The Future, This Week 15 Mar 19: #BreakUpBigTech

Disclaimer: We'd like to advise that the following program contains real news, occasional philosophy and ideas that may offend some listeners.

Intro: This is The Future, This Week on Sydney Business Insights. I'm Sandra Peter. And I'm Kai Riemer. Every week we get together and look at the news of the week. We discuss technology, the future of business, the weird and the wonderful, and things that change the world. Okay let's start. Let's start!

Sandra: Today on The Future, This Week: big tech breakup, Amazon power and Facebook rethink. I'm Sandra Peter, I'm the Director of Sydney Business Insights.

Kai: I'm Kai Riemer, professor at the Business School and leader of the Digital Disruption Research Group. So Sandra, what happened in the future this week?

Sandra: All the major stories this week covered one big important renewed push, to think about how do we break up the big tech giants. So the conversation has mainly revolved around Facebook, Amazon, and Google. Even though there were calls for Apple, and a number of other companies to be broken up. But they were led by Senator Elizabeth Warren's latest proposal to break up these tech companies. And the article at the centre of this was a piece in Medium, that Elizabeth Warren, the Democratic presidential candidate has written herself, 'cause it seems these days that's where you launch major policy calls, in Medium.

Kai: And so Elizabeth Warren, of course, writes off the back of controversies that we've been covering on The Future, This Week for the past two years. And indeed, we have talked about anti-trust, we have talked about platforms, we've talked about Google and Amazon, and indeed also the calls to break up these companies. So this is not necessarily an original idea by Elizabeth Warren, but what is really interesting here is, that this has now entered the major political debate that is shaping up in the wake of the 2020 presidential election, and of course the Democratic primary.

Sandra: So what we're going to do this week, is put this story at the centre of our conversation. We'll draw on a number of different articles and different angles that have come through over the last seven days, and try to really think through all of the aspects of #BreakUpBigTech.

Kai: And there is of course also two related stories that couldn't have been timed any better. There is Mark Zuckerberg coming out with a much-discussed Facebook blog post, around a pivot towards privacy. And there's also Amazon, who have been in the media for kicking off a good number of their vendors from their platform.

Sandra: And of course, Elizabeth Warren's own ads being taken off by Facebook, kind of making her point.

Kai: Ironically, and Facebook has since reinstated them, but it was seen by many as retaliation for her ideas. Which only goes to prove, of course, the power that these platforms have in providing access and shaping public conversation.

Sandra: So all up, we think this is a really worthwhile important conversation to have.

Kai: And let's start by hearing from Elizabeth Warren herself.

AUDIO Elizabeth Warren: The giant tech companies right now are eating up little tiny businesses, start-ups. And competing unfairly. Look at it this way, someone like Amazon runs a platform. You know the place for you buy your coffee maker and get it delivered to 48 hours. And that's great. But in addition to that, they're sucking up all that information about every purchase, every sale, and every one of the other little businesses that are offering their products on Amazon. And when Amazon sees one that's profitable, they say "Hmmm, I think we'll go into business against them", now that they've got all this extra information. And they put their own business out there to compete on selling coffee makers, put themselves on page one, put the competitor back on page six, and the competitor’s business is just gone. So, what I'm saying is we gotta break these guys apart. You want to run a platform? That's fine. You don't get to run a whole bunch of the businesses as well. You want to run a business, that's fine. You don't get to run the platform.

Sandra: And that was Elizabeth Warren talking to CBS on Face the Nation, while she was at South by Southwest, the big tech conference that we've covered before on this podcast, where there was an ongoing big conversation about anti-trust regulation. So before we get into the details of this story, we want to give credit where credit is due. We on this podcast have been talking about the dangers of having the big five, the Frightful Five, having so much market power. And we have been talking about various ways of reconsidering anti-trust regulation, but to be fair, neither of us have come up, nor have other people, come up with a very concrete plan of how to do this. So Elizabeth Warren has been talking about making big structural changes to the tech sector to promote more competition. So breaking up Amazon, Facebook, and Google. But she has been given a very concrete roadmap of how you would do this.

Kai: And we also shouldn't forget that she is not the only Democratic candidate who is advocating for these kinds of measures. There's Senator Amy Klobuchar of Minnesota, and there is of course Bernie Sanders who has famously not only said to break up Amazon, but to fully nationalise the company. Which is probably an idea that is a little bit out there for the US environment. But Elizabeth Warren has put forward some concrete ideas.

