A Quick Summary of the House Judiciary Committee Report (Premium)

The House Judiciary Committee has called on Amazon, Apple, Facebook, and Google to be regulated and, in some cases, even broken up. They have made a solid case against each of these Big Tech giants, and while I find it hard to believe that any of these companies could or even should be broken up, their abuses are obvious and do need to be addressed.

The 449-page report is, of course, hard to get through in a reasonable amount of time, but I’m impressed by the thoroughness. If you were worried that our government was going to hell in a handbasket, this detailed and well-argued document is a timely reminder that there is still some solid thinking working on the behalf of U.S. citizens and, in this case, trying to protect us from ongoing abuse.

“The Subcommittee has followed the facts before it to produce this Report, which is the product of a considerable evidentiary and oversight record,” the report explains. “This record includes: 1,287,997 documents and communications; testimony from 38 witnesses; a hearing record that spans more than 1,800 pages; 38 submissions from 60 antitrust experts from across the political spectrum; and interviews with more than 240 market participants, former employees of the investigated platforms, and other individuals totaling thousands of hours. The Subcommittee has also held hearings and roundtables with industry and government witnesses, consultations with subject matter experts, and a careful—and at times painstaking review of large volumes of evidence provided by industry participants and regulators.”

What I’d like to do here is quickly summarize the arguments made against each company, the recommended solutions, and then, when possible, the public responses that each firm has made in the wake of this blockbuster filing. But I strongly recommend reading the report: There is much, much more detail in each case there.

In order…

Facebook

Facebook is the largest social networking platform in the world with several billion users across its five primary product offerings: Facebook (a social network), Instagram (a social network for photos and videos,), Facebook Messenger (a cross-platform messaging app), WhatsApp (another a cross-platform messaging app), and Oculus (a virtual reality gaming platform). The firm has over 3 billion monthly active users (MAUs) and generated $70 billion in revenues last year, mostly from advertising.

“Facebook has monopoly power in the market for social networking [and] monopoly power in online advertising in the social networking market,” the report says. “Facebook’s monopoly power is firmly entrenched and unlikely to be eroded by competitive pressure from new entrants or existing firms.”

The report notes, correctly, that Facebook’s monopoly has been maintained and expanded by acquiring rivals like Instagram and WhatsApp when they threatened Facebook’s own offerings. It’s so powerful, the report claims, that its only real competition is its own products.

Facebook, of course, claims that it does not have a monopoly, and it cites rival social networks like Twitter as evidence. But “Facebook’s position that it lacks monopoly power and competes in a dynamic market is not supported by the documents it produced to the Committee during the investigation,” the report counters. “Instead, Facebook’s internal business metrics show that Facebook wields monopoly power.”

In short, “Facebook abused its monopoly power to harm competition in the social networking market.”

Google

Google, the report says, is “ubiquitous” online, thanks to its monopoly in online search and advertising, two comingled businesses. “The company is now … the largest provider of digital advertising, a leading web browser, a dominant mobile operating system, and a major provider of digital mapping, email, cloud computing, and voice assistant services, alongside dozens of other offerings,” the report notes of Google’s reach.

To expand its monopoly, Google has acquired over 260 companies in 20 years, and it reported over $33 billion in net income on revenues of over $160.7 billion last year, a gain of 45 percent in just two years. “It generates the vast majority of its money through digital ads,” the report correctly notes, “and Search advertising, in particular, [is] critical to Google.” It has worked tirelessly to maintain its monopoly by paying Apple billions to keep it the default search engine on the iPhone and by forcing smartphone makers to bundle Search and its other services on Android handsets. Google routinely steals third-party content and diminishes the visibility of rival services while propping up its own services, which it launches based on popularity derived from its own search data.

Google’s monopoly power is obvious: The firm now has nine products with more than one billion users, and it controls 87 percent of the search market in the United States and over 92 percent worldwide. Google also controls over 50 percent of all digital advertising in the United States. And thanks to obvious barriers to entry, these monopolies are “durable,” the report adds, and “generally immune to competition.” It’s so strong, that Google’s advertising business can charge advertisers 30-40 percent more than Microsoft Bing.

