Technology

How Big Tech became such a big target on Capitol Hill

Facebook Chief Executive Mark Zuckerberg walks past members of the news media as he enters the office of U.S. Senator Josh Hawley (R-MO) while meeting with lawmakers to discuss “future internet regulation on Capitol Hill in Washington, September 19, 2019.

Joshua Roberts | Reuters

After a 16-month investigation into competitive practices at the largest U.S. tech companies, Democratic congressional staffers laid out their findings this week in a 449-page report. They concluded that Apple, Amazon, Facebook and Google enjoy monopoly power that needs to be reined in, whether that means breaking the companies up, blocking future acquisitions or forcing them to open their platforms.

Wall Street shrugged at the news. Three of the four stocks rose the day after the report’s release, reflecting investors’ long-held view that regulators and politicians are in no position to squelch Big Tech’s continuing rise and market share expansion.

Still, lawmakers certainly aren’t putting the matter to rest. And with Joe Biden carrying a commanding lead in the polls less than a month before the Nov. 3 election, tech companies face the possibility of Democrats controlling the White House and both branches of Congress in 2021.

Should Democrats win the Senate, it would put Elizabeth Warren and Bernie Sanders, who are among the loudest voices calling for the break up of Big Tech, in the majority.

Here’s what Warren had to say in early 2019:

“Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”

How did this happen? Just a decade or two ago, tech companies were seen as innovators, as young industry disruptors focused on making consumers’ lives easier. How did they turn into the dark faces of corporate America, with their every move questioned at the highest levels of government?

There’s no single answer. But here are a few key things that happened in recent years to paint a giant bullseye on tech.

Tech five-year rally

CNBC

Market cap consolidation

Five years ago, Apple, Amazon, Google, Microsoft and Facebook were among the most valuable companies in the world, worth a combined $2 trillion. Today, that number is above $7 trillion, more than tripling over the last half-decade, while the broader S&P 500 climbed 73% over the same stretch.

The five tech giants are by far the most valuable U.S. companies and now make up over one-fifth of the S&P 500 and a whopping 46% of the Nasdaq 100

Lawmakers have largely decided to give Microsoft a pass as they probe Big Tech for anti-competitive behavior, despite the software maker’s swelling market cap and influence.

What they see in each of the other four is are companies that price out competition, exploit consumers, rip off partners or collect vast amounts of user data. Sometimes, all of the above.

The massive market cap appreciation and consolidation is the result of revenue growth, profitability and investor expectations that nothing’s going to challenge the dominance of these companies. Trillion-dollar valuations and immense profit margins also foster a self-perpetuating cycle: The tech giants have such high equity value and big cash hoards, they can easily outbid smaller players. 

While history is filled with companies enjoying dominant market positions and outsized market caps, the difference today is that one industry is home to all of them.

Amazon CEO Jeff Bezos

Alex Wong | Getty Images

Amazon’s ambitions

Amazon has gone from being the everything store to the everything company.

Well past its original e-commerce roots, it’s now a major player in cloud infrastructure, media, consumer hardware, grocery, payments and advertising, and has big ambitions in health care and other industries.

Even with annual revenue poised to top $350 billion, Amazon continues to report steady revenue growth and has recently started generating hefty profits, thanks to Amazon Web Services, its cloud computing business.

The extent of that business became clear for the first time in April 2015, when Amazon started reporting its finances and revealed that AWS was earning about about $1 billion a year in profits, even as the entire company was breaking even or losing money. In other words, while everybody thought Amazon was an e-retailer with a nice side business in cloud computing, it had quietly built a gigantic and profitable software business.

Last year, AWS earned more than $9 billion in profit on $35 billion in sales, making it the number-three software company by sales volume, trailing only Microsoft and Oracle.

Then, after helping spur the decline of physical retail for years, Amazon jumped into the brick-and-mortar world, buying upscale grocer Whole Foods for $13.7 billion in 2017. Would Amazon do to groceries what it did to information technology?

