Elizabeth Warren has announced her plan to break up Facebook, Google and Amazon. Plus any other tech companies that grow to such sizes. The idea has its faults – it’s unnecessary and silly and is just someone looking for something to do rather than solving an actual problem – but, to the amazement of all, it’s not entirely stupid. She’s managed to get some of the background economics here right even if the overall idea lacks any useful justification.
What she’s actually suggesting is something that we did very successfully in the electricity market. Sure, there’s the network part which is if not a monopoly certainly tends to concentrate economic power. Then there’s the market itself which operates over that network. As long as we make sure that those who own the network aren’t operating over it then we should be able to manage that concentration of economic power.
For example, we’ve the grid itself. OK, that’s naturally going to trend towards monopoly. But there’s no reason why electricity generation should so trend. Nor why selling to consumers over that network should. So, all we’ve got to do to create a nice competitive market – well, as good a one as we can given that trend toward monopoly in the network – is make sure that no one partaking of that market power gets to generate or sell the electricity. They can distribute over their monopoly, or they can generate or sell, but they can’t do all three.
Which is roughly enough what Warren is proposing – not entirely stupid:
Democratic presidential candidate Sen. Elizabeth Warren has proposed breaking up the big tech giants, including Amazon, Facebook and Google, a move she says will help the “next generation of great American tech companies … flourish.” “I want a government that makes sure everybody — even the biggest and most powerful companies in America — plays by the rules,” Warren wrote in a blog post. “And I want to make sure that the next generation of great American tech companies can flourish. To do that, we need to stop this generation of big tech companies from throwing around their political power to shape the rules in their favor and throwing around their economic power to snuff out or buy up every potential competitor.”
We can see there what she really means. It’s that political power thing. How dare a couple of genii from a garage in California – or any such who have created massive value for consumers and thereby become wealthy – have the sort of political power that a not very good lawyer does have by conning voters? But, but, my power grab is sanctified by election, theirs is just through competence and that will never do.
Her newest proposal falls right in line with that idea. In Friday’s post, Warren breaks her proposal down into “two major steps.” The first would be passing legislation that designates tech platforms with annual revenues surpassing $25 billion as utilities that “would be prohibited from owning both the platform utility and any participants on that platform.” “Amazon Marketplace, Google’s ad exchange, and Google Search would be platform utilities under this law,” she writes. “Therefore, Amazon Marketplace and Basics, and Google’s ad exchange and businesses on the exchange would be split apart. Google Search would have to be spun off as well.”
If she’s identified the problem correctly then that is a reasonable solution. That’s what I mean by her proposal not being entirely stupid. That she’s not identified the problem correctly makes it a bad proposal but that is different from the normal political problem of complete imbecility.
Weak antitrust enforcement has led to a dramatic reduction in competition and innovation in the tech sector. Venture capitalists are now hesitant to fund new startups to compete with these big tech companies because it’s so easy for the big companies to either snap up growing competitors or drive them out of business. The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.
That, however, is insane. Think of what she’s insisting upon there. The big tech companies buy up promising start ups. OK, great, and at times they do so. Which gives what incentive to VC funders? To fund start ups so that they then get bought up by the tech giants. In fact, there’s an entire little ecosystem that operates on just these incentives. A bright idea, a few seasoned people, instead of taking it to the boss to get funded internally they raise some cash and set up in the garage. 6 months later, when it looks like the idea works, they get bought out and they’re back in the big companies again. A few tens of millions richer, a level of management higher up and the VCs have a nice threefer to bank.
Which is why this specific complaint is insane. If big tech buys up start ups then that’s an incentive to invest in start ups. Not a dissuasion from doing so.
But then this is Liz Warren meeting economics so we know it’s going to stink in at least part.
The problem with the overall analysis though is that there’s no evidence of this restriction of innovation because of the control Big Tech has. Since there isn’t any evidence of consumer harm there’s no reason to take any action. Let’s go off and solve an actual problem instead, eh?