A couple weeks ago, I retweeted this article about Facebook’s plan to integrate its messaging platforms, and an Irish watchdog’s subsequent investigation. I initially questioned why it matters that they’re integrating the backends of the three platforms if Facebook already owns all three. Since then, I’ve been exploring the world of antitrust regulation, especially as it pertains to the world’s largest tech companies. This issue has garnered more and more attention over the past several months, as NPR’s Planet Money podcast recently did a three-part series on antitrust and presidential candidate Elizabeth Warren laid out a plan to split up Amazon, Facebook, and Google.
Modern antitrust law has been around since about the 1970s and focuses primarily on ensuring consumer welfare. In other words, these laws are centered around price and quality. When a company has little to no competition, that company has a monopoly. If a company has a monopoly, they can raise prices, restrict output, and reduce quality. In this scenario, consumers have no choice but to either buy the more expensive, lower-quality product, or forgo the product completely. The consumers bear the burden. This is exactly what happened when Rockefeller’s Standard Oil Company thrust antitrust issues to the forefront of the collective American consciousness in the late 19th and early 20th centuries, resulting in sweeping antitrust legislation.
But is that antitrust legislation—which helped to dismantle Standard Oil—now broken?
As recent issues with tech companies like Facebook have demonstrated, the concept of consumer welfare may be shifting. Instead of a focus on prices as an indicator of consumer welfare, Senator Warren and some antitrust experts argue that perhaps regulators should adopt more of a focus on things like data protection and privacy as a marker of consumer welfare. Further, proponents of regulation argue that these companies are becoming too big and too powerful, and many of their business tactics are anticompetitive. Just as the rise of the platform model has changed the nature of Porter’s Five Forces, it has similarly changed the nature of monopolies and competition.
Let’s look at Amazon and how it differs from brick-and-mortar retailers like Wal-Mart. Wal-Mart, Kroger, and Costco all have private label brands that piggyback on the momentum of successful products. All of those retailers are well within their rights to create a generic, private label version of, say, Lucky Charms. They can even take their own private label brand and position it more prominently on the shelves, relegating the real Lucky Charms to a dusty corner. This is not necessarily anticompetitive because brick-and-mortar retail is more competitive and less concentrated than e-commerce. In 2016, Wal-Mart had the greatest market share of any grocery retailer at 17.3%. It’s a substantial piece of the pie, but the other 82.7% is split among dozens of other retailers, meaning that if a consumer goes into a Kroger store looking for Lucky Charms and all they see is Kirkland’s Luck o’ the Irish (this is an entirely fictional example, by the way), they have the option of going to the Target down the street.
Tech, on the other hand, tends toward more of a winner-takes-all scenario. Most consumers rely on one platform much more heavily to meet specific needs. Want to find out who Chrissy Teigen is married to? Google it. Need to buy some dog food? Go to Amazon and it’ll be on your doorstep in less than 48 hours. Feeling compelled to share a picture of your adorable nephew with your friends? Post it on Facebook! Google’s market share among search engines has remained steady at around 90% for over a decade, Amazon’s market share of e-commerce was a whopping 49.1% in 2018, and Facebook’s market share among social platforms as of February 2019 was 69%.
In 2017, Yale Law student Lina Khan wrote a paper on antitrust and Amazon which made waves all across the internet. Khan argues that Amazon, like Kroger, can create a private label (Amazon Basics) version of whichever products are selling well and move their Amazon Basics product to the top of the search results, while moving their primary competitors to the bottom.
Let’s say I take a risk on manufacturing and selling water bottles. When selling through brick-and-mortar retailers, my inventory of water bottles and the risk associated with it transfers to the retailers before they’re sold. If they don’t sell, the retailer eats most of that loss. If my water bottles do sell, then the retailers I sell through can essentially take my idea and make their own private label water bottles, but at least they assumed some risk in the process. And as a manufacturer, I have dozens of other retailers I can sell my water bottles to.
What if I want to sell my water bottles online? I’ll go to Amazon, the world’s largest online marketplace. I never sell my inventory to Amazon, so they don’t assume the same risk that the brick-and-mortar retailer above did. If my water bottles don’t sell, my company is going under. What happens to Amazon? Nothing. And if they do sell, Amazon can create an Amazon Basics version of my water bottle and appropriate the value without taking on any risk at all. At that point, I don’t have many options. There’s no other online marketplace that has the traffic Amazon does. It’s a lose-lose for me and my beloved water bottles. The long-term implications of this, Khan claims, is that it is a deterrent to undertaking risk, and that is bad for competition.
Khan probably believes that if there’s a John D. Rockefeller & Standard Oil of the 21st century, it’s Jeff Bezos & Amazon. She writes, “The thousands of retailers and independent businesses that must ride Amazon’s rails to reach market are increasingly dependent on their biggest competitor.”
A spokesman from Amazon responded to Khan’s argument, stating, “We operate in a diverse range of businesses, from retail and entertainment to consumer electronics and technology services, and we have intense and well-established competition in each of these areas. Retail is our largest business today and we represent less than 1 percent of global retail.” He added that Amazon making its own products means lower prices, better products, and more competition. He also pointed out that private label is a relatively tiny portion of Amazon’s business.
So, is antitrust broken? Should tech giants like Amazon be split up? You tell me.