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Reining in the horsemen: Can we tame the internet giants?

Can the unbridled wealth and power of the internet giants be tamed without destroying them and slowing us down? by Peter Griffin.

Bought a new smartphone lately? One of the first things you probably did after popping in the mobile SIM card and booting it up was to open the web browser and tap in a search phrase.

If it was a new Apple or Samsung, the two bestselling smartphone brands in New Zealand, you would have automatically been sent to the Google search engine, which accounts for more than 90 per cent of the internet searches undertaken globally every day.

For the best part of 20 years, we’ve been doing little more than googling when it comes to internet searches. Bing? Yahoo? DuckDuckGo? No other search engine comes close to Google’s ability to find exactly what you want as quickly as possible. I found that out myself when I was forced to live without Google for a few days last year during a visit to mainland China, where the search engine has been blocked by the Chinese Communist Party’s Great Firewall since 2010.

Google’s Chinese equivalent, Baidu, was woeful in comparison. I eventually found a virtual private network capable of tunnelling through the digital barrier, which is exactly how millions of Chinese access Google from within the country.

Top of the search results

Virtually from the outset, Sergei Brin and Larry Page, the Stanford University computer science students who designed the earliest version of the search engine in 1996, had a fundamentally better way of trawling the web for information.

But what has kept Google No 1 in search by a vast margin year after year ever since? Continuous innovation plays a big part – Google’s parent company, Alphabet, spent US$26 billion on research and development last year, a large chunk of which went into the search and advertising empire that generates the lion’s share of Alphabet’s revenue.

But the US Department of Justice claims, in an antitrust lawsuit filed against Google last month, there is more to Google’s supremacy. It alleges that the California-based company has used “anticompetitive and exclusionary practices” to maintain an unlawful monopoly in the search and search-advertising markets.

It’s the first major salvo in the US against tech companies, variously known as the Big Four, the Four Horsemen or simply GAFA – Google, Apple, Facebook, Amazon. Each company has a valuation of over a trillion New Zealand dollars and wields incredible power in the online world in slightly different if overlapping areas, from advertising and social media to smartphone applications and online shopping.

American politics is the most polarised it has ever been. But Democrats and Republicans are roughly on the same page in their view that these four companies are effectively an oligopoly that has a stranglehold on much of the tech sector and a huge influence on the lives of billions of people around the world.

The question now is how the US Government should temper that power without destroying the companies in the process. For the Justice Department, that has meant avoiding the temptation to bundle together a grab bag of complaints that stray beyond competitive issues to issues of free speech, censorship and bias (see story page 21).
The approach is to zoom in on the commercial deals Google does with device makers such as Apple and Samsung, as well as web browser makers such as Opera and Firefox’s Mozilla, to keep Google as the default search engine for billions of users.

How big are those deals? Google is estimated to pay US$8-12 billion a year to Apple alone to make Google the default option for the Safari web browser on the iPhone and other devices. Billions more are paid to other companies, some of which require a bundle of Google apps, including Gmail, Maps and YouTube, to be provided by default as well.

Google search and those other apps are largely free to use. The adverts pay for everything. But by ensuring that vast numbers of web users stay in its application ecosystem, Google gathers ever more data about us that helps it improve its products and puts eyeballs in front of the ads that run alongside its search results.

You, too, may think you can’t live without Google, or even YouTube for that matter. But that’s because no rival has been able to get a toehold against Google to convince you otherwise. Google has the prime position on smartphone and computer screens and a mountain of data from its users, giving it an unassailable market lead.

Bigger can be better

Not everyone sees that as a bad thing. Google controls a market with what economists call “network externalities”.

“That is, when more consumers use the product, it becomes more valuable for other consumers,” says Richard Holden, professor of economics at the University of New South Wales.

“Facebook is useful because it connects one with lots of other users. A thousand little disconnected social media platforms would be much less useful,” he says.

“Amazon connects lots of sellers with millions of consumers. This is hugely valuable for both. Google connects lots of consumers with advertisers and information.”

Traditionally, competition regulators have viewed overwhelming control of a market by a single company as problematic. In 1904, US oil company Standard Oil controlled 91 per cent of all oil production in the US and 84 per cent of sales. Henry Ford founded the Ford Motor Company the previous year and would soon kickstart the petrol-powered automobile revolution with the Model T.

