THE BLOG
07/01/2016 06:28 pm ET Updated Jul 02, 2017

What Senator Warren Gets Right and Wrong About Competition

Senator Elizabeth Warren's recent speech on competition was compelling and well-delivered, showing her academic and political chops. To the surprise of many conservatives, she discussed her love of markets and her preference for market-based competition over regulation. She also rightly championed robust antitrust enforcement and pointed out that "too big to fail" goes beyond the banking system. But her sweeping embrace of a "big is bad" view of competition lacked nuance. Markets structures of different industries naturally vary, and competition takes different forms. Specifically, she erred when she lumped the Internet into the same category as some brick-and-mortar markets that have remained stagnant for decades.

As a long-time advocate of antitrust enforcement in the technology sector, I have participated in antitrust efforts against IBM, AT&T, Intel and Microsoft. These companies possessed real market power, and the particular characteristics of their markets made new competition by "startups" virtually impossible. Furthermore, all those companies engaged in clear, anticompetitive practices that had no arguable rationale to benefit consumers.

The Internet is different. Standardized protocols, the proliferation of broadband access, rapidly declining costs of hardware, emergence of the cloud and the ubiquity of smartphones has supercharged competition online. Although the "bigness" of a company can often be a sign a company is insulated from competition in the brick-and-mortar world, applying that same assumption to the Internet is potentially dangerous for competition regulators. The same characteristics that allow an Internet company to get big fast, also make them vulnerable to quick irrelevance.

A decade ago, attacking big Internet companies would have led to regulatory intervention against MySpace and Yahoo! search, two services that were quickly surpassed by startups with better ideas. In fact, in what was in retrospect a silly concern, U.S. antitrust enforcers imposed antitrust conditions on AOL's "dominant instant messenger" because U.S. competition authorities viewed it as an "essential platform for the development of future high-speed Internet-based services." AOL IM, like Myspace and Yahoo! search, fell victim to new competitors with better ideas.

Big Internet companies are susceptible to startups with better ideas and better execution. Despite Amazon's position as an eCommerce leader, for example, the Canadian company Shopify created an eCommerce platform for small businesses. It was so successful that Amazon shutdown its own offering in the space. Shopify is now traded on the Nasdaq and valued at $2.6 billion. And, as most people often forget, Google tried to create a ride-sharing platform before Uber's immense success in that space. Now, Uber is investing in mapping and self-driving cars to compete with Google.

As the above examples illustrate, today's Internet leaders face enormous competitive pressure. Traditionally, markets lacking competition are characterized by low innovation and R&D spending. This is intuitive. Without competition, why spend money innovating when you don't need to? Furthermore, competitors are disincentivized to invest, because they would be squished by dominant players. If competition online was strangled by "dominant" players, then online markets too should reflect these characteristics. However, the reality is quite the opposite.

In 2014, PricewaterhouseCoopers found that the "software and Internet sector" exhibited the highest growth rate in R&D spending of any industry. The same year, the National Venture Capital Association noted that investment in the sector was at its highest in a decade, and Battelle pointed out that the ICT sector accounted for one-third of all R&D spending in U.S. In the first quarter of 2016, Google, Apple, Facebook and Amazon, the companies most frequently charged by casual observers as being "Internet monopolists," all significantly increased their R&D spending. Hardly what one would expect from companies or an industry facing little competitive pressure.

The evidence Senator Warren offered of competition problems on the Internet was also flawed. She cited questionable allegations of Google favoring its Google+ social networking service as proof of the ability of large platforms to leverage their size to the detriment of competitors. It was a curious premise for her argument, as Google+ never gained traction on account of better competition, and the Washington Post recently quipped that it was "a wonderful social network for the introverts among us who would prefer to avoid most people." Furthermore, she said the FTC Commissioners disagreed with their staff when they rejected bringing an antitrust case against Google, which is simply not true. After a long investigation, the final decision of the FTC Commissioners tracked recommendations of FTC staff, despite initial media reports.

She also charged Amazon with limiting opportunities for less well known authors by squeezing publishing companies. Although this charge fits nicely into the overall narrative of her speech, the facts do not back that up either. While the rise of Amazon, and ebook sales more generally, has hurt some traditional publishing companies who failed to adapt to Internet distribution, overall book revenues are up, as are the publisher's profit margins as people are consuming more books. On top of that, self-publishing has been a boon to niche authors who were frequently rejected by publishing companies. Digital publishing is benefiting diverse voices and enabling diverse content, not limiting little guys with non-mainstream views as Warren suggested. The ebook story is an illustration of the positive effects of competition and innovation, not the negative effects of consolidation.

I agree with Senator Warren that competition benefits consumers and even protects our democracy as too much economic power for an extended period of time -- especially in the wake of the Citizens United decision -- can lead to the accumulation of too much political power. I disagree with her over-generalizations about markets, particularly Internet markets. Antitrust regulation is still essential to foster competition in the 21st century, but competition policy is also modernizing. Cutting-edge competition enforcers are developing new economic tools and legal arguments that move beyond the "big-is-bad" assumptions -- that hobble traditional market share analysis to examine if behavior is truly anticompetitive. In online markets, size is not a proxy for monopoly power.