The great big tech break-up

Regulators are cracking down on big tech, with antitrust law as their main weapon. Can they boost competition without killing off innovation?

 
 

or Apple and Google, September 10, 2024 was a judicial bloodbath. For the EU’s regulatory apparatus, a rare victory in its war against big tech. The European Court of Justice ruled that Apple should pay €13bn in back taxes to the Irish tax authorities, while Google failed to overturn a €2.4bn fine over abuse of its online search dominance. For the EU’s previous competition commissioner Margrethe Vestager, an anti-big tech crusader to her enemies and a defender of fair competition to her friends, this was not a temporary triumph, but an omen for the future, with more similar cases in the pipeline.“I am afraid we are only at the beginning,” Vestager told the media a few hours after the decisions were announced, adding: “Or, rather, the end of the beginning.”

A global crackdown
The EU is not alone in its quest to rein in technology powerhouses, which dominate smartphones (Apple), digital search and advertising (Google), e-commerce (Amazon) and social networks (Meta). From California to India, a global wave of regulatory crackdowns on the digital powers that be is raging on. Governments deploy an old tool against this new enemy: antitrust law, with the prospect of break-ups looming large as the ultimate penalty to bring offenders into line.

The rise of AI has also convinced regulators that they must act now before it is too late

There are four reasons why big tech faces such a fierce backlash. One is a chronic concern among regulators and antitrust academics that competition in the tech industry is diminishing because tech companies exploit their dominance to stifle new entrants, which harms innovation and economic growth. Regulators like Vestager and her US counterpart, Lina Khan, see themselves as modern versions of Theodore Roosevelt, the first US President who dared to assail monopolies. Big tech gets more attention because of rapid technological transformation, says Christopher Sagers, an expert on antitrust law at Cleveland State University, pointing to antitrust activity in the early 20th century as a precedent. Although concentration was a problem across the US economy back then, the railroads became the main target of regulators due to the changes they had brought in people’s lifestyles. “It is easier to get average consumers and voters to care about market power in a sexy, highly visible, exciting business like e-commerce or social media than it is in most other business sectors,” he says.

Politics plays a role too. Populism left and right bases its allure on scepticism towards elites, big corporations and mainstream media, exemplified by tech companies and their leaders, such as Facebook’s founder Mark Zuckerberg. Deglobalisation due to rising geopolitical tensions is also pushing policymakers to rein in multinational corporations, with antitrust law effectively becoming a protectionist tool. In the EU, concerns over the bloc’s loss of competitiveness, expressed in a recent report authored by former ECB head Mario Draghi, may be linked to measures against US tech companies.

Finally, platform economies have reached a tipping point. With the increasing convergence of digital technologies, the level of horizontal and vertical integration these companies have achieved is unprecedented. Take Google for example. More than a simple firm, it is an ecosystem that has expanded its tentacles from online search to mobile operation systems and email, all under the same entity. That is reflected in the valuation of its mother company, Alphabet, which accounts for over four percent of the S&P 500 stock market index. Facebook and Apple are not very different in their sprawling operations, while Amazon has built its own e-commerce empire. From Amazon’s suppliers to software developers, governments face pressure to level the playing field. The rise of AI has also convinced regulators that they must act now before it is too late. But it is exactly this complexity that makes antitrust action against tech giants tricky, as the repercussions are unknown and the measures taken possibly counterproductive.

Court of Justice of the European Union, Luxembourg

Breaking up is hard to do
As big tech’s homeland, the US is the jurisdiction where the industry’s future will be decided. After decades of unfettered growth, big tech now faces regulators with a strong antitrust agenda. The head of the Department of Justice (DoJ) antitrust unit, Jonathan Kanter, has made his mission to tighten the screws on digital oligopolies, while Lina Khan, chair of the competition regulator Federal Trade Commission (FTC), made her name as an academic with an influential paper on Amazon’s monopolistic practices. “For a long time, antitrust has been percolating various theories of harm that regulators feel have been underused, particularly about potential nascent competition. There is this view that conglomerates are increasingly important in terms of the scrutiny they deserve and that mergers are too permissive,” says John Yun, an expert on antitrust law and former FTC executive who teaches at George Mason University.

