The major publishers feared that Amazon’s pricing strategy was changing consumers’ perceptions about what was a “normal” price to pay for an ebook in a way that would permanently alter the economics of the book business, and tried to wrest back some control. Five of the “Big Six,” as the largest publishers were known before Penguin merged with Random House in 2013, decided to try to shift business to Apple, which agreed to let publishers set the price consumers would be charged—meaning Apple couldn’t slash the price of an ebook in half whenever it wanted—and take a 30 percent cut from whatever price the publishers agreed was fair. Macmillan, one of the Big Six, pushed Amazon to accept this deal, too, at which point Amazon turned around and accused Macmillan of exerting monopoly power.
The irony of a book publisher worth a fraction of what Amazon is worth being able to exert any kind of relative power in the market was lost on the Department of Justice, which decided to sue both Apple and the publishers in 2012 in an antitrust suit that claimed collusion. Various outside experts and politicians complained that the DOJ was going after the wrong party—after all, what were Amazon’s pricing strategies if not an attempt to capture more and more market share?—but investigators found “persuasive evidence lacking” that the company had engaged in predatory pricing, since its business had been consistently profitable, even when books were steeply discounted.
The problem, according to Khan, was that this approach didn’t take into account two things. First, discounting products sold on a digital platform like Amazon affords that platform owner certain advantages that a retailer discounting products in traditional stores doesn’t enjoy—namely the data garnered by those ultralow prices (which Amazon gathered even when customers were simply browsing on its platform and not even buying). And second, the multiple ways in which Amazon—which by that time had grown to dominate a number of other retail sectors—could recoup the losses it willingly took on ebooks. The DOJ was looking at pricing power in an extremely linear way: Was a particular business line (books, say, or diapers, or white goods) losing money in order to undercut the competition, and were consumers suffering as a result?
But platform technologies had changed the publishing business—and indeed, every retail business—in ways that made the old ideas of pricing irrelevant. “What the DOJ missed,” explained Khan, “is the way in which below-cost pricing…entrenched the reinforced Amazon’s dominance in ways that loss leading by physical retailers does not.”
Buoyed by the success of this strategy, Amazon has since used similar tactics to dominate so many other areas, ultimately undercutting competitors not just in traditional retail, but in e-commerce as well. In the market in baby products, for example, Amazon drove a competitor called Quidsi out of the dominant position by using bots to monitor Quidsi’s prices—and then knocking its own down by the optimal amount, in real time. Amazon eventually bought up the company, just as it has many competitors, like shoe retailer Zappos, wholesale.
Amazon is now the default starting point for online shopping, accounting for 44 percent of U.S. consumers’ first search for products according to one study.9 In addition to being a retailer, it is also a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space and computing power.10 It has racked up double-digit increases in net sales yearly, for several years running, all the while accepting operating losses or low margins in order to attain even more market share, in ever more industries.
Amazon’s prices are seductive—truth be told, I shop there frequently, and I expect many of the people reading this book do, too. But it’s not up to consumers to enforce the competitive landscape; it’s up to regulators. And as they look more closely at Amazon, there is plenty of behavior that looks anticompetitive, if not downright creepy. Consider, for example, the way in which Alexa can direct us to certain products and away from others. One study found that such nudges could create a 29 percent increase in sales for Amazon.11
But remember that prices aren’t really so cheap on Amazon if you consider the value of the data you are giving up. One conservative estimate of the value of personal data to platform firms like Google, Facebook, and Amazon, as well as to other big aggregators like credit bureaus, put the number at around $76 billion in 2018.12 And that’s just tabulating the way in which it allows such firms to sell targeted advertising (which is half of the overall ad revenue for platforms).13 Those figures don’t count the way in which all the personal data can be collated to increase its value, or employed by the firms in a variety of ways to nudge you toward certain purchasing decisions.
A close read of Google chief economist Hal Varian’s 1998 book, Information Rules, makes it clear that the people in charge of such firms knew that “free” products were actually an illusion. The problem is that we have no clear idea how valuable our data actually is to the companies that mine it. “Why does Google give away products like its browser, its apps, and the Android operating system for mobile phones?” asked Varian rhetorically in a 2009 Wired piece. “Anything that increases Internet use ultimately enriches Google.”14 By “giving” things away in exchange for something that is actually much more valuable, companies like Google and Amazon bring in enormous profits, while also creating impenetrable moats around their businesses.
Amazon now controls so much of the logistics industry that it can demand steep discounts—as much as 70 percent off the going rates—from companies like UPS. That leaves delivery companies to charge other, smaller customers more in order to make up for the cut in margins.15 In yet another amazing competitive jujitsu move, Amazon has started a new business offering logistics and delivery services to the very retailers who are now being charged higher prices by UPS and FedEx as a result of Amazon. Merchants who sign up, most of whom are already competing with Amazon itself for sales, now find themselves at even less of a competitive advantage, thus further strengthening Amazon in the process.
