Antitrust: Tech’s endgame
First mover advantage. Fastest to scale. Winner take all. And, now we have our champions: Apple, Amazon, Google, Facebook, etc. If you’ve followed my work (Twitter & Medium), you know I oppose strong-form regulatory intervention in the tech sector… but regardless, I don’t see how Tech 2.0 doesn’t end with the second coming of populist Trust-Busters.
The Antitrust conundrum
Antitrust 1.0 focused on consumer impact:
United States antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations, generally to promote fair competition for the benefit of consumers. [emphasis mine]
On the contrary, today’s tech giants usually employ tactics that are well within that letter-of-the-law: they create massive consumer surplus, and if the consumer benefits, there really are not grounds for conventional antitrust enforcement. With Tech 2.0’s champions, there aren’t even grounds for enforcement on behalf of suppliers, who might feel like they have a case for monopsony charges:
An unlawful monopsony, the lesser known violation in the antitrust family, occurs when a buyer of goods has the power to unlawfully lower the prices of the products that it buys…
The theory of monopsony assumes that the monopsonist has the power to dictate terms to its suppliers. However, to show monopsony, one must show that suppliers are forced to sell their products at prices so low that the loss results in a reduction of supply. [emphasis mine]
The way the law is written, nothing about the tech darlings’ modus operandi is illegal today. The problem is that the effects of antitrust behavior are being manifest, even though there’s no evidence of the causes — leaving courts without the smoking gun necessary to build a case:
Both [monopolies and monopsonies] result in a misallocation of resources, which harms consumers and distorts markets… As an added wrinkle, buyer power without actual monopsony power can actually benefit consumers. Indeed, when buyer power pushes prices down without resulting supply reduction, consumers enjoy lower prices. Consumers are harmed, however, when output reduction is coupled with a misallocation of resources…
Harm to the market results when suppliers are, in turn, driven out of business, or have less money to invest in new innovation, technology, equipment and/or expansion… While consumers may not immediately feel the effects of the monopsony, harm resonates nonetheless as wealth is transferred to the monopsonist, and consumers are ultimately faced with higher prices and fewer options. [emphasis mine]
Thus, to enforce Antitrust 2.0, legislatures will have to update the legal definition of “anticompetitive” — refashioning it to fit today’s tech giants. If that sounds like a Congressional exercise in tortured rationalization, it is.
Why will law-makers pursue such means? Anytime a sector’s margins are this enormous, anytime there’s a perception of excess, anytime the winners are winning so bigly, the populist sentiment turns against them. Tech startups have scaled exponentially, and unfortunately, public sentiment will degenerate just as quickly. So, much like a tech startup, Congress itself will start with a problem (monopoly power), then find a solution (antitrust modernization).
These updated laws have no choice but to focus on impact across all stakeholders, which could fundamentally change corporations and capitalism as we know them. No more shareholder model; the future will be multistakeholder — treating users, clients, shareholders, community, sustainability, et al as pari passu.
Again, I don’t support such strong-form intervention. What’s even worse is that we’ll likely see a regulatory overreaction just to assuage an outraged public. However, were it to produce a multi-stakeholder model, as such, it could mark a milestone in capitalism — a long-overdue, much-needed evolution.
The Amazon case study
I would never trivialize the brilliant foresight and strategic wizardry that allowed these tech giants to rise to supremacy. However, to understand them is to acknowledge how low barriers-to-entry characterize a lot of these businesses. Because of that, their network effects/economies of scale are important defense mechanisms — insulating them from competitors. Each incumbent effectively corners-the-market in its respective moat, so every new entrant is too small to challenge it on the basis of network or scale. No major supplier can resist the incumbent platform’s reach, and no consumer can resist its network/scale.
Take Amazon, for example. Scott Galloway once hypothesized that ‘Amazon’s investors don’t demand that it turn a profit; they prefer that Amazon continually reinvest in growth instead.’ Today, that’s consensus, although consensus is still split as to the sustainability of such “profit lite” growth. (Galloway was once bearish on the name because of its inability to rake-in profits, but now he himself has come around to actually celebrate Amazon’s cash flow management — as I always have outspokenly — with a hint of awe.)
