newsletters

The Corner Newsletter, Feb. 8, 2018: Hidden Voting Machine Oligopoly, G & FB Advertising, Decline of Local News

In this issue of The Corner, we highlight concentration in the voting machine industry, look at how Facebook and Google have monopolized advertising, and, in the process, threatened local journalism.

February 8, 2018  |  by Open Markets

DOES A VOTING MACHINE OLIGOPOLY OPEN THE DOOR TO MASS HACKING?

Lots of people are worried about the security of our voting machines in the upcoming 2018 congressional election—and with good reason. According to the Department of Homeland Security, Russians attempted to hack election systems in 21 states in 2016.

Yet one of the biggest threats to the integrity of our electoral system has been widely overlooked: the concentration of the voting machine industry into the hands of three corporations. Fewer and bigger electronic voting systems, which are used in all fifty states and many democracies around the world, make it easier for hackers to disrupt more votes. They also simultaneously reduce the competitive pressure on these corporations to invest in hardening their systems.

Since 2002, mergers have cut the number of players from eight to three. The remaining firms—Election Systems & Software (ES&S), Dominion Voting Systems, and Hart Intercivic—control roughly 92% of voting machines across the United States, according to a report from the Penn Wharton Public Policy Initiative.

This concentrated market structure threatens the integrity of our elections in three ways. First, the companies can exert their market power to lock-in clients. As the financial research firm PrivCo has written, the company with the largest market share, ES&S, is “economically incentivized to offer closed-system solutions.” This arrangement makes it difficult for county or state officials to switch to the newer or more secure system of a rival, especially after a breach.

Second, the industry’s high degree of concentration reduces investment in making voting machines more secure. The three incumbent companies can easily cooperate in carving up the existing market. And little outside competition, according to the authors of the report, means “limited incentives for innovation.” Indeed, a 2017 economics paper published by New York University Professors Germán Gutiérrez and Thomas Philippon validates this point, noting, “industries with less competition and more concentration (traditional or due to common ownership) invest less.”

As the 2018 congressional elections approach, election officials, vendors, and advocates are looking to address this issue. One idea comes from a growing chorus of politicians calling for greater enforcement of antitrust laws. If applied to the voting machine industry, that would begin to solve the problem and help de-concentrate the voting machine industry.

Another comes from Greg Miller of Open Source Election Technology (OSET). OSET is working with the National Institute of Standards and Technology and the Election Assistance Commission to create standards for electoral machinery, build open-source software, and help states certify secure equipment. The hope is that improved standards would reduce lock-in effects used by companies like ES&S and create a more competitive voting machine market.

Unfortunately, neither of these fixes will solve the problem quickly. State and county officials often enter into ten-year contracts with election vendors, and many of those existing contracts run through the 2020 election.

 

📷 WHAT’S MISSING FROM THE PICTURE?

The New York Times Reports that The Problem with Online Advertising is…Online Advertising.

In a recent column, New York Times tech writer Farhad Manjoo identified what he called the “central villain” of the internet. It’s bigger than Facebook or Google or any particular company. As he put it, “it’s the advertising business, stupid.”

While online advertising has financed powerful tools and content, Manjoo argues, selling attention using targeted data has allowed for Russian interference, extremist content, addiction, and other social problems.

What’s missing from Manjoo’s column? A simple question: How did the advertising business come to be this way? So too, the answer to that question: Google and Facebook exploited their monopoly position over the flow of information and news in American society, and their duopoly control over key online advertising technologies, to make the advertising business precisely the way it now is.

The Google-Facebook roll-up of online advertising in America has been so successful that today there really no longer is any “advertising business” of note other than what the two corporations already control. Together, they capture 84 percent of all digital advertising globally, excepting China. And conversely, there really is no Google or Facebook without their control of America’s advertising.

Indeed, 87 percent of Google’s revenue comes from advertising and 98 percent of Facebook’s, according to Wired. Or as the latest annual report for Alphabet, Google’s holding company, clearly states, “We generate revenues primarily by delivering advertising on Google properties and Google Network Members’ properties.”

“There’s no ad industry separate from the platforms,” says Josh Marshall, publisher of Talking Points Memo and a client and critic of Google. “They are the ad industry. Most of the other players just plug into them.”

The history of how Google and Facebook captured almost complete control over online advertising is not hard to find.

Take Google, for instance. In 2007, the corporation paid $3.1 billion in cash for control of DoubleClick, an online exchange for placing digital ads. Then, in 2009, Google bought AdMob for $750 million, which extended its tech dominance into the realm of mobile apps.

