Antitrust is stifling innovation, we can fix it

Good vs Bad Antitrust

Antitrust by Nick Youngson CC BY-SA 3.0

Antitrust’s aim is to encourage competition in order to improve consumer products & services.

The “self-preferencing rule”, included in the EU’s Digital Markets Act’s and the American Innovation and Online Choice Act, will become law in 2023.

The rule creates competition at an individual service level, but impedes it at a vertically integrated level, where user convenience & time are the more important consideration.

To walk through how this happens, consider which option you prefer for a phone plan?

1. Options compared side by side apples to apples — pros & cons, prices & reviews, one-click purchase, contract terms & clauses all upfront, and a standard option to back out, in case you change your mind.
2. Scattered provider sites, which means a hunt for 3rd party reviews, the need to drill deep into middlemen & provider sites, read all the small print, watch out for hidden clauses, make sure you’re not tied in & finally pull the trigger on a phone plan.

It is not in the interest of phone companies to offer their services side by side against each other to enable an easy apples-to-apples comparison. It’s in their interest to do the opposite.

As there’s a need for it, other companies will often step in to provide to intermediary comparison services. This has happened successfully in many industries, retail (amazon), freelance labor (taskrabbit, fiver), contractor services (Angie’s list, Houzz), used cars (carvana) to name a few.

However, in industries where Providers are fewer in number & larger in size (Media Giants & Telecom providers), it’s harder for an intermediary to accomplish this, as Providers have the market power to push back.

The opportunity provided by the digital economy is that once the interests of a large number of end users are represented by a single intermediary, the balance of power between Providers and the Intermediary adjusts.

For example, lets say that Apple were to decide to offer a standardized cell service choice to iphone users. For example, they could required service providers to meet a certain product & service criteria in order to be included within the offered choices. Given the number of iphone users, Telco’s might decide to comply and participate.

The factors that determine where exactly that power balance settles, is a conflict between:

• The number of users represented by the Intermediary.
• The uniqueness & irreplaceability of the Providers offering (They are the only wireless provider in an area).

This helps to create some more standardization & an apples-to-apples comparison between the larger service providers, to the benefit of consumers.

What is the “Self-Preferencing” rule?

The self-preferencing rule states that “Gatekeepers” should be prohibited from “self preferencing” their own products above those of competitors. In other words, it prevents companies from leveraging their strengths in one area, to create value for their users in other areas.

The reality is that consumers might sometimes prefer a combined service if it simplifies their life & saves them time, even though a better individual service is available.

This enables vertically integrated companies to build up a larger base of users and these companies are able to drive benefits for them in all the areas they service.

Specifically, negative impacts of the rule banning “self-preferencing” are:

Reason #1 — Large vertically integrated ecosystems are very effective at pushing back against traditional oligopolies. The rule blocks companies from building large vertically integrated ecosystems.

Reason # 2 — Less competition for Tech incumbents. For those Tech incumbents who have already built up large vertically integrated ecosystems (eg. Search with Shopping), banning self-preferencing now shuts off smaller competitors from using the power of their users to build a more valuable set of services that could compete against the incumbents offerings. It also inhibits Tech Giants from branching into each others areas to offer competing vertically integrated offerings.

Reason # 3 — It increases low level competition, because it makes it easier for anyone to copy discrete services offered by gatekeepers & get a free distribution channel. This is not really a negative, but it does result in a crowded field of discrete services by small competitors, while providing them little incentive to vertically integrate & grow their user base.

Reason # 4 — Scattered choices, higher prices, inconsistent buying processes & uncertainities in the quality of service persist. The consumers automatically default to the Tech Giant’s standardized offering, which is not really a negative, as long as the Tech Giant continues to provide good choices, low prices, consistent process & high quality.

Antitrust regulation should not aim at blocking growth. It should instead lower entry barriers, so smaller competitors have a better chance to grow to provide vertically integrated services & compete.

The last section of this article will describe how Antitrust could accomplish this.

The Travel Example

The Travel industry is an example where large travel oligopolies have been partially successful in pushing back against intermediary companies. There are 3 categories of players in the travel ecosystem-

1. Hotels/Airlines/Cars/Vacation Homes that provide the actual service — Service Provider
2. Consumers who book the services— Consumer
3. Companies that bring them together — Middlemen (companies like Booking.com, Hotels.com, Expedia, Vrbo & Airbnb)

The Middlemen provide a fairly broad comparison service that connects hotel/airline/car companies with consumers.

Despite strong competition between middlemen, travel bookings are still painful, especially when you need to make changes, or cancel bookings. This is because large airlines, car providers & hotels have no incentive to standardize policies.

They would need to be coerced into doing so in order to benefit consumers. Middlemen like Expedia and Travelocity own a share of the marketplace & lack the clout needed to require standardization across travel providers.

The “Functional” Monopoly

Having just a few large players in a specific market, is usually bad for consumers because a Monopolist will eventually misuse it’s power.

On the positive side, Functional Monopolies are often able to effectively build reliable infrastructure & deliver low-cost service to a broader base of consumers.

Continuing with the Travel Example, suppose a company created an even bigger ecosystem — Maps & Geo Based Services, and their approach turned out to be resoundingly successful. They beat out all the existing players & take over 90% of the travel market.

Now they have this massive user base, and are perfectly positioned to negotiate better terms for their consumers.

They also have the ability to optimize airline/hotel “capacity utilization” across their users & ensure consumers are treated fairly by large travel companies.

