Presidential hopeful Sen. Senator Elizabeth Warren (D-Mass.) laid out an explosive proposal as a prelude to her appearance at South by Southwest last week, calling for the breakup of the largest technology companies in America on the grounds of anti-competitive behavior.
Her proposal contained some detail and some ambiguity, but the message was unmistakable: Apple, Google, Amazon and Facebook have gotten too large for there to be fairness in their respective businesses, and the only way to remedy this is via wholesale, government-mandated breakups, the likes of which we haven’t seen since the regional telephone companies were cleaved off of “Ma Bell” almost 40 years ago.
{mosads}Are Warren’s proposals reasonable? Are they likely to have the intended effect and promote a more competitive landscape for users, small business and new entrants? Because our technology giants are not monolithic, or even engaged in the same lines of business, it’s hard to say.
If oil companies begin to act in an anti-competitive way, along the lines of a Standard Oil from the turn of the last century, it’s easier to make broad pronouncements about why they should be smaller.
In the case of technology, specifically today’s technology companies, there are too many idiosyncrasies specific to each firm for anyone to propose a one-size-fits-all solution and expect a universally positive outcome.
This past week, both Facebook and Instagram experienced a service disruption that locked users around the world out of being able to upload their photos for hours.
The jokes came flying fast and furious across Twitter about the desperation users felt as they pined away for these apps to come back on line. In the modern era, losing access to these services is akin to experiencing an electricity outage.
It might actually feel worse for many people; if you ate the best taco of your life but didn’t post a pic, did you actually even experience it? Was it worth the calories?
Instagram had only 30 million users, no revenue and a handful of employees when it was acquired by Facebook seven years ago. The takeover was an audacious move by Facebook founder Mark Zuckerberg, given that his firm was on the eve of going public itself and trying to convince Wall Street that he would be a responsible steward of investors’ cash.
The price tag he was paying ($1 billion) for the unprofitable photo-sharing app still had shock value in those days, despite the fact that in hindsight, we all now acknowledge that Instagram was a steal.
There are some analysts on The Street who currently project that Instagram will bring in as much as $14 billion in revenue this year thanks to its robust, targeted advertising platform.
This is important to understand because although we now look at Instagram as a giant social media platform in its own right, it wasn’t a slam dunk that it would become quite so dominant when it originally launched.
And had it not accepted a buyout from Facebook, there isn’t any guarantee that it would have ever gotten to over a billion users as it had by last summer. The integration of Instagram onto Facebook’s social graph almost certainly had a major impact on its adoption curve.
When it was acquired, there were many other photo-sharing sites and apps offering similar features. To hear the anti-monopolists tell it, Facebook had acquired a competing social platform and thus took over a market. In reality, Facebook built Instagram into what it is today.
So the question becomes one of incentives. If we want to see our large technology companies continue to generate profits for shareholders, promote growth in the overall economy, pay good wages for employees and invent new businesses that keep America’s dynamism the envy of the world, then why would we seek to punish them for having done so?
Facebook’s success at growing the user base of Instagram and then its revenue base should not, in and of itself, be grounds for a breakup. Size alone is not the real issue.
The monopolies of past eras of American history attracted the ire of antitrust proponents because, upon attaining a certain size within their industries, they had become abusive to everyday consumers who found themselves with a limited amount of choice.
By cutting out smaller operators, Rockefeller and Morgan were able to effectively set prices for oil or steel and then defend their monopoly by using their influence over shippers, rail operators, miners, politicians and construction companies.
What’s tricky about today’s alleged monopolists is that they’ve actually used their size to do the opposite. Consumers have not been harmed by Amazon’s dominance over e-commerce, they actually love it, which is why there are over 100 million Prime users paying an annual membership fee for the privilege.
If anything, Amazon’s size has been a deflationary force for the consumer, in much the same way that Walmart had been for decades prior.
This perhaps explains why no serious political proposal has come along to stop Amazon up until now, as it’s grown from an online bookstore to one of the largest employers in America. If consumers were complaining, it might have come up sooner.
But people love being able to buy everything in one place, they love everyday discounts, they love having items suggested to them that compliment the items they’ve already bought, they love free shipping and they love a shopping experience that anticipates what they’re going to need before they even need it.
Warren’s strongest argument is to separate Amazon the platform from Amazon the seller of proprietary products on its own platform. Indeed, by making and marketing its own version of products from third-party sellers, it is acting in an extremely anticompetitive way.
But this is all benefiting the consumer, and the only complaints are those coming from sellers who’ve built their business selling on its platform. That’s not a large enough political constituency for any mainstream politician to have made it a cause to be championed.
In the examples of Facebook and Amazon, you can see just how different the issues are, and why it would be so hard to propose a law that would address both in a sensible way.
The issues with Google being both an advertising platform and a search engine are even further divorced from the Facebook conundrum. And then the complaints about Apple’s power to levy a tax on developers from the App Store muddies the waters even further.
Consumers have benefited from the size of these companies and they plainly like the integration of their apps, their preferences, their shopping habits and their browsing history.
If they didn’t, they’d simply sign out and stop using them altogether. But no one signs out, even after a temporary outrage over Russian disinformation campaigns or data leaks of private information.
The moment passes, and within a day or so, consumers are back to taking pictures of themselves and uploading details from every aspect of their lives. People seem to complain about a lack of privacy but then act in ways completely counter to the notion that they actually care about it.
And for most, the unwritten agreement they make with social networks — “We’ll allow you to play here so long as you allow us to target lethally effective advertisement toward you.” — has become an accepted part of daily life at this point.
Most internet users would prefer to see ads that make sense for them rather than non-sequitur ads selected at random if ads are going to be the price of admission to log on.
Warren’s catch-all answer to these nuances is to say that what these companies have in common is that they are very big, they’re benefiting from the network effects of their respective platforms, and they ought not be able to.
Her methodology for determining who is too successful in their respective space is to impose a revenue limit ($25 billion annually) before a company draws scrutiny or begins to pay a fine.
{mossecondads}In my view, each of the advantages of these companies should be looked at with distinction, and judged according to their true anti-competitiveness.
Using size as the basis to judge a company in this era would not necessarily improve the consumer’s position or lead to a better experience while buying, searching, interacting or being entertained.
And when imposing more regulation, Warren would do well to remember what happened when financial services regulations were strengthened on the heels of the great financial crisis: All of the large players who had survived the crisis ended up getting even larger, their market share further concentrated, their competitive positions bolstered by the burdens of complying with these well-meaning rules.
Perversely, the imposition of more regulation can itself act as a barrier to entry, solidifying the hold of incumbents while keeping would-be competitors looking on from the other side of the moat.
Joshua Brown is CEO of Ritholtz Wealth Management and a commentator for CNBC and MSNBC. He has been named by The Wall Street Journal, Barron’s and TIME Magazine as the most important financial follow on Twitter. Follow him on Twitter: @ReformedBroker.