What factors will shape Big Tech regulation?

The House Judiciary Committee’s antitrust subcommittee hearing Wednesday established clearly that Big Tech will be regulated and held accountable. As noted by Rep. David Cicilline (D-R.I.) “while the names have changed – from Rockefeller and Carnegie to Big Tech – the story is the same.” As Cicilline said, Big Tech platforms form the arteries of our economic activity and democracy and have abused their power as the railroads of the new economy. Regulation is imminent.

The hearings established common troubling patterns across Big Tech. There is abundant evidence that Big Tech companies are exploiting data and market power to act in ways that are harmful to competition, society and individuals. They monitor and control the competition under the guise of “improving the product” for which they have “user consent,” when in fact, their questionable business practices stifle competition, invade privacy, steal intellectual property (IP) and undermine democracy.

While the problem is obvious, the solution is not. There is a lot at stake. How should we think about regulation? Are there useful precedents? And what is unique about current digital platforms that should be considered? Fortunately, we have starting points on both fronts for regulators to consider. 

The financial services industry provides a good initial blueprint for thinking about the regulation of digital platforms. Such regulation provides a few central tenets that apply to digital platforms. For starters, the operator of a marketplace cannot selectively reward or punish its participants at will or steal their intellectual property (IP). In contrast to financial marketplaces, Google operates both as a buyer and a seller in the ad marketplace, which it controls. Similarly, Amazon competes with its sellers, sometimes driving them out of business. The same is true of Apple, which uses differential pricing to thwart its competitors. 

Secondly, financial institutions must “know” their customers (called KYC), and why they are paying you. Banks, brokers and asset managers must be able to demonstrate that their actions are in the best interests of customers. When asked by Rep. Lucy Kay McBath (D-Ga.) how Amazon knows whether its sellers’ information is correct, Bezos’ answer was “we don’t.” Neither does Facebook, as long as it gets paid. As far as we know, Amazon could be supporting stolen goods and child labor exploitation without realizing it, as noted by McBath. Would we allow banks to turn a blind eye towards their customers? 

These kinds of problems plague the Wild West digital platforms of today. Thus far, the pace of technology has outpaced our ability to control it. That must change.

But it is equally important to consider what is unique about digital platforms, especially the Big Tech platforms of today.

The first is the inherent tendency of digital platforms towards “winner take all” outcomes, which leads to monopolies. It is therefore difficult to “create competition.” But the railroad analogy is appealing: Why not treat digital platforms like railroads and let innovation and growth occur along their rails? After all, the internet is a utility, freely available to everyone. Why not other basic services in a digital economy? 

Equally importantly, there is a unique twist that artificial intelligence Big Tech platforms create, namely, their ability for “cross industry disruption” due to the economies of scope they create. In an increasingly virtual world where only a few observe almost all of human activity as data in the physical and digital worlds, the knowledge acquired and its scope of application is staggering, and the incentive systems are rife for misuse. In addition, as noted by Rep. Mary Gay Scanlon (D-Pa.), their size enables them to eliminate entire industries by subsidizing massive losses via profits in their monopolies. To put their size in perspective, Facebook’s market cap is roughly $15 million per employee compared to $200,000 per employee for Best Buy and similar physical economy companies. Industrial era companies ran into limits to growth naturally, whereas digital platforms have exactly the opposite property — their machines allow them to scale up their supply on demand, virtually for free.

In effect, the Big Tech platforms have tremendous market power to enter entirely new industries like transportation and finance, while potentially eliminating banks, auto manufacturers and even transportation service providers. They have no traditional industry boundaries. What industry is Amazon in? How about Google? Or Apple? The very notion of industry has become obsolete. Regulation must recognize this shift in market structure when considering the meaning of competition in the digital economy.

Finally, given the inherent monopolistic nature of digital platforms, it makes sense to consider what parts of such platforms might be considered “digital utilities” that are regulated accordingly to promote equal access to these commodity services and encourage innovation. India, for example, has already adopted this position towards payments and authentication, which it considers digital utilities available to all at low prices, and the creation of “data fiduciaries” that enable control of data by their creators.

Utility providers operate by a strict set of standards and transparent procedures. If we all rely on a single search algorithm, for example, should we care if the operator of that algorithm changes its ranking criterion at will? How would we feel if someone rearranged the merchants on our streets every day according to what would maximize the revenues of our city, or favor some at the expense of others depending on the preferences of their operators? What risks do such capabilities impose on business and society? These questions will receive more scrutiny going forward.

I am encouraged that regulators have realized the threats by Big Tech to the economy, our political systems and individuals. As Cicilline said, quoting Louis Brandeis, in his closing remarks: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

Vasant Dhar is a professor at New York University’s Stern School of Business and the director of the PhD program at the Center for Data Science.