Sandra: So Elizabeth Warren's plan rests on two things. First, she wants to pass legislation that requires large tech platforms to be designated as platform utilities, and broken apart from any participant on those platforms. And for that, she proposes looking up companies with an annual global revenue of 25 billion or more, that offer to the public an online marketplace, an exchange, or a platform for connecting third parties. These would all be designated as platform utilities.

Kai: So, this would mean that Amazon would no longer be allowed to own Amazon Marketplace, Amazon Marketplace would be a standalone entity. And Amazon, if it wanted to sell on this marketplace, would have to be an equal seller to every other participant on that platform. Equally Google, on its search platform, would no longer be allowed to feature or privilege, in any way, its own services.

Sandra: All of these companies would be prohibited from owning both the platform utility, and being a participant on that platform. Secondly, Elizabeth Warren wants to appoint regulators committed to reversing any illegal or anti-competitive tech mergers. That means that the federal regulators in the US would have the power to break up mergers that have reduced competition. For instance, and she singles out in this case for Amazon, the acquisition of Whole Foods and Zappos.

Kai: For Facebook, she talks about the acquisition obviously of Instagram and of WhatsApp.

Sandra: And for Google it would be Waze, and DoubleClick, also Nest. We're not quite sure why Nest is on that list, but Nest.

Kai: Yeah, which is a curious addition because the thermostat developer is quite a small fish in this list, so it's curious to say. But, you know, you could argue that Google is putting forward an infrastructure for the home, and as an IoT, as a device company, Nest should be unbundled from the infrastructure. But it's still not quite clear why she mentions it.

Sandra: And just to be clear, the initial Medium post singled out Amazon, Facebook, and Google as the targets of this new legislation. Since then, we have to mention that Senator Warren has added Apple in an interview at South by Southwest that she did with The Verge. So, what we wanted to stress here is that we largely agree with the spirit, and that the direction that Senator Warren proposes, in that America's big tech companies have achieved a level of dominance in the market that is not healthy in the long run.

Kai: And that's Elizabeth Warren's own words.

Sandra: And this is a conversation that we have had on the podcast before. But what we want to do today is to actually have a closer look at how this conversation is being had now. So for that, the first thing we want to take a close look at is what is the actual source of that dominance.

Kai: So, what Elizabeth Warren says is two things that correspond directly with her two measures. One is that these companies, these platforms, use mergers, they buy smaller companies to limit competition. So Facebook buying Instagram and WhatsApp is a direct result of new developments in the markets, so Snapchat coming up, direct messaging on iMessage being popular forced Facebook to basically react and buy competitors. And the second one she mentions is that they use proprietary marketplaces to limit competition. Facebook as a platform for exchanging and distributing news and opinions, Google as the dominant search platform, and obviously Amazon in retail. But is this all there is? That's the question that we want to ask.

Sandra: And I think this is where we somewhat depart with this line of thinking about why these companies are so powerful. So yes, indeed, there is something to be said about proprietary marketplaces, and about the mergers and acquisitions that these companies have gone through over the last few years.

Kai: And, while obviously mergers and acquisitions is a fairly old-fashioned way of thinking about the monopolies in concentration, the marketplace idea points in the right direction. But it is not all that makes them so dominant.

Sandra: Google, Facebook, and Amazon, and even Apple for that matter, have become dominant, not by force but a lot of the times by choice. If we think about why people buy Apple phones, it's because they love the product, they love being part of this ecosystem. Most of us use the Google search engine because...

Kai: Bing has become the butt of many jokes, because it's just no good.

Sandra: Same with Facebook, and with Amazon. All of them have given us a solution to a particular set of needs, and they've done so really well. Some of them for free, or for a cost that we all see as acceptable. Indeed, we've spoken before on this podcast about Amazon driving prices down for the consumer. So, all of us are on these platforms, because we made a choice to be on this platform.

Kai: And while Amazon is often singled out as the villain, with Bezos being the richest man in the world, and Bernie Sanders having turned Amazon into his main enemy. We have previously talked about Apple and Amazon in particular, in terms of having built a fiduciary moat. The kind of business model that really rides on the popularity with the customers, in terms of convenience, in terms of price, in terms of range of products, and overnight delivery, so there's many things that Amazon does right from the consumer's perspective.

Sandra: Yeah, so a fantastic selection at a really, really low price.

