Enlarge /. The United States Capitol Building, the seat of Congress, on the National Mall in Washington, DC.
Last June, the House of Representatives' Antitrust, Commercial and Administrative Law Subcommittee launched an in-depth investigation into four major companies – Amazon, Apple, Facebook and Google. The subcommittee wanted to answer a key question: has Big Tech obeyed the rules or is it cheating on staying at the top? After 16 months of hearings, research and analysis, the results of the panel are in … and the results look really bad for every company involved.
The technology sector is indeed suffering from abuse of "monopoly power," the subcommittee concluded in the huge 450-page report (PDF) released late yesterday afternoon.
"As they exist today, Apple, Amazon, Google and Facebook each have significant market power over large parts of our economy. In recent years, every company has developed and used its market power in an anticompetitive manner," said Jerrold, chairman of the Nadler Judiciary Committee (DN .Y.) And Antitrust Subcommittee chairman David Cicilline (DR.I.) said in a joint statement. "Our investigation leaves no doubt that there is a clear and compelling need for Congress and antitrust authorities to take action to restore competition, improve innovation, and protect our democracy."
What was the Congress looking for?
As we have already explained, antitrust law is not just about monopolies. Being the greatest player in a sector – even if you are so tall that you dwarf any potential competition – is not inherently illegal. Sometimes it can just be like a market shaking off.
Antitrust law instead deals with what you did to become dominant and what you do with the oversized power that comes from being the greatest. If you have a 90 percent market share, but it's all built on natural growth and dealt fairly with other businesses and consumers, you're likely to leave antitrust authorities alone. But what if aspiring startups can show that you used your crowd to take them out before they could become real competition, or if competitors can show that you used different parts of your business unfairly to take them down? These are problems.
After seven hearings, examining more than 1.3 million internal documents, conducting more than 240 interviews, and reviewing the contributions of 38 antitrust experts, the committee found evidence that all four companies acted, and continue to act, anti-competitive to do.
Amazon: It's all
Amazon is dominant in online sales, the committee found. Between first-time sales and the third-party market, Amazon controls roughly 50 percent of the U.S. e-commerce market and a much higher percentage in certain sectors such as e-books. And the company is using this gatekeeper, the monopoly power, unfairly, the committee concluded.
Amazon is using its power over both sellers and manufacturers to break agreements, press for unfair bargaining terms, and integrate potential competitors into its ecosystem, the report concluded. The problems were particularly pronounced in the company's third-party market. Around 2.3 million vendors worldwide sell their goods on the Amazon market, and of these, just over a third "rely on Amazon as their only source of income". In other words, Amazon is their storefront, and Amazon uses that leverage to twist metaphorical arms whenever it pleases.
"Numerous vendors told subcommittee staff in interviews that they cannot turn to alternative marketplaces regardless of how much Amazon increases their business costs or how badly they are treated," the report said. "Sellers feel compelled to be on Amazon because that's where the buyers are."
And of course Amazon is also a retailer, and in many categories of goods it competes directly with the sellers for whom it provides infrastructure. It collects data from third-party sales to inform its own product launches and then competes directly with the dealers who rely on it for a living. The company also runs a logistics business that takes great advantage of these sellers by allowing its opaque "Buy Box" algorithm to penalize sellers who don't.
Amazon has also been anticompetitive in several of its dozen of its acquisitions over the past decade, the committee found. Not only have these purchases reduced consumer choice and significantly expanded the inventory of consumer data on Amazon, but in at least one instance, Amazon used predatory pricing to anticompetitively undercut and ultimately acquire a rival company.
The report notes that Amazon continues to use its power across the chain to make the cost of moving away from Amazon too high for most businesses and consumers. In terms of antitrust law, these are known as switching costs and network effects. "Amazon has built its market power through avoiding taxes, attracting government subsidies and anti-competitive behavior – tactics that have given the company an unfair advantage over actual and potential competitors," the report concludes. "Amazon's market power is permanent and is unlikely to wane for the foreseeable future."
Apple: It's the App Store
Apple controls about 45 percent of the U.S. smartphone market and 20 percent of the global smartphone market, the committee found, and is expected to sell its 2 billionth iPhone in 2021. It is true that Apple is not a monopoly in the smartphone cell phone market. Instead, iOS and Android have an effective duopoly in mobile operating systems.
