A Perfect Storm?

Is the age of the too big to bust techno-trust about to come to and end?

Have political, economic, sovereign and consumer butterflies created a techno-bombogenesis of dynasty ending proportions? Have the monopoly making network effects of multisided platform flywheels finally reached their asymptotic limit? Will the simple humility of sound business practices, fidelity to consumer welfare and trustworthy motives of honest actors supplant the hubris of virtue signaling, jazz handed CEO’s and their trendy brand new corporate headquarters?

Not likely.

But something seems to be building and the spin machines behind techdom’s biggest powers haven’t been able to snuff it out. And that’s partly because the monopolistic underpinnings of technology’s largest players are becoming exposed on an almost daily basis. To a point where it is both impractical if not down right embarrassing to pretend they don’t exist and actually do something, deliberate or unintentional, about it. The EU, fresh from launching GDPR, is making ready to do it again, this time to loosen the grip of certain search engines. China has taken the wraps off its national standard on personal information protection. France is launching legal action against Google’s monopolistic hegemony in search. Japan just raided Amazon’s local headquarters looking for evidence of market collusion. Congress introduced legislation to curb the Internet platform curation and revenue appropriation of independent news organizations. And Trump just unauthorized the Broadcom/Qualcomm deal. A power even he didn’t know he possessed. The dots are slowly connecting. Quick, somebody crank up the Generative Adversarial Networks. There’s a pattern that needs detecting.

Once upon a time…

Every so often whiny competitors and ambitious regulators get together and point out the obvious; somebody’s eating all the porridge and has grown so corpulent that the only thing between them and their next meal is the flatware with which to consume it. Not software, not hardware, not wetware but flatware. Who’s eaten all the ad tech spending? Google. Who’s consumed social media? Facebook. What percentage of on-line retail belongs to Amazon? Intel’s, Apple’s and Samsung’s respective shares are, for all practical purposes, unassailable. The list goes on.

Sometimes when this happens, it becomes politically expedient to slap said ravenous party with a law suit, with the expectation that everyone involved will eventually come to their senses and see the benefits of settlement. Some modest fines. A couple of quid pro quos. And the inevitable consent decree. Consent decrees are popular for their efficacious anti-trust effects, as well as notorious for their second order economic effects. For instance, if it weren’t for the IBM consent decree of 1956 there would be no Microsoft. At least not the Microsoft that we are familiar with today. Curiously, there is nothing specific in US law that stipulates the when, why and wherefore of consent decrees. If you were to look at the history of techno-based consent decrees it would most closely resemble a random walk of Brownian motion. The EU only started to embrace them in 2004 as a practical, even efficient, means of antitrust enforcement. Consent decrees are negotiated, albeit binding, artifacts of potential legal civil action where concessions are agreed to in lieu of penalties that could otherwise irreparably harm the entity so enjoined. Ostensibly, consent decrees are issued to improve competition through more efficient resource allocation. Viewed this way they form a redistributive forbearance that promotes a salutary increase in the volume of economic activity and, consequently, a larger and a greater share of benefits to all of the parties that so participate. At least that’s the theory. Put this way why wouldn’t you consent? A question one might put to AT&T who agreed to the process only to be broken up, re-capitalized, re-merged and re-gorged and re-stuffed with so many goodies that it begs the question why haven’t they been broken up again? This week the DOJ is going to try but nobody thinks that buying Time Warner is going to take Humpty Dumpty down this time.

Scrutinized with a gimlet eye…

 Howsoever, there are other factors afoot that are beginning to augur for the re-distribution of large, monopolistic technology entities. The most pressing of which is the subtle, subjective and slippery notion of consumer welfare and the Hobbesian constituents that bind it together. According to most legal authorities, the objective of anti-trust policy is to protect and promote consumer welfare. So that’s where anti-trust begins and also where opinions about it part company. Several other voices have suggested that consumer welfare shouldn’t be the primary criterion for anti-trust action when it comes to dominant Internet platforms. Clearly, fair price and fair competition are in the consumer’s best interest. But price is a loaded concept when it comes to Internet platforms. They don’t conform to “out of pocket” axioms. Instead these offers incorporate elements of access, availability, choice, convenience, quality, innovation, pleasure and a number of other intangible factors including such things as being cool; consumers want to be cool, whatever that means, so cool needs to be affordable, available, respectful and convenient, etc. (see The Perils of Being Cool – July 2012).

