But the tide may be starting to turn, as regulators finally begin to wake up to the competitive threat posed by corporate concentration. In 2017, the European Union, which has taken the lead on monopoly issues, hit Google with a record antitrust fine, $2.7 billion, for unfairly favoring its own services over those of its rivals. The core complainant came from the U.K.-based shopping service Foundem, discussed in chapter 7, but the case also touched on issues relevant to the Yelp-Google conflict and the FTC case against Google that was dismissed in 2012. Margrethe Vestager, the EU competition commissioner, hit the point home with a strongly worded letter accusing the company of “destroying jobs and stifling innovation.” The very next year, the European Union hit Google with an even bigger fine, some $5 billion, for abusing its dominance in the mobile market.31
Obviously, antitrust litigation is a slow and complex process. But even in the United States, where the last big antitrust case was taken on more than twenty years ago, there are finally signs of change. Joseph Simons, the chairman of the Federal Trade Commission, has pledged “vigorous” antitrust enforcement, and in 2018 convened hearings on competition and consumer protection, the first broad policy hearings on the topic since 1995. House Democrats in particular are galvanizing around the issue. Even Republican lawmakers joined Democrats in calling on the FTC and the Department of Justice to investigate the largest tech companies. In July of 2019, Facebook disclosed that the FTC had indeed begun an antitrust investigation into the company. Both the FTC and the DOJ are also looking into possible actions involving other Big Tech firms.
Makan Delrahim, the DOJ head of antitrust who tried to prevent the AT&T–Time Warner merger, has told me that he believes that price isn’t the only metric for consumer welfare, and that “data is an important asset.” While he is not opposed in principle to Big Tech’s business models or dealmaking, he is concerned about abuse of a dominant position. Many critics see evidence of that behavior in Google today, something that Delrahim has told me the DOJ is looking out for.32 “Can you use position to disadvantage and discriminate against a new technology that would challenge a monopoly position?” he asks. “I think that’s an important test and a good guidepost for a lot of us as we look to the type of practices that are happening with a Google or with anyone else.”
A Price on Data?
The big question now is how policy should shift, and on what basis new antitrust and monopoly cases should be argued. There are some who believe the Chicago School’s consumer pricing philosophy could actually be used to curb the power of the tech titans. “As data becomes more and more important, you get more efficient products for consumers, but you also get certain barriers [to competition],” says Delrahim. “There should be competition to create and collect data,” he says, hinting at the notion that choice—and not just price—should be part of the consumer welfare metric.33 SEC commissioner Robert Jackson has said he believes that companies should have to report the value of their data on their filings, just as they would any other material holding. If that information were publicly available, it would go some way toward clarifying the true power of Big Tech in the marketplace.
That would, of course, require putting a price on data—and efforts to do just that are now under way. As investor Roger McNamee points out, it’s true that the combined power of data and the network effect have created value for consumers. And yet, they’ve created exponentially more value for Big Tech companies. “Each time Google introduced a new service, consumers got a step function increase in value, but nothing more. Each new search, email message, or map query generates approximately the same value to the user,” he says. “Meanwhile, Google receives at least three forms of value: whatever value it can extract from that data point through advertising, the geometric increase in advertising value from combining data sets, and new use cases for user data made possible by combining data sets. One of the most valuable use cases that resulted from combining data sets was anticipation of future purchase intent based on a detailed history of past behavior. When users get ads for things they were just talking about, the key enabler is behavior prediction based on combined data sets.”34
Bottom line? Consumers are giving up more value in personal data than they receive in services—indeed, vastly more. Which means that the true price of Big Tech to each of us has been rising sharply—in lockstep with the amount of time we spend on our devices and thus the amount of data we’ve generated over twenty years. And if that can be shown to be the case, then regulators can make a strong argument, even with the current Chicago School thinking, that Google, Facebook, Amazon, and other giants fail to meet the standard of consumer welfare and should be regulated in new ways, or broken up.
But there are many others—and I would put myself among them—that believe we need to go beyond the Chicago School, and consider more deeply the ways in which Big Tech’s power has distorted markets and the political economy. In his book The Curse of Bigness, academic Tim Wu has made a persuasive case for neo-Brandeisian reforms that would include things like broader public hearings and debate over big mergers, forced breakups of mergers that are ultimately found to be uncompetitive (he advocates for spinning both Instagram and WhatsApp off from Facebook), and new rules that would allow regulators to investigate not just individual firms but entire economic landscapes (a method that was used in the United Kingdom to determine that joint ownership of the Heathrow, Gatwick, and Stansted airports was not serving the public).35
He and others, including Open Markets’ Barry Lynn, and Lina Khan (who has advised the FTC and joined the staff of the House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law, which has begun hearings on the topic of Big Tech and antitrust), also argue for dropping consumer welfare in favor of “citizen welfare” as the bar for mergers. “Decades of practice have shown that the promised scientific certainty of the Chicago method has not materialized, for economics does not yield answers, but arguments,” writes Wu.
