Congressional Democrats are ramping up pressure on Big Tech companies such as Google, Facebook, and Amazon, making 2018 a potential regulatory battleground. A briefing organized by Sen. Mark Warner (D-VA) last month lambasted the supposedly unethical behavior of the giants in Silicon Valley. Regulating online companies, however, is not an easy task.
If regulation is not carefully constructed, it could reduce the quality of service consumers have come to expect. Standard policy tools such as antitrust policy are likely to be ineffective due to the nature of online competition. And direct regulation would burden startups more than incumbents.
Worries about the growing market dominance of large tech companies are not unwarranted, though writing legislation that is beneficial to the public has becoming increasingly difficult, as online companies do not directly compete in the same way as conventional firms. The market power held by online firms is mostly due to the amount of data these companies collect. This enables network effects, a type of externality in which the value of using the site increases the more data it has.
Whenever a new person joins Facebook, the platform becomes more valuable to all their friends, encouraging more use, and more data is subsequently collected. The more you search with Google, the more it gets to understand your search patterns, and the better it is able to tailor the results of similar demographics, increasing the data it collects.
These network effects make it harder to switch to a new platform that offers a similar service, as the quality that these sites offer improves with use, so someone would necessarily have a worse experience when moving to a new competitor’s site. When you leave, these sites also keep your data, meaning that they continue to benefit, while you lack the ability to port this information to their competitors.
Antitrust measures are unlikely to do anything to reduce the benefits of these network effects. The scrutiny over the pending AT&T acquisition of Time Warner is being supported by those, such as the Open Markets Institute, who desire more stringent antitrust, as this could limit the power of tech companies to purchase smaller firms in different markets. By doing so they hope to end the buying sprees of the Big 5: Alphabet (Google’s parent company), Apple, Microsoft, Amazon and Facebook.
None of this, however, would do anything to reduce the dominance of these companies, but may instead starve startups of the resources they need to innovate. Preventing vertical mergers will not increase online competition.
Other regulations discussed in the briefing included intensified disclosure rules on ads, making it harder to anonymously buy ad space online, and a reduced liability shield, meaning that companies such as Facebook would be liable for the content posted by their users. This would reduce the freedom of companies to innovate online, adding paranoia about what their users might do, and generally restrict online freedom. These regulations intend to combat issues such as fake news and Russian influence over US politics, but are completely unnecessary and likely harmful.
Twitter and Facebook have already been making their content guidelines stricter in a voluntary move to combat the issue of Russian bots and fake news. Facebook has tried and failed to change its policies to combat the spread of myriad “satire” sites that confound and confuse users, leading it to invest in academic research to understand the problem. Forcing all platforms to adopt the same policy on content would get rid of this learning process, committing websites to the tools that Congress mandates. This would simply provide larger companies protection from competition, by making it harder for a new social media site with more innovative guidelines to exist and poach users from the old guard.
Recently, Forbes declared fake news a competition problem, since Facebook has become the main vehicle by which young people access news, which grants the site’s algorithms significant power to influence public opinion. These algorithms — which feed content optimized to the user’s tastes based on the totality of their browsing history — have exacerbated the online world’s echo chamber problem, with people not exposed to any dissenting opinions.
Legislation that makes market access for new competitors more difficult, such as increased liability for user content, may actually increase the dominance of incumbents. This is the economically expected result, and given the close relationship Google had with the Obama White House, might even be the intended one.
Google lobbyists visited the White House more than any other major firm, with this revolving door questioning the degree to which legislation has been written as favorable to its market dominance. This is not a minor issue, as any major tech legislation that is more difficult for smaller companies to comply with relative to large ones will squeeze out competition, exacerbating the network effects that online firms enjoy.
One of the most innovative policy solutions to the issue of network effects and low competition among online firms has been suggested by Luigi Zingales and Guy Rolnik of the Chicago Booth School of Business. They propose that a legal definition of digital property should be created, allowing users to own their social graph. This would allow all the individual user data inputted into a company to be owned by that user, meaning that if they wanted to leave a social media site such as Facebook and move to a newly introduced alternative, their social graph would allow them to transfer that data from Facebook and their servers.
Making firms more accountable to their users in the way it uses their data would give the users greater power to influence the firm’s actions, and to switch to competitors. This, and other creative measures, might significantly lower the barriers to entry for new platform firms, and would reduce the market power of larger tech companies.