Don’t sleep on tech giants’ critical infrastructure dominance

Critical infrastructure is always strategic. It is essential to a country’s economy and its defensive capability. Technological breakthroughs can drive significant changes in critical infrastructure.

For example, James Watt’s improvements to the steam engine created the British lead in the Industrial Revolution, enabling the rise of the British Empire and over a century of global domination. 

Net-based information technology is today’s critical infrastructure, and it’s dominated by American-owned platform giants. Google, Amazon and few others alone control the desktop, the smartphone and systems for the emerging smart home.

{mosads}As a result, Europe has lost control over its critical infrastructure. America likewise has also lost control because these firms are subject to only limited regulation and have operated in ways that range from predatory to a whole lot worse. 

It’s not always obvious what infrastructure is going to be strategic until it is used against you. 

At the start of World War I, few German commanders understood the significance of foreign domination of maritime insurance until the British cut off all insurance for cargoes that were headed to Germany. This can be viewed as an effortless, costless full naval blockade, and it would have ended the war if President Wilson had not intervened to protect American cotton exports. 

The economic implications of today’s platform giants are becoming clear. Concerns are most visible in Europe because these firms are foreign and because Europe has been forced out of these industries. American firms and consumers will suffer from these same pressures. 

It’s not just a matter of size but of control of access to critical platform infrastructure. With their control of iOS and Android, Apple and Google dominate mobile computing by determining which mobile apps you will see and use.

Google’s monopoly power over search allows it to charge almost whatever it wishes to firms that need to be found. More frightening, it allows Google to hide competitors and potential competitors in any business it chooses to enter.

All have been the subject of massive multi-billion-dollar decisions against Google, but Google’s power remains undiminished. 

These penalties reflect the damage that these giants have already imposed on competitors. But their future implications are even more striking. 

Platform giants are growing at an unprecedented rate. Apple, Microsoft, Amazon and Alphabet/Google are the four most valuable firms in the world. Facebook dropped in value after its role enabling the Cambridge Analytica election manipulation scandals, but is still ranked in the top 10. Interestingly, no firm has ever matched the 3.5 years between Facebook’s initial public offering and reaching $250 billion in market value. 

These firms will continue their rapid growth in power, profit and reach as they continue to diversify and expand into new areas. They have revenue from monopoly power. They have profit from tainted sources, like monetizing private information in ways that most firms cannot legally match.

They use their power and profit to enter new markets, subsidizing their offerings or providing them at no cost, literally eliminating competition from any source other than one of the other American giants. The cost to any seller who needs to purchase keywords from a search engine or the cost to any society dependent upon investigative journalism should already be clear.

Widespread adoption of the internet of things will lead to exponential increases in online data volumes and to corresponding increases in the power and influence of these platform giants. 

Smart appliances in the near future will communicate through a smart home interface, probably Amazon Alexa or Google Assistant. That means that consumer durable manufacturers around the world are going to be dependent upon Amazon and Google to communicate with their customers’ home appliances.

Smart refrigerators are going to reorder from Amazon or from whichever vendors pay Google enough for access. Small retailers don’t stand a chance.

Moreover, enormous amounts of data will be retained by these platform giants, giving them advantages in big data analytics and AI, which will have far-reaching impacts in areas like medical treatment and public policy. 

Since Google, Facebook and Amazon control over 60 percent of the market for digital advertising, there is not much space for newspapers to compete for ad revenue. And with news available without charge from Google, Facebook and Apple, there is not much room for subscription revenue.

As traditional journalism erodes, how much additional power will Google and Facebook have to manipulate public opinion in their own favor?

The extent of the problem is not always visible to regulators, consumers or even executives who have trouble predicting the future behavior of these firms. 

{mossecondads}Anti-monopoly law needs to be modernized to deal with platform-based monopoly strategies. Privacy protections need to be strengthened to protect fairness in consumer markets and limit the use of personal information to create effective fake news campaigns.

A small set of actions would go a long way toward restoring control over critical infrastructure: 

• Tighten control over the use of private information to create and distribute fake news. This could solve the threats that fake news represent toward participatory democracy without limiting freedom of speech.
• Limit the sharing of consumers’ private information with sellers. This would go a long way toward reducing the potential for abusive pricing strategies targeting some consumers.
• Improve oversight over platform-based strategies to limit a company’s ability to use its domination to gain secondary domination in other industries. The EU judgment against Google’s use of Android is a start. Similar rulings could reduce the ability of Alexa, Siri or Google Assistant to harm competitors or to dominate the smart home and the internet of things. 

Eric Clemons is a professor of Operations, Information and Decisions at the Wharton School of the University of Pennsylvania. He is the author of “New Patterns of Power and Profit: A Strategist’s Guide to Competitive Advantage in the Age of Digital Transformation.” Clemons received a grant from Microsoft over several years and did contract consulting for Microsoft in 2011.