US regulators are cracking the whip on tech giants such as Facebook. Photo by bloomberg
ON July 16, top executives from tech behemoths Facebook, Google’s owner Alphabet, Amazon.com and Apple will testify before the US House Committee on the Judiciary. The congressional hearing, part of a wide-ranging antitrust probe of the tech players that have a combined market capitalisation of US$3.3 trillion (S$4.49 trillion), will cover their potential threat to competition and innovation as well as whether their continued dominance is harmful to consumers or business rivals.
The moment of truth for global tech giants is finally here. A decade after the end of the global financial crisis that suddenly catapulted high-growth tech companies with their blitzscaling business models to the forefront as the new drivers of the global economy, US regulators are cracking the whip. Will search giant Google, social media powerhouse Facebook and e-commerce pioneer Amazon be reined in? Will the intense scrutiny of their respective business models eventually lead to antitrust action against one or several of them? Will they be regulated? Are Facebook and Google in danger of being broken up?
Silicon Valley behemoths are in the crosshairs of global regulators not because they are among the largest and most profitable businesses on earth, but because they exploit the data we produce as part of the normal course of web browsing, app use and digital consumption as well as making sophisticated inferences about who we are, what we want and what we are likely to do.
Harvard professor Shoshana Zuboff, the author of a new book on the business model of data harvesting, The Age of Surveillance Capitalism, argues that Google and Facebook are primarily focused on gathering data about everybody and using it to manipulate choices available to people and getting them to do things or modify behaviour, shaping it towards desired commercial outcomes like generating advertising revenues or e-commerce sales.
Indeed, digital platforms such as Google and Facebook are today where the US chemical industry was in the 1950s when they were pouring by-products like mercury and chromium into fresh water, says San Francisco-based veteran venture capitalist Roger McNamee, the author of Zucked: Waking up to the Facebook Catastrophe. “What we are seeing is the digital equivalent of a toxic oil spill where tech companies, like Facebook and Google, are not bearing the huge cost of the damage they are doing to society,” he says.
Tech giants have been under scrutiny since late 2016 when Facebook was accused of allowing the Russians to manipulate the US presidential elections that put Donald Trump in the White House. Since then, both major parties in America, the Republicans and Democrats, have attacked the tech giants for their political bias, privacy violations, as well as for their business model of extracting too much data without permission and then selling and reselling it for profits.
US regulators, Congressmen and President Trump have stepped up their attacks on data harvesters in recent months. The ascension of William Barr, a known critic of Big Tech, as the US Attorney General in mid-February was the tipping point in the case against the internet giants. “A lot of people wonder how huge behemoths that now exist in Silicon Valley have taken shape under the nose of the antitrust enforcers,” Barr told his Senate confirmation hearings earlier this year. Late last month, Trump in a TV interview said that the government “should be suing Google and Facebook, which perhaps we will”. The president also has a long-running feud with Amazon founder Jeff Bezos, who owns The Washington Post, a constant critic of his administration.
Antitrust investigations into large, powerful companies are nothing new. In 1984, US regulators broke up giant telco AT&T into small regional “baby bell” phone companies, which eventually helped usher in a telecommunications revolution. Computer giant IBM survived a 13-year antitrust scrutiny between 1969 and 1982. Microsoft, which was the dominant player in the personal computer era, barely scraped through after an extensive investigation that began 1998. In April 2000, the Department of Justice (DOJ) ruled that the software giant be broken up, and even though that ruling was later reversed, Microsoft was distracted enough by the scrutiny to miss the internet revolution as well as the switch to mobile communications, clearing the way for the emergence of players such as Amazon, Google and Facebook, and re-emergence of Apple.
In late June, DOJ finally launched an official inquiry into Google. The US Federal Trade Commission is investigating both Facebook and Amazon while DOJ is investigating Apple. FTC has been reportedly working with Facebook for months on a deal that could result in a US$5 billion fine. FTC is likely to take other regulatory actions resulting from the violations of the 2011 consent decree that prohibited Facebook from misleading consumers about their data privacy and security. The social network promised FTC that it would get the explicit consent of users before making changes that overrode their privacy preferences. FTC is also investigating reports that Facebook’s founder Mark Zuckerberg was aware that his company was in violation of the FTC decree as far back as 2012 and did nothing about it.
