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Protecting Innovation: Antitrust Laws and the Tech Giants

Protecting Innovation: Antitrust Laws and the Tech Giants

Kin Pan

Bachelor of Arts (Media and Communications) /

Bachelor of Laws IV

 

 

I Introduction

In this digital age, the internet is both entangling and irresistible. Its open and decentralised design carries a democratic and creative promise which has underpinned its expansion into our lives.[1] With a few careless swipes on our phone screens, we can access more information than we could ever consume, and communicate with peers across the world.[2] The internet has also revolutionised and disrupted countless industries, facilitating the emergence of new innovative technologies.

However, whilst the internet has conferred great benefits over the last two decades, progress never comes without a price. The rise of tech giants, which now exert serious power and influence over how we experience the web, has undermined the openness and freedom of the internet. Through their market power, these tech giants have bullied competitors to preserve their elite status. But this hawkish exploitation of market power has come at the cost of innovation and competition. In the end, this hurts consumers who are left subservient to these new age ‘robber barons’ that now control the internet.

In response to these concerning trends, this paper will explore how antitrust laws, which seek to maintain a competitive free market for the benefit of consumers, can be reformed to protect innovation in the face of domineering tech giants. In the past, these laws have sought to scrutinise power structures in the marketplace, and in particular the power of monopolists. However, as is often the case when new technologies arise, these laws have failed to remain effective in addressing the anticompetitive corporate power that tech giants now wield.

 

II The Closing of the Open Internet

We often forget that the internet is contingent—after all, technologies are not just “autonomous from society” but rather the product of social mechanisms.[3] The outcome of processes of technological innovation is shaped by the choices and preferences of actors that participate in these processes. As such, the notion of technological determinism is “a product of the overt and covert marketing of relevant interests”.[4] Whilst technologies are often developed with a certain spirit, the influx of various powerful interests can recast the trendline of such inventions. The internet is a powerful example of this narrative. Pioneers like David Clark envisioned a digital sphere that rejected “kings, presidents and voting”, believing instead in “rough consensus and running code”.[5] The internet as a platform would abolish hierarchical structures and empower the citizens of the internet (‘netizens’) to act without coercion from powerful private interests.

That vision of an open internet has been undermined by the struggles that underpin all capitalist societies —the same struggles that have seen all other historic communications technologies, including the telephone, radio, cinema and television, succumb to the controlling embrace of corporations.[6] Companies seeking to create fortunes and build power have sought to dominate different areas of the internet. In doing so, the internet’s original decentralised architecture has transformed into a minefield of “control points”—locations where those companies possess extensive power over netizens.

There are legitimate reasons for this growing concentration in power. Economies of scale mean that firms will seek to merge and/or acquire competitors in a free market. Closed platforms also tend to be simpler to use and more convenient compared to open platforms, and are therefore more attractive for most people.[7] Moreover, once certain platforms reach a critical mass, the “network effect” compels others to join in fear of missing out.[8]

For most of us, Facebook is our social media hub, Google is our search engine and Apple’s iOS or Google’s Android are our operating systems of choice. These are all innovative products and we gravitate towards them for that reason. However, whilst these companies have come to dominate their markets through their successful innovations, this success has also left us without credible alternatives. Whilst such monopolisation is not undesirable in itself—companies should not be punished for just being large and successful—it does leave tech giants with serious power to exploit their market position to the detriment of consumers.

The anticompetitive threat of control points cannot be understated, with evidence that tech giants exploit their market positions to benefit their private interests. For example, in 2012 prior to the launch of its online bookstore iBooks, Apple conspired with several leading publishers including Hachette Book Group, HarperCollins Publishers, Macmillan Publishers, Penguin Group and Simon & Schuster to raise the prices of ebooks.[9]When publisher Random House refused to join the venture, Apple blocked the publisher from launching a new app into Apple’s App Store. This pressure led to Random House’s eventual capitulation to Apple’s plot.[10]

As tech giants use their platforms to favour their own services and undermine their competitors, the democratic and creative promise of the internet is dissolving. In the absence of competition, netizens do not have the choice of alternative products. Monopolists can therefore exploit their market positions to further their own business interests at the expense of consumer choice. Thus, the defining challenge for regulators over the coming decade is whether the internet should be allowed to continue to evolve towards a structure that amplifies power within an elite class of actors, or whether it should return to its roots in supporting individual freedom.[11]

 

III Control Points and Antitrust Laws

When it comes to diagnosing and treating control points on the internet, antitrust laws—known in Australia as “competition laws”—have a central role in maintaining fair competition on the internet. Whilst Western democracies are committed to the free market, it is undisputed that some commercial behaviours (like price collusion) can undermine the level of competition in the market.[12] Antitrust laws reconcile this tension by placing restraints on certain commercial activities to ensure that marketplaces maintain the level of competition required to protect consumers.

