Your five minute guide to what's happening in tech

×

The House antitrust subcommittee, chaired by Rep. David Cicilline, concluded that Facebook has monopoly power in the market for social networking.

Photo: Bloomberg/Getty Images
House Democrats say Big Tech has ‘monopoly power.’ Here’s what they mean.
Politics

House Democrats say Big Tech has ‘monopoly power.’ Here’s what they mean.

Here are the most important findings and recommendations from the House antitrust subcommittee's report.

The House Judiciary antitrust subcommittee has spent over 15 months aggressively investigating the dominance of the country's largest tech firms. On Tuesday, it published its findings — along with proposals for how to deal with Big Tech's power.

The investigation sought to draw conclusions about how to rein in what they see as the monopolists of our time: Facebook, Google, Amazon and Apple. The culmination of studying millions of documents and taking hundreds of hours of meetings is a 449-page final report, laying out what Congress has discovered about the inequalities of the digital marketplace.

Get Protocol straight into your inbox

The Democrats were ultimately unable to convince any Republicans to sign onto their report, but several GOP members of the subcommittee offered their own separate proposals, signaling some level of bipartisan interest in changing the status quo around Big Tech. It's one of the most serious congressional efforts to oppose corporate power in decades.

"To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons," the report says. "During the investigation, subcommittee staff found evidence of monopolization and monopoly power."

The Democratic report is a highly anticipated document that could indelibly shape the future of antitrust law in the U.S.

Here are some of the most important passages from its findings and recommendations.

Facebook

  • "[A] senior executive at the company described its acquisition strategy as a 'land grab' to 'shore up' Facebook's position, while Facebook's CEO said that Facebook 'can likely always just buy any competitive startups' and agreed with one of the company's senior engineers that Instagram was a threat to Facebook."

Facebook has consistently been charged with buying its way to dominance, an anti-competitive strategy that emerges over and over again throughout the report. Here, the subcommittee cites an email that Mark Zuckerberg sent in April 2012, shortly after the company acquired Instagram. In the email, marked "CONFIDENTIAL ANNOUNCEMENT," Zuckerberg suggests that Facebook acquired Instagram because it was a competitive threat. "One reason people underestimate the importance of watching Google is that we can likely always just buy any competitive startups, but it'll be a while before we can buy Google," he wrote.

  • "More recent documents produced during the investigation by Facebook show that it has tipped the social networking market toward a monopoly, and now considers competition within its own family of products to be more considerable than competition from any other firm."

One of the juicier tidbits the committee collected during the investigation is something it calls the Cunningham Memo, which is the document discussed in this passage. Drafted in October 2018 by Thomas Cunningham, a senior data scientist and economist at Facebook, the memo was prepared for Zuckerberg and was meant to guide Facebook's growth strategy, according to a former Facebook employee the committee interviewed. That memo essentially concluded that the network effects for Facebook's family of apps were "very strong" and that the apps within that family posed a bigger threat than anything outside of it.

  • "There was brutal in-fighting between Instagram and Facebook at the time. It was very tense. It was back when Kevin Systrom was still at the company. He wanted Instagram to grow naturally and as widely as possible. But Mark was clearly saying 'do not compete with us.'"

This quote comes from an interview the committee conducted with a former Instagram employee who was involved in preparing the Cunningham Memo. According to the report, the employee told the committee Zuckerberg was engaging in "collusion, but within an internal monopoly" and said that kind of behavior should be illegal. "If you own two social media utilities, they should not be allowed to shore each other up," the employee said, according to the committee.

  • "Facebook used its data advantage to create superior market intelligence to identify nascent competitive threats and then acquire, copy or kill these firms. Once dominant, Facebook selectively enforced its platform policies based on whether it perceived other companies as competitive threats."

It's been widely reported that Facebook identified WhatsApp as an acquisition target by analyzing app usage through Onavo, a VPN app that Facebook also acquired. In the report, the committee cites internal documents that suggest Facebook data scientists had been monitoring WhatsApp to see if it was "killing Messenger," Facebook's own chat app.

- I.L.

Google

  • "Documents show that Google used its search monopoly to misappropriate content from third parties and to boost Google's own inferior vertical offerings, while imposing search penalties to demote third-party vertical providers."

Google has often been accused of edging out would-be competitors, such as the local business directory Yelp, by creating niche search products of its own. In its report, the committee points to internal documents that show Google executives were concerned about these so-called "vertical" search products as early as 2005. "Vertical search is of tremendous strategic importance to Google," one internal message reads. "Otherwise the risk is that Google is the go-to place for finding information only in the cases where there is sufficiently low monetization potential that no niche vertical search competitor has filled the space with a better alternative."

