American Tech Giants Are Fiercely Competitive Monopolies

ESB Market power ESB Market power

DESIGN American tech giants are fiercely competitive monopolies

In virtually every country, antitrust agencies and regulators support the moligopoly hypothesis. They offer a new characterize US tech giants as monopolists. The press now picture of the FAANG firms’ competition. One in which each FAANG takes competition from other refers to them as ‘big tech’, the ‘frightful 5’, or FAANGs FAANGs, non-FAANGs (like AT&T, DELL, IBM (for Facebook, Apple, Amazon, Netflix and Google). Do and Oracle), foreign tech firms (like Spotify, Baidu and Tencent), and related companies (like Facebook versus they deserve to be vilified as monopolists regulated like Instagram or Google Maps versus Google Waze). Once public utilities or even broken up? this is understood, it is possible to see a lot of variations across FAANGs, and doubts that one-size-fits-all regulatory proposals are in order.

NICOLAS PETIT ntitrust and regulatory agencies say THE NATURE OF MOLIGOPOLY COMPETITION Professor at the FAANGs are monopolies. Other obser- How do moligopolists actually compete, is the next University of vers, including FAANGs themselves, logical question. The data, again, suggests that FAAN- Liege, Belgium, and consider digital markets as intensely com- Gs display four features, though there are significant Research Fellow at Apetitive. What if both were right? This intuition, which discrepancies at firm level. Stanford University I present in Petit (2016) and discuss in a forthcoming First, FAANGs are conglomerates. All have a book is what I call the moligopoly hypothesis. This is core business: Apple in hardware, Amazon in online the idea that FAANGs – or perhaps just a few of them, retail, and Google in search engines. But all also have with the possible addition of Microsoft – are at the a diversified portfolio of activities. Some, like Amazon, same time monopolists and oligopolists. Microsoft or Google, cover a wide scope of products To explore that question, in Petit (2016) I inves- and services. Others, like Facebook or Netflix, are less tigate two sources of data. First, the yearly 10K reports spread out. Sometimes, FAANGs vertically or con- filed by the tech giants before the US Securities and glomerally integrate through the mergers and acquisi- This article is based Exchange Commission (SEC) give reliable evidence on tions (‘M&A’) market, for instance with Google and on Petit (2016) the competitive environment and risk factors faced by Android, Facebook and WhatsApp or Microsoft and and draws from a each FAANG. Second, the ‘market research’ produced LinkedIn. In other cases, FAANGs expand by internal forthcoming book by financial data providers, embodies useful company growth, like Amazon into cloud, Apple into watches Petit (2019) and competitor profiles information. Both datasets and Netflix into media content.

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Second, FAANGs characterize uncertainty as a for new markets, for cooperation in entrepreneurial source of intense competitive pressure. The FAANGs’ assets and the competition inside the firm. concern is specifically on technological uncertainty, not on disruption caused by other factors like currency Competition for new markets fluctuations, demand shocks or trade wars. Admitted- As a second dimension to competition, FAANGS ly, technological uncertainty belongs to FAANGs own compete against the ‘non-consumption’. Competition DNA. Most, if not all of them, leveraged technology against the non-consumption often leads moligopolists to disrupt incumbent players perceived as unassailable to compete against other FAANG and non-FAANG monopolists. firms. Third, FAANGs channel high amounts of finan- The concept of ‘competition against the non-con- cial and human resources into research and develop- sumption’ is an invention of Business-Strategy Profes- ment (R&D). More precisely, some FAANGs show sor Clay Christensen (better known for his work on the unusually high R&D intensity levels (i.e. the ratio of theory of disruptive innovation). The key point made R&D expenses to revenue) in excess of the orders of by Christensen is that some firms essentially try to serve magnitude observed in other R&D hungry sectors like potential purchases that are not made by customers, defense or pharmaceutics. because existing products or services are ‘too expensive Fourth, FAANGs’ competitive strategies display or too complicated’ or try to deliver ‘new market appli- a degree of serendipity. Innovation strategies are a case cations for entirely new customers’. in point. In parallel to outcome-driven R&D proces- The notion of ‘competition against the non-con- ses, some FAANGs follow blue-sky research processes sumption’ is very apt to capture the competitive dyna- designed to achieve unpredictable outcomes through mics at play in moligopoly markets. Unlike monopolies experimentation. Microsoft Sky Blue, Google Research/ which do not worry about unserved, and often unseen, Google X or Facebook’s Building 8 divisions are possible segments of market demand, moligopolies go after the illustrations. non-consumption in new markets. Think for instance Sometimes, successful innovation occur out of of competition in cloud computing (Amazon, Micro- any institutional framework: Amazon almost involun- soft and Google), self-driving cars (Google and Apple), tarily developed cloud services. Similarly, a degree of virtual reality devices (Microsoft, Facebook), weara- serendipity characterizes the FAANGs’ product launch bles (Google, Microsoft, Apple) or space transporta- strategies. Google Maps, the Apple Store or Netflix’s tion (Google, Amazon, Facebook). This process often streaming were all introduced without any clear monetization strategy. And when products fail, exiting the market is promptly decided, for example as with the smartwatch Microsoft Band. Four-dimensional competition FIGURE 1 INTERPRETATION

