De-Fanging the FANGs

Thank you for coming. It is always a pleasure to work with Harold Furchtgott-Roth[1], for whose distinguished public service we are indebted and who has maintained Hudson’s attitude towards these sessions: they are a forum for trying out ideas, that might well be proved wrong. It is the right to be proved wrong that we economists so treasure. So please view this talk as a contribution to an ongoing policy debate which is far from being concluded.

Let me begin by saying that I will not spend time on one of the FANGS – Netflix. It is a disrupter that creates no special policy problems, and is an example of the creative destruction that Joseph Schumpeter identified as the driving force that accounts for the success of capitalism. So long as it can keep borrowing money to finance its innovation – binge watching and new employment opportunities for deliverers of pizza and Chinese food – I wish it well.

Its fellow Fangsters, however, do present a range of difficult public policy problems, in part because we are schizophrenic: we want to retain the innovative dynamism that has brought us so many products we have come to love, or at least upon which we are dependent, but we are uncomfortable with the power they wield.

Fortunately, – and this is my central point – those problems can be solved with the policy tools already to hand, rather than by massive fines or the new regulations for which politicians here and abroad are clamoring. And for which Facebook is calling, fully aware that it can keep ahead of any regulator, just as it, Apple and others keep a step ahead of the tax man. After all, one of the congressmen on the committee investigating what needs to be done was astonished to learn that Google knew he had moved to Washington. He undoubtedly believes that an analogue is something to throw on the fire on a cold night.

Facebook, Google, Amazon and – here I add Apple — present at least four difficult policy problems that have legislators thrashing around for solutions:
The absence of effective competition in many markets in which they operate. This applies to Facebook, Google and, although less urgently, to Amazon, all of which have the power to decapitate competition when it rears its lovely head.

Their unwillingness or inability to control content — Their relaxed attitude towards their obligation to prevent the use of social media platforms to spread false, dangerously inciting and other materials that would land any print publisher in court or jail. Here, I will use Facebook as the poster boy, and for lack of time and knowledge leave discussion of the activities of Google and Amazon, which know where you are and what you like, and sell or make that information available to advertisers.

Their unwillingness or inability to prevent the spread of private information, made available to them by users of their services, lest such protections reduce the amount and value of the private data they have available to sell to advertisers.

Their relaxed attitude towards their obligation to pay taxes that compensate society for the value of its contribution to their success.
I would like to defer the discussion of the tax issue for last, and cover it only if we have time after talking about the other three: competition, content control, privacy and taxes.

Government regulation as it is being considered won’t restore competition to these markets as certainly as would deployment of the antitrust tools already to hand. Nor will the effort now being made by Facebook to clean up its act solve the problem. It is in the business of selling our information to advertisers in return for allowing us to use its platform. Its incentive is to gather as much personal data as it can, using whatever means that does not antagonize masses of its users sufficiently to cause them to abandon the service, and sell those data to advertisers. In the jargon of the trade, it is monetizing our data. Regulations that attempt to leave that incentive in place, in a market in which there are few alternative equivalent services, are doomed to fail. The profit margin from that trade, in which you provide your valuable data in return for “free” use of the platform — which use Facebook can provide at zero (or negative) marginal cost — is enormous.

Oddly, for a brief moment, Facebook COO Sheryl Sandberg mentioned a possible solution: give users of the platform the option of paying with cash, or with their data. That offer was quickly abandoned and does have problems of implementation, not least setting a price on data if we choose to sell it.

The root of the problem is that a competitive market structure that allows you to shun a supplier you do not like in favor of one with a better price-quality offer, simply does not exist. Like it or not, Facebook has become a vital means of communication for hundreds of millions who have a TINA problem: There Is No Alternative. But before making final decisions we should take a closer look at Byte Dance’s Tik Tok, which last year 1.5 times as many users downloaded as downloaded Instagram.

Solution to Facebook’s market power: create alternatives by reversing the public policy error that allowed Mr. Zuckerberg to buy out existing companies – 66 acquisitions in all[2] — that might have evolved into competitors, and tiny entrants that might have become competitors, and individual entrepreneurs who might, maybe, possibly have become competitors. No new policy needed here. The authorities have long had the power to prevent mergers that substantially lessen competition, and to order divestiture as a remedy if already-completed mergers threaten competition, especially in the case of a company with a history of shutting down companies it has acquired.[3]

The problem is that the antitrust authorities have hesitated to use their powers. As Roger McNamee, an early investor in and advisor to Facebook notes, “Three internet platforms – Amazon, Google, and Facebook – have benefited enormously from the Chicago School’s antitrust philosophy.”[4] It is hardly beyond the interpretive skills of the authorities to argue that we are not dealing with an industry in which the effect of an acquisition on competition is to be found by totaling up the market shares of the acquirer and the acquired, or by guessing at the impact of the prices charged by – well, by a company that offers its product for “free”.