For the EU, reining in big tech is as much about competition as competitiveness

Currently, Google is the major target of this regulatory crackdown. Last October the DoJ proposed that breaking the firm up may be one option to end its online search monopoly. In a landmark case, judge Amit Mehta ruled that the firm had violated antitrust rules and operated as a ‘monopolist’ in its pursuit of search dominance. Google may have to offer remedies such as sharing with competitors search data or even divesting its Chrome browser and Android smartphone operating system, which it is accused of using to promote its search engine. Crucially, it may be forced to ditch a $20bn exclusivity contract with Apple that makes Google the preselected search engine on Safari, Apple’s browser. A decision is expected by August, although Google is expected to take the case up to the Supreme Court.

Alphabet’s antitrust troubles don’t end there. The firm is also the target of a different DoJ lawsuit over anti-competitive practices in its digital advertising business. Although less well known than its search engine dominance, advertising is the real golden goose for the company, which effectively controls supply, demand, measurement and auctions of online ads. What’s more, last October a San Francisco court ordered Alphabet to open Android to rivals, permitting Android apps to be listed on alternative app stores other than Google Play and be paid for via alternative payment systems.

Although break-up orders are rare, given that courts disfavour them and governments use them mainly as a negotiating tactic to scare companies into compromises, Google may be an exception, according to Sagers from Cleveland State University, as the firm has been accused of a range of anticompetitive conduct and has established power in various sectors: “The situation that Google currently finds itself in may be uncommonly favourable to break-up remedy,” he says. Separation of its ad tech business is the most likely scenario, he argues: “The government’s whole theory is that Google uses its ownership of different parts of the ‘ad stack’ to squeeze out competitors and raise prices. If you break up the different pieces and give them to separate owners, they might have less incentive to behave anti-competitively.”

One reason why there have been few tech break-ups is that digital platforms have developed network effects, meaning that they provide a service whose appeal is based on the power of the crowds: the more people use it, the better it is. Breaking them up is impractical and expensive because the resulting firms may not be able to match previous efficiencies or may even try to consolidate again. However, in Google’s case, a structural remedy for its search dominance would make sense, says Sagers: “The government might argue that if Chrome and Android were broken off into separate firms, which don’t directly profit from search engine ad revenues, they will no longer have the incentive to give preference to Google search over competing search engines.”

China was the first superpower to employ antitrust law to curb the power of its tech companies

For its part, Apple faces a DoJ antitrust lawsuit for making it harder for consumers to switch to third-party software and hardware by exploiting its dominant position in the US smartphone market; iPhones account for roughly two out of three smartphones sold in the country. The FTC is also pursuing antitrust cases against Meta and Amazon, accusing the former of monopolising social media through its acquisitions of Instagram and WhatsApp and the latter of favouring its own products and services and stifling competition from other retailers on its e-commerce platform. More ominously, the regulator has launched an investigation into digital price discrimination that could disrupt one of the pillars of the digital economy: how firms tap into users’ data to set individualised prices online.

Part of the regulatory conundrum is that few relevant precedents exist. Since the US telecoms powerhouse AT&T was broken up four decades ago, no tech company has faced a similar fate. Although some believe that the separation boosted competition in parts of the market that drove the internet explosion of the 1990s, others point to the decline of the research centre Bell Labs as one reason the US was left with no major player in telecommunications technology, allowing foreign competitors to emerge. Another danger is that oligopolies can slowly reform, as in AT&T’s case, says Sagers: “Lax merger enforcement allowed the companies that had been broken up to slowly knit themselves back together into larger and larger companies, until once again just a handful of firms controlled all of communications.” Alternative antitrust tools could be compulsory licensing of key technologies, which was used in the case of AT&T, or mandating interoperability and data portability, according to Luise Eisfeld, an expert on digital platforms who teaches finance at HEC Lausanne: “Both might effectively break the impact of network effects that is cementing the market power of large companies.”

Margrethe Vestager, European Commissioner for Competition

Europe’s dilemma
For the EU, reining in big tech is as much about competition as competitiveness, leading many critics to accuse the bloc of deploying antitrust law as a protectionist tool. “Competitiveness is a very dangerous term used to say that we should fight non-EU big corporations to allow EU corporations to merge and concentrate. That would create so-called ‘EU champions’ but in reality, it would enable EU oligopolies or monopolies to rise to the detriment of consumers and businesses,” says Claire Lavin, a researcher at the antitrust think tank Open Markets Institute.