Kai: And even Google, with of course it's search engine, but also Google Docs, Gmail, and many of its services, including Android and the Chrome web browser, are very popular with customers. And so it will be interesting to see how this argument plays out politically, because while there's an understanding among the population that there's problems with these platforms, and certainly Facebook has been the number one target in recent times, because there have been real issues around the election, and privacy breaches, and data breaches. It will be interesting to see how this plays out, because people just love many of these products.

Sandra: And this is not to say that the mergers and acquisitions that these companies have gone through are not important. But let's remember Facebook dominated the market before it ever starts WhatsApp or Instagram. Same with Google, powerful way before it required YouTube. Amazon clearly dominated the market before it acquired Whole Foods.

Kai: And while it's not as obvious what kind of technologies Apple has acquired, it is worth pointing out that they acquired the Beats headphone range. Siri, for example, was acquired. And what Apple does is they are very good at acquiring small tech startups that are then being silently integrated into their platforms, around basic technologies such as fingerprint readers and cameras, and all of the kind of things that Apple does with its phones. So, acquisitions at Apple is something that doesn't happen at the same level as with other companies, but it nonetheless happens.

Sandra: So, ultimately these companies are really, really, successful because they deliver a very clear consumer benefit. So then customers really opt-in to this system, rather than being forced to use the system. But this brings us to the second point that we think is really important. Every time we have a conversation about anti- trust legislation, these large tech companies get lumped in with things like railroads and telecom, and indeed that is a very useful way of thinking about how anti-trust legislation came about. But there's also something very different about technology, which is why this comparison can only take us so far. So, we thought it useful to have a conversation about what makes tech different. What is it about tech that changes the conversation about anti-trust regulation? So if you're thinking about something like a railroad company, or like a telecom company, everyone involved in railways is basically in the same business, is in the mobility business, or the transport business.

Kai: But that changes on Facebook for example, because on the one hand we have the users who want to build communities, connect, exchange messages. But then there's the other side, there's the advertisers.

Sandra: So whilst Google for consumers might be a search company, Google for everyone else is an advertising company, and those are two very separate industries, with very different dynamics, and very different value to those two groups.

Kai: And that has been at the heart of the discussion around the business models of both Google and Facebook, which harks back to our discussion around what makes Apple and Amazon different. Their main products are paid for by the customers, whereas Google and Facebook create their main revenue from advertising, from basically selling people's privacy to advertisers.

Sandra: And this is again an important aspect of what makes technology different, the fact that if you look at railroads or telecom, in trying to break up these companies all railroad monopolies or all telecom company monopolies were the same. But the business model of a company like Google, is very different to that of Facebook, and very different to that of Amazon. So it's not a one-size-fits-all. They have very different ways in which they impact the competition. They have very different ways in which they deliver value, and they have very different supply chains.

Kai: Which go straight to the pesky practicalities of how would you actually break them up. Now, take Amazon for example. It's not as easy as saying you have the platform where trade happens, and then you have Amazon as a seller, because a lot of the companies that are selling on those platforms as independent merchants, are actually dependent on Amazon fulfillment. So there's very different levels of what Amazon actually does for these small merchants to enable them to do their business in the first place. That puts them in a weak bargaining position of course, and makes them dependent on Amazon. But it is not as clear-cut as saying we're taking Amazon out of the marketplace, when in fact Amazon does a lot of business with and for the companies that they're actually competing with. So disentangling this is not going to be easy or straightforward. Take Google. Gmail, Google, Google Apps, Chrome, these are highly integrated products, you can't just pull them apart because what makes them platforms is precisely that these services are tightly integrated, which also is what makes them so useful for customers. And that brings us to Facebook, and the recent discussion around integration between Instagram, WhatsApp, and Facebook itself.

Sandra: So this story comes from one um, Mark, Mark Zucker... Zuckerberg who writes about a privacy-focused vision for social networking. So Mark Zuckerberg outlines a number of things that he wants to address in this new privacy-focused vision. Things like private interactions, encryption, reducing permanence, of course safety and interoperability, and secure data storage.

