Big Tech getting way too powerful

The most valuable intellectual properties are platforms so widely used that everyone else has to use them, too. Think of Facebook's communication network and Google's search engine.
The most valuable intellectual properties are platforms so widely used that everyone else has to use them, too. Think of Facebook's communication network and Google's search engine.PHOTO: REUTERS, AGENCE FRANCE-PRESSE
The most valuable intellectual properties are platforms so widely used that everyone else has to use them, too. Think of Facebook's communication network and Google's search engine.
The most valuable intellectual properties are platforms so widely used that everyone else has to use them, too. Think of Facebook's communication network and Google's search engine.PHOTO: REUTERS, AGENCE FRANCE-PRESSE

Largest tech firms now have more economic, political power than ever

BERKELEY (CALIFORNIA) • Conservatives and liberals interminably debate the merits of "the free market" versus "the government". Which one you trust more delineates the main ideological divide in America.

In reality, they are not two separate things. There cannot be a market without government. Legislators, agency heads and judges decide the rules of the game. And, over time, they change the rules. The important question, too rarely discussed, is who has the most influence over these decisions and in that way, wins the game.

Two centuries ago, slaves were among the nation's most valuable assets, and after the Civil War, perhaps land was. Then factories, machines, railroads and oil transformed America. By the 1920s, most working Americans were employees, and the most contested property issue was their freedom to organise into unions.

Now information and ideas are the most valuable forms of property. Most of the cost of producing it goes into discovering it or making the first copy. After that, the additional production cost is often zero. Such "intellectual property" is the key building block of the new economy. Without government decisions over what it is, and who can own it and on what terms, the new economy could not exist.

But as has happened before with other forms of property, the most politically influential owners of the new property are doing their utmost to increase their profits by creating monopolies that must eventually be broken up.

Contrary to the conventional view of a US economy bubbling with innovative small companies, the reality is quite different. The rate at which new businesses have formed in the United States has slowed markedly since the late 1970s. Big Tech's sweeping patents, standard platforms, fleets of lawyers to litigate against potential rivals and armies of lobbyists have created formidable barriers to new entrants.

The most valuable intellectual properties are platforms so widely used that everyone else has to use them, too. Think of standard operating systems like Microsoft's Windows or Google's Android, Google's search engine, Amazon's shopping system, and Facebook's communication network. Google runs two-thirds of all searches in the United States. Amazon sells more than 40 per cent of new books. Facebook has nearly 1.5 billion active monthly users worldwide. This is where the money is.

POWER OF PLATFORM OWNERS

Despite an explosion in the number of websites over the last decade, page views are becoming more concentrated. While in 2001 the top 10 websites accounted for 31 per cent of all page views in America, by 2010, the top 10 accounted for 75 per cent. Google and Facebook are now the first stops for many Americans seeking news - while Internet traffic to much of the nation's newspapers, network television and other news-gathering agencies has fallen well below 50 per cent of all traffic. Meanwhile, Amazon is now the first stop for almost a third of all US consumers seeking to buy anything. Talk about power.

Whenever markets become concentrated, consumers end up paying more than they otherwise would, and innovations are squelched. Sure, big platforms let creators showcase and introduce new apps, songs, books, videos and other content. But almost all of the profits go to the platforms' owners, who have all of the bargaining power.

Contrary to the conventional view of a US economy bubbling with innovative small companies, the reality is quite different. The rate at which new businesses have formed in the US has slowed markedly since the late 1970s. Big Tech's sweeping patents, standard platforms, fleets of lawyers to litigate against potential rivals and armies of lobbyists have created formidable barriers to new entrants.

The patent system is crucial to innovation. The law gives 20 years of patent protection to inventions that are "new and useful", as decided by the Patent and Trademark Office. But the winners are big enough to game the system. They make small improvements warranting new patents, effectively making their intellectual property semi-permanent. They also lay claim to whole terrains of potential innovation, including ideas barely on drawing boards and flood the system with so many applications that lone inventors have to wait years.

White House intellectual property adviser Colleen V. Chien noted in 2012 that Google and Apple were spending more money acquiring patents (not to mention litigating them) than on doing research and development.

INTELLECTUAL PROPERTY RIGHTS

Antitrust laws used to fight this sort of market power. In the 1990s, the federal government accused Microsoft of illegally bundling its popular Windows operating system with its Internet Explorer browser to create an industry standard that stifled competition. Microsoft settled the case by agreeing to share its programming interfaces with other companies. But since then, Big Tech has been almost immune to serious antitrust scrutiny, even though the largest tech companies have more market power than ever. Maybe that is because they have accumulated so much political power.

In 2012, the staff of the Federal Trade Commission's (FTC) Bureau of Competition submitted to the commissioners a 160-page analysis of Google's dominance in the search and related advertising markets, and recommended suing Google for conduct that "has resulted - and will result - in real harm to consumers and to innovation".

But the commissioners chose not to pursue a case. Investigators also found evidence that Google was pushing its products ahead of competitors' on search results, though no legal action was recommended on this point.

It is unusual for commissioners not to accept staff recommendations, and they did not give a full explanation. The FTC noted a competing internal report that recommended against legal action, but another plausible reason has to do with Google's political clout. Google is among the largest corporate lobbyists in the United States. Around the time of the investigation, the company poured money into influencing both the commissioners and the commission's congressional overseers.

Google is heading into a major fight with antitrust officials in the European Union for some of the same reasons the FTC staff went after it. Not incidentally, Europe is also investigating Amazon for allegedly stifling competition in e-books, and Apple for doing the same in music.

While many on this side of the Atlantic believe Europe is taking on these tech giants because they are American, another possible explanation is that Google, Amazon and Apple lack as much political clout in Europe as they have here.

MARKET SHARE AND POLITICAL CLOUT

Economic and political power cannot be separated because dominant corporations gain political influence over how markets are maintained and enforced, which enlarges their economic power further. One of the original goals of antitrust law was to prevent this.

"The enterprises of the country are aggregating vast corporate combinations of unexampled capital, boldly marching, not for economical conquests only, but for political power," warned chief justice Edward G. Ryan of Wisconsin's Supreme Court in 1873. Antitrust law was viewed as a means of breaking this link. "If we will not endure a king as a political power," Senator John Sherman of Ohio thundered, "we should not endure a king over the production, transportation and sale" of what the nation produced.

Mr Sherman's Antitrust Act easily passed Congress and was signed into law by president Benjamin Harrison on July 2, 1890. Twelve years later, president Teddy Roosevelt used it against the Northern Securities Co, which dominated rail transportation in the north-west. In 1911, president William Howard Taft broke up the Standard Oil empire.

The underlying issue has little to do with whether one prefers the "free market" or government. The real question is how government organises the market, and who has the most influence over its decisions. We are now in a new gilded age similar to the first Gilded Age, when the nation's antitrust laws were enacted. As then, those with great power and resources are making the "free market" function on their behalf. Big Tech - along with the drug, insurance, agriculture and financial giants - dominates both our economy and our politics.

Yet as long as we remain obsessed by the debate over the relative merits of the "free market" and "government", we have little hope of seeing what is occurring and taking the action that is needed to make our economy work for the many, not the few.

NEW YORK TIMES

•Robert B. Reich is a professor of public policy at the University of California, Berkeley, and the author of the forthcoming book Saving Capitalism: For The Many, Not The Few, from which this essay is adapted.

A version of this article appeared in the print edition of The Sunday Times on September 27, 2015, with the headline 'Big Tech getting way too powerful'. Print Edition | Subscribe