Amazon’s physical footprint also includes its unmatched network of fulfillment centers and last-mile delivery facilities. It’s now America’s second largest employer and has continued to aggressively hire amid a broader economic downturn tied to the coronavirus pandemic. 

Amazon upset lawmakers in 2017, when it courted proposals for its next headquarters and had cities offering up all sorts subsidies to try and win the deal. It ended up choosing two cities — New York and Washington, D.C., only to back out of New York at the last minute because of fierce opposition from some locals.

The eccentricity and ambition of CEO Jeff Bezos has contributed to the company’s mythos. Bezos spends billions a year on his private space travel company, Blue Origin. He bought the Washington Post in 2013, giving him an influential arm of the national media (although he does not exercise editorial oversight) and turning him into a favorite punching bag for President Donald Trump, as the Post frequently criticized Trump as both candidate and president. In 2017 he became the richest person in the world, and in 2019 publicly confronted a tabloid that threatened to publish details of an extra-marital affair.

While investors have cheered Amazon’s growth, politicians from both parties have recently decried its unfettered expansion, including its unruly marketplace and alleged anti-competitive tactics. Calls to break up Amazon peaked this summer when CEO Bezos appeared in front of Congress for the first time to answer questions about its market power and business practices.

Google CEO Sundar Pichai testifies before the House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law during a hearing on “Online Platforms and Market Power” in the Rayburn House office Building on Capitol Hill, in Washington, July 29, 2020.

Mandel Ngan | Pool via Reuters

The Google-Facebook ad squeeze

In a little more than a decade, Facebook and Google have completely reshaped the world of advertising.

Last year, the companies recorded a combined $232 billion in sales, up almost 10-fold from 2009.

EMarketer said it started using the term duopoly in 2017, but the ad industry saw the trend quite clearly before that. As of 2016, according to eMarketer’s own data, the companies controlled a combined 57.9% of the digital U.S. ad market. Based on estimates provided in late 2019, that share has topped 60%

Meanwhile, advertising dollars for the news industry plummeted from $38 billion in 2008 to $14 billion in 2018, according to the Pew Research Center. The News Media Alliance argued this year in a letter to the Department of Justice that Google had for years used news content to enhance its bottom line, pulling money from the actual content providers.

It’s not just the news business that’s hurting. The World Advertising Research Center (WARC) predicted earlier this year that global advertisers would spend more on Google and Facebook than on television. The third-largest U.S. digital ad company is now Amazon, which doesn’t help Big Tech’s defense against regulators.

Business reliance on Facebook was underscored this year when a large roster of major marketers paused spending in support of a campaign called “Stop Hate For Profit,” to pressure the company to take steps to stop the spread of hate speech and misinformation on the site. Some of those advertisers said they wanted to stop spending on Facebook permanently, but they ultimately couldn’t afford such a drastic move.

Facebook co-founder, Chairman and CEO Mark Zuckerberg testifies before the House Energy and Commerce Committee in the Rayburn House Office Building on Capitol Hill April 11, 2018 in Washington, DC.

Yasin Ozturk | Anadolu Agency | Getty Images

Facebook, speech and democracy

In his first public appearance after Trump’s election in 2016, CEO Mark Zuckerberg swiftly dismissed criticisms that his company played much of a role in the outcome.

“Personally I think the idea that fake news on Facebook, which is a very small amount of the content, influenced the election in any way — I think is a pretty crazy idea,” Zuckerberg said.

Zuckerberg was quickly proven wrong. Facebook published a case study in April 2017 confirming that outside groups had attempted to use its social network to sway the outcome of the 2016 election. In Feb. 2018, a federal grand jury indicted 13 Russian nationals and an accompanying FBI report detailed how they used Facebook and Twitter to wage “information warfare” against the U.S. and “sow discord” in the American political system in an effort to help Trump win.

In 2018, reporters at the New York Times and The Observer revealed that consulting firm Cambridge Analytica had improperly accessed the data of 50 million Facebook users (later revised to 87 million) and used it to try and sway potential voters towards Trump.

