STRS: Leading Tech Services Are Still Not Public Utilities
In an opinion for the Guardian, King’s College lecturer Nick Srnicek argues that leading tech services should be treated as public services — either nationalized and operated by the government or regulated as closely as gas or electricity providers. Considering leading tech services are nothing like utilities, Srnicek’s proposal would benefit from a review of important points, including:
—Utilities and leading tech services do not operate in the same manner within the economy or for consumers.
—Overregulation could harm new entrants and inhibit innovation.
—Competition drives down prices and encourages innovation.
Utilities and leading tech services do not operate in the same manner within the economy or for consumers.
—Per CCIA’s Matt Schruers: Utilities provide essential, non-differentiated services: “…'[U]tility’ is a word with a specific meaning, a meaning which has nothing to do with providing services via Internet connection. Utilities provide essential, non-differentiated commodities, over a capital-intensive infrastructure network, usually on a full-requirements basis, with government authorization, and certain government-granted privileges (like tearing up your street to lay infrastructure). Few, if any, of these criteria apply to tech services.”
Leading tech services are not essential commodities and can easily be foregone: “As should be plainly apparent, none of the criteria above characterize Internet platforms, social media websites, multi-sided online markets, or other edge-based Internet services. These services, although highly useful, are not essential commodities. While surveys suggest you often would have to pay consumers a considerable amount of money to forego these services, they can in fact be foregone. These services are also unique and highly differentiated. Not only do different companies provide different experiences to multiple sides of a market, but most provide unique experience customized to each user. This is the antithesis of a non-differentiated commodity. Social media sites and Internet services do not face the high fixed costs of entry associated with capital-intensive infrastructure networks. No one launches a natural gas distributor out of their garage with a few friends.”
—Harvard Professor Susan Crawford notes that tech services are not utilities, and that consumers can live respectably despite quitting these services. “But, at least in America, it [Facebook] is not also providing the physical transport networks that carry Facebook messages. People can #deletefacebook and still live respectably. It’s much harder to do that without basic transport, power, communications, water, and sewer services. Because Facebook is not a physical, tangible network and is not on the same level of necessity as a ‘real’ utility, it isn’t one.”
Overregulation could harm new entrants and inhibit innovation.
—Steven Sinofsky, Board Partner at venture capital firm Andreessen Horowitz, warned that regulation can stifle innovation. “I’ve worked before, during, after regulation. I’ve seen improper actions corrected and punished around the world. But I also believe that regulation can stifle other’s innovation when done too soon and cripple companies when punishment was the goal.”
—Deputy Assistant Attorney General for Antitrust Roger Alford has focused on the need for a careful approach (the consumer welfare standard) as opposed to a broader, one-size-fits-all approach (the public interest standard). “But as with any other law enforcement agencies, we as competition law enforcers must be ever vigilant about exercising our power properly, using precise tools rather than blunt instruments. The current debate between the consumer welfare standard and the public interest standard is illustrative of the tendency to trade the scalpel for the sledgehammer.”
—As CCIA’s Matt Schruers wrote for the Disruptive Competition Project, “You don’t subject highly innovative, dynamic firms to utilities regulation if you want them to stay dynamic and innovative.” “Having started my legal career representing regulated utilities, I speak from experience in saying that the business models of structurally regulated utilities and technology companies could not be more different. The cultural differences are similarly stark. You don’t subject highly innovative, dynamic firms to utilities regulation if you want them to stay dynamic and innovative, but that is what Sen. Warren has put forth.”
—Tyler Cowen, Professor Of Economics At George Mason University, says breaking up big tech would be detrimental to most citizens. “And practically speaking, moving to decisively to [sic] break up big tech or regulate it much more strongly would only distract the attention of senior management and deprive those companies of resources and focus. There just isn’t any other sector of the North American economies that has been as dynamic in recent memory, or that shows comparable promise for the future – and breaking it up would only make it less focused on innovation and more focused on bottom-line administration, to the broader detriment of most citizens.”
Competition actually drives down prices and encourages innovation.
—According to McKinsey Global Institute, disruptive competition and large amounts of invested capital mean “superstar firms” are far from entrenched: “Superstars are not the entrenched incumbents of conventional wisdom. Since the early 1990s, almost half of the entire cohort of superstar firms in one business cycle have been knocked out of the top decile by the next business cycle. The fall can be steep: about two in five of the erstwhile highfliers dropped from top decile to bottom decile. This is often because the size of their invested capital base amplifies any decline in the returns to capital relative to the cost of capital. At the other end, about 20 percent of firms in the bottom half managed to move to the top half in each of the past two business cycles. About 10 percent of these firms moved from the bottom decile to the top decile, showing that upward mobility is also possible.”
—With many competing services and the ability to multi-home, the tech sector experiences high churn, per economists David Evans and Richard Schmalensee: “People can use multiple online communications platforms, what economists call ‘multihoming.’ A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform. This process has happened repeatedly. AOL, MSN Messenger, Friendster, MySpace, and Orkut all rose to great heights and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose.”
—As Recode has reported, the tech industry leads in R&D spending (a sign of investment in innovation):