AMERICAN ENTERPRISE INSTITUTE
SHOULD WASHINGTON BREAK UP BIG TECH?
PANEL DISCUSSION PARTICIPANTS:
RYAN HAGEMANN, NISKANEN CENTER
ANDREW MCAFEE, MASSACHUSETTS INSTITUTE OF
TECHNOLOGY
MICHAEL R. STRAIN, AEI
LUIGI ZINGALES, GEORGE J. STIGLER CENTER FOR THE
STUDY OF THE ECONOMY AND THE STATE AT THE
UNIVERSITY OF CHICAGO
MODERATOR:
JAMES PETHOKOUKIS, AEI
1:30–3:00 PM
MONDAY, NOVEMBER 27, 2017
EVENT PAGE: http://www.aei.org/events/should-washington-break-up-big-tech/
TRANSCRIPT PROVIDED BY
DC TRANSCRIPTION – WWW.DCTMR.COM
JAMES PETHOKOUKIS: Welcome. Thanks for coming here on the first working
day after Thanksgiving. Of course, I had a great fear nobody would show up, being the first
working day after Thanksgiving, so I’m especially grateful everyone made it here for our
panel, which we have a great panel here who I’ll introduce in a moment.
A decade ago, the world’s five largest companies by market value were Microsoft,
Exxon Mobile, General Electric, Citigroup, and Shell Oil. Today, Microsoft is still there,
but the rest are all tech firms: Apple, Alphabet (the parent company of Google), Amazon,
and Facebook, though, on some days, I think Facebook swaps with Alibaba. So those are
now the top five. And combined, they have a market value of $3.5 trillion. They have powered
the market’s rally this year, leaving some to wonder if owning these stocks is all you really
need to do when investing.
But it’s not just their size and market performance that’s been impressive. It’s also
their market dominance. Google has 76 percent of the search ad market; 80 percent of total
searches worldwide are done through Google. Facebook and its subsidiaries own 77 percent
of mobile social traffic. Amazon has three-quarters share of the e-book market. And when
some people look at those statistics, as well as the overall size of these companies, they think
that, well, if America has a corporate concentration problem or a monopoly problem, then
these super platforms look like the most obvious and serious examples of that concentration
issue.
And there’s criticism — perhaps it started on the left, but certainly is now coming
from the left and the right. And there have been calls for various sorts of regulation and
antitrust actions with maybe the extreme being to turn some of these firms into public utilities
or break them up in some fashion. Yet these remain very popular companies along with the
services and products. They’re a source of innovation, high-paying jobs. And with perhaps
the exception of the shale revolution, it’s just about the only bright spot in the US economy
over the past decade.
And, again, public opinion surveys, so they are — you know, well, if Congress only
had these kind of ratings that that these tech firms have. You know, 80 percent favorability
rating, 77 percent for Amazon, the most widely admired companies by young Americans.
And even over the past year, in which there have been a lot of rough headlines, whether it’s
the Russians using Facebook to try influence the election or free speech issues at Google
or sexism at Uber, yet these remain very popular companies. So what’s going on and why
do some people have such a problem with these big mega-platforms?
To discuss whether the rise of the tech giants has become problematic in some way
that requires a policy solution, as I said, we’ve assembled a really excellent panel. I’m going
to do them in alphabetical order.
We have Ryan Hagemann, who is director of technology policy at the Niskanen
Center, where he specialized in issues at the intersection of sociology, economics, and
technology.
Right next to me is Andrew McAfee, principal research scientist at MIT, where he
studies how digital technologies are changing business, the economy, and society. He’s also
coauthor of the recent book “Machine, Platform, Crowd: Harnessing Our Digital Future”
with his compatriot, Erik Brynjolfsson.
At the far end is Michael Strain, director of economic policy studies here at AEI.
His research focuses on labor economics, public finance, and social policy.
And last but not least, Luigi Zingales, director of the George J. Stigler Center for
the Study of the Economy at the University of Chicago. His research focuses on regulatory
capture, crony capitalism, and the various forms of subversive competition by special
interest groups.
Again, everyone, thanks for coming.
And I want to start with Professor Zingales, who earlier this year hosted a conference
at the University of Chicago titled “Is there a concentration problem in America?” And I
watched a good chunk of that conference over my Thanksgiving weekend, sitting there
for those hour-and-a-half-long panels.
MICHAEL STRAIN: Giving thanks for the American economy.
MR. PETHOKOUKIS: Yes. Yes. Yes. Giving thanks. Well, I was not doing that.
And during that conference, a good bit of it focused on the tech industry, which, again, may
be to at least some people the most obvious examples. If you believe there is a concentration
monopoly problem, I guess it would be hard to talk about this issue without talking about
the tech industry. So I want to start with you to sort of give me what the theory of the case
is that these big platforms, super platforms, whatever you want to call them, that they’re —
I mean, my bias is to see these companies as, gee, they’re, you know, as something that’s
gone right with America, great national assets, remain (popular ?). What is the case that
they’re problematic in some way, their size and scope and influence?
LUIGI ZINGALES: OK. So, first of all, I want to make sure that at least we have
one common ground, which is we believe that for free markets to work well, we need to
have an antitrust authority. We need to have some government intervention. We’re not in
a laissez faire utopia, but at least we are a more — (inaudible) — society where antitrust
plays a role. And then the question is what role and when. And, of course, the question of
cost and benefits.
This said, I think that — and I would like to set aside, even if it’s a big issue, but I
would like to discuss later, this platform as media industry. Because I think when you talk
about media, we need to talk — there is another set of concerns that plays a role. But even
if we did not consider them media, and I don’t know why we shouldn’t consider media, but
imagine for a second we don’t consider them media, I think that especially when I think of
Google and Facebook, the issue about network externalities comes big. And I think it’s sort
of something that deviates from our standard notion of markets and also our standard notion
of antitrust. If I sell my main product at price zero, what it means to have a market share,
OK? That’s a pretty basic thing, but it’s quite important.
And so the question is then, however, if we have a sort of market share — (inaudible)
— I offer a glass a wine to whoever uses Bing that does not use Google. And I generally
go around, and I make this offer and never pay any price because nobody, unless you are
in China, where you are prohibited from using Google, everybody in the United States, uses
Google. So in terms of market share of searches that represent in the United States is above
90 percent.
You go to Facebook, you have sort of the same thing. And, of course, this market
power does not manifest itself in the main product they provide us because it’s for free, but
it does manifest on the other side, which is the advertising business. And you’re transforming
it dramatically and concentrating dramatically. In the last year, 85 percent of the increase
in ads online are shared by Google and Facebook, OK?
So should we worry about it? And the answer is either you have a sort of Panglossian
view that the market always will fix the problem no matter what and then you say, OK, let
the market go. If you don’t have this Panglossian view and you look at the history of this
country, you think that doing something — and then we can discuss what — but doing
something is probably a good idea. Few are concerned about innovation.
I think the biggest (part ?) of innovation in this country is being associated to antitrust
intervention from the time the antitrust in the late ’40s went after AT&T who just invented
the transistor. And it wasn’t actually technically for the wrong reason because it was a
regulated industry, but as a result, the transistor got widely licensed and created a new
industry that would not have existed before.
Then sort of the antitrust went after IBM over the ’70s and contributed dramatically
to the PC industry. If it wasn’t for the fight during the ’70s, the PC industry would not be
there. Then it went after AT&T and broke it up, and we have the explosion of the mobile
industry. Then it went after Microsoft, and we have Google and Facebook. Google and
Facebook today are not part of Microsoft because Microsoft was under intense scrutiny
of the antitrust authority. And so they should thank that.
The problem is that yesterday’s startup is today’s monopoly. So if you want to
create the space for the new startup, I think some intervention is needed. And my view is
let’s try with at least the simplest thing, and this is what my article in The New York
Times is about — is trying to say, at least trying to attack the sources of these platforms
and the network externality.
We know that the source of the network externality that gives you market power —
one of the sources is the difficulties in switching. So I’m not too worried about Uber and
Lyft because the drivers can switch between Uber and Lyft in a second, and I can switch
— in fact, I have both programs and look at prices and choose between Uber and Lyft all
the time. So the switching cost is basically zero. And so the nature of concentration is limited.
In this industry, Google and Facebook are designed to sort of maximize the switching
cost. And the structure of the government, by the way, is aiding and abetting this effort, and
it says — I’m sure you’re familiar with the famous case of Power Ventures versus Facebook
where Power Venture was taking from clients the password and entering Facebook in name
of the person. So if I give to Jim my Facebook passwords and he enters my Facebook account,
he commits a felony according to the US law, the Fraud Act, OK?
So here we have the most extreme form of the power of the state used not to protect
competition, but to protect the incumbent against competition. This is the most brutal form
of monopoly enforced and supported by the state. And that’s what I want to fight against,
against that particular law, against the fact that the older system is designed to make it
difficult to transfer data from one place to the next.
