|A far reaching set of recommendations on how the U.S. should remake its antitrust policies to take on Big Tech|
The subcommittee of the House Judiciary Committee that has been investigating digital competition for over a year issued its final report and is calling for nothing less than a complete remaking of United States (U.S.) antitrust policy and law. In the view of the subcommittee a handful of technology companies have strangleholds on a number of key markets, and the health of the U.S. economy demands that the companies be broken up and reformed. The four companies the subcommittee focused on are Amazon, Apple, Facebook, and Google, four of the world’s largest companies by market capitalization. Even though the tide has turned against these and other large technology companies that were feted during the Obama Administration, if the response of Republicans on the committee encapsulates the feeling of party members in the Senate, there is no likely path for enactment of many of these proposals even under a Biden Administration unless the filibuster is junked. And even then, tech companies would find many sympathetic moderate and centrist Democrats who could not go along with a wholesale reform of antitrust enforcement.
The House Judiciary Committee’s Antitrust, Commercial, and Administrative Law Subcommittee started its inquiry over a year ago and held seven hearings, including one this past summer with the CEOs of the four companies. Subcommittee Chair David Cicilline (D-RI) has long made his leanings clear in his opening statements and questions as has the full Committee Chair Jerrold Nadler (D-NY). They agree that these companies are too large and current antitrust enforcement and law are inadequate to the job of addressing dominance of inline markets to rival to trusts from more than 100 years ago.
The Subcommittee found:
- Over the past decade, the digital economy has become highly concentrated and prone to monopolization. Several markets investigated by the Subcommittee—such as social networking, general online search, and online advertising—are dominated by just one or two firms. The companies investigated by the Subcommittee—Amazon, Apple, Facebook, and Google—have captured control over key channels of distribution and have come to function as gatekeepers. Just a decade into the future, 30% of the world’s gross economic output may lie with these firms, and just a handful of others.
- In interviews with Subcommittee staff, numerous businesses described how dominant platforms exploit their gatekeeper power to dictate terms and extract concessions that no one would reasonably consent to in a competitive market. Market participants that spoke with Subcommittee staff indicated that their dependence on these gatekeepers to access users and markets requires concessions and demands that carry significant economic harm, but that are “the cost of doing business” given the lack of options.
- This significant and durable market power is due to several factors, including a high volume of acquisitions by the dominant platforms. Together, the firms investigated by the Subcommittee have acquired hundreds of companies just in the last ten years. In some cases, a dominant firm evidently acquired nascent or potential competitors to neutralize a competitive threat or to maintain and expand the firm’s dominance. In other cases, a dominant firm acquired smaller companies to shut them down or discontinue underlying products entirely—transactions aptly described as “killer acquisitions.”
- In the overwhelming number of cases, the antitrust agencies did not request additional information and documentary material under their pre-merger review authority in the Clayton Act, to examine whether the proposed acquisition may substantially lessen competition or tend to create a monopoly if allowed to proceed as proposed. For example, of Facebook’s nearly 100 acquisitions, the Federal Trade Commission engaged in an extensive investigation of just one acquisition: Facebook’s purchase of Instagram in 2012.
Regarding the four companies themselves, the Subcommittee claimed:
- Facebook has monopoly power in the market for social networking. Internal communications among the company’s Chief Executive Officer, Mark Zuckerberg, and other senior executives indicate that Facebook acquired its competitive threats to maintain and expand its dominance. For example, a senior executive at the company described its acquisition strategy as a “land grab” to “shore up” Facebook’s position, while Facebook’s CEO said that Facebook “can likely always just buy any competitive startups,” and agreed with one of the company’s senior engineers that Instagram was a threat to Facebook.
- Facebook’s monopoly power is firmly entrenched and unlikely to be eroded by competitive pressure from new entrants or existing firms. In 2012, the company described its network effects as a “flywheel” in an internal presentation prepared for Facebook at the direction of its Chief Financial Officer. This presentation also said that Facebook’s network effects get “stronger every day.”