Kai: And there have been a number of articles that have focused on this and discussed what Mark Zuckerberg outlines. He paints it as a pivot of Facebook as a company towards privacy, and there have been cynical reports about how this is merely a distraction because they are experiencing the headwind of the discussion around anti-trust, and the controversies around how they actually go about using data. And so, some commentators have pointed out that this is not at all about privacy, and that we have to carefully understand what he actually means when he says privacy. Because privacy is of course, not about Facebook not using our data, because it's about privacy on Facebook not privacy from Facebook. Of course Facebook's entire business model, it's 55 billion dollar revenue at a 45 percent profit margin, comes off the back of selling people's privacy to advertisers. And so, many have pointed out that the discussion is hardly about changing Facebook's business model, but about integrating Facebook with its other services such as Instagram and WhatsApp. So what Zuckerberg is highlighting here is that he wants to put more focus on these other services, which are of course where growth in a future Facebook company will come from, and also where customers are increasingly going, because there a lot more focus on direct and private messaging. And there is of course, the vision that WhatsApp will become more like WeChat in China, as a platform that has been built up from the ground on private messaging, and now includes all kinds of different payment and e-commerce services. And so while Zuckerberg puts a lot of emphasis on how Facebook will enable encrypted and private communication between clients, Facebook will of course, even though they might not know what people are talking about, have access to the metadata. And the important point here is that Facebook again wants to be the one place where all of this happens. The monopoly for private conversations, on the foundation of which it will then roll out all kinds of different services for its clients.

Sandra: Which takes us back to our anti-trust conversation. So let's recap this. What Facebook might do on the back of this privacy-focused vision for social networking, will have nothing to do with replacing how Facebook exists today, and how Facebook collects data today, but rather would add to these services in the sectors that have been growing fastest in the social networking space. That are one-on-one ephemeral communications. And this indeed goes back to that market power. The end result is still that a company like Facebook will be incredibly valuable to advertisers who can continue to make use of the types of data, and the types of segmentation that the data that Facebook has on its customers can enable.

Kai: And none other than MIT have run an article titled "Zuckerberg's new privacy essay shows why Facebook needs to be broken up", and the author makes the argument that, and he says "it's impossible to escape the conclusion that if privacy is indeed to be protected in any meaningful way, Facebook must be broken up". Stressing that Facebook wants to become that one place where private communication between two individuals will be possible, when Mark Zuckerberg decides that it ought to be, and impossible when he decides it ought not to be. Which goes straight to the idea of infrastructure, right. So, why should the infrastructure for private communication between people be owned by one company, and be controlled by one person like Mark Zuckerberg? If we are indeed serious about enabling people to communicate in private, then a company like Facebook building the infrastructure for it is not the right way to go. That's the argument here.

Sandra: So whilst on the one hand integrating services like Instagram, WhatsApp, and Facebook might again deliver increased value for the end user.

Kai: And also might make it harder to break them up. So, doing this quickly might actually be a move by Zuckerberg to safeguard against a break up.

Sandra: It will also make it that much harder to think of useful ways to implement such anti-trust legislation, because breaking them up will mean a worse-off experience for all consumers. And this goes at the heart of re-thinking a lot of the regulations that we had, that were designed for traditional industries. Take for instance, the GDPR, the data protection legislation in the European Union that is designed to protect the privacy of individuals and to ensure that they have the right to their own data, and the ways in which that data is used. On the other hand, it is legislation like the GDPR that increases the power of companies like Facebook and Google. Because if anything, if you think about such privacy-focused legislation, it ensures that Google and Facebook maintain the control they have over the data that they acquire on their own platform, and it makes it very, very, difficult for any competitor, or anyone else, to amass the same amount of data and power. Let's remember, companies like Google and Facebook collect most of their data within their own platform, within their own ecosystem.

Kai: At the same time, and it is here that we want to quickly interject our third story. We were reminded this week, how much power, and what the kind of power is that some of these platforms actually wield. So, our last story comes from Recode, and the article is titled "Amazon ousted thousands of merchants with no notice - showing the danger of relying on the shopping platform". So Recode points out (and this was reported in other sources as well), that Amazon on March 4 de-listed a number of its often smaller vendors. Companies that Amazon bought products from directly, then stocked them and sold them to customers. Instead, telling these merchants that instead of selling to Amazon they should sell directly to customers on its Amazon Marketplace. And the article points out that for many of these companies that will be incredibly difficult, because they don't have the expertise, they don't have the resources. Where Amazon is indeed able to then solve the problem for these merchants by selling them services such as warehousing and fulfilment, in the process taking a much greater cut out of each of those transactions. So while these merchants are still able to do business, for Amazon it's a way to take a much larger share of the revenue. And the article also goes on to point out that just in November last year, they did the opposite move for a number of their larger brands on the platform, that was selling directly to customers as independent merchants. Telling them that they could no longer do this but had to instead sell to Amazon, who would then sell to the customers, and it was widely regarded as a move to cut out direct access to the customers, and therefore access to the primary data for these larger brands, where Amazon is now playing the middle-man. Again, on the back of control of its platform. So, it appears that Amazon really plays with this power, configuring it's supply network in the best way possible, so that it either gets the share of the data where they need it, or the share of the revenue where they can take it.

