Amazon makes that network available to third-party merchants who pay a 15% commission and, typically, a $3 pick-pack-and ship-fee, says Greg Mercer, founder of Jungle Scout Inc. which advises third-party merchants how to sell on Amazon. “We have tons of examples of small entrepreneurial-type people who are really good at creating new inventions but have no idea how to distribute to the masses,” he says. “They create products and Amazon can take care of the rest.”

An Amazon warehouse in Britain. An Amazon warehouse in Britain. Photo: Jane Barlow/PA Images/Getty Images

As the dominant platform for third-party online sales, Amazon also has access to data it can use to decide what products to sell itself. In 2016 Capitol Forum, a news service that investigates anticompetitive behavior, reported that when a shopper views an Amazon private-label clothing brand, the accompanying list of items labeled “Customers Who Bought This Item Also Bought,” is also dominated by Amazon’s private-label brands. This, it says, restricts competing sellers’ access to a prime marketing space

Mr. Mercer says he doesn’t see Amazon favoring its own products, and indeed his own firm helps merchants target profitable niches on Amazon. Nonetheless, he says many would prefer to sell through their own sites, but with so many shoppers searching first on Amazon, they feel they have little choice.

In the face of such accusations, the odds of regulatory action—for now—look low, largely because U.S. regulators have a relatively high bar to clear: Do consumers suffer?

“We think consumer welfare is the right standard,” Bruce Hoffman, the FTC’s acting director of the bureau of competition, recently told a panel on antitrust law and innovation. “We have tried other standards. They were dismal failures.”

Still, Ms. Scott Morton notes, “the consumer welfare standard covers today and tomorrow,” and the potential loss of innovation is something both the law and the courts can and have weighed in an antitrust case. The Justice Department sued Microsoft to protect an innovation, the internet browser, remained a potential competitor to Microsoft’s monopoly over the user’s interface with the personal computer.

Microsoft Chairman Bill Gates appeared at an antitrust hearing in Washington federal court in 2002. Microsoft Chairman Bill Gates appeared at an antitrust hearing in Washington federal court in 2002. Photo: STEPHEN JAFFE/AFP/Getty Images

What would remedies look like? Since Big Tech owes its network effects to data, one often-proposed fix is to give users ownership of their own data: the “social graph” of connections on Facebook, or their search history on Google and Amazon. They could then take it to a competitor.

A more drastic remedy would be to block acquisitions of companies that might one day be a competing platform. British regulators let Facebook buy Instagram in part because Instagram didn’t sell ads, which they argued made them different businesses. In fact, Facebook used Instagram to engage users longer and thus sell more ads, Ben Thompson, wrote in his technology newsletter Stratechery. Building a network is “extremely difficult, but, once built, nearly impregnable. The only possible antidote is another network that draws away the one scarce resource: attention.” Thus, maintaining competition on the internet requires keeping “social networks in separate competitive companies.”

How sound are these premises? Google’s and Facebook’s access to that data and network effects might seem like an impregnable barrier, but the same appeared to be true of America Online’s membership, Yahoo’s search engine and Apple’s iTunes store, note two economists, David Evans and Richard Schmalensee, in a recent paper. All saw their dominance recede in the face of disruptive competition. If someone launched a clearly superior search engine, social network or online store, consumers could switch more easily than they could telephone or oil companies a century ago. Microsoft has long dominated desktop operating systems but has failed to extend that dominance to internet search or to mobile operating systems.

It’s possible Microsoft might have become the dominant company in search and mobile without the scrutiny the federal antitrust case brought. Throughout history, entrepreneurs have often needed the government’s help to dislodge a monopolist—and may one day need it again.

Write to Greg Ip at greg.ip@wsj.com

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