THE FTC MUST FIX FACEBOOK
The recent revelations about the corporation’s inability to keep personal data safe, or to protect Americans from Russian interference in our democracy, means the time has come for antitrust law enforcers to step in.
This morning Open Markets called on the Federal Trade Commission to move immediately to address America’s Facebook problem. We also listed nine actions the FTC will take if it is serious about protecting our democracy and ensuring that our nation’s news and communications systems truly serve the American people.
GOOGLE’S NEW SHOPPING PROGRAM LIKELY TO CONCENTRATE YET MORE POWER IN GOOGLE
While much attention is focused on Facebook’s latest privacy scandal this week, another tech platform made a less noticed bid for more power.
Google announced a new feature on Monday that it says will make shopping on the giant platform more convenient. Regardless of whether they are using their phones, laptops, voice search, or other means, consumers will be able to place anything they buy into one universal Google shopping cart. The program, known as Shopping Actions, will charge retailers a cut of their sales on Google in exchange for favorable placement across several of Google’s platforms.
The program has been widely covered in the media as a new tool to help retailers challenge Amazon’s growing power. But of course that isn’t the only, or perhaps even real reason, for Google’s latest venture. The company is offering the new program because it provides a different way to extract revenue from retailers who are actually making the sale.
The program will add to Google’s already awesome power by increasing its ability to track— and profit from—other people’s business. Shopping Actions will likely steer yet more business to a few large retailers, increasing concentration in an already heavily concentrated retail industry. Target, Walmart, and Home Depot are among the retailers who have already joined.
“The biggest players … will be able to buy their way to the top of the platform,” says Stacy Mitchell, co-director of the Institute for Local Self-Reliance. Those firms can “marry their own market power with that of Google’s to funnel more and more of the nation’s commerce to a handful of cash registers.”
Because retailers often work within thin profit margins, smaller businesses will likely struggle to pay the toll for Google’s new shopping highway, leaving them at a disadvantage relative to the Targets, Walmarts, and Home Depots of the world. “It quite likely represents the further centralization of consumer spending into a handful of companies,” Mitchell says.
Gary Reback, an antitrust lawyer who has represented companies filing complaints against Google, says Shopping Actions could mean higher prices for consumers. “Since Google gets a cut,” he says, “ it’s going to have some effect on prices,” as businesses seek to make up for the bite that Google takes out of their sales.
Much the same thing happened the last time Google pushed hard into online shopping. In 2012, the company started charging merchants to feature their products within Google Shopping. But as California-based non-profit Consumer Watchdog found, prices for products inside Google Shopping were between 9% and 67% percent more expensive than the lowest-priced products found in Google’s regular search results. “Prices went up,” says Reback, “they had to.”
Retailers may view this new system as a smart way to check Amazon’s power. But all retailers, big and small, may ultimately come to regret Google’s new push into online shopping. Not only must they now cut Google into the sale, they are ceding control over their data and their brands to a second super-sized gatekeeper that has no intention of ever getting out of the way.
“It’s not a competitive situation for consumers,” says Mitchell. “But it’s definitely not a competitive situation for all the retailers that rely on those platforms.”
🔊 ANTI-MONOPOLY RISING
- Sen. Amy Klobuchar (D-MN), responding to news that the political advertising firm Cambridge Analytica illegally accessed the private information of 50 million Facebook profiles, tweeted that “platforms can’t police themselves” and that “Mark Zuckerberg needs to testify before [the] Senate Judiciary [Committee.] Sen. John Kennedy (R-LA) echoed her demand, calling for a hearing on the “unprecedented amounts of personal data” amassed by tech platforms.
- Tim Berners-Lee, who is often credited with inventing the internet, wrote last week in a blog post that the “once rich selection of blogs and websites has been compressed under the powerful weight of a few dominant platforms. This concentration of power creates a new set of gatekeepers, allowing a handful of platforms to control which ideas and opinions are seen and shared.”
