Don’t Fear the Titans of Tech and Telecom

July 2, 2018

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We are bombarded on an almost daily basis with some new angst-ridden lament about the inexorable rise of “Big Tech” or “Big Broadband.” The concern is that tech and Internet companies like Google, Apple, Facebook, and Amazon (or “GAFA,” as European policymakers brand them), along with broadband companies like AT&T, Verizon, and Comcast, are just too big and therefore too powerful: They are present at every turn in our digital lives, from the devices and apps we use to manage our daily affairs and navigate the world, to the platforms we frequent, to the communications infrastructure connecting it all. What’s to stop them from using that power for self-interested reasons, and in the process distorting the economy and threatening not only fundamental liberties such as free speech, but our very democracy?

These fears, while understandable, are largely unwarranted. After all, Americans have long distrusted centralized power, whether in our philosophy of government or our attitudes toward business. The Progressive-era antitrust crusader and Supreme Court Justice Louis Brandeis once wrote, “The doctrine of the separation of powers was adopted … not to promote efficiency but to preclude the exercise of arbitrary power.” The way to “save the people from autocracy,” he said, is by building “friction” into the system. These days, when it comes to fears about Big Tech and Big Broadband, there are two main proposals for building in that friction. One is wielding the antitrust cudgel to break up some of these big companies. The other is to turn some of them into regulated public utilities. But either way, the cure would be worse than the disease. Breaking up Big Tech or reconstituting Big Broadband as a public utility would grievously wound the U.S. information technology and communications ecosystem, which is otherwise the envy of the world.

Many of the attacks on Big Tech and Big Broadband stem from the same fear: that they will use their power to limit our freedom or otherwise manipulate our lives. We are regularly told that large Internet service providers (ISPs) will use their last-mile “pipe” to control the Internet traffic we see. Katrina Vanden Heuvel, editor of The Nation, warns that “if net neutrality is eliminated, these media monopolists will restructure how the internet works, creating information super-highways for corporate and political elites and digital dirt roads for those who can’t afford the corporate tolls.” Rebecca Vallas, an analyst at the Center for American Progress, writes that absent strong net neutrality laws, ISPs would capriciously block YouTube channels like “The Misadventures of Awkward Black Girl,” presumably out of some latent or even overt racism. Big Tech is even less trusted by others. DC economic consultant Ev Ehrlich asks, “How do we assure ourselves that the ‘users’ they [Internet companies] connect us to are human or that the search results they feed us are based on merit—not pay for play (or worse, algorithmic racism)?” Likewise, Google critic Jonathan Taplin warns, “we’ve given Google enormous control over our lives and the lives of our children.”

Notwithstanding all this breathless fearmongering, there are almost no cases where any of the major ISPs or Internet companies have intentionally blocked or manipulated legal Internet content for nefarious reasons. The one legitimate net neutrality case that has emerged to date involved a small, independent DSL provider, Madison River, which blocked the voice-over-Internet provider Vonage, but then quickly backed down (and paid a fine) after the Federal Communications Commission intervened (without net neutrality rules). For Internet firms, most criticism is about cases where they block hate speech or prevent illegal access to copyrighted content. So they are often dammed if they do and damned if they don’t: If they block hate speech, they are accused of being censors. If they don’t, they are accused of enabling hate.

Nonetheless, critics warn that corporations are poised become Big Brother at any moment, so government must act now. Hence, the two main solutions being proffered. Proponents of greater antitrust enforcement put their faith in more competition. The idea is that if there were more ISPs, search engines, and social networks, then we would be less dependent on any of today’s market leaders, and their nefarious urges to manipulate networks for their own purposes would be less damaging and easier to defeat. As Klint Finley writes in Wired, “ideally, if your internet service provider … decided to charge you more to access Netflix than Hulu, you’d just switch to a different provider that offered better terms.” For big Internet companies like Google, John Hawkins argues in National Review, “there is another option to deal with this situation that would reduce the power of these companies and serve the public interest. That is breaking these monopolies up into smaller, more focused entities.”

Besides the fact that there is no evidence that the titans of tech and telecom are harming consumers, there are at least three problems with the “break ’em up” solution. The first is that it would raise costs. As my colleague Mike Lind and I argue in our book Big Is Beautiful: Debunking the Myth of Small Business, there are very good reasons why many tech and telecom firms are large: They tend to gain significant market share because of economies of scale and scope, and what economists call “network effects.” For the latter, by providing platforms for users around the world to connect, their very size generates enormous economic benefits for society and consumers.

