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The Corner: Beginning of End for FB? — The Collapse of Car Dealerships

Greetings from Open Markets. In this issue of The Corner, we look at how the Zuckerberg hearings on the Hill may prove the beginning of the end for Facebook, and dig into the real reason for the escalating collapse of America’s independent car dealerships.

April 20, 2018  |  by Open Markets

Greetings from Open Markets. In this issue of The Corner, we look at how the Zuckerberg hearings on the Hill may prove the beginning of the end for Facebook, and dig into the real reason for the escalating collapse of America’s independent car dealerships. To read previous editions of The Cornerclick here.

THE FACEBOOK HEARINGS—THE BEGINNING OF A PERIOD OF DRAMATIC REFORM?

After Mark Zuckerberg’s 10 hours of testimony before both the Senate and House last week, much of the press concluded the Facebook CEO carried the day. “The verdict from Wall Street is in,” CNN reported, as the corporation’s stock rose 4.5% over the course of hearings. “Investors clearly think Facebook CEO Mark Zuckerberg was the winner.”

Facebook executives agreed. Wired quoted one executive who expressed not merely relief, but disdain for Zuckerberg’s questioners: “Once it was clear how bad it was and how mismatched [the members] were, everybody had this awakening: We have made some mistakes, but these guys know even less.” Facebook VP Carlyn Everson assured The Wall Street Journal that the company plans no major changes to its revenue or business model. When Zuckerberg returned to Facebook’s headquarters in California, according to Wired he met with employees in what one called “a Mark lovefest.”

It’s certainly fair to give Zuckerberg his due. In two long days of hearings, he remained calm and polite and kept closely to his script. It was an impressive performance. But just because no Senator was able to shout, “it was Colonel Mustard in the ballroom with the candlestick” does not mean the investigations are over. On the contrary, these hearings raised more questions than they answered and set many wheels into motion.

Like the Pujo hearings of 1912 and Pecorra hearings of 1932, the Facebook hearings of 2018 may well be remembered not as the end of something, but the beginning of a period of radical reform.

Of the many realizations on Capitol Hill last week, perhaps the single most important is that Facebook is a communications monopoly, not much different in kind from AT&T a century ago. This realization in turn provides Congress and law enforcers with a way to better understand the nature of America’s Facebook problem and a better idea of what to do about it. In short, Russian interference in elections, the spilling of personal secrets into the hands of bad actors, and Facebook’s disruption of trustworthy news all become easier to fix when and if Washington recognizes Facebook as a monopoly.

Senator Lindsey Graham (R-SC) was first to bring up the subject. “You don’t think you have a monopoly?” Graham asked incredulously. The best answer Zuckerberg could come up with was: “It certainly doesn’t feel like that to me.”

During the House hearing the following day, Rep. Bill Flores (R-TX) compared Facebook to AT&T and Standard Oil. “Just as we addressed those monopolies in the past, we’re faced with … that situation today,” Flores said. “Congress needs to consider policy responses” to secure not only “privacy,” Rep. Flores said, but also “fairness.”

Perhaps the most damning set of questions came from Sen. Dan Sullivan (R-AK). Sen. Sullivan started with “Is Facebook too powerful?” then spoke the words Facebook executives most dread. “When companies become big and powerful,” Sullivan said, “what typically happens from this body is there is an instinct either to regulate or break up.”

When Zuckerberg replied: “I think we should have a full conversation about what is the right regulation,” Sullivan countered with his fear that regulating the corporation, as opposed to breaking it up, would simply lock Facebook “into a position of cemented authority.”

Sen. Sullivan ended with a line of questioning that will all but certainly be taken up by Congress in the near future. Seeking to get a clear understanding of what role exactly Facebook plays in the news business, he asked: “So which are you? Are you a tech company, or are you the world’s largest publisher? Because I think that goes to a really important question on what form of regulation or government action, if any, we would take.” (italics added)

Tellingly, Congress’ new anti-Facebook attitude was on full display the next day in a little noticed hearing for Rebecca Kelly Slaughter, who was nominated to serve on the Federal Trade Commission. Both Republican and Democratic Senators who had questioned Zuckerberg the day before pressed Slaughter hard on Facebook, privacy, and tech monopolies in general. The FTC’s entire leadership is about to turn over, and the other four nominees clearly heard the senators’ anger and noted their questions.