In 1911, antitrust action forced the break-up of Standard Oil into 34 smaller companies under the Sherman Anti-Trust Act, the same legislation the Department of Justice is using more than 100 years later in its pursuit of Google.

“But internet search isn’t like oil,” says Holden. “Neither is social media, ride sharing or platforms like Amazon. Just because tech companies have a big share of the market now doesn’t mean they are destined to keep it.”

He points to Microsoft’s Internet Explorer web browser, which in the early 2000s had a market share of 95 per cent. Today, it claims about 1 per cent of the browser market. In 1998, Microsoft also found itself battling the Department of Justice in a similar antitrust case that centred on its bundling of Internet Explorer with its Windows operating system on new PCs. That was seen as helping maintain Windows’ hold on the PC market. But the case was settled in 2001 without Microsoft being broken up and without it having to stop bundling its web browser with Windows.

A major part of the Google lawsuit, which Holden suggests may end up in the US Supreme Court just as Standard Oil did, could hinge on arguments around just how easy it is to choose an alternative to Google.

For its part, Google says the lawsuit is “deeply flawed”. Its global senior vice president and top lawyer, Kent Walker, pointed out in a blog post that a record 204 billion apps were downloaded last year.

“Many of the world’s most popular apps aren’t preloaded – think of Spotify, Instagram, Snapchat, Amazon and Facebook,” he wrote. “The bigger point is that people don’t use Google because they have to; they use it because they choose to.”

Local implications

The Justice Department is seeking “structural relief” to Google’s alleged anticompetitive activity, rather than financial damages. That could see Google forced to split apart some of its products or business divisions or discontinue its payments to device makers.

Any outcome like that would reverberate around the world, given Google’s extensive reach into most countries, including our own. The European Union has already fined Google billions of euros in antitrust lawsuits, some of which Google is appealing.

The Australian Competition and Consumer Commission undertook an extensive investigation into the power of digital platforms across the Tasman. It followed that up by demanding that Google and Facebook share some of their digital advertising revenue with media companies whose content it features on their platforms. In response, Google and Facebook have threatened to block news articles from their networks.

If the big platforms do pose such a big threat to the free market and consumer welfare, why aren’t we attempting to rein them in here as well?

“The Commerce Commission is keeping across the enquiries that are being undertaken into the tech industry internationally, and developments in these markets,” a Commerce Commission spokesperson told the Listener. “We have not received any recent complaints about the market power of Google or Facebook and we have not completed any investigations in this area.”

As antitrust action accelerates around the world, we have taken a hands-off approach when it comes to grappling with the competitive influence of the Big Four.

“Some of that is cultural, a lack of interest at one end and a sense that it will all be okay on the other,” says Riley Scott, a junior solicitor at law firm Chapman Tripp. Scott is one of a new generation of lawyers taking a particular interest in the legal issues that the power of the digital platforms pose.

No free rides

As part of his master’s degree thesis, Scott has looked at the rise of US ride-hailing service Uber, which set up in New Zealand in 2013 and immediately caused havoc in the taxi industry. For the first time, you could book a ride via a smartphone app and be picked up by a driver, usually behind the wheel of an unmarked white or silver Toyota Prius.

Uber employs no drivers itself. It works with a legion of independent contractors and its trip prices are often significantly cheaper than those of regular taxis. Scott says Uber harnesses powerful attributes of the digital platform model that he calls “DNA” – digital analytics and the network effect.

Via the app, Uber gathers an unprecedented level of information about passengers, which it uses to calculate the fastest routes, fine-tune its marketing campaigns and decide how to set its “surge pricing” – the higher fares it applies at peak times.

As more drivers join Uber, the network has grown at very little extra cost to the company, which gives drivers some basic training before sending them out to pick up passengers.

Taxi drivers, used to making a living from kerbside pickups and lucrative airport runs, struggled to compete with the convenience and lower prices of Uber. The taxi industry was outraged because Uber refused to act like a taxi company.

