Why Breaking Up Big Tech Could Do More Harm Than Good

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Wharton's Herbert Hovenkamp, George Washington University's William Kovacic and Hemant Bhargava from UC-Davis discuss the merits of Elizabeth Warren's proposal to break up Big Tech firms.

Earlier this month, Democratic Senator Elizabeth Warren solidified her party’s growing disenchantment with Big Tech by proposing to break up companies like Amazon, Google and Facebook. “Today’s big tech companies have too much power — too much power over our economy, our society and our democracy,” the 2020 presidential candidate wrote in a March 8th blog post. “They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”

Clouding the issue of breaking up Big Tech is that these firms arguably make consumers’ lives better by offering such things as free Google searches, social media connections on Facebook and low prices with fast, free shipping through Amazon. But Warren argues that they are impeding competition by buying up or squashing smaller rivals — and ultimately harming consumers. She cited the antitrust lawsuit against Microsoft in the 1990s that tamed its ways and made room for an upstart — Google — to rise. “Aren’t we glad that now we have the option of using Google instead of being stuck with Bing?”

But experts from Wharton and elsewhere challenge some of the basic premises of her proposal and warn that breaking up these three companies could result in unintended consequences that ultimately would harm consumers. The presence of Amazon, Google and Facebook in the market, they said, have lowered prices of products and services to consumers and provided a marketing platform for small companies at little or no cost. Weakening them would not necessarily level the playing field, but could instead route profits back to other big businesses — the old incumbents.

The Legal Ground

First, it’s critical to set aside the political rhetoric to see if her proposal even has legal merit. “We have to disaggregate some of the informational and political concerns from the antitrust concerns,” said Herbert Hovenkamp, an antitrust expert who holds a joint appointment as a University of Pennsylvania law professor and Wharton professor of legal studies and business ethics. He and other experts spoke about the merits of Warren’s idea on the Knowledge@Wharton show on SiriusXM. (Listen to the podcast at the top of the page.)

“The single biggest fundamental problem with the Warren proposals is that they do not sort out who is being harmed and who is benefiting.” –Herbert Hovenkamp

Today’s antitrust enforcement policy hinges on whether or not a company is acting for the welfare of consumers. According to Hovenkamp, Amazon’s “very low” margins allow it to charge lower prices while Google “most commonly charges a price of zero” to consumers. On the other hand, “they are very big companies, and that creates questions about whom the antitrust laws are supposed to protect,” he said. Are regulators supposed to protect consumers — or rivals of Big Tech that feel squeezed and want to see Amazon, Google and Facebook taken down?

Warren doesn’t make it clear. “The single biggest fundamental problem with the Warren proposals is that they do not sort out who is being harmed and who is benefiting,” Hovenkamp said. “And I found them somewhat distressing, because Elizabeth Warren has dedicated her entire professional career to protection of consumers. But these proposals seem calculated to me to raise consumer prices, reduce consumer variety, and it is kind of hard to figure out who is systematically benefited by them.”

Then there’s the complexity of the break-up itself. How exactly does one dismantle three behemoths? “Getting there has proven historically to be very difficult,” said William Kovacic, a former commissioner for the Federal Trade Commission who is now a professor of law and policy at George Washington University, on the radio show. “You can do it, but it is hardly an easy venture.”

Competitive Advantages

Warren contends that Big Tech hurts small firms. “There are plenty of small businesses who are injured by Amazon,” Hovenkamp said, “but there are at least as many small businesses who are benefiting because Amazon acts as their broker” for sales and marketing they may not have had the resources to do on their own. “You’ve got to start with the question, who is getting hurt? And then decide whether that group is worthy of being your constituency,” he added.

Hemant Bhargava, technology management chair at the University of California, Davis, said Warren has good intentions but “the disease [she is trying to cure] is not that bad,” he said. “These companies … are certainly big, but they are not monopolies. They are nowhere near as dominant as Microsoft was, for example, in the 1990s with over 90% of market share in operating systems.” (Warren has pointed out that nearly half of all e-commerce business goes through Amazon, while Google and Facebook account for more than 70% of internet traffic.)

