Presidential candidate Elizabeth Warren is proposing anti-trust action against major tech firms including Google, Facebook, Apple and Amazon. This proposal if enacted would increase prices and reduce options to consumers. The main beneficiary of rules restricting Big Tech would be Walmart, other larger brick and mortar stores, Cable Television firms, and large established brands. Smaller companies that are attempting to enter markets and compete with larger older firms with the assistance of Google, Amazon or Facebook will have fewer opportunities and higher costs.
One element of her plan designates on-line firms with more than $25 billion as Internet Utilities. These Internet Utilities would be prohibited from selling both their own products and products of their competitors on the same web site. This would most immediately impact Amazon, Google and Apple but could also in a very short period of time impact Netflix.
A second element of her plan involves reversing mergers, which have contributed to the growth of the tech giants. These mergers include Amazon’s purchase of Whole Foods and Ring, Google purchase of Waze, Nest and Double Click, and Facebooks purchase of Instagram and WhatsApp.
Let’s start our discussion by observing that Walmart has larger revenues than Amazon. In 2018 Walmart revenue was around $500 billion compared to around $233 billion for Amazon. Amazon obtains a larger percent of revenue by partnering with third-party businesses. Partnerships with small firms are less important to Walmart than Amazon.
Amazon purchased Whole Foods sparking fears that Amazon would take over the grocery sector. There are at least five firms with grocery sales larger than Whole foods. Walmart has the largest market share of the U.S. grocery market with a 14.5 percent market share. Kroger is second with market share around 7.2 percent. The market share for Whole Foods — around 1.2 percent.
Amazon is now actively promoting its own private label groceries on line, a strategy which would be hampered by Warren’s new rules. What firms are threatened by the Amazon private label? According to Wall Street research firm Bernstein (no relation to me) J.M Smuckers and Mondelez are the two firms most threatened by Amazon’s private labels.
I suspect that Amazon may purchase and fund small jam and snack producers to bolster their private label. Explain to me why this is anti-competitive.
Bernstein finds e-commerce makes up around 1 percent of packaged food sales. This may rise to 5 to 6 percent in a few years. This does not strike me as anti-competitive. Really bad news for some older established firms but hardly anti-competitive.
The Apple app store serves to provide updates for many items that are sold with a phone, computer, or IPAD. I doubt that direct sales of Apple products in the App store are a large source of profit for Apple. Apple might respond to the mandate for separate third-party and Apple-only App store by increasing purchases of third-party apps from developers or increased in-house App development.
Many people come to the Amazon site or the App store to either buy products sold directly by the sponsor of the site but end up buying a product or service created by a third party. The creation of separate web sites for the big tech firm and for third parties could decrease traffic towards third-party offerings.
Google has purchased Nest giving this product a potential advantage over its several competitors including Carrier, Ecobee, Honeywell and several other smaller firms. Is this a big problem? There are several smart thermostats available in the market. I haven’t seen a case made that Nest has market power over its rivals. Any case for divesting Nest from Google should be based on actual evidence monopoly power, which may not exist.
Amazon and Apple may both enter this field because home thermostats can connect with Alexa and Siri. Should entry by Apple and Amazon be prohibited because their Alexa and Siri give Tech firms an advantage over older non-Tech competitors?
Amazon buys ring and hooks it up to Alexa, gaining an advantage of existing security companies. This is all good news for consumers. Any existing problems could be solved with modest regulations rather than a broad anti-trust action.
Google owns both Google Maps and Waze creating a challenging situation for Apple Maps. Does Apple really need government help?
Currently, Google appears to have a monopoly or near monopoly on search and Facebook has a monopoly or near monopoly on social networks. Both industries and both firms are young. Both monopolies are contestable. A new superior search engine could give Google a run for its money. A new social network with a different look and policies could do the same to Facebook.
Google and Facebook and Amazon, while in different narrowly defined industries, are all in competition. All three firms are competing for ad revenue from businesses who are marketing their goods and services to the world. It may be tempting to stop Facebook from purchasing Instagram and other Apps to level the competition between Facebook and other social networks like Snap. However, this could adversely impact the ability of Facebook to get advertisers and compete with both Amazon and Google, two much larger powerful firms.
The clearest potential harm caused by Warren’s proposal involves the possibility that Netflix and maybe Hulu would be treated as utilities and prohibited from producing their own content. Netflix revenue could soon rise above 25 billion and become subject to Warren’s rules on Internet utilities. Netflix is the main competition to cable companies, an industry that exerts monopoly pricing power in local markets. The availability of Netflix allows people to cut the cord and save hundreds of dollars a month. Netflix is an example of private industry fixing an anti-competitive situation. This could all be undone by Senator Warren’s proposal.
Senator Warren is a highly skilled lawyer and candidate who has made useful contributions to discussion of several issues including bankruptcy reform, the safety net, taxes, inequality health insurance and student debt. I admire her and readers of my blog and my books know that I share her much of her outlook and priorities. However, her attack on Big Tech is not supported by economics and may derail her candidacy.
Author Notes: The Trump Administration is accelerating its war on student borrowers. It had previously proposed the elimination of subsidized student loans and the public service loan program. The new budget proposes the elimination of income contingent loan programs and loan forgiveness programs.
The Democrats seem fixated on free college a proposal that most experts believe is unaffordable. My book Innovative Solutions to College Debt Problems considers benefits and costs of making the first year of college free. The book also proposes several different ways to assist overextended borrowers that are more sustainable than Income Contingent Loan Programs.
Innovative Solutions to the College Debt Problem:
Liberals appear to be dominating the contest for new ideas for the Democratic Presidential nomination. Amy Klobuchar gets some points for honesty, an attribute that used to be expected. However, honesty does not by itself solve problems. Centrists need to put forth bold proposals that will reduce student debt, improve health insurance, and expand retirement income.
Pragmatic centrist solutions to these problems are outlined in my book.
Defying Magnets: Centrist Policies in a Polarized World.
A final note: I would love to do some consulting work on these topics. Contact me through linked in. https://www.linkedin.com/in/dbecon/