By splitting big tech you generate incremental changes, but another giant will take over

Last spring the Commission launched an investigation against Apple, Meta and Alphabet for potential violations of the EU’s Digital Markets Act (DMA), which aims to prevent tech powerhouses from abusing their dominant position and facilitate the emergence of new firms. It singles out platforms with at least 45 million EU-based users and a turnover of at least €7.5bn, dubbed ‘gatekeepers,’ as potential offenders. The Commission is investigating whether the companies allow app developers to provide users with alternative options outside their stores. Google, which has paid €8.25bn in EU fines in the last decade, is also under scrutiny for giving preference to its own services over rivals in its search results.

In a separate case, the Commission has accused the firm of using anti-competitive practices to protect its adtech business, suggesting that its ownership of various tools such as the ad management platform Google Ad Manager, the exchange AdX and buying platforms Google Ads and DV360 creates a conflict of interest that could be resolved only through divestment. A final decision is expected by the end of the year, but a potential break-up order involving Google would face fierce opposition and long battles in court. “Although it seems feasible on paper, the Commission is wary of judicial review, essentially intervening too much and then having the decision appealed and subsequently annulled by EU courts,” says Lavin. Tech break-ups may also disrupt a rising EU tech ecosystem, which the Draghi report highlights as a source of future growth. “It could backfire, generating criticism and even cancellation of so many new ideas that get developed on the basis of traditional competition law,” says Oles Andriychuk, an academic who specialises in competition law and digital markets at the University of Exeter.

Facebook’s parent company Meta may also face a fine over alleged efforts to dominate classified advertising. EU regulators are expected to claim that the firm links Marketplace, an e-commerce platform, with Facebook to undercut competition. The firm has also come under scrutiny for using data collected from third parties to sell ads to users and for offering users ad-free versions of its social networks for a fee. As for Apple, beyond its tax troubles in Ireland, last March it received its first antitrust fine of nearly €1.8bn for favouring its own music streaming service over competitors.

As the EU’s antitrust chief for a decade, Vestager presided over a trust-busting crusade, fighting against tech companies, lobbyists, politicians and even Eurocrats. “The European Court of Justice in its current composition increased the evidentiary standards, making them harder and harder for the European Commission, and yet the Commission won several cases,” says Andriychuk. Her successor, Teresa Ribera, has joined a new Commission focused on helping create EU-based big tech companies, a priority set out in the Draghi report. “The vocabulary of industrial policy had a bad reputation in competition cycles for many decades. Now it has been partially rehabilitated and people have started rediscovering the correlation between competition and industrial policies,” says Andriychuk. However, Ribera will also have to balance conflicting priorities. “She will likely face pressure to apply competition differently and to lessen competition when applied to EU companies, driving from the Draghi report. But she also has a vigorous agenda to update EU merger rules to address the risks posed by killer acquisitions,” says Lavin.

Shou Zi Chew, CEO of TikTok, Linda Yaccarino, CEO of X, and Mark Zuckerberg, CEO of Meta testify before the Senate Judiciary Committee

The first big tech killer: China
China was the first superpower to employ antitrust law to curb the power of its tech companies. It all started in late 2020 with an anti-government statement by Jack Ma, co-founder of the e-commerce platform Alibaba. Ma’s defiant attitude angered the authorities so much that he had to disappear from the public eye, while the IPO of Alibaba’s sister company Ant Group was suspended and China’s financial regulator forced the firm to restructure to comply with financial regulations. What may have triggered the fierce reaction, argues Wendy Chang, an expert on Chinese digital policy at the think tank Mercator Institute for China Studies (MERICS), was the group’s aggressive expansion into finance, which defied the government’s intention to keep control of the industry.

China’s competition watchdog also launched an investigation into Alibaba, fining it a record ¥18.2bn (£1.96bn) for abusing its e-commerce dominance. This was just the beginning of a broader crackdown. Chinese authorities released a guideline to curb digital monopolies and pushed the country’s biggest tech firms, including Tencent Holdings, food delivery giant Meituan, and TikTok owner ByteDance, to change their monopolistic practices. One reason for the crackdown was the government’s preference for investment in manufacturing rather than services, says Chang. “It wanted to signal to the market a pullback from software industries, and to focus on areas it considers critical, such as electric vehicles.” Regulators also investigated older merger cases, fining Alibaba, Tencent and ride-hailing giant Didi Global for failing to report deals for antitrust reviews, resulting in a significant drop in tech mergers and acquisitions.