Are these structural features the cause or the effect of Entrepreneurial assets Non-consumption a specific model of competition particular to the moli- • Labor • New market footholds gopolists? One that would distinguish FAANG firms • Capital • Low-end market footholds from the average tendencies displayed by monopolies, Moligopoly as evidenced from past or contemporary industries. Competition The answer to this question is that moligopolists inside the firm participate in a four-dimensional competitive process (figure 1). First, moligopolists compete as rival sellers of substitute products or services in a multiplicity of product or service markets, like mobile payments, cloud Product and computing, games or messaging are obvious examples. service markets But contemporary antitrust and regulatory policy focuses on this first dimension of competition only, and Source: adaptation of Petit (2016) | ESB neglects other dimensions of rivalry in the competition

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brings the moligopolists to mimic one another. When Competition for cooperation in entrepreneurial assets one moligopolist discovers a potential new market foo- A third dimension of competition is for cooperation in thold outside of its core activities, other moligopolists entrepreneurial assets. This competition can be seen on tend to follow suit. This imitation game is suggestive of the demand side of the labor market and on the supply an urge to keep the iron in the fire, and of the ability to of side of capital markets. ‘hop’ to the next (disruptive) ‘dominant design’ in case Take labor markets. SEC filings data show that a rival tech giant would be the first to discover a viral job growth in FAANG has approximated job growth technology application. in the high-tech sector over the past few years. The US In parallel to the search for new market footholds, Bureau of Labor Statistics also recently reported that moligopolists also attempt to disrupt incumbents’ eco- high tech workers are paid well above those not enga- nomic rents in low-end footholds. In this variant, moli- ged in high tech. This percolates through all employee gopolists try to resegment markets where incumbent ranks. Not only are engineers paid more, but sales reps, suppliers perform poorly in price or non-price terms. managers and administrative staff earn wage premiums Zero price offers like Amazon Prime, WhatsApp or of between 8 and 48 percent. Last, but not least, data Gmail are possible instantiations. shows that employees at Amazon and Google have among the lowest job tenures of Fortune 500 companies, indicating the job churn that characterizes a vibrant, competitive industry. Or consider capital markets. The moligopolists Employees at Amazon and M&A activity on transactional markets can be seen as a declination of moligopoly competition for entre- Google have among the preneurs, through waves of ‘acqui-hiring’. Addition- lowest job tenures ally, the moligopolists engage in corporate venture capital (CVC). Well-known examples include Google ventures of $258 million and Microsoft venture of $1 billion investments in Uber, Microsoft’s $240 million investment in Facebook in 2007, Google-led $524 million investment in MagicLeap. In both cases, moligopolists exploit the relatively The bottom line is: some moligopolists look like low marginal costs that characterize the supply of intan- Schumpeterian social institutions which incentivize, gible goods and services. The challenge for them is then finance and structure the efforts of entrepreneurs to cover the large fixed and sunk costs necessarily incur- through which competitive disruption occurs. red upon entry. This long term horizon issue requires moligopolists to solve hundreds of highly complex Competition inside the firm scalability problems. Google, Facebook and Amazon Finally, some moligopolists also embody a degree of spent hundreds of millions of dollars scaling Android, internal rivalry at subsidiary, division or business unit Instagram and Prime. Networks effects certainly help, levels: Google has Waze and Maps, YouTube and Play but many platforms fail to ‘ignite’ due to crummy Music; Microsoft has Word and Works or Mojang and design or poor monetization choices. Moreover, esta- Studios. blished platforms may go under due to demand shocks. Outside of the US, tech firms also institutional- It is often forgotten that network effects cut both ways, ize competition. China’s Tencent is a good example. as Yahoo!’s demise reminds us. Also, digital firms are It initially had a messaging app called QQ. It then exposed to unanticipated variable costs. Indeed, regu- introduced a competing service called WeChat which latory requirements like protective privacy regimes or eventually disrupted QQ. However, the QQ service content moderation rules are labor intensive. was maintained. Both now compete against each other, The general take away from the above discussion though each with a distinct focus. is that entrenched market positions in the core are just This rivalry is distinctive. Competition economics one slice, layer or facet of the various dimensions of perfectly well understands how vertically integrated competitive interactions amongst moligopolists. platforms compete with third-party sellers (like Ama-

