Regulating the internet giants
The world’s most valuable resource is no longer oil, but data
The data economy demands a new approach to
antitrust rules
A NEW
commodity spawns a lucrative, fast-growing industry, prompting antitrust
regulators to step in to restrain those who control its flow. A century ago,
the resource in question was oil. Now similar concerns are being raised by the
giants that deal in data, the oil of the digital era. These titans—Alphabet
(Google’s parent company), Amazon, Apple, Facebook and Microsoft—look
unstoppable. They are the five most valuable listed firms in the world. Their
profits are surging: they collectively racked up over $25bn in net profit in
the first quarter of 2017. Amazon captures half of all dollars spent online in
America. Google and Facebook accounted for almost all the revenue growth in
digital advertising in America last year.
Such
dominance has prompted calls for the tech giants to be broken up, as Standard
Oil was in the early 20th century. This newspaper has argued against such
drastic action in the past. Size alone is not a crime. The giants’ success has
benefited consumers. Few want to live without Google’s search engine, Amazon’s
one-day delivery or Facebook’s newsfeed. Nor do these firms raise the alarm
when standard antitrust tests are applied. Far from gouging consumers, many of
their services are free (users pay, in effect, by handing over yet more data).
Take account of offline rivals, and their market shares look less worrying. And
the emergence of upstarts like Snapchat suggests that new entrants can still
make waves.
But there is
cause for concern. Internet companies’ control of data gives them enormous
power. Old ways of thinking about competition, devised in the era of oil, look
outdated in what has come to be called the “data economy” (see Briefing). A new approach is needed.
Quantity
has a quality all its own
What has
changed? Smartphones and the internet have made data abundant, ubiquitous and
far more valuable. Whether you are going for a run, watching TV or even just
sitting in traffic, virtually every activity creates a digital trace—more raw
material for the data distilleries. As devices from watches to cars connect to
the internet, the volume is increasing: some estimate that a self-driving car
will generate 100 gigabytes per second. Meanwhile, artificial-intelligence (AI)
techniques such as machine learning extract more value from data. Algorithms
can predict when a customer is ready to buy, a jet-engine needs servicing or a
person is at risk of a disease. Industrial giants such as GE and Siemens now
sell themselves as data firms.
This
abundance of data changes the nature of competition. Technology giants have
always benefited from network effects: the more users Facebook signs up, the
more attractive signing up becomes for others. With data there are extra
network effects. By collecting more data, a firm has more scope to improve its
products, which attracts more users, generating even more data, and so on. The
more data Tesla gathers from its self-driving cars, the better it can make them
at driving themselves—part of the reason the firm, which sold only 25,000 cars
in the first quarter, is now worth more than GM, which sold 2.3m. Vast pools of
data can thus act as protective moats.
Access to
data also protects companies from rivals in another way. The case for being
sanguine about competition in the tech industry rests on the potential for
incumbents to be blindsided by a startup in a garage or an unexpected
technological shift. But both are less likely in the data age. The giants’
surveillance systems span the entire economy: Google can see what people search
for, Facebook what they share, Amazon what they buy. They own app stores and
operating systems, and rent out computing power to startups. They have a “God’s
eye view” of activities in their own markets and beyond. They can see when a
new product or service gains traction, allowing them to copy it or simply buy
the upstart before it becomes too great a threat. Many think Facebook’s $22bn
purchase in 2014 of WhatsApp, a messaging app with fewer than 60 employees,
falls into this category of “shoot-out acquisitions” that eliminate potential
rivals. By providing barriers to entry and early-warning systems, data can
stifle competition.
Who ya gonna call, trustbusters?
The nature
of data makes the antitrust remedies of the past less useful. Breaking up a
firm like Google into five Googlets would not stop network effects from
reasserting themselves: in time, one of them would become dominant again. A
radical rethink is required—and as the outlines of a new approach start to
become apparent, two ideas stand out.
The first is
that antitrust authorities need to move from the industrial era into the 21st
century. When considering a merger, for example, they have traditionally used
size to determine when to intervene. They now need to take into account the
extent of firms’ data assets when assessing the impact of deals. The purchase
price could also be a signal that an incumbent is buying a nascent threat. On
these measures, Facebook’s willingness to pay so much for WhatsApp, which had
no revenue to speak of, would have raised red flags. Trustbusters must also
become more data-savvy in their analysis of market dynamics, for example by
using simulations to hunt for algorithms colluding over prices or to determine
how best to promote competition (see Free exchange).
The second
principle is to loosen the grip that providers of online services have over
data and give more control to those who supply them. More transparency would
help: companies could be forced to reveal to consumers what information they
hold and how much money they make from it. Governments could encourage the
emergence of new services by opening up more of their own data vaults or
managing crucial parts of the data economy as public infrastructure, as India
does with its digital-identity system, Aadhaar. They could also mandate the
sharing of certain kinds of data, with users’ consent—an approach Europe is
taking in financial services by requiring banks to make customers’ data
accessible to third parties.
Rebooting
antitrust for the information age will not be easy. It will entail new risks:
more data sharing, for instance, could threaten privacy. But if governments
don’t want a data economy dominated by a few giants, they will need to act
soon.
Regards
Pralhad Jadhav
Senior Manager @ Knowledge
Repository
Khaitan
& Co
Upcoming Event | MANLIBNET 17th Annual International Conference on 15-16 September 2017 at
Jaipuria, Noida, India
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