Ceteris Paribus #8: The Access Act of 2019

Breaking down walled gardens in tech

Hey there,

It’s Mikal Khoso and welcome to Ceteris Paribus, a newsletter that deals with the topics, trends and questions at intersection of business, technology, economics, regulation and politics globally. If you haven’t already, subscribe here. If you liked this week’s edition and think someone else you know would find it interesting please take a couple seconds to share it via email or on social media.

This week’s key issue is a recent bill proposed in the US Congress around creating new standards for data portability and interoperability on social networks like Facebook, Whatsapp and Instagram. The bill is smart regulation and is thoughtful in how it defines large communication platforms, where it places the burden of adhering to regulation and the rights its gives consumers. If this bill is passed it will be a good start but alone it is not enough. Controls around privacy such as the California Consumer Privacy Act are needed at the federal level in the United States. But even more importantly regulation around tech companies use of their market power to dominate new product lines and industries is a critical part of comprehensive regulation of the industry. The regulatory and public focus so far has been on consumer privacy and rightly so. But the next phase of regulation must focus on opening up the space and protecting innovation and new business formation from the dominance and the never ending expansion of companies like Google, Apple, Facebook and Amazon.

Reply with questions, comments and feedback!

Have a great week,

Mikal

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Intellectual Sparks

Key Issue: The Access Act of 2019

“Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.”

- John Barlow, founding member of Electronic Frontier Foundation

The early days of the internet were marked by exuberant aspirations around the creation of a completely free, decentralised and ungoverned medium for human interaction, communication and one day commerce. The internet was envisioned as belonging to the people of the world, free from any one nation’s sovereignty and a system that would be free of control by any central authority. But the original dream of a free internet has been corrupted and the last two decades have seen the rise of giant internet corporations that have come to dominate the industry. These titans of tech now monopolize communication, search and commerce on the internet and their level of dominance in the internet economy is seemingly insurmountable.

The failure of the dream of a free internet is multifold. Not only has the internet come to be dominated by a few giant technology corporations (Facebook, Amazon, Apple and Google) but the internet has also been crafted into an apparatus of state surveillance and control at scale in China. Indeed, today the internet in China is a system of ubiquitous surveillance and has inspired many countries in the world to attempt to replicate China’s model. More importantly China’s technology ecosystem is going global with superstar firm Tik Tok rapidly becoming one of the most popular social platforms on earth. This puts users and their data increasingly at risk of being captured and used by the Chinese government. Tik Tok is now facing an impending national security review in the United States around these concerns.

A growing wave of scandals around the tech industry from Facebook’s Cambridge Analytica scandal to anticompetitive behaviour by Amazon, Apple and Google in the last three years has made regulation of the tech industry a central theme globally. Europe was first to institute regulation through the General Data Protection Regulation (GDPR) passed in 2016. While its implementation has been crude GDPR has given European internet users several powerful protections around their data and privacy and forced companies to allow users to view, change and delete any personal information stored about them easily.

GDPR inspired the recently passed California Consumer Privacy Act (CCPA) which was signed into law in California in June 2018. Now, this regulation may go national across the United States - the largest and most lucrative technology market outside of China and home to the world’s largest technology corporations. United States senators Warner, Hawley and Blumenthal recently introduced the “Augmenting Compatibility and Competition by Enabling Service Switching Act of 2019’’ or ‘‘ACCESS Act of 2019’’ for short.

Today the world of technology is dominated by “walled gardens.” The major technology corporations operate platforms that allow them to collect immense user data and make switching out of them or accessing the data they collect very difficult for users and businesses. The Access Act aims to chip away at, if not break down entirely, these walled gardens and help return aspects of the internet to a freer, more open system by reducing consumer and business switching costs.

The core principle of the Access Act is that data in itself is not valuable and useful but rather that the services and products built on top of and improved by data are what is valuable. Therefore, access to data is essential for creating valuable products for consumers and open access to data is crucial for a free and competitive technology market to create new products for consumers.

The Access Act specifies a few core requirements:

  1. Data Portability - Communication platforms are required to maintain application programming interfaces (APIs) to allow users to transfer their data easily and securely off the platform.

  2. Interoperability - Communication platforms are required to maintain interfaces (likely also APIs) to allow interoperable communications with users of other communication platforms.