Let’s take the example from the mobile industry. The reason why today we have
mobile at low prices is because there was a regulation called number portability. Nobody
today spends a second thinking about number portability. By the way, it’s not true in every
country. In the countries where there is no number portability, prices are much higher, and
investments and quality of service are not any better. So it’s really a subsidization to bad
corporate behavior by not having number portability. Number portability promotes competition.
In other sectors, just to say that I don’t target only the tech sector, but in the banking
industry it’s very complicated to transfer your bank account because you have a bunch of
credit cards, wires coming in and out, and why don’t we have credit account number portability
in the banking industry? Many countries, including the European Union, are implementing
in this direction, and that makes competition more effective. I want to introduce a form of
social graph portability to make it easier for competition to actually walk in this industry
before going to other mechanism that tend to be by their own nature imperfect, like antitrust.
MR. PETHOKOUKIS: But just to be clear, we need to take some sort of action,
and you mentioned perhaps that initial first step dealing with the social graph and making
that portable and others would, you know, like to do that and much more up until the point
of, you know, the title of this panel, you know, they would like to break these, some of
these companies up or take off parts of them. But the reason we need action now — I mean,
what is like sort of the key problem right now, not like — not tomorrow, what might happen
because of the market power of these firms but how that power is being used right now in
a way that’s detrimental to consumers is what.
DR. ZINGALES: First of all, we end up paying a disproportionate amount for our
advertising that eventually will come back to haunt us as consumers.
MR. PETHOKOUKIS: But I think we’re getting free stuff, but that cost is being
routed through the advertising —
DR. ZINGALES: Absolutely, because the last time I checked, Google and Facebook
were not losing money. So they are making their money somewhere.
MR. PETHOKOUKIS: We’ll fact-check that later, but I’m going to say, yes,
that’s probably true. Right. So that’s one obvious one.
DR. ZINGALES: Yes. Not to mention — and I set it aside because I think they
are two separate issues but should not be set aside is the issue of freedom of press. In a
sense, the concentration of ads in two hands basically is compressing our freedom of
expression. And the competition in the media industry is very problematic on that front,
which is key not only for the functioning of the economy, but the market itself.
MR. PETHOKOUKIS: And just finally, before I get on to everybody else, you
mentioned — that’s a first step, but can you — can you see — but can you see a situation,
the more extreme situations of either heavily regulating these companies as if they’re public
utilities — and I’m not even sure I know exactly what that means — or, again, breaking
them up in some fashion. Because you mentioned a couple of cases — some antitrust cases,
which you felt were key for innovation — the AT&T, IBM, you could have probably mentioned
Microsoft and Netscape. So can you envision that action, that kind of action being necessary
at some point?
DR. ZINGALES: First of all, I think it’s possible. I’m not so sure that this will fix
the problem. But I want to actually read a couple of sentences. And then I would — my sort
of test, if you recognize who wrote this: “Big business often possesses and uses monopoly
power. Big business weakened the political support for private enterprise system. Big
business are not appreciably more efficient — I don’t agree on this — but big business are
not appreciably more efficient or enterprising than medium-size business. Few disinterested
people deny these facts. The obvious and economical solution is to break up the giant
companies. This, I would emphasize, is the minimum program and is essentially a
conservative program.” Who wrote that?
DR. STRAIN: Ronald Wilson Reagan.
DR. ZINGALES: No.
ANDREW MCAFEE: Teddy Roosevelt.
DR. ZINGALES: No.
RYAN HAGEMANN: William F. Buckley.
DR. ZINGALES: No.
DR. STRAIN: James Pethokoukis.
DR. ZINGALES: No. Nothing short of George Stigler in a Fortune article in 1952.
Now, to be fair to George, he revised his position over time because he saw that big companies
were more efficient so he changed.
But, actually, what I like is not the efficiency part, because I think he was wrong
there and he realized over time he was wrong, but the fact that he says that sometimes
breaking up companies is the conservative program because the alternatives are worse.
So my approach is I think I want to go even lighter than that because I think that, first of
all, I don’t trust the government to break up in a good way. And, second, I’m not so sure
that breaking up will really fix the problem because it will probably hurt these particular
companies and favor — another monopoly will arise in the next day. So that’s not my
goal. If there is a gigantic efficiency gain — in a sense, unless we really attack the benefit
of being all in the same place, people want to be where — well, be in the social media where
other people are, OK? That’s a natural —
MR. PETHOKOUKIS: That’s a natural economics —
DR. ZINGALES: Exactly. And so breaking that up goes against the natural economic
rules. And I don’t think it’s going to accomplish much.
MR. PETHOKOUKIS: OK. All right. So I think that that’s great, and I think you’ve
sort of laid out I think that case, you know, wonderfully. Since you’re right next to me,
Andrew, you can — what do you think of what he said? And just more generally whether
you think that there is a problem right now with these big platforms that requires, you know,
policy action sooner rather than later.
DR. MCAFEE: OK. So part A is I disagree.
MR. PETHOKOUKIS: OK.
DR. MCAFEE: Part B is it feels to me like there are a couple of relatively smallish
problems that we might need to intervene on with the kind of blunt instrument of policy,
and beyond that, no. So let’s say that we agree that — we’ll stick with Google and Facebook.
These things tend toward natural monopoly. I want to be where my friends are, and search
gets more efficient as more and more people do search.
OK. What are the problems associated with that? As far as I can tell, Google and
Facebook, to the extent there are problems, they give us too much stuff for free. Problem
is a weird framing for that. And they do not set prices for ads. The prices of ads on both
those platforms are set via auctions. That’s a market mechanism working. That’s not — I
can’t call that price fixing in any real sense of the word.
DR. ZINGALES: If I’m a monopolist, I can do all the auction I want. I extract all
the surplus. If I’m a monopolist, I can do an auction. It’s not the market. It is a market, but
it is a market in which I, the monopoly, extract all the surplus.
DR. MCAFEE: I think I let you talk.
DR. ZINGALES: I’m sorry.
DR. MCAFEE: So the advertisers are the ones setting prices by bidding against
each other. What’s the intervention that’s going to fix that? I think the only intervention
that would fix that is some entity setting prices. That kind of makes me a little bit nervous. I
like the fact that advertisers themselves are the ones figuring out how much something is
worth for them.
I also read a really interesting write-up by Carl Shapiro. I’m not an antitrust scholar.
I’m not a legal scholar at all. But when Carl, who is an antitrust scholar, tried to educate me
and other people about it, he made a couple of interesting points. He said, first of all, the point
of antitrust is to forbid some kinds of activity that tend — that tend toward monopolization.
And they tend to do things like forming cartels, like fixing prices, like engaging in too
many mergers and in stiff-arming your competitors out of the market.
Hard for me to see how the giant tech companies that we’re talking about are engaging
in too much of those activities. The other point Carl made, which I was not aware of, is that
antitrust was explicitly not set up, and for about a half a century, we have had a bipartisan
understanding that antitrust does not exist to deal with large, dominant companies or to
immediately break them if we think they get too big. It is also not the point to level the
playing field between small companies and large companies. A lot of us have this kind of
sense of rooting for the underdog in these battles. Whether or not we do that or whether or
not that’s a good idea, and for about half a century, antitrust has not been around to help us
with that activity. So I kind of want to take antitrust off the table as a way to think about that.
Jim, you asked what problems are out there. One problem is very clearly that foreign
governments are meddling in our elections via social media platforms. And I think I’m not
alone in considering that kind of an issue. The one change that I’m pretty sure I would make
is to make the online ads follow the same practices that TV and radio ads do, which is they
have to identify who paid for them. They have to identify kind of what their source is if
they’re political advertisements. The tech companies lobbied against that. I think that was
the wrong decision.
Luigi brings up this problem of concentration in media. You framed it as a problem
of self-expression. We have never had more and better tools for self-expression, so I don’t
like that framing of it. The fact that newspapers and magazines are seeing their revenues
decline is a separate problem from the extent of free expression going on. The decline in
journalism is — I feel like it’s a worrying thing for a democracy. And we should probably
talk about what might be done about that beyond having billionaires on one side buy up
some newspapers and billionaires on the other side buy up other newspapers. But trying
to smash social media platforms or break them up feels wrong to me in addition to which
is going to be unsuccessful because if the tendencies are toward concentration, if there are
winner-take-all markets for the social graph and for search, all we’re going to get is another
round of dominant social networks and search engines out there. Then the question is how
long that will take. So it feels like a deeply unfruitful activity to me.
So I’m kind of left thinking that we need to tinker with a couple of things, and
then we need to leave these companies alone because they are providing a great deal of
innovation and a great deal of consumer surplus and consumer benefit out there.
