Antitrust 3: Big Tech What does the rise of dominant tech companies say about competition and the state of antitrust law? Third in a series.
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Antitrust 3: Big Tech

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Antitrust 3: Big Tech

KENNY MALONE, HOST:

Today's show is Part 3 of what I have been calling the PLANET MONEY antitrust trilogy. The show will be much better if you go back and listen to the first two episodes. If you do not, here is the text that scrolls on the screen at the beginning of the movie.

(SOUNDBITE OF MUSIC)

JACOB GOLDSTEIN, HOST:

The United States government used to use antitrust law a lot to protect small companies against big companies in the name of competition. Then there was a backlash led by a judge named Robert Bork. He wrote a book called "The Antitrust Paradox" that argued antitrust enforcement had gotten out of hand and the government needed to back off. Now, in the past couple years, as a few tech companies have gotten very big and very powerful, a backlash to the backlash has begun.

LINA KHAN: My name is Lina Khan, and I'm an academic fellow at Columbia Law School and a senior fellow at the Open Markets Institute.

GOLDSTEIN: And you're a lawyer.

KHAN: I'm a lawyer.

MALONE: When Lina Khan was in law school two years ago, she wrote a paper for the law review.

GOLDSTEIN: What was the title of the paper?

KHAN: "Amazon's Antitrust Paradox."

MALONE: An allusion to that Bork book, "The Antitrust Paradox."

GOLDSTEIN: Why did you choose that title?

KHAN: I was interested in exploring how Bork's approach to antitrust had enabled Amazon's rise. And the paradox with Amazon seemed to me that here we had a company that was amassing dominance in various markets, but our current approach to antitrust law was really keeping us blind to that dominance. And so that, to me, seemed like an interesting tension.

MALONE: Our current approach to antitrust law, Bork's approach, is known as consumer welfare. And the basic idea is low prices and lots of choices are good. If consumers are getting these things, then there's no antitrust problem. And clearly, Amazon has delivered low prices and lots of choices, so it hasn't run into much trouble with antitrust law in the United States.

GOLDSTEIN: And yet, Lina Khan argued in this paper, there are things that Amazon has done that have been bad for competition. So her wonky article comes out, she hears from a few antitrust lawyers, then her article gets mentioned in The New York Times.

KHAN: That spurred kind of a new wave of interest. And so I just started receiving more and more emails.

GOLDSTEIN: I feel like you're being somewhat modest about this, which I respect a tremendous amount, even though it's not good for our story.

(LAUGHTER)

MALONE: What she is not saying is that this student law review article completely blew up.

GOLDSTEIN: I mean, look; I know you didn't go on "Ellen" or whatever, but...

KHAN: Right.

MALONE: Or did you go on "Ellen"?

GOLDSTEIN: Or did you go on "Ellen"? Did I miss that?

MALONE: It got big. We know it got big.

GOLDSTEIN: Lina Khan learned that the rise of a few giant tech companies had made this very wonky thing, antitrust policy, suddenly feel urgent and important to lots of ordinary people.

MALONE: Is it bad these companies are so big? Are they a sign that the free market is failing us and competition is disappearing? Do we need to think about antitrust in a new way?

GOLDSTEIN: Congressmen wanted to meet with her. The Washington Post and The Atlantic wanted to profile her - CNBC, NPR.

(SOUNDBITE OF ARCHIVED BROADCAST)

KORVA COLEMAN, BYLINE: And she joins me now to talk about how antitrust law handles Amazon. Lina, thank you for being with us.

KHAN: Good to be here.

COLEMAN: Let me first say, Amazon is among NPR's corporate sponsors.

MALONE: Right. We're going to have to talk about that.

GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.

MALONE: I'm Kenny Malone. Today on the show, Amazon...

GOLDSTEIN: One of our corporate sponsors.

MALONE: ...And Facebook...

GOLDSTEIN: Also a corporate sponsor.

MALONE: ...And Google.

GOLDSTEIN: I think a corporate sponsor.

MALONE: Not a corporate sponsor.

GOLDSTEIN: Oh, OK.

MALONE: But all of this is kind of the point. These three companies are suddenly everywhere. They have an incredible amount of money and power.

GOLDSTEIN: And Lina Khan is part of this new wave of thinkers who are starting to say, maybe the rise of these giant tech companies is a sign that antitrust is broken, and we need to fix it.

