When Did Making Customers Happy Become a Reason for Regulation or Breakup?

Mark Twain is reputed to have said, “History doesn’t repeat itself, but it rhymes.” Of course, sometimes it doesn’t even rhyme. But that doesn’t stop some reporters and pundits from drawing analogies between today’s tech leaders and the antitrust violators of yesteryear.

Via Twenty20

The Wall Street Journal’s Christopher Mims recently wrote:

Facebook Inc., Google parent Alphabet Inc. and Amazon.com Inc. are enjoying profit margins, market dominance and clout that, according to economists and historians, suggest they’re developing into a new category of monopolists. They may not yet be ripe for such extreme regulatory action, but as they consolidate control of their markets, negative consequences for innovation and competition are becoming evident.

For example, some who study the past compare Amazon and Facebook to Standard Oil, for their similar quests to vanquish competitors and even their own suppliers through vertical integration.

To support his claims, Mims links to articles written by himself and two other Wall Street Journal reporters, including Greg Ip, who wrote:

Standard Oil Co. and American Telephone and Telegraph Co. were the technological titans of their day, commanding more than 80% of their markets.

Today’s tech giants are just as dominant: In the U.S., Alphabet Inc.’s Google drives 89% of internet search; 95% of young adults on the internet use a Facebook Inc. product; and Amazon.com Inc. now accounts for 75% of electronic book sales. Those firms that aren’t monopolists are duopolists: Google and Facebook absorbed 63% of online ad spending last year; Google and Apple Inc. provide 99% of mobile phone operating systems; while Apple and Microsoft Corp. supply 95% of desktop operating systems.

Some fact-checking

Before addressing the substance of the arguments, let’s clean up some facts. Google is chosen somewhere between 75 percent and 90 percent of the time worldwide by people using organic search. It doesn’t “drive” those searches. And this is only organic search — apps such as Yelp and Travelocity provide specialized search services. Facebook products are indeed popular, but the 95 percent figure is misleading: According to Pew Research, 35 percent of US teens say they use Snapchat more than any other social media, and 32 percent say they use YouTube more than any other. Facebook and Instagram together are most used by only 25 percent of US teens. So Facebook is, at best, number three in the market. And two companies with a 63 percent market share do not make a duopoly: To constitute a duopoly, they must have 100 percent of the market. Besides, it is unclear that online advertising is a market in the sense used in antitrust legislation.

The analogies with Standard Oil and AT&T are incorrect. Standard Oil’s market shares were indeed high during the years before final antitrust actions — 90 to 95 percent of oil production in 1880 and about 90 percent of oil production and 85 percent of final sales in 1904. However, its market dominance came from controlling resources, primarily access to railroads, which were needed to move oil to market and where regulation limited competition. AT&T served 100 percent of each of its markets, not 80 percent. Its markets happened to cover about 80 percent of the phones in the US. AT&T obtained its 100 percent market shares because of exclusive government franchises.

Customer choice, not government favors, should drive success

In both of yesteryear’s cases, government regulation played an important role in restricting competition. Today’s tech companies have no such government-granted advantages — at least not yet. Europe’s recent moves in privacy regulation are giving tech incumbents an economic advantage over smaller rivals. If the US follows a similar path, government regulation may create true tech monopolies.

But for now, large tech companies have become successful by customer choice. Facebook founder Mark Zuckerberg thought that a social media platform would take off if it enabled two-way communication and allowed people to connect with others whom they want to reach but might otherwise miss. He was right in a big way. Google founders Larry Page and Sergey Brin thought that the most valuable web-pages — those which people want to find when searching — would be the ones that other web pages cite. They were right in a big way. Amazon’s Jeff Bezos was right about online shopping and cloud computing. And Steve Jobs was right that people would gobble up cool technology that changes their lives.

Contrary to another article Ip wrote, this emphasis on customer choice isn’t a grand policy experiment, but a normal course of events in free markets. He wrote:

Facebook Inc.’s climb to the pinnacle of business success was nurtured by a grand policy experiment: that a light regulatory touch would turbocharge innovation and make consumers wealthier and happier. Companies who mistreated their customers would succumb to competitors, or be punished with rules already on the books.

As far back as 1776, Adam Smith emphasized the importance of customers driving markets. In his speech at Moscow State University in 1988, former President Ronald Reagan told the students, “We are seeing the power of economic freedom spreading around the world,” and, “Progress is not foreordained. The key is freedom — freedom of thought, freedom of information, freedom of communication.”

Customers continue to exercise this freedom: Facebook lost about 2.8 million US users under 25 years old in 2017. Customers are finding things they like better than those they consumed last year. Whether this freedom of choice results in market share growth or market share declines, it should be cause for celebration, not alarm, regulation, and breakups.

(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)