MR. PETHOKOUKIS: And this point came up frequently at your conference, that
letting these companies, you know, very big, very dominant — that that just is not sustainable,
maybe it’s — I don’t know if it’s economically stable. It may not be politically sustainable.
And so the choices are either antitrust or regulation. And no one wants to see an internet
commerce commission, and as Luigi knows, regulation, that is really the path to get to
crony capitalism.
DR. MCAFEE: Let me give you a third option, which is patience. Thirty-five years
ago, we were definitely concerned that IBM was going to have a stranglehold over the tech
industry. Twenty-five years ago, we were deeply concerned that Microsoft was going to
have a strangle hold over the tech industry. Ten years ago in this country, we were deeply
concerned about how the action in the mobile space had moved on to Finland with Nokia
and Canada with Blackberry/Research in Motion. Are any of us worried about any of those
things anymore?
And, Luigi, I do disagree with you. I don’t think the reason we’re not worried about
those things is because the government kept on whacking the Microsofts and IBMs or at
least threatening them with the antitrust hammer. That provides no part of the explanation
for the iPhone or for Facebook for me.
MR. PETHOKOUKIS: Ryan, I actually would like to get your thoughts about the
issue of whether these antitrust actions in the past have actually been good for innovation.
But as one of the folks who would like to see antitrust action has said, would you — if
someone came to you right now and said, I have a great startup, they’re going to challenge
Google. Or I have a great startup and they’re going to challenge Amazon. Let’s say you
ran a venture capital fund. Would you invest in that company?
And doesn’t that — probably not, and does that go to the enduring power of these
companies is that they are unchallengeable and that — and even though we could point to
other examples of companies that seem like they had unassailable positions and it turned
out they didn’t — Nokia. I believe there was a Fortune magazine cover that said, the search
engine wars are over and Yahoo won. So we can point to examples from the past. It just
seems like these companies are just different in some way and those positions just might
be very enduring, and perhaps that’s a problem.
MR. HAGEMANN: Well, I think the trouble we’re going to run into here is antitrust
in recent months, in the last year or two, has sort of become this empty vessel with which
a lot of people kind of fill with what they would like their post-hoc policy rationales to be,
right? Like inequality is a problem, use antitrust, right? Like concentration is a problem,
antitrust would be appropriate to use in that sort of context.
The problem is that if we’re going to use the pejorative “big tech,” there’s not a
whole lot of evidence in my mind that there’s any reason to use a more expansive interpretation
of antitrust to, quote, unquote, “break” these companies up. The key thing that antitrust has
to be concerned with is not so much firm size, right? Like the size of a firm doesn’t necessarily
equate to market power. Those aren’t necessarily the same things, and they need to be
evaluated in sort of a broader context of things like barriers to market entry and consumer
welfare, most importantly in the post-Bork era.
So really what we want to look at if we’re trying to apply antitrust rules to big
tech is contestability of the market. And I think in this space, in the online tech platform
space, it’s pretty clear that there has never been a more contestable market in the history
of human civilization, right? The barriers to entry are incredibly small, relative to other
industries, right?
MR. PETHOKOUKIS: If you want to interpret — if you want — the barriers of
entry for a company like Google or, again, Amazon, Facebook — and those are the three
I focus on more and even more so than Apple or — really those three is that — is that one
barrier of entry — is they have all that data. You know, they have all that data that they
can use, you know, to refine their algorithms, and isn’t that a tremendous barrier to entry?
MR. HAGEMANN: So maybe yes, but probably not. So, on the one hand, even if
it is a barrier to entry, even if the holding of data might be some sort of barrier to entry, it’s
not necessarily the case that that’s anticompetitive or it’s an unfair competitive advantage,
right — like these companies have developed models that essentially scoop up this data
about us. And it’s pretty clear from looking at the research that consumer preferences are
such that we don’t value privacy so much that we’re actually willing to embrace policy
prescriptions that would, say, price it, for example. Consumers just don’t care about their
privacy. That’s the reality of it. Now, if we want to talk about things like surveillance and
bring that into this context, government surveillance, it’s a slightly different story.
But the fact that Google scoops up certain bits of information about you I don’t
think it’s terribly relevant. Now, even more importantly than that, in my mind, is it’s not
the quantity of data you have, right? It’s the quality of data. And not only is it the quality
of data. It’s how you interpret that data, your access to things like, you know, advanced
artificial intelligence and analytics. The business strategy that your entire business model
is based on — that is probably more important than just having immense troves of data.
So I don’t think that a lot of data gives Google and Facebook sort of an unassailable,
durable monopolistic position in this market.
I wanted to sort of touch on very briefly something that Luigi said about — we’re
talking about firms competing in this market basically at nonzero prices, right, because we
don’t price privacy, and that’s basically what people are competing on, more or less.
Because of that, it’s very difficult to assess whether or not competition is at an optimum
level, right? It’s even more difficult to determine what an optimal level of competition is
in any given industry. But we do have a good proxy for what a competitive industry will
invest in. And it’s research and development expenditures, right? If you are in a highly
contestable market and your position is eminently assailable, if contestability is high, then
what are you going to invest in since you can’t, you know, tick up prices or lower prices on
privacy? You’re investing in research and development and innovation because you have to
constantly stay ahead of the curve to make sure that you are on the cutting edge of innovation
because you’re going to have to eke out your competitors on those lines.
And if you look at numbers from Price Waterhouse Cooper, it’s pretty clear that on
the list of top 1,000 firms in the world. The technology sector here domestically invests far
more in both absolute terms and as a proportion of total revenue, which they call R&D
intensity than any other industry in the world. Second to tech is pharmaceutical companies.
Who appears not at all in that top 1,000 list? Domestic utility companies. And who
do we usually think of as sort of traditional monopolies? Well, it’s the utility companies,
right? So why are the utility companies not investing that much in innovation, in R&D?
Because there’s no need, right? They have the market. It’s captured; it’s all theirs. Why is
the tech industry investing so heavily on R&D lines? Because they know tomorrow they
could be out.
DR. MCAFEE: The world’s largest vendor on R&D is Amazon. Alphabet is number
two or three.
MR. HAGEMANN: It is number two.
DR. MCAFEE: Two.
MR. HAGEMANN: Yeah. Alphabet is number two. Amazon in absolute terms is
I believe it was $16 billion last year. That is an immense amount of money to spend on R&D
for a firm that is ostensibly a great monopoly that can never be, you know, cast aside by
future competitors.
MR. PETHOKOUKIS: But one thing they do invest in is other companies. And
some of these companies have a very sophisticated, you know, sort of — you know, search
and acquire operations, which they will look for these future competitors and buy them.
Maybe one of those famous examples is Facebook buying WhatsApp, a potential future
competitor.
MR. HAGEMANN: Or Instagram.
MR. PETHOKOUKIS: Right. So that sounds like — you know, if you think — if
you want competition — and maybe competition is what we want. You know, Peter Thiel
famously wrote that, you know, these companies should try to have monopolies. It is a goal
— if you want a big successful tech company is to get a monopoly, a huge moat, and make
massive, you know, astronomical profits.
DR. MCAFEE: He’s hardly the first person to point that out as a business strategy.
(Laughter.)
MR. PETHOKOUKIS: Right. Certainly not. And that’s true. So should we have
let Facebook, now looking back, buy WhatsApp?
MR. HAGEMANN: Sure. Yes. So what ultimately we’re concerned about when
we’re talking about antitrust is not the structure of the firm. It’s not how the market looks.
It all comes down to, again, consumer welfare, right? And Andrew actually mentioned Carl
Shapiro. Carl Shapiro makes a point in his recent working paper that the presence of these
large firms might actually be incentivizing a higher rate of startup entrance in that space
because those new entrants expect to be bought up by the bigger firms.
So he says that — and I have it written down here somewhere — but he says
something to the effect of how the presence of these firms and acquisition by large firms
like Facebook and Google for small startups is an important exit strategy for those new
startups. And Facebook and Google probably aren’t going to be buying those firms with
which they can’t do anything, right? That isn’t going to give them any sort of, you know,
leverage.
But does it really matter to us if Facebook owns Instagram or if Instagram operates
on its own in this market so long as we, the consumers, are benefiting from the experience?
I don’t think so. So this kind of goes back to I think one of your original questions, Jim,
which is the title of this panel is “Should Washington Break Up Big Tech?” And that implies
that there’s a problem currently. As far as I see it, there’s no problem that justifies intervention
with an expansive antitrust policy. There are other problems, maybe, but I think we have
all of the regulatory tools we need to address any of those problems as they emerge, and
we shouldn’t try to get out ahead of problems that we can’t quite yet imagine.