- Rep. Rick Crawford (R-AR) sent a letter to federal antitrust enforcers in early March expressing his “grave concern” about the proposed merger between insurance company Aetna and pharmacy corporation CVS. “Vertical integration does not encourage competition or lower prices,” he wrote. Rather, it “could limit the choices and access for patients, driving out competitors while driving up prices and reimbursements for themselves.”
- Autorité de la Concurrence, France’s competition authority, announced in early March it may open a probe “in the next few months” into the online ad dominance of Google and Facebook, after an in-depth study concluded that the market power of the pair has created a “fragile” equilibrium in the French online advertising market.
BEYOND THE DOJ AND FTC: CFIUS AND THE MANY OTHER FACES OF ANTI-MONOPOLY POWER
Last week, the Trump Administration blocked Singapore-based chip-maker Broadcom’s proposed $117 billion bid for U.S.-based semiconductor producer Qualcomm. The surprise? Neither the Federal Trade Commission (FTC) nor the Department of Justice’s (DOJ) Antitrust Division, the agencies usually responsible for policing merger activity, stopped the deal.
Rather, it was the Committee for Foreign Investment in the United States (CFIUS), an inter-agency committee created in 1975 by President Gerald Ford. The agency, which has become much more active in recent years, is chaired by the United States Secretary of the Treasury and evaluates acquisitions of American companies by foreign-owned corporations. When CFIUS releases its assessments, the President can then choose to suspend or prohibit deals, under the Defense Production Act.
In its most recent guidance, CFIUS emphasized that the acquisition of Qualcomm would cede control of the semiconductor industry to China and hinder U.S. development of 5G technology. President Trump then released a presidential order blocking the deal, on the grounds that the combination “might take action that threatens to impair the national security of the United States.”
In recent decades, Americans have tended to view enforcement of anti-monopoly law as entirely a function of the DOJ and FTC. In fact, the power to take actions to head off concentration and promote competition is distributed widely across government. The Federal Reserve, Department of Agriculture, Department of Defense, Federal Energy Regulatory Commission, Food and Drug Administration, and many other agencies of government can more or less directly block mergers or clear the way for the entry of new competitors.
Even in an era of minimal enforcement by the primary U.S. competition watchdogs, many of these other agencies have provided an important check on monopoly power.
A good example came after the drug-maker Pfizer proposed selling itself to Ireland-based Allergan in 2016. The deal would have allowed Pfizer to shift its headquarters to Ireland and thereby avoid paying more than $1 billion in taxes to the U.S. government. But in April of that year Treasury Secretary Jack Lew blocked the merger by changing a relatively minor bookkeeping rule. Lew’s action also effectively headed off a series of similar “inversion” deals designed to use mergers to move U.S. headquarters off shore.
Or consider the move by the Securities and Exchange Commission last February to block the sale of the Chicago Stock Exchange to an investment group whose lead investor included the Chinese-based Chongqing Casin Enterprise Group. The SEC, which has oversight over U.S. stock exchanges, rejected the deal on the grounds that the it would fail to protect “the U.S.’s interests…not only in line with the intent of the [Securities] Exchange Act, but also with the U.S.’s broader national security interests.”
In the case of CFIUS, other anti-monopoly actions in recent years include a 2012 decision to force Chinese-based Ralls Corporation to divest itself of an Oregon wind farm project; a 2016 decision to block acquisition of Aixtron, a German-based semiconductor firm with U.S. assets, by Chinese Fujian Grand Chip Investment Fund; and a 2017 decision to stop Chinese investment firm Canyon Bridge Capital Partners from pursuing a $1.3 billion acquisition of U.S.-based chip-maker Lattice Semiconductor.