Since the inception of antitrust laws, there have been shifts in intellectual thought around the appropriate scope for government intervention in promoting competition. The Sherman Antitrust Act of 1890, [13] the landmark competition legislation in the USA, drew on ideas of “economic structuralism”.[14] Standing before his colleagues in Congress in 1890, Senator John Sherman exhorted his peers to respond to the threat of monopolies:

"If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition and to fix the price of any commodity."[15]

The prevailing view of the time was that concentration in the structure of a marketplace was itself concerning because it would “promote anticompetitive forms of conduct”;[16]when there are a small number of firms, the dominant actors have greater powers to collude in respect of pricing, exclude new entrants and pressure suppliers and consumers.[17] These fears led to aggressive antitrust enforcement. Armed with the Sherman Antitrust Act, the US Government pursued railroad owners, sugar producers, and oil companies throughout the following decades.

In the 1970s, however, the influential Chicago School of Economics challenged the prevailing belief that antitrust law was concerned with economic structuralism. Under this school of thought, restraining the growth of large companies would in fact prevent them from gaining the extra size required to create economies of scale and deliver flow on benefits to consumers.[18] Moreover, penalising innovative companies that had gained market share over time would amount to the provision of corporate welfare to their successful competitors.[19] To demand successful firms that had monopolised markets to share their infrastructure with competitors would diminish the returns on innovation, and thus the incentives for all firms to innovate as well.

Instead, as Robert Bork argued in The Antitrust Paradox, the role of antitrust law is to protect “consumer welfare”.[20] The concerns of competition law were not the exclusion of competitors but rather the exploitation of monopolistic and oligopolistic markets to produce price effects harmful to consumers. The Chicago School’s emphasis on price fixing rather than competitor exclusion has dominated intellectual thought since the 1970s. The Supreme Court of the United States has also accepted Bork’s reinterpretation of the Sherman Antitrust Act as just a consumer welfare provision,[21] thus ignoring the fears of corporate power that had underpinned the drafting of the legislation.[22]

 

IV Reforming Antitrust Laws: An Innovation-Centred Model

Antitrust laws that focus just on consumer welfare are not suited to regulating the tech giants that now dominate the internet. Their products and services are often provided for free, meaning that there are no price effects to be examined.[23] Thus, when Google uses its search engine to prioritise results from its other business lines over competitors, consumers do not suffer a pecuniary harm.

Yet, such bias in its search results injures consumer choice. Even if that bias ensures that Google can claim the economic rewards from developing the best search engine, it also disincentivises and even excludes competitors who wish to innovate in response to Google (as should occur in a free market).[24] According to empirical research, the value of that new competitor innovation is higher on average than the innovation benefits of allowing a successful monopolist to reap the financial benefits of excluding competitors from its platform.[25] To compound this problem, dominant firms that lack competition have little incentive to innovate into the future.[26]

To remain effective in a digital age, an innovation-centred model for antitrust laws—which views the protection and promotion of innovation as the fundamental aim of competition legislation—is needed to address the challenges of market concentration on the internet.[27] Such a model would strengthen  antitrust laws to target anti-competitive practices of exclusion in addition to price fixing. Rather than amounting to corporate welfare, such a reform of antitrust laws would force dominant firms to maintain their market positions through innovation rather than exclusion.[28] This model also aligns with economist Joseph Schumpeter’s view that innovation is the core of economic growth.[29] If antitrust laws are premised on a commitment to the free market as the best means of delivering social benefits, then they must also be committed to the value of innovation as the driving factor behind those benefits.

To demonstrate the usefulness of an innovation model in treating control points on the internet, it is useful to explore the application of this model to situations of platform dominance and data monopolisation.

 

A Platform Dominance

Platform dominance occurs when an online platform becomes so large and influential that other companies require access to the platform to sell their products and services. This is an antitrust concern insofar as the platform owner seeks to exclude competitors from the platform, undermine competitors or privilege its own products on the platform. Each of these actions damages innovation.

The seminal case of United States v Microsoft Corp demonstrates concerns about the exploitation of platform dominance.[30] In this case, Microsoft was found to have exploited its dominance of the PC operating system market to bundle in its web browser Internet Explorer, undermining competitors seeking to compete in the web browser market. Yet, since the Microsoft decision in the USA, there has been a concerning lack of antitrust enforcement despite the fact that tech giants continue to exploit their platform dominance.[31]

For example, despite widespread evidence of Google’s search bias towards its own business lines over competitors, the Federal Trade Commission (FTC) closed their 2013 investigation into allegations of Google’s search bias due to a failure to find evidence of consumer harm. According to the FTC, Google’s search engine bias could be plausibly seen as a product improvement that benefited consumers:

Product design is an important dimension of competition and condemning legitimate product improvements risks harming consumers. Reasonable minds may differ as to the best way to design a search results page and the best way to allocate space among organic links, paid advertisements, and other features. And reasonable search algorithms may differ as to how best to rank any given website.[32]

But the FTC’s narrow focus on consumer welfare and willingness to give Google the benefit of the doubt when it comes to search rankings ignores the threat of search bias towards innovation. Through a contrasting emphasis on innovation rather than pure consumer welfare, the European Commission arrived at the opposite conclusion to the FTC when investigating allegations of Google’s search bias. In 2017, it found that Google had indeed violated antitrust rules through its search bias in promoting its own shopping comparison service over competitors. Rather than provide a better product than its competitors, Google had illegally leveraged its dominance of the search engine market to benefit its other commercial interests.

