AMERICAN ENTERPRISE INSTITUTE

SHOULD WASHINGTON BREAK UP BIG TECH?

PANEL DISCUSSION PARTICIPANTS:

RYAN HAGEMANN, NISKANEN CENTER

ANDREW MCAFEE, MASSACHUSETTS INSTITUTE OF

TECHNOLOGY

MICHAEL R. STRAIN, AEI

LUIGI ZINGALES, GEORGE J. STIGLER CENTER FOR THE

STUDY OF THE ECONOMY AND THE STATE AT THE

UNIVERSITY OF CHICAGO

MODERATOR:

JAMES PETHOKOUKIS, AEI

1:30–3:00 PM

MONDAY, NOVEMBER 27, 2017

EVENT PAGE: http://www.aei.org/events/should-washington-break-up-big-tech/

TRANSCRIPT PROVIDED BY

DC TRANSCRIPTION – WWW.DCTMR.COM

JAMES PETHOKOUKIS: Welcome. Thanks for coming here on the first working

day after Thanksgiving. Of course, I had a great fear nobody would show up, being the first

working day after Thanksgiving, so I’m especially grateful everyone made it here for our

panel, which we have a great panel here who I’ll introduce in a moment.

A decade ago, the world’s five largest companies by market value were Microsoft,

Exxon Mobile, General Electric, Citigroup, and Shell Oil. Today, Microsoft is still there,

but the rest are all tech firms: Apple, Alphabet (the parent company of Google), Amazon,

and Facebook, though, on some days, I think Facebook swaps with Alibaba. So those are

now the top five. And combined, they have a market value of $3.5 trillion. They have powered

the market’s rally this year, leaving some to wonder if owning these stocks is all you really

need to do when investing.

But it’s not just their size and market performance that’s been impressive. It’s also

their market dominance. Google has 76 percent of the search ad market; 80 percent of total

searches worldwide are done through Google. Facebook and its subsidiaries own 77 percent

of mobile social traffic. Amazon has three-quarters share of the e-book market. And when

some people look at those statistics, as well as the overall size of these companies, they think

that, well, if America has a corporate concentration problem or a monopoly problem, then

these super platforms look like the most obvious and serious examples of that concentration

issue.

And there’s criticism — perhaps it started on the left, but certainly is now coming

from the left and the right. And there have been calls for various sorts of regulation and

antitrust actions with maybe the extreme being to turn some of these firms into public utilities

or break them up in some fashion. Yet these remain very popular companies along with the

services and products. They’re a source of innovation, high-paying jobs. And with perhaps

the exception of the shale revolution, it’s just about the only bright spot in the US economy

over the past decade.

And, again, public opinion surveys, so they are — you know, well, if Congress only

had these kind of ratings that that these tech firms have. You know, 80 percent favorability

rating, 77 percent for Amazon, the most widely admired companies by young Americans.

And even over the past year, in which there have been a lot of rough headlines, whether it’s

the Russians using Facebook to try influence the election or free speech issues at Google

or sexism at Uber, yet these remain very popular companies. So what’s going on and why

do some people have such a problem with these big mega-platforms?

To discuss whether the rise of the tech giants has become problematic in some way

that requires a policy solution, as I said, we’ve assembled a really excellent panel. I’m going

to do them in alphabetical order.

We have Ryan Hagemann, who is director of technology policy at the Niskanen

Center, where he specialized in issues at the intersection of sociology, economics, and

technology.

Right next to me is Andrew McAfee, principal research scientist at MIT, where he

studies how digital technologies are changing business, the economy, and society. He’s also

coauthor of the recent book “Machine, Platform, Crowd: Harnessing Our Digital Future”

with his compatriot, Erik Brynjolfsson.

At the far end is Michael Strain, director of economic policy studies here at AEI.

His research focuses on labor economics, public finance, and social policy.

And last but not least, Luigi Zingales, director of the George J. Stigler Center for

the Study of the Economy at the University of Chicago. His research focuses on regulatory

capture, crony capitalism, and the various forms of subversive competition by special

interest groups.

Again, everyone, thanks for coming.

And I want to start with Professor Zingales, who earlier this year hosted a conference

at the University of Chicago titled “Is there a concentration problem in America?” And I

watched a good chunk of that conference over my Thanksgiving weekend, sitting there

for those hour-and-a-half-long panels.

MICHAEL STRAIN: Giving thanks for the American economy.

MR. PETHOKOUKIS: Yes. Yes. Yes. Giving thanks. Well, I was not doing that.

And during that conference, a good bit of it focused on the tech industry, which, again, may

be to at least some people the most obvious examples. If you believe there is a concentration

monopoly problem, I guess it would be hard to talk about this issue without talking about

the tech industry. So I want to start with you to sort of give me what the theory of the case

is that these big platforms, super platforms, whatever you want to call them, that they’re —

I mean, my bias is to see these companies as, gee, they’re, you know, as something that’s

gone right with America, great national assets, remain (popular ?). What is the case that

they’re problematic in some way, their size and scope and influence?

LUIGI ZINGALES: OK. So, first of all, I want to make sure that at least we have

one common ground, which is we believe that for free markets to work well, we need to

have an antitrust authority. We need to have some government intervention. We’re not in

a laissez faire utopia, but at least we are a more — (inaudible) — society where antitrust

plays a role. And then the question is what role and when. And, of course, the question of

cost and benefits.

This said, I think that — and I would like to set aside, even if it’s a big issue, but I

would like to discuss later, this platform as media industry. Because I think when you talk

about media, we need to talk — there is another set of concerns that plays a role. But even

if we did not consider them media, and I don’t know why we shouldn’t consider media, but

imagine for a second we don’t consider them media, I think that especially when I think of

Google and Facebook, the issue about network externalities comes big. And I think it’s sort

of something that deviates from our standard notion of markets and also our standard notion

of antitrust. If I sell my main product at price zero, what it means to have a market share,

OK? That’s a pretty basic thing, but it’s quite important.

And so the question is then, however, if we have a sort of market share — (inaudible)

— I offer a glass a wine to whoever uses Bing that does not use Google. And I generally

go around, and I make this offer and never pay any price because nobody, unless you are

in China, where you are prohibited from using Google, everybody in the United States, uses

Google. So in terms of market share of searches that represent in the United States is above

90 percent.

You go to Facebook, you have sort of the same thing. And, of course, this market

power does not manifest itself in the main product they provide us because it’s for free, but

it does manifest on the other side, which is the advertising business. And you’re transforming

it dramatically and concentrating dramatically. In the last year, 85 percent of the increase

in ads online are shared by Google and Facebook, OK?