It didn’t have a small passenger service licence to operate as taxi firms were required to, and for years it effectively flouted the law by failing to require its drivers to have the passenger or P endorsement on their licence.

That forced a law change, and the Land Transport Amendment Act 2017 saw Uber finally fall into line, but not before hundreds of its drivers had been fined by the New Zealand Transport Agency for having no P endorsement.

Operating in the narrow transport niche, Uber hasn’t attracted the same type of antitrust action as Google, but all over the world, it has faced hostility from rival firms, taxi unions, local authorities and even its own drivers.

“You’ve had taxi drivers blockading streets and petitioning governments. The controversy we’ve had in New Zealand pales in comparison,” says Scott.

In September, Uber won a court case in London that overturns a ban on operating in the city imposed by transport authority Transport for London, which cited a “pattern of failures” that had put passengers at risk. Uber won a new 18-month licence to operate, but its presence in many large cities remains tenuous.

In the US, where it has two-thirds of the ride-hailing market, Uber remains locked in a long-running court battle with its defunct rival Sidecar, which went out of business in 2016. Sidecar blamed alleged anticompetitive tactics from Uber, such as subsidising rides and payments to drivers and even “clandestine campaigns to send fraudulent ride requests through competitors’ ride-hailing apps”.

Despite the turmoil, Uber listed as a public company last year and its market value is now US$59 billion. But it lost an eye-watering US$8.5 billion in 2019, proof, its critics say, of the extent to which the company undercut its competitors to control the ride-hailing market. That tactic is not unusual in the tech world. Amazon also aggressively undercut and racked up many years of losses as it built the largest online store in the US.

Uber now has 7700 drivers in New Zealand and faces strong competition not only from taxi firms that have banded together to offer their own rival app, Zoomy, but also from Ola and DiDi, Indian and Chinese services respectively that are seeking to beat Uber at its own game.

A sign of things to come

But Uber has also revealed the extent to which our approach to competition regulation needs to change as digital platforms become ever more embedded in our lives, says Scott.
He sees Uber as “digital lite” compared with the Four Horsemen but a harbinger of what we face on a larger scale with the likes of Google and Facebook. “They are starting to rule the world,” he says.

“The threat of anticompetitive practices has gone far beyond economics. It is pervading all areas of political and social life as well.”

Uber created an unusual two-sided market, with the ride-hailing software maker clipping the ticket in the middle. Drivers, many of them working part time, are consumers of Uber services, too, and equally at the mercy of its price changes.

“They are as exposed to anticompetitive practices as you or I jumping into an Uber on a Friday night are,” says Scott.

Pricing signals are hard to decipher as a result of the opaque algorithms the company uses to set its trip fares. While many busy commuters use Uber’s services, its customers also deliver huge value to Uber through the data we generate. Its customers have become the product, too.

“You are reciprocally being a product and a user at the same time,” says Scott. “That’s where price signals aren’t necessarily the best indicator of competition any more.”

His solution, though, isn’t sweeping change to the Commerce Act, the key piece of legislation used to tackle anticompetitive behaviour. The language of the Act itself is broad enough to deal with these platforms.

Instead, he says, the Commerce Commission needs to focus on the structural features of digital platforms – the data analytics at the heart of their businesses and the network effects that can give them an unassailable lead over their competitors.

Scott proposes that a digital taskforce be set up as a “multi-department authority” drawing input from the Treasury, the Commerce Commission, the Ministry of Business, Innovation and Employment and other agencies. That would cover issues relating to privacy, data security, innovation and economic development, rather than just market competition.

A dedicated focus on digital platforms has become a feature of competition watchdogs overseas. In addition to undertaking its digital platforms inquiry, the ACCC has set up a Digital Platforms Branch to review competition in the digital economy on an ongoing basis. The UK set up its Digital Competition Expert Panel in 2018 with a similar purpose.

Our Commerce Commission already has specific regulatory oversight of the telecommunications industry, with a commissioner dedicated to the sector and the Telecommunications Act giving power to the commission to lay out the terms of supply for some telecommunications services.

Beyond economics

The commission has also displayed an ability to look beyond purely economic factors in regulating markets. In 2017, it knocked back for the second time a proposal to merge NZME and Fairfax, which between them publish 90 per cent of the country’s daily newspapers and run the two largest news websites, Stuff and Herald Online.

