The ISP Column
A column on various things Internet
September 2021
Geoff Huston
Regulating Big Tech. This Time, for Sure!
United States President Biden has recently commented: "But let me be very
clear: Capitalism without competition isn't capitalism; it's exploitation.
Without healthy competition, big players can change and charge whatever
they want and treat you however they want. […] So, we know we've got a
problem — a major problem."
It's not every day you hear the President of the United States take on the
very industry that supported his national economy remaining the world's
richest over the past couple of decades. Yet his tone resonates with a
growing unease within the US and elsewhere over the extraordinary rise of
these technology giants, not just in monetary terms but in terms of their
social power as well. He is reflecting a growing sentiment that the
current situation looks like it will never be adequately corrected by just
competitive pressures within market itself. Some further forms of
regulatory intervention will be needed to force a fundamental realignment
of these players. In so doing, it appears that regulators are finally
catching up with the online world in the US, in Europe and in China. I'd
like to explore this topic here.
Anti-Trust Legislation
However, first some background to this topic.
The Sherman Antitrust Act of 1890 was a US Federal measure intended to
curb the emerging power of corporate trusts. It was named for Senator John
Sherman of Ohio, who was a chairman of the Senate Finance Committee and
the Secretary of the Treasury under President Hayes. Several states had
passed similar laws, but they were limited to intrastate businesses. The
Sherman Antitrust Act used the constitutional power of Congress to
regulate interstate commerce. The Act passed through the Senate and
Congress with overwhelming support on the floor and signed into law on 2
July 1890, by President Harrison.
A "trust" was an arrangement by which stockholders in several companies
transferred their shares to a single set of trustees. In exchange, the
stockholders received a certificate entitling them to a specified share of
the consolidated earnings of the jointly managed companies. The trusts
came to dominate a number of major industries, destroying all forms of
competition in the process. For example, on January 2, 1882, the Standard
Oil Trust was formed. A Board of Trustees was set up, and all the Standard
Oil properties were placed in its hands. Every stockholder received 20
trust certificates for each share of Standard Oil stock. All the profits
of the component companies were sent to the nine trustees, who determined
the dividends to be distributed to the certificate holders. The nine
trustees elected the directors and officers of all the component
companies. This allowed the Standard Oil to function as a monopoly since
the nine trustees ran all the component companies. The Sherman Act
authorized the Federal Government to institute proceedings against trusts
in order to dissolve them. Any combination "in the form of trust or
otherwise that was in restraint of trade or commerce among the several
states, or with foreign nations" was declared illegal.
The US Federal sector made extensive use of the Sherman Act in the period
1890 - 1915. President Theodore Roosevelt sued 45 trust companies under
this act, while William Howard Taft sued a further 75 trusts. There were a
number of high-profile actions under the Sherman Act, including the
divestitures of Standard Oil, American Tobacco, and General Electric, all
in 1911. However, the appetite to continue to apply this legal provision
waned in the ensuing years. There were probably a number of factors behind
this. The break-up of these large enterprises caused some consequent
ripples through the national economy and played a role in the US economic
panic of 1911. Congress established the Federal Trade Commission (FTC) in
1914, whose legal and business experts could force business to agree to
"consent decrees", which provided an alternative mechanism to police
antitrust. At the same time the most egregious labour-exploitative
business practices of large corporations was moderated by "welfare
capitalism" in the 1920's. For example, the Ford Motor Company dominated
global auto manufacturing, built millions of cheap cars that put America
on wheels, and at the same time lowered prices, raised wages, and promoted
manufacturing efficiency. This emergence of US dominance in international
markets for manufactured goods meant that the US domestic economy was a
major beneficiary of such large-scale US enterprises dominating the global
market, making them politically untouchable in the domestic context.
Subsequently, such dominant enterprises turned to political lobbying to
forestall political action in the form of anti-trust actions.
Consequently, these anti-trust provisions were largely unused through most
of the 20th century and were only brushed off again in the action bought
against AT&T in 1982.
