Trust Busting in Silicon Valley: Analyzing the Role of Antitrust Regulation in the Technology Industry
December 15, 2017
With such size and scope, however, these technology companies are beginning to worry pundits and commoners alike. For example, just this summer alone, European Commissioner for Competition Margrethe Vestager fined Google for biasing its search engine towards its own services and fined Apple and Amazon for matters regarding tax-avoidance . In order to address such issues, governmental agencies could use antitrust regulation to limit the power of these tech giants. that these tech companies are choking out competition, adversely impacting the revenues of content creators, or approaching a level of market share that deters further entry. On the other hand, that tech companies are successfully supplying the entire market’s demand for a lower price than that of two firms – effectively acting as natural monopolies . The polarization of these perspectives have prompted a debate among policy makers, regulators, engineers and business people over the best course of action. Whether it be breaking up monopolistic technology companies, applying more stringent regulation, or even instituting some more creative solutions like regulating technology companies as utilities, the different policy approaches to regulation sector in the technology sector each address different problems . Given these multiple courses of action, the approach to regulating technology companies – if at all – must depend on the specific problem policy makers seek to solve.
Antitrust and the Sherman Act
Setting aside natural monopolies, economists and policymakers tend to hold the view that monopolies in general harm consumers . In order to address this issue, governments apply antitrust policy to keep markets competitive. At the beginning of the twentieth century, there was a huge growth in corporate mergers and horizontal integration and trusts became increasingly prevalent in the United States. Arguably the most notable of such trusts was John D. Rockefeller’s Standard Oil Company, but this time period also saw trusts in the sugar and cigarette industries among others. In 1890, Congress passed the Sherman Act, which made illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce” . Over the next decade, there developed a standard for two general forms of violation against the Sherman Antitrust Act. A per se violation typically consists of price-fixing or other practices which the courts have found to be always harmful. Therefore, a defendant need only show that a corporation practices such an action to be found in violation of the act . The rule of reason violation, however, considers the effect of a firm’s actions on restraining trade. It follows that the size of a monopoly alone cannot cause a violation of the Sherman Antitrust Act; a court would have to also find the monopoly guilty of acting in unreasonable ways that harms the competitive nature of a market .
Through the early twentieth century, the Supreme Court made influential antitrust rulings that still govern antitrust policy to this day. In a sweeping blow to corporate leaders, the Supreme Court ruled in 1904 that the Sherman Act “declares illegal every combination or conspiracy in restraint commerce” . In 1911, the Supreme Court ruled against Standard Oil and the American Tobacco Company, finding that they were guilty of monopolizing their respective industries and had violated the Sherman Act. The Court sought to remedy this solution by breaking up the companies into multiple competing firms, setting a precedent for such corporate break-ups over the last century.
Antitrust Regulation Meets the Technology Industry
The Reagan administration narrowed the focus of antitrust enforcement to cases where there was clear evidence of market power and economic harm to consumers. It was under Reagan’s presidency that the Bell System monopoly (led at that time by AT&T) was broken up into several different companies .
The number of antitrust suits filed per year steadily increased throughout the 90’s, leading to one of the most famous tech antitrust cases in recent memory: United States v. Microsoft Corporation (not to be confused with the pending Supreme Court case Microsoft Corporation v. United States that will be heard in the 2017-2018 term) . Microsoft bundled its internet browser, Internet Explorer, with its Windows operating system, which the Department of Justice argued restricted the internet browser market and harmed competing web browsers. Microsoft claimed that Windows and internet explorer were effectively two parts of the same product and that when a consumer purchased the Windows operating system, they received a free copy of Internet Explorer. Judge Jackson of the US District Court ruled in favor of the government, finding that Microsoft possessed monopoly power in the PC operating system market, engaged in exclusionary practices to protect its operating system monopoly, and ultimately harmed innovation and consumers . The judgement found that Microsoft had tried to maintain its monopoly power in the internet browser market through anticompetitive means and had thus violated the Sherman Act. To address this, Jackson proposed splitting Microsoft into two separate companies, where one would produce operating systems and the other would produce software . Microsoft appealed the decision, and ultimately, Microsoft settled with the Department of Justice. The settlement ordered Microsoft to share its APIs (application programming interfaces) with third party companies in order to promote competition. This constitutes just the beginning of software companies’ encounters with antitrust regulation, and United States v. Microsoft Corporation serves as an important case study for the application of antitrust law to technology companies.