  3. Data Security - Competing communication providers are required to ensure that they securely receive transferred data and protect it with high degrees of security.

  4. Usage Controls - The bill specifies that large communication platforms can establish “fair, reasonable and nondiscriminatory” usage expectations of these APIs and can charge reasonable, proportional fees for their usage.

The Access Act is centrally focused on freeing up data from “walled gardens” which reduces switching costs for users and opens up the aperture for new companies to innovate and create products for users. Importantly, the act defines a communications provider in the right way. A “large communications platform” is a business that:

  1. Generates income directly or indirectly from the “collection, processing, sale or sharing of user data.”

  2. Has 100,000,000 or more monthly active users.

By defining a communications platform in this way, the bill handicaps the main argument of Silicon Valley against regulation - that regulation will slow down innovation by increasing costs for startups, and by extension, that the relative burden of observing regulation is higher to startups than large incumbents. The bill ensures that costs of adhering to the Access Act fall primarily on large established tech companies who have the resources to do so. More importantly, these large tech companies also have the level of scale which grants them market power where being a “walled garden” suffocates innovation in a space.

Interestingly, the Access Act seeks to regulate the market for digital communications in the United States in much the same way the cellular communications market is regulated. Today, US consumers enjoy seamless interoperability between network operators like AT&T and Verizon, have clear product pricing and can easily switch their number to a new provider in just 48 hours. These benefits were all stipulated by the Federal Communications Commission across a series of laws and policy changes starting with the 1996 rules around wireline to wireline number porting. These regulations put the burden of interoperability and creating easy methods to port your number on the cellular providers not consumers. If you are an AT&T customer today, it’s easy and relatively seamless to switch your phone, number and plan to a competing cellular provider like Verizon thanks in large part to the regulations put in place by the FCC. The Access Act envisions creating the same openness and reducing switching costs for consumers in the digital communications environment that consumers now enjoy in the cellular one.

Importantly the Access Act has important positive antitrust implications. Antitrust and competition law centers around three core tenets: choice, pricing and competition. By reducing switching costs and allowing users to switch to competing communications providers easily the act increases the choice consumers have. More importantly, the act will also make it easier to new startups to emerge and grow which will further increase consumer choice. Today most consumers aren’t charged for these digital communications platforms, so pricing is not necessarily impacted by the act. Finally, when it comes to competition by breaking down the “walled gardens” of the major communications platforms the act will increase the space for new companies and increase competition in the market.

The Access Act is a step in the right direction but it by itself is not enough to break up the market power of the major tech companies. The core antitrust violation of these companies is not their size and scale, but how they use that size and scale to their own business advantage.

Tech companies have used their power as gatekeepers to systematically push out competitors, privilege their own services and thereby maximise their own revenues. Tech companies have been focused in the last decade on vertically integrating services in areas they predict they can capture market share. For example, if you search for a job or flight on Google today Google places its widget for Google Flights or Google Jobs above all other search results. This directs traffic away from travel websites like Expedia and Booking.com and jobs websites likes Monster.com towards Google products. Google did the same thing in Europe by artificially promoting links to Google Shopping products over competitors and was fined heavily by the European Union for it.

- Ceteris Paribus #3: The Antitrust Hammer

The true power of these companies lie in their network effects and these network effects make them gatekeepers of consumer time, dollars and attention. While the Access Act promises to chip away at these network effects it will only do so minimally. It will allow new platforms to jumpstart with the data from users who switch over and allow them to begin to form their own early network effects. But the billions of fellow users on Facebook, Google, Amazon and Apple are a huge switching costs for consumers. It’s tough to migrate away from Facebook when all your friends are on it, even if the Access Act makes it very easy to do.

The Access Act of 2019, GDPR and CCPA are all good starts in regulating Facebook, Amazon, Apple and Google and reducing their market power. The suffocating effect of their dominance needs to be reversed and the commitment to openness around data enshrined in the Access Act is a great method for achieving this. But as long as tech companies benefit from huge network effects and serve as gatekeepers they will be able to vertically integrate new product lines around their core service (Google Flights, Amazon Basics and many more examples). The vertical integration of new products is what truely suffocates the space for innovation. This is the next area where smart regulation is needed.

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