Meanwhile, the former FTC official who wrote the agency’s 2011 consent decree governing the Facebook’s use of data, law professor David Vladeck, said he has changed his mind about the corporation. Facebook is not, as Vladeck believed in 2011, “clueless,” which he defined as admitting errors but offering excuses. Instead, Vladeck wrote before the hearings, Facebook appears to be “venal,” which he defined as denying “all wrongdoing no matter how egregious the violation.” Vladeck’s words may not have been noticed by CNN or Wired, but they were heard inside the FTC.

Finally, there’s the matter of how the hearings affected attitudes outside of Washington. On Monday, Netflix CEO Reed Hastings, who is on the board of Facebook, criticized the ad model of the company. The dating app Bumble dropped a requirement that users also have a Facebook login. U.S. District Judge James Donato certified a potential multi-billion dollar class action against Facebook for violating Illinois’s facial recognition law against storing biometric data without user consent.

Perhaps most troubling for the corporation, after nearly a year of Facebook scandals in Washington barely a quarter of Facebook users now say they trust the corporation.

Facebook’s mystique of invulnerability is gone, at least in Washington. Which means, the day of reckoning comes.

HIGHLIGHTS FROM THE HEARING:

  • Sen. Lindsey Graham (R-SC): “My point is that one way to regulate a company is through competition, [or] through government regulation. Here’s the question that all of us got to answer: What do we tell our constituents, given what’s happened here, why we should let you self-regulate?”
  • Rep. Anna Eshoo (D-CA): “I think the damage done to our democracy, relative to Facebook and its platform being weaponized, are incalculable. Enabling the cynical manipulation of American citizens for the purpose of influencing an election is deeply offensive, and it’s very dangerous. Putting our private information on offer without concern for possible misuses, I think, is simply irresponsible.”
  • Rep. Bill Flores (R-TX): “And, just as Facebook — and these companies were founded by bright entrepreneurs. Their companies grew. And, eventually, they sometimes became detached from everyday Americans. And what happened is policymakers then had to step in and reestablish the balance between those — those folks and everyday Americans.”
  • Rep. Kathy Castor (D-FL): “For all of the benefits that Facebook has provided in building communities and connecting families, I think a devil’s bargain has been struck. And, in the end, Americans do not like to be manipulated. They do not like to be spied on. We don’t like it when someone is outside of our home, watching. We don’t like it when someone is following us around the neighborhood or, even worse, following our kids or stalking our children. Facebook now has evolved to a place where you are tracking everyone.
  • Sen. Orrin Hatch (R-UT): “This is the most intense public scrutiny I’ve seen for a tech-related hearing since the Microsoft hearing that—that I chaired back in the late 1990s.”

ANTI-MONOPOLY RISING:

  • Labour Party MP Rachel Reeves, chair of the House of Commons’s Business, Energy, and Industrial Strategy Committee, in a recent speech at the British think tank New Economy Foundation, emphasized the ills of “the monopolies of the new platform capitalism.” Reeves said that “Google, Facebook, and Amazon…block competitive markets; avoid taxation; [and] extract and commodify information about the personal life and identities of consumers.” Reeves adapted the speech from her new pamphlet The Everyday Economy.
  • AGCM, Italy’s antitrust authority, has opened a probe into possible incorrect commercial practices by Facebook, noting in a statement that the corporation “may not adequately and immediately inform the user about the collection and use, for commercial reasons, of the data that they release.”