Around the same time, U.N. investigators determined the company played a determining role in the genocide of Rohingya Muslims in Myanmar.

“It has … substantively contributed to the level of acrimony and dissension and conflict, if you will, within the public,” said Marzuki Darusman, chairman of the U.N. Independent International Fact-Finding Mission on Myanmar.

The hits kept coming, as government agencies began digging deep into Facebook’s practices.

In December 2018, the U.K. Parliament published 250 pages of internal Facebook documents, providing insight into the company’s strategies against competitors. In one example, Zuckerberg instructed his staff to cut off the ability for users of Twitter’s Vine social app to connect it with Facebook as a way to find their friends on the service.

Early the following year, as part of her presidential campaign platform, Sen. Warren proposed the breakup of Facebook, potentially including separating Instagram and WhatsApp. Facebook co-founder Chris Hughes echoed Warren in May 2019, when he called for splitting the company apart. 

“The most problematic aspect of Facebook’s power is Mark’s unilateral control over speech,” Hughes wrote. “There is no precedent for his ability to monitor, organize and even censor the conversations of two billion people.”

The Federal Trade Commission launched an antitrust investigation in June 2019, followed a couple months later by state attorneys general and the Department of Justice. In November, California State Attorney General Xavier Becerra disclosed that his state had also begun a probe into Facebook the prior year.

Todd Haselton | CNBC

The privacy tipping point

Consumer data is the currency of the internet. Increasingly, when people look around their house, car or office, they see or hear Google, Facebook and Amazon in every corner. 

The 2018 Facebook-Cambridge Analytica scandal may have been the biggest wake-up call, but perhaps the first was when Edward Snowden leaked details of the National Security Agency’s tapping of U.S. phone calls. Consumers who had thought communications networks offered the same privacy as a quiet personal conversation realized that wasn’t the case.

In 2018, a local Seattle TV network reported that a family in Portland blamed its Amazon Alexa device for recording a private conversation and then sending it to a random contact. Amazon called the event an “extremely rare occurrence” and said it was triggered because the device interpreted something the family said as “Alexa,” and then followed a command that was never given.

Facebook users have for years accused it of eavesdropping on conversations through its apps. How else could Facebook or Instagram show an ad for a product they were just talking about with a friend in a real-world conversation? But Facebook repeatedly insists it doesn’t listen. That suggests its behavioral ad targeting is just frighteningly good.

Privacy has been a particularly resonant issue this year, amid the national conversation around the excessive use of force by police and fears of government surveillance. Ring, the Amazon-owned doorbell company, has faced criticism for partnering with police forces. Amazon and Microsoft both yielded to pressure to announce that their facial recognition software is not being used by police departments.

Consensus has grown in Congress over the need for a national digital privacy law to protect Americans against the exploitation of new technologies. In the meantime, we all keep handing over our data.

A long road ahead

The congressional report does not mean that the big tech companies are going to be broken up this year, or any time soon. Instead, the report was intended as a broad recommendation to Congress to reshape the antitrust laws to go beyond their currently narrow scope of protecting consumers on pricing and competition, and instead think about “workers, entrepreneurs, independent businesses, open markets, a fair economy and democratic ideals.”

Meanwhile, the Department of Justice, Federal Trade Commission and various other federal and state governments are investigating confronting the big technology companies one at a time on a wide variety of issues, from labor practices to privacy to fair competition. But those cases can take years to complete, as Microsoft’s experience in the 1990s and 2000s shows, and the companies can absorb huge fines without lasting damage — Facebook’s stock actually rose in July 2019 after the FTC fined it $5 billion over privacy lapses.

Nonetheless, the fact that Congress is not afraid to issue a 449-page damning indictment of Big Tech in an election year shows how much attitudes in D.C. have changed. The clock is ticking.

WATCH: Antitrust expert breaks down Big Tech concerns

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