Facebook may soon become the most powerful profit machine in history — if it is not that already. The quarterly results it released last week were staggering. Revenue, poised to pass $40bn annually, grew by nearly 50 per cent. Operating margins near 50 per cent. Return on capital? Near 50 per cent again. It is hard to find another company, from any era, with a comparable combination of size, growth and profitability.
Facebook deserves congratulations. At the same time, though, it is worth considering what the rise of Facebook and other dominant tech groups says about the US and global economies.
Five years or so ago, the unusually high margins of American corporations began to receive attention from analysts who worried that the elevated profits were not sustainable. If margins reverted to the mean — as they had in the past — the stock market’s recovery would turn into a rout. Today the worry is not that profits will normalise, but that they will not; and the focus of concern is not the stock market, but the economy itself. The consensus view is that American capitalism is increasingly oligopolistic and rigid. The evidence is found not just in high margins but low rates of new business creation, low fixed capital investment, increasing median firm sizes, and so on.
Technology is not the only industry where this has happened. Airlines, agriculture, banks, beer and various others follow a similar pattern. Technology is particularly prone to oligopoly, though. Entry costs are high and marginal costs low; intellectual property is fundamental; network effects lock in users; and the data that incumbents collect gives them a durable edge over newcomers.
As a few tech companies become ever more powerful (and there is little evidence that the ascents of Facebook, Google or Amazon are over) antitrust authorities need fresh thinking. In the US, they have hesitated to block mergers or levy fines for anti-competitive conduct. There are reasons for this. No one is very good at predicting which tech oligopolies will be persistent or where fresh competition will arise. And the tech leaders’ operate in fast-moving, multi-sided markets, where products are often given away and traditional industrial classifications do not apply. So many of the standard measures for anti-competitive behaviour — price gouging and market concentration — are an uneasy fit.
Competition regulators need to arm themselves with new concepts. On mergers, rather than concentration in particular markets, the focus should shift to the potential for customer lock-in. When Facebook bought WhatsApp in 2014, for example, regulators treated the merger as an advertising company buying a telecommunications company — not as a social network deepening its customer data set.
Ensuring the interoperability of technology will be another key. It is important to remember that Google’s search engine was initially distributed exclusively on Microsoft’s operating system and browser. If antitrust actions had not already chastened Microsoft, we might all be searching on Bing today. The next great innovator may have a similar dependent relationship to Facebook.
Finally, regulators need to think hard about how user data enables dynamic pricing algorithms that eliminate the very notion of market prices, and with it the consumer surplus.
We are all benefiting from the revolutions brought about by the great tech companies — and we all have an interest in seeing that those revolutions do not harden into technological authoritarianism.
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