? WHAT WE’VE BEEN UP TO:

  • Lina Khan was awarded Best Academic Article on Unilateral Conduct by the Antitrust Writing Award Jury, a select group of law professors and general counsel members, at the annual Antitrust Writing Award ceremony in Washington, DC. She also appeared on CNN to discuss whether Amazon is a monopoly, and was interviewed by Minnesota Public Radio, where she explained the harm mergers pose to the economy.
  • Phil Longman published an article in The Washington Post about the misconceptions surrounding the Veteran Administration’s healthcare system and attempts to privatize it. He also presented his ‘Medicare Prices for All’ idea at the Lown Institute Healthcare Conference last week, based on this piece in Washington Monthly.
  • Barry Lynn spoke on a panel entitled “Antitrust in a Time of Economic Populism” at the American Bar Association’s 66th annual Antitrust Law Spring Meeting.
  • Zephyr Teachout, Open Markets board member, wrote an op-ed in The Guardian about how last week’s Senate hearing on Facebook was a “show trial.”
  • Sarah Miller published an article in The Daily Beast arguing that the best way to fix Facebook is to break apart the corporation’s monopolistic business model.
  • Matt Stoller joined WNYC’s “On the Media” to discuss the Senate and House hearings on Facebook, and to explain the problems the corporation poses for ad-buyers and customers.
  • Kevin Carty appeared on KALW’s “Your Call” to discuss how big companies use data collection to expand their power over users and other companies.

? WHAT’S MISSING FROM THE PICTURE? 

The Real Reason Behind the Decline of Car Dealerships

A recent article in The Wall Street Journal reports that traditional car dealerships are increasingly selling out to mega-dealers like AutoNation, hedge funds, and private equity firms.

The rapid consolidation of the retail auto market is putting control of dealerships into fewer and fewer hands. Indeed, the nation’s top 50 auto retailers sold some $175 billion in vehicles and services this year, up from $144 billion four years ago, even as the sales for the entire auto dealer market has remained relatively stable.

The Journal accounts for this trend by citing changing industry practices, ranging from the introduction of websites that allow customers to purchase vehicles online to the belief that ride-hailing will make vehicle ownership a less practical option. As the article puts it:

“The internet has made car prices more transparent for customers and given them the ability to shop around. It has also enabled online purchases of used cars. Electric-car maker Tesla Inc. is using online ordering to circumvent dealerships entirely. And Uber Technologies Inc. envisions a world where more people will rely on ride-hailing apps instead of owning a car.”

To be sure, these factors have indeed disrupted the traditional auto sales business model and have made it more difficult for dealers to compete. They’ve also ushered in a few positive benefits: increased transparency regarding the ‘sticker price’ of cars and increased choice for purchasing vehicles.

But what the article misses is that dealers also face extraordinary pressure from car-makers as a result of changes in case law and competition policy.

In the early decades of the auto industry, the franchise agreements that car-makers imposed on owners gave car-dealers few legal or economic protections. For instance, a typical agreement did not require auto manufacturers actually to supply the dealer with cars and allowed the manufacturers to terminate dealers “at will.”

To address these concerns, various states in the late 1930s began passing laws that neutralized the enormous power car-makers wielded over dealers. In 1956, the Feds joined in, passing the Automobile Dealer’s Day in Court Act (ADDICA). This Act gave dealers the right to sue automakers when they engaged in practices of arbitrary termination and non-renewal.

The laws also had the effect of creating an open market for dealers to sell and distribute automobiles. Besides counterbalancing the power of auto manufacturers over its dealers, the franchising laws helped ensure that a large percentage of both the revenue and profits from automobile sales remained local, in the hands of the dealers themselves and the local companies they supported, such as advertising agencies and newspapers.

But this balance of power began to shift in the late 1970s, when courts narrowed the scope of a clause in ADDICA, which required plaintiffs to prove car-makers were exercising “coercion.” Since then, as franchise law scholar Jessica Higashiyama writes, “very few dealers have been successful in recovering damages and costs under ADDICA.”

