Introducing Inquisitorial by Indianaut, a long-form newsletter where we explain and analyze important stories stemming out of the Indian entrepreneurial ecosystem & economy. New articles every Saturday & Sunday.
“As gatekeepers to the digital economy, these platforms enjoy the power to pick winners and losers, shake down small businesses and enrich themselves while choking off competitors. Our founders would not bow before a king. Nor should we bow before the emperors of the online economy.”
- Representative David Cicilline, Democrat of Rhode Island and chairman of the House Judiciary Committee’s antitrust subcommittee.
United States has a rich history of large corporations amassing wealth and power by monopolizing their own industry through a series of abusive and anti-competitive actions which harm small businesses. Whether that includes the trust-busting of U.S. Steel and Standard Oil a century ago, AT&T facing the heat in 1984 or Microsoft standing trial in the late 1990s for antitrust charges, chief executives have eventually always come under such a microscope for the power of their businesses.
(Credits: AP)
Facebook, Google, Amazon and Apple have always been considered emblems of national pride for their innovation and growth. But the expanding reach of the four — which are involved in everything from smartphones to e-commerce to digital payments — and their stumbles in misinformation, privacy, election interference and labour issues have increasingly raised hackles.
On July 29th, the U.S. House Judiciary’s antitrust subcommittee held a hearing with four of the biggest figures in tech: Apple’s Tim Cook, Amazon’s Jeff Bezos, Facebook’s Mark Zuckerberg, and Google’s Sundar Pichai. The hearing underlined the government’s recognition that this cohort of tech companies — which wield immense control over commerce, communications and public discourse — had become the new trusts of the internet age.
From its conception, the House antitrust hearing was set to be a spectacle, lining up four of the world’s most powerful executives — with two of them among the planet’s richest individuals — to answer largely hostile questions together. While the joint appearance limited sustained questioning of any one executive, it created a side-by-side image that recalled the 1994 congressional hearing of top American tobacco executives, who said they did not believe that cigarettes were addictive.
It can considered truly comedic that the House’s antitrust hearing targeting the big four tech companies took place Wednesday because literally a day after a meeting attempting to determine if Big Tech was too big, three of the four companies in the hearing got bigger. On Thursday, July 30th, all 4 companies reported their quarterly earnings, which beat market expectations. The hearing was about how tech companies have consolidated their power and the coronavirus seems to be making that consolidation even easier.
The House Judiciary Committee’s investigation into the market power of Amazon, Apple, Facebook and Google ran to nearly six hours. Alternating Democrats and Republicans asked the CEOs of those companies a combined 217 questions, including inquiries into why politicians’ fundraising emails are going to the spam folder (Rep. Greg Steube). Let us breakdown highlights from the hearing for each company.
Amazon
With Amazon, members focused on two key areas: the company’s controversial use of data about third-party sellers on its platform to inform the development — and promotion — of its own products; and the proliferation of counterfeit goods on the site, and the harms that causes for buyers and sellers.
“Let me ask you, Mr. Bezos, does Amazon ever access and use seller data when making business decisions?” Jayapal asked.
Bezos highlighted the company’s policy banning the practice, but said, “I can’t guarantee you that that policy has never been violated.”
Amazon’s acquisition of Ring not only made it easy for the e-commerce giant to get into home security services and devices, but it provided a new outlet for its own voice assistant, Alexa. After purchasing Ring, Amazon integrated its Alexa voice assistant into the devices, allowing users to control their video doorbells via voice and expand the company’s position as a titan of internet-connected homes.
“Feel good about moving forward with Ring due diligence, willing to pay for market position as it’s hard to catch the leader,” Jeff Helbling, an Amazon vice president, said in an email dated October 11th, 2017. Amazon officially bought Ring in February 2018.
Emails show that, at the time, Bezos viewed the Ring’s value as primarily strategic. Bezos had to defend this during Wednesday’s hearing by saying that Amazon buys up other companies primarily for market position.
“There are multiple reasons that we might buy a company,” Bezos said. “Sometimes we’re trying to buy some technology or IP, sometimes it’s a talent acquisition. But the most common case is market position.”
Amazon was also asked why, during the pandemic, its own Ring doorbells were deemed an “essential good” so as not to interrupt their distribution, where competitors Arlo and Eufy were not.
In addition to scrutiny for Ring, documents released by the committee outlined how Amazon executives schemed to undermine the parent company of Diapers.com, which once challenged it in the market for products for new parents. Amazon cut prices on diapers and eventually acquired the company for a fraction of its previous value.
