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Last week I mentioned that certain potential problems could only be solved at the federal level. The example I gave was social media, specifically Facebook, but it’s not just Facebook, traditionally stopping powerful companies in general has been something only the government can do. But before we get to that, in the last post I also briefly mentioned that one, unrealistic, possibility would be for the individuals themselves to cut themselves off from these powerful companies. Well, over the last several weeks Gizmodo reporter, Kashmir Hill, tried to do just that.

Hill decided to live, in turn, without each of the tech giants: Amazon, Facebook, Google, Microsoft, and Apple, and on the final week she attempted to live without all of them. And as I pointed out, it ends up being pretty difficult, if not impossible. In fact that’s the title of of the article she wrote about her week without Amazon. I Tried to Block Amazon From My Life. It Was Impossible. So I guess we’ll start there. The Amazon week was particularly interesting because when most people think of Amazon they think, “I could easily go for a week without buying something on Amazon.” But that’s not the hard part of the exercise it’s going for a week without using AWS.

For those who don’t know, AWS stands for Amazon Web Services, it’s the Amazon cloud offering and it’s used by a huge chunk of the internet. (I use it for my business.) She didn’t include many statistics, though her subjective impression was summed up in the title of her article: It was impossible.

When I say a huge chunk, I think the best measure is that as far as cloud services AWS is 42% by revenue, which seems high, but not ridiculous. However when you’re used to 100% of the internet being available 100% of the time, 42% is huge, as people found out when it went down twice in 2017. And as the author found out when she tried to cut it out of her life.

But the title of this post and our eventual destination is a discussion of monopolies and 42% doesn’t sound like much of a monopoly. Maybe not, but one of the first points I want to make is that unlike some of the more traditional monopolies, the current tech monopoly is harder to see. You might notice that all of the oil refineries in your state are run by Standard Oil and sue them as Ohio did in 1892. Or that every single computer in the office is Widows, leading to that Microsoft antitrust action of 2001 but I think far fewer people understand how deeply embedded Amazon is in their life, even if they ignore the actual store. (Also it should be noted that AWS is where most of Amazon’s profit comes from.)

As an illustration of this mismatch in perceptions consider Facebook. If you were going to pick the company from her list which has been subjected to the most criticism recently, that’s who you would choose. And yet when it came time to cut Facebook out of her life it was relatively straightforward, nothing close to as “impossible” as cutting out Amazon. And, insofar as our level of concern should correlate with the difficulty of cutting something out of our life the animosity directed at Facebook might be misplaced.

Obviously Facebook engages in a lot of shady practices like data collection and distorting what people see in their feed. But if you think Amazon and Google aren’t collecting data you may be in for a rude shock. As a matter of fact Google collects more data than Facebook. And as far as distorting information have you ever done a search for “American Scientists” on Google? If you get a chance to do that, look at the images which are displayed along the top. The Google list of American scientists exercises, what I can only describe as, a significant amount of affirmative action. Of the first 10, eight are African American. (Einstein and Fermi are the other two). Compare this to Bing and it’s reversed, of the top 10, two are African American.

This might be a small thing. But I think it shows a clear ideological bias (one you might agree with, but a bias nonetheless) and given that Google has 93% of all search traffic, even small things can add up. And as long as we’re on the subject of what percentage Google controls of certain markets. Hill’s experience with cutting out Google was described as “screwing up everything” because 88% of all mapping applications (including Lyft and Uber) use Google.

In other words despite my sense that Google is less reviled than Facebook (I guess it could be the same, but I doubt it’s more). They’re far more deserving of it. They collect more data, they’re more ideologically biased and they’re more of a monopoly. But, because most of what they do is behind the scenes (similar to Amazon), people don’t notice how ubiquitous they are. Another example of a potential, yet subtle danger. Another example of how monopolies could exist but in a different form than we’re used to.

Okay, so a Gizmodo reporter tried to live without the tech giants and it was super annoying and the tech giants themselves do lots of suspect things on top of that annoyance. And yes they control vast swaths of the internet and by extension our lives, but that’s why they’re tech giants. Does this mean that something needs to be done? If so what?

I’ve already mentioned the word monopoly a few times, and we’ve now arrived at the point where we need to discuss what a monopoly is and why it’s bad. We have not reached the point where we label any of the aforementioned technology companies as monopolies, but we will.

Historically the most famous monopoly, which I already mentioned, was Standard Oil. But more recently, there was antitrust action against Archer Daniels Midland for conspiring to fix the price of Lysine and citric acid. In both cases the worry was that in the near absence of competition they could raise prices, rake in profits and harm the consumer, who would end up paying much higher prices than they would have otherwise. And currently high prices are considered to be the best standard for determining whether something is a monopoly or engaged in antitrust behavior, but Facebook is free, and so are most of the offerings from Google. Amazon charges money, but it’s certainly hasn’t used it’s position to raise prices. Accordingly, many would argue, they’re not monopolies. But it sure seems like they might be headed in that direction. Is it possible that by targeting prices have we mistaken the symptom for the disease? Or that this is too simple a way to look at things?

