In our previous commercial awareness articles, we have written about the effects big data, cyrptocurrency, and blockchain are having on the markets and the legal challenges that come with them. As previously noted, whilst some of these advancements are advantageous, they also run the risk of allowing large tech companies too much control which could be detrimental.
So in the final article in our commercial awareness series, we ask ‘how can ‘big’ tech be regulated better’?
The five most popular and best performing tech stocks in the market; Facebook, Apple, Amazon, Netflix, and Google (known as FAANG) retain their leading positions for four major reasons:-
- Network externalities – their search engine functions and matching platforms perform better when more consumers use them thus making it challenging for new market entrants to compete. A market without serious competitors gives tech companies consumer control as consumer choice is reduced.
- Data – collecting huge amounts of data on customers creates economies of scope and economies of scale because one type of activity creates advantages for another activity. For example, tech companies can exploit user activity patterns and provide targeted advertisements to entice their customers to buy related goods and services. Furthermore, this facilities individual price discrimination at a seriously unfair level as the more a company knows about a person, the more concentrated they can set their prices to which they know consumers will accept (which inevitably will be at the higher end the of the spectrum).
- Intangible nature of internet services – makes it easy for tech companies to avoid taxation as they are not physically resident in jurisdictions which their services run. Furthermore, they reap the benefits of a lower demand for human employees therefore very little of their returns need to pay for labour. Tech companies are also able to utilise data gathered and slither into a broad range of traditional industries thus extracting economic surplus from them, taking out competitors and enjoying monopoly and high profit rewards.
- Internet business activities –are designed to be addictive, especially social media platforms. This exaggerates the consequences of the attributes mentioned above.
There are two main ways to overcome these threats:-
- Tax – Tech companies have been able to grow to such large sizes because they do not satisfy the traditional test of competition (which is whether the price of their products and services are being driven up for consumers) as many of their services are provided free of charge. The advancement of Big Tech has highlighted the change of importance of labour to capital therefore we should look at business profits rather than product prices when enforcing tax rules. We should also look at other factors. For example, India has begun taxing online companies based on how many users they engage with even if they aren’t physically present in the country.
- Regulation – There are two proposed policies; those which regulate digital market behaviour and those which regulate the structure of the digital market. An example of behavioural regulation would be to make consumers the authors of their own activity and providing them with legal protection over the information they create. The General Data Protection Regulation (GDPR), due to come in force in May 2018, is a step in this direction as it is strengthening the term ‘consent’ for EU citizens. With regards to structural regulation, the government could demand Big Tech companies to break up into smaller companies, however, this idea is flawed because the smaller tech companies would just grow again and we would have the same problem again. Furthermore, this could have a terrible domino effect on the economy as tech companies would demand other industries to follow the same procedure. This would likely kill innovation in all industries and bring the economy to a halt. Instead, the government could work with Big Tech companies and demand they share their data with the government so that the government can create public apps, such as something similar to Uber, thus taking monopoly away from the Big Tech companies.
Whatever the government decides to do, they must do something, and quickly. Day by day the legal challenges posed by big tech grows, and we are already seeing the consequences of a failure by to keep up.
It will be interesting to see how the legal industry responds.