Sandra: Which is where we probably diverge from Elizabeth Warren, in that the solution to curbing some of the market power and the market dominance that these companies have, might not come from a one-size-fits-all regulatory move, but rather come from the type of investigations, or the type of commissions that we've seen in Europe for instance, with the European Commission considering breaking up the power and the dominance that Google has, and a closer look at how these companies are integrated, and how these companies create value to understand how to productively break them up so that they still deliver value for the consumer.

Kai: And so, maybe when we talk about openness and integration, and the MIT article pointed that out. When Zuckerberg talks about integration, of course he only talks about integration between WhatsApp, Instagram and Facebook, and how customers can talk across those platforms. So maybe, a way forward is to not break up, but break open these monopolies, and make it easier for customers to transcend platforms, and to actually switch platforms. Rather than disentangle those services that are increasingly integrated, create more widely shared infrastructures like we have with email for example, it doesn't matter which company you are with, what client, what browser are you using. So you can actually send emails, regardless of which provider you're with, right? But of course, these companies want to own the customers. So maybe, rather than breaking them up, breaking them open, and making them more interoperable might be a way of going forward and curbing some of that power.

Sandra: And before we turn to our robot of the week. There was one more takeaway for me from all the stories that we've seen this week. And this is gonna sound really close to standing up for the big tech companies. There is a number of points that we failed to make when we have these conversations. One of them is that there are trade-offs in approaches to anti-trust, and to privacy. Quite often, the moves that we make to curb some of the privacy breaches, actually go to reinforce what these companies are able to do with the data, and go towards strengthening their market power. The second is that, not everything tech companies do to increase their profits, are by definition bad for consumers. It is possible for companies to pursue profits and self-interest, and also at the same time deliver fantastic value to the consumer. Apple is case in point. And, last but not least, why is it a surprise that Facebook for instance, would go through these moves to protect its business, and to protect its interests?

Kai: But I think that is somewhat the point. Of course these companies need to be allowed to work in their self-interest and make a profit. When we talk about infrastructure however, there might be a conflict of interest when people depend on, quite existentially, to access to Facebook for example for communicating, or to a platform that has come to dominate, such as Amazon for doing that trade. That power needs to be curbed, to the extent that fair and open access for everyone needs to be possible, and then of course, within those boundaries of running a fair and open marketplace, those companies need to be allowed to make a profit and work in their self-interest. But I think the rebalancing is what we're talking about. And maybe breaking up is not the right measure. It's more about regulating and putting in place some rules that creates a level playing field, and especially for Amazon, which is where this can be illustrated in the best way.

Sandra: So before we end, here is:

Robot voice: Robot of the week.

Sandra: This week...

Kai: No bullshit...

Sandra: No bullshit, a fish zapping robot.

Megan: Lipstick taser!

Kai: Ah, not quite lipstick, but taser nonetheless.

Sandra: Yes pretty much. This robot is hunting invasive lionfish in the coral reefs of the Bahamas. And if this wasn't good enough, the robot this called The Guardian, and it's developed by the inventor of the Roomba.

Kai: So, instead of vacuum-cleaning your house, this thing is fish-cleaning the reef, with face recognition for fish. Believe it or not we've discussed this on the podcast as well, is there anything we haven't discussed?

Sandra: Given that a single lionfish in a Coral Reef can reduce native reef fish by 79 percent, this is actually a fantastic use of electrocution.

Kai: And yes, animals are being harmed in the production of this podcast.

Sandra: And that's all we have time for today.

Kai: See you soon.

Sandra: On The Future,

Kai: Next week.

Sandra: This week?

Kai: Yes. but next week.

Sandra: On The Future, This Week. Next week. Thanks for listening.

Kai: Thanks for listening.

Outro: This was The Future, This Week made possible by the Sydney Business Insights team and members of the Digital Disruption Research Group. And every week, right here with us, our sound editor Megan Wedge who makes us sound good, and keeps us honest. Our theme music was composed and played live on a set of garden hoses by Linsey Pollak. You can subscribe to this podcast on iTunes, Stitcher, Spotify, YouTube, SoundCloud or wherever you get your podcasts. You can follow us online on Flipboard, Twitter sbi.sydney.edu.au. If you have any news that you want us to discuss, please send them to sbi@sydney.edu.au.