Causes of Concern in Silicon Valley
As the rule of reason describes, a company cannot face antitrust regulation on the sole premise that it is large. Founders of start-ups claim that it is becoming increasingly difficult to compete against large, established technology companies because they can replicate the startups’ technology rapidly . Additionally, some argue that these tech giants are directly reducing revenue for content creators. As Jonathan Taplin, Professor of Communication at the University of Southern California’s Annenberg School, wrote in the Wall Street Journal, “the massive growth in revenue for the digital monopolies has resulted in the massive loss of revenue for the creators of content. The two are inextricably linked” . Additionally, consumers often criticize tech companies for their purportedly excessive collection of customer data. Tech companies, like Google, Amazon, and Facebook, usually collect data in order to personalize advertising or refine search results. In a 2017 study, however, a team researchers found that anonymizing data did not significantly harm the quality of search experience, suggesting that tech companies may be able to offer search services of equal quality even if they collect far less consumer data . While this study does not necessarily negate the commercial purpose of data collection writ large, it is promising that stricter data collection regulations might not significantly impact tech companies’ commercial objectives. Lastly, in the wake of the congressional hearings on the influence of social media in the 2016 US presidential election, more politicians and policy makers seek to hold tech companies accountable for the content they publish, similarly to the FCC standards imposed on political cable and radio content.  As antitrust regulation can come in many forms, the appropriate policy solution must depend on the specific problem policy makers seek to solve.
Breaking Up Tech Companies
Those wary of the growing power of certain technology firms often seek stricter antitrust regulation for the technology industry. Looking at precedents like the breakup of the Bell System or Judge Jackson’s ruling in United States v. Microsoft Corporation, there are many different remedies and policies that can address abuse of monopoly power. It is important to understand, however, that these tactics need only, and should only, be used if there is demonstrable proof of an abuse of monopoly power or clearly anticompetitive actions. As demonstrated by the breakup of the Bell System, splitting one firm that monopolized a market can make the market more competitive and reduce barriers to entry. One AEI scholar argues that splitting the Bell System into separate companies put more telecom companies on the same playing field; for example, Sprint and MCI grew as long-distance fiber-optic firms that could feasibly compete against .
Furthermore, some legal experts argue that antitrust policy itself was crucial for spurring innovation in the technology industry over the last half century. When the Bell System was broken up, AT&T agreed to license all of its patents to American firms for free, which helped spur further innovation based on Bell’s patents for the next decade . In the 1970’s, after more than a decade of litigation, IBM agreed to only focus on producing PC hardware and let others develop PC software, which gave way to the rise of software companies like Microsoft. Moreover, when Microsoft itself faced antitrust legislation, it had to let other internet browsers share the market, allowing for more competition in the rapidly developing internet browser market . These case studies show ensuring that the market remains competitive – through antitrust legislation or otherwise – is a crucial factor promoting for innovation in the technology sector.
Regulating Tech Companies as Utilities
The notion of regulating these large technology companies as public utilities has gained surprising traction over the past few months   . Typically, public utilities control goods or services that are seen as necessities for daily life. Regulators, policy makers, and politicians, however, often do not hold a common viewpoint on whether the services that large tech firms offer meet that standard. Moreover, utility-style regulation can take many forms, from setting price caps, to making the company in question perform specific actions, to simply giving the government more oversight authority.
The main idea behind setting a price cap in “utility”-style regulation is that a monopolist’s profits should not be higher than the amount that competitive market would allow. In order to determine these price caps, some regulators have looked to the Regulated Asset Base Model, which is often used for utilities in the United Kingdom . Under this model, in order to calculate the profit a company would make in a competitive market, regulators would have to calculate the profits of a fictitious newcomer and then cap the monopolist’s profits at the estimated profit that the imaginary newcomer would accrue. The profit of this imaginary newcomer is known as a regulated asset base. Since the regulated asset base would factor in the monopolist’s cost of capital, it would act as a proxy for the profits the monopolist would make were the market competitive. It would then fall upon regulators to update this calculation regularly and enforce the profit cap . One estimate shows that if Alphabet’s returns were capped at 12% (an estimate for the returns of a newcomer in the tech industry), its profits would fall by 65% under the RAB approach. Tech companies receive limited benefits from this system. On one hand, they can almost guarantee that they will make consistent profits (at the rate of their cost of capital), which should please investors. On the other hand, computing the RAB calculation can become especially difficult for technology firms. Regulators may not be able to keep up with the rapid pace of the technology industry and consistently modifying the RAB can make the regulation process extremely difficult . This form of regulation is promising in its ability to limit the profits of a monopoly power, but it ultimately does not confer many other benefits to consumers.