Google, of course, argues that it faces stiff competition in both search and advertising, noting that the competition is “one click away.” But it did not produce any evidence of either claim, the report says, despite being confronted about this repeatedly.

“To the contrary, there is compelling evidence that Google has only strengthened and solidified what was already a leading market position,” the report reads. “For example, in 2009, Microsoft and Yahoo!—Google’s closest competitors—entered an agreement to integrate their search platforms, an effort to team up to tackle Google’s dominance.1077 A decade later, the two collectively have a lower share of the general search market than they did at the time of their deal … And Google’s share has increased.”

The Google case is one of the strongest because the abuses are so vast: The report cites multiple abuses across multiple Google products, from Search to Android to Maps and more, making Google’s bundling capabilities seem like a hyper version of what Microsoft did with Windows and IE back in the day.

Amazon

Amazon is the second-largest private employer in the United States with over 500,000 employees. It is one of the most valuable companies in the world. And its CEO, Jeff Bezos, is the wealthiest person in the world. The firm earned $280 billion in 2019, up 20 percent year-over-year, and while its retail operations are still the largest contributor, its AWS online services deliver 60 percent of its operating income despite accounting for just 12.5 percent of its revenues.

Amazon Prime members can choose from over 100 million items that are available for free, two-day delivery in the continental United States; Walmart, by comparison, has “only single-digit millions of products eligible for free, two-day shipping.” Amazon told the subcommittee that it offers about 158,000 private label products across 45 in-house brands, hosts 2.3 million active third -party sellers from around the world (about 45 times more than the 52,000 third-party sellers that Walmart hosts), and that 37 percent of those third-party sellers—about 850,000 sellers–rely solely on Amazon for their income. Net sales for services provided to third-party sellers increased from $23 billion in the first six months of 2019 to $32 billion in the same period in 2020, an increase of 39 percent YOY.

Meanwhile, “AWS accounts for close to half of all global spending on cloud infrastructure services and the business has three times the market share of Microsoft, its closest competitor.” And AWS has benefitted nicely from the pandemic, with its operating profits surging YOY by over 300 percent. Today, Amazon’s market valuation, about $1.5 trillion, is “greater than that of Walmart, Target, Salesforce, IBM, eBay, and Etsy combined.” (Etsy? Come on.)

Amazon’s share of the e-commerce market is estimated to be over 50 percent in the U.S. But because the firm captures an average of 74 percent of “digital transactions across a wide range of product categories,” it has more “significant and durable market power.” And it has a “monopoly power over most third-party sellers and many of its suppliers.”

“Amazon is the dominant online marketplace,” the report notes. “It reportedly controls about 65 to 70 percent of all U.S. online marketplace sales.” The issue here, of course, is how Amazon abuses that power, by “bullying” its so-called “partners” to accept ever-shifting terms and higher prices, and by releasing its own low-cost products that compete with popular third-party offerings.

“Amazon also enjoys significant market power over online consumers,” the report says. “Amazon uses Prime and its other membership programs to lock consumers into the Amazon ecosystem. According to an internal analysis, Amazon was willing to pay a credit card company a significant sum in 2013 for signing up new Prime members under the assumption that each new member would contribute $527 to Amazon’s gross merchandise sales and $46 of gross profit. Amazon estimated that the deal had a five-year net present value of $17 million.” More to the point, Prime members tend to do most of their online shopping at Amazon, of course, and these members spend an average of $1400 annually vs. $600 for non-members.

“Other retailers are unable to match Amazon on its ability to provide free and fast delivery for such a large volume and inventory of products,” the report adds. “Even Walmart, with its extensive, national distribution network, does not come close to matching Amazon on this measure.”

