Spring Reads From Springboard: The Danger Of Breakups
Calls to break up today’s top tech companies rely on a flawed assumption that the tech sector is static. As a post in Truth on the Market points out, nearly every prediction of a company as an “unassailable monopoly” has been wrong: Palm, AOL, MySpace, Barnes & Noble, and Blockbuster were all deemed unstoppable at one point.
But not only are these calls misguided, they’re harmful. As AEI’s Mark Jamison writes, if tech companies are broken up, the “US would move to the backwater of tech innovation.”
Check out more good reads below.
The tech sector is incredibly dynamic, and the top companies today are unlikely to be the leaders of tomorrow
As ICLE’s Geoff Manne and Alec Stapp note, predictions of sustained dominance in the tech sector always turn out to be wrong. “Here’s the pattern we observe over and over: extreme success in one context makes it difficult to predict how and when the next paradigm shift will occur in the market. Incumbents become less innovative as they get lulled into stagnation by high profit margins in established lines of business. (This is essentially the thesis of Clay Christensen’s The Innovator’s Dilemma). Even if the anti-tech populists are powerless to make predictions, history does offer us some guidance about the future. We have seen time and again that apparently unassailable monopolists are quite effectively assailed by technological forces beyond their control.” (Geoff Manne & Alec Stapp, “This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable,” Truth On The Market, 4/1/19)
Manne and Stapp continue, arguing that predicting the future of the tech industry is a “fraught endeavor.” “The only winning move is not to play. Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions.” (Geoff Manne & Alec Stapp, “This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable,” Truth On The Market, 4/1/19)
Breaking up the tech sector — or even threatening to — would have dire consequences for consumers and the economy as a whole
If plans to break up tech companies were enacted, AEI’s Mark Jamison writes, the United States would lose its technological edge. “What would happen under a hypothetical Warren plan? Much would depend on the details, but experience teaches us that the businesses would become more politicized, their economic value would decline, and the US would move to the backwater of tech innovation.” (Mark Jamison, “A Dark(er) Side Of Elizabeth Warren’s War On Tech?,” American Enterprise Institute, 4/2/19)
Breaking up tech companies would so warp the incentive structure that consumers would lose out, per Jamison. “In this nightmare scenario, today’s tech leaders would become bland, unattractive, and uncompetitive. They would eventually go out of business. How do we know this? Heavily regulated platforms would serve regulators and politicians, not customers. Businesses respond to economic incentives. And in the case of greatly regulated industries, regulators and politicians have more influence on profits and the ease of executives’ lives than do customers. When a regulatory system enables a marketplace for political favors, resources flow into it. As a result the platforms would be more responsive to politically connected businesses, entertainers, and news providers than to those that most satisfy customers. Unsatisfied customers would leave the platforms, causing financial decline.” (Mark Jamison, “A Dark(er) Side Of Elizabeth Warren’s War On Tech?,” American Enterprise Institute, 4/2/19)
Tech industry analyst Larry Downes writes that “break-ups almost always backfire.” “More to the point, break-ups almost always backfire. Think of the former AT&T, which was regulated as a monopoly utility until 1982, when the government changed its mind and split the company into component long-distance and regional phone companies. The sum of the parts actually increased in value — except for the long-distance company, which faded in the face of unregulated new competitors.” (Larry Downes, “How More Regulation for U.S. Tech Could Backfire,” Harvard Business Review, 2/9/18)
Discussing leading tech services, Sen. Schumer worries about government regulation. “Yeah I’m more sympathetic because I think they’re in a very difficult position, and I worry about government regulation.” (Sen. Chuck Schumer, Recode Decode, 3/12/18)
Law professor Herbert Hovenkamp argues breaking up successful technology companies would injure rather than benefit consumers. “There are a couple of things worth noting about this approach. First, it clearly injures rather than benefits consumers. They are being robbed of the larger firms’ lower prices. Second, there is no obvious way of limiting its application. Should antitrust condemn every practice that reduces the defendant’s prices or costs, or improves the quality of its product when rivals are injured or suppliers are worse off? That policy would rather quickly drive the economy back into the Stone Age, imposing hysterical costs on everyone.” (Herbert Hovenkamp, “Antitrust Policy And The Inequality Of Wealth,” Penn Law, 10/17)
MIT researchers James Campbell, Avi Goldfarb, and Catherine Tucker found overregulation would have negative consequences for innovative startups, stifling competition. “Our results suggest that the commonly used consent‐based approach may disproportionately benefit firms that offer a larger scope of services. Therefore, though privacy regulation imposes costs on all firms, it is small firms and new firms that are most adversely affected. We then show that this negative effect will be particularly severe for goods where the price mechanism does not mediate the effect, such as the advertising‐supported Internet.” (James Campbell, Avi Goldfarb, and Catherine Tucker, “Privacy Regulation And Market Structure,” Journal Of Economics & Management Strategy, 2/10/15)