To be sure, regulators are moving quickly because the US is in the early stages of a political cycle that will end with fiercely fought presidential elections next November. That aside, there is also a growing awareness that the world’s biggest tech firms have issues that are bad for the US, global economy and emerging competitors, as well as consumers around the world.
Very different cases
Yet each of the cases against the four tech giants could not be more different. Tech industry analysts say the case against Apple, which does not extract personal data without permission or sell data to advertisers, appears trivial. Apple has been criticised for its App Store. Though the company has a mere 17% share of global smartphone market, its App Store accounts for over two-thirds of the total app revenues worldwide.
Music streaming giant Spotify recently lodged a formal complaint with the European Union claiming that Apple uses its App Store to stifle innovation and limit consumer choice in favour of its own Apple Music service. Apple denies the charges and competition lawyers say the problem can been rectified fairly easily by changing the way Apple charges developers who sell their apps on its App Store. Both Apple and its rival Google Play store take a 30% cut from developers or a smaller 15% for in-app purchases. Amazon has some serious structural issues, like its ability to develop competing white-label products at the expense of its brand suppliers and then pushing them at its customers with all the data at its disposal. But Amazon, which despite its dominance in e-commerce has less than 10% of the US retail market, is seen likely to survive any antitrust scrutiny.
For Google and Facebook, the issues go to the heart of their business model. “Facebook’s acquisition of Instagram was the greatest regulatory failure of the past decade,” says Taipei-based tech strategist Ben Thompson, who writes the popular Stratechery blog. Regulators doubled down on the mistake by later allowing Facebook to buy WhatsApp. Yet that does not mean the antitrust scrutiny will lead to severe action like Facebook being forced to divest or hive off Instagram or WhatsApp, a breakup of Google or being put under regulations that basically tie their hands. Still, in Google’s case particularly, it is more likely than not that DOJ will force some changes to the business model.
Facebook’s COO Sheryl Sandberg has been appealing to America’s worst nationalist instincts by arguing that instead of being obsessed with the size and power of the Silicon Valley giants, people should be concerned about the Chinese tech giants that are being nurtured by Beijing and allowed to grow without any obstacles. America’s attempts to rein in Facebook and Google are putting its tech leaders at a severe disadvantage in key technologies like artificial intelligence, where it needs to be ahead, against the likes of China’s home-grown tech champions like Alibaba Group Holding, Tencent Holdings and Baidu.
Senator Elizabeth Warren, a left-leaning Democrat and leading contender for a presidential nomination next year, has emerged as the icon of the Big Tech breakup. She argues that the tech giants are a clear danger to American democracy, as well as to competition, because there is a massive gathering of data without permission, which is then used in a way that consumers are completely unaware of. “Not only do companies like Facebook and Google extract private data without permission, they pay very little taxes, if any,” says Warren, who has been particularly harsh on Amazon and has argued that Apple should be forced to hive off its App Store.
Warren and several other Democratic presidential contenders argue that if Washington breaks up the Big Tech companies, there will be more competition and more innovation, which in turn will only help grow the US economy faster. Silicon Valley’s entrepreneurial world has been completely upended as Facebook, Google and Amazon have grown into giant incumbents. Every start-up these days has to have a plan to avoid competing with these giant incumbents because they would be clobbered if they do, the way Facebook started copying everything that Snapchat did. Indeed, the fear of the tech giants is starting to stifle innovation. The upshot of that is that start-ups these days are trying riskier business models that tend to be capital-intensive, lower-return businesses and venture capitalists are being forced to take bigger risks or walk away.
When American regulators finally do get around to forcing Google, Facebook and others to pay for the cost of the damage they have wreaked over the past decade, they will be a lot less profitable. Yet that will not make Facebook or Google unattractive businesses — just more responsible players in the society.
Assif Shameen is a technology writer based in North America