Since the termination of the Broadcom-Qualcomm deal, the Singapore-based chip-maker is reported to be pursuing other mergers, including those of U.S. semiconductor corporations Xilinx and Analog Devices Inc. So CFIUS staff may find themselves busy in the coming months. But the real question is whether the DOJ and FTC will do their jobs in relation to the concentration that still exists in the semiconductor realm.
In the last two years, both Broadcom and Qualcomm have driven consolidation of the semiconductor industry with a series of acquisitions. In 2016, for instance, Broadcom was allowed to merge with network switch manufacturer Brocade Communications Systems in a $5.9 billion deal. Similarly, Qualcomm is expected to acquire chip-maker NXP Semiconductors for $47 billion.
Further, in recent years Qualcomm repeatedly has been found guilty of anti-competitive actions. Taiwanese enforcers in October 2017 fined the chip-maker $773 million for licensing its patents in an unfair manner. Then in January, European antitrust officials hit the corporation with a $1.2 billion fine, saying that the chip-maker used its market power to drive out competitors.
The White House stopped a bad situation from getting worse. Will U.S. competition authorities now move to restore real competition in this vital industry?
📝 WHAT WE’VE BEEN UP TO:
- Lina Khan published “The New Brandeis Movement: America’s Anti-Monopoly Debate,” which identifies key tenets of the new anti-monopoly movement, in the Journal of European Competition Law & Practice.
- Barry Lynn and Open Markets Board Member Zephyr Teachout spoke about the effects of concentrated economic power at “Restoring our Democracy: The Impact of Corporate Concentration,” a panel organized by the Congressional Antitrust Caucus.
- Lina Khan participated in the first session of the Roundtable Series on Competition and Deregulation about antitrust law immunities and exceptions, hosted by the Department of Justice’s Antitrust Division. Additionally, she spoke about the tech giants at “New Tech, New Rules? Addressing Antitrust and Competition in the Digital Economy” at SXSW in Austin, TX.
- Barry Lynn was cited as a “long-time champion of greater economic competition” in a Fast Company piece exploring the movement to rethink antitrust in light of increased market concentration.
- Matt Stoller was quoted in an article in The Hill about the national security risks of the Pentagon awarding Amazon a sole-source cloud computing contract.
📷 WHAT’S MISSING FROM THE PICTURE?
China’s Trading Monopolies—The Journalist Who Said There was Nothing to Fear is Now Fearful
In a recent New York Times column, Thomas Friedman writes that America has a “real problem with China.” That nation “hasn’t been playing fair” when it comes to international trade. The time has come to impose tariffs, he believes, to protect American jobs and innovative U.S. manufacturers such as Tesla and Apple.
In every instance, Friedman is correct. And his tone—sober, reasonable, constructive—fits the nature of the challenge. But Friedman also overlooks a few key facts that help to explain how China was able to concentrate so much power over American commerce.
Most egregiously, he ignores his own role in selling the policies that resulted in this trade “shock” (his word) that so disrupted the U.S. economy. Over the last 20 years no other writer defended the laissez-faire trading system established in 1995 with the World Trade Organization with more energy and creativity than Friedman. Nor has any other writer had more influence, both over the public and over policymakers.
In such super-selling books as The World is Flat (2005) and The Lexus and the Olive Tree (1999), Friedman’s basic message was that all state power in the world had, somewhat magically, evaporated. It was time for Americans to wake up to the fact that we now lived in a “global” utopia. All peoples of the world, he wrote, had become so economically interdependent there would never be a major war again, and we’d all live happily as free agents in a society without borders or conflict.
Not that we could get lazy. In Friedman’s vision of the new global world, Americans faced all sorts of competition, mainly from people far away who aimed to take our jobs. But rather than use the state to protect the nation and the citizens within it (such as through tariffs), Friedman said the only option now was for every one to study really hard in school. Or as he put it in The World is Flat:
When I was growing up, my parents told me, ‘Finish your dinner. People in China and India are starving.’ I tell my daughters, ‘Finish your homework. People in India and China are starving for your job.