Fair point. Indeed, if the 2008 economic crisis didn’t put the final nail in the coffin of the Chicago School’s own monopoly of ideas in economics, then the rise of the digital giants certainly should. Both have contributed to the feeling among many ordinary Americans that the system is rigged. And that’s not good for the economy or for our democracy. “The new Brandeis movement isn’t just about antitrust,” says Khan. Rather, it is about values. “Antitrust laws used to reflect one set of values, and then there was a change in values that led us to a very different place.” Now that corporate power in this country has reached levels not seen since the Gilded Age, it’s time for another such change.
Whether or not Washington will listen remains to be seen. Yet one thing is clear: There is more than just economic vibrancy at stake here. Whether by antitrust policies, by agency regulation, or by some new philosophy of welfare, Silicon Valley’s economic and political power should be curbed, lest we fail a very costly stress test of democracy.
CHAPTER 10
Too Fast to Fail
The late, great management guru Peter Drucker once said, “In every major economic downturn in U.S. history the ‘villains’ have been the ‘heroes’ during the preceding boom.”1 I can’t help but wonder if that might be the case over the next few years, as the United States (and possibly the world) heads toward its next big slowdown. Downturns historically come about once every decade, and it’s been more than that since the 2008 financial crisis. Back then, banks were the “too-big-to-fail” institutions responsible for our falling stock portfolios, home prices, and salaries. Technology companies, by contrast, have led the market upswing over the past decade. But this time around, it’s the Big Tech firms that could play the spoiler role.
You wouldn’t think it could be so when you look at the biggest and richest tech firms today. Take Apple. Warren Buffett says he wished he owned even more Apple stock. (His Berkshire Hathaway has a 5 percent stake in the company.) Goldman Sachs is laun
ching a new credit card with the tech titan, which became the world’s first $1 trillion market cap company in 2018. But hidden within these bullish headlines are a number of disturbing economic trends of which Apple is already an exemplar. Study this one company, and you begin to understand how Big Tech companies—the new too-big-to-fail institutions—could indeed sow the seeds of the next crisis.
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THE FIRST THING to consider is the financial engineering done by such firms. Like most of the largest and most profitable multinational companies, Apple has loads of cash—$285 billion—as well as plenty of debt (close to $122 billion). That is because—like nearly every other large, rich company—it has parked most of its spare cash in offshore bond portfolios over the past ten years. At the same time, since the 2008 financial crisis it has issued debt at cheap rates to do record amounts of share buybacks and dividend payments. Apple is responsible for about a quarter of the $407 billion in buybacks announced since the Trump tax bill was passed in December 2017.2
But buybacks have bolstered mainly the top 10 percent of the U.S. population that owns 84 percent of all stock.3 The fact that share buybacks have become the single largest use of corporate cash for over a decade now has buoyed markets. But it has also increased the wealth divide, which many economists believe is not only the biggest factor in slower-than-historic trend growth, but is also driving the political populism that threatens the market system itself.
That phenomenon has been put on steroids by yet another trend epitomized by Apple: the rise of intangibles such as intellectual property and brands (both of which the company has in spades) relative to tangible goods as a share of the global economy. As Jonathan Haskel and Stian Westlake show in Capitalism Without Capital, this shift became noticeable around 2000, but really took off after the introduction of the iPhone in 2007. The digital economy has a tendency to create superstars, since software and Internet services are so scalable and enjoy network effects. But according to Haskel and Westlake, it also seems to reduce investment across the economy as a whole. This is not only because banks are reluctant to lend to businesses whose intangible assets may simply disappear if they go belly-up, but also because of the winner-takes-all effect that a handful of companies, including Apple (and Amazon and Google), enjoy.
As we read in the last chapter, that’s likely a key reason for the dearth of start-ups, declining job creation, falling demand, and other disturbing trends in our bifurcated economy. Concentration of power of the sort that Apple and Amazon enjoy is a key reason for record levels of mergers and acquisitions. In telecoms and media especially, many companies have taken on significant amounts of debt in order to bulk up and compete in this new environment of streaming video and digital media.
Some of that high yield debt is now looking shaky, which underscores that the next big crisis probably won’t emanate from banks, but from the corporate sector. Rapid growth in debt levels is historically the best predictor of a crisis. And for the past several years, the corporate bond market has been on a tear, with companies in advanced economies issuing a record amount of debt; the market grew 70 percent over the last decade, to reach $10.17 trillion in 2018.4 Even mediocre companies have benefited from easy money. But as the interest rate environment changes, perhaps more quickly than was anticipated, many could be vulnerable. The Bank for International Settlements—the international body that monitors the global financial system—has warned that the long period of low rates has cooked up a larger than usual number of “zombie” companies, which will not have enough profits to make their debt payments if interest rates rise. When rates eventually do rise, losses and ripple effects may be more severe than usual, warns the BIS.
