Scales of Justice

Monday's Musings: Get Ready For Big Government Vs Big Tech

THE AGE OF BIG TECH REGULATIONS HAS ARRIVED

Governments across the world seek to rein in the digital giants for political, economic, and societal rationale. While most digital giants have not flaunted the law, the public perception of their enormous size, massive scale, and unfair competitive advantage drive political motivations to check the power of big tech ahead of any economic or societal costs.

The recent five anti-trust legislation proposed by the House Democrats and the House Republicans Anti-trust agenda reflect the growing bi-partisan sentiment to reign in digital giants. Further, China’s crack down on its digital giants such as Alibaba’s Alipay and Didi highlight both the threat digital giants pose to the power structure of the CCP China government and the populist sentiment that government must do something to protect their citizens. And the recent global minimum tax deal endorsed by the G7 seeks to cut out loopholes that digital giants have effectively used to reduce their tax burdens.

Consequently, in the age of big tech regulations, both built-from-the-ground-up digital giants and joint venture digital giants will experience a high level of scrutiny for potential marketplace abuses. In highly regulated markets such as the EU, market dominance is defined as having more than 39.7% market share. But while the percentage thresholds for what constitutes market dominance may change, how dominance is defined will play a significant role in identifying digital giants that have the power to abuse their market position.

LOOKING FOR ANTI-COMPETITIVE PRACTICES

As we saw in the battle for mobile operating systems with Google Android versus Apple iOS, market share alone does not necessarily convey market dominance. Apple with less than 20 percent adoption versus Google’s 80 percent market share has managed to drive more profits than Google with a more attractive ecosystem. In the future, market dominance might be defined as the percentage of paid users, or percentage of total transactions, or percentage of personal data controlled, or percentage of economic value created.

Once a digital giant is deemed a dominant company, regulators and politicians seeking to create a more fair playing field should look out for these anti-competitive practices:

  1. Forced upsell or cross-sell (Tying). When a company requires that the purchase of one product or service be made with the sale of another to restrict consumer choice. For instance, you want to purchase a video game and you are forced to buy the augmented reality headset with it whether you need it or not.
  2. Bundling. Similar to forced upsell or cross-sell, when a supplier will only sell products that are put into a combined package and will not sell the individual item. For example, you are required to purchase an extended digital warranty for each digital product you buy.
  3. Collusion and price fixing. When competitors work together to pre-determine and agree to either set, increase, or lower prices to impact the market. Imagine every digital mortgage broker got together to agree that they will charge no commission below 2.5 percent. In this case, fixing the floor in pricing would be a form of collusion.
  4. Exclusive dealing. When a customer must purchase a majority or all of a particular type of good or service from a company and is excluded from purchasing from its competitors. One example would be when a hospital is forced to buy only one brand of hardware to run a type of healthcare software, even though the software could run perfectly on any device.
  5. Exclusive rebates. Plans or loyalty programs that force a customer to purchase the majority or all their goods or services from one company and prevents them from purchasing from a competing one in order to receive a discount. An example of an exclusive rebate would be if one vendor provides rebates and volume discounts only if the customer makes all their purchase exclusively through that vendor.
  6. Margin squeezing. When an integrated firm sells a product that is an essential input at a downstream rival for a similar price as the integrated firms’ finished product in order to hamper the rivals’ ability to survive or compete. For instance, a software vendor that resells its component code to competitors as well as builds its own software on the same code, decides to increase the price of the component code it charges competitors but charges its own internal teams less.
  7. Predatory pricing. When a dominant entity reduces prices that create market side losses in order to force competitors out of a market. For example, a digital giant offers free shipping and returns for purchases at a loss to increase the cost of business for a competitor.
  8. Price discrimination. When some market participants are arbitrarily charged higher prices unrelated to the actual costs of supplying, creating, or distributing the service or good. Charging small businesses one price for a product and large enterprises a higher price without a regard for how much volume they order could be considered a price discrimination violation.
  9. Refusal to provide IP. When a dominant firm refuses to license critical intellectual property to potential competitors. An example would be if a critical security technology is banned for use in a competitor’s product, leaving them vulnerable to security attacks.
  10. Refusal to supply. Similar to the refusal to provide IP, when a dominant firm refuses to supply limiting access to a competitor with a good or service to eliminate competition.  

