Five of the 10 most valuable companies in the world – Apple, Microsoft, Alphabet (Google), Amazon, and Meta (Facebook) – are based in the U.S. generating their value and profits by creating and operating multi-sided platform marketplaces. A recent proposal to regulate these platforms (See “Lindsey Graham and Elizabeth Warren: When It Comes to Big Tech, Enough Is Enough” in the New York Times on July 27, 2023) ignores economic principles, undermines consumer value, neglects international competition, and abuses the notion of freedom.
The Network Effect
Most traditional businesses make and sell a product whose value is unrelated to who else is using the product. My shoes, for example, are comfortable because of how they were made, not because of who else is also wearing the same kind of shoes. Contrast this with the services provided by Big Tech: the value that each consumer enjoys from these companies’ product is directly related to the number of other people who are also using the product. For example, as more people shop on Amazon, more vendors recognize the marketplace as a vital source of sales. The result is a wider diversity of sellers. Moreover, these vendors compete against each other, lowering prices for consumers. Similarly, as more people post content on Facebook (and its siblings Instagram, WhatsApp, and the new Threads), other people on the platform have more information to peruse. This principle is called the network effect, where the value of a platform service is directly related to the number of people using that service. The network effect concludes that a company’s growth increases consumer value. As opposed to most traditional business, where large corporate size creates inefficiencies and sclerotic decline-making, larger platforms offer more value for each customer. Bigger is better for buyers and seller on a platform.
If regulators are successful in narrowing the reach, scope, and features of these platforms, fewer people will join and participate, reducing the value for existing and future participants. That degradation of consumer value seems to run counter to the purpose of government regulation. Indeed, the examples of regulatory agencies cited by legislators in the NYT editorial tackled business concepts that did _not_ employ or enjoy the network effect. That legislators do not make this distinction is troubling, since it suggests that they are misidentifying both the problem and the solution.
The editorial mentions several purported evils perpetrated by Big Tech. For example, concerns over consumer privacy are legitimate. However, these are not specific to Big Tech; they apply to all modern companies, from neighborhood landscaping companies that might learn the layout of your house to electricity companies that can determine when you are at home or away based on your energy consumption. More fundamentally, American companies and consumers do not need a new agency for these protections. For privacy, if Congress deems its current laws inadequate, it could either look to Europe’s General Data Protection Regulation (GDPR) or to existing U.S. regulations on the protection of patients’ medical data as enshrined in the 25+ year-old Health Insurance Portability and Accountability Act (HIPAA). No new agencies or immature regulatory frameworks required.
In another example, the editorial offers anecdotes of the “dark side” of Big Tech’s business practices. Yes, open forums contain extreme and dangerous opinions, especially social media, which continues to struggle to eliminate harmful content. Yet to accuse Big Tech’s of human harm is almost laughable given Congress’s impasse on gun, pharmaceutical, and cryptocurrency regulation. In 2022, almost 50,000 died from gun violence in the U.S. How many people died as an immediate result of using Google’s search engine or Apple’s App Store?
The legislators in the editorial also cite the potential for Artificial Intelligence to increase structural, embedded bias. And although AI does indeed contain algorithmic bias, regulation does not offer a solution. AI relies on “large language models” – in other words, everything that is available on the internet – to make predictions about the next word in a sentence. We all recognize that most content on the internet was written by dominant groups; marginalized populations do not write as much as, say, university professors, who tend to be white American males. But correcting this bias is almost impossible. How can anyone know what pieces of history are underreported? More generically, how can we know what we do not know? Even if we can reconstruct this information, what weight and credibility should we give to this new information? And who should adjudicate disputes about expansions of human knowledge? Do we really want to give such power to fill in these gaps to the most exclusive club in the nation, the U.S. Senate, whose members bare almost no resemblance to the diversity of race, wealth, education, or age of the American people?
Perhaps more worrying, these proposals for regulation seem to target Big Tech because of their brand awareness and market capitalization. Yet Amazon’s annual sales are smaller than that of Walmart. Apple has less than 30% market share of global smartphone sales. Is the regulation punishing market value instead of market share?
If regulators hobble these large platform companies, other companies will happily take their place. Alibaba, TenCent, and Bytedance (the makers of TikTok) are poised to entice American consumers to their Chinese owned marketplaces. As they gain consumers, they, too, will harness the network effect to increase the value for each consumer. Such a migration would reduce American employment, American prosperity, American geopolitical power, and American intellectual property rights. In the past, anti-trust regulators did not need to consider the specter of international competition. After all, railways and energy grids do not cross oceans. Yet online platforms have no geographical limitations. Instead of trying to limit Big Tech power at home, why aren’t American legislators trying to increase Big Tech’s influence as part of U.S. economic resurgence, especially in Asia?
American politicians repeatedly declare that Big Tech’s “unelected CEOs” are curtailing “individual freedom.” This is an absurd power grab. Whereas every American is represented by two Senators and one Representative for a total of three out of 535 votes (0.6%) in Congress as required by the Constitution, any American has the freedom to use or avoid services from Big Tech. The purchase of an Apple phone or use of Google’s search engine is entirely voluntary. Far from being “unaccountable,” these companies lose customers instantly if they cease to provide value. Twitter is only the most recent illustration of the consequences of a consumer revolt. Big Tech does not infringe upon our freedom or other enumerated rights. If anything, these companies expand our freedom to read, watch, play, interact, or disconnect as we choose. I wish I could say the same about this proposal from members of Congress.
When I mentioned my concern over these proposals to regulate Big Tech at a recent academic conference, one person accused me both of advocating for Big Tech for my own benefit and of failing to read enough about Congressional deliberations. While the second is certainly true, the first is only true if you squint. None of my research is corporately funded. While I have given paid speeches to Big Tech, most recently Amazon Web Services, I also give paid speeches to other companies that are not considered Big Tech. Like most other investors, my investment portfolio includes Big Tech stocks. However, these decisions are made by an investment manager without my interference. In short, even though I cannot claim total objectivity, my opinions above do to give me any direct benefit.