The subcommittee points to Yelp as a prime example of Google misappropriating data from competitors. In 2010, Google launched Google Local, a Yelp competitor, and licensed Yelp data to power its listings. When Yelp asked for that data to be removed from Google Local, internal communications show that Google said that would require removing Yelp from search altogether. "In short, Google weaponized its search dominance, demanding that Yelp surrender valuable content to Google's competing product or else risk heavy losses in traffic and revenue," the subcommittee writes.

  • "Google appears to be siphoning off traffic from the rest of the web, while entities seeking to reach users must pay Google steadily increasing sums for ads."

This passage refers to the blurring lines between Google's organic search results and Google ads. The committee cites interviews with multiple web publishers who said they've been forced to buy ads from Google just to compete with it. "Google thus deceptively siphons internet traffic away from its vertical competitors in online travel and forces them to pay more for [search engine monetization] and Ads in order to get meaningful placement on Google's [search engine results page]," one publisher said, according to the report.

  • "Documents show that Google required smartphone manufacturers to preinstall and give default status to Google's own apps, impeding competitors in search as well as in other app markets."

The committee reserves special scrutiny for the way Google has used its foothold in hardware through the Android operating system to boost its software, including Google Search. The report points to the company's Mobile Application Distribution Agreement, which "specifies which apps Google requires hardware manufacturers to preinstall and where on the phone the apps should be placed," the subcommittee writes. It also points to other anti-competitive agreements Google struck with device manufacturers, including one in which Google forbid manufacturers from preinstalling any app "which is the same or substantially similar to a Google Search Client or the Google Search Services."

  • "Internal communications also reveal that Google exploits information asymmetries and closely tracks real-time data across markets, which — given Google's scale — provide it with near-perfect market intelligence."

Just as they were concerned that Facebook used Onavo to track potential acquisitions, the committee also criticizes Google's use of its search data to monitor its competition. In one internal document from 2009, a member of Google's Chrome team wrote a message explaining that the company could use Gmail data to compare the performance of different browsers. "It's quite clear which browsers are faster," the employee wrote. That's insight that the subcommittee argues could provide Google Chrome with a competitive advantage.

"Through linking these services together, Google increasingly functions as an ecosystem of interlocking monopolies," the subcommittee writes.

- I.L.

Apple

  • "Apple has maintained its dominance due to the presence of network effects, high barriers to entry and high switching costs in the mobile operating system market."

Apple has evaded much of the techlash that defined the last few years, but the report makes it clear that the subcommittee believes there's significant antitrust issues around the way Apple operates its App Store. Based on extensive conversations with app developers, the subcommittee claims that Apple is making life hard for smaller players and potential rivals by holding them to excessively high standards and keeping them locked into their arrangements on the App Store.

  • "In the absence of competition, Apple's monopoly power over software distribution to iOS devices has resulted in harms to competitors and competition, reducing quality and innovation among app developers, and increasing prices and reducing choices for consumers."

It's hard to argue that Apple has a monopoly over hardware, but the report says that Apple has exercised "monopoly power" over iOS devices, harming consumers in the process. Developers have been pushing back against the company's App Store practices recently, making similar arguments about how they deem the market's constraints to be unfair.

-E.B.

Amazon

  • "Although Amazon is frequently described as controlling about 40% of U.S. online retail sales, this market share is likely understated, and estimates of about 50% or higher are more credible."

In order to build a successful antitrust case against a company, you first have to define which market it's monopolizing and then you have to prove that it dominates that market. So it was important for the report to clarify that the subcommittee believes Amazon has "significant and durable market power," specifically in U.S. online retail sales. (Amazon has said previously that it couldn't be a monopoly because sales on its site only amount to a small fraction of all sales that happen in the U.S.) It's generally held that less than a 50% market share is insufficient to bring a proper monopolization claim.

  • "Publicly, Amazon describes third-party sellers as 'partners.' But internal documents show that, behind closed doors, the company refers to them as 'internal competitors.'"

Progressive antitrust experts like Lina Khan, one of Cicilline's top staffers, have long accused Amazon of gaming the system in its favor as it operates its powerful online retail platform while simultaneously selling its own products on that platform. The report says Amazon has an "inherent conflict of interest" as it operates a marketplace and sells on that marketplace.

  • "Finally, Amazon Web Services (AWS) provides critical infrastructure for many businesses with which Amazon competes. This creates the potential for a conflict of interest where cloud customers are forced to consider patronizing a competitor, as opposed to selecting the best technology for their business."

There's been little discussion of Amazon Web Services, Amazon's lucrative cloud-computing arm, throughout the hearings for the antitrust investigation. But it's well known that a significant proportion of Amazon's revenue is derived from AWS. Here, the report makes a fairly novel argument: that Amazon's ownership of AWS could amount to an antitrust violation.

-E.B.

