4 Policy Issues That Make Big Tech so Big (and it's impact on Social Welfare)
Sangita Ganesh
Doctoral Researcher in Environmental Economics and Management @ University of York | Public Policy @ ATREE | Biodiversity Conservation and Human Well-Being
Introduction
Technological innovation is a key contributor for economic growth, and in recent years, this innovation fuelled by the internet, Big Tech (1), and platform economy (2) has shaped several aspects of our every day lives including how we communicate, shop and seek information. However, as policies have not kept pace with this progress, several new challenges have emerged. Vague antitrust has resulted in Big Tech having more market power and turning into monopolies, this has been aided by corporate consolidation and lax taxation policies, bringing about social inequalities in income and opportunity. Moreover, Big Tech companies manage our data and much of public discourse, this concentration of power combined with loose regulation on privacy and content can threaten society’s welfare.
This article discusses the impacts ?of competition, taxation, data and content moderation on the growth of Big Tech and its subsequent welfare effects on consumers and populations. Social welfare is defined as consisting of 3 main components: (i) effects on productivity and state revenue; (ii) misuse of customer data and privacy; (iii) impacts on democracies and national interests. These areas are explored as a consequence of competition, taxation, data and content moderation. I argue that in order to improve social welfare we must address the underlying issue of concentration of power and wealth by Big Tech i.e competition, as it’s impacts cut across several welfare areas - reducing the appeal of taxation policies that benefit MNCs, end user’s privacy dilemmas if there are more secure platforms that increase data privacy, and minimises their role as governors of content that arises from their strength and lack of political agreement. Moreover, with the renewed political focus by the recent passing of the Digital Markets Act (DMA) by the EU and changes in the FTC administration, timing is conducive to address anti-competitive policies.
Defining Social Welfare for Tech?
Current U.S anti-trust law is limited to price effects on consumers or less market innovation. For digital platforms, anti-trust can be particularly ambiguous as prices are typically zero (Khan 2017).
Some argue that anti-trust welfare standards need to be replaced by the total welfare standard (Wilson 2019) which considers gains to relevant firms relative to losses to consumers. However, this may not capture effects of psychological and sociological factors on the harm tech platforms can cause. Big Tech amasses consumer information, and their products are inherently social and political. This renders them the ability to gather an international reach and scale at a faster pace than other industries. Such aspects are currently omitted in consumer and total welfare centric definitions; therefore, my definition of social welfare for tech encompasses:
Impacts on Social Welfare
Productivity and State Revenue
Market competition is the basis for a well functioning economy. Firms competing for customers and workers leads to lower prices, higher quality goods and services, more innovation, increased wages and improved working conditions (Boushey 2021). In Big Tech, competition concerns relates to the risk of firms turning into monopolies, with the creation of entry barriers for potential competitors. This is characterised by:
Moreover, we see the creative destruction dilemma in play (Schumpeter 2012), with potential competitors entering the market running the risk of acquisition. In the last 30 years the Big Five (3) have collectively made 800 acquisitions (CBInsights 2021).
When competition is reduced in this way, innovations introduced by smaller newer companies will not be able to grow and replace older less productive companies. This has far reaching negative implications on the economy, as new firms are unable to innovate, productivity growth weakens. Productivity can have a huge impact on social welfare, a report by the McKinsey Global Institute (2021) found that an increase of 1 percentage point of productivity growth per year until 2024 would generate additional $3500 per capita income for Americans. On the contrary, a less productive economy can generate greater economic inequality, social division and lower personal incomes (Bessen 2022).
Aside from productivity, monopolistic practices and ease of conducting cross-border business allows Big Tech to achieve huge profits. A direct consequence of this is taxation, which obliges Big Tech to enhance social welfare by paying taxes to home and foreign governments. On the contrary, tax avoidance has been rife and Bilateral Tax Treaties misused to allow Big Tech to utilise tax havens and shop for favourable treaty terms and establish conduits in third-party states to make cheap indirect payments.” (Arel-Bundock 2017). For example the Double Irish Dutch Tax Sandwich, which used a combination of Irish and Dutch subsidiary companies brought Google"s rate down to 2.4%.
This loss in taxation revenue could impact government(s) investments in education, health, research and development etc. This could result in increasing social inequalities with more poverty, reduced literacy, and increases in crime as a result of social frustration (Lénártová 2020).
Particularly, it is estimated that Big Tech avoids paying as much as $2.8 billion tax a year in developing countries (Abdel-Sadek 2021). They are likely to be the most affected as they rely more on corporate income taxes for their financial resources, e.g. India has the world’s largest Facebook audience (Statista 2022), and raises around 50% of tax revenue from corporate taxes (Dhasmana 2021), but Facebook pays little to no taxes in India (Dave 2020). Withholding sizeable amounts from developing countries, could even lead to humanitarian challenges such as malnutrition.