So should we worry about it? And the answer is either you have a sort of Panglossian

view that the market always will fix the problem no matter what and then you say, OK, let

the market go. If you don’t have this Panglossian view and you look at the history of this

country, you think that doing something — and then we can discuss what — but doing

something is probably a good idea. Few are concerned about innovation.

I think the biggest (part ?) of innovation in this country is being associated to antitrust

intervention from the time the antitrust in the late ’40s went after AT&T who just invented

the transistor. And it wasn’t actually technically for the wrong reason because it was a

regulated industry, but as a result, the transistor got widely licensed and created a new

industry that would not have existed before.

Then sort of the antitrust went after IBM over the ’70s and contributed dramatically

to the PC industry. If it wasn’t for the fight during the ’70s, the PC industry would not be

there. Then it went after AT&T and broke it up, and we have the explosion of the mobile

industry. Then it went after Microsoft, and we have Google and Facebook. Google and

Facebook today are not part of Microsoft because Microsoft was under intense scrutiny

of the antitrust authority. And so they should thank that.

The problem is that yesterday’s startup is today’s monopoly. So if you want to

create the space for the new startup, I think some intervention is needed. And my view is

let’s try with at least the simplest thing, and this is what my article in The New York

Times is about — is trying to say, at least trying to attack the sources of these platforms

and the network externality.

We know that the source of the network externality that gives you market power —

one of the sources is the difficulties in switching. So I’m not too worried about Uber and

Lyft because the drivers can switch between Uber and Lyft in a second, and I can switch

— in fact, I have both programs and look at prices and choose between Uber and Lyft all

the time. So the switching cost is basically zero. And so the nature of concentration is limited.

In this industry, Google and Facebook are designed to sort of maximize the switching

cost. And the structure of the government, by the way, is aiding and abetting this effort, and

it says — I’m sure you’re familiar with the famous case of Power Ventures versus Facebook

where Power Venture was taking from clients the password and entering Facebook in name

of the person. So if I give to Jim my Facebook passwords and he enters my Facebook account,

he commits a felony according to the US law, the Fraud Act, OK?

So here we have the most extreme form of the power of the state used not to protect

competition, but to protect the incumbent against competition. This is the most brutal form

of monopoly enforced and supported by the state. And that’s what I want to fight against,

against that particular law, against the fact that the older system is designed to make it

difficult to transfer data from one place to the next.

Let’s take the example from the mobile industry. The reason why today we have

mobile at low prices is because there was a regulation called number portability. Nobody

today spends a second thinking about number portability. By the way, it’s not true in every

country. In the countries where there is no number portability, prices are much higher, and

investments and quality of service are not any better. So it’s really a subsidization to bad

corporate behavior by not having number portability. Number portability promotes competition.

In other sectors, just to say that I don’t target only the tech sector, but in the banking

industry it’s very complicated to transfer your bank account because you have a bunch of

credit cards, wires coming in and out, and why don’t we have credit account number portability

in the banking industry? Many countries, including the European Union, are implementing

in this direction, and that makes competition more effective. I want to introduce a form of

social graph portability to make it easier for competition to actually walk in this industry

before going to other mechanism that tend to be by their own nature imperfect, like antitrust.

MR. PETHOKOUKIS: But just to be clear, we need to take some sort of action,

and you mentioned perhaps that initial first step dealing with the social graph and making

that portable and others would, you know, like to do that and much more up until the point

of, you know, the title of this panel, you know, they would like to break these, some of

these companies up or take off parts of them. But the reason we need action now — I mean,

what is like sort of the key problem right now, not like — not tomorrow, what might happen

because of the market power of these firms but how that power is being used right now in

a way that’s detrimental to consumers is what.

DR. ZINGALES: First of all, we end up paying a disproportionate amount for our

advertising that eventually will come back to haunt us as consumers.

MR. PETHOKOUKIS: But I think we’re getting free stuff, but that cost is being

routed through the advertising —

DR. ZINGALES: Absolutely, because the last time I checked, Google and Facebook

were not losing money. So they are making their money somewhere.

MR. PETHOKOUKIS: We’ll fact-check that later, but I’m going to say, yes,

that’s probably true. Right. So that’s one obvious one.

DR. ZINGALES: Yes. Not to mention — and I set it aside because I think they

are two separate issues but should not be set aside is the issue of freedom of press. In a

sense, the concentration of ads in two hands basically is compressing our freedom of

expression. And the competition in the media industry is very problematic on that front,

which is key not only for the functioning of the economy, but the market itself.

MR. PETHOKOUKIS: And just finally, before I get on to everybody else, you

mentioned — that’s a first step, but can you — can you see — but can you see a situation,

the more extreme situations of either heavily regulating these companies as if they’re public

utilities — and I’m not even sure I know exactly what that means — or, again, breaking

them up in some fashion. Because you mentioned a couple of cases — some antitrust cases,

which you felt were key for innovation — the AT&T, IBM, you could have probably mentioned

Microsoft and Netscape. So can you envision that action, that kind of action being necessary

at some point?

DR. ZINGALES: First of all, I think it’s possible. I’m not so sure that this will fix

the problem. But I want to actually read a couple of sentences. And then I would — my sort

of test, if you recognize who wrote this: “Big business often possesses and uses monopoly

power. Big business weakened the political support for private enterprise system. Big

business are not appreciably more efficient — I don’t agree on this — but big business are

not appreciably more efficient or enterprising than medium-size business. Few disinterested

people deny these facts. The obvious and economical solution is to break up the giant

companies. This, I would emphasize, is the minimum program and is essentially a

conservative program.” Who wrote that?

DR. STRAIN: Ronald Wilson Reagan.

DR. ZINGALES: No.

ANDREW MCAFEE: Teddy Roosevelt.

DR. ZINGALES: No.

RYAN HAGEMANN: William F. Buckley.

DR. ZINGALES: No.

DR. STRAIN: James Pethokoukis.

DR. ZINGALES: No. Nothing short of George Stigler in a Fortune article in 1952.

Now, to be fair to George, he revised his position over time because he saw that big companies

were more efficient so he changed.

But, actually, what I like is not the efficiency part, because I think he was wrong

there and he realized over time he was wrong, but the fact that he says that sometimes

breaking up companies is the conservative program because the alternatives are worse.

