Regulatory Hurdles Already Impeding Competition to Big Tech

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A bipartisan chorus of calls to regulate “big tech” firms such as Google, Facebook, and Amazon continues to grow louder. Concerns range from the ability of these firms to influence the political landscape to allegations of anti-competitive mergers and acquisitions. Regardless of the specific gripe, or from which side of the aisle it emanates, the accompanying purported solutions almost universally involve more government regulation.

Regulatory efforts are already underway at the antitrust divisions at the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Yet, with a Code of Federal Regulations closing in on 190,000 pages pertaining to virtually every sector of the economy, it stands to reason that the more prudent course of action would be to evaluate the impact of existing regulation on big tech’s competition.

Many big tech skeptics regard the Internet and the platform economy as technological shifts that have “reinvented economics, reinvented business as we knew it.” This has led many to believe some version of the idea that the Internet is “the Wild West,” and thus in need of new regulatory structures.

However, these sentiments are just the latest versions of a problem that has plagued antitrust law since its inception: the relevant market fallacy. It may be true that there is not yet a significant amount of regulations, relative to other sectors, specifically governing things like online retail, search, and social media. Yet this does not mean that Amazon, Google, and Facebook operate in unregulated spaces where competitors would be free to challenge them without significant government interference.

First let’s look at Amazon. At the moment, Amazon occupies the largest share of the online retail market by far, at 38.7 percent. Yet, when consumers are deciding where to acquire the goods they need, do they really just evaluate their online options? As a total of the entire U.S. retail sector, Amazon represents a mere 4 percent.

Of course, the online retail experience differs from the brick-and-mortar one, yet those differences are part of the competitive dynamic, not an obstacle. Some consumers like to see items before they purchase them and want them immediately, while others may prefer the wider selection and convenience of online retail.

Differing experiences and offerings are quintessential to competition, yet they can cause legitimate competitors to face drastically varying levels of regulation. A case in point is the online retailer Rakuten. As Japan’s largest e-commerce platform, Rakuten is commonly referred to as the “Amazon of Japan.” Considering that Japan is the world’s third-largest economy, Rakuten obviously has the potential to go toe-to-toe with Amazon. Yet, a significant portion of its business model currently sits before a federal agency awaiting approval.

In Japan, Rakuten offers a host of financial technology (“fintech”) services and basic banking to its customers. Through these services, customers can earn points redeemable for discounts and other benefits when using other Rakuten platforms. To provide similar services and attract U.S. customers, Rakuten has applied for an industrial loan company (ILC) charter. Rakuten filed its application to the Federal Deposit Insurance Corporation (FDIC) over seven months ago and is still waiting for permission from the government to execute its full business plan and begin competing in the online retail sector in earnest.

How can we expect to reach an honest assessment of the need for antitrust or any other regulation in the online retail space when competitors such as Rakuten remain sidelined by existing regulatory hurdles? (For the long, sordid history of regulation blocking retailers from entering the U.S. banking sector—despite the fact that they can and do so in virtually every other developed country—see this article and paper by my colleague John Berlau.)

Direct competitors to other tech firms such as Facebook and Google may not seem as obvious as those to Amazon. That is because with Amazon, the user is generally also the customer. That isn’t necessarily the case with many of the offerings of Facebook and Google. Facebook is obviously the dominant social media company, especially considering its ownership of Instagram. Google so dominates online search that its name has become a verb: “Google it.” Yet, the relevant market of competition for Facebook is not social media nor is it search for Google. Both of these companies are actually each other’s competitors in the advertising market.

Critics say that Facebook and Google occupy outsized market share in the online advertising market, but this again minimizes the scope of competition that big tech platforms truly face. Just as a consumer decides between heading to the mall or logging on to her computer to shop for goods, advertisers big and small must decide where they will get the most bang for their buck.

It is not necessarily the case that online advertising best suits a particular business. Perhaps a local small business could best reach prospective customers by placing advertisements in local newspapers and television or radio stations. However, federal regulation has its boot on the neck of these competitive alternatives to big tech as well.

Last fall, a federal court reversed the Federal Communications Commission’s (FCC) reforms to local media ownership rules. The FCC had attempted to relax rules related to the common ownership of local newspapers and broadcast stations (radio and television) that generally barred the same person or entity from owning both a newspaper and a station in the same local market.

There is a natural economy of scale to owning both a local newspaper and station because it enables the owner to sell different forms and combinations of advertising to the same customer to reach the same audience. Yet, local stations and newspapers continue to close their doors around the country because these federal rules block many of the people interested in actually owning these firms from acquiring them. This only serves to help concentrate advertising spending in companies that can offer multiple forms and combinations of advertising, like Facebook and Google.

There are undoubtedly countless other examples amid the vast regulatory code in which traditional and unique business models are hampered in their ability to compete with the current dominant online firms. Those seeking novel regulation of online firms ought to consider these barriers before instituting regulatory regimes that would undoubtedly have similar stifling effects on future would-be competitors.