To improve social welfare with respect to productivity and state revenue, we must ensure Big Tech fosters innovation, by overseeing mergers and acquisitions and observing behaviours that can hinder market entry for new players. In this vein, Khan (2017) argues that anti-trust and competition policy for platform markets must be guided by two questions ‘does our legal framework capture the realities of how dominant firms acquire and exercise power in the internet economy? And what forms and degrees of power should the law identify as a threat to competition?’. Additionally, the financial power they hold through tax avoidance mechanisms that lessens income for state expenditure, needs to be disrupted. The recent G20 Tax Deal (OECD 2021), aims for ‘a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises’ and introduces a global tax regime to ensure that firms pay their fair share of tax regardless of where they operate and generate profits.
The monopolistic practices that enabled Big-Tech to become so big in the first place, provides them with the ability to exploit tax loopholes that benefit the wealthy and large multinational corporations (Shaxson 2019), and exercise power in the internet economy. This must fundamentally be addressed to minimise productivity and state revenue losses.
Misuse of Customer Data and Privacy
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?Anti-competitive practices of building freemium model based businesses around data has facilitated the growth of Big Tech. Instead of costing consumers money, it costs their time and attention, generating data. This invokes network effects, since it’s free, more consumers adopt the product and subsequently provide data. Such data, being non-rival, can be used for research studies, training data for machine learning algorithms, or one of the biggest sources of revenue for Big Tech - internet advertising. However, this is not without it’s consequences on social welfare, when user’s personal information becomes the product - there is less time spent with family and friends, people become more anxious and divided as a society and lack trusted sources of information (Toscano 2021).
?There are several ways customer information is misused as a result of monopoly power. Big Tech’s lack of interoperability with other platforms makes it difficult for consumers to move away, and since information about our preferences, beliefs and needs is controlled by a handful of companies it is prone to breaches. For example, in 2021 533 million Facebook users’ phone numbers and personal data was listed on a hacking forum, enabling cybercriminals to impersonate users and commit fraud (Holmes 2021), and the 2018 Cambridge Analytica scandal led to Mark Zuckerberg testifying in front of congress on Facebook's position on data harvesting and right to privacy. Another factor, revenue generation with the freemium model has contributed to the growth of the internet advertising industry - projected to reach $1,089 billion by 2027 (Rake & Gaikwad 2020). The longer users spend on their services, tech companies can understand preferences better and curate content. Consequently, services are designed to be addictive" (Barendregt et al 2021), creating psychological burdens on consumers - leading to issues of addiction and anxiety, harming social welfare. The FTC released a statement last year on Facebook’s market dominance “Lacking serious competition, Facebook has been able to hone a surveillance-based advertising model and impose ever-increasing burdens on its users” (FTC 2021). Furthermore, little oversight on how ads are curated and run can also pose a threat to marginalised groups in society. For example, in 2019, Facebook faced accusations that employers and landlords were using demographic information (used as an indicator of race) to discriminate and target particular users (Jan and Dwoskin 2019), this can influence social wellbeing including access to quality housing, education and food and poverty levels.
Aside from these factors, as these companies seek to grow their market power in other industries such as tech health, lacking a fair representation of consumer demographics in their AI datasets can generate bias. For example an app designed by Google to detect skin conditions vastly under-represents people with dark skin tones (Feathers 2021) leading to consequences for public health and marginalised communities. At the extreme, the network effects they rely on can aid in the spread of inflammatory material which could incite violence and discrimination towards such populations. For example, Facebook’s motivation for market presence in South-east Asia, came at the cost of their algorithms amplifying hate speech and facilitating the Rohingya minority genocide in Myanmar (Milmo 2021). Consequently, in the absence of alternative platforms, and without addressing the foundations of tech monopolistic power (freemium model, network affects and privacy of user information and control over data), information misuse poses a threat to social welfare.
The EU, has attempted to address some of these challenges through the passing of the Digital Markets Act (DMA), which is based on protection of user data and mitigation of data sharing between companies, and the ability of firms to be able to compete with Big Tech by opening up the ability to build on top of their platforms. However, this is a contradiction, which fails to address social welfare concerns. By allowing interoperability of personal data there is less control on how that data is used by third parties. This can fuel issues such as the spread of misinformation, which is currently limited to the platform it is being shared on e.g. WhatsApp, and privacy, as platforms would not be able to see what’s happening to the data once it’s taken over by a third party. Moreover, even by allowing interoperability it is unlikely that consumers would be able to move away from these platforms, nullifying anticipated effects on increasing competition, for example, email is interoperable but controlled by Google, Microsoft and Yahoo. This highlights that targeting data and information alone is insufficient to improve social welfare, and we must also find solutions for the freemium model, network effects and predatory pricing and integration.
