“Power tends to corrupt, and absolute power corrupts absolutely.” /Lord Acton

1. The regulatory case against
tech giants: What path will
lawmakers choose?
A consensus is crystallizing — for the good of society, tech
giant power needs to be counterbalanced by policymakers
enforcers.
For two days last week, lawyers from Google, Twitter, and Facebook
testified in front of the Senate intelligence and judiciary committees about
Russian-election meddling. And for two days, politicians on both sides of
the aisle denounced the tech giants for systematically prioritizing
profit over the interests of the American people. Sen. Dianne
Feinstein, a Democrat from the Bay Area, best encapsulated the lawmaker
edict: “You’ve created these platforms, and now they are being misused,
and you have to be the ones to do something about it. Or we
will.”

2. In these pages, we have time and again asserted that tech giant power
(and profits) would continue to grow until antitrust concern escalated to
the point of regulatory intervention. The Russia investigation
appears more likely than ever to prove that tipping point. From
the U.S. to Europe, from pundits to think tanks to elected officials, a
consensus is crystallizing — for the good of society, tech giant power needs
to be counterbalanced by policymakers and policy enforcers.
For more than a decade, tech giants — led by Google, Facebook,
and Amazon — have evaded regulatory restriction by exposing
the inadequacy of existing law. The legal paradigms defined in the
Industrial Age fail to address the dynamics of the Digital Age, whether
copyright protection, privacy, tax liability, or monopolism. In turn, tech
giants have, by and large, been permitted to self-police.
But the more their power solidifies, the more an age-old truth
becomes undeniable: unchecked power begets corruption. A
new legal paradigm is required, and the responsibility to author that
paradigm falls to lawmakers. Yet, a central question remains: How do
you rein in tech giants without compromising consumer
benefits, free speech, and most of all, innovation? The more this
question is debated, the clearer potential regulatory pathways become.
First, however, we must recognize the issues of greatest concern that will
shape lawmaker strategies. Headline numbers tell the story:
• 146 million: This is the total number of people Facebook has
acknowledged Kremlin-backed activity reached on its platforms
during the election. It paints a stark picture of the extent to which
Facebook neglected the social good in favor of profit growth.
• $1 trillion: This is the combined value the top 5 tech giants (Apple,
Alphabet, Facebook, Microsoft, and Amazon) have added to their
market cap so far this year, more than the combined worth of the
biggest five companies at the bottom of the bear market in 2009. It
testifies to the once-in-an-era dominance accrued by tech giants.
• -40%: This is the amount seed-stage funding transactions have
fallen in the past two years. It suggests that start-up dynamism in
Silicon Valley is plummeting as tech giants strengthen their grip.

3. • $73 billion: This is the total amount the top 8 tech companies
spend on R&D each year, more than the rest of the sector — roughly
400 publicly-listed companies — combined. It suggests tech giants not
only dominate today, but are poised to own the industries of the
future.
• 718,664: This is the total number of people employed by the top 5
tech companies. By comparison, the top 5 global companies in 2007
(Petrochina, Exxon, GE, China Mobile, and Bank of China) employed
1,283,640. This discrepancy demonstrates the extent to which tech
giants are contributing to escalating inequality.
So what might lawmakers do to address these issues? To date, six
regulatory strategies appear to have emerged as the foundation
upon which policy action will be built. Tech giants will fight hard to
prevent all — Facebook, alone, increased its 3Q17 lobbying spend by 40%
year-over-year, according to The New York Times. But between the U.S.
and E.U., we expect some action to be taken in the short- to medium-
term. The six strategies are as follows:
• Threat-by-threat policymaking: This strategy is already being
deployed. Between the Honest Ads Act (HAA) and the Stop Enabling
Sex Traffickers Act (SESTA), lawmakers are attempting to solve
imminent threats one by one. Targeting consensus concerns,
bipartisan support is achievable. However, narrow laws leave little
room for compromise, giving tech giant lobbyists greater opportunity
to defang laws like HAA and SESTA. Moreover, narrow laws are
unlikely to materially affect broad tech-giant powers.
• Halt M&A activity: As The Economist wrote recently about the
fallout from the Russia investigation: “The likeliest impact will
eventually be on the ability of tech firms to pursue acquisitions and
mergers.” From Facebook’s bid to buy tbh to Amazon’s purchase of
Whole Foods, there have been intensifying calls for a decisive
crackdown on tech giant M&A efforts. It could help re- invigorate the
startup ecosystem and slow tech giant infiltration into new industries.
However, M&A regulators would have to set precedents. To date,
regulators in both Europe and the U.S. have hesitated in taking such
action without new laws written. Escalating public concern could tip
that scale.

4. • Define them as what they are: As Robert Haslehurst and Alan
Lewis of L.E.K. Consulting wrote for Harvard Business Review last
year: “These businesses have not redefined industries in a
fundamental way; instead they are ‘old wines in new bottles’…and
should be regulated accordingly.” Uber is a taxi company. AirBnB is a
hotel company. Facebook and Google are media companies.
Enforcing these classifications would strip tech giants of
competitive advantages increasingly seen as unfair to
incumbents. It could also eliminate many of the offshore tax
practices that have enabled tech giant cash hoarding. The concern is
how this would impact consumer benefits and freedoms, from the
information they share to their ability to monetize assets like cars and
homes.
• Utility classification: This strategy has been backed by both
Steve Bannon and Bernie Sanders. As Bannon has said, “Facebook
and Google have become effectively a necessity in contemporary
life” — a baseline reason for many past utility designations. The
fundamental concept of utility classification goes, “a monopolist’s
profits should not exceed the level that a competitive market would
allow,” as The Economist recently wrote. Any profits greater than the
set RAB (regulated asset base) would have to be redistributed to
consumers, possibly in the form of data payments. This could be a
powerful counterbalance to inequality. The central concern would be
the effect on innovation. Lawfare dissected this problem this
summer: “As airline deregulation exemplifies, the traditional public
utility approach does not work well for markets characterized by
innovation and rapid change.”
• Give users ownership of their own data: Luigi Zingales and
Guy Rolnik of the University of Chicago have popularized the idea of
“social graph portability”. It would require Facebook to give users
ownership of their social footprint, thus the power to transfer their
network to a competitive platform. A similar approach could apply to
Amazon, forcing the e-commerce giant to share user shopping
histories with competitors. This could substantially limit the
power of network effects, therefore giving innovative competitors
a chance to challenge tech giant dominance.

5. • Break them up: As deputy chairman of the DNC, Keith Ellison,
said recently about Amazon: “I do think they should be forced to sell
off huge parts. They’re too big.” Could Amazon undercut competitors
and relentlessly expand without revenue from AWS? Could Google
suppress mobile app competition if it didn’t own Android? Would
Facebook maintain the same ad targeting advantage if it didn’t control
WhatsApp and Instagram? By breaking up tech giants, a new era of
intense competition and as a result, innovation could follow. Yet, one
primary concern remains: In an era when data concentration
increasingly equals power, can the U.S. compete with China if their
tech giants aren’t similarly constrained?