The Tech Barons’ Ideological Platter

Many people are troubled by the growing power and abuse of today’s leading tech barons:  Alphabet (Google), Apple, Meta (Facebook), Amazon, and Microsoft. Nonetheless, the prevailing view among Americans is that the big tech platforms promote innovation.

In a 2019 Pew Research Center study, for example, many Americans distrusted two groups in particular: the leaders of tech companies and members of Congress. Americans rated tech CEOs and members of Congress far lower in empathy, transparency, and ethics than others in a position of power (such as military leaders, public school principals, police officers, or even local elected officials). Most Americans (77 percent) believe that tech leaders often behave unethically and can get away with it. Only members of Congress fared worse of the professions surveyed with 81 percent of Americans believing that the politicians act unethically all or some of the time. But once asked about innovation, the views of a majority of Americans change. Eighty-three percent believe that tech leaders are highly likely to fulfill their mission of building products and services that enhance our lives. Many Americans, however, were pessimistic about members of Congress accomplishing their mission, such as promoting laws that serve the public.

It is easy to see why. For example, in looking through the financial statements of Google, Apple, Facebook, and Microsoft over the past decade, it becomes apparent that these companies have spent billions of dollars annually on research and development (Amazon does not break out R&D separately in its annual reports, combining it with content). Over eleven years, these four companies collectively spent over $451.6 billion on R&D. To put that number in perspective, their combined R&D expenditures over eleven years exceeded the gross domestic product of over 160 countries in 2020.

But as our new book ‘How Big-Tech Barons Smash Innovation—and How to Strike Back’ (HarperCollins 2022) shows, the reality (including R&D expenditures) is gloomier. While tech giants invest in some innovations, they also stifle plenty. In their quest to protect their power, these tech barons deploy multiple weapons to identify and quash innovations that may disrupt their ecosystems’ value chain. Instead of disruptive innovations that create value, we receive innovations that sustain and fortify their power and profits.  As we argue in our book,

• The major tech platforms design their ecosystems to favor their interests, at the cost of crushing beneficial innovations.
• The value chain of these companies dictates the type and scope of innovation that one will find, and in looking at the value chains, we can predict that innovations will become scarier (envision virtual reality headsets that can decode one’s emotions and private thoughts).
• Even if one can avoid some—or all—of their ecosystems, one cannot avoid the toxicity of some of their innovations.
• Finally, while the tech barons are in the news for the mounting investigations and lawsuits by antitrust enforcers around the globe, and the proposed legislative reforms to rein them in (such as Europe’s Digital Markets Act, Digital Services Act, and Data Act), the likely relief, if any, will not fix the underlying problems.

Steak versus Cabbage

The discussion of how to advance innovation requires a nuanced approach. This is so, in particular, due to the mixed effects generated by the major digital platforms. And yet, as we were interviewing individuals in researching for our book, we noticed how some policymakers rejected a nuanced approach—instead, they saw the topic of innovation through a binary lens. One US policymaker, for example, waved us off when we raised the concept of toxic innovation. For her, any doubt or proposal for intervention would lead to the demise of innovation. She told us how when she was fourteen years old, she traveled through the then-Communist-governed Eastern Bloc countries and ate cabbage every night. ‘When you limit the freedom of companies to operate and innovate, you’ll get a centrally planned economy’, she warned us. ‘You’ll end up eating cabbage every night. I prefer the steak in a free-market economy’.

So do we. But that’s not a choice society needs to make. The alternative to the tech barons’ innovation feudalism is not the absence of innovation and Soviet-era meatloaf and cabbage.

Yet, even when startups that offer dynamic innovations (we call these startups ‘Tech Pirates’) are being eradicated, and the innovation kill zones expand, many policymakers and enforcers still hesitate. While careful consideration of the costs and benefits is crucial to refrain from chilling innovation, the binary approach may lead enforcers to refrain from acting. Consider, for example, US Republican Senator Rand Paul, who recently opined: ‘Rather than pursue even stronger antitrust laws, Congress should allow the free market to thrive where consumers, not the government, decide how big a company should be’. That ideology is wrong on several fundamental levels—namely, this vision of a ‘free market’ does not reflect the reality of the many captured markets dominated by a handful of tech giants.