The clampdown officially ended with another regulatory guideline promoting a healthier model of development for the digital economy. Although authorities maintained the pledge to battle monopolies, they also recognised the importance of tech platforms for economic growth.

One lasting result is that the Chinese government now has seats on the boards of major digital platforms, influencing their strategy and potentially getting hold of their data. However, significant damage has already been done, with massive loss of stock market valuation; most affected companies have yet to recover, which restricts their ability to innovate and grow in sectors that the government disfavours, including gaming, virtual currencies and financial services, according to Chang. “The chilling effect was also to a certain extent transferred to the AI industry – a sector struggling with geopolitical headwinds already,” says Xiaomeng Lu, a Chinese digital policy expert at the consultancy Eurasia Group. Although it is difficult to measure the crackdown’s impact on the economy, it is widely accepted that it contributed to the drop in China’s growth rate. “The government might have had second thoughts in driving foreign capital away with its aggressive measures, had it foreseen the financial troubles it finds itself in now,” says Chang. Ironically, however, antitrust activity in advanced economies may have offered a post-hoc justification. “I don’t think the Chinese government regretted that decision, since more governments worldwide began to put pressure on big tech,” says Lu.

Should the rising AI powerhouses be broken up?

Since ChatGPT’s launch in 2022, artificial intelligence (AI) has become more than the subject of science fiction novels. Generative AI, which involves the creation of images, texts and videos, is already used by billions worldwide. Google, Amazon and Microsoft have taken notice, acquiring hundreds of AI start-ups and offering AI developers cloud services and funding in exchange for equity and licences.

Developing advanced AI models involves costly computing hardware, energy and data, which gives an advantage to established tech firms over smaller competitors, raising concerns that they will dominate this market too. A case in point is ChatGPT creator OpenAI, which is backed by Microsoft. However, AI is also expected to disrupt markets where big tech currently reigns supreme, such as search; OpenAI is developing SearchGPT, an AI-based search tool that could potentially undercut Google’s dominance. In its case against Google, the US DoJ expressed concerns that the firm may tap into its unique dominance in crucial markets to build an AI empire, with suggested remedies against potential monopolistic practices including restrictions to its use of third-party data to train its AI models.

Should the rising AI giants face antitrust action before it’s too late? Some think that is necessary, given the significant barriers for new entrants. “The current dynamics of the AI ecosystem give incumbent tech giants like Alphabet, Amazon and Microsoft the ability and incentive to entrench their power in AI markets and suppress meaningful competition,” says Jack Corrigan, a researcher at Georgetown University’s Center for Security and Emerging Technology, adding: “Competition authorities seem to be aware of these dynamics, and by closely monitoring these firms’ behaviour and intervening as necessary, they can prevent the market for AI products from becoming as stagnant as those of other digital technologies.” Some suggest that governments should step in to provide public resources that would reduce the reliance of AI developers on big tech. Another way of preventing oligopolies from controlling AI is more vigorous enforcement of rules on merger control and anti-competitive practices, including considering break-ups, says Lavin from the Open Markets Institute, adding: “The EU Digital Markets Act should also be updated as it suffers from certain gaps. For instance, AI foundation models are not considered a core platform service.”

The end of an era
Beyond the world’s biggest economies, regulators in several jurisdictions including Brazil, Australia, South Africa and India have taken similar measures. “Authorities have realised that the current application of antitrust laws did not work for big tech and failed to stop oligopolies and big tech companies from expanding,” Lavin says. From policymakers to smaller tech firms and consumers, big tech has made some powerful enemies with its rule-breaking streak. Leftwing economists accuse digital platforms of indulging in a form of ‘techno-feudalism’ that undermines the basic tenets of capitalism; rightwing politicians castigate it for its ‘woke’ political correctness. All agree that its power should be curbed, its edgiest pieces taken apart. And yet, few know how to do this. Most of these digital powerhouses are not ordinary companies – they have created new markets whose unravelling might be too expensive, temporary, or even have unintended consequences. “By splitting big tech you generate incremental changes, but another giant will take over, maybe from an authoritarian jurisdiction,” says Andriychuk, adding: “I don’t expect that the law of gravitation will change and digital markets will stop being monopolistic.”