April 4, 2022

Giant internet platforms are failing us – we need fair market rules

Sumit Sharma

Sumit Sharma leads CR’s work on Tech Competition. He is an economist with experience across regulatory, finance, and competition issues in the technology and telecoms sector. He has advised both governments and companies on strategy, policy design, competition, antitrust, and investment matters.

The pursuit of profits might work as an organizing principle for an individual corporation, but it cannot be the basis to set market rules

Over the past two years, the pandemic and other significant events have revealed how misinformation online can have dire consequences. They are a reminder of how key markets – including the markets for news and information – are failing us. 

Fundamentally this is because market rules need to be fair and give everyone and all ideas an equal opportunity to flourish, and this is not the case today. Right now, the rules of the road are mostly set by a handful of large online platforms driven by profits.

In this marketplace extreme views are promoted with the help of hidden algorithms to maximize user engagement and boost revenues from targeted ads based on someone’s personal data. The largest online platforms also set terms and conditions to disadvantage competitors and entrench their dominance in the digital marketplace. 

It is urgent that we individually rethink our relationship with these technologies that are transforming our society. As Jaron Lanier explains in his book, Ten Arguments for Deleting Your Social Media Accounts Right Now, the problem is not the many conveniences and technological progress that the internet has enabled. The problem lies with the business models of the few corporations that dominate online activities today.

There is no doubt that Apple, Amazon, Google, Facebook, and Microsoft have introduced technologies that have had a positive impact on our daily lives. But the persistent and continued dominance of these corporations is due to their control of their networks, the millions of users they’ve built up, and the ability to set market rules, not necessarily due to innovations and product improvements. 

Network effects are an inherent characteristic of online platforms. The value of an online platform increases with the number of connections it enables. For example, the more users Facebook has, the more attractive it is for other users to join and for businesses to advertise to these users. But without interoperability — the  ability to connect with users of a different service — a consumer who stops using Facebook and switches to an alternative service will lose her Facebook connections, unless all her connections simultaneously switch to the alternative service.

This lack of interoperability is not an inherent market feature but one example of a market rule imposed to maintain dominance. In contrast, users of different email and wireless service providers can easily contact each other. 

The market dominance of the largest platforms is also unproductive. For example, Meta (which owns Facebook, Instagram, Messenger, and WhatsApp) and Alphabet (which owns Google search and YouTube) dominate digital advertising. The result is a less diverse online ecosystem in which personally targeted advertising business models dominate and alternatives like WhatsApp’s privacy-first 99-cents-a-year subscription service model disappear. Similarly, Apple and Google operate the software on virtually all smartphones and use this control to set constraining rules for commerce and innovation on smartphones and related products like smartwatches, smart speakers, and voice assistants.

These market failures are well documented in the 16-month digital markets investigation by the U.S. House Antitrust Subcommittee as well as investigations around the world such as those by the UK’s CMA, the European Commission, Germany’s BNetzA, and Australia’s ACCC.

Many consumers have an intuitive understanding that they are not in the driver’s seat. This is because we lack meaningful choices as the largest online platform services are must-haves. Users are locked into closed systems, making it difficult for new and improved business models to challenge existing ones. And without the ability to switch to competing services, consumers lose the key lever to discipline corporations to ensure that markets function to serve them, not exploit them. This is reflected in a recent survey by Ipsos which found that over 70% of Republicans and Democrats would support market rules to enable more competition and 65% would support breaking up large monopolistic technology companies.

Congress is taking note, and considering setting fair market rules for the largest online platforms. And even in our divided society, there is bipartisan support for these proposals. The American Innovation and Choice Online Act and the Open App Markets Act both passed the Senate Judiciary Committee with overwhelming bipartisan support and similar proposals are being considered in the House.   

These bills propose rules that prohibit discriminatory conduct by the largest online platforms that materially harm competition. It is the ability of the largest platforms to discriminate and pick winners and losers that constrains innovation from competing suppliers.

The new rules would mean consumers can more easily choose, install, and use alternative apps and online services; mix and match services from different providers; and break out of closed product ecosystems. The bills will also restrict the largest online platforms’ ability to use confidential third-party business data to compete in the retail market, and allow permissionless technology innovation by all, not just the largest platforms.

This increased competition will bring many benefits like improved privacy and security and better flow of information and news via a greater choice of products and services delivered using different business models.

Congress should advance both bipartisan bills so that we can start moving away from a market equilibrium where a handful of the giant tech companies can shape markets to their own benefit and become the arbiters of what is allowed and not allowed in our ever more connected world.

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