Keeping the idea of consumer welfare in mind, how would one go about testing Internet platforms to see if they may, in fact, diminish rather than enhance consumer welfare? For starters, most Internet services are free to the consumer so unless you’re discussing the hidden costs of those services, price, as a relevant factor, is mostly off the table. Social responsibility might be another. The Chinese have, in part, invested their privacy policies with the idea of positive social behaviors. Internet platform services, free to the consumer based on harvesting their personal information, could be “marked to market” for each transaction of each identity and the consumer remunerated for its use. Some experiments along these lines suggest that consumers with the right identities, the top 3-5%, might be worth upwards of $1200 per year. Another means would be to determine the consumer cost of asymmetric information in the selection and acquisition of goods and services. There are monetizable proxies for many of these factors such as digital ad spend per consumer or the value of returned items for asymmetrical information costs. (see The Search for El Dorado – September 2011) Social responsibility and other forms of platform virtue signaling might be harder to measure. However, other common measures might include assessing the behavior and status of markets, the share of transactions executed by rivals and whether or not the markets they serve are truly contestable. This is where things can get a little tricky because consumers, markets, industries and competitors have life cycles. They are subject to things like disruption, regulation and obsolescence. For instance, everything in the self-driving autonomous vehicle segment was hunky-dory until an Uber vehicle ran over and killed a pedestrian. Similarly, lets say Facebook’s inadvertent violation of its 2011 consumer privacy consent decree might cause a ripple in the social media scheme of things. So the status quo can be upset and is always subject to change. The same would hold true for the assessment of monopolistic behavior at any given point in time and whether or not it harms or promotes consumer welfare.

Cat Skinning 101…

There are other precedents when it comes to the regulation of native or natural monopolies that incorporate factors other than consumer welfare. These are usually applied when, for a specific good or service, such as shared utilities, power, water or telecommunications, the sheer cost of the assets required to provide the service in question prohibit the formation of competition. In such instances, returns on assets, rents and regulations for those services are carefully monitored and controlled. The same can be true of market making activities around specific products such as securities where the need for uniformity and transparency give rise to agencies such as the Securities Exchange Commission (SEC). Born from the calamity of the ’29 crash the SEC’s charter is relatively simple, first, companies offering securities must be honest and transparent and second, businesses that trade securities must treat investors fairly and honestly. In both of these instances, the remedies provided by regulation are somewhat dictated by the nature of the offer in question (electricity, securities, etc.) as well as the economics that support its equitable creation, distribution and consumption. With respect to the SEC, if in the first part of its charter you replaced “securities” with “Internet services” and in the second part replaced “securities” with “personal identities” you might have most of the current techno kerfuffle covered. These same concepts could be applied to at least some if not all of the techno trusts. And then there’s baseball; an unregulated monopoly that nobody can explain.

Often, when first introduced, even nascent, monopolistic Internet platforms, due to their unprecedented levels of innovation, are deemed to benefit consumers. They can afford consumers capabilities they scarcely ever dreamed of, so early on, consumers and regulators are pretty much indifferent to being mugged, gouged or otherwise mangled. But as time wears on and network effects limit choice, undermine competition, increase switching cost and jeopardize personal information, consumers and regulators start to get a little cranky. At the same time, the larger these entities become the more they seek to solidify their status by expanding into adjacencies through the acquisition of potential competitors. So what do service-oriented, computer time-share services and tomatoes have in common? Amazon.

The larger and more diverse these entities become the harder it is to scrutinize them for what they really are and tease out what factors might be harming consumers. However, it is becoming increasingly clear that any entity that occupies the nexus of a thriving, global network or platform is uniquely privileged when it comes to curating the offers it extends and capturing the value that subsequently accrues from such curation. And this is rapidly becoming the crux of the matter. It’s not only about network effects and returns to scale but returns to connection and curation. Several analysts have recently suggested that Facebook, and in general social media, is really a content and communications entity, essentially a utility, subject to not only FTC but also FCC regulations. Such a declaration would limit the degrees of freedom afforded Facebook with respect to mergers and acquisitions and provide for greater oversight and comment on proposed operations, such as appropriating most of the ad the revenue that independent news providers might generate. After all, one of its primary competitors, Verizon, is already subject to such scrutiny and they don’t seem to be appropriating anybody’s ad revenue. At least not yet.

Once Amazon started selling smart speakers and placing them in consumers’ kitchens and bedrooms didn’t they, in fact, also become a communications entity? How is that any different than owning radio stations, newspapers or operating a phone company? And on that basis how would they be allowed to advertise and promote only those products and services that benefit them, say things you might buy from Whole Foods. Does seem a tad monopolistic and anti-competitive doesn’t it? And isn’t this something that Google, curating search to its own advantage, has been accused of doing since its very inception and something the EU is about to prohibit? Why would Google announce it’s “contributing” $300m to established content publishers if it didn’t believe it might absolve them of some evil inflicted on those same entities? Would $300m be enough to ward off a consent decree?

