Results tagged “Internet exceptionalism”

January 25, 2018 9:12 AM

The Internet Giants' Dominance Goes Beyond Antitrust

Recent media coverage of Alphabet, Amazon, or Facebook's dominance has often raised the notion that antitrust laws might be the best tool to counter it.  See, e.g., this excellent survey article by David Dayen for American Prospect. Because these giants do, indeed, have concentrated economic power, a certain reflexive tendency exists to turn to the antitrust laws. After all, these laws are supposed to be the antidote to market power, right?

Violations of the antitrust laws, however, are not the only explanation for market dominance. In his book, "Move Fast and Break Things," Jonathan Taplin explains, with extraordinary clarity, that the internet giants' economic power is the direct result of legal advantages bestowed upon them by the United States government.  Let's look at some of the profound government-granted advantages these firms hold, before reaching a conclusion that a competitive market--where consumers pick the winners--is even possible.  

Tax Free--An Offer You Can't Refuse

In the 1980's, mafia-affiliated gasoline distributors were stunningly successful new entrants into the wholesale gasoline market in New York and New Jersey. Their secret?  Undercut the competition by not paying taxes that every legitimate gasoline distributor remits to federal and state authorities

One ambitious individual, working on Wall Street at the time, was clearly paying attention. When Jeff Bezos quit his Wall Street job to start Amazon.com in 1994, Bezos already had the winning formula, courtesy of Colombo crime family caporegime Michael Franzese; except that in the "virtual" world where Bezos was headed, there were no pesky tax collectors--and he aimed to keep it that way.

Amazon aggressively--and largely successfully--fought the states on the issue of sales taxes for years. About 5 years ago, Amazon noticed that it wasn't exactly a sympathetic character in this fight, and handed over lobbying against sales taxes to eBay and Overstock.com.  On April 1, 2017, Amazon finally "threw in the towel," and began collecting sales tax on its sales (but not sales made through individual vendors through "Amazon Marketplace"). 

Amazon's Prime Rates

Amazon Prime membership--$100 annually (or monthly $12.99)--gives you free 2 day shipping on most items, as well as streaming videos and music; it's a great deal for what you're paying. The bad news is that you're paying more than you think for that luxury--whether you're an Amazon customer or not.

The U.S. Postal Service carries a lot of Amazon deliveries and they give their biggest customer a great deal.  For you, the Postal Service's monopoly customer, the deal isn't so great.  In fact, during the recent holiday season, the public--which pays the USPS' perennial deficits--had a difficult time getting its packages delivered, even at much higher prices than Amazon pays.

While some argue that it's not entirely fair to blame Amazon for the Postal System's woes, these folks may be missing the forest for the trees. Regardless of whether Amazon could, or should, be paying more for shipping, there can be no doubt that the Postal Service favors the largest online retailer at the expense of every other competitor.

The HQ Shakedown

Last year Amazon announced it was considering a second headquarters location.  The prize for any jurisdiction lucky enough to win the bidding: 40,000-50,000 high-paying jobs and Amazon's promise of a $5 billion investment. As a result, cities are in a "frenzy" to attract Amazon.  

According to the Wall Street Journal, the D.C. area ranks highly among the "finalists."  Last week, Maryland's Governor offered Amazon $5 billion in state services/tax relief--around $125,000 per job--just to improve the state's chances. Other states have offered even more; it's a risky bet for states, but not for Amazon.

Section 230--A License to Steal

We've previously discussed Google's use/abuse of Section 230 of the Communications Decency Act (Title V of the Telecommunications Act of 1996) --and how the prospect of narrowing this exemption solely to protect the weakest members from the most ruthless websites--led Google on a scorched-earth defense of internet sex traffickers.  The internet giants' opposition to even modest amendments to Section 230's unlimited liability shows these firms' dependence on rent-seeking.  In other words, internet platforms succeed through the relative efficiency with which they are able to appropriate and monetize the value of content/intellectual property created by others.  

Counterfeiting

Today, a genuine Gucci belt from Neiman-Marcus sells for approximately $400-450.  Expensive, sure, but you know it's real.

On Amazon, if you search "men's Gucci belt," you'll see that all the choices look real, and the prices are frequently lower--though not that much lower--than the Neiman-Marcus prices. However, if you look carefully, you can see there are three different sellers, including one named "gĂșCCĂ­."  If you guess wrong, and unintentionally buy a fake, Amazon might refund your money.  However, as a racked.com article recently explained, Amazon is nowhere to be seen when you will have to face any legal consequences that may result from your order being seized by U.S.Customs

Piracy

We've avoided talking too much about Google and Facebook specifically in this post--because we've covered them extensively in others (e.g., here and here)--recall that a substantial portion of their ad revenue comes from placing ads on the intellectual property of others.  For example, this chart (from Digital Music News) shows that while YouTube is responsible for the most music streams, it also pays the least to rights-holders.

Music streams_royalties.png

 There are a couple of reasons for this. First, artists believe that the Digital Millennium Copyright Act's "notice and takedown" provision grants the websites a relatively risk-free way to profit from piracy.  Second, even when Google and Amazon need advance licenses to use music, music rights attorney Chris Castle observed that, in April of 2016 they began "taking advantage of two little known and previously little used sections of Section 115 of the 1976 Copyright Act that . . . limit when statutory mechanical royalties are payable."  By exploiting these loopholes, Castle explains, the largest digital music users are able to avoid paying royalties, and insulate themselves from infringement liability, for older (pre-1978), and very new, music

Likewise, Facebook--the biggest single source of "news" for almost half of America (according to a recent Pew study)--has steadily usurped the ad revenue of those who create the content. News organizations have seen their ad revenue plummet from $50 billion in 2006 to less than $20 billion in 2016. Pew p. 28.

If you ever doubt whether Google and Facebook could stop piracy, consider this exercise: type "watch child porn online" into Google. This search is for illegal, repugnant, material--and Google's search results practically scream, "don't do it; you'll go to jail!"   

watch_child_pornography_search3.jpg

Now, type in "watch [any movie/TV show] for free." In response to this search--which is just as illegal as the first--the very first link Google returns is to "putlockers" (a variant name of pirate site putlocker).

watch_whos_the_boss4.jpg
The Internet Isn't for Antitrust

Antitrust laws protect competition, because competition produces benefits for consumers.  Among these benefits, competition eliminates the waste of economic "rents" implicit in artificially high prices.  The internet, on the other hand, evolved under the notion that--if allowed to flourish without all the "red tape" that constrains every other business in the country--competition on the web would flourish naturally. 

As it turned out, web-based businesses did exactly what the Colombo crime family--or anyone else operating outside the law--would do: take as many rents as possible. For this reason, antitrust and internet exceptionalism are two policies that could not be more in conflict with one another.  As long as the internet remains "special," cries for increased antitrust enforcement make about as much sense as tougher speeding tickets, but no prohibition on drunk driving.