Instead, we are dealing with an industry in which potential competition can be stifled by acquiring even a tiny competitor that might probably morph into a Facebook competitor if Mark Zuckerberg is permitted from dipping into his petty cash box and buying it out. As a practical matter, since it is difficult to separate potential competitors from others, and given Facebook’s market dominance, this means prohibiting Facebook from making any acquisitions.

I hasten to add that there are two objections to this proposal that must be considered. One is that, if implemented, it would deprive possible entrants of the “right” to sell out to Facebook, cashing in on their work, and perhaps moving on to the next invention. But I rather doubt that there is a “right” to engage in a transaction that will probably lessen competition, or that such a sales prohibition will deter future room- or garage-mates from developing the next great innovation, which they know in advance they will sell to an existing company.

Another possible objection is that markets are a more reliable source of relief, given time. Facebook is developing a “clear history” option that just might give users an easy path to reclaiming ownership of their personal data. To the extent that “clear history” reduces privacy problems it also reduces the value of what Facebook can offer to sell to advertisers. I am not certain what that “clear history” will turn out to be, or how Facebook’s earnings will be affected by it, but – as all scholarly grant-seeking articles say – “this warrants further research”.

There are even precedents for going behind mere prohibitions and forcing Facebook to provide resources to emerging competitors until its market power is reduced to a level that permits dissatisfied users to go elsewhere. Then, if Facebook plays fast and loose with our data, we would have an alternative, which would have the salutary effect of providing Zuckerberg & Co. an incentive to do a better job of protecting those data.

I would not want to leave you with the impression that other Fangs do not create competitive issues that need addressing. The existing tools available to rein in Facebook can also be used to contain Google and Amazon.

  • If Google does have market power in search, which the company denies, and is leveraging that power in other markets by giving pride of place to its own maps and other services, prohibiting that practice will not be effective, as regulators would have to dig deep into algorithms and such, a game they will always lose to Google. Instead, the company can be broken up, with shareholders receiving stock in the search engine company and, separately, the companies operating in the many markets that are unfairly disadvantaged by the search engine would now face a level playing field. This might be what Congressman David Cicilline, chair of the House Antitrust Subcommittee, has in mind when he calls for a Glass-Steagall Act for large tech companies. I hope so.
  • Amazon operates in highly competitive markets, and has a relatively small share of retail sales, but it has the ability to deny capital to emerging competitors by pre-announcing plans to offer the same products, thereby scaring off potential funders of newcomers. Mere size is no offense, but using financial muscle as a competitive tool is. So, examine pre-announcements and any potentially predatory pricing practices by Amazon to determine whether antitrust intervention is called for. Also, if the company’s market power in specific well-defined markets enables it to set prices and the other terms of trade, divestiture might be considered. But I hasten to add that the ground on which I have so far trod becomes shakier when it comes to Amazon because of the enormous pro-competitive effect the company has had – and is about to have as it turns its skills to attacking the cost of covering “the last mile” of the product-distribution chain. If enforcement resources are scarce, I would be inclined to pass on Amazon if regulatory and antitrust resources are limite: Facebook and Google surely should be higher on the list of enforcement authorities. Beware: my tender feelings for the company might be a result of my anger at the treatment it received from the looney-left when it attempted to construct a campus in Queens.

Content Control – of the hackers, the false news purveyors, the violent and abusive users of the Facebook platform.

The threat of regulation is insufficient to provide Facebook with a real incentive to get these abuses under control. As I mentioned, truly effective regulation is so unthreatening a prospect that Mark Zuckerberg is in favor of it. That is not an unusual position for a powerful incumbent to take: regulation, which requires a company to put in place an expensive team of lawyers and lobbyists that a newcomer can ill afford, can be a powerful barrier to entry.

Instead, and in addition to the structural changes I have already mentioned, subject Facebook to the same restraints under which any media company labors: liability for the misuse of its platform. As things now stand, Facebook and other internet companies are protected by Section 230 of the Communications Decency Act of 1996, which exempts them from liability for what appears on their sites. Imagine what would become of a newspaper that published some of the materials that Facebook publishes – untruths, incitements, libels. It would face lawsuits, damage payments, and heaven only knows what eager plaintiffs’ lawyers, scenting a cash-rich target, can conjure. Traditional media companies, which are liable for what they publish, curate that material and set standards for what they publish. No media company would dare print every letter or proposed column that comes its way, asking for space on the company’s “platform”; neither should Facebook provide a platform for broadcasting everything anyone might want circulated.