So my approach is I think I want to go even lighter than that because I think that, first of

all, I don’t trust the government to break up in a good way. And, second, I’m not so sure

that breaking up will really fix the problem because it will probably hurt these particular

companies and favor — another monopoly will arise in the next day. So that’s not my

goal. If there is a gigantic efficiency gain — in a sense, unless we really attack the benefit

of being all in the same place, people want to be where — well, be in the social media where

other people are, OK? That’s a natural —

MR. PETHOKOUKIS: That’s a natural economics —

DR. ZINGALES: Exactly. And so breaking that up goes against the natural economic

rules. And I don’t think it’s going to accomplish much.

MR. PETHOKOUKIS: OK. All right. So I think that that’s great, and I think you’ve

sort of laid out I think that case, you know, wonderfully. Since you’re right next to me,

Andrew, you can — what do you think of what he said? And just more generally whether

you think that there is a problem right now with these big platforms that requires, you know,

policy action sooner rather than later.

DR. MCAFEE: OK. So part A is I disagree.

MR. PETHOKOUKIS: OK.

DR. MCAFEE: Part B is it feels to me like there are a couple of relatively smallish

problems that we might need to intervene on with the kind of blunt instrument of policy,

and beyond that, no. So let’s say that we agree that — we’ll stick with Google and Facebook.

These things tend toward natural monopoly. I want to be where my friends are, and search

gets more efficient as more and more people do search.

OK. What are the problems associated with that? As far as I can tell, Google and

Facebook, to the extent there are problems, they give us too much stuff for free. Problem

is a weird framing for that. And they do not set prices for ads. The prices of ads on both

those platforms are set via auctions. That’s a market mechanism working. That’s not — I

can’t call that price fixing in any real sense of the word.

DR. ZINGALES: If I’m a monopolist, I can do all the auction I want. I extract all

the surplus. If I’m a monopolist, I can do an auction. It’s not the market. It is a market, but

it is a market in which I, the monopoly, extract all the surplus.

DR. MCAFEE: I think I let you talk.

DR. ZINGALES: I’m sorry.

DR. MCAFEE: So the advertisers are the ones setting prices by bidding against

each other. What’s the intervention that’s going to fix that? I think the only intervention

that would fix that is some entity setting prices. That kind of makes me a little bit nervous. I

like the fact that advertisers themselves are the ones figuring out how much something is

worth for them.

I also read a really interesting write-up by Carl Shapiro. I’m not an antitrust scholar.

I’m not a legal scholar at all. But when Carl, who is an antitrust scholar, tried to educate me

and other people about it, he made a couple of interesting points. He said, first of all, the point

of antitrust is to forbid some kinds of activity that tend — that tend toward monopolization.

And they tend to do things like forming cartels, like fixing prices, like engaging in too

many mergers and in stiff-arming your competitors out of the market.

Hard for me to see how the giant tech companies that we’re talking about are engaging

in too much of those activities. The other point Carl made, which I was not aware of, is that

antitrust was explicitly not set up, and for about a half a century, we have had a bipartisan

understanding that antitrust does not exist to deal with large, dominant companies or to

immediately break them if we think they get too big. It is also not the point to level the

playing field between small companies and large companies. A lot of us have this kind of

sense of rooting for the underdog in these battles. Whether or not we do that or whether or

not that’s a good idea, and for about half a century, antitrust has not been around to help us

with that activity. So I kind of want to take antitrust off the table as a way to think about that.

Jim, you asked what problems are out there. One problem is very clearly that foreign

governments are meddling in our elections via social media platforms. And I think I’m not

alone in considering that kind of an issue. The one change that I’m pretty sure I would make

is to make the online ads follow the same practices that TV and radio ads do, which is they

have to identify who paid for them. They have to identify kind of what their source is if

they’re political advertisements. The tech companies lobbied against that. I think that was

the wrong decision.

Luigi brings up this problem of concentration in media. You framed it as a problem

of self-expression. We have never had more and better tools for self-expression, so I don’t

like that framing of it. The fact that newspapers and magazines are seeing their revenues

decline is a separate problem from the extent of free expression going on. The decline in

journalism is — I feel like it’s a worrying thing for a democracy. And we should probably

talk about what might be done about that beyond having billionaires on one side buy up

some newspapers and billionaires on the other side buy up other newspapers. But trying

to smash social media platforms or break them up feels wrong to me in addition to which

is going to be unsuccessful because if the tendencies are toward concentration, if there are

winner-take-all markets for the social graph and for search, all we’re going to get is another

round of dominant social networks and search engines out there. Then the question is how

long that will take. So it feels like a deeply unfruitful activity to me.

So I’m kind of left thinking that we need to tinker with a couple of things, and

then we need to leave these companies alone because they are providing a great deal of

innovation and a great deal of consumer surplus and consumer benefit out there.

MR. PETHOKOUKIS: And this point came up frequently at your conference, that

letting these companies, you know, very big, very dominant — that that just is not sustainable,

maybe it’s — I don’t know if it’s economically stable. It may not be politically sustainable.

And so the choices are either antitrust or regulation. And no one wants to see an internet

commerce commission, and as Luigi knows, regulation, that is really the path to get to

crony capitalism.

DR. MCAFEE: Let me give you a third option, which is patience. Thirty-five years

ago, we were definitely concerned that IBM was going to have a stranglehold over the tech

industry. Twenty-five years ago, we were deeply concerned that Microsoft was going to

have a strangle hold over the tech industry. Ten years ago in this country, we were deeply

concerned about how the action in the mobile space had moved on to Finland with Nokia

and Canada with Blackberry/Research in Motion. Are any of us worried about any of those

things anymore?

And, Luigi, I do disagree with you. I don’t think the reason we’re not worried about

those things is because the government kept on whacking the Microsofts and IBMs or at

least threatening them with the antitrust hammer. That provides no part of the explanation

for the iPhone or for Facebook for me.

MR. PETHOKOUKIS: Ryan, I actually would like to get your thoughts about the

issue of whether these antitrust actions in the past have actually been good for innovation.

But as one of the folks who would like to see antitrust action has said, would you — if

someone came to you right now and said, I have a great startup, they’re going to challenge

Google. Or I have a great startup and they’re going to challenge Amazon. Let’s say you

ran a venture capital fund. Would you invest in that company?

And doesn’t that — probably not, and does that go to the enduring power of these

companies is that they are unchallengeable and that — and even though we could point to

other examples of companies that seem like they had unassailable positions and it turned

out they didn’t — Nokia. I believe there was a Fortune magazine cover that said, the search

engine wars are over and Yahoo won. So we can point to examples from the past. It just

seems like these companies are just different in some way and those positions just might

be very enduring, and perhaps that’s a problem.

