Harry Geels: The dilemma of breaking up Big Tech

October 22, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

On October 9, the US Department of Justice filed a lawsuit to break up Alphabet, with the secondary aim of forcing the company to make public the data it collects across various competing platforms. However, there may be other, better solutions to defend ourselves against oligopolies.

A social debate has arisen about the power of large companies, especially in Big Tech and Big Pharma. But there is also regular talk about Big Finance, Big Food and Big Energy. These sectors have acquired monopolistic or oligopolistic features. This is objectionable for several reasons, as previously explained in my column, The political-philosophical dilemma of oligopolies, in which the social advantages and disadvantages of oligopolies are contrasted. The balance here tips to the negative.

A major disadvantage of oligopolies is their power: lobbying power, pricing power (to the detriment of consumers) and fiscal power (global tax planning). Yet there are also advantages of oligopolies. They can optimize certain products through their power. For example, Google's de facto monopoly contributes to improving the quality of its search engine. And it can help Amazon efficiently offer a huge amount of products to consumers, while also offering smaller providers a global market.

New lawsuit against Alphabet

Big Tech in particular is in the crosshairs of politicians and alleged victims. The EU has already issued several high fines to well-known American tech companies. On October 9, the US Department of Justice (DoJ) filed a lawsuit against Alphabet. The DoJ has proposed both 'behavioral and structural solutions', including the possibility of splitting up Google's search business to prevent Google from using its other products, such as Chrome, Android and AI tools, to maintain its market dominance.

The unsurpassed Aswath Damodaran, Professor of Corporate Finance at the Stern School of Business in New York, has written an interesting 'long read' in response to this lawsuit. Damodaran first explains the matter historically, by looking at past splits, after which he lists the advantages and disadvantages of splits, and finally comes up with solutions for the power of Big Tech: 1) splits, 2) regulated monopolies, 3 ) goal-oriented changes, and 4) doing nothing.

Doubts about the usefulness of splitting up

With regulated monopolies we should, for example, think of price regulation, or consider the companies in question as utilities in which the government plays an important role, making it a public matter. Targeted changes include access to the platforms by third parties, or making Big Tech pay for use or user data. At the end of his story, Damodaran comes to the conclusion that breaking up is (too) complex and is not necessarily in the interests of the consumer (see the aforementioned advantages of the monopolies of Google and Amazon).

Also interesting is Damodaran's statement that oligopolies in technology tend to be temporary and that the market solves the problem by itself. They can also disappear again due to new disruptive technologies. Think of the rise and fall of Nokia and HTC (in favor of Apple and Samsung) or Intel. In a (short) time, certain tech companies can become powerful and achieve certain technological developments that were not possible within smaller companies. In that sense, bubbles can also be efficient.

Two comments

Finally, two comments, points to which Damodaran pays slightly too little attention. Consumers can benefit from certain technologies, but those products exist by the grace of those consumers, for example by exploiting their data. Given the enormous profits that Big Tech makes, there appears to be a wealth transfer from consumers to Big Tech (in this case its employees and shareholders). Strict regulation should ensure that consumers are rewarded for their data and use.

The second comment is that Damodaran's argument is mainly about Big Tech. Other dynamics apply to other sectors, such as pharmaceuticals and finance, where oligopolies also exist. The fact that the oligopoly of banks in the Netherlands demonstrably leads to, for example, lower interest rates for savers and higher mortgage rates (compared to other countries) - which means a wealth transfer from Dutch consumers to our banks - is something that calls for a different approach. Perhaps Damodaran can write about that too.

This article contains a personal opinion from Harry Geels

More columns by Harry Geels