The common theme with the biggest tech companies: walled gardens

The European Union is proposing new regulations on big tech companies and how they use their data, potentially to the detriment of competing companies. That comes on the heels of the Federal Trade Commission and 46 states suing Facebook and the FTC opening investigations into lots of other tech companies. One thing that both the EU and the FTC say is that these big tech companies impose anti-competitive conditions on third-party developers that operate on their platforms.

Apple has been criticized over its App Store rules and Amazon over how it treats third-party sellers. The EU regulations would determine some companies to be “gatekeepers” subject to different rules. I spoke with Mark Lemley, a law professor at Stanford. The following is an edited transcript of our conversation.

Mark Lemley: We view some actions that are fine when engaged in by an ordinary business as more problematic when they are engaged in by a monopoly. They can become a problem if the monopolist is making decisions of who to allow access to and who not to allow access to, in order to try to prevent anyone who might facilitate a competitive threat.

Molly Wood: Well, then let’s dig more into these conditions that these tech companies impose and their relative size, because the other company [besides Facebook] that has been in the spotlight, of course, for imposing conditions that may be anti-competitive on third-party developers is Apple. So where does Apple fall in the fine line spectrum?

Lemley: Right. So I think traditionally, Apple hasn’t had as much to worry about, because it was harder to make the claim that Apple is a monopolist. Its share of sales of computers has never been particularly high. And even in cellphones, its share has been growing in the United States, but it’s not a dominant player. There are other competitors with significant market share. That said, I do think that one plausible potential argument is that while Apple faces competitors in the phone ecosystem, once you have an Apple phone you are locked into it, or once you decide to develop an app for an Apple phone, you are locked into it. And so among Apple phone users, the control they exercise through the App Store does seem more like a monopoly for a particular locked-in group of Apple users.

Wood: There’s been so much focus in this FTC case against Facebook on the breakup part of it, but we’re talking about Apple. Amazon has been the target of very similar complaints about control of its ecosystem and third-party sellers, and even video creators. I wonder if this third-party-app-system aspect of this case isn’t a little bit of a hidden headline.

Lemley: I think that’s exactly right. I think this is the stealth part of the case that’s probably the most important. We’ll see it in Google, we’ll see it in Amazon, and we see the allegations in Facebook, and then it applies as well to Apple and the idea of self-preferencing. The tech industry, for most of its history, has largely been an open and interoperable place. You could write any software you want to run on a PC. There’s no gatekeeper who says, hey, this software is allowed, this software is not allowed. In nominally closed ecosystems like video games, companies tried to break in and got sued for intellectual property infringement, but they won. The court said, hey, you can write a video game to run on the Sony platform, whether or not Sony wants you to. There’s no ability to close off or lock down what gets included in my platform. What’s interesting to me about the mobile space in particular, and the modern social media world, is that we’ve seemed to have kind of drifted into a closed rather than an open ecosystem. So I think the big antitrust push that we might expect, in part in these government cases, is a push to try to open links to those platforms to say, I should be able to put an app on somebody’s phone once they own that phone, whether or not Apple wants me to.

Wood: Would you say it all depends on future lawsuits? If the FTC is successful in its lawsuit against Facebook, or the [Department of Justice] is successful in its case against Google, could that end up changing the whole third-party-app system? Is that a direction for future regulation?

Lemley: Absolutely. And you could imagine that happening through successful antitrust suits. So an example involving Apple right now is the suit by Epic Games against Apple over the Fortnite game, which is one of the most popular video games in the world. It’s loaded through the App Store, [and] Fortnite has a bunch of in-game purchases, and they don’t want to pay 30% of all of the things on the Fortnite ecosystem to Apple in order to get access to people who play the game through an Apple phone. So you could imagine antitrust cases, whether it’s the government case against Facebook or a private case against Apple, establishing the principle that interoperability is required, at least when the platform is a dominant player. But you could also imagine this being the basis of regulation. That may be more likely in Europe, frankly, than in the United States. The United States has historically resisted the idea of regulation. And since it seems likely we’re going to continue to have a divided Congress, I’m not sure how much legislation is possible in this area. Although, it is worth noting that both Republicans and Democrats, albeit for different reasons, have taken some aim at the tech industry when it comes to antitrust.

Wood: The big question seems to be: There are like four or five dominant players, whereas “monopoly” used to be defined by one. And we have said occasionally, they all have very different business models, and so it’s hard to kind of pin down who’s anti-competitive where. But it actually seems like maybe it’s more straightforward than we think, right? Like the problem is ecosystems?

Lemley: Yeah. I think the real problem is these walled gardens. Once you’re in a platform network, the platform has every incentive to sort of keep you there. And the ability to do that while controlling how you experience it is something that we generally just didn’t have in the PC era. And I do think it is a fundamental shift in how people experience technology.

Related links: More insight from Molly Wood

Companies determined to be gatekeepers in the EU would face potential fines of up to 10% of their global revenue for any violations. In responding to the EU’s new draft regulations, Facebook said, basically, hey, what about Apple? Which, to be honest, is the question I had that led to this interview. And then, as it sometimes happens, it turned out that we stumbled upon this bigger idea of ecosystems and gatekeepers, which does seem like a useful framework for discussing competition when obvious and traditional antitrust and monopoly definitions, at least in the U.S., don’t totally apply.

But Facebook made a point of providing a statement to Reuters, saying it hoped the EU’s new Digital Markets Act would “also set boundaries for Apple.” And it said that “Apple controls an entire ecosystem from device to App Store and apps and uses this power to harm developers and consumers, as well as large platforms like Facebook.” Apple did not respond. 

Reuters also reported Tuesday that Facebook would move all its users in the U.K. into user agreements based in California, mostly because of Brexit. Google did the same thing back in February of this year. And this is kind of a funny story of tax evasion and geopolitics and regulation, so hang with me. See, Facebook and Google had historically had European headquarters in Dublin because of a longstanding tax evasion scheme, a loophole that Ireland allowed, which earlier this year caused the IRS to sue Facebook, saying it owed the U.S. more than $9 billion in unpaid taxes. Facebook actually stopped running global revenue through the Irish unit back in 2017. Google didn’t stop taking advantage of the tax loophole until the very end of 2019. But they still had these central offices, and now with Brexit, Ireland is staying with Europe, which, of course, has the toughest privacy laws in the world at this point. So why stay there with no tax benefits anymore?

Also, that thing in August where Irish regulators actually tried to stop Facebook from ever transferring data on any of its customers out of the EU. A hearing on that order actually happened Tuesday, and a lawyer for Facebook said the rules would have “devastating consequences for Facebook’s business that would be irreversible.” It’s just not as friendly a joint as it used to be, I guess.