MR. HAGEMANN: Well, I think the trouble we’re going to run into here is antitrust

in recent months, in the last year or two, has sort of become this empty vessel with which

a lot of people kind of fill with what they would like their post-hoc policy rationales to be,

right? Like inequality is a problem, use antitrust, right? Like concentration is a problem,

antitrust would be appropriate to use in that sort of context.

The problem is that if we’re going to use the pejorative “big tech,” there’s not a

whole lot of evidence in my mind that there’s any reason to use a more expansive interpretation

of antitrust to, quote, unquote, “break” these companies up. The key thing that antitrust has

to be concerned with is not so much firm size, right? Like the size of a firm doesn’t necessarily

equate to market power. Those aren’t necessarily the same things, and they need to be

evaluated in sort of a broader context of things like barriers to market entry and consumer

welfare, most importantly in the post-Bork era.

So really what we want to look at if we’re trying to apply antitrust rules to big

tech is contestability of the market. And I think in this space, in the online tech platform

space, it’s pretty clear that there has never been a more contestable market in the history

of human civilization, right? The barriers to entry are incredibly small, relative to other

industries, right?

MR. PETHOKOUKIS: If you want to interpret — if you want — the barriers of

entry for a company like Google or, again, Amazon, Facebook — and those are the three

I focus on more and even more so than Apple or — really those three is that — is that one

barrier of entry — is they have all that data. You know, they have all that data that they

can use, you know, to refine their algorithms, and isn’t that a tremendous barrier to entry?

MR. HAGEMANN: So maybe yes, but probably not. So, on the one hand, even if

it is a barrier to entry, even if the holding of data might be some sort of barrier to entry, it’s

not necessarily the case that that’s anticompetitive or it’s an unfair competitive advantage,

right — like these companies have developed models that essentially scoop up this data

about us. And it’s pretty clear from looking at the research that consumer preferences are

such that we don’t value privacy so much that we’re actually willing to embrace policy

prescriptions that would, say, price it, for example. Consumers just don’t care about their

privacy. That’s the reality of it. Now, if we want to talk about things like surveillance and

bring that into this context, government surveillance, it’s a slightly different story.

But the fact that Google scoops up certain bits of information about you I don’t

think it’s terribly relevant. Now, even more importantly than that, in my mind, is it’s not

the quantity of data you have, right? It’s the quality of data. And not only is it the quality

of data. It’s how you interpret that data, your access to things like, you know, advanced

artificial intelligence and analytics. The business strategy that your entire business model

is based on — that is probably more important than just having immense troves of data.

So I don’t think that a lot of data gives Google and Facebook sort of an unassailable,

durable monopolistic position in this market.

I wanted to sort of touch on very briefly something that Luigi said about — we’re

talking about firms competing in this market basically at nonzero prices, right, because we

don’t price privacy, and that’s basically what people are competing on, more or less.

Because of that, it’s very difficult to assess whether or not competition is at an optimum

level, right? It’s even more difficult to determine what an optimal level of competition is

in any given industry. But we do have a good proxy for what a competitive industry will

invest in. And it’s research and development expenditures, right? If you are in a highly

contestable market and your position is eminently assailable, if contestability is high, then

what are you going to invest in since you can’t, you know, tick up prices or lower prices on

privacy? You’re investing in research and development and innovation because you have to

constantly stay ahead of the curve to make sure that you are on the cutting edge of innovation

because you’re going to have to eke out your competitors on those lines.

And if you look at numbers from Price Waterhouse Cooper, it’s pretty clear that on

the list of top 1,000 firms in the world. The technology sector here domestically invests far

more in both absolute terms and as a proportion of total revenue, which they call R&D

intensity than any other industry in the world. Second to tech is pharmaceutical companies.

Who appears not at all in that top 1,000 list? Domestic utility companies. And who

do we usually think of as sort of traditional monopolies? Well, it’s the utility companies,

right? So why are the utility companies not investing that much in innovation, in R&D?

Because there’s no need, right? They have the market. It’s captured; it’s all theirs. Why is

the tech industry investing so heavily on R&D lines? Because they know tomorrow they

could be out.

DR. MCAFEE: The world’s largest vendor on R&D is Amazon. Alphabet is number

two or three.

MR. HAGEMANN: It is number two.

DR. MCAFEE: Two.

MR. HAGEMANN: Yeah. Alphabet is number two. Amazon in absolute terms is

I believe it was $16 billion last year. That is an immense amount of money to spend on R&D

for a firm that is ostensibly a great monopoly that can never be, you know, cast aside by

future competitors.

MR. PETHOKOUKIS: But one thing they do invest in is other companies. And

some of these companies have a very sophisticated, you know, sort of — you know, search

and acquire operations, which they will look for these future competitors and buy them.

Maybe one of those famous examples is Facebook buying WhatsApp, a potential future

competitor.

MR. HAGEMANN: Or Instagram.

MR. PETHOKOUKIS: Right. So that sounds like — you know, if you think — if

you want competition — and maybe competition is what we want. You know, Peter Thiel

famously wrote that, you know, these companies should try to have monopolies. It is a goal

— if you want a big successful tech company is to get a monopoly, a huge moat, and make

massive, you know, astronomical profits.

DR. MCAFEE: He’s hardly the first person to point that out as a business strategy.

(Laughter.)

MR. PETHOKOUKIS: Right. Certainly not. And that’s true. So should we have

let Facebook, now looking back, buy WhatsApp?

MR. HAGEMANN: Sure. Yes. So what ultimately we’re concerned about when

we’re talking about antitrust is not the structure of the firm. It’s not how the market looks.

It all comes down to, again, consumer welfare, right? And Andrew actually mentioned Carl

Shapiro. Carl Shapiro makes a point in his recent working paper that the presence of these

large firms might actually be incentivizing a higher rate of startup entrance in that space

because those new entrants expect to be bought up by the bigger firms.

So he says that — and I have it written down here somewhere — but he says

something to the effect of how the presence of these firms and acquisition by large firms

like Facebook and Google for small startups is an important exit strategy for those new

startups. And Facebook and Google probably aren’t going to be buying those firms with

which they can’t do anything, right? That isn’t going to give them any sort of, you know,

leverage.

But does it really matter to us if Facebook owns Instagram or if Instagram operates

on its own in this market so long as we, the consumers, are benefiting from the experience?

I don’t think so. So this kind of goes back to I think one of your original questions, Jim,

which is the title of this panel is “Should Washington Break Up Big Tech?” And that implies

that there’s a problem currently. As far as I see it, there’s no problem that justifies intervention

with an expansive antitrust policy. There are other problems, maybe, but I think we have

all of the regulatory tools we need to address any of those problems as they emerge, and

we shouldn’t try to get out ahead of problems that we can’t quite yet imagine.