MR. PETHOKOUKIS: Maybe I’m slow, but I’m still just having a problem with
the idea that we’re going to have three, four, and five enduring companies that you cannot
— that you cannot challenge for the foreseeable future, even though, you know, I made
the joke about Yahoo, and we can point to Nokia. These just seem like they are — we are
talking about a sort of a different breed of company. Should I just not be concerned that we
have these big, very powerful companies, again, you know, the five most valuable companies
in the world, even though they’re huge, still making massive profits? That’s just not a problem?
DR. STRAIN: Yes. I think that’s basically not a problem. You know, I feel like so
many good points have already been made. One that hasn’t — you know, go back in time
maybe a year or two and everybody in the United States was looking to Silicon Valley as
if it was the only good thing happening in the United States. And, you know, companies
like Google and Facebook were being hailed as American success stories of innovation,
and, you know, even if things may be dysfunctional in Washington, at least we have Silicon
Valley to keep powering the United States. And isn’t it wonderful that the United States
is the incubator for all of this incredible innovation and talent?
I think that view is still basically right. And I think that’s important to kind of keep
in mind when we talk about potentially very drastic policy action. What’s happening in
Silicon Valley is fantastic. I use Gmail every day. I’ve used Gmail every day for a decade. I
haven’t paid one penny for that service. And as a consumer, that’s wonderful, wonderful
thing. I recently joined Instagram, and you know, that’s been good as well. And it doesn’t
matter —
DR. MCAFEE: You don’t qualify as the early adopter on that.
DR. STRAIN: I’m not an early adopter. And I’m not a successful adopter either. I’m
marginally successful at it. But, you know, it doesn’t matter to me at all whether Instagram
is owned by Facebook or owned by somebody. You know, I think most users of Instagram
have no idea what the ownership structure is. It is an example of innovation in a post-Google,
post-Facebook world. You know, I think — I don’t think the only thing that matters in antitrust
considerations is consumer welfare. But consumer welfare matters a lot, and consumers
are benefiting enormously from this.
You know, I also think the examples, Jim, that you raised about Yahoo and about
Nokia are extremely salient. I mean, there was a time not long ago when everybody in this
room would have had a Blackberry attached to a Blackberry holster riding on their belt.
And there was a time not long before that when everybody would have had a flip phone
attached to a holster riding on their belt. You know, these were extremely powerful — at
least Blackberry was an extremely powerful company. Sprint was an extremely powerful
manufacturer of cell phones. Now we all have iPhones. I think it would be foolish to think
that it’s impossible to imagine that the iPhone won’t be displaced by another technology
at some point in the next 10 years. I think —
MR. PETHOKOUKIS: But what if they’re buying their competitors? What if they’re
buying their competitors?
DR. MCAFEE: Jim, why should your intuition that this time is different matter at
all given the history that Michael — and that we’ve all talked about?
MR. PETHOKOUKIS: I don’t know, but I just do — you look at history, and you
can say, yes, they eventually will fall, right? That’s been the history. But I also look forward
like, you know, maybe this time is different. Maybe this time — maybe this time is different
for some reason. I don’t know if it’s because — I don’t know whether it’s because of data.
I don’t know if it’s because of the network effect.
DR. STRAIN: Can I help you to think through that?
MR. PETHOKOUKIS: And I am being a bit of a devil’s advocate so don’t jump
on me. But — go ahead.
DR. STRAIN: I was the other day trying to put some music on my iPhone, and I
downloaded — and, see, I already hear laughter from the under 30.
MR. PETHOKOUKIS: It sounds like it was an exhausting experience for you.
DR. STRAIN: It was difficult. I downloaded a Springsteen concert from — it was
official. I paid for it and everything. And I wanted to get it on my iPhone. And so I asked
some of our fantastic 25-year-olds here at AEI to come help me. And, you know, three of
them came over and stared at me like I was born in the 19th century for not just using Spotify.
I said, what is Spotify? And they explained it to me.
DR. MCAFEE (?): I think he needs to leave the panel now.
DR. STRAIN: Facebook — my understanding is that young people — you know,
people who are in their like teens and early 20s —
MR. PETHOKOUKIS: The kids.
DR. STRAIN: The kids, they don’t use Facebook, or they don’t use it in nearly the
same quantity as older people do. I think that’s less true of Google. But, you know, I’m
sure everybody on the panel does remember using Yahoo as a search engine. And then
Google came along. And, you know, I do not believe that Google — I mean, I love Google,
but I do not believe that Google has perfected the way to organize the internet. And, you
know, the idea that a couple of, you know, young computer scientists at some point in the
next 10 years can figure out a better algorithm to get you what you want faster.
MR. PETHOKOUKIS: Which will then be purchased by Google, right? I mean, that’s
sort of the case. Part of the antitrust case is to break them up. The other part is we need to
quit letting these companies acquire potential competitors.
DR. STRAIN: That’s right, but I think that if somebody really believed that they had
a better way to organize the internet than Google, they would be reluctant to sell to Google.
DR. MCAFEE: Snap is exhibit A there. It turns out that’s not a better way to organize
ephemeral social content or at least the market’s heading that way, but Snap held out.
DR. STRAIN: I think if you look at these examples, it certainly helps to significantly
mitigate any concern about these companies. And I think if you look at the context in which
this conversation is happening, a surge of concern on the right about social issues, a surge
of concern on the right about things that are — on the left, excuse me, about things that are
big, you know, and a general kind of anxiety amongst the American people about how things
are going and where we’re headed, you know, two, three years from now, we may be back
to celebrating these companies again. And we shouldn’t be making — we shouldn’t be
taking drastic policy action without really good reason to do so.
MR. PETHOKOUKIS: One of my — and feel free to respond to what he just said
as well as maybe what I’m just going to say. One of my — focus on sort of the innovation
aspect and the part maybe that — to the extent I’m worried about — I would be worried
that these companies, because they’re big, because maybe they buy companies that are
smaller right away before they get a chance to grow and scale and improve their technology
— and this has been an argument made by some people who are worried, that they are already
actively suppressing innovation in this country. And they’ll point to the productivity numbers,
and they’re low. And so they’re trying to come up with reasons why those numbers are so
low.
Do you think already that that is an issue? Do you think that these — that we are
seeing less innovation and productivity because the — because of these companies right
now and how they act in the market?
DR. ZINGALES: First of all, I would like to answer his point first before I —
MR. PETHOKOUKIS: Feel free. Feel free.
DR. ZINGALES: So we should be careful of not using false analogies in the sense
that — the fact that Nokia or the Blackberry went by the wayside is great in terms of creative
disruption has nothing to say about important network industries because in that particular
case, the network did not exist. And the fact that the history of giants that eventually die.
And that’s part of the created disruption of capitalism, that’s great.
Our concern is today are the network externalities so strong that this natural creative
disruption process is impeded. And I think that the good analogy, if you want, is AT&T
because AT&T, as a phone industry had a strong network externality and, by the way,
was investing a lot in R&D, OK?
So if that’s our benchmark, it was great. So I would like to ask the panel in the future,
if they went back, we’ll be against regulatory intervening in AT&T because it was such a
great monopoly? So let’s continue. The Soviet Union was investing in R&D by GDP more
than the United States and sent a man in space before the United States. Is that a good system
we want to copy just because of that? And, by the way, measuring innovation on input rather
than output is not that great. We know. Facebook spends a fortune in developing new planes.
I’m not so sure that this is their comparative advantage. I don’t know why they’re doing it.
But, as a finance economist, I think it’s called free cash flow. But that’s a different
story. OK? So I wouldn’t count that as productive investment. It’s more waste of free cash
flow. What we care is about having more innovation. And I think that none of the panelists
have addressed, in my view, the key point I made, which is today the government is directly
involved in making it more difficult to have competition. The Computer Abuse and Fraud
Act, as interpreted by the Supreme Court, was just rejected — to see the Power Venture
case — is now basically blocking the ability even to give to my friend my password on
Facebook. I think this is awful and this needs to be corrected, OK? So I’m not saying we
should go to antitrust, yet I at least would like to do these basic things that are not done.
And until we do this, I don’t see sort of a — the antitrust intervening.
On the antitrust point, I think that — I like very much Carl Shapiro. I read his
recent piece. I think he’s very good in a lot of dimensions. But there is a fundamental
misunderstanding. The fundamental misunderstanding, as correctly was quoted, is the
bipartisan understanding for the last 50 years has been this, OK, which, by the way, is
known as the Chicago push for antitrust developed by the very people that were saying
those things before. And in the late ’60s, early ’70s, in the face of a too aggressive sort of
things of antitrust decided to limit the power of antitrust. In the late ’60s, the antitrust has
prevented mergers that we gained 5 percent of market share, OK? So that’s clearly excessive.
And as a result of that thing, they developed a very narrow interpretation of antitrust, which,
by the way, is not within the statute because the Sherman Act was precisely against the
power of bigness because power corrupts and absolute power corrupts absolutely and we
are afraid of those giants.
