With the upcoming 2020 elections in the USA, we are seeing a revival of movements across candidates in the Democratic Party along the lines of consolidating the Tech companies which by and far are becoming too big. The biggest example of this could be seen in the plans of one of the top running contenders for the primaries – Elizabeth Warren. She wants to break down and split the companies like Amazon, Google and Apple.
Now before we go into the history of how these brands have gotten too big, and whether breaking them down would, in the end be as beneficial to the consumer as Warren says, and if not, what solution should exactly be taken; Let’s first understand the economics in the USA and how the Anti-Trust laws (A precursor to what Warren wants) came into place.
History of the Anti-Trust laws
Back in the 1800s, giant businesses, also known as “Trusts”, were the ones too big, and controlled almost entire sections of the economy such as Railroads, Oil, Steel and others. They essentially were monopolies and thus, essentially, had entire control over the supply of their products as well as the prices. There was hardly any competition, thus the consumers lacked any options to buy from. The prices were off the charts and the biggest examples of such so-called monopolies were US Steel and Standard Oil.
In 1890, the government, under Theodore Roosevelt, took strong action in this regard. The first Anti-Trust law in the US was passed then. Also known as the Sherman Act, it made illegal for the competitors to make agreements with each other to limit competition. It also made it impossible for any company to be a monopoly and did away with practices like predatory pricing.
This continued with the Clayton Act in 1914, which stopped Mergers and Acquisitions that were happening in order to stifle the competition. And with the Federal Trade Commission Act in the same year, the FTC in the country got the authority to investigate such practices happening in the country.
How are tech companies becoming too big now?
We are currently at an inflection point in history. A new, fast growing Silicon valley is crashing up against the slow, old government. Everywhere, we are seeing the power and influence of the big tech being questioned.
By the EU, Google was recently fined a sum total of US $ 1.7 Billion for their anti-competitive behaviour. We recently saw a heavy pushback against the merger that happened between T-Mobile and Sprint. Facebook still is under a heavy scrutiny after all that about the company has come to light. Spotify has attacked Apple on the front of unfair treatment.
Which of these are right though? Google or the EU government? Apple or Spotify? Facebook or the public? We need to understand first how these tech companies reached to these levels first.
Let us start with Amazon. In a span of few years, we oversaw what Amazon was – a cheap and convenient platform for shopping to what it is now – a mega corporation with powers deep within the politics too.
Let us understand the retail industry first. The profit margin on the majority of the products on the retail mostly are on the lower single digit percentage. In addition, in the verticals like groceries, where Amazon makes the most sales from, there is no special customer loyalty to be seen for the retail stores. We don’t see people being loyal to your local grocery stores or Big Bazaar. They just buy these products wherever they can get it cheaply and conveniently from.
For these verticals, the growth isn’t when they are up and coming, but comes when they survive long enough to either have enough sales for huge bulk orders (thus improving their margins) or cutting off the middle man altogether by making their own generic brand (Big Bazaar’s Fresh and Pure, or Walmart Best Price’s Great value brands). Reaching that size gives them a strong leverage and thus, let these companies by cheaper.
But the biggest problem that comes here is reaching to that size. Since any up and coming business would have to compete with already established businesses to reach that scale, it would thus have to constantly lose a lot of money in the long run with a heavy risk of hoping to retrieve it all back later.
That’s where Bezos comes in. He saw how the use of Internet is rising exponentially, and the fact that at the time, no good cloud storage solutions were available for enterprise customers. That is what Amazon’s distraction today is – Amazon Web Services. Now, if we look at Amazon and its total revenue, you’d pretty much see what you’d expect. That it is mostly an online store with AWS as its side business.
But that’s where it gets interesting. Let us look at Amazon by its profits. AWS now accounts for around 60% of the company’s net income. It alone makes even more money that corporations like McDonald’s even. Yeah, Amazon does sell us a lot of USB Cables and Vacuums, but that isn’t where the money is.
AWS is the camouflage Amazon uses to make the company look good and hide how much it actually is losing. Amazon gets to subsidize its complete online store business with AWS. And that’s how, one after another, we see Amazon entering new industries and instantly get to dominate them. It is playing by a fundamentally complete different set of rules, and it is a lot easier for Amazon to expand especially if it’s not worried at all about the profits.
The company is touching more money than ever, but just, never keeping it. Profits for Amazon as a whole has stayed around 0, since its more focused in the growth aspect. Amazon is big, dominant and pursuant to killing a lot of competitors, but due to its low prices, their predatory pricing techniques have been under the radar when it comes to Antitrust laws till now.
