Setting The Record Straight: Wu Break-Up Call Misses State And Value Of Leading Tech Services
Tim Wu wants to break up Facebook and other leading tech services, because “we’re in a time where we need to bring back the controls on bigness,” according to a recent Vergecast, summarized here. Wu’s case overlooks several critical issues.
1. Wu downplays existing competition among tech players (despite having hailed it as a solution in an April column).
—Wu previously argued that ‘network effects’ are not destiny and as Snapchat has shown, competitors can take market share. “No, the real challenge is gaining a critical mass of users. Facebook, with its 2.2 billion users, will not disappear, and it has a track record of buying or diminishing its rivals (see Instagram and Foursquare). But as Lyft is proving by stealing market share from Uber, and as Snapchat proved by taking taking younger audiences from Facebook, “network effects” are not destiny. Now is the time for a new generation of Facebook competitors that challenge the mother ship.” (Tim Wu, Don’t Fix Facebook, Replace It, The New York Times, 4/3/18)
—Within social media globally, the average person has eight different social media accounts. “Across the globe, Global Web Index finds people have eight different social media accounts on average, echoing a Pew Research Center analysis finding the typical American multi-homes on at least three different platforms a day.” (“Setting The Record Straight: Anti-Facebook Campaign Is ‘Misguided Political Fervor That Ignores The Economic Facts,’ Springboard, 5/20)
—USA Today reports that Facebook is losing market share among young people. “Less than half of U.S. Internet users ages 12 to 17 will use Facebook this year for the first time, the research firm says. And the giant social network can no longer count on Instagram to help retain that younger audience, according to eMarketer. Facebook will lose 2 million users under 25 this year, eMarketer estimates. Not all of those users are migrating to Instagram, also owned by Facebook.” (Jessica Guyn, “Facebook Losing Young Users Even Faster To Snapchat, eMarketer Says,” USA Today, 2/12/18)
—eMarketer research predicts leading tech services’ share of digital ads will fall as smaller rivals grow quickly, “seeking a larger share of the pie.” “In its latest forecast, research company eMarketer predicts the combined U.S. digital ad market share of Alphabet Inc.’s Google and Facebook will fall for the first time this year, shrinking to 56.8% from 58.5% last year. At the same time, overall digital ad spending in the country is likely to grow nearly 19% to $107 billion in 2018. To be sure, Google and Facebook are still increasing their total ad revenue significantly, and no other competitor even cracks 5% market share. But those smaller rivals are growing more quickly than expected and are seeking a larger share of the pie.” (Alexandra Bruell, “Rivals Chip Away At Google’s And Facebook’s U.S. Digital Ad Dominance, Data Show,” The Wall Street Journal, 3/19/18)
—Economist David Evans finds tech leaders compete across 27 different categories. “Online platforms face dynamic competition as a result of: disruptive innovation that provides opportunities for entry; competition from online platforms that have secured a toehold in one area but compete across multiple areas; the fragility of category leadership resulting from the fact that network effects are reversible and entry costs are low; and the prevalence of ad-supported models, which result in seemingly disparate firms competing for consumer attention and advertiser dollars.” (David Evans, “Why The Dynamics Of Competition For Online Platforms Leads To Sleepless Nights, But Not Sleepy Monopolies,” SSRN, 7/23/17)
2. Wu’s anecdote suggesting all viable start-ups are acquired is not reflected in actual data.
—Acquisitions by leading tech services are a small percentage of total acquisitions in the tech sector. “The report also blows up the Economist’s notion that market leaders acquire all the most promising startups — a stark reminder of the adage that anecdote is not data. Relative to overall activity, tech acquisitions by prominent tech firms remain a small fraction of tech sector acquisition, having been at 1% or less since 2015. In fact, since 2011, acquisitions by leading tech services exceeded 2% of total tech M&A in only 2 years, and during those outlier years (Facebook’s 2014 purchase of WhatsApp and Google’s 2012 acquisition of Motorola), the leading firms’ share of tech M&A barely broke 10%.” (Matt Schruers, “Do Top Tech Firms Affect VC Funding?” Project DisCo, 7/11/18)
—Subsector analysis of tech finds no evidence that investment flows away from areas where tech leaders are involved. (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
—Brookings’ Robert Crandall found that structural remedies have historically failed to increase competition, especially for “markets gripped by technological change.” The important lessons to be learned from this review of the history of Section 2 cases is that the government often lags the market in finding ways to increase competition, rendering antitrust cases redundant. In other cases, the government failed to formulate relief that resulted in any meaningful change in competition because it failed to grasp the essentials of the market that led to concentration in the first place. This is particularly true for markets gripped by rapid technological change, such as computers or the distribution of video programming. Given the rapid pace of technical progress that we are encountering as we enter the 21st century, there is surely little prospect that Section 2 will be employed more productively in the future than it has been in the past.” (Robert Crandall, “The Failure of Structural Remedies in Sherman Act Monopolization Cases,” Brookings, 3/2001)
3. Wu’s focus on size ignores the value of large companies for consumers and workers.
—Federal Trade Commissioner Nominee, Joseph Simons, argues “big is not necessarily bad,” and enforcement should not interfere with successful companies’ growth through serving consumers. “Big is not necessarily bad. I also believe big is not necessarily good. Sometimes big is good. Sometimes big is bad. And sometimes it’s both at the same time. Oftentimes companies get big because they are successful with the consumer. They offer good service at low price and that’s a good thing and we don’t want to interfere with that. On the other hand, companies that already big and influential can sometimes use inappropriate means, anticompetitive means, to get big, or to stay big. If that’s the case, then we should be vigorously enforcing the antitrust laws and attacking that conduct and prohibiting it.” (Joseph Simons, “Nomination Hearing,” Senate Committee On Commerce, Science, And Transportation, 2/14/18)
—According To Economists Erik Brynjolfsson, Felix Eggers And Avinash Gannamaneni, Americans would have to be paid $3,600 to give up internet maps for a year, $8,400 to give up e-mail, and $17,500 to give up search engines. “One way to quantify how much these internet services are worth is by asking people how much money they would have to be paid to forgo using them for a year. A new working paper by Erik Brynjolfsson, Felix Eggers and Avinash Gannamaneni, three economists, does exactly this and finds that the value for consumers of some internet services can be substantial. Survey respondents said that they would have to be paid $3,600 to give up internet maps for a year, and $8,400 to give up e-mail. Search engines appear to be especially valuable: consumers surveyed said that they would have to be paid $17,500 to forgo their use for a year.” (“How Much Would You Pay To Keep Using Google?” The Economist, 4/25/18)
—Robert Atkinson, Founder of The Information Technology And Innovation Foundation, says larger companies provide higher wages, better benefits, more benefits, and lower prices, among other positives. “Bigger companies provide higher-wage jobs, better workplace benefits, lower prices, stronger environmental protection, and greater workplace diversity, safety, and stability, while engaging in less tax evasion. Regardless, neo-Brandeisians want to go back to an economy in which most Americans are employed in small, locally owned firms or worker co-ops, and they want to use aggressive antitrust enforcement to get there.” (Robert Atkinson, “The Neo-Brandeisian Attack On Big Business,” National Review, 10/2/17)