House Report Calls For ‘Structural Separation’ Of Big Tech (It’s 449 Pages, So Here’s Your Much-Needed TL;DR)

by Ryan Joe and Allison Schiff

“To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”

In a 449-page report released Tuesday, the House Judiciary subcommittee on antitrust criticized the business practices of the big four tech giants: Amazon, Facebook, Apple and Google. The subcommittee called for a “structural separation” of big tech, essentially a breakup, among one of the many ways regulators could make the market more competitive for smaller companies.

The findings are the fruits of an investigation that began in June 2019. Here’s what it uncovered:

Google siphoned traffic from publishers, who had to buy ads on Google to get it back

The subcommittee raised an eyebrow at Google’s contention that it “operates in a highly competitive environment” since so many companies depend on it for traffic. Its ownership of the Android operating system solidified its lead in search even as mobile took over the world.

Google also weaponizes its dominance in search, according to the subcommittee. For instance, Google scrapes content from third-party sites and places it in Google search results, essentially diverting traffic from publishers.

It also algorithmically pushed what it called “low-quality” sites further down the page. Based on that logic, Google’s own sites, which copied content, should have been penalized – but were exempt from this penalty. Froogle, for instance, Google’s comparison-shopping service, which “was of such low quality that Google’s product team couldn’t even get it indexed,” still had a top spot in the search results over competing third-party shopping comparison sites.

Meanwhile, demoted sites could only recover lost traffic by advertising on Google – a move that also risks giving Google “commercially sensitive information.”

Also, the growth of paid spots on Google’s search results page come at the expense of organic search results. Businesses that saw organic traffic decline have to pay Google for ad placements.

Google’s conflicts of interest in digital advertising ensure its continued dominance

In the digital ad space, the experts interviewed by the subcommittee claimed that “with a sizable share in the ad exchange market, ad intermediary market and as a leading supplier of ad space, Google simultaneously acts on behalf of publishers and advertisers, while also trading for itself.”

And this setup is why Google will always win.

Google uses Android to get data it monetizes through ads, and to gain strategic intelligence on competitors

Android has numerous points where it can identify users. One such point is a unique “Client ID” that device manufacturers must install in each smartphone, which lets Google combine metrics recorded by the actual device with all the other data Google gathers from its users.

“Combined with location data, which Android also extensively collects, Google can build sophisticated user profiles… These intimate user profiles, spanning billions of people, are a key source of Google’s advantage in its ad business. In this way, Android’s location data feeds into Google’s dominance in ads.”

Chrome’s dominance as a browser gives Google power to “shape outcomes across markets for search, mobile operating systems and digital advertising”

Due to search, Google already had an unprecedented view of the browser space – even before it developed Chrome. As early as 2004, Google was able to track Firefox’s rise and Internet Explorer’s fall – and Google would later use its purview to track Chrome’s performance.

When Chrome finally launched in 2008, Google advertised it on top of its search page, driving a tremendous amount of installations.

Of course, the biggest Chrome news around these parts focuses on the coming phaseout of third-party cookies. While this decision could be Google’s attempt to address consumer privacy concerns, the subcommittee zeroed in on competitor complaints, noting how “market participants are concerned that while Google phases out third-party cookies needed by other digital advertising companies, Google can still rely on data collected throughout its ecosystem.”

Facebook monopolizes advertising in social media

“Facebook,” the report says, “has monopoly power in online advertising in the social networking market.”

To no one’s surprise, the subcommittee concluded that Facebook’s data and reach ensure it’ll always have higher, and higher growing, revenue per user, than its competitors – $7.05 worldwide and a whopping $36.49 in North America as of July 2020. Snap, Facebook’s closest rival, had ARPU of $1.91 worldwide and $3.48 in North America during its most recent quarter.

“As a result,” the subcommittee found, “entry or success by other firms is unlikely” – a conclusion supported by Facebook’s internal documents, which boasted about the ability of its ad products to target accurately.

Facebook used its data to identify and thwart competitive threats

As per the House, “Facebook’s position that it lacks monopoly power and competes in a dynamic market is not supported … Instead, Facebook’s internal business metrics show that Facebook wields monopoly power.”

While Facebook claims its news feed is similar to YouTube – and therefore competitive with it – the subcommittee rejected this, since YouTube hosts video only. Ultimately, most of Facebook’s competition comes from the apps it already owns, namely Instagram (which competes with core Facebook) and WhatsApp (which competes with Messenger).

The global proliferation of these apps creates powerful network effects that keep other social media apps from gaining any traction against Facebook.

Apps that were threats – such as Instagram and WhatsApp – became acquisition targets, according to the report.

The subcommittee found that “Facebook used its data advantage to create superior market intelligence to identify nascent competitive threats and then acquire, copy or kill these firms … it advantaged its own services while weakening other firms.”