Nonetheless, some antitrust advocates would chop these powerful titans down to what they consider to be a more manageable size by trying to split their core businesses into multiple competitors. In broadband, this would have little effect on competition. If Comcast, for example, were broken up into 25 companies, all providing “triple-play” Internet, phone, and television services, consumers in any market now with Comcast would still have the same amount of choice (usually several satellite providers, one telco broadband provider, and sometimes another cable or fiber provider). Some advocates instead would try to add more competitors, such as through having the government subsidize the deployment of a third or sometimes even a fourth broadband network in a particular jurisdiction. But trying to add more broadband ISPs to any particular geographic market would be a waste of money for the simple reason that it would increase the total cost of providing broadband services in the United States.

Breaking up big Internet companies makes just as little sense. Imagine the government pressuring Google to somehow break up its search business (e.g., mandating that it give its algorithm to competitors for free or at low cost) and that we now have 10 search engines. Given the considerable economies of scale involved in building and improving software systems, having 10 competing search engines would be wasteful. Moreover, none of the 10 would have pockets deep enough to invest as much in R&D as Google does every year to keep improving search, so overall innovation would likely diminish. Such breakups would also be terrible for users. Were the government to break Facebook into two companies (say, Facebook and “Headbook”) we’d all have to post twice every time we did something we want our friends to know about. There is a very good reason why these applications have evolved to where there is one leading social network (Facebook); one leading professional network (LinkedIn); one leading microblogging site (Twitter): It makes it easier for users. Finally, breaking apart these companies would likely be temporary as the market would eventually choose the best service and over time it would gain dominant market share.

There’s a third problem with the “add competition and stir” panacea. If, for example, there were now 10 search engines, each with 10 percent market share, one likely result would be that some search engines would cater to particular interests. Are you a conservative? Use XYZ search engine and be sure to avoid those troubling liberal search results. Holocaust denier? Use ZYX search engine to be sure that the denier sites feature prominently in search results. Surely, this kind of balkanization cannot be in the public interest. More and smaller tech companies also have fewer resources and incentives to respond to challenges, including the fact that a freewheeling Internet where anyone can post anything anonymously is not an unmitigated blessing. For example, it may well be easier for the Russians to influence U.S. elections through social networks if there were five major social networks, because each network would have fewer resources and less motivation to fight “fake news.”

Most proposal for breakups seek to separate various component services offered by tech and telecom giants: This makes little sense either. In the broadband space, the market is already driving that phenomenon, with video and phone alternatives that are now separate from the ISPs’ triple-play offerings. By next year, an estimated 19 million American households will have “cut the cord” from pay TV, choosing “over-the-top” video offerings like Hulu, Netflix, and YouTube.

In the Internet space, such unbundling of services would either be inconsequential to competition or would harm innovation and consumers. For example, some have argued for breaking up Amazon retail from Amazon Web Services (its cloud computing business). But if there is concern about market power in retail or cloud computing—and there shouldn’t be—then splitting up Amazon wouldn’t diminish power in either business. It’s worth noting that such a move would also send a powerful signal to innovators: Be careful when innovating. Don’t get too successful because if you do the government will step in with a crow bar to yank it away into a separate business. It’s easy to forget that it was Amazon that was the major original innovator in cloud computing because it had so much excess computing power that it didn’t need except over the holidays, so CEO Jeff Bezos decided to build a business around it.

For other separations, either consumers would be hurt, or innovation would be, or both. The Boston Globe recently called for the government should break up Alphabet (the holding company for Google), including separating Google Search from Google X, its “moonshot” R&D group. But many large technology companies, including Google, use their “Schumpeterian” profits to invest in highly risky, expensive innovation ventures, which if successful would lead to enormous societal progress. Indeed, one can make a compelling case that were it not for Google’s investments in autonomous vehicle driving systems the major car companies would not be as far as long as they are with their investments in the technology. Indeed, most if not all of the Big Tech companies are investing exactly the way so many pundits think American companies should be investing, but all too often are not: making big, risky bets on transformative innovation such as drones, AI, AVs, robotics, new kinds of Internet access for remote places, and more. Indeed, as law professor Michael Petit points out, most big tech companies embody patient capitalism, investing large amounts of R&D in future-oriented projects.

In other cases, vertical integration provides real benefits to consumers, as in the case of WhatsApp—a disruptive application that enabled much cheaper messaging than traditional SMS—being part of Facebook. Prior to WhatsApp’s acquisition by Facebook, users had to pay a subscription fee to use it. Now there is no fee. This is because of “economies of scope,” which in this case produce greater consumer welfare. Most breakups would reduce the efficiency of providing a bundle of products and raise overall the overall costs of providing services.

So, the antitrust solution to the alleged problem of Big Tech and Big Telecom fails in every respect. How about more regulation? If we can’t “break ’em up,” then at least the government should heavily regulate big tech and telecom companies, right? We certainly hear this for ISPs, where legions of advocates have called for imposing heavy-handed controls. Neo-Brandeisian advocate Lina Khan argues that, for networks with natural monopoly economics, “the answer is not to break these firms up, but to design a system of public regulation that prevents the executives … from exploiting their power.” For many net neutrality advocates, that has long been the goal, which is why they have actually opposed a legislative solution to net neutrality that would simply prevent blocking legal content in favor of the heavier-handed approach they fought for in the Obama administration—a legal maneuver that classified broadband Internet access as a common-carrier “telecommunications service” under Title II of the Communications Act of 1934, thereby putting it on the road to become a heavily regulated utility, like telephone service was for almost a century.