So the question for today's show is, what, if anything, should we do about the big tech firms? I mean, actually, that's a ridiculously large question. There's no way we could do that in a show. I mean, we're going to do a subset of that question, right? We're going to focus specifically on competition and the free market and the role of the government. We're going to focus on antitrust.

So the question really is, should we be using antitrust law in some way with respect to these big tech companies?

MALONE: And the way we're going to do this - we're going to talk to two very smart people, lawyers whose job is to answer questions like these. And we're going to ask them two big questions. One, are we thinking about antitrust the right way? Does this consumer welfare standard still work? And question two, if you had all the antitrust power in the world, what would you do?

First up, Lina Khan.

GOLDSTEIN: Do you want a title? We're going to make you the ruler of antitrust in America.

KHAN: That seems kind of antithetical to the spirit of antitrust (laughter).

GOLDSTEIN: Well played. Oh.

MALONE: Yeah, it's fair. That's fair.

GOLDSTEIN: So are you sort of respectfully declining your appointment?

KHAN: I'm happy to play along with the hypothetical.

GOLDSTEIN: OK. Is there a reason in particular to focus on big technology firms?

KHAN: So the reason I've been focusing on big technology companies is because I think some of the blind spots of the current antitrust approach are most significant in the context of these tech companies, in part because in many instances, they're offering products or services that are nominally free, right? We're paying in data, and so that complicates how antitrust looks at these issues.

MALONE: Think of Google and Facebook. You don't have to pay money to use those services, so the current antitrust approach - consumer welfare standard, which focuses largely on price - just isn't going to work very well.

Also, she says there's just this fundamental nature of a few key tech sectors. They just tend to be winner-take-all. Everybody's going to tend to end up using one search engine, one social network. Everybody who wants to buy or sell online is going to wind up at the one online store with the most buyers and sellers.

GOLDSTEIN: Can we talk about specific companies?

KHAN: OK.

GOLDSTEIN: What should we do about Amazon?

KHAN: Well, I think first we need to have investigations into Amazon's conduct. We have a very meager understanding of how the different parts of its businesses actually interlink and how it potentially uses data collected in one market to advantage itself in another market and that sort of thing.

And so I think as a first step, more investigations, more hearings just to understand what's happening. And that should then help inform what we should do.

GOLDSTEIN: OK. What about as a second step?

(LAUGHTER)

KHAN: Well, you know, I think...

GOLDSTEIN: You've written about things...

KHAN: Yes.

GOLDSTEIN: ...That are way more interesting...

KHAN: Yeah (laughter).

GOLDSTEIN: ...Frankly, than investigations.

KHAN: Yeah. I mean, I think, you know, one problem that I've been focused on is the potential conflict of interest that seems baked into some of these companies' current businesses.

GOLDSTEIN: Amazon - let's talk about Amazon in particular.

KHAN: OK, let's talk about Amazon.

MALONE: Amazon is many things, but the main thing most people think of when they think of Amazon is this marketplace, a store where anybody who wants to can sell almost anything they want to millions and millions of potential customers. In the jargon, this marketplace is a platform.

And what we wound up mostly talking to Lina Khan about is, what does it mean for competition when one company winds up controlling such a huge platform?

KHAN: I mean, what's so unique about platforms is that platforms end up dramatically reducing the cost of entry for all the third parties.

GOLDSTEIN: And what that means is platforms can be really good for competition because now there is this place where everybody in America who wants to buy, say, batteries is going to go to buy their batteries. So if I want to get into the battery selling business, that is great for me. Of course, I have to compete against all the other battery brands out there - not only Duracell and the Energizer, but also Amazon's own private-label batteries, AmazonBasics batteries.

KHAN: Amazon has built out a pretty extensive private label. It has at least 120 different labels where it's now actually producing Amazon-based goods.

MALONE: Now, you could argue, and a lot of people do, that these Amazon store brands are good for competition. Amazon is one more competitor in the market. But Khan argues, in the long run, Amazon selling Amazon brand stuff on Amazon may be bad for competition.

KHAN: So that, I think, can create a conflict of interest. And so far as Amazon owns the platform, it runs the platform, it decides who comes up where in the search rankings. But it's also competing with all the merchants that are now dependent on the platform.

GOLDSTEIN: So this problem - I mean, this seems like a fundamental, like, store brand problem, right? Like, there, you know - whatever. Walmart is a bigger retailer than Amazon, and they have store brands. And they can, you know, put the Purina dog food on the bottom shelf...

