Data Barons: About Time To Reign Them In

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Facebook has a huge amount of data on people. Let’s make sure it isn’t messing with it.

For the first part go here.

Mark Zuckerberg had no problems on “quoting” the fact that people in America, on average, used about eight social and communication applications.

Interestingly enough, he neglected to make any mention of the fact that his own social network, Facebook, owned a multiple number of those popular social and communication applications.

For the uninitiated, Facebook owns Instagram.

It also owns the Messenger service.

We have also seen Google fervently arguing that technology companies such as Facebook and Amazon effectively did compete with the company.

How?

Well, according to Google, Facebook and Amazon also helped users to find information in the online world to solve their real-world problems.

Of course, it is another fact that Google’s real competitors are all the online dedicated search engines such as Bing (from Microsoft) and DuckDuckGo (that leverages Yahoo search results).

Both Bing and DuckDuckGo (along with every other online search engine) only have a small market share.

Similarly, Amazon makes the case that people can take advantage of a ton of other companies that offer the same type of e-commerce services that it does.

Amazon would also like people to believe that the company really does compete with all the older brick-and-mortar retail business.

However, one simply cannot ignore the dominance of Amazon in areas such as book publishing.

In short, data barons have a lot of power.

And that power is exactly the thing that makes it so difficult for startups to challenge them in any meaningful way.

The majority of the startups show extreme reluctance to make any sort of a headway into areas that these technology companies have dominated.

Moreover, that also makes the all-important venture capitalists reasonably wary of backing any of the few startup mavericks that take the plunge and try to compete with data barons.

A Union Square Ventures managing partner, Albert Wegner, recently mentioned that one of the firms’ top objectives nowadays was to identify and then avoid all the “kill zones” that internet giants cause.

What are kill zones?

Kill zones are referred to as the areas where data barons have the capability to absolutely crush any meaningful competition.

No one should have any negative ideas about internet giants only causing these kill zones to grow.

Web companies have shown no signs of stopping their expansion plans.

And they will continue to plunge themselves and their resources into more and more businesses.

Large firms aren’t known for breakthrough ideas.

That’s the job of startups.

So, at least in theory, the dominance of these technology giants may deprive the society of some much need and crucial innovations.

What About All The Special Effects.

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The question that really needs to be asked and then answered is that were technology companies really supposed to work this way?

Society expected technology to lower entry barriers.

People also expected technology companies to make it easier for online consumers to switch any of their services with the help of nothing but a couple of clicks.

In the early days of the internet, it looked like its design would guard against digital empires as fleets of rebel online startups would prompt besiege any such empire.

So the obvious question that arises from that discussion is:

Why didn’t that actually happen when the internet did start to see the rise of digital empires?

The answer is anything but straightforward.

But part of the reason why the internet did little to nothing to equalize opportunities for everybody is that of a buzz phrase that shows no signs of leaving Silicon Valley.

That buzz phrase is:

Network effects.

Yes.

Network effects.

The thing about online services and products is that the more people use them, the more valuable they become.

And the more valuable they become, the more people use them again.

This is the exact reason why buyers have no second thoughts about flocking to sites like Amazon.

They do so because they know in their head that they will not have a hard time finding lots of sellers there.

And wherever there are lots of sellers, there are lots of choices.

Why do people want to join Facebook?

Well, because most of their friends have already made accounts there.

Internet giants in the United States of America have shown a remarkable skill at harnessing the power of network effects.

But so have other internet giants in other countries.

Examples include Alibaba and Tencent in China.

Just like Google and Amazon, both Tencent and Alibaba have become extremely dominant in their relevant markets in China.

Amazon, Google and Facebook probably thank the power of network effects.

Because without network effects, these technology companies would have found it very hard to harvest such oceans of user data.

As mentioned in the previous part, technology companies need to continually fine-tune their online services and products.

And they have no other choice but to use data in order to do that.

What happens when these technology companies make use of data to improve their services and products?

That’s right.

With improved services and products, technology companies get to win even more online consumers.

That, in turn, yields even more oceans of data for them.

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And the cycle continues.

The other thing readers need to understand about these data barons is that, whenever they see other businesses showing any signs of succeeding in the markets that these data barons have worked so hard to dominate, they often swoop in and buy these businesses out.

