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18 July 2020

The New Robber Barons

Tag(s): Politics & Economics, Business
A recent 437 page report from the Competition and Markets Authority (CMA) described how Google has more than a 90% share of the £7.3 billion UK search advertising market and Facebook has over 50% of the £5.5 billion display advertising market. They monetise that grotesque power. Google charges 40% more than its closest rival Bing for search adverts. Facebook’s revenue per UK user increased tenfold to £50 in just eight years. The CMA would “expect these excess profits to be shared more freely with consumers in a more competitive market.”

Their defence is that they are natural monopolies like a water utility or a railway. Network effects on the Internet are so powerful that you cannot break them up. The more people who use Google search the better its algorithms become, drawing greater numbers. The more people on Facebook, the more that others will join. But there is nothing natural about this.  The internet’s guiding principles in its early days were open standards. The building blocks that Sir Tim Berners-Lee used to invent the World Wide Web were interoperability, compatibility and consistency. To populate the web he developed the Hypertext Transfer Protocol (HTTP) which is open and free for anyone to use. Email was the same. Open standards were developed cooperatively between providers, becoming the Simple Mail Transfer Protocol (SMTP), so everyone could communicate with each other.

The traditional postal market works like this; I can send a letter to any address in the world. Similarly I can make a telephone call to any telephone receiver anywhere in the world. I can send an email in the same way to any other email address anywhere in the world whatever provider you are using but if I want to send a Facebook message to anybody I have to join Facebook’s otherwise closed system which I don’t want to do because I don’t want Facebook to have my data.  Google and Facebook may have the appearance of a natural monopoly but it comes from deliberate choice, a choice not to have open standards on data. But they have no right to control your data. “Digital platforms decide what data they will make available on the basis of their own private interests”, Jason Furman, who  chaired President Obama’s council of economic advisers, wrote in his review of digital competition for the U.S. Treasury last year.

It is clear that our competition authority is in little doubt that Facebook and Google are monopolies but it seems to have decided against imposing multibillion pound fines as seen in Brussels. But to foster real competition the UK needs new legislation to enforce open standards and data mobility.

The #StopHateForProfit campaign is focused on hate speech. It has brought together six American civil rights organisations to lobby advertisers to ”pause” their ads during July, a campaign triggered by Facebook’s decision not to remove a post by Donald Trump threatening violence against Black Lives Matters protesters: “When the looting starts, the shooting starts.” 500 companies have now joined the boycott, including Unilever, who has said it will “pause” for the rest of the year, and other major brands. However, it is reported that this represents only a 5% dip in profits. Most of Facebook’s advertisers are small businesses, even individuals. Many of these are regularly fleeced by click fraud where bots check an advert, thereby generating payments, but no sales. Last year Facebook paid $40 million in settlement to advertising agencies over inflated video viewing metrics.

But without real competitors the scans will just continue. Where is the network that applies the same code of ethics as a newspaper? If our data is public, it should be public for all. Anything less is anti-competitive. The coronavirus crisis has brought the tech giants’ behaviour into even sharper focus. Serious misinformation such as the anti-vaccination campaign has compromised the ability for authorities to control the virus. I genuinely believe that democracy is in peril and that much of the increasing lack of trust in institutions in many countries around the world is seriously exacerbated by the lies and rumours and disinformation spread by social media or by fake news turning up on Google.

The heads of ITV, Channel 4 and Sky recently sent a joint letter to The Times saying that statutory regulation of online advertising is necessary and urgent, given the scale of harm currently being caused to consumers. Dame Caroline McCall of ITV, Alex Mahon at  Channel 4 and Stephen van Rooyen, Sky’s chief executive for the UK and Europe, said that laws should be enacted urgently to hold online platforms and online advertisers to the same high standards as television channels. The Covid-19 pandemic has thrown into sharp relief the need for immediate reform, with fake news on the virus posing a real risk to life. Facebook and Google should "bear the responsibility for the advertising they carry and liability for harmful or misleading ads as broadcasters.”

Legislation needs to spell out clearly how Google and Facebook are to protect consumers from harmful content and must be backed up with large fines. Regulators must have the power to meaningfully incentivise major online platforms to comply with the rules. The government needs to address not only the symptoms of the epidemic of disinformation but also its cause; the dominance of Facebook and Google in the digital advertising market.

“The advertising models of the major online platforms reward and amplify many of the very types pf content that the government wants to see tackled. New rules will have to ensure that it is the platforms that bear the cost of compliance rather than those small businesses reliant on the dominant online advertising platforms. They can certainly afford it.”

The governance of these companies is simply not up to scratch; dominated by one individual in the case of Facebook and two in the case of Google.  Carol Cadwalladr writing in The Guardian said “There is no power on this earth that is capable of holding Facebook to account. No legislature, no law enforcement agency, no regulator. Congress has failed. The EU has failed. When the Federal Trade Commission fined it a record $5 billion for its role in the Cambridge analytic scandal, its stock price actually went up.” She goes on to say that “This is a company that facilitated an attack on a US election by a foreign power, live-streamed a massacre then broadcasted to millions around the world, and helped incite genocide…. A United Nations report says the use of Facebook paid a “determining role” in inciting hate and violence against Myanmar’s Rohingyar, which has seen tens of thousands die and hundreds of thousands flee for their lives…. It is not subject to laws or control – it is in the hands and homes of 2.6 billion people, infiltrated by covert agents acting for nation states, a laboratory for groups who praise the cleansing effects of the Holocaust and believe 5G will fry our brainwaves in our sleep. People sometimes say that if Facebook was a country, it would be bigger than China. But this is the wrong analogy. If Facebook was a country, it would be a rogue state. It would be North Korea… It’s a nuclear weapon.

Because this isn’t a company so much as an autocracy, a dictatorship, and mobile empire controlled by a single man. Who – even as the evidence of harm has become undeniable, indisputable, overwhelming –has simply chosen to ignore its critics across the world.”

With the world facing a desperate health and economic crisis it is clear to me that the authorities’ attempts to overcome the crisis are severely hampered by the role that Google and Facebook play in disseminating disinformation and encouraging hate speech. I titled this blog “The New Robber Barons”. The Robber Barons were the giant oligopolies of the early twentieth century in the Railroad, Oil and Steel markets in the USA. The myth is that President Theodore Roosevelt bust these so called Trusts and made them split up.

Actually his successor President Tait split up more than he did. Roosevelt was not against big corporations and saw many
advantages in size. But he was for the proper regulation of such businesses just as Adam Smith had argued before him. It may not be practical to split up Facebook or Google but they must be properly regulated, fined huge sums for their abuses and made to sell off all the subsidiaries that they bought to kill off competition.

Sources:
“Facebook is out of control. If it were a country it would be North Korea” Carole Cadwalladr.  The Guardian 4.7.2020
“Tech giants may seem all-powerful, but their monopoly can be broken” Philip Aldrick The Times 4.7.2020
https://www.thetimes.co.uk/article/the-opaque-world-of-online-advertising-needs-a-strong-light-shining-on-it-rvhbr02mk The Times 8.7.2020



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