So if you look at the law of the land, the law of the land is clear. Antitrust should
not only be — should not take care of all the things on the face of earth. I’m not in favor
of that, but it’s not just about consumer welfare. It is about sort of making sure that there
is not a power that is too strong because that will distort our democracy. And I think that
that is the big fear I have more than any economic fear is that excessive concentration of
power will lead to a distortion in our democracy.
And I think that McAfee is absolutely right that there is a lot freedom of expression,
absolutely. Some people might say even too much because everyone says everything on
Twitter and — but that’s only part of what the role of the free press is about. I think that in
a democracy, a key role of free press is also to hold power accountable by investigating and
analyzing. And we have some great things like the International Consortium of Investigative
Journalists, but in the grand scheme of things, the ability to hold power accountable has
been reduced over time because the scrutiny has been reduced over time. And maybe —
for sure we need to find new forms.
But we need to be conscious that this process is not without sort of friction. And
probably before the newspapers were making too much money and the money was wasted,
et cetera. So I’m not trying to go back to the world of yesteryear. I think what we need to
think about is: What are the bigger consequences? And innovation is one. It’s very difficult
to know sort of what is the optimum amount of innovation. What I can tell you — and, again,
I would like to know retrospectively do we think that the antitrust against Microsoft in the
’90s was good or not?
MR. PETHOKOUKIS: I think that’s a good question. That’s the reason we had
this destruction of these companies have fallen is because government gave them a nudge.
DR. MCAFEE: No, no. Microsoft did not fall —
MR. PETHOKOUKIS: That’s not factually correct.
DR. MCAFEE: No. That’s factually incorrect. There was no antitrust action against
Microsoft. Microsoft was not broken up by the government. The reason we don’t worry
about Microsoft’s dominance — let me finish.
MR. PETHOKOUKIS: I think that — the threat, though, that they were worried
about threatening of them.
DR. MCAFEE: No. I’m disagreeing that the threat is what caused Microsoft to
fall from grace. Microsoft made tons of money all throughout the time they were being
pursued by the government, and there was no action taken against them. They had to pay
some lawyers a lot of money for it. That’s the worst thing that happened.
The real thing that happened with Microsoft was they missed search and they missed
mobile. And, therefore, they’re a large profitable uninteresting company in technology these
days, and we’ll see if Satya can turn that around or not.
Can I say one more thing? Nobody worries about Microsoft’s stranglehold on
innovation anymore. And I want to be clear. That is not because of government action
against Microsoft because that company missed a couple of big trends. And I categorically
agree with you. The instant like we don’t want to check Facebook, Facebook ceases to
matter despite how worried we are about it now.
DR. STRAIN: And I think there are parallels from Microsoft to, Luigi, your concern
about the advertising side of the market. You hear media companies and content providers
complain about the treatment they get from Google and Facebook. That is in large part
driven by their failure to anticipate this kind of network structure that people like to receive
their news from and driven in part by their failure to create the kind of content distribution
channels that have made Google and Facebook so successful.
You know, it is hard for me to conceive of Facebook versus The New York Times
as a David versus Goliath situation. I see two big companies that are both very powerful,
that are engaged in a dispute about the way that the public consumers their content and
uses their network services. And, you know, I do not see this tiny little company, The New
York Times, being stomped on by Facebook. I see The New York Times wishing that they
had gotten out ahead of where Facebook was in terms of distributing their content before
Facebook got there and not having done so and trying to claw back some of what they can.
And I think that’s an important consideration.
I think, Luigi, your point about power as a general matter I think is important and
does deserve to be reflected upon. It is not clear to me — and I could be persuaded that
I’m wrong about this, but it is not clear to me that if you roll back the clock to the 1970s
when an American had three 30-minute news broadcasts to choose from and one local
newspaper that arrived in the morning, that that American was subject to less competition
in the market for information and opinion.
DR. MCAFEE: Or was better served back then by the journalism and the information
they had access to.
DR. STRAIN: That’s right. That’s right.
DR. MCAFEE: Can I jump on that, because I think it’s a — do you want to say
something else?
DR. STRAIN: Can I just tell a story about Walter Cronkite?
DR. MCAFEE: Please don’t tell of Walter Cronkite. We know —
MR. PETHOKOUKIS: I think that was a universal absolutely.
DR. STRAIN: I mean, think about — you know, what’s commonly said, right, when
Johnson lost Cronkite, he lost the war, you know. Who is there that has that kind of credibility
with the American people today? You know, it’s not Chuck Todd. It’s not, you know, Mark
Zuckerberg. You know —
DR. ZINGALES: Wait a minute. We’re discussing — and I don’t agree — but
we’re discussing if $100,000 paid in Facebook ads can swing an election, OK? So people
perceive the power of Facebook to be so enormous that you spend $100,000, you can swing
an election. Imagine if you actually use it to win an election. It’s going to be devastating
in that 60 percent of the news that people receive is filtered by Facebook the way they want,
OK? So if they don’t like you, if they think that your news is unimportant, it’s filtered out,
and people don’t receive it.
DR. MCAFEE: In a less severe way than Walter Cronkite filtered our news two
generations ago.
DR. ZINGALES: I not here to defend Cronkite but —
DR. MCAFEE: But you’re saying we’re living in this dark time of access to
information and —
DR. ZINGALES: I didn’t say it’s a dark time. I said I’m concerned —
DR. MCAFEE: And the trend is in the right direction, not the wrong direction.
You bring up the excellent point that a free press is vital to a democracy, right, and the
best phrase I’ve heard about is that the role of journalism is to comfort the afflicted and
afflict the comfortable. I love that phrase. There was excellent reporting both from what
we consider the mainstream media during the 2016 election. The Post and The Times did
a great job. And, recently, the apparent deficiencies in Facebook’s ad vetting were brought
up, I believe, by ProPublica and BuzzFeed. The notion that these companies are getting a
pass from the press doesn’t hold water.
DR. ZINGALES: Actually, I think the press did a terrible job because until — and
I’m not a Trump supporter — but until Trump came to the picture and until he won the
election, how many articles did we have about the people dying of the opioid epidemics
in the Midwest?
DR. MCAFEE: Tons.
DR. ZINGALES: Very few. It became —
DR. MCAFEE: You were reading different things than I was.
DR. ZINGALES: Maybe I was reading the old news
DR. MCAFEE: Case Bing published a paper in 2015. It was extensively covered.
DR. ZINGALES: OK. Case is an academic. I understand. But I’m saying what
investigative journalism was done about this phenomenon.
DR. MCAFEE: I just answered that question. It was extensively covered in 2015.
DR. ZINGALES: No, no. Case is not an investigative journalist. It’s an academic
paper that they covered, OK? And they covered during the election, when this problem was
already coming up. I’m saying what level of investigative journalism was done? Think about
mortgage fraud. How many articles during the financial crisis did we have about mortgage
fraud that was rampant in the United States? Very few. So I think that there is a lack — and
I’m not saying that the past was perfect. Certainly Cronkite was far from perfect, but saying
that now we live in the perfect world, I think that’s wrong also.
DR. MCAFEE: OK. If I don’t get to put words in your mouth, you don’t get to put
words in mine.
DR. STRAIN: I also don’t think the world is perfect.
MR. HAGEMANN: I’m sure it could use some improvement for sure. Just to sort of —
MR. PETHOKOUKIS: There are other examples of the antitrust — you did jump
on the Microsoft example, but there are also the other examples of IBM in the late ’60s
and AT&T.
DR. MCAFEE: There was no action taken against IBM, was there?
MR. PETHOKOUKIS: But do you think, again, that’s a similar case?
DR. ZINGALES: No, no. The reason why they started to license out the PC is
because they were under continuous sort of threat of the antitrust enforcement. And they
couldn’t even mention the word market share in the board of directors for fear of the antitrust.
And maybe it was excessive, but what I’m saying is there’s no doubt that the reason why
there was not propriety PC, they contracted out, et cetera, is because of that.
And I think that you’re absolutely right. Other factors contributed to the demise of
Microsoft. It was not just the antitrust, but certainly they gobbled up many of the competitors
before. This is — I’m old enough to remember that there used to be a Lotus before Excel.
There was used to be a WordPerfect before Word, and there used to be a Eudora before
Outlook, OK? All this stuff was eaten up, and they were — in the process of eating up the
internet browser and probably would have eaten up much more if at some point an
antitrust consideration was not raised.
So I think that the business of business is to make money, and it’s natural that they
try to do these things. It’s natural that you have a police to try to limit that. If you say, let’s
do everything, then there is the risk of abuses. And, certainly, what Microsoft was doing
at the time was abuse. The question we’re asking the panel is: Are you against today of
what was done to AT&T and Microsoft back then? If you were in the ’50s, were you against
regulating AT&T or sort of do antitrust to AT&T? And I want to know the answer.