Amazon is like the house in a Vegas casino—it always wins. “You can’t really be a high-volume seller online without being on Amazon, but sellers are very aware of the fact that Amazon is also their primary competition,” complained one merchant to The Wall Street Journal in 2015.16 The end result is Amazon controlling a bigger piece of more and more markets. Bezos’s retail behemoth is now a fulfillment and logistics juggernaut, with thousands of trucks, container ships, planes, and drones at its disposal. Former employees have said that its ultimate goal is to supplant all delivery services, making it not just the Everything Store, but the Everything Shipper.17
The rise of tech platforms has been linked to a decline in new business growth and reduced opportunities for entrepreneurs.18 This is in part because platforms can move quickly into new business lines in a way that traditional businesses, particularly smaller ones, cannot. Remember from chapter 7 the way in which Google was able to copy Yelp’s local search business model and quickly move to take the space (and the subsequent ad revenue) for itself? Again, like the railroads or telecom companies of the past, Big Tech is able to both create a market and conduct commerce within it—and that is clearly an unfair advantage.
Technology firms are widely understood to enjoy unusual and (many would say) unfair profits because of their monopoly power. In 2018, The Economist calculated that increased corporate concentration has led to a pool of $660 million in abnormal profits, two-thirds of which came from the United States, and one-third of that from the tech sector alone.19 This is a direct result of the way in which they can upend the usual economic laws of gravity.
Big Tech makes a big point of denying this. “We are one click away from losing you as a customer, so it is very difficult for us to lock you in as a customer in a way that traditional companies have,” said Google’s Eric Schmidt back in 2009.20 Yet a spate of researc
h shows that customers are unlikely to switch platforms once they’ve reached a dominant position in the marketplace, because “switching costs” are quite high—it’s a cognitive pain to move from one platform to another, in a way that is different from simply deciding to do one’s shopping at a different store. (Just think about the trouble of password memorization alone.)21 The truth of the matter is that most of us would be more likely to go out and take a walk around the block than we would be to switch to, say, Microsoft’s Bing search engine if Google suddenly went down. The usual laws of competition simply don’t work in the world of platforms.
The Antitrust Paradox
When a company becomes a player in a market while also owning the marketplace itself, it’s clearly problematic from a competitiveness standpoint. This is why there are rules in the financial sector to prevent companies from owning assets they are trading, and from trading in markets they created (though these rules are sometimes circumvented by clever lawyers and lobbyists). Technology companies have so far avoided such specialized restrictions, even as they’ve become some of the largest and most concentrated companies in the world.22 This is due in part because the opacity of their business model makes them hard to even understand, let alone regulate. But it’s also because regulators who might curb their power are working with an outdated model of monopoly power, one that hasn’t been revisited in forty years.
Indeed, the last time we had a major reset of antitrust policy in the United States was when Robert Bork published The Antitrust Paradox in 1978. Bork held that the major goal of antitrust policy should be to promote “business efficiency,” which from the 1980s onward came to be measured in consumer prices. It was a shift that took the United States away from antitrust policy predicated on the welfare of the “citizen” and toward one that clearly served the laissez-faire politics of the Reagan administration. The problem is that in a world where data is the new currency, price is an insufficient—if not irrelevant—metric. This has provoked calls for an overhaul of antitrust policy similar to the one America had with the passage of the Sherman Act at the end of the nineteenth century, which was designed to ensure that the economic power of large companies did not result in the corruption of the political process.
It’s a timely call. Income inequality and corporate consolidation in the United States have reached levels not seen since that Gilded Age, which is no accident, since our monopoly laws have become just as weak and inefficient as they were back then. At the turn of the last century, oligopolies such as Standard Oil and U.S. Steel were in many ways more powerful even than the government. They often had paid politicians in their pockets; President William McKinley “tacitly acknowledged that Wall Street rather than the White House had executive control of the economy,”23 just as the many players in the tech sector arguably do today.
The robber barons of the Gilded Age were eventually stymied by Louis Brandeis, the advocate, reformer, and Supreme Court justice who grew up around the mid to late 1800s in Louisville, Kentucky, a diverse and decentralized midsized American town that Brandeis praised as “idyllic” and free from the “curse of bigness” (a Brandeis phrase that Columbia University legal scholar Tim Wu, who advocates for a return to turn-of-the-century antitrust interpretations, has repopularized).24
The Louisville of Brandeis’s youth was prosperous, but relatively untouched by the sort of industrial concentration found on the coasts and some other parts of the country. It was a place where small farmers, retailers, professionals, and manufacturers all knew one another, worked together, and had the sort of shared moral framework that Adam Smith believed was a key to well-functioning markets. But by the time Brandeis himself became a lawyer in Boston, oligarchs John D. Rockefeller and J. P. Morgan were building empires—Rockefeller’s oil dynasty and Morgan’s railroad monopoly—that were neither moral nor efficient. But the tycoons had bought the legislatures, and there was no one powerful enough to reel them in.
