Monday, September 28, 2020

OPINION AND ANALYSIS | 23-02-2019 10:03

A blueprint for regulating Google and Facebook

In the same way as Spotify pays rights for the music you stream, Google and Facebook must reach rights agreements that are fair with content producers.

The situation has radically changed for Silicon Valley’s tech giants over the past three years or so. They’ve gone from the most respected companies in the world to vampire squids facing mounting calls for regulation. Google has perfected its lobbying efforts to the point where it is arguably the world’s best, while Facebook’s swaying is still in its infancy (though Mark Zuckerberg appears to be a quick learner). These companies have begun to face fines that are still relatively innocuous from a financial perspective, but their bigger fear is a regulatory overhaul that effectively curbs their control of the world’s attention span, and therefore wounds the golden geese that is their grip on digital advertising. With the European Union leading the charge with an ambitious, and risky, plan to impose digital copyright rules, and countries — including Argentina — gearing up to follow suit, it’s high time to lay out a blueprint for the best ways to effectively regulate tech monopolies without hampering the Internet’s capacity to improve the way we live.

In a nutshell, Google and Facebook are the two most vivid examples of how disruptive innovation can quickly lead to market power and therefore the stifling of competitive innovation. Through highly attractive services, including access to all of the world’s information (Google search) or instant communication with essentially everyone connected to the Internet (Facebook), they’ve amassed the largest databases of personal information history has ever seen. With them, they’ve developed amazingly effective advertising dashboards allowing companies and individuals to target potential customers with incredible precision. Given the Internet’s zero marginal cost of distribution and of transaction costs, as Stratechery’s Ben Thompson puts it in his aggregation theory, they’ve become dominant through a virtuous cycle of offering the best product, which attracts users, which attracts suppliers (in this case of content, but also of attention). Taking it one step further, that dominance coupled with the ad-based model has allowed them to aggressively lower rates, as they rely on “billionsof-small-transactions” rather than “few-big-ones,” as media companies were used to. Moving on, Google and Facebook swept the digital advertising market from below publisher’s feet without them even realising they were contributing to their own demise, ending their dominance of the control of global information flows and therefore the ad pie. This same kind of framework can be adapted to understand Amazon, Uber, Netflix, Airbnb and the rest of them.

Taking Thompson’s theory to the battle between publishers and super aggregators, like Google and Facebook, requires an extra step. Journalism is not like the taxi or hotel industry, it is a sufficient and necessary condition for a properly functioning democracy, and therefore the generation of consciousness. The opportunity to freely form our opinions cannot be left to algorithms based on maximising user attention. And, in the same way as with the music industry – where major record labels were forced to completely restructure their business model and ultimately found a new way to charge for their content – smart publishers must find a way to charge both the reader for quality news, and aggregators for their use of it.

It is clear that it is the publishers’ burden to build business models that are suited for the Internet age and the smartphone revolution, meaning that no longer can they simply rely on giving away circulation in order to gain access to eyeballs which are transformed into lucrative advertising deals. Google and Facebook took that model and grew it out of proportion, blowing up the advertising market, essentially engaging in dumping across the globe and paying corporate tax rates that barely exceed 10 percent.

Yet regulators can’t swallow this story about the free Internet and Schumpeterian creative destruction at face value, unless they are willing to accept the colateral damage such as the loss of thousands of jobs, the reduction of the journalist population, and therefore less, not more, protections against fake news. And, of course, the absolute concentration of economic and digital power in a handful of players. Before Google’s Larry Page and Sergey Brin were forced to take down their slogan — “Do no evil” — the search giant had lobbied the world’s regulators for a series of rules that cleared them of all responsibility for content accessible through their web pages. The same thing favours social networks regarding what its users upload. At the same time, they had convinced naive regulators not to regulate them, as they could do it themselves. This is how Google and YouTube made it extremely easy for anyone to illegally stream rights protected films and sporting events for free, while Facebook allowed the spread of fake news through Cambridge Analytica-like schemes across the globe. Both companies got incredibly rich as they washed their hands of any responsibility for massive copyright violation and electoral manipulation, for example.

On February 13 in Strasbourg, the EU reached a political agreement to pass their new digital copyright rules, to much criticism from certain lobbyists and activists. These rules, particularly Articles 11 and 13, call for aggregators to pay for content they distribute and monitor it to avoid copyright violation. It follows in the lead of laws imposed in Germany and Spain, wherein Google directly shut down its Google News product in the latter with negative effects for publishers. Talk about monopoly power.

It is unlikely that Google will directly shut down News across Europe and/or eliminate news results from search, given the economic importance of that market, but they can (they did shut down in China years ago, but are looking for a way back in). In part, that’s what Facebook did when it changed its algorithm to favour friends and family content while hiding publishers’. Another piece of EU regulation, the General Data Protection Regulation (GDPR) was received with criticism claiming it harmed smaller companies and strengthened the giants, but its intention was to limit the amount of data these companies could collect from users without their knowledge while allowing them access and the capacity to delete said personal data.

What is the purpose of regulating Google, Facebook and the rest of the tech giants? Is it simply to create a subsidy for those industries suffering from creative destruction? A first point has to do with fixed costs. While the Internet allows for zero marginal cost and zero transaction cost, as Thompson explains, it shouldn’t allow for the evasion of taxes the “antiquated” competitor is paying. This in turn takes us to the dumping argument, as the taxi-driver faces a regulated tariff, while the publisher — whose creation of journalistic content isn’t replaced by a cheaper option as in the case of Uber — is going bankrupt, while global tech firms buy market share by giving their products away for free. And, in the same way as Spotify pays rights for the music you stream, Google and Facebook must reach rights agreements that are fair with content producers.

We also need to curb monopoly power which allows tech juggernauts to engage in bad faith negotiations by bundling products that lock publishers in to unfavourable deals in exchange for temporary benefits, much like giving a glass of saltwater to someone who is dying of dehydration. Another key point is that we need these companies to properly compensate those helping them to gather the raw material that makes them so powerful: data. And, of course, we need them to be transparent to users about what they’re doing with the inforation they have collected. It’s necessary for them to be liable for the fraudulent use of that data, be it in the ad market or for electoral gain. What we need is smart regulation that paves the way for a healthy digital ecosystem composed of aggregators, content producers and advertisers, all of them serving users.

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Agustino Fontevecchia

Agustino Fontevecchia


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