In two recent NYT columns , , Farhad Manjoo makes a series of curious arguments that suggest successful tech firms are too competitive, and are not regulated. These arguments are made with respect to what Manjoo refers to as “the Frightful Five,” referring to Google, Apple, Facebook, Amazon, and Microsoft.
(The “Frightful Five” branding effort recently got some traction on NPR’s “Fresh Air”, but it is actually a French import, where successful Internet firms have for some time been referred to as “les GAFA”. In France, Microsoft evidently doesn’t make the cut.)
Manjoo’s arguments — particularly that tech firms (1) compete too aggressively, and (2) are unregulated — both require some examination.
(1) Is aggressive competition a bad thing?
Contrary to other critics of successful tech firms, Manjoo doesn’t argue that tech firms are uncompetitive, but rather that they are too much so, engaging in “merciless, sometimes unfair competition”. (“Merciless” competition, of course, is lawful. “Unfair” competition would violate at least FTC Act Sec. 5.) Pointing to the tech startup Snap, Manjoo says it has been “battered by giants,” who today are “nimbler and more paranoid about upstart competition.” Setting aside that Snap is winning over users — a fact reflected in its stock — and doesn’t seem to be “battered” at all, it is strange that being “nimble” and worried about competition is intended here as a critique. Would consumers benefit more if tech firms were lethargic and unfazed by potential new entrants? That sounds more like the average broadband provider, who is far less popular with consumers than technology firms.
I often observe that consumers usually benefit when their product of choice is threatened by a new entrant. It might sound counterintuitive, but Amazon Echo users benefit from the appearance of Apple’s HomePod, Google Home, and the Microsoft Invoke, because the threat of losing users to the competition drives product improvement. Similarly, Instagram users might never try Twitter, Google+, or Snapchat, and yet benefit from their entry because the threat of all of these entrants has inspired Instagram to deploy new features like ephemeral posting of pictures or videos as “stories”. As we’ve previously said, tongue-in-cheek, ‘look at all those monopolies, competing against one another.’ It’s odd that Manjoo seems to suggest tech companies shouldn’t (or shouldn’t be allowed to) innovate against the competition, and adopt new features to compete.
Not surprisingly, investors or startup executives do not seem to share the view that large firms represent a threat to innovation. Manjoo notes that “many investors and startup executives I talked to in recent weeks argued that with the insane amounts of money pouring into startups, the Five don’t have the whole game won.”
In fact, many startups think that the services offered by large tech firms make launching a new venture easier. At the same time, Manjoo’s column implies this might be inappropriate, pointing to Snap’s cloud hosting contract with Google for the Snapchat app as “feeding off Snap’s carcass.” As an initial point, Snapchat’s rocketing user base among young users makes the word “carcass” hardly seem appropriate. More generally, the suggestion seems bizarre: tech firms shouldn’t compete against Snap, but shouldn’t enter into an agreement with it either.
Snap’s IPO documents seem to contradict Manjoo’s assessment. The company reports that it has “a capital-light business model” because it benefits from “Google Cloud for the vast majority of our computing, storage, bandwidth, and other services.” According to Snap this enables it to:
“run and scale our services rather than building our own infrastructure, which would require significant up-front capital and resources. We believe that working with these partners will result in lower costs for us in both the short and long term.”
In short, the Snapchat messaging app could not scale as quickly without access to Google’s data centers. But Manjoo’s column suggests startups like Snap should construct expensive, capital-intensive data centers, or remain small. It’s unclear why anyone — large firms, startups, or consumers — would benefit in this environment.
Manjoo also raises concerns about larger firms acquiring startups, which he compares to being eaten by a whale. It’s a decidedly pejorative metaphor, suggesting that acquisition is a bad thing even from the perspective of the acquired company. But “acquisition is one of the primary options for an exit,” and small companies actively pursue being acquired by larger firms, all the time. Investors may regard acquisition as the most viable exit strategy for having developed an innovative technology without a clear revenue model. Services like YouTube, Instagram, and WhatsApp all began as services with exciting technology but no sustainable source of revenue. In fact, commentators have suggested that Twitter should have pursued a similar strategy, as LinkedIn did with its ultimate acquisition by Microsoft. Consumers benefit from the acquisition of a firm without a sustainable revenue model as well, since it increases the chances that the service will remain available.
Ultimately, Manjoo’s prescription seems contradictory: don’t compete with smaller firms, but don’t partner with them either. Don’t provide revenue opportunities, but don’t acquire firms without a revenue model either.
(2) Are tech firms regulated?
Manjoo’s column from last week follows this thread, suggesting that tech firms are unregulated, while focusing principally on the subject of antitrust.
Outside of antitrust, technology firms are of course subject to considerable regulation. As a paper I presented last year points out, in the United States and Europe, online platforms are subject to various privacy and data protection regulation, regulations on consumer protection and unfair competition, intellectual property regulations, among many other laws. While it is true there is no “Law of the Horse” for the Internet or machine learning (which Manjoo implies should be regulated like nuclear weapons), this shouldn’t be equated with an absence of regulation.
With respect to the question of antitrust, Manjoo relates conversations with the likes of Jonathan Taplin, Franklin Foer, and Barry Lynn, all of whom have urged greater antitrust scrutiny of successful technology firms. The column also gives Steve Bannon’s outlandish call for public utility regulation of tech firms a validating nod (which is likely a first for the N.Y. Times).
But as Manjoo acknowledges, “there is far from universal recognition that the tech giants’ vast powers might be harmful.” Indeed, the explanation for that is fairly evident in Manjoo’s previous column. Technology firms compete aggressively, and innovate to stay ahead of the competition. As firms provide innovative new services at lower prices, it becomes hard to articulate a theory of harm other than abstract hand-waving at “bigness” — which is hardly a prescription for improving consumer welfare.