Mar 26, 2020
In a 2019 Article, Elizabeth Warren summarised the widespread feeling that Big Tech’s influence on society needs to be curtailed: “Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”
It is unlikely that regulators will go as far as breaking up Big Tech firms, as Warren promised. However, the past two years have seen reviews across jurisdictions on whether or not existing competition frameworks are adequate for firms like Amazon and Alphabet. In 2019, the US Federal Trade Commission (FTC) made a permanent Technology Enforcement Division. Meanwhile, the European Commission (EC) commissioned a report on EU competition policy. Even in Australia, the Australian Competition and Consumer Commission (ACCC) gave recommendations to the government on how to change competition policy last year. After all these reviews, it is clear that large changes to competition law are due for the next two years.
What is driving this scrutiny of Big Tech?
Primarily, this scrutiny is being driven by how ubiquitous Big Tech has become in everyday life. Facebook has almost 2.5 billion active users and so the kind of service that it provides is increasingly important. Yet, these markets are increasingly concentrated. For instance, Google comprises over 90% of searches in each European member state. Ensuring that these huge platforms still have incentives to innovate and provide a high quality of service therefore underpins concerns about competition in the technology sector.
This size has been accompanied by a feeling that large technology firms are abusing their position of strength. In the aftermath of scandals such as the Cambridge Analytica scandal in 2018, there is a growing suspicion of the amount of power that belong to the Big Tech firms. This has already resulted in regulatory changes to data protection such as the General Data Protection Regulation (GDPR) in the EU but it is also likely to bring about changes to competition laws. If consumers have viable alternatives to Facebook, it is harder for them to be careless with data without losing business.
Furthermore, Big Tech firms have attempted to use their size to enter into other industries. The launch of services such as Apple Music, Alexa and Google Nest shows that firms are trying to diversify their services as they grow in size. These firms arguably have unfair advantages in these other services, as they are able to take advantage of the fact that they have a captive audience already. For instance, Apple initially tried to block Spotify from the Apple Watch platform in order to force users to use Apple Music instead. (Shapiro, 2019) Sometimes these other services do not have regulatory regimes that can account for Big Tech. This is particularly the case with the payments industry, where services such as Microsoft Pay and Google Pay have a competitive edge because they are not subject to as many regulations as existing players. (Padilla & de la Mano, 2019) The fact that these firms are able to influence a range of industries adds to the sense that they are too big and thus competition guidelines need to be changed.
Although there have been different specific factors driving each country’s review into competition law, the international pressure for each country to change their guidelines has acted across the board. Research done in one jurisdiction on why competition laws should be changed often acts as a signal to other jurisdictions that they should implement similar changes. This was most clearly shown with Japan’s review into its competition framework in 2019. The Japanese Fair-Trade Commission (JFTC) itself cited the European Commission’s proposals for competition reform in its justification behind regulatory changes. This is particularly likely to occur as time goes on. If changes to competition frameworks produce good outcomes in the long-term, then that will act as an incentive for other countries to adopt the same measures.
Which changes to competition frameworks are likely to come about?
It is difficult to generalise across jurisdictions exactly which reforms will be implemented but four trends are emerging: the increased use of fining, more investigations on firm expansion, a heightened focus on consumer demands and restrictions on data use across platforms.
The European Commission in particular has been increasingly willing to use fines to penalise anti-competitive behaviour. Between 2017 and 2019 alone, the European Commission fined Alphabet €8.25bn. Meanwhile, in the UK, the Competition and Markets Authority (CMA) has stated that the body should have more powers to force fines on companies without needing to resort to courts first. China has also reviewed its power to fine companies and increased the cap of fines for anti-competitive behaviour to 10% of the previous year’s revenue in its moves against Alibaba. Fines are an important tool of competition authorities because the increased use of fining may act as a deterrent to anti-competitive behaviour from Big Tech. In any case, even if these firms do not change their practices, the ability of regulators to impose higher fines marks an important change in the amount of power that competition authorities have when trying to steer industry.
Big Tech’s particular method of expansion has created a need for reviews into how competition authorities investigate merger and acquisition (M&A) deals. Technology firms typically acquire smaller competitor in a process called a ‘killer acquisition’. This allows the larger technology firm to buy out a competitor before it becomes a threat, as shown in the Facebook acquisition of Instagram in 2012. This however poses a challenge for competition authorities who base their definition of whether or not a merger is anti-competitive on turnover or market shares. Often, these smaller firms will have little turnover and a very low market share. To get around this problem, competition authorities have used other measures to determine when a merger is anti-competitive. For example, Germany and Austria introduced a form of merger review that is based on valuation in 2018. Even where there is no change to merger guidelines, competition authorities are likely to be more sceptical of M&A deals going forwards. The ACCC’s recommendations in 2019 included increasing the amount of notice that firms have to give to the Australian government, which could allow investigations to be more thorough. This comes at a time when more M&A deals are being notified to competition authorities. Whereas between 2008 and 2009, three deals were notified to the European Commission where there were considerations of data gains involved, between 2018 and 2019, that number has risen to 26.
