The Antitrust Bonanza Against Google and Facebook
Crime Pays
The Problem of Elite Lawlessness
The Value of Handcuffs

Crime Shouldn't Pay: Why Big Tech Executives Should Face Jail

Mark Zuckerberg and Sundar Pichai need to be indicted.

Dec 20

Hi,

Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Today’s issue is about the various antitrust cases against Google and Facebook announced this week, and why it’s time to issue criminal indictments against the executives responsible for the bad behavior. Plus:

Legendary judge Jed Rakoff issues a ruling threatening private equity’s business model.
A BIG reader discusses the health care monopoly situation in New Jersey.
Why are taxpayers subsidizing Netflix?
Engineer Tim Bray explains why he thinks blockchain is “bullshit.”

First, some house-keeping. Author and gadfly to the elites Anand Giridharadas interviewed me about the Facebook case. Also, antitrust lawyer Shaoul Sussman and I wrote a piece on a centrist scholar and historian named Herb Hovenkamp. Hovenkamp is not well-known outside the antitrust bar, but he is enormously influential within it, and it is his ideas that are structuring the dysfunctional environment in which we are operating.

And now…

The Antitrust Bonanza Against Google and Facebook

It’s hard not to be excited about the multiple antitrust suits filed this week against Google. This past Wednesday, Texas Attorney General Ken Paxton, along with 10 other state AGs, accused Google of monopolizing online advertising, arguing it used coercive tactics to seize control of the plumbing that underpins all ad-financed internet content, and illegally divided up the online ad market with Facebook. The next day, Colorado’s Phil Weiser and Nebraska’s Doug Peterson led 38 states in accusing Google of manipulating its search results to disfavor specialized competitors like Yelp, as well as blocking competitors who seek to enter new search markets like those of voice assistants or internet-enabled cars.

The suits themselves are stunning.

The Texas case reveals new details about how online advertising markets function, drawing from Dina Srinivasan’s critical research on how advertising sales has been transformed into a complex financial market run by Google. While the complaint alleges that Google has engaged in monopolization, it also alleges a different violation, that Facebook and Google are in a cartel to violate user privacy and fix prices in advertising markets. The complaint reveals that after Facebook bought WhatsApp, which pledged to its users (and the FTC) strict privacy controls, “Facebook signed an exclusive agreement with Google, granting Google access to millions of Americans’ end-to-end encrypted WhatsApp messages, photos, videos, and audio files.” If true, that’s a remarkable set of illegal acts, by both Google and Facebook, as well as a betrayal of their users.

The complaint also asserts Google divided the ad market with Facebook, offering Facebook advantages in buying and selling ads through Google services if Facebook withdrew from head-to-head competition in other markets. This collusion is meaningful from a legal perspective. The Sherman Act has two parts. Section Two prohibits monopolization, but monopolization cases are very hard to bring and quite expensive, and require elaborate models. Section One prohibits cartels and price-fixing as conspiracies. Cartel cases are much easier - just show an agreement to collaborate on fixing prices, and you’re done. In fact cartels are so much easier to prosecute that price-fixing is the only area that enforcers actually bring criminal charges. And worrisome for Google, Texas is alleging cartel behavior.

The Colorado-led suit, while not unearthing anything earth-shattering, is also quite useful. Enforcers there are addressing not just today’s search markets on desktop and mobile platforms, but where search is heading in the future, platforms like internet-enabled cars and voice assistants. It’s a smart way to ensure that antitrust enforcement blocks monopolization at the creation of new markets, which is when it’s easiest to generate competition.

Since October, enforcers have brought four strong suits against Google and Facebook, two of the largest corporations in the world. And the demanded remedies for these civil violations are tough. Enforcers are asking for injunctive relief to stop the bad behavior, break-ups of these companies to end the structural conflicts, as well as monetary damages and civil fines. These few months represent perhaps the toughest spate of antitrust action since the post-World War II era, when Harry Truman restarted antitrust cases after their suspension during the war.

It’s not just these suits; Apple is facing a major attack from Epic Games and a broad coalition who seeks to destroy its app store monopoly, and Congress is gearing up to smash monopolies through legislative efforts. As Steven Perlstein noted in the Washington Post, this effort is more than just an attack on Google and Facebook, but a “legal shot across the bow of dominant firms in other highly concentrated industries — pharmaceuticals, telecommunications, financial services — who are now on notice that their nonstop acquisitions and hardball business practices could invite similar challenge.”

Even Europeans are getting more aggressive, with European member of Parliament Paul Tang winning a vote to ban personalized advertising in the EU, as well as offering increasing criticism of EU Competition enforcer Margarethe Vestager for lagging behind the tougher approach in the United States.

It’s hard not to see the sharp turn in competition policy without a recognition that something has gone very very right in policy circles on the question of monopoly.