“These companies … are certainly big, but they are not monopolies. They are nowhere near as dominant as Microsoft was … in the 1990s.” –Hemant Bhargava

The government tried to break up Microsoft but didn’t succeed beyond putting restrictions on its market behavior. Eventually, it was a better widget that humbled Microsoft, Bhargava believes. “Microsoft lost its lead with Internet Explorer, not because of any help from the government or its other [agencies], but simply because other firms innovated better and faster,” he said. Market forces successfully checked its behavior. “The evidence that the government actions led to good results is really not there.”

As for the argument that tech giants enjoy big competitive advantages because of network effects, which make them more valuable as more users join them, there is a market solution for that. Hovenkamp noted that it is possible to thrive in a market where there is a dominant company — by specializing. For example, a dating site can do well against Tinder or Match.com by targeting niches. “They’ve got all kinds of dating sites: for older people, for people of certain religious backgrounds, and so on,” he said.

Warren’s Two-pronged Strategy

In her proposal to break up Big Tech, Warren has put forward two ways of curbing their market power. One is to mandate that companies with revenues of at least $25 billion and that offer an online marketplace or platform to the public would be designated as ‘platform utilities.’ As such, they can’t participate on the platform since they could give themselves an advantage.

But this rule not only requires a new statute, it could be harmful to consumers, experts said. Imagine if Amazon could not sell its Amazon Basics-branded products on its own site. Take household batteries, which Amazon Basics sells for 10% to 50% less than branded rivals, Hovenkamp said. By banning Amazon Basics, consumers would pay higher prices for Duracell batteries, which is owned by Berkshire Hathaway, a behemoth. Or shoppers could buy Energizer, Rayovac and Eveready batteries, whose parent is a “very large battery company,” he said. Hovenkamp noted that name-brand batteries have markups in excess of 50% or 60%.

Warren’s second idea is to appoint regulators who would reverse “illegal and anti-competitive” tech mergers such as Amazon’s deal with Whole Foods and Zappos, Facebook’s WhatsApp and Instagram purchase and Google’s Waze, Nest and DoubleClick acquisitions. The idea “has some real merit at a particular level,” Hovenkamp said. “A case is to be made that some of these independent firms that the large platforms have acquired could have developed into rivals.”

“It is a long, long way … to put all of these measures in place.” –William Kovacic

But Bhargava said restricting big tech companies from buying smaller startups can be harmful. For many startups, the initial, say, $100 million they get from venture capitalists is given with the expectation that they will be bought by a Google or Facebook. “For many of these firms, the only way out is to get acquired by these big tech companies,” he said. “If you somehow tell them that is not going to happen, then they may never reach the point of developing that ambitious product.”

Moreover, unwinding the transactions cited above would be “an extraordinarily difficult undertaking. Not impossible, but you are going to have to go into a federal court and explain a theory of competitive harm,” Kovacic said. The tech giants would sue, and it would be tough for regulators to win in court. “The U.S. jurisprudence allows you to provide evidence of consumer benefits, and to emphasize those benefits.”

Looked at another way, if regulators could unwind mergers, then it must also find a way to stop such “anti-competitive” deals from happening in the future. That means there would have to be rules prohibiting big companies from acquiring certain small firms, Kovacic said. That takes new legislation. “To make that truly effective, to have that complete barrier to acquisitions in place, requires going to the Congress and changing the law.”

The only way Warren’s two ideas would get through Congress is if there was “some cataclysm, some external shock that is a result of a corporate scandal, a further set of revelations that calls into question the legitimacy of the sector,” Kovacic said. One recent example is the Dodd Frank act that resulted from the severity of the financial crisis, he added. But barring such disasters, “it is a long, long way … to put all of these measures in place.”

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