Advocates now call for the same kind of regulation on Internet companies. Barry Lynn of the Open Markets Institute writes with regard to Internet companies: “These are public utilities. They provide services that are essential in nature. So the people of the United States have an essential interest in ensuring that these giant companies are serving us all equally.” This gets to the heart of the debate. The real agenda for the new tech populists is not to enshrine some reasonable protections to ensure that tech and telecom giants act in the public interest; it is to fundamentally reject the very idea of private, capitalist companies providing these services. Sure, they might argue, capitalist companies can sell us cars, but no way should they be selling us broadband or search services, or if they are then they need to be price-regulated monopolies. It is why the tech populists’ endgame is either public regulation for search engines and other tech platforms, or better yet a user-owned search or social network coop that would never dare to run ads or collect personal information.

While the hardcore populist Big Tech and ISP haters will only be satisfied with radical breakups or regulated monopolies, or even public ownership model, polls show most Americans understand it is important to have private companies with strong incentives to be efficient, innovate, and provide ever-increasing product quality, and that it’s a bad idea for government to run them. If government did, then broadband networks would look like roads—filled with potholes and congested—and Internet firms would look like the VA health system: underfunded and poorly run.

But doing nothing can’t be the answer either. Many Americans hold legitimate concerns about the power of large tech and telecom firms and want to know that there are some guardrails constraining their behavior, ideally ones that preserve the world-class Internet and broadband systems

the U.S. enjoys. In the case of ISPs, the answer is easy. As the Information Technology and Innovation Foundation has written, Congress needs to pass legislation that simply bans ISPs from blocking or degrading legal Internet traffic. End of story. This would lock in protections regardless of which party occupies the White House, but it wouldn’t come with the considerable baggage that Title II regulation imposes.

There is no similarly straightforward fix to ensure objectivity from Internet companies, for the simple reason that there is no such thing as search neutrality, or social network neutrality, or retail sales neutrality, etc. This is not to say that leading Internet companies put their thumbs on the scale in unfair way. They don’t. It is to say that unlike with ISPs, where the definition of neutrality is clear (all legal Internet data packets get treated to no less than what is called “best-efforts” Internet service), there is no analogy to that for Internet companies. Google for example, alters its algorithm many times a year in part on the feedback of thousands of independent search raters around the world in the attempt to make it better for consumers. Is last month’s algorithm more “neutral” than today’s? Does the fact that a particular search result appears on the first page one day, but not on the next day mean one is more neutral than another? No. But still, leading Internet companies can and should do more to be more transparent, such as by disclosing more details (but not proprietary intellectual property) about how their algorithms rank content, including their own competing services; sharing details about updates to their platforms before making major changes; and providing more clarity and explicit policies for managing content objectively (for example, what are the objective factors companies use for removing users or content from a platform like Twitter, addressing online harassment, or removing infringing content, and what steps do companies take to ensure internal compliance?). And of course, if there are documented cases, as opposed to just complaints from disgruntled competitors, that Internet companies have manipulated results for anti-competitive purposes, then government antitrust regulators should act.

Even if Internet companies do an even better job of making their services more transparent, let’s be clear: They will continue to be attacked. For neo-Brandeisians, nothing short of breakup or public ownership will do. For some conservatives, anything that these companies do to be more responsible (e.g., kicking neo-Nazis off their platforms) will raise suspicions. As Adam White writes in The New Atlantis, some conservatives believe that the real risk is that these Internet platforms will quietly partner with progressives to advance their social engineering agenda.

Noted Harvard historian Alfred Chandler, who wrote the seminal work on the history of the U.S. industrial revolution in the late 1800s and early 1900s, concluded that the rise of large industrial corporations—the “Big Tech” of their time—was likely opposed by a majority of the American people. If they could have voted on the matter, most would have said, “No, thanks. We like small [inefficient, craft-based] firms.” Thankfully, the American people did not vote on their fears and elected officials were wise and brave enough to mostly resist them, too. They broke up Standard Oil and installed antitrust guardrails, but by and large they enabled industrial consolidation and size, knowing that the rise of big corporations meant not only massive increases in U.S. living standards, but also U.S. global economic leadership. The same holds true today. Tearing down U.S. technology companies will present less competition for China’s tech giants, which are backed by the Chinese government. Let’s hope that our elected officials today show similar courage and wisdom when it comes to encouraging rather than harnessing today’s Big Tech and Big Broadband.