The Rise of the Digital Giants
It was this action against AT&T that was one of the triggers for the
explosion of the Internet around a decade later. AT&T had largely
suppressed the rise of data communications through prohibitive tariffs for
its services and an aversion to invest in packets network research at the
time. It saw data networks as a wedge that would ultimately threaten its
monopoly in communications services, and it left the field open for DARPA
to explore using federal funding. The divestiture of AT&T created a
collection of rapacious "Baby Bell" enterprises who were successful in
arguing for the deregulation of the telecommunications market. At the same
time computers were leaping the gap from expensive specialised instruments
to consumer goods with the introduction of the personal computer, and
there was a happy co-incidence of demand and supply that fuelled the
transformation of the telecommunications sector. The result was as
explosive as the great railway mania of the 1840's in the United Kingdom,
or the rapid economic and industrial growth of the Gilded Age in the US in
the 1880's. Microsoft was an early leader in the personal computer market,
but it was Cisco that was an early darling of the Internet with an initial
public offering in early 1990 that produced an instant market
capitalisation of $224 million. It may sound like a minor sum today, but
at the time it was an attention-grabbing fortune! And the dot-com bubble
was born.
The bursting of the dot-com bubble in 2000 cleared away much of the
initial hysteria over the Internet, and in its wake, we saw a second wave
of digital entrepreneurism that subsequently overtook the peaks of the
dot-com bubble and continued with an inexorable rise to not only dominate
but define the global digital space. We all know these names, as they are
simply part of pretty much everyone's life these days: Apple, Microsoft,
Amazon, Alphabet (Google), Facebook, Tencent and Alibaba. Apple and
Microsoft now have a market capitalisation in excess of 2 trillion
dollars, Amazon and Alphabet are both at around 1.7 trillion dollars and
Facebook at just under 1 trillion.
The digital world is now totally dominated by these big seven corporates,
and there are some rather troubling issues emerging. The economic model
that these enterprises are using these days goes by the name of
"surveillance capitalism" where the data associated with each customer's
individual interaction with the service is collected, analysed, and then
used to feed profiling models that are used to guide the service's
subsequent interaction with that customer. This includes ad placement, but
may also involve search result tuning, navigational guidance, or similar
customised service responses. The erosion of our expectations of personal
privacy is a rather disturbing by-product of this unprecedented
concentration of attention on the customer, but there are a number of more
common undesired outcomes as well, including the elimination of
competition, the active suppression of disruptive innovation from any
third party, and the clear formation of cartel-like behaviour from these
major market actors.
In many ways this is a repeat of the situation that emerged in the Gilded
Age in the US in the 1880's where the leading market actors were moving
far faster than the ability of public institutions and the legislators to
react. What it meant was that these entities were out on their own with
their unique operational business model and they were able to define their
own terms of interaction with customers, with their labour force, with
each other and with the public institutions of the day.
This has happened again with the digital enterprise models used on the
Internet, and it has taken the public sector more than two decades to
catch up with these extremely nimble enterprises. It should be stressed
that this is no longer a telecommunications policy issue. We have moved
well beyond telecommunications here and we find ourselves in the domain of
commerce and enterprise, where the medium and environment is defined by
the behaviour of the applications running on our devices. When we talk
about how to regulate the actions of Facebook, we are not all that far
from the hypothetical conversation on how to regulate the actions of
applications such as Word or Excel! What we are in fact talking about is
the behaviour of these digital services and they ways in which we interact
with them.
So, what are we doing about it?
There is legislation being drafted that is aimed at curbing the power and
influence of the big technology companies in both the United States and
Europe, while in China, the government has already implemented sweeping
changes to the way Chinese technology companies can operate both in China
and beyond.
The US efforts
There is a visible preference in the United States for using the courts to
curb the power of these digital giants, and this is reflected in a number
of legal decisions in recent times. A good example is a recent ruling by a
federal judge in California that Apple must allow app developers to steer
users to payment options outside Apple's App Store and thereby avoid the
fees (to up to 30%) levied by Apple. This is a move that is likely to be
visible in the corporate giant's financial bottom line as Apple is
increasingly reliant on its e-commerce margins rather than rely solely on
platform sales. Behind these legal actions is a number of proposed
legislative actions intended to strengthen the legal framework to curb the
overwhelmingly dominant market position of the current behemoth
incumbents.
There are five bills before the US legislators, following a 16-month
investigation by the House Judiciary Committee. The measures are headed
for a house vote, preceding a Senate vote and then Presidential assent.
There is a lot of opportunity to derail this process, but the fact that
this has got this far already reflects a sense of unease that these tech
giants have been perceived to be abusing the massive social reach and
commercial powers, gaining overwhelming relative market power over
potential competitors, or simply purchasing competitive technologies with
a view to either integrating it into their product or simply suppressing
its further development. This Congress appears to be serious about this
topic and is attempting to move forwards with a legislative agenda on a
bipartisan basis.