Scott Galloway: How Amazon is Dismantling Retail
Not only has Amazon changed consumer shopping habits, it has changed the shareholder/investor relationship too…
By L2 >>> Annotote
What’s the end-game for that strategy though? Amazon keeps on investing to subsume competitors in so many business lines — and it’s doing so with great success. But, what happens when the competitive landscape is laid to waste (Google), or reduced to a duopoly (Uber/Lyft), or funneled through a monopsony (Amazon)?
There are only so many possible outcomes for Amazon:
- Amazon is unable to maintain its growth, failing to fully eviscerate its competition and therefore having to re-focus on profitability to fulfill its fiduciary obligation to shareholders; or
- Amazon swallows its target markets whole, fully modularizing brands and demoting them to mere suppliers who pump product through the platform.
In the former outcome, profitability means increasing margins. For a company run as efficiently as Amazon, that can only mean extracting more money from either suppliers or consumers. There’s no other option. This would explicitly violate current antitrust laws. So, ostensibly, the latter is the better outcome… as long as Amazon remains altruistic.
If the latter came to pass, there’s nothing wrong with a company like Amazon transitioning from high growth to steady cash flow. And that appears to be the path Amazon’s heading down. But, already, Amazon is waving a red flag: private-label goods, such as Prime Video and Amazon Studios, not to mention in-house CPG brands like Amazon Basics and Elements.
Amazon’s private-label brands are a problem because they turn a formerly passive platform into a non-neutral agent. Amazon was once the marketplace that facilitated sellers and buyers, supply and demand. Amazon had no horse in that race: it had no incentive to favor one good over another; rather, its motivation was to facilitate transactions. Void of bias and misincentive, Amazon’s algorithms drew-upon a trove of objective and subjective data to make personalized recommendations to consumers.
The “subjective” part of that is important, because not all goods are perfectly substitutable or undifferentiated, so the lowest price isn’t always the sole factor determining a purchase decision. In other words, if you’re buying AA batteries, a $1 battery that lasts 1-month is a worse price-per-pound than a $2 battery that lasts 6-months. Yet, that’s a simplistic example; there are innumerable other factors that are way harder to quantify — that are way more qualitative.
This subjectivity is opportunity for Amazon’s private-label brands. $5 for Bounty paper towels? Amazon recommends that you buy their private-label paper towels for $5.50 instead. Yea, even though Amazon’s are more expensive, have a lower crowdsourced rating, and some poor reviews, they recommend them because you’ve tried other Amazon products… or you can receive delivery in half-the-time… or you have a tendency to purchase $2 batteries instead of $1 ones.
Think that’s trivial? Think it’s inconceivable? On Amazon’s voice interface, Alexa already flat out refuses to search for any other product if there’s an Amazon-branded option in the category. If you ask for paper towels, Alexa recommends that you purchase the Amazon brand, often at a premium price, and if you decline, she refuses to search or purchase another brand for you.
You can’t audit such subjective factors, and you shouldn’t regulate the algorithms that nominate them. The only solution is to separate the platform from the proprietary product.
That’s a misincentive inherent in most 3rd party platforms who also peddle proprietary products. Digital platforms like Amazon are even worse, since the data they’re privy to redoubles their propensity toward vertical foreclosure. (AWS compounds that yet again for Amazon.) At very least, there should be a Chinese Wall within such organizations.
Again, as a consumer, I love these companies. I don’t mean to pick on just Amazon. Take another example: Netflix. They just transitioned from a rating system that crowdsourced user feedback on a five star scale to a recommendation system that nominates content based upon multifactor personalization. There’s a misincentive there that makes it too easy to push Netflix Originals — and that lure really shouldn’t exist.
And the rest
How about Facebook? When they reach maximum ad-loads and user-growth slows, there’s no doubt that revenue growth will maintain its velocity due to ad price increases — those ad spots are incredibly valuable real estate, so when supply is constrained, demand will overwhelm. Again, there’s nothing nefarious in that economic reality, but it’s a sure sign of classical antitrust pricing-power.
Much the same can be said of Google. Although these companies have a ton of property and no shortage of ad inventory for years-to-come, their prime real estate (i.e. Google’s search results and Facebook’s core News Feed) should decouple from the rest of their app constellations and start pricing with upward pressure.
It will be interesting to see how the regulatory landscape adapts — or doesn’t.