Last week’s epic House hearing on online platforms raised many issues, chief among which was the question who gets to operate at scale.
Last week’s epic House hearing on online platforms has come and gone. This was actually the sixth hearing in the House investigation into Big Tech, but with Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg as the star witnesses, this was the first one that was guaranteed to make front-page news.
Operating at Scale
The written statements by the four tech CEOs raised an interesting conceptual question: who do we want to operate at scale, and should the government have a monopoly over scale? Small firms are naturally limited in what they can accomplish, but firms like the tech platforms are able to operate at scales often associated with governments. Indeed, Facebook, with more than 2.6 billion monthly users, operates at nearly the combined scale of the Chinese and Indian governments. The question of the scale of tech platforms’ operations isn’t just an antitrust question, but the answer to this question may matter for how we think about possible breakups of major tech platforms.
Zuckerberg’s statement addressed scale directly, as he emphasized Facebook’s R&D spending ($10 billion a year), while Pichai put Alphabet’s R&D spending at $90 billion over five years. Bezos’s statement was very clear on what Amazon could do because of its size: “Our scale allows us to make meaningful impact on social issues.” These types of large undertakings are often the exclusive province of governments, but the large tech platforms are capable of operating at an enormous scale, a capability that would be reduced if these firms were broken up.
The US government isn’t the only government playing in the scale space, and Zuckerberg’s references to China presumably were trying to make that salient. Past US tech crises have involved governments operating at scale, sometimes with their own private sectors. Think of the Soviet Union and Sputnik in the 1950s-60s and Japanese semiconductors (and more) in the 1970s-80s.
The call to break up the big tech companies is precisely about the virtues and vices of size, and the extent to which real size is the exclusive province of governments. The debate over big tech platforms is usually framed as big private firms competing with small private firms, but we should be thinking about the scale monopoly question as well. Having the government as a single chokepoint on scale operations means that if the government gets it wrong—think perhaps of the response of FEMA during Katrina—we don’t have alternatives.
And of course, government corruption is a concern as well, a problem exacerbated if the government has a monopoly on scale activities. The US government is operating at an extraordinary scale during the pandemic—as it should be—but that doesn’t somehow mean that concerns about competence or corruption are gone, as the current questions about political influence over vaccine research should make clear.
The Facebook/Instagram Deal
It is always great fun—and instructive—to see firms’ internal documents. They also make for lively teaching, and I am sure that law and business school professors will be putting the House document dump to use for years. The new documents on the Facebook/Instagram deal, set out nicely by The Verge, provide a fresh window into how Facebook understood that increasingly controversial deal.
In April 2012, Facebook bought Instagram for a billion dollars. As I emphasized in my own House statement, filed as part of the digital platforms investigation (see pages 17-18), that the deal occurred at a key juncture. Facebook was trying to figure out how to navigate from the computer desktop to mobile. In contrast, Instagram was born on mobile—IG was all about photos you could take with your phone—and it seemed to be achieving scale and was benefiting from standard network dynamics (your friends were on Instagram so you wanted to be there as well).
It is easy to be critical of this deal as reducing possible competition between Facebook and Instagram after the fact—and in my House statement, I am—but at the time of the deal itself, professional antitrust agencies looked at the acquisition and blessed it. The FTC closed its investigation without taking any action—the vote was 5-0—and the UK Office of Fair Trading did the same.
But the newly-released internal Facebook documents are sure to boost calls for a Facebook breakup or, at least as a starting point, a retrospective look at the deal by the FTC to examine what the FTC understood about the deal at the time and what Facebook itself was saying about the deal.
Instagram had, per the Mark Zuckerberg emails, done a great job of creating what the Facebook CEO saw as a distinctive “social mechanic.” Again, this was occurring at a key time in the industry: the transition from the desktop to mobile and Instagram’s social mechanic were going to be tough to supplant. David Ebersman, Facebook’s CFO at the time, made the sensible point that buying Instagram would just attract more entry into that space.
This is one of the tricky parts about just buying your competition. If an incumbent routinely buys off competitors, clones of the purchased firm should appear and it isn’t obvious that it is much of a strategy to be committed to buying each new entrant seriatim.
But Zuckerberg had a response to that: once Facebook had sufficient time to deploy Instagram’s social mechanics at scale, new entry by an Instagram clone wouldn’t really matter. Buying Instagram really was about controlling the window in which the Instagram social mechanic invention posed a risk to Facebook.
The emails suggest that Facebook well understood the competitive risk posed by Instagram and how purchasing it would control that risk. In the old days—say, the era of Standard Oil—the government would have brought a Section 2 monopolization case to dissolve the merger. That matches exactly what happened to Standard Oil itself. Of course, the procedural posture here is quite different, in that the government agencies looked at the original deal and approved it.
Big Tech firms have a centrality in our lives that makes careful scrutiny appropriate, and the House investigation has been an important part of that. That said, it is worth noting that other countries are looking at these firms as well, probably on a faster timeline than ours. The world is a competitive place after all, and with the Big Tech platforms operating across the planet, governments are effectively in competition with each other on how to regulate these firms.
Breakups will receive a great deal of attention. I do think that we need to think about breakups, in the large and in the small. Tech platforms operate at an unusual scale—the downside of this scale is currently receiving a lot of attention, but we should also be nervous if governments are the only entities that can operate at large scale, and we push in that direction if we choose to break up the tech platforms.
That is the point about breakups in the large. The Facebook/Instagram deal raises questions about breakups in the small. I do think that there may be some under-explored legal issues there, given the prior approval of the deal by different governments, but I would start still smaller, with a retrospective look at the deal by the FTC to better understand what the approval process looked like inside the agency and what Facebook said to the FTC at the time regarding the nature of competition between Facebook and Instagram. The answers to these questions would be particularly interesting now that we know more about what Facebook was saying internally about that competition.