And yet, there’s a fly in the ointment, as we move from the theoretical idea of antitrust against dominant corporations to the actual implementation. And that is, the suits are going to take a very long time.

Crime Pays

Judge Amit Mehta, who is hearing the case filed in October, said that the DOJ and Google will likely go to trial in late 2023. That’s nearly three years from now. The reason for the delay makes sense; both sides must gather documents, do research, file and debate procedural motions, interview executives and stakeholders, and build complex economic models for the trial. Still, three years is three years, and that’s a minimum. The trial itself could stretch out, with a remedy phase, and then there will be appeals. When all is said and done, it could be five years before there’s a remedy, or even longer.

One problem with such a lengthy period is that the longer monopolistic behavior goes on, the more damage, in this case to publishers whose ad revenue is being stolen, and small and medium size businesses whose property is being appropriated. We can quantify the additional damages, somewhat. Google has $170B in revenue this year, and is growing on average at 10-20% a year. If we take the lower end of 10%, Google will add another $100 billion to its revenue by 2025. That’s a lot of money. Facebook is at $80 billion of revenue this year, but it is growing faster, so the net increase of revenue is a roughly similar amount. In other words, if the claims of the government are credible, then the lengthy case, while perhaps necessary, is also enabling these monopolists to steal an additional $100 billion apiece.

Monopolization isn’t just illegal, it is in fact a crime, an appropriation of the rights and property of others by a dominant actor. The lengthy trial is essentially akin to saying that bank robbers getting to keep robbing banks until they are convicted, and can probably keep the additional loot. There are ways of a judge issuing preliminary orders to stop bad behavior in the interim, so it’s not inevitable that these corporations get to continue what they are doing. However, judges don’t tend to like issuing such orders, though hopefully enforcers will ask for them and Mehta will make an exception.

But the monetary cost is not the most dangerous part of the delay. What’s more frightening is the political corruption that Google and Facebook are enabling. Thousands of newspapers have fallen apart over the past ten years, and over the next three, thousands more will collapse. Aside from killing pro-social institutions like newspapers, these platforms have been inducing significant harms society-wide, from enabling ethnic cleansing abroad and divisiveness in Western democracies, to undermining our economy writ large. The end state is frightening. Indeed, here’s what the Texas complaint alleges is Google’s long-term goal.

Google’s current dominance is merely a preview of its future plans. Google has an appetite for total dominance, and its latest ambition is to transform the free and open architecture of the internet. Google’s plan is to create a walled garden around the internet in which it controls websites and mobile applications. Google calls its emerging venture the [redacted], a world in which publisher content is operated by Google…
Google’s documented plan is to capture online publishers on the open internet and transform them into content creators generating revenue for Google on a completely closed platform—like YouTube content creators.

Google has total power over YouTube creators, the ability to demonetize them, to censor them, promote them or not. And that’s Google’s goal for all speakers and businesses online, to turn us all into serfs working - and speaking - at Google’s pleasure. It’s hard to argue that waiting five years for a remedy is sufficient to address this incredible threat to our wallets and more importantly our liberties.

Now, this is not to say these cases won’t have an effect until they are concluded. I’ve pointed out that the DOJ suit is already having an effect, in that Google is now facing potential competition and changing its behavior to stop the most egregious exclusionary behavior. As scandal after scandal emerges around Google and Facebook, the political need for these companies to mitigate their behavior will increase.

Legal scholar Tim Wu calls such a phenomenon the Policeman at the Elbow theory of antitrust enforcement, and there’s a lot of precedent. In the 1990s and early 2000s, during and after the antitrust case against Microsoft, Microsoft executives became far more cautious in product development, seeking legal advice to ensure they were not behaving in anti-competitive ways. Bill Gates recently noted that the reason people use iPhones and Android phones is because Microsoft was distracted by the case and so lost out on making Windows Mobile the standard. There’s a similar story with IBM, which unbundled software in the 1960s as a result of an antitrust case, thus enabling the creation of the modern software industry.

Because of the policeman at the elbow watching their every move, Google and Facebook are going to have to incorporate legal advice into their product development patterns, and doing so is likely to increase opportunities for competitors.

Still, there’s a difference between 2020 and earlier periods. Bill Gates, as hard as it is to believe, was more law-abiding than Zuckerberg and Pichai, because the rule of law was much stronger decades ago. Given legal uncertainty around the point of antitrust laws, as well as the political defiance of these leaders, it’s likely that Mark Zuckerberg and Sundar Pichai are going to work extremely hard to corrupt antitrust enforcement. They will do everything they can to *not* change their bad behavior, whether that’s ensuring products continue to exclude others, continuing a merger spree with more acquisitions (as Facebook just did), or even attempting to use their platforms to manipulate elections (as Uber and Lyft did with Prop 22 in California). We are in an era of elite lawlessness, so the normal effects of antitrust may not work until powerful leaders start to be afraid of getting caught breaking the law.

