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Wednesday, November 25, 2020

Antitrust case in tech space needs to be built on intellectual evidence, rather than on ideology

Anti-trust proceedings against Google could mark a shift from the times when it, along with Microsoft, Amazon, Facebook and Apple, dictated terms in the tech world.

Written by Rajat Kathuria , Mansi Kedia | Updated: November 16, 2020 8:44:25 am
In this world, it is unlikely for markets to discipline errant firms, and hence we feel that the Chicago manual needs to be revisited. (Illustration by C R Sasikumar)

It took a long while coming but it has finally arrived. Roughly 20 years after it threatened to break up Microsoft for abusing its monopoly power, the United States Department of Justice (DoJ) has launched antitrust proceedings against Google. The charges against Microsoft then and Google today are disconcertingly similar: The use of monopoly power to exclude potential rivals from gaining a foothold in the market, also known in competition law as “exclusionary conduct”.

In what was one of the most celebrated antitrust cases of its time, the DoJ in 1998 accused and found Microsoft guilty of using its considerable muscle in the operating system (OS) market to effectively destroy Netscape Navigator in the browser market. Microsoft did this by bundling its own browser, Internet Explorer with its Windows OS and “refused to deal” with any computer hardware manufacturer who dealt with the now-defunct Netscape. Microsoft’s almost complete dominance of the OS market at that time meant that no serious hardware manufacturer had the nerve to challenge it.

Google, alleges the DoJ, exercises exclusion by paying device manufacturers — including phone-makers such as Apple — huge sums of money to pre-install its proprietary search engine on devices, thereby cementing its monopoly in search and sustaining it by the advertising profits it generates because of its dominance. A market share in excess of 90 per cent ensures that a sort of virtuous cycle gets created in search and advertising for Google but not so for consumers, claims the DoJ, who are deprived of alternatives.

“Google scholars” — a pun, that for us, refers to the coexistence of legions of zealous devotees and packs of intense detractors — will recall that two years ago the European Commission (EC) had fined Google a record $5 billion for abusing its market power. The EC claimed that Google abused the ownership of its Android mobile operating system to reinforce dominance in search. Specifically, Google forced Android handset and tablet manufacturers to pre-install the Google search app and its own web browser, Chrome, as a condition for allowing them access to its Play app store. The EC also found Google guilty of making payments to large manufacturers and mobile network operators that agreed to exclusively pre-install the Google search app on their devices.

Has the DoJ come to the party two years too late or was Google’s monopoly conduct limited to markets outside the US until now? Take your pick, but 20 years of lack of antitrust action in the US against big tech (Google is one of the big five that includes Apple, Facebook, Amazon and Microsoft) could rest on two mutually exclusive arguments, separated by time and space.

One is the battle for technological supremacy between China and the US manifested in ambitions of dominance in Artificial Intelligence (AI). A narrative, presumably self-serving, was created in the US that to counter the state-led, data-abundant development of AI in China, the US needed to create its own national champions. That aim is best supported by a permissive regime that not only looks the other way in case the big five breach the “lakshman rekha” in respect of data privacy and abuse, but by outright support. “Without more leadership from Congress and the President, the US is in serious danger of losing the economic and military rewards of AI to China”, concluded a report from the US Congress.

The other influence which made the US more laissez-faire in dealing with the structural dominance of big tech was arguably the Chicago-inspired approach to competition law. The Chicago school’s intellectual arguments that became mainstream in the 1970s and 1980s have dominated discourse in the US both inside and outside courtrooms even as the rest of the world, including European Union, was passing judgments including harsh penalties to curb the excesses of big tech. Judged on the basis of efficiency and consumer welfare alone, the Chicago doctrine privileged markets over antitrust action. Technological change and Schumpeterian competition, it argued, will result in “fragile monopolies”, with single companies dominating segments for a while, until they are toppled by rivals.

Some of that strong influence may now be coming unstuck as the untrammelled power of big tech grows ubiquitous. If the big five were a country, their combined market capitalisation would make them the third-largest country in the world in terms of GDP. Between them, free cash flows in 2019 exceeded a trillion dollars. According to the EC, in 2017, the big five spent a total of $31.6 billion on acquisitions of start-ups. Over the period 2001-2018, Google alone bought one firm a month, every month and Apple buys a company every two to three weeks on average. This digital “conglomerisation” is reminiscent of the merger waves in the US in the 1980s and 1990s when several firms with free cash flows bought others in order to build empires, even at the expense of shareholder value. Managerial hubris was not resolved by the market punishing the bad managers as one had hoped, just as it is unlikely that a failure by a firm to maximise profits and efficiency will be punished by the competitive forces of the market. Even if it is, the wait can be too long if companies have market power and a willingness to exercise it. Antitrust action can reduce the exercise of market power and potentially improve the welfare impact.

The US DoJ has shown its commitment to investigate Google for alleged violation of competition law. It may be premature to infer that this represents a shift away from the intellectual influence of the Chicago School in competition law and enforcement. But if it did, what could be a competitive remedy in this case or for that matter, big tech in general? This is a weighty question which has no simple answer. But bad decisions should be studiously avoided. A structural remedy or breaking up the tech monopoly, while appealing to the popular spirit, is, according to us, a recipe for failure. Profound network effects in this space mean that the broken entity will become big again sooner than later. A lasting resolution could centre around severe, effective and rapid penalties for breach of rules and constant monitoring by competition authorities. Microsoft’s brush with litigation (accompanied by a credible threat of break-up) in 1998 has kept it out of harm’s way since. An isolated example, admittedly, but an example nonetheless.

The case for or against antitrust action in the tech space needs to be built on powerful intellectual evidence, rather than on ideology. In the tech economy, for example, technological change may not be exogenous, that is, independent of an industry’s structure. In other words, sufficiently powerful incumbents like Google or Apple could buy startups to choke innovation. Three Chicago professors refer to this as the “Kill Zone”, a phenomenon prompted by access to cash and aided by barriers to entry. In this world, it is unlikely for markets to discipline errant firms, and hence we feel that the Chicago manual needs to be revisited. Fortuitously, that process has started in Chicago itself.

This article first appeared in the print edition on November 16, 2020 under the title ‘Reining in the big five’ Kathuria is director & chief executive and Kedia is fellow at ICRIER. Views are personal

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