- Google has a monopoly in the markets for general online search and search advertising. Google’s dominance is protected by high entry barriers, including its click-and-query data and the extensive default positions that Google has obtained across most of the world’s devices and browsers. A significant number of entities—spanning major public corporations, small businesses, and entrepreneurs—depend on Google for traffic, and no alternate search engine serves as a substitute.
- Google maintained its monopoly over general search through a series of anticompetitive tactics. These include an aggressive campaign to undermine vertical search providers, which Google viewed as a significant threat. Documents show that Google used its search monopoly to misappropriate content from third parties and to boost Google’s own inferior vertical offerings, while imposing search penalties to demote third-party vertical providers. Since capturing a monopoly over general search, Google has steadily proliferated its search results page with ads and with Google’s own content, while also blurring the distinction between paid ads and organic results. As a result of these tactics, Google appears to be siphoning off traffic from the rest of the web, while entities seeking to reach users must pay Google steadily increasing sums for ads. Numerous market participants analogized Google to a gatekeeper that is extorting users for access to its critical distribution channel, even as its search page shows users less relevant results.
- A second way Google has maintained its monopoly over general search has been through a series of anticompetitive contracts. After purchasing the Android operating system in 2005, Google used contractual restrictions and exclusivity provisions to extend Google’s search monopoly from desktop to mobile. Documents show that Google required smartphone manufacturers to pre-install and give default status to Google’s own apps, impeding competitors in search as well as in other app markets. As search activity now migrates from mobile to voice, third-party interviews suggest Google is again looking for ways to maintain its monopoly over search access points through a similar set of practices.
- Amazon has significant and durable market power in the U.S. online retail market. This conclusion is based on the significant record that Subcommittee staff collected and reviewed, including testimonials from third-party sellers, brand manufacturers, publishers, former employees, and other market participants, as well as Amazon’s internal documents. Although Amazon is frequently described as controlling about 40% of U.S. online retail sales, this market share is likely understated, and estimates of about 50% or higher are more credible.
- As the dominant marketplace in the United States for online shopping, Amazon’s market power is at its height in its dealings with third-party sellers. The platform has monopoly power over many small- and medium-sized businesses that do not have a viable alternative to Amazon for reaching online consumers. Amazon has 2.3 million active third-party sellers on its marketplace worldwide, and a recent survey estimates that about 37% of them—about 850,000 sellers—rely on Amazon as their sole source of income.
- Amazon achieved its current dominant position, in part, through acquiring its competitors, including Diapers.com and Zappos. It has also acquired companies that operate in adjacent markets, adding customer data to its stockpile and further shoring up its competitive moats. This strategy has entrenched and expanded Amazon’s market power in e-commerce, as well as in other markets. The company’s control over, and reach across, its many business lines enables it to self-preference and disadvantage competitors in ways that undermine free and fair competition. As a result of Amazon’s dominance, other businesses are frequently beholden to Amazon for their success.
- Amazon has engaged in extensive anticompetitive conduct in its treatment of third-party sellers. Publicly, Amazon describes third-party sellers as “partners.” But internal documents show that, behind closed doors, the company refers to them as “internal competitors.” Amazon’s dual role as an operator of its marketplace that hosts third-party sellers, and a seller in that same marketplace, creates an inherent conflict of interest. This conflict incentivizes Amazon to exploit its access to competing sellers’ data and information, among other anticompetitive conduct.
- Apple has significant and durable market power in the mobile operating system market. Apple’s dominance in this market, where it controls the iOS mobile operating system that runs on Apple mobile devices, has enabled it to control all software distribution to iOS devices. As a result, Apple exerts monopoly power in the mobile app store market, controlling access to more than 100 million iPhones and iPads in the U.S.
- Apple’s mobile ecosystem has produced significant benefits to app developers and consumers. Launched in 2008, the App Store revolutionized software distribution on mobile devices, reducing barriers to entry for app developers and increasing the choices available to consumers. Despite this, Apple leverages its control of iOS and the App Store to create and enforce barriers to competition and discriminate against and exclude rivals while preferencing its own offerings. Apple also uses its power to exploit app developers through misappropriation of competitively sensitive information and to charge app developers supra-competitive prices within the App Store. Apple has maintained its dominance due to the presence of network effects, high barriers to entry, and high switching costs in the mobile operating system market.