In the years since, car-makers have imposed a complex and largely opaque system of incentives and quotas on owners. Dealers will receive payment from car-makers only if they sell a certain number of cars or buy a certain number of auto parts, invest a certain amount of money into showroom upgrades, or even process a certain number of loans through the automaker’s finance arm.

As one dealer explained in trade industry publication Automotive News, the dealer is increasingly “an agent of the manufacturer” rather than an “independent retailer.” Dealers, he says, are subject to “a pay plan that is completely in the manufacturer’s control and changes on a whim.”

The power of car-dealers has presented itself in other ways too. In 2008, General Motors and Chrysler Group lobbied the Obama Administration’s Presidential Task Force on the Auto Industry to terminate more than 3,000 dealerships, purportedly as a measure to cut costs. And more recently, car-makers have solidified their near-monopoly on aftermarket and repair car parts, squeezing out independent mechanics but also increasing their control over their branded dealers.

These dynamics have pressured dealers into finding ways to increase their bargaining power against car-makers. A growing number are simply choosing to sell out. Indeed, AutoNation, the country’s biggest chain, grew from 206 stores in 2011 to 360 today. Similarly, Group 1 Automotive increased in size over that same period, swelling from 100 dealerships to 227.

Even at the local level this dynamic is playing out, with once small dealers, like Hendrick Automotive and Koons Automotive, growing in clout by serving many car manufacturers, instead of just one. The former, for instance, has grown from 66 to 139 outlets over the past seven years.

 

? WHAT WE’RE READING:

  • Beyond Austerity: Towards a Global New Deal, Chapter VI (The United Nations): This section, entitled “Market Power and Inequality: The Revenge of the Rentiers,” highlights the structural effects of the growing market domination and lobbying powers of large corporations.
  • “How Profiteers Lure Women Into Often-Unneeded Surgery,” (The New York Times, Matthew Goldstein & Jessica Silver-Greenberg): An exposé of the industry that makes money by coaxing women into having surgery—sometimes unnecessarily—so that they are more lucrative plaintiffs in lawsuits against medical device manufacturers.
  • “The Stealth Media? Groups and Targets Behind Divisive Issue Campaigns on Facebook,” (Political Communication, University of Wisconsin-Madison): After reviewing 5 million paid Facebook ads seen by 9,500 people before the 2016 presidential election, the authors of this peer-reviewed study suggest that the scope of ads promoting disinformation by foreign actors extends far beyond just Russian interference.

 

? VITAL STAT:

206,749,248

The number of eggs recalled by Rose Acre Farms, the second-largest U.S. producer of eggs, due to fears that they may be contaminated with salmonella, according to a notice by the Food and Drug Administration. The eggs, which already sickened 22 people, and which were sold under more than six different brands, illustrate how the extreme consolidation of food production can accelerate the harm and geographic scope of public health outbreaks.

? WHAT WE’RE WATCHING:

  • On The Docket: On April 24, the Supreme Court will hear Animal Science v. Hebei Welcome, a case that arose when U.S. corporations alleged that the Chinese corporations from which they had bought Vitamin C fixed prices, thereby violating U.S. antitrust laws. At issue is whether U.S. courts should defer to the interpretation of laws by foreign government agencies—in this instance, the claim of the Chinese Ministry of Commerce that the Vitamin C producers were not exhibiting cartel-like behavior. If ruled in favor of the defendants, the decision would suggest that U.S. courts defer to foreign government interpretation of their domestic law, even when doing so would undermine U.S. law and policy.
  • Century Note: Last week European Union antitrust enforcers raided the London offices of 21st Century Fox, alleging that the media giant “violated EU antitrust rules that prohibit cartels and restrictive business practices.” Will this action affect the outcome of the proposed £11.7 billion takeover bid of Sky News by 21st Century Fox?
  • Cutting Class: The Department of Justice opened an investigation into whether the sharing of information about early-decision applicants by admissions counselors at competing colleges violates antitrust law. While there exists a long history of cartel-like behavior among universities, this inquiry suggests a new dynamic: whether higher education institutions accept or reject students based on the admissions decisions of other colleges.

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