State AGs investigate Big Tech, and threaten to wreck the internet - American Enterprise Institute

The internet’s global impact is unprecedented: about 4.3 billion people joined it between 1990 and 2019. And some 1 million more choose to do so every day. The internet now connects about half of the world’s population. (See here and here.)

Why are so many people joining? It’s not because people in Western Sahara (whose 364 percent growth in internet users was the world’s highest in 2018) suddenly developed a strong interest in sending emails to China, which is home to nearly 20 percent of the world’s internet users. It’s because the likes of Google, Facebook, and Alibaba make people’s lives better.

The Google logo is displayed outside the company offices in New York, NY – via REUTERS

But rather than applaud the companies that make the internet great, 48 state Attorneys General (AGs), plus AGs from Puerto Rico and the District of Columbia, want to take the US tech leaders down a few notches. Somewhere the EU and China are smiling.

The AGs are zeroing in on Alphabet — Google’s parent company — but they are sniffing around Facebook and other US tech leaders. This is likely to be yet another costly investigation for Alphabet. The EU has already fined it about $9 billion. US federal antitrust authorities have investigated Alphabet before and are doing so again. Who knows how much Alphabet spends on these investigations and how much they distract the company from serving customers?

While the theory behind the AGs’ case is vague at best, one thing is clear: If they succeed in their quest, internet users will be the biggest losers. Here are three reasons why.

1. The AGs will lower the quality of Google search

It is hard to provide quality search. Statista reports that Google, which provides about 93 percent of mobile searches, receives the highest consumer rankings of all search engines with a “company-level satisfaction score” of 79 out of 100. Its next biggest rivals — Bing and Yahoo — each provide about 3 percent of mobile searches, with satisfaction scores of 72 and 70 respectively.

The rewards for providing high quality search are huge: An 8 percent difference in customer satisfaction yields a 90 percent difference in share of searches. But those 8 percentage points are extremely hard to achieve: Microsoft — the world’s leading tech company in terms of market capitalization and the owner of Bing — can’t do it.

Yet these AGs believe they know how to create higher quality search. They want to control Google’s search algorithms, how results are displayed, and how Google manages advertising. Perhaps the AGs should google “overconfidence.”

What will happen if the AGs succeed? Rather than improve Google, they are likely to make Google more like Bing and Yahoo, or worse. As I explained in an earlier blog, that could cost US consumers about $380 billion annually in lost value.

2. The AGs will mistake fine-tuning for discrimination

Building a successful internet platform requires finely tuning who gets to use the platform, how they can use it, at what prices, and other factors. Fine tuning is the difference between success and failure: MIT and Harvard professors Michael Cusumano and David Yoffie, along with University of Surrey professor Annabelle Gawer, describe how large numbers of platforms fail because they don’t get the details right.

To outsiders like the AGs, who have never built a platform and see the businesses only after they have become successful, the fine-tuning can look like undue discrimination. This naïve view is encouraged by rivals who would like to tilt platform design in their favor, or even damage it to benefit them competitively.

3. The AGs will be led by bias

The AGs used the steps of the Supreme Court to announce their intention to study Google and “be led by the facts.” The investigation will be large, but it’s hard to say how substantive it will be. The Supreme Court location gave dramatic effect, which wouldn’t be needed if there were clear and substantial facts.

The AGs say they will be led by the facts, but they have already concluded that Google is an “existential threat” and a “juggernaut,” that using Google costs people their “freedom to choose the best products from the best companies,” and that the company “dominates all aspects of advertising on the Internet and searching on the Internet.” (See here and here.) Perhaps the AGs should google “confirmation bias.”

The AGs will be led by bias because that is human nature and because the pressure to find something will be intense. Many journalists and those in the hipster antitrust movement have spent years building a public narrative that large tech companies are a curse, data barons, cash-rich internet moguls, etc.

What should be done?

The AGs shouldn’t pursue broad, naïve investigations based on outdated theories of antitrust. If they do investigate, they should limit themselves to complementing the Federal Trade Commission’s inquiries into whether companies have been less than forthcoming with users and customers.

(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)