DR. STRAIN: I certainly would be opposed to breaking up Facebook or Google
in the manner that —
DR. ZINGALES: We’re not talking at this moment of Facebook or Google. I’m
asking, let’s go back in history. You have the right to decide whether to go antitrust against
AT&T or to go antitrust against Microsoft. What do you choose?
DR. STRAIN: Can I say I don’t know?
DR. ZINGALES: Is it chicken — is it copping out? Sure.
MR. HAGEMANN: I’ll bite on Luigi’s question. Yeah. You break up AT&T. The
difference though is that —
DR. STRAIN: Can you explain why?
MR. HAGEMANN: Because AT&T was a government-granted monopoly, so it’s
a different set of circumstances.
DR. STRAIN: He know more about AT&T than I do.
MR. HAGEMANN: Yeah. Yeah.
MR. PETHOKOUKIS: It’s quite clear.
DR. ZINGALES: No, no. But it was a regulated government kind of monopoly. It
was regulated because there was a big network externality.
MR. HAGEMANN: Right. Yes.
DR. ZINGALES: So we don’t discuss that the telephone had a huge network
externality component. I hope that we all agree on this.
MR. HAGEMANN: Sure. Absolutely. So should government have broken up AT&T?
Well, I think, you know, the innovation that flourished after they did is, you know, sort of,
you know, kind of in hindsight saying, yeah. Absolutely. Great job. But in my — as I’m
searching through my memory banks, other than standard oil, I cannot conceive — or I
cannot recall another situation in which the government affirmatively broke up an existing
private-sector entity using antitrust. I know antitrust was kind of held over Microsoft as
sort of like, you know, this cudgel that they were going to come down on them with, but
Microsoft ultimately just settled under a consent decree.
DR. MCAFEE: Am I wrong that United was a Boeing spinoff?
MR. HAGEMANN: Airline and transportation is not my bread and butter. Unless
you want to talk about autonomous vehicles.
DR. MCAFEE: We can Google that. I think it might be, but I’m not sure.
MR. HAGEMANN: Yeah. So, sure, break up AT&T. I’m a lot more skeptical about
using antitrust in an ex ante manner to break any of these big tech firms, again, because
of a lot of the issues that I laid out, like how are we actually assessing competitiveness in
the market and all of that.
But I kind of wanted to go back to what Andrew and Luigi were sort of, you know,
sparring about earlier. And that’s sort of, you know, the threat or the perceived threat that
some of these large tech companies pose to the integrity of our democracy. I think that the
problem there has less to do with the platforms and more to do with sociological issues,
right, like cultural issues. There’s been a declining trust in institutions in this country over
the last 20 years or so. And no one has yet figured out the ultimate culprit of this, right?
Jonathan Rauch had a great piece I think last summer where he talked about how
it was actually the breakdown of the traditional party structure that acted as gatekeepers
to enter into the political marketplace that has allowed some more extreme viewpoints to
enter in. You know, maybe it’s the fact that people are able to share what they actually
think about their lives, society, and everything going on that’s sort of feeding, you know,
the franklin for kind of filter bubble.
But it’s not clear to me that as a result of these companies having provided a
platform for individuals to associate with one another in a decentralized manner without
actually having to go through Walter Cronkite and, you know, ABC and CBS — it’s not
clear to me that that’s the actual problem. The problem is more fundamental. The problem
is more cultural, and the problem is far more political than anything else in this country. I
don’t know how you address that. If I knew how to address that, I might be running for office.
Just like if I knew what the next big innovation was going to be in the online space, I
would be a VC, right, but —
DR. MCAFEE: Can I jump on this? Because I think this is a fundamental point.
MR. HAGEMANN: Jump on.
DR. MCAFEE: Because there is — Luigi, I agree with you. I think there is an actual
problem out there that’s associated with these platforms, and I don’t quite know what to
do about it. And the problem broadly is that — we’ll continue to talk about Facebook and
Google — they have built these unbelievably large and influential and profitable engines
based on a combination of two things, based on user-generated content. We just provide
huge amounts of information that they then diffuse back out to other people. And self-
service advertising.
And that confluence of things, I think we learned during 2016, leads to some very
strange outcomes. The spread of fake news on Facebook and on YouTube and other social
channels is bizarre. And it just proves the old adage that a lie is halfway around the world
while the truth is still getting its boots on. So what do we do about the unbelievable velocity
and apparent power of fake news? Wow. That is an actual tough problem. I don’t mean
that rhetorically. I don’t know what to do about that.
The other one is you or I can walk up to Facebook right now and buy ads against
a very targeted demographic, and most of those are not vetted in any way by Facebook.
It’s complete self-service, and there’s no white list of approved advertisers. Wow. What
we learned during the 2016 election is how the bad guys drove a hole through that and
put out all kinds and served ads that didn’t do our democracy very well. What do we do
about that? Do we require either an algorithmic or an in-person check from somebody at
Facebook before we allow those kinds of ads on? Maybe we do. Would that solve the
problem? That’s a hard thing to answer.
I have heard — I haven’t verified this — that the reason we don’t come down too
hard on Google for the 2016 election and the spread of these ads is that there was a white
list for YouTube. You had to have been an approved advertiser to place an ad on YouTube.
According to the people I’ve talked to on Google, that kind of inadvertently dodged a bullet
during the 2016 election because of that difference in their structure. Do we regulate that in
place? I’m not being facetious. I don’t know. It seems like an important thing to dive in on.
MR. HAGEMANN: Can I just comment real quick? Because the point that Andrew
made about the speed with which, you know, fake news actually travels these days as a
result of these, you know, decentralized digital networks. I think it’s important to also
remember though that that speed of the spread of lies and fake news is only matched by the
speed with which we can actually like assess the fact that fake news and lies are spreading,
right? So like we have, you know, mechanisms — social mechanisms to respond to those
issues. And I think, on net, it should probably get us wondering about, you know, not whether,
you know, these digital networks are a good thing but assessing just how good they are,
right?
These aren’t problems that emerged just with the advent of the internet. These are
problems that have been simmering for a long time, and now we can start to identify what
some of these problems are, have these conversations, and actually have a conversation
about what our policy responses might be.
DR. STRAIN: Yeah. I just wanted to make two quick points in response to that as
well. You know, one is that non-fake news can also spread very quickly as a consequence
of these platforms. I mean, if you look back at 20th-century American history, and you know,
you have all these instances of the president of the United States getting on the phone with
the publisher of The New York Times asking him not to publish a story and, you know,
the American people being systematically lied to for year after year after year, and, you
know, Congress not even knowing that the National Security Agency existed, you know,
all this kind of stuff. You know, is fake news a problem? Sure. But if you look back at the
way things used to be done, it’s not obvious that things are worse or trending in the wrong
direction right now.
Secondly, I think there — you know, having said that, I think there is a legitimate
policy debate to be had about whether a company like Facebook should as a general matter
be expected to hold more responsibility over the content on its platform. And some of that
is fake news; some of that is advertisers. Some of it is also — you know, if I, you know,
go, you know, up to a 7-Eleven and, you know, beat up the clerk and steal a bunch of
candy bars and film that, should I be able to just throw that up on Facebook for anybody
to see?
You know, right now, Facebook takes very little responsibility for what’s put on
its platform. And that’s something that I think it’s reasonable to think about, you know,
whether policy should push Facebook toward being more responsible — toward taking
more responsibility. I think, you know, the situation with Google is much harder, but, you
know, YouTube provides a good analogy I think because there — you know, YouTube is
a content-hosting platform. Google, the main product is a search engine and so how — you
know, how a search engine would take more responsibility, I mean, they have their ways
but that in some way is harder. But there I think you could have, you know, a pretty legitimate
policy debate about whether that would be an improvement over current policy.
DR. ZINGALES: Yeah. But what I’m a bit surprised is to hear that you don’t —
people here don’t want to intervene on the marketplace, but they want to intervene massively
on regulation of content and selection. I don’t feel as a citizen so protected by the fact that
Facebook decides who gets to distribute content and who doesn’t. And so what protects
me is competition. How do I get competition?
By favoring alternative platforms, alternative ways of diffusion. Having sort of all
this enormous power, Facebook, to select which stuff we produce because the notion that
you have, Andrew, that this spreads around is — I know that you know, but it is not exactly
right because this stuff is targeted by Facebook to maximize the time you spend on Facebook
so that they on purpose edit. So they are editors. It’s not that they publish everything because
if they were to publish everything, OK, they don’t take the responsibility. No. They actively
choose of all the news in a sense the worst one, the one that clearly have more attractive
content in order to induce people to look at them. So they play a negative role, and it puts
sort of gasoline on the fire. It’s not that they help the fire spread. They actually put gasoline
on the fire.