Amazon operates a marketplace and sells on it – a clear conflict of interest

The House subcommittee contends that Amazon’s market power is rooted in its treatment of third-party sellers and the conflict of interest in being both a marketplace operator and a seller on that same marketplace.

Like Apple, the report calls out Amazon for being a gatekeeper that exerts market power over both third-party sellers and many of its suppliers. Numerous sellers told subcommittee staffers that they felt abused by Amazon, but unable to leave the platform, because of Amazon’s dominant position in ecommerce. This dynamic will only become more fraught as the pandemic pushes an increasing amount of shopping online.

Third-party sellers that spoke with the subcommittee say they’ve been bullied by Amazon and coerced into unfavorable agreements. They also accuse Amazon of using its data to benefit its own private label retail business.

On top of that, the report alleges that Amazon’s strategy of buying its top competitors in adjacent markets is a major contributor to its power in ecommerce, as well as other markets, not to mention the goo-gobs of valuable customer data that comes along with these deals.

Amazon has acquired more than 100 companies over the past two decades, including everything from and Whole Foods to Ring and Twitch.

Apple rules with an iron fist in its App Store

The subcommittee’s primary complaint against Apple is the control it exerts over software distribution.

IOS is one of only two dominant mobile operating systems both in the United States and globally, the other being Google-owned Android. The report points out that Apple’s market power is durable due to three main factors: high switching costs, ecosystem lock-in and brand loyalty (or, perhaps, a form of Stockholm Syndrome based on the other two factors).

As a result, the report proclaims that “Apple’s control over iOS provides it with gatekeeper power over software distribution” on its devices. From there, it’s only a short hop to monopolistic behavior, the report asserts, pointing to Apple’s ability to generate “supra-normal profits” from its App Store and services business.

The House subcommittee zeroed in specifically on Apple’s 30% commission fee for app downloads and in-app purchases (see: Fortnite maker Epic Games’ recent lawsuit over Apple’s App Store policies).

By owning both the OS as well as the only means to distribute software on iOS devices, the report says that Apple prohibits alternatives to the App Store and preferences its own products and services, such as the Safari browser.

Internal Apple communications reviewed by subcommittee staff indicate that Apple has leveraged its power over the App Store to pressure developers to offer in-app purchases – of which Apple gets a cut – or risk getting turfed out of the App Store.

These are the problems – so, what does the subcommittee recommend?

Problem: The platforms “misappropriate” partner data in order to get an advantage. They lock customers in with integrated products and services. And they use the outsized profits from their core businesses to subsidize entry into new businesses.

Solution: A breakup, essentially. The subcommittee suggests prohibiting the platforms from competing with companies that use their infrastructure, and restricting the markets where they can do business.

The antimonopoly tools the subcommittee recommended were “structural separation” and “line of business restrictions.” The structural separation is where the subcommittee starts getting into breakup territory, as it could require different lines of business to be owned separately.

Alternatively, a structural separation could let the platforms keep their lines of business, but they wouldn’t be free to dictate how those business units are organized.

Problem: The platforms give preferential treatment either to themselves or to business partners.

Solution: Congress should create rules requiring the platforms to offer consistent terms and services that would apply to pricing and access to those services.

Problem: The platforms are not interoperable, which locks consumers in and keeps other services from competing.

Solution: The platforms must be able to connect with other companies, and users must be able to move their data to other platforms.

Problem: Antitrust agencies haven’t blocked acquisitions that enabled anticompetitive behaviors.

Solution: Congress should assume that any acquisition by one of the platforms is inherently anticompetitive, and the onus is now on the merging companies to prove that it is not.

As faithful readers know, Google’s digital advertising power came from a combination of acquisitions, notably DoubleClick in 2007, AdMob in 2010 and Admeld in 2011. In each instance, regulators assumed healthy competition already existed or would exist.

The FTC said the display market was competitive during the DoubleClick acquisition; that Apple would launch a mobile ad net competitor to compete with AdMob; and the Justice Department’s Antitrust Division believed that Google buying Admeld wouldn’t likely hurt consumers. Hindsight is 20/20 …

Problem: Facebook and Google determine what news to distribute, and publishers are at their whim.

Solution: The subcommittee should consider laws that provide publishers with a “safe harbor” where they can negotiate with the platforms collectively. This one sounds a little odd, but the subcommittee pointed to HR 2054, a bill introduced in April 2019 that would allow news publishers an exemption from antitrust laws so they could coordinate if certain circumstances were met – namely, that the goal benefits the entire industry.

Problem: The platforms leverage their bargaining power over others to get more access to users and markets. 

Solution: Congress should think about prohibiting this, possibly by going after “anticompetitive contracts” and by introducing protections for people and companies using those platforms.

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