As the European Commissioner for Competition, Margrethe Vestager, explained, Google had “denied other companies the chance to compete on the merits and to innovate”, and “denied European consumers a genuine choice of services and the full benefits of innovation”.[33] The European Commission’s approach to antitrust laws thus reflects an effective application of an innovation-centred model.

Perhaps even more pernicious than instances of platform bias are situations of “forced free-riding”. This describes situations where a platform owner only provides a competitor with access to that platform if a substantial benefit is conferred.[34] In 2017, Yelp accused Google of scraping photos and reviews from its own site for the benefit of Google’s other services (including Shopping and Google+ Local). In response to Yelp’s requests to stop this behaviour, Google provided an ultimatum: it would cease the free-riding if Yelp agreed to be removed from Google’s web search index. As Yelp’s CEO Jeremy Stoppelman observed, this represented “a choice between allowing Google to co-opt one’s content and not competing at all”.[35]

While successful companies should be able to profit from building dominant platforms, this should not extend to a right to leverage that platform dominance to exclude competition or to free-ride. Given the secret nature of the algorithms used by companies like Google and Facebook on their closed internet platforms as well as their sprawling business interests, antitrust enforcement agencies must scrutinise how platform proprietors deal with their competitors. An innovation-centred model is the most appropriate approach to antitrust enforcement as it forces tech giants to ensure that their platforms maintain a level of fair competition for the benefit of consumers.[36]

 

B Data Monopolisation

The historical preoccupation of antitrust with price effects means that data monopolisation has failed to attract much concern from enforcement agencies. Yet, the internet has seen an explosion in the number of “zero-price” products—these products appear free on the surface but in fact require us to incur information costs.[37] For example, when we use Facebook, we give up our personal data, something which is then commoditised and sold to advertisers. Network effects have also amplified the amount of data that tech giants hold; when platforms grow large, people feel compelled to sign up without regard to the terms contained in the user agreement. It is no secret that these user agreements are complex and often ignored. Yet, given the absence of alternative services or scope to negotiate the level of data to be shared, users are somewhat compelled to agree to the data terms of tech giants.[38] 

With the proliferation and commoditisation of data online, a tech giant’s access to large quantities of data can create barriers to new firms entering a marketplace. New firms lack the data required to develop competitive products.[39] Thus, data-driven strategies can be used to exclude competitors, create effective monopolies and stifle innovation. If we assume that data is “rivalrous”,[40] and that people have limited amounts of data to provide to all services,[41] then access to big quantities of data is an antitrust concern—one that can be addressed effectively through an innovation-centred model to competition laws.

Given that data is indeed a dimension of market power, antitrust laws should also scrutinise deals like Facebook’s acquisition of WhatsApp where the transfer of personal data is perhaps the most valuable component of the transaction. Recent investigations suggest that there will be an increasing need for antitrust laws to scrutinise data transactions. In 2017, for example, the European Commission fined Facebook $122 million for providing misleading statements leading up to the deal suggesting that it would not be combining the data of WhatsApp with Facebook’s data post-acquisition.[42] Such an approach from enforcement agencies that recognises the control of data as a competition concern will be required into the future under an innovation-centred model of antitrust.

 

V Conclusion

For the early architects of the internet, its open platform carried a democratic and creative promise unmatched in the offline world. Nevertheless, technologies are social. Over time, we have witnessed the rise of tech giants that have been responsible for remarkable innovations, but, in doing so, have restructured the internet to entrench their power and exclude competitors. Antitrust laws are a powerful tool in protecting against the online control points that these companies have built. To safeguard innovation, these laws must extend past notions of consumer welfare and address the challenges of the modern digital age—one where platform dominance and data monopolisation are shaping to be the most pressing threats towards the maintenance of a competitive marketplace that consumers deserve.

 

 

References

[1] Yochai Benkler, ‘Degrees of Freedom, Dimensions of Power’ (2016) 145(1) Daedalus 18.

[2] Yochai Benkler, The Penguin and the Leviathan: How Cooperation Triumphs Over Self-interest (Crown Business, 2011).