The Subcommittee summarized its recommendations:
a. Restoring Competition in the Digital Economy
- Structural separations and prohibitions of certain dominant platforms from operating in adjacent lines of business;
- Nondiscrimination requirements, prohibiting dominant platforms from engaging in self- preferencing, and requiring them to offer equal terms for equal products and services;
- Interoperability and data portability, requiring dominant platforms to make their services compatible with various networks and to make content and information easily portable between them;
- Presumptive prohibition against future mergers and acquisitions by the dominant platforms;
- Safe harbor for news publishers in order to safeguard a free and diverse press; and
- Prohibitions on abuses of superior bargaining power, proscribing dominant platforms from engaging in contracting practices that derive from their dominant market position, and requiring due process protections for individuals and businesses dependent on the dominant platforms.
b. Strengthening the Antitrust Laws
- Reasserting the anti-monopoly goals of the antitrust laws and their centrality to ensuring a healthy and vibrant democracy;
- Strengthening Section 7 of the Clayton Act, including through restoring presumptions and bright-line rules, restoring the incipiency standard and protecting nascent competitors, and strengthening the law on vertical mergers;
- Strengthening Section 2 of the Sherman Act, including by introducing a prohibition on abuse of dominance and clarifying prohibitions on monopoly leveraging, predatory pricing, denial of essential facilities, refusals to deal, tying, and anticompetitive self-preferencing and product design; and
- Taking additional measures to strengthen overall enforcement, including through overriding problematic precedents in the case law.
c. Reviving Antitrust Enforcement
- Restoring robust congressional oversight of the antitrust laws and their enforcement;
- Restoring the federal antitrust agencies to full strength, by triggering civil penalties and other relief for “unfair methods of competition” rules, requiring the Federal Trade Commission to engage in regular data collection on concentration, enhancing public transparency and accountability of the agencies, requiring regular merger retrospectives, codifying stricter prohibitions on the revolving door, and increasing the budgets of the FTC and the Antitrust Division; and
- Strengthening private enforcement, through eliminating obstacles such as forced arbitration clauses, limits on class action formation, judicially created standards constraining what constitutes an antitrust injury, and unduly high pleading standards.
The Ranking Member on the Antitrust, Commercial, and Administrative Law Subcommittee, Jim Sensenbrenner (R-WI) signaled his agreement with some of the recommendations made in the report but articulated his views:
- I disagree with the view that there needs to be a wholesale rewrite of our country’s antitrust laws.
- Congressional review of our antitrust laws in the age of Big Tech was absolutely warranted. Oversight of the existing legal and regulatory framework is one of the key functions of the committee system, and I applaud Chairman Cicilline on his undertaking of this project in a bipartisan manner.
- There actually is a lot that we agree on, including the lack of sufficient scrutiny on past activity by these companies. For example, the report highlights that Facebook only had one acquisition extensively reviewed by the FTC out of nearly 100. That lack of enforcement raises significant questions. What becomes clear is that better resources and funding for the enforcement agencies are key to having an effective antitrust framework.
- Ultimately, I am concerned with several of the recommendations made by the committee. A ‘Glass-Steagall’ like approach to tech regulation does not benefit consumers and will lead to too much government regulation of a very innovative industry. Likewise, mandating data interoperability could hamper future innovation by preventing the development of new and better systems.
- I am also opposed to several of the proposed changes to merger activity. A presumptive ban on future acquisitions, especially now with economic uncertainty plaguing the world, could hinder potentially fruitful, beneficial business decisions. Also, shifting the burden of proof in merger cases misplaces the obligation upon companies to prove their innocence rather than the government proving their guilt.