MR. PETHOKOUKIS: Maybe I’m slow, but I’m still just having a problem with

the idea that we’re going to have three, four, and five enduring companies that you cannot

— that you cannot challenge for the foreseeable future, even though, you know, I made

the joke about Yahoo, and we can point to Nokia. These just seem like they are — we are

talking about a sort of a different breed of company. Should I just not be concerned that we

have these big, very powerful companies, again, you know, the five most valuable companies

in the world, even though they’re huge, still making massive profits? That’s just not a problem?

DR. STRAIN: Yes. I think that’s basically not a problem. You know, I feel like so

many good points have already been made. One that hasn’t — you know, go back in time

maybe a year or two and everybody in the United States was looking to Silicon Valley as

if it was the only good thing happening in the United States. And, you know, companies

like Google and Facebook were being hailed as American success stories of innovation,

and, you know, even if things may be dysfunctional in Washington, at least we have Silicon

Valley to keep powering the United States. And isn’t it wonderful that the United States

is the incubator for all of this incredible innovation and talent?

I think that view is still basically right. And I think that’s important to kind of keep

in mind when we talk about potentially very drastic policy action. What’s happening in

Silicon Valley is fantastic. I use Gmail every day. I’ve used Gmail every day for a decade. I

haven’t paid one penny for that service. And as a consumer, that’s wonderful, wonderful

thing. I recently joined Instagram, and you know, that’s been good as well. And it doesn’t

matter —

DR. MCAFEE: You don’t qualify as the early adopter on that.

DR. STRAIN: I’m not an early adopter. And I’m not a successful adopter either. I’m

marginally successful at it. But, you know, it doesn’t matter to me at all whether Instagram

is owned by Facebook or owned by somebody. You know, I think most users of Instagram

have no idea what the ownership structure is. It is an example of innovation in a post-Google,

post-Facebook world. You know, I think — I don’t think the only thing that matters in antitrust

considerations is consumer welfare. But consumer welfare matters a lot, and consumers

are benefiting enormously from this.

You know, I also think the examples, Jim, that you raised about Yahoo and about

Nokia are extremely salient. I mean, there was a time not long ago when everybody in this

room would have had a Blackberry attached to a Blackberry holster riding on their belt.

And there was a time not long before that when everybody would have had a flip phone

attached to a holster riding on their belt. You know, these were extremely powerful — at

least Blackberry was an extremely powerful company. Sprint was an extremely powerful

manufacturer of cell phones. Now we all have iPhones. I think it would be foolish to think

that it’s impossible to imagine that the iPhone won’t be displaced by another technology

at some point in the next 10 years. I think —

MR. PETHOKOUKIS: But what if they’re buying their competitors? What if they’re

buying their competitors?

DR. MCAFEE: Jim, why should your intuition that this time is different matter at

all given the history that Michael — and that we’ve all talked about?

MR. PETHOKOUKIS: I don’t know, but I just do — you look at history, and you

can say, yes, they eventually will fall, right? That’s been the history. But I also look forward

like, you know, maybe this time is different. Maybe this time — maybe this time is different

for some reason. I don’t know if it’s because — I don’t know whether it’s because of data.

I don’t know if it’s because of the network effect.

DR. STRAIN: Can I help you to think through that?

MR. PETHOKOUKIS: And I am being a bit of a devil’s advocate so don’t jump

on me. But — go ahead.

DR. STRAIN: I was the other day trying to put some music on my iPhone, and I

downloaded — and, see, I already hear laughter from the under 30.

MR. PETHOKOUKIS: It sounds like it was an exhausting experience for you.

DR. STRAIN: It was difficult. I downloaded a Springsteen concert from — it was

official. I paid for it and everything. And I wanted to get it on my iPhone. And so I asked

some of our fantastic 25-year-olds here at AEI to come help me. And, you know, three of

them came over and stared at me like I was born in the 19th century for not just using Spotify.

I said, what is Spotify? And they explained it to me.

DR. MCAFEE (?): I think he needs to leave the panel now.

DR. STRAIN: Facebook — my understanding is that young people — you know,

people who are in their like teens and early 20s —

MR. PETHOKOUKIS: The kids.

DR. STRAIN: The kids, they don’t use Facebook, or they don’t use it in nearly the

same quantity as older people do. I think that’s less true of Google. But, you know, I’m

sure everybody on the panel does remember using Yahoo as a search engine. And then

Google came along. And, you know, I do not believe that Google — I mean, I love Google,

but I do not believe that Google has perfected the way to organize the internet. And, you

know, the idea that a couple of, you know, young computer scientists at some point in the

next 10 years can figure out a better algorithm to get you what you want faster.

MR. PETHOKOUKIS: Which will then be purchased by Google, right? I mean, that’s

sort of the case. Part of the antitrust case is to break them up. The other part is we need to

quit letting these companies acquire potential competitors.

DR. STRAIN: That’s right, but I think that if somebody really believed that they had

a better way to organize the internet than Google, they would be reluctant to sell to Google.

DR. MCAFEE: Snap is exhibit A there. It turns out that’s not a better way to organize

ephemeral social content or at least the market’s heading that way, but Snap held out.

DR. STRAIN: I think if you look at these examples, it certainly helps to significantly

mitigate any concern about these companies. And I think if you look at the context in which

this conversation is happening, a surge of concern on the right about social issues, a surge

of concern on the right about things that are — on the left, excuse me, about things that are

big, you know, and a general kind of anxiety amongst the American people about how things

are going and where we’re headed, you know, two, three years from now, we may be back

to celebrating these companies again. And we shouldn’t be making — we shouldn’t be

taking drastic policy action without really good reason to do so.

MR. PETHOKOUKIS: One of my — and feel free to respond to what he just said

as well as maybe what I’m just going to say. One of my — focus on sort of the innovation

aspect and the part maybe that — to the extent I’m worried about — I would be worried

that these companies, because they’re big, because maybe they buy companies that are

smaller right away before they get a chance to grow and scale and improve their technology

— and this has been an argument made by some people who are worried, that they are already

actively suppressing innovation in this country. And they’ll point to the productivity numbers,

and they’re low. And so they’re trying to come up with reasons why those numbers are so

low.

Do you think already that that is an issue? Do you think that these — that we are

seeing less innovation and productivity because the — because of these companies right

now and how they act in the market?

DR. ZINGALES: First of all, I would like to answer his point first before I —

MR. PETHOKOUKIS: Feel free. Feel free.