And that’s what brings me to why we need to start talking about crime and punishment.

The Problem of Elite Lawlessness

In the late 1930s, we had a similar period of elite lawlessness, a battle over the very legitimacy of the public’s right to vote for political change in the form of the New Deal. In the election of 1936, the banks, newspapers, and big business leaders combined through a variety of well-funded interest groups in an attempt to thwart FDR’s reelection. They lost. Two years later, in the midst of a recession, these leaders sought again to roll back New Deal rules as an unconstitutional seizures of power.

Enter Thurman Arnold, the greatest antitrust enforcer in American history. Arnold was a Wyoming Democrat, but he was an iconoclast, both an ardent New Dealer and good friends and collaborator with Henry Simons, an anti-monopolist conservative at the University of Chicago who later helped found the Chicago School law and economics movement. Arnold was a press hound, believing that the public needed to understand antitrust law through the cases he would explain in the press. He shepherded the massive Alcoa monopoly suit through the courts and the press, and during World War II he would testify before Congress and accuse Standard Oil of New Jersey, among other giants, of collaborating with Nazis (which they were doing).

In 1938, Arnold became the head of the antitrust division at the Department of Justice. He took a specific approach to bringing law and order back to the business community, which was to turn antitrust from a mere business problem to be handled by lawyers into a significant social stigma for executives. He would actually indict the executives themselves, fingerprinting them as common criminals. Arnold believed that “the only thing that would make businessmen behave was the threat of indictment.” And lo and behold, when he did so, all of a sudden there were lower prices in the associated markets and anti-competitive practices stopped.

Arnold also believed in the political purpose of criminal prosecution for antitrust law. Political democracy, he believed, depended on what was known at the time as “industrial democracy,” meaning open competitive markets in which ordinary people could participate. Monopolization and cartelization prevented that, and thus should be blocked through either civil or criminal proceedings to ensure the rules of business preserved fairness and safety. After all, Arnold asked, antitrust represented the “red lights of business traffic, and why shouldn’t we seek criminal indictments if traffic violations are criminal offenses?”

The strategy Arnold pursued worked remarkably well. He would "hit hard, hit everyone and hit them all at once,” bringing both criminal indictments and civil charges concurrently to everyone in the industry at all layers who were involved in anti-competitive practices, and then offering a consent decree to restructure the industry. Businessmen would practically line up outside his office, and sign whatever he put in front of them, and his approach ended up changing the “building and construction, motion picture, tire, fertilizer, petroleum, and transportation industries,” among others. By going after bad behavior by big business, Arnold became one of the most popular New Dealers in the country.

Yet while Arnold is often lauded as a great antitrust enforcer, his true legacy is much more important than that. Along with other New Dealers, he helped end the crime spree that had taken place among business and banking elites. Today, we face a similar crime spree. As Gilead Edelman wrote in Wired on the deal between Facebook and Google to divide up the ad market, “If what Texas is alleging is true, then both companies may have violated federal antitrust law—and committed felonies in the process.”

The Value of Handcuffs

And that gets to the basic point. What Facebook and Google are doing is crime, and it needs to be treated as such. Right now, Mark Zuckerberg and Sundar Pichai believe that they have to fight a civil case, which means spending money on lawyers and being deposed by government officials. But they will keep their wealth, and of course, their freedom, because they are personally not at risk, so scheming to dominate more markets elsewhere is a perfectly reasonable activity to pursue even while their companies are on trial. Violating the law by taking someone else’s livelihood risks, at worst, a parking ticket.

But if these men were facing the prospect of personal criminal liability, then the stakes would suddenly shift. During the trial, they would become far more cautious and unwilling to engage in potentially predatory actions, for fear of losing their wealth and freedom, much as they have appropriated that of others. And their lawyers would start giving them different advice on what is legal and what is not when they come to key business decisions.

Moreover, using criminal laws creates a different dynamic and gives enforcers investigative tools that don’t exist for civil suits. The DOJ Antitrust Division has a policy called the “Corporate Leniency Policy,” which lets cartel participants get leniency if they tell the division about the conspiracy, thus creating an incentive for wrongdoers to tell the DOJ about crimes in action. If enforcers began to bring real criminal indictments against big tech executives for monopolization, they would be able to flip executives in ways they cannot now do. Imagine any number of Facebook or Google employees, aware of attempts to monopolize and suddenly afraid of being put in jail if they don’t come forward and tell enforcers what they know. I suspect that any problems Zuckerberg or Pichai have with employees would be magnified dramatically if employees feared they might face charges as co-conspirators in a criminal act.