In addition to his own culpability, Friedman overlooks at least two key facts that would have helped readers better understand the challenges we face today, thanks to the Clinton Administration’s dismantling in 1994 of America’s traditional trade policy, with its strong anti-monopoly focus:
China’s Monopsony Power over America
Thanks largely to the libertarian trade philosophy championed by Friedman, the United States now depends on China for innumerable basic goods, ranging from vital electronics to basic ingredients in our food and drug systems. A growing number of U.S. firms depend on China for day-to-day profits. As our team has demonstrated in detail, these dependencies give the government of China the ability to wield real power over America and/or over individual corporations, whenever they wish.
The Instability of the International System
The retreat of the U.S. state from active oversight of the structure of international trade after 1995 left both domestic and foreign monopolists—such as the Politburo in Beijing—free to concentrate industrial capacities as they wished. One byproduct of such hyper concentration? A radical increase in the likelihood of a catastrophic industrial crash, in the event of any conflict or disaster that might break the supply of a keystone component. Open Markets has written about this risk in depth.
Friedman is right when he attacks President Trump for lacking a strategy. But Friedman is dangerously wrong when he says the answer is to dig up such flawed Obama-era ideas as the Trans-Pacific Partnership trade agreement. The Obama Administration, under the influence of Friedman’s own writings, never understood the real dangers, as we wrote in this Foreign Policy piece. Which means they never had any idea what they needed to fix.
📚 WHAT WE’RE READING:
- “Louis Brandeis: A Man for this Season” (Colorado Technology Law Journal, Jonathan Sallet): An essay that distills key anti-monopoly principles from the writing and judicial opinions of former Supreme Court Justice Louis Brandeis.
- “All the People, All the Places” (Wallace Global Report, Ben Goldfarb): A nuanced report that tracks how the political and economic dispossession of rural America has weakened civic engagement in small towns.
- “Google’s Academic Influence in Europe” (Google Transparency Project): A report that finds Google has spent millions of euros funding European academics, university institutes, and think tanks in London, Berlin, Brussels, Paris, and Warsaw.
📈 VITAL STAT:
The percentage of search ad budgets spent on Google Shopping ads by American retailers, according to a report by advertising analytics company Adthena. The report, which analyzed 40 million ads from 267,000 advertisers in the U.S. and U.K. between January and February 2018, underscores the highly consolidated nature of the digital advertising industry.
👀 WHAT WE’RE WATCHING:
- Jailbroken: Sen. Tammy Duckworth (D-IL) led a bipartisan group of Senators last week in introducing a bill to address “usurious” prison phone call fees, which can run as high as $17 for a 15-minute local phone call. A duopoly of jail phone service providers requires state and county prison systems to pay kickback fees, which dramatically inflates the price of jail phone calls. (By way of background: The FCC under the Obama administration had issued rules capping the rates that telecom firms could charge for in-state calls. But the telecom industry filed suit against the rules, and a federal court sided with them. The FCC under the Trump administration said they would not defend the rules.)
- Of Service: Financial market indices provider S&P Dow Jones and research-based index provider MSCI in September 2018 will re-classifycompanies on the Global Industry Classification Standard, an influential industry taxonomy used by stock exchanges and financial professionals. Of note is that corporations currently listed under the ‘information technology’ sector—like Google, Facebook, and Twitter—will now move to the ‘communication services’ sector. Will the change inspire government officials to more closely scrutinize how the companies “facilitate communication and offer related content and information”?
- Check Up: The Federal Trade Commission sent a letter last week requesting more information from dialysis provider DaVita Medical Group on its $4.9 billion vertical merger with pharmacy benefit manager Optum, a subsidiary of insurer UnitedHealth Group. We’re tracking how the outcome of AT&T’s combination with Time Warner, which could set a new precedent for vertical mergers, would affect clearance of this deal.
🔎 TIPS? COMMENTS? SUGGESTIONS?
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