Nonetheless, the binary innovation rhetoric’s impact is pervasive. Even when we look at antitrust enforcement, which has intensified in recent years, the cabbage/steak imagery still captivates the debate.

The Ideological Platter

The result is an ideological platter that appears substantive but consists of empty calories. Our book explores six mantras about innovation repeated so frequently by interested parties that seek to capture the debate and push aside any nuanced discussion that they are often accepted as true. One major mantra is: ‘What the tech barons deliver, others cannot’.

When we asked economists about myths involving innovation, most identified this one: the belief that the large digital platforms are the most innovative companies in the world. The economists noted how the tech barons’ innovations are primarily sustaining and have added relatively little value in recent years.

Nonetheless, when Epic Games challenged Apple’s exclusionary and restrictive practices involving its App Store in court, Apple replied that its ‘App Store encourages vigorous competition between apps and is an engine of innovation’.  This reply omits the darker sides of Apple’s strategies.

Platforms are indeed central to the digital economy. They offer important matchmaking functions and can deliver efficiencies by, among other things, lowering the cost to innovate. But the tech barons can influence the demand and supply of innovation both within and beyond their sprawling ecosystems. Once we account for the decline in innovation plurality, the tech giants no longer appear as the engines of innovation.

And then there is the reference point. The steak-versus-cabbage story posits the current scenario with an even worse scenario, a centrally planned economy. But communist and socialist countries can point to the innovations in their economy and how they are better than other despotic regimes. After all, no matter how bad things are, undoubtedly, one can point to a worse situation (or worse place to live).

The problem with disruptive technologies is that it is hard to predict the counterfactual. Since the tech barons dominate so many jurisdictions, we cannot say how the technological landscape would appear today if the digital economy were contestable. But there would likely be many more startups whose disruptive innovations create value. For example, that only two app stores predominate does not mean that only Apple and Google can provide app stores. Other app stores exist, and absent Apple’s and Google’s restraints, these app stores would likely contain far more apps.

The fact that Apple’s and Google’s app stores are growing does not mean the market is competitive. Network effects work in the tech barons’ favor. In limiting access to other app stores on their platforms, Google and Apple ensure that we turn to their app stores, which requires app developers to use Google and Apple. So, the fact that the Google and Apple app stores grew in size does not mean customers are rewarding the tech barons for their innovations (or, more accurately, the innovations they allow into the ecosystem). Instead, it can simply represent the lack of viable competitive alternatives.

Nor are the tech barons the primary originators of digital innovation. Instead, as a 2021 Harvard Business Review article notes, ‘much of the technology we rely on every day runs on free and open-source software (FOSS). Phones, cars, planes, and even many cutting-edge artificial intelligence programs use open-source software such as the Linux kernel operating system, the Apache and Nginx web servers, which run over 60% of the world’s websites, and Kubernetes, which powers cloud computing’. One concern is that the tech barons are appropriating the free software that creates value for the whole community, and wall it off so that ‘they were the only ones who could capture value from it’. The HBR article notes how Amazon took a version of the search engine Elasticsearch that Elastic had made open source, repackaged it, and sold it to their customers under nearly the same name. Elastic argued that essentially Amazon took free code that created value for the whole community and walled it off so that they were the only ones who could capture value from it.

Another crack in the ideology is that we don’t see the Tech Pirates’ disruptive innovations that have been killed or stifled. Nor do we see any of the tech barons’ innovations that could potentially disrupt their ecosystems. Consider Bell Labs, which, as Tim Wu recounted, collected ‘seven Nobel Prizes, more than any other corporate laboratory, including one awarded in 1956 for its most renowned invention, the transistor, which made the computer possible’. But we never saw the many innovations that AT&T stifled (like magnetic tape and the answering machine).

