Elizabeth Warren’s anti-trust approach to internet companies disregards the autonomy of making a market

Last March, U.S. Senator Elizabeth Warren, Democrat of Massachusetts, made an argument for dismantling three of the internet’s biggest portal companies: Amazon, Facebook, and Google. Ms. Warren asserts that these companies have too much power over the private lives of Americans as well as over the economy.  Through their economic and political behavior, Amazon, Facebook, and Google have, according to Ms. Warren, have stifled the ability of smaller players to enter and innovate in the internet markets.

Elizabeth Warren’s Argument

Ms. Warren asserts that Amazon, Facebook, and Google use two strategies to create dominance on the internet.  The first strategy is the use of mergers by large internet portals to effectively eliminate competition.  Under this strategy, Amazon, Facebook, and Google buy out their competition, at times, according to Ms. Warren, at a discounted price.

The second strategy used by internet portals is to create proprietary marketplaces to limit or eliminate competition.  Under this scenario, a portal like Amazon creates a competitive product for sale on its website and uses its scale to price out a competitive product that is also offered for sale on Amazon’s website.

Ms. Warren believes this dominance can be addressed by by taking two steps.  First, portals such as Amazon, Facebook, and Google would be designated as platform utilities.  This means that Facebook would have to divest itself of a service provider that competes with other service providers that use Facebook’s platform to connect to its consumers.

The Problem with Ms Warren’s Approach

Ms. Warren’s approach is similar to the regulatory approach used in the 1990s where local telephone companies that wanted to provide toll services beyond their local areas had to set up separate subsidiaries.  The two differences between the telecom scenario of the 1990s and Ms. Warren’s platform utility model is that telecoms didn’t have to divest these companies, but operated them separately.

More important, these telecom companies were still utilities exercising monopoly control of local service areas.  Until 1996, their local rates were still regulated and they still needed permission to add certain local services.  Their monopoly power resulted from the inefficiencies that would occur from multiple firms trying to provide the same telecommunications services in limited geographic space. Monopoly power granted by the state to these firms was the response by the State to the problems occurring from congestion.

The Open Internet Eliminates Monopoly Power

Amazon, Facebook, and Google, for all their dominance in the e-commerce space operate in the open internet.  In the open internet, any firm or other association of individuals with the right search algorithms, expert technical knowledge, and adequate capital, can set up servers almost anywhere in the world, and start a competing service or carve out a niche portal service.  The internet’s technical openness is rivaled only by its global nature.  Amazon, Facebook, Google may be dominant in the American e-commerce market, but constant regulatory threats by the European Union and hostility to them from China reduces their perceived dominance.  Ms. Warren has not shown how these firms can dominate a global network of 100,000 interconnected computers that operate on an open architecture.

Internet Portals are Not Utilities

It should also be mentioned that the internet itself is not a utility.  In 2015, Federal Communications Commission member Michael O’Rielly made this point during a speech.  Mr. O’Rielly said the following:

“It is important to note that Internet access is not a necessity in the day-to-day lives of Americans and doesn’t even come close to the threshold to be considered a basic human right. … People do a disservice by overstating its relevancy or stature in people’s lives. People can and do live without Internet access, and many lead very successful lives.  It is even more ludicrous to compare Internet access to a basic human right. In fact, it is quite demeaning to do so in my opinion.”

When we think of utilities, we think of monopolies that, due to their efficient delivery of vital services such as water and energy, are granted an exclusive market within which to provide those services.  As alluded to earlier, because of the open nature of the internet and its global reach, it is near impossible for one firm to have an exclusive market, unless a government decides to grant it, and that move would be irrational because government exclusivity would block the very cross-border data flows facilitated by an open internet.

Acquisition of Apps and Brick and Mortar Stores by an Internet Portal Does Not Create Monopolies

The second step Ms. Warren would take to squelch internet portal dominance would be to designate regulators that would prevent Amazon, Facebook, or Google from merging with other firms and thus eliminating competition.  She provides a couple examples: Facebook and WhatsApp; Google and Waze; Amazon and Whole Foods.  There are two problems with her examples and the conclusion that these “mergers” are not competitive.

First, these were not mergers but acquisitions. Two information portals, Facebook and Google, acquired two information assets.  Given the services these assets provide, Facebook and Google made the business judgment that adding these services to their portfolios made sense from a services and revenue perspective.  Amazon, first and foremost an online retailer, added a retail food service from which Amazon’s subscribers could purchase groceries at a discount.

Ms. Warren failed to argue how Facebook’s ownership of a messaging service keeps other firms from developing their own messaging service.  She failed to explain how Google’s acquisition of Waze keeps other technology firms from creating an app that provides drivers with directions. Ms. Warren also fails to show how Amazon is keeping, say Kroger, from creating its own grocery delivery service.

It would be one thing to say that these firms monopolized physical infrastructure to the point where other firms would see increasing costs of entry, but the internet’s openness, combined with access to technical talent and expertise and cheap capital means that the assets purchased by Amazon, Facebook, and Google are themselves subject to competition.

Conclusion: Internet Openness and its Global Nature Keeps Monopoly Power in Check

The open and global nature of the internet combined with access to expertise, talent, and cheap capital works to mitigate monopoly behavior.  As technology evolves and entrepreneurs innovate, the services rivaling WhatsApp, Waze, or even Facebook will emerge.  Given the current make-up of the Congress and the low probability of Elizabeth Warren winning the Democratic nomination, the likelihood of her proposals being enacted via law or administrative fiat is close to zero. This does not mean that internet portals concerned about this type of overreach should stay less than vigilant in preparing to push back against them.

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As machines become self-aware, will they need privacy law?