In his statement, Ranking Member Jim Jordan (R-OH) again chose to ignore the competition and market dominance issues on which a number of his Republican colleagues agreed with Democrats to again reiterate unproven Republican talking points about alleged conservative bias:
Big tech is out to get conservatives. Unfortunately, the Democrats’ partisan report ignores this fundamental problem and potential solutions and instead advances radical proposals that would refashion antitrust law in the vision of the far left.
On the same day, a small group of committee Republicans released their report on “Big Tech” with their proposed policy and legal solutions. This effort was led by Representative Ken Buck (R-CO), a subcommittee member who participated in the hearings in a bipartisan fashion even praising Cicilline for his evenhanded conduct of the proceedings. However, Buck did indicate he could not agree with some of the directions his Democratic colleagues seem to be heading in response to the evidence. Buck was joined by Representatives Matt Gaetz (R-FL), Doug Collins (R-GA), and Andy Biggs (R-AZ).
We write this response to join Chairman Cicilline and the majority staff on certain recommendations, offer modifications to some recommendations, and argue against the wisdom of proceeding on a few recommendations. We also want to point out that the committee’s ongoing efforts should emphasize issues that have been ignored but must be addressed in the future for a truly bipartisan approach to reforming Big Tech’s dominant position in the marketplace. Finally, we want to thank the Chairman for not using this report as an opportunity to push a progressive labor, environmental, or other unrelated policy agenda under the guise of antitrust enforcement. We sincerely appreciate the Chairman’s friendship and dedication to making this process open and accessible to all members.
Buck, Gaetz, Collins, and Biggs added:
The majority staff report offers a comprehensive review of the technology marketplace and accurately depicts the harmful effects of Big Tech’s anticompetitive reign over the digital economy. Many of the factual findings detailed in the report are undeniable. The majority staff accurately portrays how Apple, Amazon, Google, and Facebook have used their monopoly power to act as gatekeepers to the marketplace, undermine potential competition, and pick winners and losers, all while simultaneously cozying up to unfriendly nations like China in order to further expand their global footprint.
In terms of where they agree with Cicilline and the Democrats, they remarked:
- We agree that antitrust enforcement agencies need additional resources and tools to provide proper oversight. However, these potential changes need not be dramatic to be effective. By reinforcing presumptions that certain behaviors are likely to reduce competition, lowering evidentiary burdens in litigated cases, and emphasizing that anticompetitive effects are not limited to price effects and include innovation competition, quality, output, and consumer choice, Congress can make a meaningful difference.
- We also agree with a number of the majority’s other legislative recommendations, including proposals to shift the burden of proof for companies pursuing mergers and acquisitions and empowering consumers to take control of their user data through data portability and interoperability standards. Additionally, the report offers recommendations where we believe there is common ground, but the subcommittee should receive expert feedback before pushing forward. Some of these proposals include the majority’s monopoly reforms related to predatory pricing, monopoly leveraging, the Essential Facilities Doctrine, and policies related to the Supreme Court’s recent decision related to two-sided markets in Ohio v. American Express Co.
Buck, Gaetz, Collins, and Biggs spelled out the recommendations made by the majority they could not join:
- However, the majority also offers policy prescriptions that are non-starters for conservatives. These proposals include eliminating arbitration clauses and further opening companies up to class action lawsuits. Similarly, the majority’s desire to institute Glass- Steagall for America’s tech sector and modeling the majority’s equal terms for equal services recommendation on President Obama’s net neutrality rule will not garner support from Republicans.
- While we agree in principle with the findings identified in the report, we cannot endorse all of the legislative recommendations offered by the majority. We will work with the Chairman in a bipartisan fashion to help enact the legislative solutions where we can agree. However, we are concerned that sweeping changes could lead to overregulation and carry unintended consequences for the entire economy. We prefer a targeted approach, the scalpel of antitrust, rather than the chainsaw of regulation.
© Michael Kans, Michael Kans Blog and michaelkans.blog, 2019-2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Kans, Michael Kans Blog, and michaelkans.blog with appropriate and specific direction to the original content.
3 thoughts on “Antitrust Report Released”