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zon’s competition against merchants) or with related A WAY FORWARD FOR COMPETITION POLICY firms in which they have a stake (for instance, Google’s I propose a rechanneling of modern antitrust and regu- driverless car subsidiary Waymo’s competition against latory policy in two directions. To start, concerns of Uber). By contrast, existence of internal rivalry violates accumulation of market power in one relevant market economics’ first principles. Nobel Prize economist should be systematically filtered through a prior exami- Ronald Coase showed that some firms exist to avoid nation of several dimensions of competition, in order the transactions costs encountered on markets. Why to establish whether the firm under scrutiny is a moli- do moligopolies incur internal transaction costs resul- gopolist. I call this the ‘moligopoly screen’. ting from the competitive process, when they could If the firm under scrutiny is a moligopolist sub- substitute this by costless hierarchical control? Perhaps, ject to fierce multi-dimensional rivalry, this should serendipitous innovation is an explanation. be the end of the antitrust or regulatory inquiry. For consumers, this will ensure that a steady flow of innova- THE PROBLEM WITH COMPETITION POLICY tive products will continue reaching the market. If the As said before, contemporary antitrust and regulatory policy pays almost no attention to the second, third and fourth competitive dimensions of moligopoly competition outlined above. Why? The problem here is not one of ideology, it is one of methodology. In decision after decision, the com- The assessment of competition mon thread in all antitrust regulatory agencies’ inves- in the context of a relevant market tigations is to measure competition by reference to a relevant market. On its face value, this preliminary handicaps decision makers step called ‘market definition’ is legitimate. Its practice, however, is much less satisfactory. Market definition lends itself to risks of gerrymandering. Or the idea that if antitrust watchdogs draw markets narrowly enough, every company can be made to look dominant. In the multi-dimensional, moligopoly competition is insuf- 2018 Google Android decision, the European Com- ficient, the antitrust inquiry should focus in priority mission said that Google Android was dominant on on conduct that elevates barriers on entrepreneurial the market for ‘licensable smart operating systems’, resources, which are the engine of competition in dig- excluding Apple from the relevant market because iOS ital markets. is a proprietary system not licensed to other phone makers. This is akin to saying that Airbus is a monopo- Moligopoly screen list. True, Airbus sells 100 percent of a unique product: A possible way to measure the multi-dimensional a double deck aircraft. But Airbus also faces dog eat dog degree of moligopoly competition is by using firm-level competition from Boeing. variables. The firm’s degree of diversification suggests Moreover, the systematic assessment of competi- a commitment to compete against the non-consumption in the context of a relevant market handicaps the tion. And the firm’s direct and indirect R&D invest- antitrust and regulatory decision makers’ ability to ments give indications of its commitment to compete think about the social costs and benefits of cross-mar- for entrepreneurial assets. ket competitive injuries or efficiencies. The questions Key data points are the absolute and relative size, are simple: can conglomeral integration without a the open-ended versus the purpose-driven nature and dominant position reduce competition? Should we direction of R&D investments, the number and range redeem competitive injury in one relevant market on of product segments, the profit allocation choices the ground that it is outweighed by efficiencies in some (retained earnings opposed to dividends and buybacks) or all other markets? Failure to look at these issues is and the transactional activity (M&A, VC, CVC). Tho- antithetical to antitrust and regulatory decision makers’ se tools, in turn, could assist antitrust and regulatory commitment to evidence-based policy. And in practice, agencies in discriminating between pro- and anticom- it is likely to lead to false convictions and acquittals. petitive tech firms.