However, the report concludes that Apple has a monopoly control over what you can do with an iPhone. You can only push apps to your phone through the Apple App Store, and Apple has full gatekeeper control over that App Store – which is exactly why Epic is suing the company.
This monopoly control enables Apple to generate "above average profits" from the App Store, according to the report. Those gains have made a dramatically higher percentage of Apple's revenue over time, and now generate billions more than the company spends annually on running the app on business.
Apple is also anti-competitive tying its in-app payment system (IAP) to the app store, the committee said. Citing internal Apple communications and statements from the founders of ProtonMail and Hey, the report states, among other things, that "Apple has used its power over the App Store to require developers to implement IAP, or there is a risk that getting kicked out of the App Store. "
Using IAP adds cost to developers, as several testify. For apps that compete directly with Apple's own first-party services, it doesn't make economic sense to pay Apple for the privilege of making less money – that's at the heart of Spotify's complaint against Apple. But developers also say they can't leave iOS because, while iPhone users are a minority of the market, by and large they have more money and spend more money than Android users. (Several of these developers teamed up early this fall to form a trading group that is pushing for Apple to cut its fees and disconnect IAP's App Store.)
The committee found internal documents showing that management, including former CEO Steve Jobs, "recognized that IAP requirements would stifle competition and limit the apps available to Apple's customers." The report concludes that Apple improperly used its control over APIs, search rankings, and default apps to restrict competitor access to iPhone users.
Facebook: It's the acquisitions (and the data)
Facebook has "monopoly power in the social networking market," the report concludes, and that power is "firmly entrenched and unlikely to be undermined by competitive pressures from anyone" because of "high barriers to entry – including strong network effects – high migration costs and the significant data advantage from Facebook – which hinder the direct competition of other companies to offer new products and services. "
Facebook claims that it competes heavily with users on other platforms like Twitter, TikTok, Snapchat, and Pinterest. But it doesn't compete with other big platforms like Instagram because it bought them out before they could become real competition. The company's four top apps – Facebook, Instagram, Messenger, and WhatsApp – comprise four of the seven most popular mobile apps in the US. The flagship app from Facebook alone reaches 200 million US users or 74 percent of smartphone users.
This range alone prevents people from using the product. There are high conversion costs for social media platforms because users want to go where their friends are. "Either everyone uses them or nobody uses them," concluded an internal Facebook document. According to the report, Facebook also hides its data portability settings from users, which results in users keeping their accounts active so they don't lose information like photo albums.
The purpose of the merger review is to ensure that you cannot buy out your competitors if that would significantly affect competition in the industry. For example, if Company A has a 40 percent market share, Company B has a 10 percent market share, and Company C has a 50 percent market share, Company A and B could likely merge and Company C could acquire Company B. However, Companies A and C could do not merge as the combined company would have a 90 percent market share. Competition in this sector would be destroyed.
So many acquisitions
However, regulators have not blocked Facebook or Facebook's WhatsApp, and have not stopped 60 other Facebook acquisitions. This led to what a former employee of the committee described as an inter-platform collusion, "but with an internal monopoly". The representative added, "If you have two social media utilities, they shouldn't be allowed to back each other up. I don't see why this shouldn't be illegal. You can collude by acquiring competitors and banning competition. "
Facebook used some of these acquisitions, such as the VPN service Onavo, to collect non-public data in other companies' apps and then use this data to further inform its own acquisition strategy. Snapchat legendarily kept a dossier called "Project Voldemort" on Facebook's attempts to undercut Snapchat's business and acquire the company at a discounted price.
That strategy was deliberate, the committee found. As evidence, the report cited internal communications from Facebook CEO Mark Zuckerberg and other corporate executives. "Facebook's series acquisitions reflect the company's interest in buying companies that had the potential to become competitors before they could become serious competitive threats," the company concludes.
Facebook also used acquisitions such as purchasing Microsoft's Atlas advertising service to expand understanding of consumer data and become a major player in the online advertising market that it now dominates. "Regardless of Google's dominance," the committee wrote, "the market participants surveyed by the subcommittee consider Facebook" inevitable "or" must "because of the reach and scope of its platform."
Together with Google, Facebook is half of a duopoly that controls online advertising to the detriment of competition, the committee concluded.