And they are able to do that because of the high price of their shares and vast reserves of cash.

Examples of data barons doing that are many.

Facebook used its financial muscle to buy WhatsApp and Instagram.

In similar fashion, Amazon picked up Quidsi and Zappos.

Zappos and Quidsi represented two of the fastest growing online retailers in the US.

Google did the same by acquiring Waze.

People don’t know about Waze as much precisely because Google recognized the threat and bought it before it became a serious competitor to the company’s Google Maps service.

The more worrying part about the whole situation is that most online consumers seem to not know such deals.

When the media broke the Cambridge Analytica scandal, more than a few Facebook users put up posts on the platform stating that they had made the intention of leaving Facebook and moving to Instagram as a form of protest.

That clearly showed that they had no awareness of the fact that Facebook-owned Instagram.

Needless to say, data barons have shown a lot of aggression when it comes to acquiring budding startups that show a lot of tenacity.

And the reason for that is very simple if one understands how data barons themselves work.

Data barons know all too well that rivals can use network effects to turn the tide against them.

That, in turn, could lead to rivals challenging data barons’  data-driven monopoly on online influence and power.

The other question that one needs to ask is that where are the antitrust regulators?

More specifically, why haven’t they moved in and blocked all the deals that have stifled competition?

It is primarily because of a 1980s change in United States antitrust philosophy.

The change was inspired by none other than legal scholars at the University of Chicago and neoclassical economists.

Before that shift, US antitrust regulators had a clear head and kept themselves wary of any and all deals which reinforced a given company’s market dominance.

After the shift, the antitrust regulators adopted the approach of more tolerance towards such combinations.

They showed a certain satisfaction towards such deals as long as such deals did not raise prices for consumers.

Such lax attitude towards antitrust deals sat pretty nicely with internet companies.

These internet companies were already offering the majority of their online services for free, so any deal with another company would certainly not change that fact.

Some critics have raised their voices on how trustbusters lost the plot by exercising too little scrutiny.

The antitrust lawyer at Paul Weiss, Jonathan Kanter, recently mentioned that because of the fact that these web companies offered products free of charge, it did not mean that they deserve a free pass when it comes to antitrust anti-competition deals.

Challenging Things And Challenging Them Fast

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One other, and deeper reason, why antitrust regulators have had to struggle so much with the power of these internet giants is that these antitrust regulators haven’t completely appreciated the power of network effects.

And how network effects work towards breeding dominant and anti-competitive market positions.

There are some exceptions though.

Especially in Europe.

Antitrust authorities in the European Union fined Google a total of $2.7 billion (2.4 billion euros) for trying to push its own price-comparison online shopping service in its Google search results over competitors in an unfair manner.

Authorities also said that Google deprived its rivals of online traffic.

Google, as a firm, has stated that it didn’t do anything wrong.

Moreover, the technology giant has also appealed the 2.7 billion-fine ruling in court.

At the moment, antitrust authorities in the European Union have also started investigations in claims (all from Google rivals) that the technology giant used its AdSense advertising program and its mobile operating system, Android, to suppress meaningful competition unfairly.

With Money, Comes Power

As far as big internet companies in the United States of America concerned, the Trump administration is bad news.

Why?

Because during the Obama administration, these internet companies had great lobbying clout.

Along with that, they also had some close links to key personnel in the then administration.

Some believe, this gave web companies an easier ride.

The Trump administration is different though.

More specifically, the US Treasury secretary, Steven Mnuchin, has recently urged the United States Department of Justice to take some time and look hard at big technology firms and their market power.

The Federal Trade Commission’s new president, Joseph Simons, also can leverage his antitrust powers.

In Simon’s Senate confirmation hearing, he said that he would watch all the big and influential technology companies based in Silicon Valley.

And he would do so very carefully.

The head of public policy at Yelp (an online service that has taken the responsibility of collecting local reviews about things such as repair shops and restaurants), Luther Lowe, recently predicted that he had an optimistic vision that by the end of the current year, they’ll have at least one major investigation out there.

Yelp, is one of the handful of companies, that has locked horns with Google in a long-running battle of words.