ENCOURAGING INNOVATION THROUGH ANTI-TRUST LAWS

One of the negative consequences of a duopoly market for consumers is that they block competitors from gaining critical mass. In the course of a challenger’s lifecycle, leading digital giants will try to partner, acquire, or otherwise threaten it with retaliatory measures. The result? Each value chain will be left with only a couple of digital giants and very small players in niche markets.

In order to encourage competition, governments must enforce anti-trust laws that ensure a free-market system and corporations must respect these laws. In the US, three pieces of legislation form the core of our antitrust laws. The Sherman Anti-Trust Act sets rules to prevent restraint of trade or the conspiracy to restrain trade. Fines for violating these rules include up to $100 million for organizations and $1 million for individuals with up to 10 years of imprisonment. The Clayton Antitrust act regulates mergers and acquisitions, pricing, discounts, and other unfair practices that reduce competition and enable the creation of monopolies. The Federal Trade Commission Act bans all unfair or deceptive acts or practices and unfair methods of competition.  

In the US the Federal Trade Commission (FTC) plays a significant role in supporting free and open markets through competition. The creation, adoption, and enforcement of these rigorous anti-trust rules allows for vigorous competition on the merits of a company’s offerings. Anti-trust rules often remove the impediments to economic opportunity and powers economic growth. Without these laws, consumers face limited access to products and services and would pay higher prices for goods and services. Some of the common anti-trust rules involve the prevention of bid rigging, market allocation, mergers and acquisitions, and price fixing.

PROTECTING DIGITAL GIANTS FROM OVER-REGULATION

The balance between over-regulation and no regulation is delicate. To achieve it, regulatory bodies have to engage in a cost-benefit analysis. Most regulation is designed to protect the consumer and the smaller competitors. But regulation must also consider the benefits that come from a duopoly market: the stable creation of a new market, increase in the number of jobs, and market efficiencies gained for the consumer. New markets create and expand new categories for spending and for hiring. New types of jobs are created along with new opportunities for both the new market and its ancillary ecosystem. Market efficiencies include cheaper pricing, easier access, and more choices for customers.

In some markets, the minimum efficient scale for a given product, service, or experience is one or two per market—or even per planet. At that point these entities may emerge as regulated duopolies like Airbus and Boeing. They both sell planes, everyone can board them at an airport, and few passengers care what type of plane they are boarding. These factors should be taken into account when considering regulations of digital duopolies. 

A key guideline to keep regulation in check is to put the burden of proof on governments to show how an organization’s actions or behaviors harm consumers in a market as opposed to measuring how a policy change may improve competition. For example, dominant streaming services built on membership and advertising revenue may end up creating new models that disrupt traditional cable, satellite, and movie theater distribution. The net result is that consumers will pay less per view, content creators and consumers will avoid massive distribution fees, and more money will go back to the content creator. These benefits could outweigh the fact that there are only two streaming players with a dominant market share, and that more expensive, traditional competitors are being disrupted in the market.

The successful balance between growth and regulation will require a deft hand and smart regulators. The massive influence of digital giants on politics, society, and the economy require the smartest and most skilled professionals to ensure that policies not only address the policy needs of today, but also builds in a futurist view of the impact today’s policies may have for generations to come.

My book, "Everybody Wants to Rule the World," talks about what needs to be done to regulate big tech while balancing the costs and benefits. Get the book on pre-order now and receive the first 3 chapters today: https://amzn.to/3uR9Q9I

Your POV

How will we balance innovation with regulation?  What's required for free and fair markets?

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