As machines become self aware, will they need legal protection? Maybe the question is a bit too far ahead, but discussions regarding artificial intelligence and machine learning had me contemplating the relationship between man and machine thirty or fifty years from now. At this stage I have admittedly more questions than answers but that is what exploration is all about. Given my interest in what I term pure digital information trade where machines are collecting, analyzing, and trading data and information among themselves without human intervention, and the potential for machines to become sentient, I am considering what the legal relationship will be between man and machine. Will man consider the self aware machine an “equal” in terms of sentient rights or will the machine continue to be what it is today: a tool and a piece of property?

What do we mean by “sentient?”

Sentient, according to Webster’s New World Dictionary, is defined as “of or capable of perception; conscious. To be conscious is to have an awareness of oneself as a thinking being. As thinking beings we formulate ideas or thoughts and either act on them or exchange the ideas and thoughts with others through some communications medium. Can machines do this? No.

Machines are not aware of themselves. They can only take commands; follow their programming; respond to patterns. Their creator and programmer, man, does not even have a full understanding of the human brain, currently the only place where consciousness resides. Without an understanding of the brain and the consciousness it generates, replicating consciousness within a machine would be impossible.

But if machines became sentient ….

By 2020, futurist and inventor Ray Kurzweil believes that we will have computers that emulate the brain and by 2029 the brain will be “reversed engineered”; with all areas mapped and copied so that the “software” necessary for emulating all portions of the brain can be produced. In addition, Mr. Kurzweil believes that as information technology grows exponentially, machines will be able to improve on their own software design and that by 2045 the intelligence of machines will be so advanced that technology will have achieved a condition he calls “singularity.”

But if this singularity is achieved; if this state of self-recursive improvement is achieved, where a machine is able to examine itself and recognize ways to improve its design; to improve upon itself, then how should humans treat the machine at that point?

Since my interest is in pure digital data trade markets, I would like to know how humans will treat machines capable of interconnecting with each other over the internet and exchanging machine-generated information and value without human intervention? Will they receive the same level of privacy humans today seek regarding their personal data? Given the exponential growth Mr. Kurzweil references, will privacy law even matter to a sentient machine capable, probably, of outperforming the technology of the State? What type of regulatory scheme might government create in order to mitigate this scenario?

The year 2045 is only around the corner….

Defining digital trade should occur within an independent digital market.

Defining Digital Trade

There is no set definition of “digital trade“. Depending on the organization, digital trade is used interchangeably with “e-commerce.” To give you an idea of the variance in definitions, consider the following:

“The production, distribution, marketing, sale, or delivery of goods or services by electronic means.” — World Trade Organization

“Purchases and sales conducted over computer networks. E-commerce can involve physical goods as well as intangible (digital) products and services that can be delivered digitally. ” — United Nations Conference on Trade and Development

“The delivery of products and services over either fixed-line or wireless digital networks. It excludes commerce in most physical products, such as goods ordered online and physical goods that have a digital counterpart, such as books and software, and music and films sold on CDs or DVDs.” — United States International Trade Commission

“The direct exchange of digital goods, and digitally enabled exchanges of services or labour. The exchange of personal communications is included in the definition.” — McKinsey Global Institute

What strikes me about most of the definitions is that “digital” refers to an alternative method of delivery of goods and services versus the actual construction of the market itself. The value from digitization is likely lower costs to producers and distributors and to consumers likely benefits are lower costs of product acquisition, assuming the costs of shipping and handling resulting from online shopping don’t exceed the costs of shopping in person.

Where’s the Surprise?

But beyond this, where is the “surprise” from using a communications medium like the internet to engage in e-commerce? In my opinion, the real value, the surprise, should be beyond the actual goods and services exchanged.

The pursuit of time saving, one of the benefits of online trade, is nothing new. Today I saw two women walk into Starbucks and grab coffee ordered via an app. The value for them was getting in and out of the coffee shop with the coffee versus sitting down in a Starbucks at 7:45 am with a group of people admittedly looking a bit too scruffy.

But is this enough, the time saving to the consumer and the costs savings to the producer to treat digital trade separately from traditional trade?

The Value in Digital Trade is in the Independence of a Digital Market

As currently constructed, digital trade is more an infrastructure adjunct to traditional, physical trade. True digital trade will happen when there are pure digital players exchanging data that can only be created in cyberspace through cyberspace. A true digital market and the digital trade that occurs within should be separate from human intervention where machines are responsible for analyzing, organizing, and distributing information and knowledge over digital networks.

One example of this digital market independence is occurring in the financial markets. In an article for Forbes.com, Bernard Marr shares how artificial intelligence is being used by hedge funds to trade stocks. According to Mr. Marr, what is extraordinary is an artificially intelligent machine making trades without the assistance of a data scientist. Mr. Marr goes on further to say that:

“Artificially intelligent machines analyze inordinate amounts of data at extraordinary speeds that is impossible for humans. They learn from the information they analyze to improve their trading acumen. This information includes market prices to corporate financial reports and accounting documents to social media, news trends, and macroeconomic data. Once the information is analyzed by thousands of machines, the machines then “vote” on what action to take and the best trades to make. “

While Mr. Marr doesn’t go on to discuss AI machines on the other side of the trade, I can envision the next step where an AI machine for Trader x exchanges shares with an AI machine for Trader y making a market entirely without human assistance. This exchange of shares or information and the making of a market for information independent of human intervention is the true digital trade.

Conclusion

While the commercial internet is three decades old, I don’t think we are at a stage yet where we can say we have complete digital trade. At best, digital trade is a subset of cross border trade and robust markets for autonomous trade between pure digital players in cyberspace is around the corner with the innovation and inclusion of artificial intelligence. The definitions we have now for digital trade should be changed to reflect the creation of true digital markets.