Apple
Apple arguably got off the lightest of any of the companies in Wednesday’s hearing.
Apple makes at least 60 apps like Music and Mail that compete with third-party sellers but are not subject to the 30 percent tax that it places on them, reducing competition in the marketplace.
Tim Cook testified that “we apply the rules to all developers evenly” when it comes to the App Store. But documents revealed by the subcommittee’s investigation show Apple senior vice president Eddy Cue offered Amazon a unique deal in 2016: Apple would only take a 15 percent fee on subscriptions that signed up through the app, compared to the standard 30 percent that most developers must hand over.
In the garb is giving a better uniform user experience, Apple forces app developers to use it Apple's proprietary payment API to collect payments through the app. It charges a 30% cut in the transaction. For reference, Paytm charges around 2-3% for its payment API.
Cook argued that there are many phones, and many operating systems, and more consumer choice than you can almost even imagine, and that the fees Apple charges are competitive with Google and other stores (‘Tim Apple’ failed to mention that Google doesn’t force developers to use their own proprietary API).
Unlike Android, because of Apple's closed ecosystem (a term I learnt from Apple fanboys), apps can't be side-loaded without ‘jail-breaking’ the phone which means the only marketplace available for Apple apps is the Apple App Store.
In late February 2012, Facebook CEO Mark Zuckerberg emailed his chief financial officer, David Ebersman, to float the idea of buying smaller competitors, including Instagram and Path.
“These businesses are nascent but the networks established, the brands are already meaningful, and if they grow to a large scale the could be very disruptive to us,” he wrote. “Given that we think our own valuation is fairly aggressive and that we’re vulnerable in mobile, I’m curious if we should consider going after one or two of them. What do you think?”
Ebersman was skeptical. “All the research I have seen is that most deals fail to create the value expected by the acquirer,” he wrote back. “I would ask you to find a compelling elucidation of what you are trying to accomplish.” Ebersman went on to list four potential reasons to buy companies and his thoughts on each: neutralizing a competitor, acquiring talent, integrating products to improve the Facebook service, and “other.”
It’s a combination of neutralizing a competitor and improving Facebook, Zuckerberg said in a reply. “There are network effect around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different.”
In the hearing, Zuckerberg copped to buying a competitor, but said he thought it would be complementary to Facebook rather than an app that would one day rival its size:
“I’ve been clear that Instagram was a competitor in the space of mobile photo sharing”
“And by having them join us, they certainly went from being a competitor in the space of being a mobile camera to an app that we could help grow and to help get more people to be able to use.”
Of the four companies, Google is in the most imminent danger of antitrust action. The US Department of Justice is investigating Google’s massive digital advertising business, and is expected to file a lawsuit against the search giant this summer. The company is also ensnared in another probe by a coalition of state attorneys general, led by Texas AG Ken Paxton.
Lawmakers were mainly focused on Google’s dominance in web search, digital advertising and smartphone software. The company processes around 90% of all online searches in the US. That stranglehold on the market is the foundation of Google’s massive advertising business, which generates almost all of the company’s $160 billion in annual sales.
“People have more ways to search for information than ever before—and increasingly this is happening outside the context of only a search engine. Often the answer is just a click or an app away,” Pichai said in his opening statement on Wednesday.
“When searching for products online, you may be visiting Amazon, eBay, Walmart, or any one of a number of e-commerce providers, where most online shopping queries happen,” he went on to explain. “Similarly, in areas like travel and real estate, Google faces strong competition for search queries from many businesses that are experts in these areas.”
The Road Ahead
By any measure, the power of the four companies, which are worth roughly $5 trillion combined, is vast. Facebook, the world's largest social network, has roughly the same number of users as the populations of the two largest countries, China and India, combined. Amazon controls 38% of US online sales, more than six times the size of Walmart's US web business, its nearest competitor. Apple's App Store is the only way for most developers to get their software onto the huge iPhone and iPad customer base, and Apple takes a cut of those installations. Google has a lock on search, processing about 90% of all web searches around the world.
Wednesday’s hearing was a major milestone for the House’s investigation, but far from the finale. Given the chaotic nature of the four-way hearing, it would be great to see separate one-on-one hearings with each CEO. But that’s unlikely. The next step is most likely the subcommittee’s final report, due out sometime in August or September. Wednesday’s hearing made clear that the report will have some real substance to it. Whether it will fire up the American public—or spur real governmental action—remains to be seen.
Gautam Marwah is the founder of Indianaut, a platform showcasing and strengthening India's next best analytical and creative minds.