KHAN: That's right.

GOLDSTEIN: ...And the Ol' Roy or whatever their house dog food is on the top shelf. And you could imagine the same problem there - right? - a giant retailer with all this power just says, oh, look what's selling in our store. We're going to have a store brand. Is that a similar competitive problem?

KHAN: I think you have to really look at the degree to which the retailer or the distributor is playing a bottleneck role in a sector. So with retailers, it's absolutely true that they have private labels. Generally speaking, there's much more competition in the retail industry than there is in online commerce. And so I think that means that the stakes of discrimination are quite different.

GOLDSTEIN: So you're saying I could shop at Walmart or I could shop at Kroger or I could shop at Costco. It's that level of competition that you're talking about?

KHAN: There's that level of competition. There's also the issue of how risk gets assigned.

MALONE: The issue of who is taking the risk here, the company developing a new product or the company running the store where the product is going to be sold. So let's say, Jacob, that you and I decide to go into business.

GOLDSTEIN: I'm in.

MALONE: We're going to sell hats for dogs.

GOLDSTEIN: Yes, million-dollar idea.

MALONE: The way a lot of traditional stores work is they buy the dog hats from us in bulk.

GOLDSTEIN: Yes.

MALONE: And then, if the dog hats sit on the shelves and don't sell, that's not really our problem, at least not in the short run. The retail store paid us money for our hats. We have the money. The store took the risk that the hats might not sell.

GOLDSTEIN: Amazon does not work that way. Amazon is not going to buy the dog hats from us. We can post our dog hats for sale on Amazon, and if they don't sell, we go out of business, and it did not cost Amazon anything.

If the dog hats do sell, then we pay Amazon a chunk of our revenue. And if our dog hats sell like crazy, if the world suddenly goes bananas for dog hats, then Amazon is free to start selling their own line of dog hats, AmazonBasics dog hats.

KHAN: There are merchants that bring all sorts of niche products - right...

GOLDSTEIN: Sure.

KHAN: ...That are not guaranteed to sell. They're - it's these third parties that are undertaking the original risk to invest in a product and see, hey, is this going to succeed?

What's troubling is that in some instances, when a product does start doing well, Amazon observes it and then takes that idea, produces it itself, knocks out the third party from the top search listings. And so suddenly, you know, it's Amazon that's reaping the reward of the risk that somebody else took.

GOLDSTEIN: Then what would you expect the sort of long-term consequence would be?

KHAN: I think the long-term consequence will be that third parties will be more reluctant to invest in products to take risks to bring them to market, the idea being that even if this product succeeds, there's a good chance that Amazon will appropriate the value of that reward, and they'll just be left hanging.

MALONE: In other words, if Amazon's just going to wait and see if our dog hats sell, and if they do sell, it's going to start selling AmazonBasics dog hats, why should we get into the dog hat business in the first place? Khan argues that lots of people will think, why should I even start selling anything online if I'm just going to end up losing to Amazon? And in the long run, she says, this will mean less competition.

GOLDSTEIN: You've presented this as a problem or as a potential problem. What's the solution?

KHAN: I think one solution is separating the marketplace from Amazon to private label. I think if you're going to be a dominant marketplace, then you perhaps shouldn't be able to also sell on that marketplace, putting yourself in direct competition with all the merchants that are dependent. I mean, I think that relationship of dependence is really one to drive home here.

GOLDSTEIN: So you're saying that you would say to Amazon you can either sell Amazon stuff or you can be a marketplace for all these third-party sellers, but you're not allowed to do both.

KHAN: That's right.

GOLDSTEIN: That's a big one.

It's a big one not just because it would mean the government intervening in a big way in this giant business - although, obviously, that is big. It's a big win because, really, we haven't seen antitrust enforcement on this scale in this country for decades.

MALONE: And by the way, we did reach out to Amazon, and a spokesperson argued Amazon making its own products means lower prices, better products and more competition. He also noted that private label is a relatively tiny part of Amazon's business. After the break, we talk to our second emperor, and he tells us what he would do about Facebook.

(SOUNDBITE OF KENDRICK LAMAR AND SZA SONG, "ALL THE STARS")

MALONE: The second person we're going to talk to today is Scott Hemphill. He's an NYU law professor. He's teaching right now an antitrust course called Big Tech and Standard Oil - perfect for the series that we're working on. And he did want us to mention that he's done some consulting work for a firm that has concerns about Amazon's conduct.