The Anti-Regulatory Argument
On the other hand, that further regulating tech companies will harm consumers. It is evident that there are large technology companies that control a substantial portion of their given markets, yet simply existing as a large company is not sufficient grounds for antitrust action (assuming no per se violation of the Sherman Act). Many of these companies provide services for people that few would be willing to go without. Moreover, these companies do not charge users the exorbitant prices that one typically expects of a monopoly power in a market (though, one can make an argument that consumers are paying through data instead) . Furthermore, opponents of antitrust action and governmental antitrust authorities often argue that none of the “tech giants” are engaging in systematic anticompetitive actions in the manner that Microsoft did against other internet browsers at the turn of the millennium . Yet, many regulatory authorities, especially in the European Union, are seriously regulating American tech companies specifically for anticompetitive actions. For example, the European Union’s antitrust authorities declared this summer that Google has been prioritizing its own services on its search engine – in this case, specifically, its instant comparison-shopping services – against the services of its competitors . But, even if Google does prioritize its own search results over others, there is a still a debate on whether the benefits to consumers from instant information, whether about shoes as in this case, or about the weather, flight timings, or directions, for example, outweigh the harms to the services of Google’s competitors . More broadly, there are concerns that, even if these tech giants do meet some criteria of anti-competitive behavior, regulating them might quell the innovative engine that led them to dominate in the first place .
In addition, monopolies commonly drive up barriers to entry, but some argue that barriers to entry are low for certain technology companies. They explain that it takes less resources, planning, and time to build a new application or new software than it would to construct a new infrastructure project, for example . Furthermore, nearly every major tech company has made some of their most advanced artificial intelligence software and frameworks – from Google’s TensorFlow to Microsoft and Facebook’s joint Open Neural Network Exchange (ONNX) – open source to developers across the world  . Furthermore, the products of one tech company are always susceptible to technological breakthroughs from other companies. As the Economist succinctly described in an article about the growth of tech companies, “the case for being sanguine about competition in the tech industry rests on the potential for incumbents to be blindsided by a startup in a garage or an unexpected technological shift”  .
Alternative Regulatory Approaches
There are also other approaches to regulating the technology industry that do not directly fall under scope of antitrust regulation but can address some of the common grievances critics have with tech companies. As mentioned earlier, one of the most often cited criticisms of the “tech giants” is that they take away revenue from content creators. One approach to curbing the power of these large technology companies would be to allow content creators to negotiate collectively. Currently, tech companies are benefiting from laws that prevent collective action because this leaves smaller competing companies with minimal negotiating power. To address this, the New Media Alliance, an organization that represents print and digital publishers, has proposed new legislation that gives publishers limited safe harbor under current antitrust laws to negotiate against large online news platforms  .
Furthermore, proponents of antitrust regulation look to another detail of the Bell Systems break up for a hint on how to regulate today’s technology giants: licensing. In 1949, the Department of Justice brought a suit against Bell for monopolizing the telecommunications market. Bell and the Department of Justice reached a settlement in 1956, which allowed Bell to remain a vertically-integrated monopolist at the cost of licensing all of its existing patents royalty free to American companies . Looking back on this action, research has shown that patents held by monopoly powers in a market can act as a serious barrier to entry, and licensing these patents to other companies can spur innovation in the industry, especially for small or newly-founded companies  . However, opponents of licensing often fault this method for the amount of time it takes to become effective. Licensing may promote growth in the long-run by lowering the initial cost to create a product for a given market, but it will not necessarily immediately impact the power of monopoly actors  .
In addition, critics of antitrust regulation claim that today’s technology companies are radically different from the monopolies of the early twentieth century and so we need to reinvent new approaches to better identify abuse of monopoly power or anticompetitive practices. For example, when considering mergers between two companies, antitrust regulators typically consider the company’s sizes. Instead, it may be more effective for regulatory authorities to consider the firm’s data assets or the acquisition price. If a dominant firm in a given industry tries to acquire a smaller competitor for a price significantly higher than the value of the competitor’s assets, this could alert antitrust authorities that the dominant firm may be trying to eliminate its competitor to increase its own power and market share.
In order to effectively regulate the technology industry for the betterment of consumers, it is crucial to thoughtfully identify the specific problem and choose a policy path accordingly. Since antitrust regulation cannot be applied to a company solely on the grounds of its size, it is crucial to determine if each company is engaging in anticompetitive practices or abusing the power that comes with its market share. Given the dynamic nature and rapid growth of the technology industry, antitrust regulation in this industry is a daunting task. Policymakers must consider what evil they seek to address, whether using the existing legal framework for antitrust or new regulations geared toward technology companies. A technology company’s size or ubiquity alone is not cause enough to use antitrust regulation under current law, so regulating these modern institutions will require a dramatic rethinking of the relationship between industry and the law.
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