And I think that that’s a source of concern, and to me it’s much better to address
through inducing competition than to having some regulator, especially because, I think
you wrote a very interesting article about the level in which Facebook is embedded in the
political campaign. So these guys basically own the government, and they can do whatever
they want because they are bipartisan. So they own the government on both sides, and who
protects us against this power?
DR. MCAFEE: You don’t think Facebook owns the government is a touch hyperbolic?
MR. HAGEMANN: Just to be clear, I did not write an article suggesting that Facebook
owns the government. (Laughter.)
DR. MCAFEE: You see, Luigi’s demonstrating that if it’s outrageous, it’s contagious.
MR. PETHOKOUKIS: Well, I think we have about 20 minutes left, and I kind of
do want to go to questions if no one minds. So we’re going to — so I’ve been given things
I must say before questioning. And while I’m saying this, you can think of your question.
Remember, this is a livestreamed event. Please wait for the microphone to be
handed to you before asking your question so we can hear you. Please speak clearly into
the microphone. Keep your questions brief and make sure they’re questions — questions
and with a question mark — and they’re not soliloquies ending with a question mark. Again,
no statements. So if we want to think of a question, raise your hand. And we’ll start right
here since you asked a question before the event even started so you’re the early bird.
Q: Thank you. Netra Halperin, Peace Films. I want to talk about one of the things
you said —
MR. PETHOKOUKIS: A question, not a talk about. Just a second. We do want a
question, not a talk about.
Q: OK. My question is about antitrust and the fact that all mainstream media is
owned by six companies. There was a banking crisis in 2008. The banks are now bigger,
et cetera, et cetera, et cetera. So I don’t think we should throw antitrust out. That’s just a
comment. But anyway, regarding Facebook — I mean, my biggest interest is also like you,
in democracy. And I don’t really think that we have a forum of democracy because all of
the questions are being — the discussion is being controlled. So one of my questions to
you was about the possibility of porting your profile. I’m a big Facebook user, and I wish
I wasn’t only on that one platform because they do control things. They do have their
algorithms. How could we port our Facebook profile and have all our friends follow us?
MR. PETHOKOUKIS: Like the social graph and the issue of who — you know,
do I own my own data and some people — they want to be paid for their data as well.
DR. ZINGALES: I think it’s very simple because the European Union has already
done with financial transactions is a regulation that will come in place in January 2018.
It’s called PSD-2. And it brings data portability from one bank to the next. So exactly the
same which if you are a cell phone user and you want to switch from Verizon to AT&T,
you go to AT&T and say, get all my information, include my phone numbers in this transfer.
In Europe, it’s possible to do that from generally with your bank data, and they’re going
to get all the bank data.
And you can apply the same idea with your social graph. And if you change laws
like this Computer Abuse and Fraud Act, that makes it difficult for third parties to use your
password to access and transfer, then you have a much easier portability of data and social
graph. But this must be acquired by law. But it is not that the law is neutral today. The law
today is actually favoring tremendously the incumbent. And what I propose is that the law
is changed in order to favor new entrants to promote competition.
DR. MCAFEE: So I like that idea of changing the law. It sounds a little restrictive
to me. It won’t make any difference. You can’t port your social network. You can’t —
Q: And all my friends.
DR. MCAFEE: You can’t ask all your friends to come over to Facebook or
whatever Facebook’s alternative is with you. In addition to which, let’s say you take all
of your data. Let’s say I comment on one of your posts. That’s my data. Does that come
over when you want to port or not? The questions tumble out very easily, and they lead
me to the conclusion that if Facebook let you download all of your data immediately, it
would make absolutely no difference. These are winner-take-all markets.
DR. ZINGALES: You know, it’s interesting, but Facebook is fighting tooth and
nail Power Ventures, which is a little startup, in order to protect this. So it must be that
they care about this, otherwise they wouldn’t spend their money fighting this.
DR. MCAFEE: It must be that they care about airplanes then because they spend
their money on that, too.
MR. CLEWS: I think it’s more fun to spend money on airplanes than in legal cases.
DR. MCAFEE: Or it could be your words, it could be a free cash flow problem.
MR. HAGEMANN: To be clear, high-altitude solar-powered drones to deliver
internet access.
MR. PETHOKOUKIS: Over here.
Q: Hi. Luther Lowe from Yelp. Do you think that there’s a reason that we didn’t
have bad actors attack our democracy and have enjoyed the economies of scale in 2012,
in 2008 and whether it might have something to do with the internet being more pluralistic
and open and, you know, therefore things are getting more concentrated? You know, even
over the last four years, as Luigi noted, 85 cents — it’s actually 99 cents — of every new
dollars in online advertising last year went to Google or Facebook.
And then the second question is: Isn’t this really Silicon Valley using experiment-
based behavioral economics to design its products in kind of Bork-based neoclassical
economics to defend its monopolies? And really the premise of Borkian economics saying
that we don’t have information so let’s kind of plot the domain curve thus, when really we’ve
got information coming out of our ears in these markets. That’s why you’ve got Steven Levitt
at Chicago plotting real demand curves with Uber. And don’t you think some of that data
that these firms are sitting on could help us better understand these dynamics?
MR. HAGEMANN: Could help us better understand the dynamics of — I’m sorry.
I didn’t quite follow the connection there.
Q: So, for example, if — you know, how Varion these days will cop to the claim
competition is a click away suggests there’s zero switching cost, but if you look at the
data, people are far more likely to actually give up on their searches and assume the
information is not out there than move a few pixels up to your L bar and type in Bing.com.
And so it suggests that there’s something that is not being detected under sort of the current
analysis.
DR. STRAIN: Or to suggest that people don’t think that Bing.com is going to do
any better for them than Google.
DR. ZINGALES: No, no. But I think he’s raising a very good point. And, basically,
the way the antitrust is conceived today is neoclassical economic in which people are rational
and they basically are not affected by biases and so on and so forth. And the irony is that
when these firms operate in the marketplace, they actually use behavioral economics in a
massive way to obtain. But when it comes to discuss what should be done to address them,
they say, no, no. Let’s look at the old economics, and according to the old economics, we
are fine. I think there is a contradiction that needs to be resolved. I think he’s absolutely
right.
DR. STRAIN: I agree with that, too.
DR. MCAFEE: And on your first question, my understanding is that in this new
world that we’re creating with global social platforms. This is very new territory. The way
we used them in the 2008 election changed a lot to 2012, and the way we used them in
2012, 2016 changed a great deal as well. I don’t know the answer to your question. My
guess is the Russians, for example, just weren’t as aware in 2012 that this kind of thing
was possible and effective.
DR. STRAIN: Or, you know, look, I mean, it’s not foreign power is trying to
interfere in other countries’ elections is a new phenomenon. The United States —
DR. ZINGALES: As an Italian, I can tell you is not.
DR. STRAIN: The United States —
MR. PETHOKOUKIS: That’s an easy one for Luigi.
DR. STRAIN: — did quite a bit of that in the 20th century as well. And it could
just be that Vladimir Putin really didn’t like Hillary Clinton or really thought it would be
good for him for whatever reason if Donald Trump were president. You know, it could be
a thousand things.
DR. ZINGALES: But what I find paradoxical is that we are here agonizing over
$100,000 spent by Russia when the two parties spent $18 million just on Facebook. So if
really sort of money can buy consensus, my first order of magnitude is, wait a minute, those
$18 million, where do they come from, and what are the objectives? So if democracy is
for sale so cheaply, I think that that should be our main concern, not the $100,000 of the
Russians.
DR. STRAIN: And I agree with that, too. But, again — I mean, there’s a classic —
I’m not sure if you’re aware of it, you know, “Why Do We Spend So Little on Elections,”
written long before —
DR. ZINGALES: “The Man in the Golden Tower.” Yeah.
DR. STRAIN: Yeah, written long before Google and Facebook came on the scene.
So this has been — this is an old — it’s an old problem.
MR. PETHOKOUKIS: All right. We’re going to go all the way to that wall.
Q: One of the things that you guys haven’t really talked about is the politicization
of antitrust and how a lot of the current conversation on the whole hipster antitrust movement
could potentially allow for politicization, which I think we’re seeing already some allegations
of that in the AT&T-Time Warner case the Department of Justice is bringing. I just wondered
if you guys could talk about that.
MR. HAGEMANN: Yeah. I think this is — I think this is a big concern that we
probably should have hit on, right? Like any tool that you give the government can be
politicized to achieve the ends of that political actor, right? And it’s not uniquely the case
with antitrust. It’s the case with pretty much any regulatory tools and any law that you enact.
And so that’s part of the reason that I’m a big proponent of interpreting that antitrust
in a very narrow context and interpreting it as empirically well-sounded as we possibly can,
right? The broader the authority, the more likely it is to be abused. And so if you have a
problem, it’s better to use a scalpel than to take a hammer or a cudgel to it, right? You want
to get at the actual symptom of the disease. You don’t actually want to get at the boils that
result from it, right?