GOLDSTEIN: Hemphill has worked in antitrust for a long time. And for most of that time, most people were just not very interested in talking about antitrust.

MALONE: Was there a moment that you realized other people were perking up and paying attention?

SCOTT HEMPHILL: When it played a role in the last presidential campaign on both sides. It was a plank in the Democratic platform and then-candidate Trump from time to time raised concerns about possible targets for antitrust intervention.

GOLDSTEIN: Was it, like, exciting?

HEMPHILL: Sure, it was exciting.

(LAUGHTER)

HEMPHILL: It was exciting.

GOLDSTEIN: So, like, what's it like working in - you know, being an antitrust expert now, having this be your field at this...

HEMPHILL: It's cool that people are excited about these issues.

GOLDSTEIN: Is there a but there?

HEMPHILL: Well, you worry that we'll get it wrong, that we'll get too excited, that we'll pass a new law that does more harm than good, that people will have unrealistic expectations for what antitrust is about and what it can accomplish.

MALONE: Scott Hemphill describes his antitrust views as middle of the road. He doesn't think the system needs to change as much as Lina Khan thinks the system needs to change.

GOLDSTEIN: Here's one difference between the two of them. Khan thinks the consumer welfare standard just fundamentally can't work anymore. Hemphill thinks it can. Remember; consumer welfare is a lot about prices, but companies like Google and Facebook give their product away to people for free. So it seems like under the consumer welfare standard it would be really hard to know what to do about these companies. But...

HEMPHILL: So we say consumer welfare and antitrust is a shorthand for situations where sometimes we don't mean consumers in the sense of individuals.

GOLDSTEIN: Consumers can also include companies that buy stuff, like, say, companies that buy ads on Google and Facebook. And if Google and Facebook use their market power to jack up ad prices, that can be a violation of antitrust law under the consumer welfare standard.

MALONE: Scott Hemphill says generally we are thinking about antitrust in the right way. We don't need to rethink the goal of antitrust. But he is still worried about big tech companies and competition.

GOLDSTEIN: We're going to make you emperor of antitrust now today. What would you do?

HEMPHILL: Two major things. Oh - one is...

MALONE: Can I - I just want to point out, as soon as you were anointed emperor, you folded your arms in a very sort of noble fashion.

(LAUGHTER)

MALONE: It was good.

HEMPHILL: I thought a power pose would be helpful answering this question.

MALONE: It's good.

HEMPHILL: One place to go is to investigate. Now, this may seem like small stuff. Of course, we want to investigate.

GOLDSTEIN: Pretty weak. So...

HEMPHILL: I'm warming up here.

GOLDSTEIN: OK.

(LAUGHTER)

HEMPHILL: The main thing I'd want to do is to take a hard look at tech mergers that have already been consummated where there may have been an anti-competitive problem at the time.

MALONE: So the big idea for Scott Hemphill is mergers. That is the thing that worries him when he thinks about big tech and antitrust.

GOLDSTEIN: And specifically, what are some of those mergers?

HEMPHILL: So the one that jumps out to me is Facebook-Instagram.

MALONE: In 2012, Facebook bought Instagram for $1 billion, and Hemphill says as antitrust emperor, he would try to figure out why Facebook did that.

GOLDSTEIN: And the why, he says, is important because mergers are not inherently an antitrust problem. He says sometimes there is a totally legit reason for two firms to merge.

HEMPHILL: A classic reason for mergers is if you think one firm can help successfully grow, promote, develop the technology of the other.

GOLDSTEIN: So Facebook already has all this data, and it has a great ad sales team or whatever, things that will really benefit Instagram. So Instagram is just going to be a more efficient business. It's going to grow better. That's going to be good for everybody.

HEMPHILL: That's the good news, happy story. Sure. And, you know, it might be right.

GOLDSTEIN: Also it might be wrong. The Facebook-Instagram merger might be a bad news, sad story. Here's how that story goes - company's already big and then it starts getting bigger and bigger by buying up other companies. That is a sign that maybe the company is trying to suppress competition, you know, to just buy up its rivals so it doesn't have to compete. That is obviously bad for competition.

MALONE: Hemphill says as antitrust emperor, he would try to figure out what Facebook was thinking here. Why did it want to buy Instagram? Good news, happy story or bad news, sad story?