[3] Benedetta Brevini, Public Service Broadcasting Online: A Comparative European Policy Study of PSB 2.0 (Palgrave Macmillan, 2013); see also David D. Clark, ‘The Contingent Internet’ (2016) 145(1) Daedalus 9.

[4] Raymond Williams, Towards 2000 (Penguin, 1985) 133.

[5] David Clark, ‘A Cloudy Crystal Ball – Visions of the Future’ in Megan Davies, Cynthia Clark and Debra Legare (eds), Proceedings of the Twenty-Fourth Internet Engineering Task Force (Massachusetts Institute of Technology, 1992) 539, 543.

[6] Tim Wu, The Master Switch: The Rise and Fall of Information Empires (Vintage, 2010).

[7] Zeynep Tufekci, ‘As the Pirates Become CEOs: The Closing of the Open Internet’ (2016) 145(1) Daedalus 65.

[8] Ibid.

[9] John B. Kirkwood, ‘Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy’, 69(1) University of Miami Law Review 1.

[10]  United States v Apple Inc, 952 F Supp 2d 638, 686 (D NY, 2013)

[11] Benkler, above n 1, 19.

[12] Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity (Crown Business, 2003).

[13] Sherman Antitrust Act 1890 (USA) (Fed)

[14] Lina M. Khan, ‘Amazon’s Antitrust Paradox’, 126(3) Yale Law Journal 710, 718.

[15] 21 Congressional Record 2461 (John Sherman) (1890).

[16] Khan, above n 14.

[17] Ibid.

[18] Richard A. Posner, Antitrust Law (University of Chicago Press, 2001).

[19] Ibid.

[20] Robert Bork, The Antitrust Paradox (Free Press, 1978).

[21] Reiter v Sonotone Corp, 442 US 330 (1979).

[22] Barak Orbach, ‘How Antitrust Lost Its Goal’ (2013) 81(5) Fordham Law Review 2253.

[23] John M. Newman, ‘Antitrust in Zero-Price Markets: Foundations’, (2015) 164(1) University of Pennsylvania Law Review 149.

[24] Jonathan B. Baker, ‘Exclusion as a Core Competition Concern’, (2012) 78(3) Antitrust Law Journal 527, 561; see also Joshua G. Hazan, ‘Stop Being Evil: A Proposal for Unbiased Google Search’, (2013) 111(5) Michigan Law Review 789.

[25] Jonathan B. Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’, (2007) 74(3) Antitrust Law Journal 575, 583-587.

[26] Kenneth Arrow, ‘Economic Welfare and the Allocation of Resources for Invention’ in Richard Nelson (ed), The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton University Press, 1962) 609.

[27] Tim Wu, ‘Taking Innovation Seriously: Antitrust Enforcement If Innovation Mattered Most’ (2012) 78(2) Antitrust Law Journal 313.

[28] Herbert Hovenkamp, ‘Restraints in Innovation’ (2007) 29 Cardozo Law Review 247.

[29] Joseph Schumpeter, Capitalism, Socialism and Democracy (Routledge, 2013).

[30] United States v Microsoft Corp, 253 F 3d 34 (2001)

[31] Ramsi Woodcock, ‘EU’s Antitrust ‘War’ on Google and Facebook Uses Abandoned American Playbook’, The Conversation (online), 14 July 2017, < http://theconversation.com/eus-antitrust-war-on-google-and-facebook-uses-abandoned-american-playbook-80659>.

[32] Federal Trade Commission, ‘Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. FTC File Number 111-0163’ (Statement, 3 January 2013).

[33] European Commission, ‘Antitrust: Commission fines Google €2.42 billion for abusing dominance as search engine by giving illegal advantage to own comparison shopping service’ (Press Release, IP/17/1784, 27 June 2017).

[34] Howard A. Shelanski, ‘Information, Innovation, and Competition Policy for the Internet’, (2013) 161 University of Pennsylvania Law Review 1663, 1699.

[35] Jeremy Stoppelman, Submission to United States Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Right, 21 September 2011.

[36] Wu, above n 27.

[37] Newman, above n 23, 206.

[38] Frank Pasquale, ‘Privacy, Antitrust, and Power’, (2013) 20(4) George Mason Law Review 1009; See also Robert McLeod, ‘Novel But a Long Time Coming: The Bundeskartellamt Takes on Facebook’, (2016) 7(6) Journal of European Competition Law & Practice 367.

[39] Daniel Sokol & Roisin Comerford, ‘Antitrust and Regulating Big Data’, (2016) 23 George Mason Law Review 1129, 1143.

[40] Shelanski, above n 34, 1687.

[41] Ibid, 1689.

[42] Mark Scott, ‘E.U. Fines Facebook $122 Million Over Disclosures in WhatsApp Deal’, The New York Times (online), 18 May 2017, <https://www.nytimes.com/2017/05/18/technology/facebook-european-union-fine-whatsapp.html>.