Could tech giants be controlled through anti-monopoly and merger regulations?

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12 Mar 18

Last week members of the House of Lords International Relations Committee concluded tech firms were negatively affecting our society and questioned whether a ‘different regulatory approach’ was needed to control them. Could incoming monopoly and merger regulation provide the solution? asks Respublica's Joe Cowen.

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The problem 

The tech giants - Facebook, Amazon, Netflix and Google - were once deified for their potential to solve societal issues through innovation. Today, the same firms are branded BAADD - Big, Anti-competitive, Addictive and Destructive to Democracy - by the media. 

They, and by proxy the whole industry, have been blamed for the rise of mental health issues amongst young people, the erosion of liberal democracy through the dissemination of ‘fake news’, and the fostering of cyber criminality - encrypted messaging companies like WhatsApp grant terrorists’ anonymity whilst cyber-attacks on the NHS have raised doubts about compliance with national security. 

A handful of tech firms also have effective monopolies over large parts of the web. Google has an 88% market share in search advertising, Amazon has 74% of the e-book market and Facebook accounts for 77% of all mobile social traffic – giving them the market power to exploit their workers and avoid paying taxes. 

As a result, public attitudes are turning against them and there are growing calls to regulate the sector. Polling indicates that 69% of the British public feel that politicians are not taking sufficient action to address the challenges of technology and Europe's Commissioner for competition has stated, "We have to take our democracy back. We cannot leave it to Facebook or Snapchat or anyone else". But how? 

The solution

In the past, monopolies were simply broken-up or turned into public utilities to make them less powerful, as was famously the case with AT&T/Bell in 1913. But few back this nuclear option for the tech industry today. A full-scale break-up would cripple firms' economies of scale, go against the web's inherent network effects, and worsen the product for the consumer. Furthermore, the normal tools of regulation such as price controls and profit caps are hard to apply to the tech giants, as most of what they produce is free to consume and would otherwise come at a high price in forgone R&D. 

A more compelling proposal is emerging, controlling tech firms through anti-monopoly and merger regulations, because monopolies after all are commonly created through acquisitions:

First, the EU Commission has recently challenged mergers that pose risks to innovation. For example, in the Dow/DuPont case the Commission threatened to block the merger between two agrochemical companies because the parties would have found it profitable to reduce their overall R&D investment, resulting in less new products being brought to market.  Although the debate is still on-going, publications by the EU Commission's Chief Economist Team have found that mergers between competitors do lead to reduced incentives to invest and innovate. This will limit the power of tech firms looking to expand in the UK and Europe by increasing barriers to mergers. 

Second, tech companies are also likely to be constrained by an increased number of consumer class actions based on 'abuse of dominance' claims, following the Commission's recent decision to fine Google £2.42bn. This follows the EU's new Antitrust Damages Directive which shifts the balance in favour of claimants, by requiring the consideration of final decisions from competition authorities. 

Third, In the UK the government has also signalled that mergers will be examined 'on a case-by-case basis to ensure they are in the national interest'. Traditionally intervention only covered security and defence companies, but it is now expected to apply to tech firms too. The legislation on Critical National Infrastructure (CNI) mergers is currently being redrafted in a BEIS White Paper that is anticipated before the summer recess. This legislation will not necessarily stop mergers, but firms will have to approach the government for permission to do so. 

The government will therefore gain control over tech firms by building in conditions upon which these mergers will be approved. These conditions will likely involve access to tech firms' valuable technology, know-how and sensitive data. This would replicate the process that occurs in the US under CFIUS legislation, where agreements between government and firms famously allowed the NSA to build back-doors into Microsoft, Facebook and Apple amongst others. 

There are clearly societal risks associated with tech companies and an urgent need to mitigate against them. For too long the tech giants have held get out of jail free cards, but competition and monopoly regulation gives the government another roll of the dice. But to ensure their success, the Government must protect these European regulations post-Brexit. And that's far from guaranteed. 

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