Why regulating Google and Facebook would be wrong… and dangerous

The Economist has suggested to regulate the internet giants. The goal would be to limit their control on the data the internet economy is built on. For the good of our society, I hope politicians don’t listen.

On May 6th The Economist published an articles with the suggestive title «The world’s most valuable resource is no longer oil, but data».  The article explains an old mantra: A handful of companies – Google, Amazon, Facebook, Microsoft… – are accumulating extreme wealth by means of the data they get from the users of their products.

The novelty resides, however, in the argumentation of the article. The newspaper defends the need of limiting the hegemony of those internet giants over the data they have worked so hard to access, analyze, refine and utilize. The Economist argues that those very companies should therefore be regulated. Two possibilities are proposed:

  • The break up of the internet giants into smaller companies (mini Googles, mini Facebooks, mini Amazons etc.). Here the precedent is the break up of Standard Oil (and for us that have IT and Telecom at heart, AT&T)
  • To force those companies to open their vaults and give access to third parties to the data they have. The mirror here is the PSD2 directive in the EU. Starting in 2018, this directive will force European banks to open the bank accounts of their customers to third party payment services, in theory stimulating competition and a more efficient market for financial services.

I deeply disagree with the need of regulating or breaking up the masters of the internet economy in the ways proposed by The Economist.

First of all, I consider it immoral. The natural ambition of establishing Over The Top (OTT) companies is by definition global. As an example, the mission of Google is «to organize the world’s information and make it universally accessible and useful». Facebook has a mission with global ambitions too: «to give people the power to share and make the world more open and connected.»  Throughout the years, these companies have consistently done exactly what they have said they would do. They have executed brilliantly. Why should regulatory third parties punish them for their success? In addition, the shareholder base of those giants have relied on their vision, mission, business model and competitive advantage in order to secure the return of their investment. The Norwegian Government Pension Fund is a heavy shareholder of these companies, with the intention of securing a fair income for the elderly in the country. Why should any regulatory force put the retirements of Norwegians in jeopardy in the name of hypothetical and unproven threats?

Second, it won’t work. It never has. The breakup of AT&T is a good example. When telephony titan AT&T was split into eight different companies in 1982, regulators congratulated themselves. They chose to ignore the fundamentals of market dynamics and the economies of scale necessary to operate and upgrade telecom infrastructure. The result? A long series of re-mergers and restructuring processes has lead to the AT&T and Verizon quasi-duopoly that exists today in USA.

ATT-breakup
The futile breakup of AT&T – source: The Wall Street Journal

As Nilay Patel, a journalist of The Verge wrote:

«How many dollars of value and hours of effort have been sucked up inside these ill-fated remixes of content and infrastructure giants? How many good ideas died because these companies were spending time and money chasing these doomed integrations instead?»

In the internet economy, scale and/ or network effects are essential to win and even to survive. Search, social media, cloud, even e-commerce are natural monopolies. Political decisions cannot alter market reality. Splitting the internet giants would have the same effect as splitting AT&T: None.  The costs for society would be, on the other hand, huge.

To force Google et al to give access to their data to third parties is also an exercise in ideological blindness. We can look back in time again and see how this kind of exercise lead to severe consequences in the long run. In the 90s, European regulators forced the national telecommunication companies to open their cellular infrastructure to third parties – the so called Mobil Virtual Network Operators or MVNOs. Immediately, hundreds of new mobile companies appeared everywhere in Europe. The Chess and Teletopia of the world forced the price of mobile communications rapidly down, as the plot was designed to achieve. However, once again market realities became impossible to beat. The ruthless law of economies of scale eventually won. Today, there are hardly any relevant MVNOs left. They have gone bankrupt or have been acquired by the incumbents.

The consequences of this regulatory experiment have nonetheless been a disaster for the old continent. Lower prices forced by the artificial introduction of the MVNOs, combined with few possibilities of mergers within state borders, have exhausted the balance sheets of European telecoms. This has badly limited the investment capacity in new infrastructure. As a result, Europe has gone from having a leading telecom infrastructure in the 90s to lagging behind USA and developed Asia countries. A serious collateral casualty has been the fall of the European telco equipment manufacturers. Specially Ericsson has been brutally hit. Its credit rating has recently been cut to «junk» by Moody’s.

Which would be the consequences of allowing third parties to feast on data today owned by Google, Facebook and Amazon? How would it affect the appetite of those tech titans for investments in Artificial Intelligence and other technologies that may be key for the development of our society ?

I really hope our politicians never fall to the temptation of trading the progress of humanity for an instant and temporary ideological satisfaction.

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Forfatter: Salvador Baille

Daglig leder ved Intelis, et rådgivingsfirma med fokus på Innovasjon og teknologiledelse.

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