If the disease is harming customers, then it seems like there are probably many ways that can happen beyond just high prices. At a high level, economic theory holds that capitalism is good because competition works in something of an evolutionary fashion, with new innovative companies replacing old uncompetitive companies, what Joseph Schumpeter called “creative destruction”, going on to describe it as “the essential fact about capitalism.” Lack of innovation is another sign of customer harm, but that was covered by price as well. Since price is a signal of innovation, lower prices are a also good indicator that a company is innovative, while higher prices are a good sign that the company is not innovative or colluding to stop innovation. But once again price is just a proxy for what we’re really worried about, innovation, something which is not only good for customers, but good in and of itself.

Still even once we toss innovation in, it’s not clear that the tech giants are monopolies, since most of them got where they are through being innovative, and have largely continued to innovate. In the last post I talked about the life cycle of a democracy, well businesses also have a lifecycle and all of the tech giants are still in the early stages of theirs. Meaning that I would expect them to continue to be innovative for awhile. And once again this would lead many people to the conclusion that they are not monopolies. But is it possible both of these standards are overly simplistic? Is it possible that the tech giants represent new kinds of monopolies? When you read about the experiences of Hill do you come away thinking something unusual and alarming is going on? If so you’re not the only one.

Not that long ago, Lina Khan, a fellow at the Open Markets Institute, published a paper, titled, Amazon’s Antitrust Paradox, where she discusses whether Amazon should be examined more closely by antitrust regulators. As you might have guessed the answer is “Yes,” but the route by which she arrived at that answer is the interesting part.

To begin with I didn’t realize that current antitrust doctrine views low consumer prices sufficient, by themselves, to deflect any antitrust accusations. And that this standard is a by product of the influence of the Chicago School of Economics, under whose influence a switch was made in the late 70s early 80s, at least according to Khan. Though when she discusses the individuals, their motivations and actions at the time it sounds believable to me. Specifically, the individuals in question, which included Robert Bork of Supreme Court nomination fame, argued against the idea of predatory pricing. The theory that large companies could use low prices to drive their competition out of business and then achieve a monopoly in the absence that competition. According to Khan:

Ward Bowman, an economist at Yale Law School, argued that the premise of predatory pricing laws was wrong. He wrote, “The Robinson-Patman Act [the prime example of such a law] rests upon a presumption that price discrimination can or might be used as a monopolizing technique. This, as more recent economic literature confirms, is at best a highly dubious presumption.

[Bork] described predatory pricing generally as “a phenomenon that probably does not exist” and the Robinson-Patman Act as “the misshapen progeny of intolerable draftsmanship coupled to wholly mistaken economic theory.”

As the writings of Bowman and Bork suggest, the Chicago School critique of predatory pricing doctrine rests on the idea that below-cost pricing is irrational and hence rarely occurs. For one, the critics argue, there was no guarantee that reducing prices below cost would either drive a competitor out or otherwise induce the rival to stop competing. Second, even if a competitor were to drop out, the predator would need to sustain monopoly pricing for long enough to recoup the initial losses and successfully thwart entry by potential competitors, who would be lured by the monopoly pricing. The uncertainty of its success, coupled with its guarantee of costs, made predatory pricing an unappealing—and therefore highly unlikely—strategy.

As with so many things we discuss in this space, the Chicago School critique was written before the internet changed everything. And it may not have been true even before then. The question of whether Standard Oil engaged in predatory pricing is still hotly debated. But that aside, how did the internet change the theory and practice of predatory pricing?

We’ll talk all about changes actually related to technology, but in the end it always comes down to dollars and cents. And here the key change is that investors in Amazon apparently don’t care about profit. There are lots of examples of this, including Amazon’s stock price going up after reporting a quarterly loss, and the tiny profits Amazon posts even when it is profitable, but I think one commenter put it best. “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.” At its core this is how Amazon can engage in, what was previously considered, irrational predatory pricing. They can afford to. But saying this is a little like an autopsy declaring that a person died from blunt force trauma. That may be so, but the difference between dying from slipping in the bathroom, and being beaten to death by a bat in a back alley is huge. Which is to say, why are investors willing to ignore profitability? Are they stupid or murderous?

In essence what the investors are doing is valuing growth over profitability. There could be a couple of reasons for this, they could be stupid, because five years from now some competitor will come along and Amazon will go the way of Sears or Myspace. Or more likely, they could be counting on Amazon to continue growing and get more and more profitable. Given that Amazon’s price to earnings ratio currently sits around 80 and that as recently as 2015 it was at 741 they appear to think that despite controlling nearly 50% of online retailing, that Amazon still has a lot of growing to do, and that something about that growth will make it largely immune from significant competition. In other words, the numbers indicate that investors are already pricing it as monopoly.