Amazon’s market power is “durable and unlikely to erode in the foreseeable future,” the report says, citing major barriers to entry, switching costs, and the steep cost of building a logistics network that in any way compares to the size and scope of “Amazon’s massive international footprint in fulfillment and delivery.”

Amazon has expanded its monopoly in part through over 100 acquisitions over 20 years, including most notably Whole Foods, Audible, Ring, Goodreads, Twitch, and Zappos, many of which were former rivals. “Amazon’s acquisitions set in motion a self-reinforcing cycle, creating an ever-widening gap between the platform and its competitors,” the report notes. “As one former Amazon employee told Subcommittee staff, ‘Amazon is first and foremost a data company, they just happen to use it to sell stuff’.”

Frankly, the Amazon abuses go on and on. It’s a bit painful to get through and is possibly even worse than Google.

Apple

Apple is the most valuable company in the world, thanks to its $2 trillion market cap, and it generates impressive income and revenues every year, not to mention unheard-of margins of 37.8 percent on a business that is driven by hardware, which is generally low margin. Apple earned a net profit of $98.3 billion last year on revenues of $260 billion.

The reason? Apple is the leading smartphone and mobile vendor in the United States and its underlying platform, iOS/iPadOS, has 52 percent marketshare, compared to just 47 percent for Android. “In 2018, Apple sold its 2 billionth iOS device, and is projected to sell its 2 billionth iPhone by 2021,” the report notes.

The issue, of course, is that Apple has monopoly power over the app stores on its mobile platforms, which generated over $120 billion in revenues and “an estimated $138 billion in economic activity in the U.S. last year.”

“Apple has significant and durable market power in the market for mobile operating systems and mobile app stores, both of which are highly concentrated,” the report says. “More than half of [all] mobile devices in the U.S. run on iOS or iPadOS … Apple’s market power is durable due to high switching costs, ecosystem lock-in, and brand loyalty. It is unlikely that there will be a successful market entry to contest the dominance of iOS and Android. As a result, Apple’s control over iOS provides it with gatekeeper power over software distribution on iOS devices. Consequently, it has a dominant position in the mobile app store market and monopoly power over the distribution of software applications on iOS devices.”

Noting that Apple’s app store is the only way to distribute software on iOS, the report explains that Apple blocks third-party stores, and the side-loading of apps, and that its position as gatekeeper is “unassailable.” And Apple provided no evidence that it was not exerting this monopoly power over app distribution, it explains.

“Apple’s monopoly power over software distribution on iOS devices appears to allow it to generate supra-normal profits from the App Store and its Services business,” the report continues. “The Services business accounted for nearly 18 percent of total revenue ($46.2 billion) in fiscal year 2019 … The Services category is also Apple’s highest-margin business at 63.7 [percent] in fiscal year 2019 and 67.2 for Apple’s ending in June 2020.”

Of course, with Apple, the issue is always “conduct,” or what I’d call its business practices. And the report cites multiple abuses here, including Apple’s excessive 30 percent fee on in-app purchases, including subscriptions.

“Apps are not permitted to communicate with iOS users that the app may be available for purchase at a lower price outside the App Store, provide links outside of the app that may lead users to find alternative subscription and payment methods, or offer their own payment processing mechanism in the app to avoid using Apple’s,” the report correctly notes. “Apps that violate Apple’s policies can be removed from the App Store, losing access to the only means of distributing apps to consumers with iOS devices.”

Humorously, Apple described its fee structure and policies as “standard industry practice,” adding that other app stores charge the same fees. But this argument “conflates practices that may be unremarkable in competitive markets but abusive in monopoly markets,” the report correctly notes. And only Apple controls a mobile platform and the only means by which software can be installed on that platform, giving it unique power and capacity for abuse.

“Apple’s rationale for its commissions and fees has evolved over time,” the report continues. “Its recent explanations of the basis for its 30 percent commission differs significantly from its explanation of its fee and revenue expectations in the early years of the App Store.”