Competition review could also lead to authorities becoming more responsive to consumer demands. As the power of regulators increases, consumers become more willing to raise issues with them. This trend is clearly shown in Europe where there has been a 121% increase in consumer complaints to the European Consumer Centres Network between 2009 and 2019. Having more consumer inputs could allow competition authorities to have more of a justification in intervening in markets as they move towards consumer-oriented views on competition. For example, Giovannia Pitruzzella, the new Chair of the Italian Antitrust Authority (IAA), has announced that competition should be seen as important insofar as consumers benefit. This suggests that the IAA will be more responsive to the growing numbers of consumer complaints when deciding whether or not to act against Big Tech.
Finally, restrictions on the use of data are likely to emerge. Regulators are increasingly realising that having a large amount of data provides firms with a significant advantage over their competitors. If one firm knows more about a customer than another firm, then it is likely to retain that customer for a significantly longer time. The discrepancy between the amount of information that Big Tech firms have on customers compared to smaller firms is huge. Thus, competition reforms are likely to centre around the data that firms have and the business practices that result from having that data. In the US, the FTC is currently deciding whether or not it should have an injunction on Facebook due to its use of data sharing across Instagram, WhatsApp and Messenger. Meanwhile, Japan’s proposed competition reforms include requiring businesses to report their business practices to the competition authority. These changes could blunt the competitive edge that Big Tech has from owning vast sums of data.
What are the likely effects of such changes?
These changes could have adverse effects on consumers depending on how they are implemented. Some platforms have benefitted substantially from killer acquisitions. For instance, at the time of its acquisition by Facebook in 2012, Instagram had 30 million users. Now it has over a billion user. (Padilla & de la Mano, 2019) This only increases the quality of service for users, as more users mean that there is a larger community that users can draw interact with. Nonetheless, if reforms are done carefully, there could be a significant benefit for consumers. Data sharing could allow multiple platforms to better tailor their service and imrpove the quality of service that they provide. Meanwhile, blocking killer acquisitions can ensure that there are incentives for established players to innovate.
The changes are unlikely to be restricted to a competition sphere as well. Issues such as data privacy and tax receipts from Big Tech are likely to be considered once competition guidelines are updated. In fact, the process of reviewing these guidelines is likely to make these other issues seem more salient. This has already been seen in Europe. The European Commission also proposed a digital tax for companies whereby they have to pay tax in each state that they operate in. In 2019, France introduced this tax rate and charged Big tech firms 3% of the revenue that they made from operating in France.
Additionally, these changes are likely to affect other industries as well. Sectors that Big Tech will be less able to enter into will be clear beneficiaries of a tighter competition framework. For example, the payments industry clearly stands to gain from regulators viewing technology with suspicion. Other industries will also be forced to change directly as a result of changes to competition frameworks. In particular, sectors that are reliant upon intellectual property and data are going to have to alter the way in which they conduct business. For instance, pharmaceutical firms will have to change their operations because they are reliant upon the use of data for a competitive advantage. In fact, pharmaceutical firms are also reliant upon an expansion process that involves killer acquisitions and so are likely to lose out as a result of restrictions on M&A activity. Nevertheless, pharmaceuticals could benefit if there is a re-allocation of the investment that currently goes into technology firms. In 2019 alone, venture capital firms invested $34bn in European technology firms. If competition reforms make these firms less attractive, a significant amount of this funding could be re-allocated to other sectors such as pharmaceutical firms. Ultimately, it is unclear whether or not these changes to competition framework are beneficial to other industries.
It is unlikely that the changes to Big Tech will be as extreme as Warren’s proposals. However, the changes to competition frameworks cannot be overstated. The far-reaching effects are likely to change how firms compete in the longer term. COVID-19 will undoubtedly shape industry for the next few years but competition standards are very rarely changed. Given this, the prospect of reforms to competition frameworks are crucial for understanding how technology firms will operate for the next decade.
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James Johnson is a second year Philosophy, Politics and Economics (PPE) student at Pembroke College, Oxford.