With this move, Google went from selling banner ads on its search engine to controlling the technologies that content providers like The Wall Street Journal and the New York Times need to compete for the business of advertisers. The corporation also captured the technologies that the advertisers themselves need to get their ideas in front of the buyer.

Stage two in rolling up control over America’s advertising business was to exploit the essential role that Google and Facebook had captured in connecting readers to reporters and publishers. Today, it is almost impossible for news organizations to put their articles and photos in front of readers and viewers without riding the rails that Facebook and Google control. At the most popular news websites, some 30 percent of the total audience comes from people clicking a link on Google. About 45 percent of all Americans say they get their news primarily through Facebook.

This concentration of control over the flow of news and advertising has resulted in innumerable harms to America’s news media, but two especially stand out.

One is that it has made it easier to hack the entire system, all at once. As Sandy Parakilas, a former Facebook privacy manager, told Open Markets in an interview, “If the digital advertising business looked more like the print business did years ago, with many smaller players able to compete, we would not be in this position today with respect to disinformation and other kinds of harm.”

Second is the slow motion starvation of the publishers of trustworthy news. Or as Will Lewis, publisher of Dow Jones, put it, Google and Facebook are “killing news,” he said. “The digital advertising revenue that we (news organizations) had all been forecasting has been [stolen] by Facebook and Google. They have taken the money to advertise around our content. It’s wrong and it has to stop.”

Perhaps next time Manjoo wants to look at what’s wrong with the online advertising business, he should call his friendly rivals at The Wall Street Journal.

 

🔊 ANTI-MONOPOLY RISING:

  • George Soros called the tech giants a “menace” in a speech at the World Economic Forum in Davos last month, adding, “it is only a matter of time before the global dominance of the US IT monopolies is broken.”
  • In a lecture at George Washington University this week, Department of Justice Antitrust Chief Makan Delrahim said the 2001 U.S. antitrust lawsuit against Microsoft was an instance of “proper antitrust enforcement” that spurred innovation in the marketplace. “Do you think the operating system on your phone and the app store would exist had the Microsoft case not been brought by the Justice Department?” he asked. “I don’t think so.”
  • Sen. Mark Warner (D-VA), while questioning if YouTube’s algorithm makes it easier to manipulate elections by foreign actors, also called out big tech. “The [tech] platform companies,” he said, “have enormous influence over the news we see and the shape of our political discourse, and they have an obligation to act responsibly in wielding that power.”

 

HOW FACEBOOK & GOOGLE HELPED DRIVE A WEST VIRGINIA PAPER TO BANKRUPTCY

After a 100+ year history that included winning a Pulitzer Prize in 2017, the Charleston Gazette-Mail declared bankruptcy last week, leaving the state capital of West Virginia without a locally owned newspaper.

To be sure, the paper faced many challenges, including West Virginia’s shrinking population and contracting coal industry. But like failing local newspapers around the country, one clear cause of the Gazette-Mail’s decline was the loss of online ad revenue to Google and Facebook.

We’ve already seen above how Google and Facebook absorbed the world’s advertising industry. Trip Shumate, President and Chief Financial Officer of the Gazette-Mail, can help us understand how this plays out at the local level.

First off, readers get to read all the local news they want “at no cost,” he said, in a phone interview. Then, Google and Facebook walk off with all “those dollars of local advertisers,” Shumate says. Car dealers, for instance, used to be a basic part of the paper’s advertising business. But now almost all that advertising has “shifted toward micro-targeting,” which means to Google and Facebook—and their immense caches of data about each reader.

The Gazette-Mail’s advertising revenues tell this story as well as anything. In 2000, the paper brought in around $30 million of advertising revenue, Shumate says. “Now it’s closer to 10 million a year,” and that is not accounting for inflation.

The Gazette-Mail is not alone. Publications as varied as Alaska’s largest paper—the Alaska Dispatch News and the Boston Herald, a 170-year old tabloid—have declared bankruptcy in the last year. And the most successful digital publishers—Vice and BuzzFeed—are facing similar problems.

These troubles can be traced in large part to the online ad market, monopolized by Google and Facebook. Making this market more competitive—perhaps by making it less concentrated, or by barring Google and Facebook from amassing so much data—would create a more equal playing field for newspapers and other online businesses.