Enforcers can use the Sherman Antitrust Act to bring criminal charges, as the law is both a criminal and a civil statute. At some point prior to the 1980s, enforcers stopped bringing criminal provisions to address monopolization, but they do bring criminal charges for price-fixing among cartels. The Antitrust Division recently indicted chicken company execs for price-fixing, though they basically consider monopolization a purely civil wrong. In my view, that is a mistake, with the criminal aspect of the Sherman Act yet one more dormant legal tool lying fallow. Indeed, some of the biggest cases ever brought, like the case against the A&P supermarket chain in the 1940s (which was the Walmart or Amazon of its day), included criminal monopolization charges.

Though I think pushing the boundaries of the law is useful, it is not necessary to pioneer a new use of the Sherman Act’s monopolization provisions to bring criminal charges against big tech executives. Price-fixing is already per se illegal, and the DOJ Antitrust Division often does indict people for engaging in this kind of cartel behavior, and price-fixing is one thing Texas accused Google and Facebook of doing. But you don’t even have to use the antitrust laws, because there are ample and routine violations of law happening on a regular basis. Last year, for instance, Facebook paid $40 million over accusations it inflated video viewing metrics, which is another way of saying it likely committed fraud against advertisers. But there are many other areas of likely wrongdoing to explore.

There are also plenty of investigations going on, and potential fodder for action. Last week, for instance, the Federal Trade Commission issued a little noticed request for information from nine social media and video streaming services: Amazon, TikTok, Discord, Facebook, Reddit, Snap, Twitter, WhatsApp, and YouTube. One of the sections was a request for information about false accounts, inaccuracies in metrics for advertisers, revenue value of errors, and senior leadership involvement in oversight. Who knows what that will unearth?

The bottom line is that criminal enforcement is in fact critical to redressing the lawlessness we’re seeing among business leaders, because we need both a safe environment for non-predatory business, and a strong statement about the rule of law itself. Monopolization is a crime. It’s time to start treating it as such.

The End of Private Equity Is Coming: I’ve noted that large leveraged buyouts are fool’s gold, and that investors are coming to understand that they aren’t getting a great deal when they put their money into large PE funds. That’s a problem for PE titans because they need pension fund money.

But now another part of the model is coming under attack. Leveraged buy-out funds use investor capital to loot companies by loading them up with debt they often know cannot be paid back, in what are known as ‘dividend recapitalizations.’

When a PE fund burns down a subsidiary company by loading it up with debt and paying itself a big dividend, creditors, and the corporation’s customers and workers, get stiffed. Last week, Judge Jed Rakoff struck at the heart of this corrupt model, allowing creditors to go after the private equity middlemen who intentionally default

A recent ruling — in the case of the bankruptcy of retailer Nine West — by Judge Jed Rakoff of the Southern District of New York said creditors can pursue misconduct charges against the previous board of directors, which approved a $2bn leveraged buyout to Sycamore Partners in 2014. The business went bankrupt four years later. The board had been “reckless” in failing to assess how the LBO debt could leave the new company insolvent, the federal judge wrote in the December 4 ruling.

Rakoff is a great judge, but he can be overturned on appeal. So we’ll see what happens. And thanks to the Fed, Dividend recaps are returning in force. So this is another footrace between corruption and the rule of law.

New Jersey Health Insurance: For New Jersey residents, BIG reader Joseph Ingemi had a piece on why the New Jersey state legislature should address its health insurer/hospital monopoly problem and how to do so.

Netflix and Swindle: Netflix is getting big local subsidies from New Mexico to locate production there, but there’s a race among a lot of states to attract film production. Georgia apparently spent $4 billion over the last ten years giving money to studios. It’s about time for states to band together and end this subsidy game.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. I got an interesting note from former Amazon Web Services employee Tim Bray, a brilliant engineer who has been writing about how to break up both Amazon and Google. He corrected my argument on the rise of Slack, and threw cold water all over blockchain technology.

Here's something that is interestingly wrong but doesn't invalidate your argument in the slightest: "In the mid-2010s, its growth was explosive, largely adopted by employees themselves in small teams who loved the product. Such an adoption strategy is common for consumer products, but not ones used in business"
In fact it's the most common experience with new tech oozing into business. I was there and watched it. The Personal Computer, Internet email, Java, Linux, the Web, Cloud computing, in pretty well every case these things were loaded in the back door by geeks and line-of-business people because they got shit done, while IT was considering spinning up a task force to evaluate possible relevance. Rhyming quip among senior geeks: "The CIO is the last to know."
It's a pretty infallible predictor, so you can use that logic the other way. I've been pretty confident that blockchain is bullshit even though it's cool technology because that scenario is *not* happening: Not being loaded in the back door to get shit done.

https://mattstoller.substack.com/p/crime-shouldnt-pay-why-big-tech-executives

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torstai 24. joulukuuta 2020