Of course, if and when the next crisis is upon us, the deflationary power of technology exemplified by companies like Apple could make it more difficult to manage. That is the final trend worth considering. Technology firms drive down the prices of lots of things, and tech-related deflation is a big part of what has kept interest rates so low for so long; it has not only constrained prices, but wages, too. The fact that interest rates are so low, in part thanks to that tech-driven deflation, means that central bankers will have much less room to navigate through any upcoming crisis. Apple and the other purveyors of intangibles have benefited more than other companies from this environment of low rates, cheap debt, and high stock prices over the past ten years. But their power has also sowed the seeds of what could be the next big swing in the markets.5
The New Too-Big-to-Fail Firms
All of this reminds me of a fascinating conversation I had a few years ago with an economist at the U.S. Treasury’s Office of Financial Research, a small but important body that was created following the 2008 financial crisis to study market trouble, and which has since seen its funding slashed by President Trump. I was trawling for information about financial risk and where it might be held, and the economist told me to look at the debt offerings and corporate bond purchases being made by the largest, richest corporations in the world, such as Apple or Google, whose market value now dwarfed that of the biggest banks and investment firms.6
In a low interest rate environment, with billions of dollars in yearly earnings, these high-grade firms were issuing their own cheap debt and using it to buy up the higher-yielding corporate debt of other firms. In the search for both higher returns and for something to do with all their money, they were, in a way, acting like banks, taking large anchor positions in new corporate debt offerings and essentially underwriting them the way that J.P. Morgan or Goldman Sachs might. But—it’s worth noting—since such companies are not regulated like banks, it is difficult to track exactly what they are buying, how much they are buying, and what the market implications might be. There simply isn’t a paper trail the way there is in finance. Still, the idea that cash-rich tech companies might be the new systemically important institutions was compelling.
I began digging for more on the topic, and about two years later, in 2018, I came across a stunning Credit Suisse report that both confirmed and quantified the idea. The economist who wrote it, Zoltan Pozsar, forensically analyzed the $1 trillion in corporate savings parked in offshore accounts, mostly by Big Tech firms. The largest and most intellectual-property-rich 10 percent of companies—Apple, Microsoft, Cisco, Oracle, and Alphabet among them—controlled 80 percent of this hoard.7
According to Pozsar’s calculations, most of that money was held not in cash but in bonds—half of it in corporate bonds. The much-lauded overseas “cash” pile held by the richest American companies, a treasure that Republicans under Trump had cited as the key reason they passed their ill-advised tax “reform” plan, was actually a giant bond portfolio. And it was owned not by banks or mutual funds, which typically have such large financial holdings, but by the world’s biggest technology firms. In addition to being the most profitable and least regulated industry on the planet, the Silicon Valley giants had also become systemically crucial within the marketplace, holding assets that—if sold or downgraded—could topple the markets themselves. Hiding in plain sight was an amazing new discovery: Big Tech, not big banks, was the new too-big-to-fail industry.
Growth over Governance
As I began to think about the comparison, I found more and more parallels. Some of them were attitudinal. It was fascinating, for example, to see how much the technology industry’s response to the 2016 election crisis mirrored the banking industry’s behavior in the wake of the financial crisis of 2008. Just as Wall Street had obfuscated as much as possible about what it was doing before and after the crisis, every bit of useful information about election meddling had to be clawed away from the titans of Big Tech.
First, they insisted that they’d done nothing wrong, and that anyone who thought they had simply didn’t understand the technology industry. This completely mirrors the “You just don’t get it” attitude that critics of the financial sector face. It was under extreme
pressure from both press and regulators that Facebook’s Mark Zuckerberg finally turned over three thousand Russia-linked ads to Congress. Google and others were only marginally less evasive. Similar to Wall Street financiers at the time of the U.S. subprime crisis, the tech titans have remained, years after the 2016 election, in a largely reactive posture, parting with as few details as possible, attempting to keep the asymmetric information advantages of their business model that, as in the banking industry, help generate outsized profit margins. It’s a “deny and deflect” attitude that is similar to what we saw from financiers in 2008, and has resulted in deservedly terrible PR.
But there are more substantive similarities as well. At a meta level, I see four major likenesses in Big Finance and Big Tech: corporate mythology, opacity, complexity, and size. In terms of mythology, Wall Street before 2008 sold us on the idea that what was good for the financial sector was good for the economy. Until quite recently, Big Tech tried to convince us of the same. But there are two sides to the story, and neither industry is quick to acknowledge or take responsibility for the downsides of “innovation.”
A raft of research shows us that trust in liberal democracy, government, media, and nongovernmental organizations declines as social media usage rises.8 In Myanmar, Facebook has been leveraged to support genocide. In China, Apple and Google have bowed to government demands for censorship. In the United States, of course, personal data is being collected, monetized, and weaponized in ways that we are only just beginning to understand, and monopolies are squashing job creation and innovation. At this point it’s harder and harder to argue that the benefits of platform technology vastly outweigh the costs.
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