Impacts on Democracies and National Interests
One of the biggest threats tech can have on social welfare is on democracy and national interests, leading to civil breakdowns and threatening freedom. States can weaponise the openness of the platform companies through easy targeting of ads based on demographics to instrumentalise and control information"(Wark 2021). For example between 2015-2017 the pro-Kremlin Internet Research Agency bought around 3000 Facebook ads to incite division and chaos in the presidential campaign (Shane and Goel 2017). This undermines the Liberal International Information Order (LIIO) which aimed to foster more openness of information to strengthen democracies and weaken autocratic regimes, however, authoritarians exploited the open communication flows and controlled information to bolster their image and agenda. These effects are a consequence of a lack of competition, because of outdated antitrust standards which has enabled their monopolistic position, and lack of international agreement on how information should be moderated; Big Tech’s economic power and vast network effects have turned them into governors of speech, and with little accountability in legislative processes, could be damaging to democracies.
Domestically, governments can exploit Big Tech’s infrastructure by using their network and data aggregation capabilities for welfare systems. Philip Alston, a UN Human Rights expert said that digitalisation programs can be used for intrusive government surveillance” to promote reductions in the overall welfare budget, a narrowing of the beneficiary pool, elimination of services, the introduction of intrusive forms of conditionality, the pursuit of behavioural modification goals, and generate profits for private corporate interests” (UN Human Rights 2019). Consequently, we need to be mindful of the social information that continues to feed into these platforms.
There can be international implications if platform companies become panopticons or chokepoints. The US holds market power and hosts the majority of Big Tech firms, without competition, weaponised interdependence” (Farrell and Newman 2019) may arise, the US could “gather information, choke off economic and information flows, discover and exploit vulnerabilities, compel policy change, and deter un- wanted actions” (Farrell and Newman 2019), as it did with Iran by cutting it off from the SWIFT network in 2012, this resulted in Iran losing almost half of its oil export revenues and 30% of foreign trade (Hotten 2022). This can have far reaching consequences on civil liberties, leading to unrest and crippling of economies.
Finally, Big Tech’s economic strength, poses a risk for the anti-competitive systems being locked in if it translates into political power. Data by Crescioli (2020) shows that the Big Five/spent in the range of $6-$22 million in 2018 on lobbying expenditure, and they are all in the US top 1% of lobbying expenditure distribution, while not a perfect measure of political influence, such sizeable amounts indicates power in the political process. This power is enhanced with Big Tech’s role in governance with tech leaders often brought into policy making, for example, Bill Gates and Eric Schmidt were invited to discuss the digitisation of New York State functions and the COVID crisis (Fernandez 2021). As we seek technological solutions to a variety of social issues we continue to provide Big Tech disproportionate power.
Priorities and Timing
Anti-competitive practices by Big Tech, including their network power, speed and volume of data collection and financial strength fuels it’s global dominance. To address this, anti-trust and competition policies need to be updated. Consequently, we could argue that tackling data or taxation first might stem their strength. However, current laws for data governance and transfers are based on transnational policies with 3 different models, and a lot of divergence between the models followed in different economies e.g. the US follows an open model whilst EU advocates for the conditional model. Unless one state develops market power by efficient political organisation or conditioning market access to dictate how data transfers happen, we are unlikely to see prevalence of any one international standard. On taxation, the recent G20 tax deal and adherence to a global minimum tax rate can potentially weaken Big Tech"s financial power, increasing competition (by hampering their ability to buy competitors), and increasing funds directed towards state social welfare programs. However, many details still need agreement e.g. accounting standards, which could affect efficacy and adherence to the deal. Given these political challenges, attempts to ensure a higher degree of competition in digital markets could have nullifying effects on issues of data, content and taxation. The DMA passed by the European Parliament is a step in the right direction and although the position of the US on this is not publicly known, there has been increasing debate in the US about Big Tech’s anticompetitive conduct (Kang and Macabe 2020). Moreover, the appointment of Lina Khan, an anti-trust scholar as the chair of the FTC, and the newly confirmed Democratic majority, can hopefully end months of partisan stalemate and enable the FTC to push forward on antitrust agenda and create a more competitive market.
Conclusion
?Current anti-trust and competition laws fail to take into account characteristics of Big Tech such as networks, freemium model and their control over data which enables them to become so big in the first place. This can have several consequences on social welfare including impacts on productivity and state revenue, misuse of customer information leading to psychological burdens and marginalisation of communities, and harmful repercussions on democracies and national interests. While data, taxation and content moderation contribute to the exacerbation of social problems, they are enabled by the monopolistic power Big Tech holds. Consequently, we must rein in their power by updating anti-trust and competition policies to mitigate detrimental effects on social welfare.?
(1) ‘Big Tech’ is used generically to refer to platform companies such as Facebook, Google etc. which have a revenue of more than 7.5 billion in euros or with >75 billion euros market cap as set out in the Digital Markets Act (DMA)
(2) Platforms that facilitate economic and social activities on online sales or technology frameworks
(3) Big Five tech firms refers to Alphabet, Amazon, Apple, Meta and Microsoft