DR. ZINGALES: So we should be careful of not using false analogies in the sense

that — the fact that Nokia or the Blackberry went by the wayside is great in terms of creative

disruption has nothing to say about important network industries because in that particular

case, the network did not exist. And the fact that the history of giants that eventually die.

And that’s part of the created disruption of capitalism, that’s great.

Our concern is today are the network externalities so strong that this natural creative

disruption process is impeded. And I think that the good analogy, if you want, is AT&T

because AT&T, as a phone industry had a strong network externality and, by the way,

was investing a lot in R&D, OK?

So if that’s our benchmark, it was great. So I would like to ask the panel in the future,

if they went back, we’ll be against regulatory intervening in AT&T because it was such a

great monopoly? So let’s continue. The Soviet Union was investing in R&D by GDP more

than the United States and sent a man in space before the United States. Is that a good system

we want to copy just because of that? And, by the way, measuring innovation on input rather

than output is not that great. We know. Facebook spends a fortune in developing new planes.

I’m not so sure that this is their comparative advantage. I don’t know why they’re doing it.

But, as a finance economist, I think it’s called free cash flow. But that’s a different

story. OK? So I wouldn’t count that as productive investment. It’s more waste of free cash

flow. What we care is about having more innovation. And I think that none of the panelists

have addressed, in my view, the key point I made, which is today the government is directly

involved in making it more difficult to have competition. The Computer Abuse and Fraud

Act, as interpreted by the Supreme Court, was just rejected — to see the Power Venture

case — is now basically blocking the ability even to give to my friend my password on

Facebook. I think this is awful and this needs to be corrected, OK? So I’m not saying we

should go to antitrust, yet I at least would like to do these basic things that are not done.

And until we do this, I don’t see sort of a — the antitrust intervening.

On the antitrust point, I think that — I like very much Carl Shapiro. I read his

recent piece. I think he’s very good in a lot of dimensions. But there is a fundamental

misunderstanding. The fundamental misunderstanding, as correctly was quoted, is the

bipartisan understanding for the last 50 years has been this, OK, which, by the way, is

known as the Chicago push for antitrust developed by the very people that were saying

those things before. And in the late ’60s, early ’70s, in the face of a too aggressive sort of

things of antitrust decided to limit the power of antitrust. In the late ’60s, the antitrust has

prevented mergers that we gained 5 percent of market share, OK? So that’s clearly excessive.

And as a result of that thing, they developed a very narrow interpretation of antitrust, which,

by the way, is not within the statute because the Sherman Act was precisely against the

power of bigness because power corrupts and absolute power corrupts absolutely and we

are afraid of those giants.

So if you look at the law of the land, the law of the land is clear. Antitrust should

not only be — should not take care of all the things on the face of earth. I’m not in favor

of that, but it’s not just about consumer welfare. It is about sort of making sure that there

is not a power that is too strong because that will distort our democracy. And I think that

that is the big fear I have more than any economic fear is that excessive concentration of

power will lead to a distortion in our democracy.

And I think that McAfee is absolutely right that there is a lot freedom of expression,

absolutely. Some people might say even too much because everyone says everything on

Twitter and — but that’s only part of what the role of the free press is about. I think that in

a democracy, a key role of free press is also to hold power accountable by investigating and

analyzing. And we have some great things like the International Consortium of Investigative

Journalists, but in the grand scheme of things, the ability to hold power accountable has

been reduced over time because the scrutiny has been reduced over time. And maybe —

for sure we need to find new forms.

But we need to be conscious that this process is not without sort of friction. And

probably before the newspapers were making too much money and the money was wasted,

et cetera. So I’m not trying to go back to the world of yesteryear. I think what we need to

think about is: What are the bigger consequences? And innovation is one. It’s very difficult

to know sort of what is the optimum amount of innovation. What I can tell you — and, again,

I would like to know retrospectively do we think that the antitrust against Microsoft in the

’90s was good or not?

MR. PETHOKOUKIS: I think that’s a good question. That’s the reason we had

this destruction of these companies have fallen is because government gave them a nudge.

DR. MCAFEE: No, no. Microsoft did not fall —

MR. PETHOKOUKIS: That’s not factually correct.

DR. MCAFEE: No. That’s factually incorrect. There was no antitrust action against

Microsoft. Microsoft was not broken up by the government. The reason we don’t worry

about Microsoft’s dominance — let me finish.

MR. PETHOKOUKIS: I think that — the threat, though, that they were worried

about threatening of them.

DR. MCAFEE: No. I’m disagreeing that the threat is what caused Microsoft to

fall from grace. Microsoft made tons of money all throughout the time they were being

pursued by the government, and there was no action taken against them. They had to pay

some lawyers a lot of money for it. That’s the worst thing that happened.

The real thing that happened with Microsoft was they missed search and they missed

mobile. And, therefore, they’re a large profitable uninteresting company in technology these

days, and we’ll see if Satya can turn that around or not.

Can I say one more thing? Nobody worries about Microsoft’s stranglehold on

innovation anymore. And I want to be clear. That is not because of government action

against Microsoft because that company missed a couple of big trends. And I categorically

agree with you. The instant like we don’t want to check Facebook, Facebook ceases to

matter despite how worried we are about it now.

DR. STRAIN: And I think there are parallels from Microsoft to, Luigi, your concern

about the advertising side of the market. You hear media companies and content providers

complain about the treatment they get from Google and Facebook. That is in large part

driven by their failure to anticipate this kind of network structure that people like to receive

their news from and driven in part by their failure to create the kind of content distribution

channels that have made Google and Facebook so successful.

You know, it is hard for me to conceive of Facebook versus The New York Times

as a David versus Goliath situation. I see two big companies that are both very powerful,

that are engaged in a dispute about the way that the public consumers their content and

uses their network services. And, you know, I do not see this tiny little company, The New

York Times, being stomped on by Facebook. I see The New York Times wishing that they

had gotten out ahead of where Facebook was in terms of distributing their content before

Facebook got there and not having done so and trying to claw back some of what they can.

And I think that’s an important consideration.

I think, Luigi, your point about power as a general matter I think is important and

does deserve to be reflected upon. It is not clear to me — and I could be persuaded that

I’m wrong about this, but it is not clear to me that if you roll back the clock to the 1970s

when an American had three 30-minute news broadcasts to choose from and one local

newspaper that arrived in the morning, that that American was subject to less competition

in the market for information and opinion.

DR. MCAFEE: Or was better served back then by the journalism and the information

they had access to.

DR. STRAIN: That’s right. That’s right.

DR. MCAFEE: Can I jump on that, because I think it’s a — do you want to say

something else?

DR. STRAIN: Can I just tell a story about Walter Cronkite?