On that note, a former director of app review for the App Store estimated that Apple’s costs for running the App Store are less than $100 million. The report adds that Apple’s net revenue from the App Store is projected to be $17.4 billion for fiscal year 2020. These two figures corroborate what I’ve been saying for years, that the App Store is literally paid for by Apple’s hardware sales and their incredible profit margins.

There are many other abuses, of course. Apple routinely removes or hobbles apps that compete with new Apple apps and services. It has opaque and arbitrary app store rules and enforcement, keeping third party developers on edge, and it changes those rules, often secretly, regularly. “Apple unilaterally determines if, how, and when to apply its guidelines, and that it also freely makes up ‘unwritten rules’ when convenient,” the report notes.

On and on it goes.

Recommendations

The report offers various recommendations for dealing with these belligerent and abusive monopolists. Some include promoting innovation, improving accessibility and interoperability, data portability, and the like. But the bigger possibilities include:

Structural separations. This is the breakup of businesses into multiple companies, the so-called nuclear option. As such, it is the least likely for any of the Big Tech firms. “Amazon, Apple, Facebook, and Google use their dominance in one or more markets to advantage their other lines of business, reducing dynamism and innovation,” the report notes. “Subcommittee staff recommends that Congress consider legislation that draws on two mainstay tools of the antimonopoly toolkit: structural separation and line of business restrictions.”

Line of business restrictions. The less dramatic possibility noted in the quote above would include nondiscrimination rules to ensure fair competition and to promote innovation online.” It notes that Google has been forced to adhere to this kind of principle in its antitrust losses in the EU. Perhaps the Federal Trade Commission could use its competition rulemaking authority to require dominant gatekeepers to “apply a rule of neutrality in operating their platforms.”

Merger presumption. Noting that most of the accused have used mergers to kill competition, the Subcommittee staff recommends that Congress “consider shifting presumptions for future acquisitions by the dominant platforms.” That is, it should block any major acquisitions by these firms. “Any acquisition by a dominant platform would be presumed anticompetitive unless the merging parties could show that the transaction was necessary for serving the public interest and that similar benefits could not be achieved through internal growth and expansion,” a very high bar.

Another interesting and potentially controversial aspect of this report is its call for restoring the anti-monopoly goals of antitrust.

“Unchecked monopoly power poses a threat to our economy as well as to our democracy,” the report notes of the antitrust action the U.S. undertook in the early years of the 20th century. “In the decades since Congress enacted these foundational statutes, the courts have significantly weakened these laws and made it increasingly difficult for federal antitrust enforcers and private plaintiffs to successfully challenge anticompetitive conduct and mergers … The Subcommittee recommends that Congress consider reasserting the original intent and broad goals of the antitrust laws, by clarifying that they are designed to protect not just consumers, but also workers, entrepreneurs, independent businesses, open markets, a fair economy, and democratic ideals.”

So. What’s my take on all this?

I believe that Amazon, Apple, Facebook, and Google all have monopolies that they routinely abuse to the detriment of competitors, partners, and consumers, and that each needs to be at least regulated.

I don’t see any of these companies being split up, nor do I see the reversal of previous acquisitions, such as Facebook being forced to give up Instagram or WhatsApp. But I’m uncertain as to the efficacy of that kind of radical solution.

The House’s recommendations on antitrust reform are wonderful and are perhaps the best and certainly the most unexpected ideas to come out of this report. The abuses of these firms are obvious, and the solutions to those problems are complicated. But reforming antitrust? I love it.

Finally, given my focus on Microsoft, it’s impossible not to view the software giant’s own behavior through the lens of this report and wonder what regulators might think of its own dominance and how it treats competitors. It’s somewhat ironic that Microsoft’s lack of success with consumers makes it less visible and thus somewhat immune to this criticism. But if regulators are as successful regulating Amazon, Apple, Facebook, and Google as I believe they will be, Microsoft is a natural next step. It is, after, a bigger company than at least two of those firms.

But that’s a story for another day. Focusing on Amazon, Apple, Facebook, and Google right now makes sense. And the time for action, whatever form it takes, is long overdue.