“Our primary concerns remain that this merger would be likely to reduce both the quality of news produced and the diversity of voices (plurality) available for New Zealanders to consume,” commission chair Mark Berry said at the time.

The media companies claimed that they couldn’t compete with the digital ad platforms of Google and Facebook, an argument that failed to sway the commission.

Scott said the impetus to look more closely at digital platforms would have to come from politicians, though Labour had shown little appetite so far to do so.

“They are left-leaning and they’ve made some quite bold statements about things such as supermarket pricing and contactless payment fees,” he says. “But those sorts of things are minor in comparison to the influence Google and Facebook have in our lives. I don’t want to make it political, but this Government hasn’t been the most proactive.”

The Cabinet reshuffle saw David Clark, who was forced to resign as health minister over controversies in his handling of the Covid-19 response, assume the roles of Minister of Commerce and Consumer Affairs, Minister for State Owned Enterprises and the newly consolidated role of Minister for the Digital Economy and Communications.

This can be read two ways: it’s a disgraced minister being given safe portfolios that will require little in the way of heavy lifting or it’s an opportunity for an out-of-favour politician to get his teeth into an issue that might restore some of his credibility.

Either way, it puts Clark squarely in the frame as the decision maker with the power to scrutinise the tech giants. Any work on that front will certainly see the Government playing catch-up.

“New Zealand is streets behind the likes of Australia, Singapore, Hong Kong and other jurisdictions,” says Scott. “We are doing nothing at the moment. It’s a problem that hasn’t really manifested itself, but it will.”

More harm than good?

Not that he sees breaking up Google as the answer to the problems the Department of Justice has identified in the US.

“How on Earth would you do that? The network has grown to the point where I don’t know how much difference after-the-fact action will make. It could also significantly hamper its ability to innovate.”

Like Holden, Scott acknowledges that pulling apart the giant, which offers businesses the “biggest billboard in the world” and individual users some of the most useful services on the web, could end up doing more harm than good.

“I can’t imagine doing my job without Google,” he says. “It’s like the air we breathe – you just use it. But it is getting to the point where you either accept almost everyone is at the mercy of Google and Facebook or you say you are not going to tolerate that.”

If Microsoft’s antitrust case is anything to go by, it could take years of court action to resolve. “The outcome will be instructive as to whether other tech companies such as Amazon, Facebook and Uber will also wind up in the firing line,” says Holden.

Scott sees Google lawyering up for the long haul. “When you have a market capitalisation of over a trillion dollars, you will have the best legal team and you will fight this to the absolute death.”

The next Big Tech battleground

The right to post vile messages is being challenged by US politicians.The outburst came during yet another one of those awkward socially distanced Senate hearings that have served as an outlet for US politicians to vent their frustrations at Big Tech.

In the run-up to the US election, Republican senator and former presidential candidate Ted Cruz was on the warpath.

“Mr Dorsey, who the hell elected you and put you in charge of what the media are allowed to report and what the American people are allowed to hear?” he shouted at his laptop camera. His question was aimed at Twitter chief executive and founder Jack Dorsey.

“We’re not doing that,” Dorsey replied, his long beard and nose ring more suggestive of laid-back Californian beach bum than billionaire tech leader.

The hearing was supposed to focus on Section 230 of the Communications Decency Act, an important provision of internet law in existence since 1996 that gives internet companies immunity from prosecution for the content users post to their platforms.

Section 230 is the reason Facebook has not faced any criminal penalties for allowing videos of the Christchurch mosque shootings to pervade its network. It is a safe-harbour provision that protects the likes of Facebook, Google and Twitter from allegations of negligence and defamation.

But Democrats and Republicans alike increasingly see it as enabling Big Tech bad behaviour, including heavy-handed censorship of posts, biased content moderation and allowing hate speech and misinformation to spread.

Cruz’s grievance related to Twitter’s move to block social media posts from the New York Post, which was touting its story alleging emails obtained from Hunter Biden’s laptop showed dodgy dealings between his father, Democratic presidential nominee Joe Biden, and a Ukrainian businessman.