DR. MCAFEE: Please don’t tell of Walter Cronkite. We know —

MR. PETHOKOUKIS: I think that was a universal absolutely.

DR. STRAIN: I mean, think about — you know, what’s commonly said, right, when

Johnson lost Cronkite, he lost the war, you know. Who is there that has that kind of credibility

with the American people today? You know, it’s not Chuck Todd. It’s not, you know, Mark

Zuckerberg. You know —

DR. ZINGALES: Wait a minute. We’re discussing — and I don’t agree — but

we’re discussing if $100,000 paid in Facebook ads can swing an election, OK? So people

perceive the power of Facebook to be so enormous that you spend $100,000, you can swing

an election. Imagine if you actually use it to win an election. It’s going to be devastating

in that 60 percent of the news that people receive is filtered by Facebook the way they want,

OK? So if they don’t like you, if they think that your news is unimportant, it’s filtered out,

and people don’t receive it.

DR. MCAFEE: In a less severe way than Walter Cronkite filtered our news two

generations ago.

DR. ZINGALES: I not here to defend Cronkite but —

DR. MCAFEE: But you’re saying we’re living in this dark time of access to

information and —

DR. ZINGALES: I didn’t say it’s a dark time. I said I’m concerned —

DR. MCAFEE: And the trend is in the right direction, not the wrong direction.

You bring up the excellent point that a free press is vital to a democracy, right, and the

best phrase I’ve heard about is that the role of journalism is to comfort the afflicted and

afflict the comfortable. I love that phrase. There was excellent reporting both from what

we consider the mainstream media during the 2016 election. The Post and The Times did

a great job. And, recently, the apparent deficiencies in Facebook’s ad vetting were brought

up, I believe, by ProPublica and BuzzFeed. The notion that these companies are getting a

pass from the press doesn’t hold water.

DR. ZINGALES: Actually, I think the press did a terrible job because until — and

I’m not a Trump supporter — but until Trump came to the picture and until he won the

election, how many articles did we have about the people dying of the opioid epidemics

in the Midwest?

DR. MCAFEE: Tons.

DR. ZINGALES: Very few. It became —

DR. MCAFEE: You were reading different things than I was.

DR. ZINGALES: Maybe I was reading the old news

DR. MCAFEE: Case Bing published a paper in 2015. It was extensively covered.

DR. ZINGALES: OK. Case is an academic. I understand. But I’m saying what

investigative journalism was done about this phenomenon.

DR. MCAFEE: I just answered that question. It was extensively covered in 2015.

DR. ZINGALES: No, no. Case is not an investigative journalist. It’s an academic

paper that they covered, OK? And they covered during the election, when this problem was

already coming up. I’m saying what level of investigative journalism was done? Think about

mortgage fraud. How many articles during the financial crisis did we have about mortgage

fraud that was rampant in the United States? Very few. So I think that there is a lack — and

I’m not saying that the past was perfect. Certainly Cronkite was far from perfect, but saying

that now we live in the perfect world, I think that’s wrong also.

DR. MCAFEE: OK. If I don’t get to put words in your mouth, you don’t get to put

words in mine.

DR. STRAIN: I also don’t think the world is perfect.

MR. HAGEMANN: I’m sure it could use some improvement for sure. Just to sort of —

MR. PETHOKOUKIS: There are other examples of the antitrust — you did jump

on the Microsoft example, but there are also the other examples of IBM in the late ’60s

and AT&T.

DR. MCAFEE: There was no action taken against IBM, was there?

MR. PETHOKOUKIS: But do you think, again, that’s a similar case?

DR. ZINGALES: No, no. The reason why they started to license out the PC is

because they were under continuous sort of threat of the antitrust enforcement. And they

couldn’t even mention the word market share in the board of directors for fear of the antitrust.

And maybe it was excessive, but what I’m saying is there’s no doubt that the reason why

there was not propriety PC, they contracted out, et cetera, is because of that.

And I think that you’re absolutely right. Other factors contributed to the demise of

Microsoft. It was not just the antitrust, but certainly they gobbled up many of the competitors

before. This is — I’m old enough to remember that there used to be a Lotus before Excel.

There was used to be a WordPerfect before Word, and there used to be a Eudora before

Outlook, OK? All this stuff was eaten up, and they were — in the process of eating up the

internet browser and probably would have eaten up much more if at some point an

antitrust consideration was not raised.

So I think that the business of business is to make money, and it’s natural that they

try to do these things. It’s natural that you have a police to try to limit that. If you say, let’s

do everything, then there is the risk of abuses. And, certainly, what Microsoft was doing

at the time was abuse. The question we’re asking the panel is: Are you against today of

what was done to AT&T and Microsoft back then? If you were in the ’50s, were you against

regulating AT&T or sort of do antitrust to AT&T? And I want to know the answer.

DR. STRAIN: I certainly would be opposed to breaking up Facebook or Google

in the manner that —

DR. ZINGALES: We’re not talking at this moment of Facebook or Google. I’m

asking, let’s go back in history. You have the right to decide whether to go antitrust against

AT&T or to go antitrust against Microsoft. What do you choose?

DR. STRAIN: Can I say I don’t know?

DR. ZINGALES: Is it chicken — is it copping out? Sure.

MR. HAGEMANN: I’ll bite on Luigi’s question. Yeah. You break up AT&T. The

difference though is that —

DR. STRAIN: Can you explain why?

MR. HAGEMANN: Because AT&T was a government-granted monopoly, so it’s

a different set of circumstances.

DR. STRAIN: He know more about AT&T than I do.

MR. HAGEMANN: Yeah. Yeah.

MR. PETHOKOUKIS: It’s quite clear.

DR. ZINGALES: No, no. But it was a regulated government kind of monopoly. It

was regulated because there was a big network externality.

MR. HAGEMANN: Right. Yes.

DR. ZINGALES: So we don’t discuss that the telephone had a huge network

externality component. I hope that we all agree on this.

MR. HAGEMANN: Sure. Absolutely. So should government have broken up AT&T?

Well, I think, you know, the innovation that flourished after they did is, you know, sort of,

you know, kind of in hindsight saying, yeah. Absolutely. Great job. But in my — as I’m

searching through my memory banks, other than standard oil, I cannot conceive — or I

cannot recall another situation in which the government affirmatively broke up an existing

private-sector entity using antitrust. I know antitrust was kind of held over Microsoft as

sort of like, you know, this cudgel that they were going to come down on them with, but

Microsoft ultimately just settled under a consent decree.

DR. MCAFEE: Am I wrong that United was a Boeing spinoff?