“The idea that the big internet platforms are not media companies have never really been tenable,” writes Francis Fukuyama.[5] Give Facebook the powerful incentive of legal liability for what it chooses to publish, rather than facing it with inevitably ineffective regulation, which in America would run up against First Amendment guarantees. By creating that incentive to behavior at least as wholesome as that to which the National Enquirer is subjected, we can rely on the genius that created the platform to find a way to winnow out much of the troublesome material it now struggles, sort of, to eliminate. Especially if advertisers and consumers have competitive alternatives, created by forcing Facebook to disgorge acquisitions that alert antitrust authorities would never have permitted.

So much has been said and written about this problem that I have little to add, especially since we will soon know if the new investigation by New York State’s Department of Financial services, established by a very angry Governor Andrew Cuomo – he characterized Facebook’s recently revealed data sharing with various apps as “an outrageous abuse of privacy”[6] – turns up convincing evidence that these abuses are at least in part a result of the company’s monopoly power. Facebook, Google and, more recently Amazon have business models that depend on learning everything they can about you, and selling those data to advertisers. Since competition is ineffective, and barriers to entry not insignificant, they have little fear that their serial violation of privacy will have serious commercial consequences, and hence little incentive to prevent such violations so long as they are willing to withstand the reputational consequences[7] of continuing to claim, as Mark Zuckerberg did in his April 2018 Senate appearance, “We do not sell data to advertisers. We do not sell data to anyone.” To which Michael Rosinski, an assistant professor at Stanford’s Graduate School of Business replies, “As a data scientist, I am shocked that anyone continues to believe this claim. Each time you click on a Facebook ad, Facebook sells data on you to that advertiser…. Facebook has a lot of data on their users and is eager to monetize it.”[8]

That cannot be changed absent a major restructuring of these industries, which I have already discussed, or requiring availability of an option that allows the payment of a fee rather than turning over personal data in return for use of these platforms. This latter approach would not be devoid of problems, not least determining the price to be paid for the personal data.

To summarize before turning to taxation. Before America entered WWII Winston Churchill asked of Franklin Roosevelt, “Give us the tools and we will finish the job.” We have given the antitrust authorities the tools, it is now up to them to finish the job. Which might be just what the FTC’s newly formed team of 17 lawyers and one consultant is planning. The only action needed from the congress is repeal of Section 230 of the Communications Decency Act of 1996 to apply to Mr. Zuckerberg the same rules applied to other media companies.

On to taxation.
Taxes. No company has an obligation to pay more in tax than it is legally obligated to do. And it is safe to assume that Facebook, Google, Amazon, Apple – to mention just four – are not about to engage in illegal maneuvers in order to reduce the size of their checks to the Treasury. Yet, it is not without reason or mere hatred of big, profitable companies that we have come to believe that these Fangs are dodging the obligations we impose on other companies to bear a fair share of the cost or value of the public investment on which they rely, most notably the education of their work forces. Barack Obama, who was wrong about many things, was onto something when he told American businessmen, “You didn’t build that.” He should have added, “without drawing on government and societal resources.”

The solution is to change the method of taxing these companies. Taxing the profits of the companies that David Goodhart would classify as “Anywheres”, as opposed to rooted “Somewheres”[9] is an exercise in futility. There are too many venues that offer low-tax homes to these easily transported profits, and too many really clever accountants who can find reasons to park brand names, intellectual property and other assets in those venues faster than over-matched T-men can mount arguments against such shifting.

So, tax sales wherever those sales are made, rather than fruitlessly chasing profits to whatever venues the companies choose as the most effective shelters in which to park their profits. This eliminates the companies’ incentive to search for Caribbean islands and Irish cities to which to transport profits, while allowing a tax rate to be set on sales, at a level that permits these companies to remain competitive with international rivals.

Allow me to close with three thoughts.

First, it is a sad fact that where America once led in devising means of preventing the use of unsavory business tactics to acquire monopoly power, we now trail the Europeans. The European Commission, acting on its success in reining in Microsoft and then Intel, has moved to confine Google’s power to those markets which it has won by offering the best product – and preventing the use of leverage to conquer markets where other firms have a good chance of winning a competitive battle. It has taken steps to protect personal privacy. Whether fines for past behavior, and regulation of future behavior that is subject to even more onerous fines will do the trick, I am not certain. Nor am I holding up the EU as a model of regulatory excellence: it is possible that its stricter approach is one of the reasons that Europe has no internet giant.