So, we do not see the closet of shelved technologies that the tech barons perceived as threatening their ecosystem’s value chain or all the Tech Pirates buried in the backyard.

But it simply isn’t killing threatening innovations. The tech barons have the incentive and ability to favor their payment plans, privacy products, apps, and private label products over rivals to extract more value. Innovation and competition, as a result, suffer.

Indeed, as their app stores grew, so too did Apple’s and Google’s profits. Apple’s revenues from services, where its app store is a key driver, reached $16.9 billion in the second quarter of 2021. Its gross profit margins from services reached a record 70 percent in 2021. That is 12 percent higher than its 2018 fiscal year when the company first began disclosing service margins. Apple’s operating margins for its app store are estimated to be even higher (over 75 percent) for 2018 and 2019. A 75 percent gross margin dwarfs what other monopolies and oligopolies enjoy—such as tobacco products (44.2 percent) or even Apple’s products segment, which had 36 percent gross margins in 2021. So, when Apple imposes a 30 percent tax on app developers, we ultimately pay with higher prices and receive less innovation.

Consequently, while the tech barons innovate, their innovations on their core products have been primarily incremental, sustaining innovations within their value chain. But many innovations, as our book explores, extract or destroy value. Plus, we lose when they kill the Tech Pirates, shelve their disruptive innovations that threaten their value chain, and reorient the innovation paths to fortify their ecosystems. We should not resign ourselves to the tech barons’ self-interested claims that innovation can only flourish within their closed ecosystems.

Why the Ideological Platter, Even When Exposed, Remains Hard to Resist

The above mantra and others we discuss in the book fit into a broader free-market narrative that assumes large players won the competition fairly and have the edge over others. The tech barons have poured a lot of money into trusts, grant providers, think tanks, and academic institutions to propagate this ideological platter.

While some policymakers know something is amiss, many don’t. For example, judges targeted in training programs funded by companies and foundations affiliated with companies, ‘were more likely to approve mergers, rule against environmental protections and organized labor, and use economic language in rulings compared to judges who did not attend’. When all you need as a tech baron is to raise marginal resistance to change (or sufficient doubt), the money is well spent.

The result? Even though competition authorities around the world are now challenging most of the tech barons, the lethal cocktail of ideology and lobbying has led the courts to marginalize antitrust—some repeat these half-truths without ever critically examining them.

So, What Can We Do?

Debunking the innovation narrative is a necessary, but not sufficient, step to rein in Big Tech and stem the flow of toxic innovation. Our book explores why betting on the tech barons and their ecosystems for the disruptive innovations to solve today’s problems is such a terrible bet. Toward that end, our book offers three fundamental principles for policymakers (Value — which considers the type of innovation and asks whether it creates, destroys, or extracts value; Incentives – which asks who’s designing the ecosystem and influencing the innovation paths, what is the ecosystem’s value chain, and what incentives it fosters; and Diversity – which stresses the need to foster an effective competitive process that enables disruption and innovation plurality and offers Tech Pirates a viable opportunity to prosper). Our book also outlines two ways to operationalize these principles.

But, where should policymakers place their bets if not the tech barons? One startling insight, at least for us, is cities. We need to fundamentally overhaul our policies and invest in general research (which will benefit innovative startups), cities, regional innovation clusters, and more generally, in diversity. If we do so, then the digital economy will more likely help us address today’s critical challenges, rather than contributing to them. Nor will we be eating cabbage every night.

Maurice E Stucke is the Douglas A. Blaze Distinguished Professor of Law at the University of Tennessee (Knoxville) and a former Academic Visitor at the University of Oxford.

Ariel Ezrachi is the Slaughter and May Professor of Competition Law at the University of Oxford.

This post was originally published on ProMarket, the blog of the Stigler Center at the University of Chicago Booth School of Business.