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Barriers to entrepreneurial assets that prescribes non-enforceability, justifies stronger Above this screen, competition and regulatory policy remedies that deter, such as antitrust fines or regulation. should focus on three categories of anticompetitive res- Third, antitrust and regulatory policy should focus traints that potentially harm the free exchange of entre- on platform governance. Moligopolists are imposing preneurial resources. commercial and technical obligations upon developers First, antitrust and regulatory policy must scruti- of complementary applications, content providers or nize restraints to capital. Entrepreneurs’ ability to raise merchants that use their platforms. So, vertical plat- capital equity may be limited by the existence of a moli- form control is necessary, because upstream players do gopoly firm. Anecdotal evidence suggests that VC and not internalize the harmful effects of their actions upon CVC refuse to fund start-ups that operate in markets third-party users (upon safety, confidentiality, security exposed to threats of moligopoly entry. Journalists refer and content moderation). At the same time, vertical to this as the ‘kill zone’ of FAANG firms. platform control may disguise strategic anticompetitive conduct. In cases where platforms enjoy life-and-death power over supply-side users, antitrust and regulatory policy can be designed to ensure due process in platform access, removal or management decisions. On Moligopolistic competition the other hand, antitrust and regulation should avoid is like Game of Thrones: policies that increase returns to vertically integrated business models with little openness and hardly any a matter of survival interoperability.

CONCLUSION Moligopoly competition is like Game of Thrones. In This necessitates an extensive consideration of the long term, it is more akin to a survivalist game than competitive pressures, well beyond the traditional to a profit-maximizing one, as Nobel Prize economist assessment of actual and potential competition within Armen Alchian once observed. existing relevant markets. Moreover, antitrust and reg- Moreover, the metaphor is particularly apt in the ulatory analysis must balance this conjecture with the short term, because moligopolies operate like HBO’s possibility that moligopoly positions act as ‘lighthouses’ Game of Thrones families: they compete with highly for entrepreneurs. The kill zone may incentivize entre- distinct capabilities and resources across various ter- preneurs to channel their efforts towards products or ritories. In digital Westeros, Apple is the Lannisters: services that bypass, disintermediate, leapfrog or pre- it sits atop a mountain of cash, enjoys strong legacy empt moligopolies. products, and its internal processes are very secretive. Second, antitrust and regulatory policy should Amazon is the Targaryen family. It is a big bazaar, host focus on labor restraints. Non-compete clauses that to many communities; it raises its army at a methodical ‘restrict an employee’s post-employment ability to work pace; and it has a dragon’s ability to fly to any market: for a competitor or start a competing company’ hold it scares every other tech player. Microsoft is the House the potential to harm innovation in digital markets. of Stark of Winterfell: it’s become the good guy of big They limit the supply of skills in the labor market, raise tech, to the point that it is out of the FAANG acronym. the opportunity costs of entrepreneurship, discourage Like Ned and Rob Stark, Microsoft has paid a big price entry and reduce the spillovers of knowledge towards in the past: its monopoly was decapitated, leading to other firms. Even in countries where they are unlawful, the departure of its two legendary CEOs Bill Gates and ‘non-competes’ remain present in many employment Steve Ballmer. contracts. In California, for example, non-compete More seriously, the moligopoly theory can be used clauses appear in 22 percent of employment contracts. to cover other firms’ strategies than the FAANGs’, as Hiring firms know that regardless of the law, non-com- long as they are competing four-dimensionally. In fact, pete clauses dissuade worker mobility, because of infor- statements by FAANGs regarding their possible com- mation and litigation costs. The fact that non-compete petitors point to other possible moligopolists, like Cis- clauses remain used, despite any statutory legislation co Systems, IBM, Intel, Qualcomm, Oracle, et cetera.

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At the same time, some FAANGs may not deserve to be called moligopolists if they essentially compete in substitute products and services, in which case estab- lished antitrust and regulatory policy can proceed at full speed.

REFERENCES Petit, N. (2016) Technology giants, the ‘moligopoly’ hypothesis and holistic competition: a primer. Working Paper, 22 October. Petit, N. (2019) Tech giants, competition and innovation. Oxford University Press. Forthcoming.

In brief ▶▶ Antitrust and regulation must ▶▶ Moligopolies are conglo- ▶▶ A moligopoly is different from begin with an exploration of merates that all have a core a monopolist because of fierce the various forms of competi- business. four-dimensional competition. tion that moligopolies face.

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