Second, the time to correct the anti-competitive structure of the market in which Facebook operates is upon us. Whatever else one can say about Mr. Zuckerberg, one thing is certain: like all brilliant private sector operators, he is quicker than government. He might not be a study in candor – watch clips of his appearances before congressional committees – or even have a sense of what is required of him to keep regulators from moving from uncertainty about his actions to opposition to them – note his refusal to accept an invitation to testify before a Parliamentary committee in the UK.[10] But he has been quick to realize that the trend of opinion is running against him. And that divestiture of Instagram and WhatsApp is being widely discussed, in the context of prior such moves in the oil and telecommunications industry. So he is rolling all of those entities into one, scrambled entity, making “regulatory breakup … harder to accomplish if the services are more tightly entwined.”[11] Germany is attempting to enjoin that process,[12] and we should join that effort. As one former antitrust enforcement official puts it, “Mark Zuckerberg has made a strategic power grab…. The FTC has looked the other way for too long…. The integration Mr. Zuckerberg plans would immunize Facebook’s monopoly power from attack.”[13] If the integration is allowed to occur, no matter what else we do, it is game, set and match to Facebook. As one of his former colleagues puts it, we would be Zucked. There is some possibility that the FTC’s newly established Technology Task Force[14] will find ways of moving enforcement developed in an industrial era into the new age of the internet. After all, the 17-attorney group plus a new “technology fellow” is not likely to decide that all has been well in the high-tech segment, and volunteer to disband. There has been no such moves by any regulatory body since Fred Kahn had the lights turned out in the Civil Aeronautics Board.

Third, these companies have enormously enriched our lives, and should be allowed to keep all the gains stemming from their efficiency and the quality of their services, but not the gains that are dependent on anti-social (tax, privacy, circulation of obnoxious materials) or anti-competitive behavior (mergers that substantially lessen prospective competition, rapacious business tactics). No new tools are needed; merely imaginative application of those already in hand and that have done so much to preserve competition in the past.

Thank you for your attention.

*Director of Economic Policy Studies, the Hudson Institute, and U.S. correspondent for The Sunday Times. Dr. Stelzer is co-author with John Shenefield of The Antitrust Laws: A Primer, published by The American Enterprise Institute, and has at times been a consultant to Google and to News Corp.
[1] Director, Center for the Economics of the Internet, Hudson Institute.
[2] “Companies acquired by Facebook,” TechWyse,
[3] ” … over the past few years, Facebook has also shut down acquisitions, including viral teen Q&A app TBH (though its founder says he recommended shutting it down), fitness tracker Moves, video advertising system LiveRail, and still-popular mobile app developer platform Parse…. Acquisitions have protected Facebook from disruption.”
[4] Roger McNamee, Zucked: Waking up to the Facebook Catastrophe, New York, Penguin Press, 2019, p. 137.
[5] “Social Media and Censorship, ” The American Interest, August 8, 2018.
[6] Sam Schechner, “Probe Seeks Facebook Data Documents,” Wall Street Journal, March 1, 2019. Facebook provided eleven popular apps SDKs, software development kits, so that the app could send the social network intensely personal data” according to Schechner.
[7] “Zuck’s and Sheryl’s failure to take action to address obvious flaws in the product and to protect their brand is at least suggestive of their monopoly power. They have not been concerned about brand damage because they knew that users had no alternative.” McNamee, op.cit., p.141.
[8] OP ed in New York Times, December 13, 2018. See also Katherine Bindley, “Why Facebook Still Seems To Spy, Wall Street Journal, March 1, 2018.
[9] The Road to Somewhere: The populist Revolt and the Future of Politics. London, Penguin, 2017.
[10] Regulators and legislators don’t much like being ignored. Damian Collins, MP chair of the Digital, Culture, Media and Sports Committee accompanied the committee’s final report with a statement, “Facebook exercise[s] massive market power…. Facebook has often sought deliberately to frustrate our work by giving incomplete, disingenuous and at times misleading answers to our questions.” 18 February 2019.
[11] Sarah Frier, “Facebook Merging Apps could Bolster Ads, Defense Against Breakup,” Bloomberg, January 25, 2019.
[12]”Bundeskartellamt prohibits Facebook from combining user data from different sources,” February 7, 2019,
[13] Sally Hubbard, “How to Stop Facebook’s App Ploy,” New York Times, February 6, 2019.
[14] James D. McKinnon, “FTC Task Force Takes On Big Tech,” Wall Street Journal, March 1, 2019.

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