The company has previously stated that Google unfairly used its search results engine to favor its own review.

However, Google has rejected all such charges.

If there is any truth to what Lowe has brought forward, then big internet companies could possibly end the year by spending a good bit of time in American courts as well.

Of course, these technology companies can always rely on their vast wealth to get them out of trouble.

In other words, even if the Federal Trade Commission fines them for a couple of transgressions in the past, it would not diminish any of their clout or power.

But there is a solution.

Albeit a radical one:

Regulators should break data barons up into pieces.

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There is a precedent for that.

In the early 1900s, the United States government splintered the then dominant monopoly of Standard Oil.

There are more than a few progressive advocacy groups based in the United States of America who have launched online campaigns against technology companies.

They have also raised slogans against Facebook and the fact that the social media giant has a bit too much power over people’s lives and the country’s democracy.

Some of these groups have advocated people to take that power away from Facebook.

They have called on the United States Federal Trade Commission to take action and force the social media network to sell,

  • Messenger
  • WhatsApp
  • Instagram

This, according to these progressive advocacy groups, would enable more competition.

Of course, Facebook is not the only technology companies that these progressive advocacy groups have in their sights.

At the start of the year, a researcher at the Open Markets Institute (just one of the many organizations behind the above-mentioned Facebook campaign), Lina Khan, made the argument with the help of a paper that the technology giant Amazon had managed to become very dominant in e-commerce, and because of that regulators should bring it under control.

Lina said that regulators must force Amazon to choose between running the online digital platform where Amazon itself and other merchants came to reach more customers and selling goods itself.

If Amazon does play along and selects to function as a platform only, then it would have to deal with a lot of consequences.

One of those consequences would have Amazon spinning off Whole Foods, a United States-based supermarket chain that Amazon just bought a few months ago.

From a legal point of view, progressive advocacy groups would find it hard to make a strong case.

Why?

Because online internet giants do not really fit the rapacious monopolistic stereotype that squeezes investment and raises prices.

Internet giants are clever enough to manipulate markets in a different, more subtle and, on the face of it, more benevolent manner.

As alluded to before, the reason why internet giants have managed to become so dominant is that they developed services and products that a lot of people want to avail.

Technology giants like Amazon, Facebook and Google gain their hard-fought but immense power via processes that allow them to collect massive amounts of data about what people do in the online world.

But that should not demoralize organizations who want to end their monopoly over the way people interact with the web.

Just the mere threat of solutions such as corporate dismemberment has the ability to cause a salutary effect.

Back in the 1990s, the United States Department of Justice made attempts to force the technology giant of the time, Microsoft, to put a stop to the practice of bundling the company’s Internet Explorer (a web browser) with its near-ubiquitous (even now) operating system, Windows.

The Department of Justice said that by doing so Microsoft had unfairly given its own web browser a good margin of advantage over other web browsers such as Netscape.

As hard as the government tried, it did not find any success in breaking up Microsoft.

However, because of the bruises that Microsoft had to endure in its battle against the US government, it exercised more caution when it came to utilizing its cloud to prevent small firms from rising up in emerging markets such as online search.

On a side note, that fact actually helped startups of the time to flourish.

Google was one of those startups.

How To Bridge The Chasm

With all of the discussion above, how does one curb the power that data barons hold?

Well, instead of playing the waiting game over the legal battle that may not (or may) successfully foster competition, the community needs to find methods using which it can bolster other rivals.

This is something we have to do urgently.

In practical terms, it means that we have to find a way to reduce the massive chasm between the data and information that these web giants hold and the rest of the competition.

This is where regulation will come into play.

Europe introduced the GDPR rule which requires internet companies to hold online consumer’s data in a form that is machine-readable.

Doing so will help them move the data to other businesses if a need arises and if they want to do it.

This is what some call data portability.

Such practices will no doubt enable startups to come in and eat up more data, more quickly.

 

Zohair

Zohair

Zohair is currently a content crafter at Security Gladiators and has been involved in the technology industry for more than a decade. He is an engineer by training and, naturally, likes to help people solve their tech related problems. When he is not writing, he can usually be found practicing his free-kicks in the ground beside his house.
Zohair

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Data Barons: About Time To Reign Them In

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