Recommendations

  • "Subcommittee staff intends for these recommendations to serve as a complement, not a substitute, to strong enforcement of the antitrust laws. This is particularly true for acquisitions by dominant firms that may have substantially lessened competition or tended to create a monopoly in violation of the Clayton Act. In these cases, subcommittee staff supports as a policy matter the examination of the full range of remedies — including unwinding consummated acquisitions or divesting business lines — to fully restore competition that was harmed as a result of these acquisitions and to prevent future violations of the antitrust laws."

Congressional investigations often serve dual purposes: They can both result in legislative proposals and put pressure on antitrust enforcement agencies to act more aggressively. Here, the subcommittee is making it clear that it believes the enforcement agencies should act far before any legislation gets through — specifically, it thinks the agencies should look into unwinding mergers to fix the market sooner rather than later. Facebook's acquisitions of Instagram and WhatsApp are the obvious candidates.

  • "To address this underlying conflict of interest, subcommittee staff recommends that Congress consider legislation that draws on two mainstay tools of the antimonopoly toolkit: structural separation and line of business restrictions."

This is the "breakup" everyone's always talking about — the one that Republicans have vehemently opposed. On a call with reporters on Tuesday, a counsel for the antitrust subcommittee emphasized that Congress cannot call for breaking up particular companies; it can only pass legislation that would make certain business practices illegal across the tech industry.

These would be the most ambitious fixes to the antitrust problems the subcommittee identified, but also, by far, the hardest to get through Congress, even if Democrats swept the House and White House in November.

  • "Nondiscrimination rules would require dominant platforms to offer equal terms for equal service and would apply to price as well as to terms of access."

These proposals would put the largest tech firms under a whole new framework of regulatory scrutiny. They could allow Congress to bar Google from giving preference to its own results in search or Amazon from boosting its own products. It's similar to public utility-style regulation that, for instance, companies like AT&T and Verizon already work under. It's also one of the tech industry's worst nightmares.

  • "The subcommittee recommends that members consider codifying bright-line rules for merger enforcement, including structural presumptions. Under a structural presumption, mergers resulting in a single firm controlling an outsized market share, or resulting in a significant increase in concentration, would be presumptively prohibited under Section 7 of the Clayton Act."

That's a lot of words to say: The government should automatically block mergers that result in market concentration. Republicans will hate it.

  • "Since 1998, Amazon, Apple, Facebook and Google collectively have purchased more than 500 companies. The antitrust agencies did not block a single acquisition."

The report ends by listing out each of the acquisitions by the companies since 1998. They say those acquisitions, taken together, reveal the Federal Trade Commission and Department of Justice are not acting aggressively enough to intervene as the digital economy becomes more and more concentrated in the hands of a small number of companies

  • "Since startups can be an important source of potential and nascent competition, the antitrust laws should also look unfavorably upon incumbents purchasing innovative startups. One way that Congress could do so is by codifying a presumption against acquisitions of startups by dominant firms, particularly those that serve as direct competitors, as well as those operating in adjacent or related markets."

The big tech firms rely on acquiring small startups to boost their own businesses and continue "innovating." Any rule along these lines from Congress to stop that from happening would interrupt a central dynamic of the tech industry. During the most recent hearing, Rep. Kelly Armstrong said his "only concern with that is a lot of these companies build themselves solely for the purpose of getting bought."

  • "The subcommittee recommends clarifying that proof of recoupment is not necessary to prove predatory pricing or predatory buying, overriding the Supreme Court's decisions in Matsushita v. Zenith Ratio Corp., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., and Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Company."

This trio of Supreme Court decisions has made it much harder to sue companies for predatory pricing, which the subcommittee says the tech companies have engaged in. It's possible for Congress to pass legislation overturning Supreme Court rulings.

  • "Over the course of the investigation, the subcommittee uncovered evidence that the antitrust agencies consistently failed to block monopolists from establishing or maintaining their dominance through anticompetitive conduct or acquisitions."

A consistent theme of the report is that the FTC and DOJ have not done enough to intervene as the big tech firms gobbled up hundreds of smaller companies and leveraged their market power to get bigger and crush rivals. Any bipartisan antitrust legislation in the future will almost certainly give more money and resources to the FTC and DOJ to help them enforce the antitrust laws more effectively.

  • "Subcommittee staff recommends that Congress revive its long tradition of robust and vigorous oversight of the antitrust laws and enforcement, along with its commitment to ongoing market investigations and legislative activity. Additionally, greater attention to implementation challenges will enable Congress to better see its reform efforts through."

The subcommittee has made it clear that it doesn't want this investigation to be a one-off endeavor. They hope it paves the way for more lengthy congressional investigations into corporate power and antitrust enforcement across a range of industries. Cicilline and his staff have long maintained that they are just reawakening the congressional tradition of oversight — and there's more where this came from.

-E.B.

Latest Stories