So I think that that is a very real concern and one, especially in the current AT&T
deal that we’re seeing right now — is something that should really be at the forefront of
our mind when we start to consider how expansively we want to use these types of tools
to achieve whatever ends that we as policy folks and academics might desire.
DR. ZINGALES: I’m very sympathetic to this concern of politicization. First of
all, I will distinguish between two things is sort of politicization of antitrust decision and
think about political consideration in antitrust in the sense of, say, too much concentration
of power.
So antitrust by design of the Sherman Act was considering the aspect of excessive
concentration of power as something that we should be worried about. And that in response
of the fear of a political use, we went to a very narrow definition. Now, this narrow definition
does not eliminate the politicization because do we think that the decision not to pursue
Google was completely nonpolitical? This is — do we know that Google employees visited
the White House 451 times during the Obama administration, of which 17 meetings with
the president himself? Do you think that there is no connection between this and the fact
that the FTC had a report saying that there was abuse of dominant position decided not to
pursue the Google antitrust?
I think that politicization unfortunately exists. It exists in both direction. We should
watch for it, but if you say that we fear politicization, then we should give up any political
decision. I think that we want to have a healthy democracy that held people accountable
for who they appoint to a particular position and how this person behaves. And I think
that that’s all. Otherwise we have entities that are governed by the industry itself, and
there’s no control.
MR. HAGEMANN: Important points. I would just point out two things real quick,
right? Like it’s not just Google folks who were going to the Obama White House. It’s
basically every industry, content industry, pharmaceutical industry. Like this is the problem
that isn’t unique to big tech.
DR. ZINGALES: How many consumers were going to the White House complaining?
MR. HAGEMANN: How many consumers get into the White House, right? And
I’m not saying that that’s not potentially a problem, right? But the other quick point is,
you know, the FTC during the Obama years did have a consent decree with Google for
violating its privacy policy. The biggest fine that the FTC has ever handed out went to
Google back in 2012, so it’s not quite fair to say that Google is somehow —
DR. ZINGALES: Can you give me the size of the fine?
MR. HAGEMANN: It was like — someone out there might know better than I do.
What I want to say it was around like $20 million. And, yes, I know. I know. But the point
is there are other tools in the tool kit, and this is — you know, the problems with revolving
doors and, you know, industries having access to high-level actors in politics is not unique
to big tech.
DR. ZINGALES: No, no. Absolutely.
MR. HAGEMANN: Sure.
DR. ZINGALES: I wish we were unique with that because it meant it was more
limited, the problem. No, it’s much bigger. I agree.
MR. HAGEMANN: Yeah. OK.
MR. PETHOKOUKIS: Is anybody concerned that we have these very big platform
companies that it encourages more bigness elsewhere in the economy to compete with these
companies?
DR. STRAIN: I don’t understand why you’re so concerned about success.
MR. PETHOKOUKIS: I’m jealous, just jealous. (Laughter.)
MR. HAGEMANN: Why do you hate America?
DR. ZINGALES: Let me tell you very simply. I understand. This is an argument
that Chicago economists have made for now two generations about we should not punish
success, and he’s right. On the other hand, there is the following concern. So my ability
to offer sort of valuable position as a revolving door and basically get my way is very
much linked to my dominant position of power. So if I am Chuck E. Cheese and I’m not
sure I’m going to be around tomorrow, offering a position in Chuck E. Cheese tomorrow is
not very valuable. And I don’t get to get what I get in my — at the government. If I’m
Citigroup, and I offer you a position as nonexecutive chairman paid $10 million a year in
the future, I get what I want, OK? So being big naturally gives you more political power.
And this is what I define as the Medici vicious circle, because it comes from the
Medici Family in Florence that they made their money in the bank industry very competitively.
Once they became big, they became the lord of Florence and remained there three centuries
exploiting Florence with that, OK? So the problem is that money gives you power, but power
gives you money. That vicious circle is what I’m concerned about.
MR. HAGEMANN: I agree entirely.
MR. PETHOKOUKIS: I’ve taken no one from the way back so we’re going to try
in the way back.
Q: I have a question that goes along the lines of the politicization and also the point
just made about government and some of these big companies having close relationships.
And the point is just that government is a consumer of the data that’s produced by these
platforms as well as, you know, considering consumer welfare, but the government as a
consumer of these — the output of these companies.
Does that over time — suppose there isn’t such a big problem right now, but in the
future if there were some sort of monopolistic behavior, then does that relationship of the
government as a consumer of the data produced by these companies disincentivize some
kind of government action in the future? So if some of you agree that there’s maybe no
reason or no good reason to intervene now, does the government’s relationship as a consumer
of the data produced by these companies cause some kind of problem potentially moving
forward?
DR. MCAFEE: I take a lot of comfort from the fact that the tech companies were
trying hard to be allowed to make public the requests that they got from the government
about — I forget exactly which statutes or what the requests were. But tech companies
tried pretty hard to say, we want to make that information public. They got fought by the
government on that. The tech guys are on the good side of this of the point that you raise.
Q: Interesting discussion. And you have lots of things — my name is Anne Krueger.
And my question is something else and that is, of course, that there’s a great deal of discussion
between the US and particularly Europe right now about antitrust with regard to the big tech
firms. And we’ve discussed this as if market power was all within the United States and it
had nothing to do with competition internationally. And I’d be interested in comments or
observations or whatever.
MR. PETHOKOUKIS: Thank you for asking the question about Europe that I should
have asked.
DR. ZINGALES: I think that’s an excellent question. It is not only Europe and the
United States. There’s also China, which is big, and the rest of the world. I think that, initially,
I thought that much of the action of the European antitrust was simply an anti-American
thing. I think that that’s not necessarily the case. It seems that there is a stronger attention
to competition in Europe because it’s the only thing in which Europe is popular about. If
you go about in Europe and say, what is the European Union sort of good for, it is freedom
of movement, of people, and competition in the European Union. So they have a strong
sense of legitimacy. And it is the only sort of point. It’s really not an elected commission.
It’s not really elected by people. It’s the only thing in which they feel they have a mandate
and they are very aggressive.
And The Economist had an article saying that all this activity of Margrethe Vestager
is because she has political ambitions. And I said, what’s the alternative? If a politician
has political ambition and tries to do something because it is popular, I think that’s good
because the alternative is doing something because she’s paid to do something by somebody
else. So I think adding political ambition of all things for a politician is a good thing. So I
think the activity of the antitrust in Europe is more aggressive for that reason.
Now, there is a tension which I regard as very dangerous — the idea of the national
champions, that we should protect and give monopoly here in order to have them stronger
and win outside. France is the country of national champions. I don’t think they’ve done so
well recently. I don’t think it’s the model we should use in the United States, but naturally
there’s a tendency in that direction.
MR. HAGEMANN: I tend to agree with most of that. There’s also the case that the
Europeans are far more bullish on how they think about privacy. At least this is the case
with the older generation. My understanding is that the younger generation is a little bit less
privacy conscious than a lot of those folks here in the US who share that same demographic
spread. But, you know, some of the history especially of, you know, some of the Eastern
European countries in recent memory —
DR. ZINGALES: Even Germany.
MR. HAGEMANN: Oh, especially Germany, especially Eastern Germany. I mean —
DR. ZINGALES: Even West Germany.
MR. HAGEMANN: Even Western Germany. Sure. Sure. So, you know, things
like the GDPR and other sort of like EU-level privacy regulations I think also factor into
this equation in addition to the, you know, different conception that the Europeans have
as it relates to — as it relates to antitrust.
Q: But should we think competition is only within the United States, or should we
think of competition as partly between firms in the US and firms in other countries when
we think of our antitrust policy?
MR. HAGEMANN: When we think about antitrust policy here, domestic —
DR. STRAIN: We shouldn’t think of the US as a competitive entity — a competitive
singular entity that is competing with other countries.
Q: No, no — (off mic) — the US market share.
MR. PETHOKOUKIS: Right. I mean, should we care about the Chinese platforms?
MR. HAGEMANN: Our policy tools here can only be applied to companies that are
located here. So we should be concerned broadly about global competitiveness, but we don’t
have the tools that the domestic — at the nation level to deal with those types of concerns.
Q: I meant it the other way around, that there are good European or Chinese firms.
Why don’t they count as part of the competition?
MR. HAGEMANN: They do, not for —
DR. ZINGALES: When is the last time you used Baidu?
MR. HAGEMANN: True. True, true, true. But that’s — I mean, there’s a lot baked
in — there’s a lot of reason that, you know, like Alibaba doesn’t have the type of market
share that Amazon does here in the United States. And it’s not simply — it’s not simply
antitrust related.
MR. PETHOKOUKIS: Well, I think we’ve actually gone a bit over. So thanks for
coming. Remember, check us out on Facebook. (Applause.)
(END)