Brandeis boldly took them on, in a case against Morgan’s New Haven Railroad that exposed the underside of monopoly power: cartel pricing, bribes to officials, accounting fraud, and so on. The result was not only the breakup of the railways, but a new approach to antitrust, and a public belief in the idea that government should, as Wu puts it, “punish those who used abusive, oppressive, or unconscionable business methods to succeed.” Brandeis believed that in limiting individuals’ ability to work and compete and prosper on their own terms, giant corporations were robbing people of their very humanity. As he wrote, “Far more serious even than the suppression of competition is the suppression of industrial liberty, indeed of manhood itself.”
This philosophy, which was brought into the mainstream by conflicted trust buster Theodore Roosevelt (who both loved and loathed power, but wanted to see corporations curbed by government), lasted through the 1960s. But with the rise of conservative Chicago School academics, in particular Robert Bork, the notion that too much corporate power alone was problematic soon fell out of favor. Antitrust policy became technocratic and weak, pegged to the idea that as long as companies reduced prices for consumers, they could be as big and powerful as they wanted.
That fundamental shift has, of course, allowed any number of industries, from airlines to media to pharmaceuticals, to reach unprecedented levels of consolidation. Yet it is the tech business more than any other—in which products and services aren’t just cheap but “free,” or rather bartered in exchange for personal data in opaque transactions—that illustrates the need for a new interpretation of monopoly power.
To Wu, Khan, Lynn, and an increasing number of other experts, Google, Facebook, and Amazon are the Standard Oil or U.S. Steel of our day—companies that are more powerful than governments, and ones that pose a threat to liberal democracy unless they can be curbed through a broader view of monopoly. Given the unique challenges Big Tech poses, the new measure of antitrust action should not only include a broader view of consumer pricing and welfare, but whether new companies have the ability to enter a market controlled by the tech monopolists and have their product compete on its merits.
“Much of the time,” says Lina Khan, “that answer will be no.”25 Khan is examining a host of old cases—from railroad antitrust suits to the separation of merchant banking and the ownership of commodities—to argue that “if you are a form of infrastructure, then you shouldn’t be able to compete with all the businesses dependent on your infrastructure.”26
New rules can’t come soon enough, because the growth of the Big Tech firms has triggered a domino effect in concentration in the rest of the economy, something that many economists believe has become a big headwind slowing shared growth. Between 1997 and 2012, corporate concentration rose in two-thirds of the nine hundred or so census-surveyed industries, with the weighted average market share of the top four firms in each industry growing from 26 percent to 32 percent.27 That’s because companies of all stripes believe they need more heft to play against the FAANGs.
Over the past few years, even giants in old guard industries have struggled to maintain the scale they believe is necessary to compete. A record number of corporate mergers and acquisition deals were inked in 2018, many of which involved big companies trying to compete with even bigger digital companies that had disrupted their traditional business models. CVS buying Aetna, for example, was a reaction to Google and Amazon moving into the healthcare space. Walmart’s purchase of Flipkart, a major Indian grocer, came after Amazon gobbled up Whole Foods.
Nowhere is this phenomenon more apparent than in media and telecoms.28 Consider the fight between Disney and Comcast for the assets of 21st Century Fox, or the proposed merger that T-Mobile and Sprint pitched to the Federal Communications Commission in 2018. Perhaps most important, a contentious U.S. District Court decision that same year allowed AT&T and Time Warner to merge, opening the floodgates to a host of new deals.29 As district court judge Richard J. Leon, who approved the deal,
put it in his 172-page opinion: “If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market, and a fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!”
It’s tough to argue that two cable giants teaming up is a good thing for consumers. Yet the deal underscores the way in which the media landscape has changed dramatically in the past few years. As hard as it might be to believe, AT&T and Time Warner, which together form a multibillion-dollar media conglomerate, are still small potatoes next to their new Silicon Valley competitors: streaming services Netflix and Amazon, as well as Facebook, Google, and, most recently, Apple, which in 2019 announced a big move into entertainment and media.
Makan Delrahim, the Department of Justice’s head of antitrust, argued that AT&T should be prevented from buying Time Warner because the two companies’ merger would result in higher cable prices for American consumers. Yet the judge bought the companies’ claim that the merger was necessary to stave off competitive pressure from those bigger fish: Google offers up to fifty channels of premium content on YouTube for $49.99 a month. Amazon and Netflix have invested heavily in original content (Netflix put $13 billion toward content development in 2018 alone) to compete for both viewers and talent with HBO. Apple and Facebook each spent $1 billion in 2018 on original video content.
In 2017, Google and Facebook took 84 percent of the digital advertising market. As Judge Leon noted on page two of his Time Warner decision, “Facebook’s and Google’s dominant digital advertising platforms have surpassed television advertising revenue,” making it even tougher for companies like Time Warner to keep subscription fees low. No wonder more than 22 million U.S. cable customers “cut the cord,” or got rid of their cable boxes, in that same year—up 33 percent from 2016.30 If someone has monopoly power in this world of digital media, it is not the legacy media players.
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