GOLDSTEIN: By the way, I just want to bring Lina Khan back for, like, one second here because she also mentioned the Facebook-Instagram merger as a potential antitrust problem. And she had this really interesting reason why it was bad for competition.

KHAN: Well, let's just think about a real example, which is as revelations about Facebook's lax privacy and security protocols have been becoming clear, you've heard more people say I'm quitting Facebook. I'm just closing this down. At least I have my Instagram account.

(LAUGHTER)

KHAN: Right? I think privacy is one good example of a dimension on which consumers should be able to choose, and having more competition could provide that.

GOLDSTEIN: So this Facebook-Instagram merger is one place where Lina Khan and Scott Hemphill are pretty close on what they think we should do.

HEMPHILL: What I'm saying is that a transaction motivated at the time by avoidance of competition is a good candidate for divestiture after the fact.

MALONE: Wait. Is that middle of the road consumer welfare is fine antitrust emperor Scott Hemphill saying after an investigation, depending on the findings, the government should maybe break up one of the biggest companies in the world?

HEMPHILL: That's what I'm - that's what I'm thinking about, yes.

GOLDSTEIN: OK.

MALONE: OK.

GOLDSTEIN: OK, great. You're about to not be the emperor anymore. Do you have any last wishes?

HEMPHILL: No, no. It's a heavy responsibility to be emperor.

GOLDSTEIN: Heavy is the head.

MALONE: We did talk to people at Facebook about this whole Instagram thing, and they made the case that both Facebook and Instagram benefited from the merger. They pointed out that Instagram had infrastructure problems and just about 30 million users when they acquired the company. Six years later, there are 1 billion users. They also noted that, quote, "relevant regulators saw no reason to stop the merger." So we talked about Amazon with Lina Khan and Facebook with Scott Hemphill. Now, let's talk about Google for just a minute.

GOLDSTEIN: Google is a big one.

MALONE: We did a whole episode a couple years ago about Google and antitrust - still online. To find it, just Google "Google Is Big. Is That bad?" That was the headline.

GOLDSTEIN: Since then, there's been more antitrust news about Google, specifically a case in the European Union that focused on Android, on Google's operating system for smartphones, which is by far the most popular mobile operating system in the world.

MALONE: Google had told phone makers if you want to use Android, you also have to pre-install the Google search app and Google's Chrome browser on your phones. The EU looked into this and last year issued a decision. Quote, "Google has used Android as a vehicle to cement the dominance of its search engine" - dot dot dot - "they have denied European consumers the benefits of effective competition in the important mobile sphere." The European Union found this illegal under its antitrust rules and fined Google $5 billion. Google said in a statement afterwards, quote, "Android has created more choice for everyone, not less." The company is appealing the ruling.

GOLDSTEIN: So, OK, we have done these three shows on antitrust, and the first two were these historical moments when we went through really big changes as a country in the way we think about, you know, the free market and big business and competition and the role of the government. And now, you know, this episode, we have the present moment, the rise of the tech giants. And, you know, the ending question has to be, is this another moment when we need to once again sort of stop and rethink the way antitrust works?

MALONE: Scott Hemphill, pretty middle of the road antitrust lawyer, says no. Maybe we could enforce the current rules better, but the rules themselves, the worldview, is basically working.

GOLDSTEIN: And then there's Lina Khan She is part of this other group of thinkers who are saying antitrust is broken. You know, what the tech giants have shown us is there are these fundamental problems with competition that the current antitrust worldview just is not detecting. And she's saying the government really needs to go back to that pre-Robert Bork era. It needs to intervene more often in the free market in order to make free market competition work.

(SOUNDBITE OF SONG, "LOOKING TO THE SEA")

IAN COTTERILL: (Singing) Looking to the sea.

GOLDSTEIN: We know we didn't talk about monopsony. Email us at planetmoney@npr.org. You can also find us on Facebook, Twitter and Instagram - @planetmoney.

MALONE: Today's show was produced by Sally Helm and Darian Woods. Sally and Darian are both former PLANET MONEY interns, and we are looking for our next intern. Interns have a lot of responsibility, help out with all aspects of the show, and they get paid. Applications are due March 4. You can find out more at npr.org/money.

GOLDSTEIN: I'm Jacob Goldstein.

MALONE: And I'm Kenny Malone. Thanks for listening.

(SOUNDBITE OF SONG, "LOOKING TO THE SEA")

COTTERILL: (Singing) I should've known better.

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