The "Ending Platform Monopolies Act" makes it illegal for a platform
operator to bias outcomes and selection of services in favour of other
companies that they own. The legislation is saying in effect that "you can
be a marketplace or be a seller of goods, but you really can't be both at
once" This has attracted the most opposition in Congress at present. It
would force a breakup of the corporate "umbrella" where individual
companies hand off users to other companies in the same corporate group in
preference to any third-party provided service. It appears to target
Amazon and Apple in particular, as its provisions are limited to retail
sales companies that have a market capitalisation larger than $600
billion, which is of course a highly selective filter.
The "America Choice and Innovation Online Act" would prevent companies
from using data that they obtain by being a platform. For example, it
would prevent Amazon using their platform data to support selling their
own party products on an unfair competitive basis with products from third
parties. It would also prohibit other types of discriminatory behaviour by
dominant platforms, such as cutting off a competitor that uses the
platform from the services offered by the platform. It also prevents
dominant platforms from using data collected on their services that isn't
made available to other platform suppliers to fuel their own competing
products.
The "Merger Filing Fee Modernisation Act" is a bipartisan bill that is
intended to revive effective antitrust enforcement in the United States.
The bill proposes to increase enforcement resources for the Federal Trade
Commission and the Antitrust Division of the U.S. Department of Justice by
more than $154 million, or almost 30 percent. It would also adjust the
merger filing fees system so that fees would more equitably fall on larger
deals. The bill alone will not solve the market power problem in the U.S.
economy but increasing the enforcers' capacity to bring more cases is a
necessary first step. Currently, the merger fee for transactions of
entities where the merger transaction is in excess of USD $919M is USD
$280,000. The proposed bill changes this filing fee to $2.25M for
transactions of $5B or more. It seems to me that the impost on mergers and
acquisitions has risen from a risibly minute level to something that is
still laughably insignificant. If this is the best indication that the US
Congress can give to signal that is it focussed on the issue of mergers
and acquisitions as an anti-competitive tool then frankly its reasonable
to conclude that this level of Congressional focus falls somewhere close
to woefully too little and lamentably ineffectual!
The "Platform Competition and Opportunity Act" is proposed to shift the
burden of proof in merger cases to dominant platforms to prove that their
acquisitions are in fact lawful in terms of not impairing levels of
competition, rather than the regulator having to prove the acquisition
will lessen competition. This measure would likely substantially slow down
acquisitions by dominant tech firms.
The "Augmenting Compatibility and Competition by Enabling Service
Switching (ACCESS) Act" would mandate dominant platforms maintain certain
minimum standards of data portability and interoperability regarding the
data they collect and store about consumers, making it easier for
consumers to take their data with them to other platforms, and also
pushing industry-wide use of common data formats and interchange between
these platforms. It strikes me as a distinct risk of this bill in enacted
that it would take a small set of distinct platforms and create a single
cartel. Such an outcome would probably be somewhat worse in terms of
entrenched barriers to competition than today's situation.
These bills would be significant if they pass through the legislative
process unscathed, and unsurprisingly the tech giants have been lobbying
intensively to try and ensure that Congress will not pass these bills in
their current form.
The EU
There are 2 draft bills before the EU Parliament, the Digital Services
Act, and the Digital Market Act. Like GDPR measures that preceded it,
these are both potentially significant pieces of legislation.
The Digital Services Act puts more responsibility on the part of service
providers, and it is intended to highlight their responsibility in taking
an active role in content moderation decisions. It also directs them to
make such decisions more transparent and appealable.
The Digital Markets Act will moderate the speed at which digital
enterprises can effectively "take over" markets. It's a significant piece
of legislation by changing the regulator's toolset by forestalling planned
corporate acts rather than reacting after the event and trying to mitigate
the consequence. As with the previous GDPR measures, fines are significant
at up to 10% of global revenue for the corporation. These potentially
massive fines have attracted headlines, but it's clear that the fines are
less of an issue than the measures to forestall private sector actions and
require corporate actors to engage the regulator beforehand.
The EU legislative process is tortuous and somewhat opaque at times so
there is much to happen in the next 18 months as these measures wind their
way through the process.
Meanwhile, France and Germany are both impatient to see change and are
acting unilaterally as a lead to potential EU action. Germany has already
made a change at the start of 2021 so that large scale platforms,
including Amazon, can be pre-emptively shut out from a suite of actions
within the German market. The French action continues a well-established
pattern of requiring social platforms to have active moderation of
content, particularly relating to hate speech. Both countries are trying
to influence the broader EU response in whatever the final EU-wide rules
may be.