Pressure drop…

Lacking a uniform, global framework with which to deal with these entities, sovereign treatment of large techno trusts is beginning to change. The European Commission just announced that they are moving forward with a 3% tax on total turn over on all technology companies that are larger than $924m in total revenue with at least $50m in revenue originating in the EU. When you stop and think about it $1b in total revenue with $50m coming from the EU really isn’t all that large.

Next, if Qualcomm is any indication, the Trump administration will soon drop all this tariff non-sense and focus instead on the real issue, sovereign jurisdiction of intellectual property. Congress, through the Foreign Investment Risk Review Modernization Act or FIRRA, is in the process of enlarging the powers of the Committee on Foreign Investment in the US or CFIUS to limit foreign business entities ability to own US companies. This is a clear indication that the stakes just got raised. Sovereign entities have officially recognized that technology and intellectual property have world changing military and economic potential. Quantum computing. Artificial Intelligence. Neuromorphic computing. All of these could radically reorganize the balance of world power and do so in the span of just a few short years.

The introduction of GDPR (see Privacy, Blockchain and Balkanization – December 2017) legitimized the notion that any entity that engages consumers over the Internet has an obligation, a custodial duty, to proactivity protect their personal information. The newly minted Chinese standard on personal information protection only amplifies this principle. The US is becoming increasingly isolated in its laissez-faire lack of personal information protection standards. Who granted Equifax a license to retain and then expose millions of consumer identities? Who provided Uber that same charter? Under what legislation was Facebook granted the custodianship of nearly two billion identities?

In the US, businesses that lend themselves to natural monopolistic tendencies sometimes operate within a regulatory framework. But there is no such uniform framework for US based Internet platforms. When it comes to protection of personal information, transparency of methods, uniformity and standards of practice and merger and acquisition activity, the techno-trusts are free to improvise. It wouldn’t be too much of a stretch to assume that after a platform achieves a certain degree of momentum, reach and engagement, by necessity it achieves a kind of utility like status; costs remaining largely fixed, marginal rents can be easily manipulated to produce monopolistic returns. It shouldn’t be all that difficult to determine when any specific technology player crosses that threshold and automatically triggers specific regulations that limit their opportunity to enlarge themselves at the consumer’s and market’s expense.

Nothing focuses the mind…

Professor Scott Galloway of NYU’s Stern School has suggested for the past several years that the biggest of the big techno trusts simply embrace the inevitable and break themselves up. After all, what’s the worst that could happen? All the little baby Amazons, like the little baby Bells, will continue to grow and make Jeff Bezos more wealthy than Mansa Musa. But how does disassembling Internet platform conglomerates improve the protection of consumers and their personal information? How does it promote rather than inhibit the value that consumers experience by virtue of their participation? How does it increase rather than decrease social responsibility? In truth, it probably wouldn’t achieve any of these objectives.

Perhaps a better measure would be the volume and value of economic activity that any given platform extends to its customers and trading partners. A velocity of virtue. Not just share of market but transparency with respect to share of pass through and opportunity. If platforms become an economic trap, an opportunistic cul-de-sac, a siphon for the means, promoting monopolistic returns, and not the ends, consumer benefit, then they should be recognized and treated as such.(see Value Based Strategy Formulation – February 2011).

We are currently facing such a test with the introduction in Congress of the Journalism Competition and Preservation Act of 2018 that seeks to curb Facebook’s and Google’s curation of independent media for their own enlightened self-interests. But this simply raises the question of whether the most successful approach to regulation of these entities is going to require a never-ending series of one-off legislative actions to protect specific players or industries. Hardly an efficient approach to what appears to be a common problem. The same would hold true for consent decrees. How many would have to be negotiated and how unique would they have to be to satisfy what ought to be common, anti-trust criteria? And once created how would such injunctions be implemented globally?

Perhaps it’s time for global trading partners to go back to the World Trade Organization and actually employ it in the capacity for which it was originally conceived. How hard would it be to harmonize international personal information identity policies or outline predatory trading practices predicated by the unique privilege afforded a technology trading nexus? Countries that protect techno predators could be hauled before the WTO and see their trade embargoed and rogue techno-trusts impounded.

For the time being even the Facebook faux pas, as damaging and humiliating as it was, probably won’t be enough to change the hearts and minds of regulators and legislators. But when it comes to predatory behavior, intentional or inadvertent, regulation isn’t the problem.

Let’s hope we don’t have to have another Crash of ’29 to put proven common sense before pernicious monopolistic profits.

 

Graphic courtesy of NOAA/NASA all other images, statistics, illustrations and citations, etc. derived and included under fair use/royalty free provisions.