While the tech giants have replaced much of newspaper advertising with their own products, they have not replaced the essential journalism that such advertising once sustained. Unlike Google and Facebook’s granular micro-targeting, “our product was targeted to seeing success in the entire community, and informing the entire community,” Shumate says.

 

📝 WHAT WE’VE BEEN UP TO:

  • Barry Lynn and Lina Khan presented at the 2018 Computers, Privacy, & Data Protection Conference in Brussels, as panelists at “Freedom & Democracy and the Threat of Global Tech Monopolies.” The two explained how the emphasis on short-term consumer welfare effects by antitrust enforcers is being exploited by tech platforms to conceal their market power.
  • Kevin Carty published a piece in the New York Post focusing on how big tech’s monopolistic reach hides in plain sight.
  • Tristan Harris, an Open Markets advisory board member, was featured in an article in the New York Times about his plans to launch an anti-tech-addiction advocacy effort through his newly created Center for Humane Technology.

 

📚 WHAT WE’RE READING:

  • “Why Is Pay Lagging? Maybe Too Many Mergers in the Heartland.” (New York Times, Noam Scheiber & Ben Casselman): A closely reported analysis of how market concentration reduces competition for workers and holds down wages—especially outside big cities.
  • “Don’t Look, But a Couple of Mega-Companies Are About to Take Over Your Food Supply,” (Mother Jones, Tom Philpott): How the rumored merger of two big, but largely unknown agribusiness corporations—Archer Daniels Midland and Bunge—would create the largest grain merchandiser and processor in both North and South America.
  • “What Amazon Does to Poor Cities” (The Atlantic, Alana Semuels): An in-depth look at how Amazon’s rapid expansion of warehouses is, for the worse, re-shaping America’s poor cities.
    • Pair with: A report released by the Economic Policy Institute, which finds that Amazon fulfillment centers do not generate broad-based employment growth.
  • “Where Are the Start-Ups? Loss of Dynamism Is Impeding Growth (New York Times): Columnist Eduardo Porter posits that “the decline of competition” and “the concentration of market power” is to blame for the U.S.’s growing economic stagnation.

 

📈 VITAL STAT:

18.8%

The percentage increase in the average retail price of eyeglass lenses between 2011 to 2015, according to data obtained by Open Markets from the Vision Council, a U.S. optical industry trade association.

The increase in price from $128.15 to $152.26 likely traces to increased consolidation in the eyewear industry. That trend is driven by a flurry of acquisitions from the largest global lens-maker, Essilor, which itself is looking to combine with the largest global frame-maker, Luxottica, in a $49 billion deal.

 

👀 WHAT WE’RE WATCHING:

  • ​Spilt Milk: Brazilian antitrust agency, the Administrative Council for Economic Defense (CADE), approved the merger of dairy giant Itambé Alimentos SA and France’s Groupe Lactalis SA last week. This deal is part of a growing trend of consolidation in the global dairy industry, whose top 5 players now capture 17% of the market, up from 11% in 2009, according to business intelligence company Euromonitor. We’re watching how this deal affects dairy farmers, transporters, and processors.
  • No More No-Poach: The Department of Justice’s Antitrust Division will announce criminal enforcement actions against companies that have “no-poach” agreements. These agreements arise when a group of firms within a single industry pledge not to hire or recruit each other’s workers.
    • In the past: No-poach agreements had been analyzed under a rule of reason standard. This meant that the anti-competitive effects of these agreements were balanced against their potential pro-competitive outcomes.
    • New guidance: According to guidance issued by the DOJ in October 2016, hereon no-poach agreements will be treated as per se offenses, a bright-line infraction.
    • What does this signal? That it could become much easier for private parties and the government to prosecute no-poach agreements. The Antitrust Division’s position is that these agreements constitute impermissible restraints of trade, full stop.
  •  NAFTA vs. Amazon? Last week, Mexico’s Antitrust Agency, the Federal Commission for Economic Competition (COFECE), said it was investigating “probable” anticompetitive actions by Internet companies like Amazon in Mexico’s e-commerce market. That action is the second instance of a NAFTA country more closely scrutinizing e-commerce giants. Early last year, Canada’s Competition Bureau fined Amazon for misleading price claims on its website. We’re wondering if U.S. competition policy enforcers will be the next (and last) country to file an antitrust complaint.

 

🔎 TIPS? COMMENTS? SUGGESTIONS?

We would love to hear from you—just reply to this e-mail and drop us a line. Give us your feedback, alert us to competition policy news, or let us know your favorite story from this issue.

Join the Movement


In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

Stay updated


Sign up to stay informed.