Internet giants must end anti-competitive practices or face being broken up

A guest post from ICOMP counsel Tim Cowen

Internet giants such as Facebook and Google must end anti-competitive “kill in the crib” practices or face sanctions including being broken up, says think tank ResPublica

The think tank, ResPublica, warns that the practice of buying up potential competitors is one of many problems in the technology sector that is harming innovation, creating a market controlled by a few large firms and is leading to higher consumer prices.

In its’ report “Technopoly” and what to do about it: Reform, Redress and Regulation, ResPublica, with support of Will Hutton’s Big Innovation Centre, calls for a radical overhaul of current regulation, which it says is unfit for purpose, incentivises bad behaviour and has failed to address ethical questions around Big Data and its use.

“Digitalisation and the new world of Big Data are already conferring vast benefits…Not such good news are the new threats that digitisation poses to competition and the weakened capacity of insurgents to be lode-bearers of the new. Investment in patents, copyrights and computerised systems has become a new form of intellectual capitalism. The company that gains first mover advantage (with the creation of the fastest growing network of digital users) is the company on the way to establishing a monopoly position, which can be further entrenched – as monopolies have always been – by buttressing that position through making its services as distinctive and non-reproducible as possible. If unconstrained by competitive alternatives, there is a danger that these companies can eliminate all potential competition through acquisition strategies.”

Phillip Blond, Director of ResPublica commented: “This matters because the dominance of the big players is crowding out innovation and leading to higher consumer prices. This is widely seen in price mark ups that have increased dramatically in recent years. Research in the US by De Loecker and Eeckhout found that these margins have more than trebled from 18 per cent in 1980 to 67 per cent in 2014. It is reasonable to assume the picture in the UK and Europe is broadly similar.”

The detailed and technical report, warns that its not just higher consumer prices that are a problem in the sector, but dominance by these internet giants of advertising revenue, data and even the provision of news.

“Facebook and Google leverage their market power to divert huge volumes of advertising to their platforms, accounting for half of all digital advertising revenue,” it says.

“The “Fantastic Four” (Google, Facebook, Amazon and Apple) are now widely recognised to be dominating the technology sector and controlling the media. They have wrapped the planet with their platforms and inhabit all, or almost all offices, schools and homes. Their impact on communication is pervasive and the consequences for freedom of expression and press freedom is only now becoming clear.

“Players such as The Guardian’s Alan Rusbridger have claimed that Facebook sucked up £20m of his former newspaper’s digital advertising revenue in 2015. If such players can accumulate control of visibility, they can threaten diversity of supply. Weakening of the press is the first step toward weakening of viewpoints, and it undermines democracy. Visibility is everything online. Control over what is seen or found determines what people see, read and, ultimately shapes what they think.”

The think tank argues that internet companies should be treated like other media groups such as SKY, or Bloomberg.  While regulators are given new powers to promote innovation and choice in the sector, rather than their current focus on “turn over thresholds”, that this report believes to be out dated.

In extreme circumstances the report recommends that companies should be broken up and forced to sell off parts of their business to “reinforce market structure and increase beneficial competition”.

“Competition authorities must be hawkish, not only in assessing what is happening today, but also the likelihood of what may happen tomorrow,” it says.

Tim Cowen, EU competition law expert and co-author of the report continued: “What we are calling for is a radical overhaul of how the sector is regulated as the concentration in the market continues at an alarming pace. Since 2001, Google alone has bought up 215 companies. Worryingly the pace of these aggressive acquisitions is increasing – 167 companies since 2008.

“While Facebook, which enjoys a virtual monopoly, with its 2 billion users has hoovered up 69 companies since 2007. Given the massive investment and high barriers to entry, this would meet almost any definition of a sector in crisis, but until the Cambridge Analytica scandal, few in power showed any concern – Even fewer understood the business model, which saw affiliates profiteering from the large scale harvesting and mining of personal data.”

The report concludes by acknowledging steps made by the Government, but warns that the UK must work with the EU in this important area. “The British government in its recent Green Paper ‘Modernising Consumer Markets’ has recognised some of these themes, and we hope it takes forward the proposed recommendations in this report; but we also recognise that national action alone is inadequate. We must try to marshal global institutions to tackle these issues. Despite Brexit, Britain must work closely with EU competition authorities to take on the difficulties posed by digitalisation.”

Phillip concluded: “This is an exciting time in the sector, as companies seek to exploit the potential of AI, which could double economic growth rates in industrialised countries like ours – But the dominance of the current behemoths puts this at risk.

“By tolerating anti competitive strategies, failure to penalise bad behaviour and make law breakers pay, we are damaging innovation. This is why we propose a pan European approach to dealing with the sector, support for small and medium size enterprises to gain market entry and the use of the states’ purchasing power to ensure greater choice and diversity.”

Download report: “TECHNOPOLY” and what to do about it: Reform, Redress and Regulation