There has been a lot of discussion recently regarding the market power of "big tech" companies and what can be done about it, most notably Elizabeth Warren's plan to use Antitrust laws to break up big tech.

A lot of people in the tech business don't tend to think the antitrust threats are a realistic solution, for reasons that make a lot of sense when you examine them. This post is an attempt to summarize the difficulties in breaking up big tech, and what could be realistically done instead.

Where does the market power of big tech come from?

When we talk about big tech antitrusts, the first thing that comes to mind is acquisitions and mergers, like Facebook/Oculus, Google/Waze or Amazon/Twitch. These acquisitions are certainly detrimental to competitiveness because they concentrate the market. 101 Industrial Organization textbooks would tell you that antitrust policies are an efficient way of counteracting this effect by breaking up the market into multiple competing firms. However, while these acquisitions are generally detrimental, they are interestingly not what constitutes the main source of market power of big tech.

Here's an interesting thought experiment: what are the barriers of entry for creating a new social network like Facebook?

Okay, having enough features to be competitive requires a lot of initial investment, but this is nowhere near as complicated as you might think. The very core features of facebook are just a basic CRUD. You could probably make students write a very stripped down version of Facebook as a year-long project, and get pretty good results. And we live in a Silicon Valley world, where VC money is virtually infinite, and an app to send "Yo" can raise $1.5M in investments. It seems unlikely that development cost would be a huge blocker to new entrants in the market.

This seems even more obvious when you look at chat applications, which are deadly simple to code. With so many people dissatisfied with Whatsapp/Messenger, why aren't people just moving to Matrix? Why hasn't Mastodon taken over the world? Why do people feel forced to have a Facebook account, when they could just be on diaspora?

The reality is that tech companies get their market power from a more subtle, pervasive barrier of entry: switching costs.

As a customer, when you're changing suppliers for a specific product, you will often incur switching costs, usually because it takes some effort to find a better supplier, you might have to change some of your habits or processes, etc. Usually, these costs are small enough to not impede the underlying competition effects too much. In the long term, with new entrants in the market choosing directly the better product, these effects will fade out.

This doesn't work as well for tech services, though. If you want to move from Facebook, you can't just pick another service and subscribe, unless you want to give up your existing contacts and social network. You either have to 1/ convince all your friends to move with you or 2/ give up on some of your friends. But 1/ isn't as simple as it looks, as your friends also recursively have the same problem: why would they switch to a different platform when all their friends are already on Facebook? Switching is an almost planet-wide coordination problem, and the costs of doing so for individuals dissatisfied with the platform are completely prohibitive.

As a side note, this is why you often see generational effects with social networks: one generation on Facebook, another on Instagram, another on Snapchat, etc. When you have a cluster of new entrants on the demand side, who incidentally, being rebellious teens, don't care about having social links with preexisting people, and can thus afford the costs of picking a different platform.

Third Party Data Access

At a first glance, it might seem that this problem is unsolvable. You can recursively break up big tech companies however you want, the switching costs won't disappear, and might even get worse.

However there is a theoretical solution to this problem: interoperability. Tech companies in monopoly positions have an incentive to create walled gardens around their users: cut down interoperability with other services to increase switching costs, so that people become stuck and can't afford to use other services that communicate with the service they're dissatisfied with.

This happens literally all the time. In 2015, Facebook discontinued its XMPP gateway, preventing third applications from communicating with Messenger. In 2018, Slack did the same with its IRC gateway. In 2014 Facebook also shut down the Friend Data API that allowed third party social networks to display people's activity feed. In 2018 Twitter shut down some streaming APIs, making it impossible to create third party clients that get a streaming feed of tweet updates. GMail in 2019. Signal in 2016. Whatsapp just bans you if you use third party applications. And that's just the tip of the iceberg.

Mandating third party data access for these companies would however be a great solution to the switching costs problem. If I can use Diaspora and see your data on Facebook, or I can use Messenger and see your Snapchats, and do the same thing for every social service, I don't need to convince my friends to switch platforms. People will naturally go towards the service that they like the most, while still being able to enjoy the social networking value of these services that are intrinsically due to people having "data links" between them.

Interoperability

We talked about social networks, but the same concept applies to other sources of market power of big tech. DRMs work in a similar fashion to create walled gardens. Why is Steam cornering the market for video games platforms? Because DRMs prevent you to take your existing video game library and bring it to a competing platform. That's what allows them to take a cut of 30% on all game sales. Old-style iTunes was also preventing users from playing the music they bought on the iPod's competitor products (Sobel 2007).

This market power problem in tech is a very general one, and can be summarized in one word: interoperability. The inability of something to be interoperable with other ecosystems is one of the greatest determining factors of the market power of big tech companies. One of the most well-known example of this is Microsoft, who was able to purposefully degrade interoperability in the operating systems market to consolidate its monopoly position (Genakos, Kühn, Van Reenen (2011)). On the hardware side, Apple is also well-known for its notoriously incompatible laptop and phone chargers.

The European Union, which is well known for its aggressive stance against monopolies, has already started to address this problem by making the right to portability one of the provisions of the GDPR. However, this isn't really sufficient, because downloading an offline dump of your data isn't good enough to interoperate through third party applications.

All of this leading to my policy proposal. We should:

1. Obligate tech companies to provide reasonable ways to interoperate with live services dealing with personal data and communications.
2. Obligate tech companies to make virtual purchases portable to the extent that it is possible, notably by prohibiting DRMs that lock in single platforms
3. Enforce well-proven technical hardware standards like USB-C to improve compatibility between different physical devices.

This proposal is very similar to Gans (2018) (thanks /u/gorbachev for the link), which I highly recommend as it outlines the problem very well, and elaborates extensively on what a proper data portability solution would look like. My proposal is basically to do what is written in this paper.