Now you, as a consumer might be thinking how does it matter to you? If a company uses its humongous size to save you money, after all according to consumerism, it should be a good thing, right? No. This isn’t a fair way to evaluate this situation. When it comes to the local grocery stores, or your Big bazaar or Walmart, they aren’t burning out money from an insanely profitable side business to subsidize your bananas or your cereals. Here, the Amazon products aren’t winning because they are the best, but because they are marginally subsidised by a completely unrelated thing.
At some point, Amazon also realized that it has a huge platform advantage on its side too. It has all the consumer data, and thus, has a strong headway into what consumer products are sold the most. Using that data most effectively, what they created is their own Generic Brand – Amazon Basics, which sells everything from keyboards to pens. They have even been able to bring down companies with high sales on their own platform by bringing their own marginally subsidized versions of the same.
Now, lets move to Apple. Here the situation is a completely different one altogether. Apple’s major product is iPhone, which runs iOS, an in-house operating system, and has Apple’s own App Store as the sole platform to get its applications from. Apple also has its in-house applications for services such as news, music, cloud and more, and definitely doesn’t have to pay 30% of its in-app purchases to anyone, which any third part application on the platform has to. Now, for businesses like Gaming, cloud infrastructure, streaming and more, they generally earn a lot, considering the 1.3 Billion users it gets access to (1.3 Billion iPhones are in use in the world right now); but the Music industry specifically runs in a completely different manner.
Music Streaming in the digital media industry is what Grocery is in the retail sector. The third-party providers, such as Spotify has such low margins, that paying 30% of its earnings from the platform tends to break its entre business structure.
Now, even if Apple doesn’t make money off Apple Music or Apple News (Which it certainly does), the fact that these services are the default on the iPhones, much easier to use and very well polished to get along with the entire Apple ecosystem, entices more and more people to use the same instead. Apple doesn’t need to make money off these applications, Spotify does. This is the entire Amazon vs Retail situation all over again.
Now, you may ask, hey its simple. A consumer can then instead switch platforms if it wants to. But this isn’t entirely true either. A customer makes one unrelated choice – like buying an iOS device or an Android, and then makes the choices of its Music app, Cloud storage apps and more dependent on the same. That customer, prior to buying the device, doesn’t know what he or she is getting into. And this lock-in/ecosystem is what Apple hugely benefits from. This integration of Apple extends even further on. You can now buy the next iPhone with your Apple Card, download Apple music to listen music to, read news on Apple news, Back your data on iCloud and watch TV shows on Apple TV+.
But this integration as a huge benefit for the consumer that outweighs the negatives. This cohesive integration provided by Apple promises higher security, with stringent focus on Data privacy and makes the devices easier to use with each other. Some of you might disagree on this and might find having choices a worthwhile trade-off for privacy and security, but this doesn’t reduce the value for the rest of the consumers who chose Apple for that very reason.
In other words, breaking up some of these companies might be hugely positively impactful, but the other ones, it might diminish the very reasons consumers bought the products. A single plan like Warren’s isn’t the right solution to take. The steps need to be taken, I agree, but heavily cracking down on any large corporation might end up hurting capitalism as a whole itself. If a “Consumer protection” plan ends up making lives of the general consumer worse off than now, it isn’t the right one to take.
What needs to be done then? That is a difficult question to answer.
A few simple ideas could pave way for a better economic reform plan though. An expansion in the scope of the qualifications of an “Anti-competitive behaviour” could be a good first step. Low prices shouldn’t necessarily mean that the customer isn’t harmed but closed lock down markets like App Store aren’t necessarily a bad thing either. A gentle balance is needed to be made here.
Secondly, a closer look is needed to be taken on Mergers and acquisitions happening all around us. We all notice young start-ups spring up and gain traction and then get bought up by a Google, Microsoft or Amazon; never to hear from the same again. Society would instead be much better incentivised by higher competition instead.
Instead of massively polarizing plans, to gain headlines, what the future government, be it Warren’s or Sander’s or Yang’s need to do is to give a closer look, and gently work on the same. Focus on consumers interests at large, while also looking out for the corporations trying to raise their political influence. It is a thin and delicate thread to walk on, and I have high hopes from the next government to make it their goal.
EDIT – When I wrote this article, at that time, Warren, Sanders and Yang were all in the race for the Democratic primaries. Things have changed right now with Biden being at the forefront of the Democratic party. This brings in the doubt if even the policies to keep these corporations in check would come up. Considering the policies that Biden stood by during the Obama leadership, Things seem pretty bleak right now, but I am still hopeful about the same.