Big technology companies have never had a greater influence over our lives than they
do now and this trend is only increasing.
Unsurprisingly, alongside their growing power comes the ever-louder public that cries out
for antitrust litigation.
But, unfortunately for the people, big tech is not going to be broken up and in this video
we’ll see exactly why they’ll get away with it.
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Before we dive into the specifics we first have to understand how the law defines a monopoly
and to do that we have to go back 150 years ago to the end of the American Civil War.
When you compare the late 1800s to today, you’ll actually find a lot of similarities.
After the war had ended, a slew of new technologies appeared all at once and catapulted businesses
into an era of rapid growth.
Telegraphs were invented which allowed for instant communication across the country,
while the expanding rail gave industries nationwide reach.
In the span of mere decades, the companies that emerged during this time of innovation
would grow to tremendous sizes.
Now, at the time the most convenient way of legally structuring a large business was by
using Trusts.
In fact, they were so popular that America had trusts for everything: there were meat
trusts, rope trusts, whiskey trusts and you name it.
One of the largest trusts, which we’ve already explored on Business Casual, was Standard
Oil, owned by none other than the richest businessman in history, John Rockefeller.
Out of the 26 rival refineries in his hometown of Cleveland, he bought 22 outright, including
6 in a 48-hour period.
It was known as the Cleveland Massacre and Standard Oil ended up controlling 90% of America’s
oil through these types of deals.
It took America three decades to muster the political will to oppose Rockefeller’s dominance
and it was President Roosevelt who finally took up the challenge.
In 1906, the Department of Justice began an antitrust lawsuit against Standard Oil that
was the first of such a grand scale and whose ruling would determine the future of Antitrust
in America.
It took 5 years for a verdict to be reached and it was: guilty.
Standard Oil was in violation of the Sherman Antitrust Act because, and this is key, it
restricted trade and inhibited competitors.
Thus, Standard Oil was broken up; interestingly, however, this was just the beginning of an
antitrust killing spree.
During his presidency, Roosevelt would pursue 45 different cases, while his successor, William
Howard Taft, would almost double the number to 80.
At the heart of most of these cases was the desire to encourage competition, sometimes
even if the company in question wasn’t even close to being an actual monopoly.
This trend continued well into the 1970s, with some cases bordering on the absurd, like
when in 1966, it was made illegal for two grocery stores to merge even though they would
have just 7.5% of the market.
Another funny case came in just a year later when the government stepped in to regulate
the pricing of pies in Salt Lake City.
It wasn’t until the arrival of Ronald Reagan that this absurdity would finally come to
an end; as part of his sweeping economic reforms, Reagan also requested a full review of antitrust
policy to see what made sense and what didn’t.
The man who shaped Reagan’s antitrust reforms was Robert Bork, perhaps the single most important
scholar in antitrust history.
In 1978 he wrote a book in which he challenged pretty much all the assumptions of antitrust
law that had dominated America for a century.
In his eyes, some industries just have a natural tendency to concentrate, thus forcing competition
onto them could actually just be nothing more than government protection of inefficient
businesses, or in the political context of the time, something eerily similar to socialism.
The changes he proposed were fundamentally simple: what really matters when asking whether
a company should be broken up is not whether it is too big, but whether the consumers would
benefit.
This principle came to be known as Consumer Welfare and it became a viral idea that spread
among lawmakers, politicians, and eventually became one of the defining policies that helped
elect Ronald Reagan in the first place.
Under the new policies, big companies were no longer inherently evil as long as customers
were OK.
It is under this new and revised antitrust framework that our familiar tech giants would
come into play, but this time we’re asking different questions than the ones people were
asking John Rockefeller: it’s no longer whether Apple, Facebook, Google, or Amazon
are too big.
So, what are the questions that are being asked?
Legally speaking, the most important aspect is whether a company has durable market power,
with the keyword being durable: just having a high market share alone isn’t enough to
fit this definition: Google, for example, owns 92% of the search engine market, and
yet their competition is just one click away.
Google can’t arbitrarily start charging people a dollar every time they search for
something because everyone would just leave.
Google has market power now, not because they’ve killed the competition, but because they’re
simply better or more convenient.
The exact same logic can be applied to Amazon as well: yes, they might be the biggest player
in e-commerce, but their market share is dependent on them continuing to serve consumers well.
The case with Amazon gets interesting when you consider its suppliers, who have for years
complained at the very aggressive practices Amazon employs when negotiating with them.
Since antitrust law focuses more on consumers Amazon pretty much gets a free pass here,
although even if it wasn’t so, Jeff Bezos can easily argue that all the suppliers have
plenty of different distribution methods if they disagree with his policies.
Where it gets tricky though is when we get to Apple: of the companies we’ve mentioned
so far, Apple has by far the smallest market share; it’s phones account for only 20%
of the global smartphone market.
However, unlike Amazon or Google, competition is not just one click away.
The Apple ecosystem is intentionally designed to lock users in, which in and of itself is
perfectly fine; it’s normal for Apple to have a monopoly on iOS.
The problem arises from the way they leverage this monopoly into a different market: that
of digital content.
You see, by forcing every single app developer to use Apple’s store, which charges a 30%
commission, Apple is effectively extracting economic rent: it’s not increasing the value
of the Spotify music or the Audible audiobooks you listen to on your iPhone; no, it’s just
artificially inflating the price of content to the detriment of the consumer.
There’s actually an ongoing lawsuit against Apple for exactly this issue and it may very
well force Apple’s hand, but at the end of the day you can’t really break up the
iOS ecosystem, so the best outcome here is that Apple just get to charge a more reasonable
commission on their app store.
Of all the tech giants the one deserving the most antitrust attention is Facebook and you
can probably guess why: because the social media market is so difficult to properly define
and value, Facebook was allowed to acquire what was effectively its biggest competitor:
Instagram.
Today, while the Facebook network itself is starting to stagnate in the West, Instagram
continues expanding everywhere; and yet, even here the question of durable market power
is difficult to answer because social media really does just come and go, and the only
way Facebook can exploit its power is by abusing privacy.
Thus, there really isn’t any case to be made for breaking up any of the big tech companies,
even Facebook, just because at the end of the day consumers are no worse off under the
status quo.
The ultimate question we should be asking ourselves is whether the antitrust framework
Ronald Reagan gave us is adequate to evaluate the trillion-dollar tech giants that dominate
our daily lives.
It’s difficult to imagine the current administration reworking such an important part of the legal
system, but you never know.
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In any case, thank you for watching.
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We’ll see each other again in two weeks, and until then: stay smart.