The question is — would the Tech Monopolist be motivated to help consumers, or to squeeze them?

Preventing “Dysfunctional” Monopolies

To prevent the dysfunctional type of Monopoly from growing, we need to ensure that any drop in service quality must immediately open the floodgates to competitors.

How would we accomplish this in the Tech Industry?

By drastically lowering entry barriers. In the Internet Economy “barrier to entry” is very different from that in traditional industry.

As every internet entrepreneur knows, user adoption is the key to growth.

There are two conditions to user growth.

Condition # 1: Your product is superior. Unfortunately, that’s not enough.

Condition #2: If the “switching cost” born by the consumer, is high, it’s very very difficult to get user traction & release that exponential growth.

#2 is where promising young competition stumbles & dies.

Big Tech knows that condition #2 is their achilles heel. So they take pains to ensure high switching costs.

What would be the key to lowering switching costs? How do we implement regulation to make this happen? We’ll talk about this in the last section. But first -

Will low switching costs solve the problem?

One objection to the argument above is that when something as large and successful as Google Search or Amazon or Facebook exists, no competition will ever emerge without more “blocking” type regulation. That these companies eventually become so large that nobody will ever switch, even if the switching cost is quite low.

CC BY-SA 4.0

Is this really true?

Search in itself makes no money as it’s a free service. Alphabet makes money by advertising. The question is — will Alphabet ever have competitors in digital advertising?

For the past few years, Amazon & Facebook have been taking significant market share away from Alphabet.

Alphabet has countered by investing heavily in new ecosystems like Google Shopping, Google Maps & Youtube, all to the benefit of consumers. This is good innovation & we should avoid regulation that will inhibit this type of innovation.

We can see Amazon alternatives also emerging.

There are two types -

1. Funded by the deep pockets of large retail (Costco, Home Depot, Best Buy, Target & Walmart).
2. Tech Giants like Alphabet + Shopify + Logistics providers (ShipBob, ShipHero, Cloudtrucks) collaborating to replicate Amazon’s one-click buying experience.

Lets say the self-preferencing rule had already been in effect, requiring Alphabet to display all competing comparison shopping services (CSS) at the same level as their own.

This would encourage more companies to create CSS’s & more “table scraps” type of competition at a low level, would definitely result.

But when I’m looking for tennis shoes, I do not want to wade through 10–12 competing websites and drill down into each one searching for the right tennis shoe. I want an integrated “one-click” experience of the type Amazon provides.

With little incentive to grow big & rampant copying within existing large ecosystems , the market will continue to splinter. Instead of competition building against Amazon, competition increases amongst the smaller players. The likehood of any one growing large enough to take on Amazon goes down, not up.

Fortunately enough, in the absence of the “self-preferencing rule”, an alternative ecosystem is actually emerging. It allows smaller retailers to -

• Create their storefront using Shopify, with Google Shopping as the front end search engine. Instead of using Shopify, smaller merchants can also simply list themselves for free & upload their own inventory via a daily spreadsheet.
• Use a logistics providers, like ShipBob, Flowspace, ShipHero etc or ship products on their own.
• Get basic analytics on their customers for free, with an option to pay for more sophisticated analytics and advertising.

Self-Preferencing Rule damages

A good example of the inhibiting effect of the self-preferencing rule is Alphabet, in the travel space. They dare not move towards building an amazing one click travel experience, of the type that Amazon created for Retail & no one has built yet for Travel.

Instead Alphabet restricts itself to directing the consumer towards existing middlemen. The result is a fragmented & unsatisfying experience. Investments in the use of AI & technologies to build a truly integrated travel service are abandoned, to the detriment of the consumer.

How can antitrust lower “switching costs”?

As discussed before, antitrust regulation should not focus on protecting Middlemen or even Service Providers. Its aim should be solely to protect the interests of the Consumer.

When a single company is able to build massive market share, but can still easily be threatened by competition (think TikTok’s viral spread), we get ideal conditions, most beneficial to consumers.

So antitrust needs to be laser focused on keeping those switching costs low.

How can it do this?

Tech Giants could be allowed to avoid antitrust scrutiny if their products adhere to a set of evolving principles — all aimed at minimizing “switching costs” for consumers.

1. Data portability — Make it easy for users to migrate their data from one company to another & maintain data history.
2. Data Privacy +Rights— Privacy must be maintained by both companies. Instead of just requiring the consumer to agree to a set of cookies, make the impact of those cookies clearer to them — eg in terms of ads following them around.
3. Interoperability between platforms — Communication ability between players inside a platform should also be made available via open API’s to all other platforms. Standardizing this will need a lot of work to flush out, and industry needs to be driving this, so that the resulting standards really work for all companies.

Data portability, Inter-operability & Data Privacy+Rights have already been identified, in various antitrust actions, as major pillars of these evolving principles. Antitrust should stay focused on ensuring standards are built for these, and it should add in additional pillars it discovers, that affect switching costs.

Although it’s not the focus of this article, these same principles need to also apply to Enterprise Software Companies. One of the major reasons for the long sticky domination of Oracle & SAP in Enterprise Financial Apps, Microsoft in Productivity Apps, despite over-engineered & costly products, has been the high switching cost due to lack of data portability & inter-operability between vendors.

Antitrust regulation must require Industry players to jointly participate in creating & maintain these standards, which must be adopted by all the Tech Companies & complied with.

This will keep the Tech Giants accountable to their users & help smaller internet innovators to grow, as it makes it practical for users to try them out & easily migrate without losing contacts or data.