The Digital Markets Act appears to be a continuation of the line of
through put forward by Luis Brandeis in the US in the first part of the
twentieth century, when he argued that big business was too big to be
managed effectively through post-facto regulatory actions in all cases. He
noted that the growth of such very large enterprises that were at the
extreme end of the excesses of monopolies, and their behaviours harmed
competition, harmed customers, and harmed further innovation, while at the
same time the quality of their products tended to decline, and the prices
of their products tended to rise once they had achieved market dominance.
When large companies can shape their regulatory environment, take
advantage of lax regulatory oversight to take on more risk than they can
manage, and transfer downside losses onto the taxpayer, then we should be
very concerned, as the public sector would by then have lost its power to
respond to such destructive and exploitative corporate practices by these
monopolists. He was in effect arguing for pre-emptive curbs on emerging
monopolies and market distortions, in line with the current provisions in
the Digital Markets Act.
China
There is a sense of catching up in China to introduce consumer protection
measures that have been a feature in European and Norther American markets
for years. There are, however, some basic differences between China and
the US and Europe.
The US and European situations are moderated by the activity of industry
lobbyists, where the case for curbs and controls is moderated by the case
that such enterprises are powerful generators of wealth in post-industrial
societies. China's response is far more along the lines of direct
intervention in the market.
Shares in Alibaba have fallen sharply following reports that Chinese
regulators want to break up Ant Group, the huge financial-technology firm
affiliated with Alibaba. The Financial Times has reported that Ant will be
directed to divest Alipay, the world's largest payments platform, and hand
over users' data. Alibaba's outspoken co-founder, Jack Ma, has reportedly
fallen out of favour with the Chinese Communist Party.
The restrictions imposed by Beijing in recent times includes ride hailing
services, social platforms and ecommerce, online education These are not
subtle changes in the overall environment but quite explicit measures. A
little over a year ago Jack Ma made some less than complementary
observations about the ruling leadership in China and their ability to
drive a policy agenda that was effective in the broader context of an
increasingly sophisticated national digital agenda. He was swiftly bought
into line by the national leadership, who then triggered a set of changes
that have taken on a far wider agenda. It's not just about regulating Big
Tech entities in China, and it goes into the entire notion of the makeup
of Chinese society. The emergence of a monied elite is seen to be a threat
to the ideal of a more egalitarian Chinese society.
Digital Education had attracted a huge level of consumer interest in
educating their children, and the Chinese changes are intended did to
curtail profit taking from such activities. This has erased large sums in
the value of these Chinese tech enterprises that are active in the online
Chinese education market.
At the same time China is taking steps to stop data leakage and direct
data export from China, attempting to curtail the export of Chinese data.
This was evident with the float of DiDi on the US market in June of this
year, a move that appeared to raise the suspicions that the resulting
multinational enterprise would have no qualms about taking a multinational
view of their gathered profile data as well. The Cyberspace Administration
of China ordered app stores to remove the DiDi app, after citing
violations on the company's collection and usage of personal information.
As a result, DiDi stopped registering new users and agreed that it would
make changes to comply with rules and protect users' rights. The Chinese
regulators then announced that it would tighten rules for Chinese
companies seeking to list or sell shares outside the country. In August
the U.S. Securities and Exchange Commission temporarily halted all IPOs
from Chinese companies due to the regulatory uncertainty surrounding DiDi
and other Chinese companies listed in the US.
Part of the concerns here relate to a domestic Chinese economy which is
still highly debt leveraged with few controls and few well-established
regulatory levers. The Chinese tech giants were in effect working with an
apparent free rein to innovate with consumers on various forms of digital
transactions and currencies which cumulatively threatened to create a
significant overhang of control across the Chinese economy and potential
exercise significant social influence.
The ground beneath Chinese digital enterprises has been well and truly
shaken by these government actions. This action also raises the question
of foreign investment in Chinese enterprises. China is still reliant on
foreign investments, despite the size of its domestic economy. These
apparently arbitrary interventions increase the nervousness of foreign
investors, which, in turn, puts pressure on the Chinese economy to lift
interest rates to factor in this investment risk. The markets in China are
highly volatile as a result and this may limit economic growth potential
in the near-term future.
The strains in China are similar to those in other parts of the world. How
much data can you collect about consumers without their explicit knowledge
or consent? What can you do with this data? What controls should you be
bound to in storing, using, and on-selling this data? How can the public
sector place a rein on the social powers of these new enterprises without
scaring off the private sector investment that underpins these
enterprises?
