Market Trends

Should we break up Big Tech?

The five Big Tech companies (Apple, Microsoft, Alphabet, Amazon, and Facebook) are one of capitalism’s modern day success stories, growing to account for 17.5% of the S&P 500 in the space of a few decades. We have long praised the innovation they have brought, but now they face a growing movement that seeks to break them up to increase contestability. To tackle these issues, and dissatisfaction, we must consider a radical update of antitrust laws to make them fit for the 21st century.

Changing attitudes towards the industry

A unique aspect of the tech industry is that, due to its rapid growth and expansion, regulators have been playing constant catch-up to tailor antitrust laws to protect the consumer. The first major landmark case that illustrated this was most likely the “United States v. Microsoft Corp.” resolved in 2001, where Microsoft was accused of creating an unfair monopoly around the firm-created Internet Explorer using its operating system, which subsequently threatened the contestability of this emerging sector and possible future innovations. Though the government won after a lengthy battle, it was not a popular outcome by any means, with many viewing it as the suppression of Gates’s genius.

Since then, the government has been slow to catch up, with Bush leaning more towards non-interventionist policies and subsidies for growth, rather than any specialty body for regulation. Even Obama took a very tech-friendly approach: he did not explicitly call for regulation and condemned the heavy approach China took, though he now wants firms to “have a conversation about their business model”. The issue of whether we should break up big tech has gained the most traction in the most recent Democrat nominee debates, with Elizabeth Warren being the main opposition to these companies, putting forward radical anti-trust policies. As we become more dependent on these companies, a process accelerated by the COVID-19 pandemic, the discussion and pressure will only grow until we reach a general consensus.

The benefits of Big Tech

Before looking at the potential harm that these firms could cause, it is important to understand how these firms have reached their size and recognise the benefits they have brought us. One key aspect of the industry is the presence of economies of scale, especially through network externalities, which means that to reach a high level of efficiency of service, a single platform is required. For example, the sheer volume of people on the Facebook platform makes it much simpler to navigate, and gives a higher quality experience than requiring the use of multiple services to connect with various friends. Additionally, many services offered come free of cost, such as using the Google search engine, suggesting consumers have little to lose price-wise, and that anyone with access to a smartphone and a network can access this sophisticated technology. This increases the standard of living for countless individuals, though this has radically changed the traditional services model analysed by regulators. On the supply-side, advertisers have also cashed in on these market efficiency gains, with the vast quantity of data collected from users allowing firms to get a deeper insight into consumer preferences, and target information more precisely to increase the accuracy of matching goods to consumers. I think it is safe to say that all of our lives have improved in some way because of these five companies.

So, why the break-up?

As tech has grown, it has become clear that the big companies are not afraid to play tough with competition and exploit regulators’ slow entry to the game. A notable example of this is the growing trend of predatory pricing, where firms use their monopoly, power, and size to undercut any emerging competition on prices until they are forced out of business, at which point they are often acquired. We could see this with Amazon and in 2009, where Amazon attempted to buy this new company, which scheduled recurring orders for essential baby supplies, but the start-up founders resisted. This led to Amazon lowering prices by 30% on certain products and offering free shipping through a sign-up service, all of which was estimated to lose Amazon $100m over three months. The start-up was in talks with Walmart, but Jeff Bezos, Amazon CEO, threatened to keep driving prices down. Amazon ultimately acquired in November 2010. This is by no means the only example, with Google now facing the largest antitrust case since Microsoft in the early 2000s, and Apple putting a 30% tax on app store developers which led Spotify to launch a lawsuit.

The high levels of vertical integration are another point of concern, as this can provide an unfair advantage in the marketplace and can subsequently slow down the pace of possible innovation. Amazon has used its proprietary marketplace to sell its own-branded goods copied from smaller companies and then has the ability to list its own products first. As Elizabeth Warren said: “You don’t get to be the umpire and have a team”. This power has arguably caused investors to be more sceptical of funding start-ups as the risk of being out-competed only grows, with possible acquisitions preventing the same high growth seen before. Though these big tech companies have had rather positive public relations for the free, high-quality services they provide, the sentiment is beginning to change as many begin to recognise that we are possibly being robbed of new innovations for the sake of profits for these corporations.

Looking ahead

Rather than completely breaking up big tech, as some have put forward, a less radical starting point could be to update our historical regulatory approach. Currently, antitrust lawsuits rely mostly upon the Sherman Act of 1890, which was tailored towards utility firms that produced physical goods, rather than the world of tech—with the relative lack of marginal cost. This has led to a narrow focus on high prices, which is not effective when investigating free services such as Google or Amazon, who are able to keep prices extremely low. One solution is to increase the regulatory scope to look at factors beyond this, such as the impact on quality of the service, contestability of the market, and the effect on jobs. We need these companies to be a certain size in order for them to provide a high-quality service, so to damage this would be an extremely unpopular decision, especially when the services come at no cost to the consumer. Perhaps focusing on elements of vertical integration that have the potential to harm consumers would be sufficient. To break up Big Tech would be an unpopular decision that would only anger consumers whose product quality falls as a result; we should instead begin by tackling cases of special interest to ensure fairness in the market.


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