There are at least three reasons for this (and probably more).

First the marginal cost of online retailing is vastly lower than traditional retailing. And also benefits much more from an economy of scale. While not a perfect example imagine the differences in opening a store in a new area. Say that, hypothetically, Utah had a great firewall similar to China and they didn’t allow Amazon in. And then one day they change their mind. This would be a relatively trivial adjustment for Amazon, particularly if all of their shipping companies were already operating in Utah. Now imagine that Walmart had been banned in Utah and that ban had suddenly been lifted. It would take many years for Walmarts to be as common in Utah as they are everywhere else. This same thing applies to individual products, particularly digital ones. Now you might imagine that this would make it easy to compete with Amazon, but that’s not the case which takes us to our second reason.

Amazon like most of the tech giants enjoys a powerful network effect. It may be less obvious than the network effect enjoyed by Facebook, but it’s nevertheless a huge factor. If you’re going to sell something you need buyers, and if you’re going to buy something you need sellers. By creating a platform to connect the two Amazon has a gigantic advantage over someone starting from scratch, even if if the tech is easy, the marketing is fantastically difficult. I understand that if there’s only one seller network effects are not quite so great, but over 50% of items sold on Amazon are from third party sellers. There’s also the vast fulfillment network they’ve created. When Hill was attempting to cut Amazon out of her life she ended up buying something from EBay, only to discover when it arrived, a “Fulfillment by Amazon” sticker.

Finally there’s the customer data, that holy grail of the tech economy, and Amazon has a ton of it. (Though again, probably not as much as Google.) This data gives them an edge against any possible competition that is almost impossible to duplicate. Certainly no startup could duplicate it. Also as an aside it increases the potential risk, not only do customers have to worry about worse quality or higher prices, they have to worry about Amazon protecting their privacy as well. And remember this is all run by someone who’s had trouble keeping pictures of his privates, private.

When all of this is combined, it paints a troubling picture. To quote from Khan again:

For the purpose of competition policy, one of the most relevant factors of online platform markets is that they are winner-take-all. This is due largely to network effects and control over data, both of which mean that early advantages become self-reinforcing. The result is that technology platform markets will yield to dominance by a small number of firms. Walmart’s recent purchase of the one start-up that had sought to challenge Amazon in online retail—Jet.com—illustrates this reality.

The key phrase there is “winner-take-all”. If network effects and control over data self-reinforce, then there doesn’t appear to be any way for real competition to arise. Certainly the Amazon investors seem to be of that opinion, and I see no reason to disagree with them.

There is one objection I should address before we move on. However unassailable Amazon is by other online retailers, there are other tech giants. The competition between Microsoft and Apple is the stuff of legends and is still ongoing, Amazon and Google might not seem like competitors but if you’re looking to buy something, both of them really want you to come to them first. And the list goes on. Perhaps this is all the evidence necessary to dismiss any monopolistic concerns, but it doesn’t seem like it to me. Also as the Archer Daniels Midlands case showed, it’s a lot easier to collude when there’s only a few big players. And lest you think that the tech giants wouldn’t do that, they already did. They colluded to cap the salaries of tech workers. In the end it spread to such an extent that it affected over a million employees. Something to keep in mind.

You may still be unconvinced that Amazon and the rest are monopolies or well on their way to becoming such, but for the moment let’s assume that they are. Why is this bad? There is of course the danger of higher prices, or less innovation, which are non-trivial. But I’m less worried about the lack of tech innovation then I am about idea innovation. Specifically the marketplace of ideas envisioned as the primary reason for free speech. And here while there are some crimes to Amazon’s name, what’s most interesting/alarming is the recent trend of denying payment processing to people on the far right. (That was a Breitbart link, if you prefer here’s a Daily Beast link.) Finally beyond issues of censorship there is the general fragility of having a single point of failure, as people affected by the AWS internet outages and more especially people involved in data breaches have discovered.

Khan offers several solutions, but the one I find the most interesting is to treat the tech companies as similar to utilities and place them under common carrier obligations. And let’s be clear interesting does not mean good or preferable, it just means interesting. In particular I think it would be an interesting answer to all of those people who claim that only the government can restrict free speech and that private individuals and corporations should be able to do whatever they want. That becomes less true if the company is being treated as a utility. But I don’t have the space to go into that again, nor to examine the utility idea in more depth either.

To be clear I am mostly interested in how technology has changed the ways in which a company might discourage competition. And to be clear that’s exactly what every company wants. Companies are not pro-free market. Which is something I probably should have made a point of explaining earlier. I’m also interested in the ways in which technology makes being a monopoly easier, but also less obvious as Hill, the Gizmodo reporter discovered. As far as what should be done about it, here, as I mentioned, there are also interesting ideas, but I’m far less certain about what, if anything should be done. It is however one more piece of evidence for increasing complexity, and it remains an open question whether our institutions can keep up.


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