The digital war between Big Tech and telcos

The dust-up over Net neutrality rules is just the latest upheaval arising from the growing dominance of the 'Fangs'

The technology sector has driven global markets this year. Now, it seems to be driving dealmaking and regulatory decisions, too.

Consider Disney's US$66 billion (S$89 billion) agreement to buy 21st Century Fox assets, or AT&T's bid for Time Warner, which are reactions to the power of Netflix and Amazon. Or the CVS-Aetna deal, which aims to counter Amazon's growth in the drug market as well as Google's likely entry into healthcare.

Consider also the US Federal Communication Commission's (FCC) decision last week to roll back "Net neutrality" rules, the principles that stipulate that Internet service providers must treat all online traffic the same.

While FCC chair Ajit Pai, a former Verizon lawyer, says this is about moving back towards "light touch" regulation, it is also about changing the balance of power between tech and telecommunications.

It does this by allowing the largest Internet service providers (ISPs) such as AT&T, Verizon, Sprint and T-Mobile to charge the cash-rich platform companies fees to move their traffic to the front of the digital queue.

All of it speaks to the huge power of the "Fangs" - Facebook, Amazon, Netflix and Google - which now dominate not just the digital business, but the entire economy.

Eighty per cent of corporate wealth now resides in 10 per cent of companies rich in intellectual property (IP), of which the platform companies are the richest, according to the McKinsey Global Institute.

It is a power that has grown so quickly, and changed so much, that it is forcing a fundamental rethink of everything from antitrust policy to the rules that have governed the Internet for more than 20 years. It is also forcing both liberals and conservatives to bump up uncomfortably against their traditional policy positions.

Demonstrators rallying outside the US Federal Communication Commission (FCC) building to protest against the rollback of Net neutrality rules last Thursday in Washington. While FCC chair Ajit Pai says the decision is about moving back towards "light
Demonstrators rallying outside the US Federal Communication Commission (FCC) building to protest against the rollback of Net neutrality rules last Thursday in Washington. While FCC chair Ajit Pai says the decision is about moving back towards "light touch" regulation, it is also about changing the balance of power between tech and telecoms, according to the writer. PHOTO: AGENCE FRANCE-PRESSE

Take Net neutrality. The term was coined in the early 2000s by academic Tim Wu, author of The Attention Merchants. It has come to be understood as shorthand for the idea that everyone - rich and poor, the start-up and the multinational conglomerate - should be able to use the Internet on a level playing field.

Many of the monopoly battles being waged are not confrontations between David and Goliath, but rather Goliath and Goliath.

Liberals in the United States have supported the idea for reasons of social equity. But some conservatives, as well as some members of the business community, have argued that it is a distorting regulation that prevents the ISPs from properly monetising their investment in broadband.

It's a fair point. After all, the telecoms companies building the 21st-century digital highway have single-digit profit margins, while the likes of Google and Facebook - which simply has to wait for someone to upload a cat video and then sell hyper-targeted advertising against it - have high double-digit profit margins.

Big tech platform companies, which have been the largest corporate beneficiaries of Net neutrality, have until now worked both the social and economic arguments to their own advantage.

They and many other supporters of Net neutrality - including start-ups that are worried about being winnowed out by larger players with deeper pockets that can pay to have their data delivered faster - have argued that more power for the ISPs would squash innovation on the Internet and unfairly penalise small businesses.

Yet a number of critics would argue that the Fangs themselves are a bigger risk to innovation than the telecoms companies, in large part because of the network effects that make them natural monopolies.

The currency of the digital age is data, and its value grows exponentially. This allows the biggest players to become ever more dominant and able to squash competition in myriad ways - be it snapping up any firm that comes close to their core business model, or via "efficient infringement" on competitors' IP.

Other industries complain that the Fangs still enjoy unfair regulatory exemptions, thanks to loopholes in Section 230 of the 1996 Communications Decency Act. Economic power begets political power, which is why the Fangs have fought hard, and so far successfully, in Washington against efforts to repeal those loopholes, as well as other attempts to make their business models fairer and more transparent.

All this serves as a reminder that many of the monopoly battles being waged these days are not confrontations between David and Goliath, but rather Goliath and Goliath. It is hard to argue that a vertical merger between content and pipe owners like Time Warner and AT&T is a good thing for competition, or for the little guy, even if you buy the idea that the goal of antitrust policy should be "consumer welfare". (For the record, I don't; we need to think about new business creation and workers, too.) But it seems inconsistent to go after AT&T without also going after the Fangs.

What is lost in all of this debate may well be the American consumer. Even if the US had an administration that cared about enforcing antitrust - beyond US President Donald Trump's politicised battles over whether Time Warner should divest itself of his arch media enemy CNN - policies predicated on outdated models that do not address the problems of the digital age will not even out the playing field.

Meanwhile, a rollback of Net neutrality will not really hurt the Fangs - they can easily pay whatever fees the ISPs decide to charge. But it could create a premium-and economy-class Internet for consumers.

What we need is equal and consistent application of competition rules. That will probably mean coming up with new rules.

FINANCIAL TIMES

A version of this article appeared in the print edition of The Straits Times on December 19, 2017, with the headline 'The digital war between Big Tech and telcos'. Print Edition | Subscribe