Is it going to be "This Time, for Sure!" Or should we expect a Next Time?
I am hard pressed to conclude that these various legislative actions or
direct leadership responses will constitute the final word in trying to
strike a workable balance between these new business models, driven by
various forms of enthusiastically deployed digital surveillance
infrastructure, and the desires of national public sectors in trying to
seek a sustainable market structure and a stable societal framework.
The aim of these digital enterprises is basically disruptive in nature at
the start and as they mature then they naturally change. The emerging
model starts to look more and more like a rerun of a colonial model of
exploitation where a multinational digital enterprise operates within each
domestic economy using a largely extractive and highly exploitative
business model that expatriates profits and performs as little in the way
of local investment as possible. So, it's useful to ask what do we mean if
we want to open up this extractive and exploitative business model to
competition? Adding more operators of the same basic extractive
exploitative digital business model hardly seems to represent a desirable
outcome. In this case more is probably not better!
My sense is that the unease is not specifically an unease with Facebook,
Amazon or any of these other digital giants. It's not specifically these
particular actors per se. It's not that if some other social network
platform had gained the momentum to obtain an effective dominance of this
space, then then the outcome would've been any different. Anyone else who
happened to be in the right position at the right time would've created
much the same outcome that we have today.
It's not even the fact that they have established massive Internet-wide
functional monopolies or cartels in their respective areas of activity.
Even that, as bad as it has become today, is not the major problem we
appear to have. Yes, it's a problem, and the monopoly will naturally exert
a repressive force for further innovation and instead it will attempt to
divert the collective effort to a more contained level of non-disruptive
refinement that does not threaten the incumbency of the established
monopoly. But we should remember that monopolies only exist for a moment
in time, and their very presence creates a continuing onslaught of
competitive pressure which ultimately disrupts their monopoly. Apple and
the others will doubtless suffer the same fate as the British East India
Company in the fullness of time. In the same way that the telco sector
simply could not react with the necessary speed and agility to respond to
the Internet in any meaningful way and their very size became a liability,
as similar fate awaits all these current digital behemoths. Doubtless
these entities will still exist in some way, and they may still be
influential for many years to come, in the same way as J. P. Morgan or
General Electric are still large and influential corporate entities more
than 120 years after their corporate debut, but like these Guilded Age
giants, their overarching market powers will dissipate over time under the
relentless pressure of competitive forces.
The unease I have about this situation is more of an unease about the
fundamental changes to our society as we head down this digital path.
There is an increasing appreciation that social networks have undermined
our collective trust in some vital public processes (such as elections,
for example). There is the sense that there are few, if any, broadly
trusted information sources left in today's world. It appears that the
wisdom of crowds is nothing more than a contradiction. There is the sense
that we are being collectively challenged with ever larger and ever more
significant common problems, but our societal cohesion and collective
ability to harness our resources and focus our efforts to address these
issues has been significantly eroded.
It strikes me that in attempting to regulate against the overwhelming
current market position of these giants we are being distracted by the
symptoms rather than looking at the root causes. In the same way that the
Sherman Act was more of a reaction to the massive changes in US society
that was being wrought as a consequence of the changes from a primary
producing largely agrarian society into an industrial society with its
associated massive displacement of people, occupations and wealth, we are
seeing a similar displacement happen today and a similar reaction from the
legislators to this sense of societal dislocation taking place in this
digital age. I suspect that in Europe there is an additional irritant in
this situation, as the former imperial powers with their respective
colonial empires have now joined the ranks of the digitally exploited. The
threat of these significant financial penalties will likely offer little
in the way of lasting comfort, let alone alter the inevitability of the
outcome.
So, yes, we can expect further rounds in this engagement between
legislators and national regimes and these digital giants, but I suspect
that future rounds will need to change their intended focus and move
forward along a path of reconciling our societies to the imperatives of
this digital economy. We need to stop applying some basically cosmetic
refinements of the regulatory measures of the 1890's to the world of 2030,
and work on the harder problem of coming to terms with what we are doing
to ourselves in this digital age. It's not easy and it will take time, as
well as entailing numerous iterations of various public sector responses
as we feel our way along this previously untrodden path.
 
Disclaimer
The above views do not necessarily represent the views or positions of the
Asia Pacific Network Information Centre.
Author
Geoff Huston AM, B.Sc., M.Sc., is the Chief Scientist at APNIC, the
Regional Internet Registry serving the Asia Pacific region.
www.potaroo.net