The Bidens have denied any impropriety. Mainstream media cast doubt on the veracity of the emails, helping deny the Republicans the “October surprise” they were hoping would shift the election campaign momentum President Trump’s way. On social media platforms, it was a bit more complicated.

Facebook limited the reach of the article across its network, fearing it would amount to spreading misinformation weeks out from the election. Twitter blocked users from tweeting the article as a result of its policy of not allowing distribution of hacked information and froze the New York Post’s account. YouTube, on the other hand, allowed a video from the newspaper to remain on its website.

Twitter ultimately reversed its decision and reinstated the New York Post’s Twitter account. Experts argue that the social media platforms based in the US have First Amendment protection, allowing them to block content they don’t like anyway.

But the fuzzy decision-making by tech companies around the Hunter Biden laptop story and the lack of transparency into their content-moderation processes haven’t helped their cause. Also on that Senate-hearing video call were Facebook chief executive Mark Zuckerberg and Alphabet chief executive Sundar Pichai, who both potentially have a lot to lose if Section 230 is repealed, as President Trump threatened to do with an executive order in June after Twitter flagged his own tweets for containing misinformation.

Back then, Facebook said such a move would expose internet companies to “potential liability for everything that billions of people around the world say”. But Zuckerberg, increasingly frustrated over the issue of content moderation, asked lawmakers to step in with some new guidance.

“Changing [Section 230] is a significant decision,” he told the hearing. “However, I believe Congress should update the law to make sure it’s working as intended.”

That’s an increasingly likely prospect that could have serious implications for how billions of social media posts are dealt with every day.

The four horsemen

With a collective market capitalisation of about $8 trillion, Google, Apple, Facebook and Amazon are the most valuable companies in the world.

But their dominance in areas of the digital economy has drawn the scrutiny of regulators, and the Google lawsuit is expected to be the first of numerous antitrust cases and, potentially, law changes as well.

Google
• Market capitalisation: $1.7 trillion
• 2019 revenue: $243.9 billion
• Employees: 132,121
• Biggest accusation: Pays device makers massive sums of money to ensure the Google search engine remains the default, maintaining its monopoly in search and advertising.

Apple
• Market cap: $2.82 trillion
• 2019 revenue: $394.7 billion
• Employees: 137,000
• Biggest accusation: Uses its popular App Store to favour its own applications and services over rival apps, which must give Apple a share of their app revenue.

Facebook
• Market cap: $1.14 trillion
• 2019 revenue: $107.3 billion
• Employees: 52,534
• Biggest accusation: Bought rivals including Instagram and WhatsApp to prevent them challenging its supremacy – at least in the English-speaking world.

Amazon
• Market cap: $2.3 trillion
• 2019 revenue: $420 billion
• Employees: 1,000,000
• Biggest accusation: Uses data gleaned from its online platforms to compete with and undercut merchants that trade in the massive Amazon store.

*Market capitalisations as at November 3; revenue and market cap in NZ dollars.

Going without Google

Google’s “free” services are great, but they come at a price. The data you are asked to share with the company is used to profile you and target adverts at you. But there’s a growing range of free or cheap alternatives to Google’s key free services that prioritise privacy and data protection.

DuckDuckGo
The best alternative to Google Search that doesn’t personalise search results based on a user’s profile. It means everyone gets the same results and DuckDuckGo has no vested interest in tailoring search-engine advertising to you.

ProtonMail
A free and user-friendly webmail service with a focus on data security with end-to-end “zero access” encryption protecting your email traffic. Developed by scientists at CERN in Switzerland as an open-source software product, ProtonMail may not be as feature-rich as Gmail but will suit those who want peace of mind that their emails are locked away from prying eyes.

Firefox
This long-standing and respected web browser arguably still exists thanks to payments from Google to feature its search engine. But it is nevertheless a great alternative to Google’s Chrome browser, offering good performance and privacy features that make it easy to avoid having your web activity monitored and logged.

Tresorit
A cloud-storage provider with end-to-end encryption, allowing you to securely store and share documents and files with other authorised users. It’s the best independent alternative to Google Drive, but you will pay for the privilege – an entry-level account offering a terabyte of storage costs about $22 a month.

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