MR. HAGEMANN: Airline and transportation is not my bread and butter. Unless

you want to talk about autonomous vehicles.

DR. MCAFEE: We can Google that. I think it might be, but I’m not sure.

MR. HAGEMANN: Yeah. So, sure, break up AT&T. I’m a lot more skeptical about

using antitrust in an ex ante manner to break any of these big tech firms, again, because

of a lot of the issues that I laid out, like how are we actually assessing competitiveness in

the market and all of that.

But I kind of wanted to go back to what Andrew and Luigi were sort of, you know,

sparring about earlier. And that’s sort of, you know, the threat or the perceived threat that

some of these large tech companies pose to the integrity of our democracy. I think that the

problem there has less to do with the platforms and more to do with sociological issues,

right, like cultural issues. There’s been a declining trust in institutions in this country over

the last 20 years or so. And no one has yet figured out the ultimate culprit of this, right?

Jonathan Rauch had a great piece I think last summer where he talked about how

it was actually the breakdown of the traditional party structure that acted as gatekeepers

to enter into the political marketplace that has allowed some more extreme viewpoints to

enter in. You know, maybe it’s the fact that people are able to share what they actually

think about their lives, society, and everything going on that’s sort of feeding, you know,

the franklin for kind of filter bubble.

But it’s not clear to me that as a result of these companies having provided a

platform for individuals to associate with one another in a decentralized manner without

actually having to go through Walter Cronkite and, you know, ABC and CBS — it’s not

clear to me that that’s the actual problem. The problem is more fundamental. The problem

is more cultural, and the problem is far more political than anything else in this country. I

don’t know how you address that. If I knew how to address that, I might be running for office.

Just like if I knew what the next big innovation was going to be in the online space, I

would be a VC, right, but —

DR. MCAFEE: Can I jump on this? Because I think this is a fundamental point.

MR. HAGEMANN: Jump on.

DR. MCAFEE: Because there is — Luigi, I agree with you. I think there is an actual

problem out there that’s associated with these platforms, and I don’t quite know what to

do about it. And the problem broadly is that — we’ll continue to talk about Facebook and

Google — they have built these unbelievably large and influential and profitable engines

based on a combination of two things, based on user-generated content. We just provide

huge amounts of information that they then diffuse back out to other people. And self-

service advertising.

And that confluence of things, I think we learned during 2016, leads to some very

strange outcomes. The spread of fake news on Facebook and on YouTube and other social

channels is bizarre. And it just proves the old adage that a lie is halfway around the world

while the truth is still getting its boots on. So what do we do about the unbelievable velocity

and apparent power of fake news? Wow. That is an actual tough problem. I don’t mean

that rhetorically. I don’t know what to do about that.

The other one is you or I can walk up to Facebook right now and buy ads against

a very targeted demographic, and most of those are not vetted in any way by Facebook.

It’s complete self-service, and there’s no white list of approved advertisers. Wow. What

we learned during the 2016 election is how the bad guys drove a hole through that and

put out all kinds and served ads that didn’t do our democracy very well. What do we do

about that? Do we require either an algorithmic or an in-person check from somebody at

Facebook before we allow those kinds of ads on? Maybe we do. Would that solve the

problem? That’s a hard thing to answer.

I have heard — I haven’t verified this — that the reason we don’t come down too

hard on Google for the 2016 election and the spread of these ads is that there was a white

list for YouTube. You had to have been an approved advertiser to place an ad on YouTube.

According to the people I’ve talked to on Google, that kind of inadvertently dodged a bullet

during the 2016 election because of that difference in their structure. Do we regulate that in

place? I’m not being facetious. I don’t know. It seems like an important thing to dive in on.

MR. HAGEMANN: Can I just comment real quick? Because the point that Andrew

made about the speed with which, you know, fake news actually travels these days as a

result of these, you know, decentralized digital networks. I think it’s important to also

remember though that that speed of the spread of lies and fake news is only matched by the

speed with which we can actually like assess the fact that fake news and lies are spreading,

right? So like we have, you know, mechanisms — social mechanisms to respond to those

issues. And I think, on net, it should probably get us wondering about, you know, not whether,

you know, these digital networks are a good thing but assessing just how good they are,

right?

These aren’t problems that emerged just with the advent of the internet. These are

problems that have been simmering for a long time, and now we can start to identify what

some of these problems are, have these conversations, and actually have a conversation

about what our policy responses might be.

DR. STRAIN: Yeah. I just wanted to make two quick points in response to that as

well. You know, one is that non-fake news can also spread very quickly as a consequence

of these platforms. I mean, if you look back at 20th-century American history, and you know,

you have all these instances of the president of the United States getting on the phone with

the publisher of The New York Times asking him not to publish a story and, you know,

the American people being systematically lied to for year after year after year, and, you

know, Congress not even knowing that the National Security Agency existed, you know,

all this kind of stuff. You know, is fake news a problem? Sure. But if you look back at the

way things used to be done, it’s not obvious that things are worse or trending in the wrong

direction right now.

Secondly, I think there — you know, having said that, I think there is a legitimate

policy debate to be had about whether a company like Facebook should as a general matter

be expected to hold more responsibility over the content on its platform. And some of that

is fake news; some of that is advertisers. Some of it is also — you know, if I, you know,

go, you know, up to a 7-Eleven and, you know, beat up the clerk and steal a bunch of

candy bars and film that, should I be able to just throw that up on Facebook for anybody

to see?

You know, right now, Facebook takes very little responsibility for what’s put on

its platform. And that’s something that I think it’s reasonable to think about, you know,

whether policy should push Facebook toward being more responsible — toward taking

more responsibility. I think, you know, the situation with Google is much harder, but, you

know, YouTube provides a good analogy I think because there — you know, YouTube is

a content-hosting platform. Google, the main product is a search engine and so how — you

know, how a search engine would take more responsibility, I mean, they have their ways

but that in some way is harder. But there I think you could have, you know, a pretty legitimate

policy debate about whether that would be an improvement over current policy.

DR. ZINGALES: Yeah. But what I’m a bit surprised is to hear that you don’t —

people here don’t want to intervene on the marketplace, but they want to intervene massively

on regulation of content and selection. I don’t feel as a citizen so protected by the fact that

Facebook decides who gets to distribute content and who doesn’t. And so what protects

me is competition. How do I get competition?

By favoring alternative platforms, alternative ways of diffusion. Having sort of all

this enormous power, Facebook, to select which stuff we produce because the notion that

you have, Andrew, that this spreads around is — I know that you know, but it is not exactly

right because this stuff is targeted by Facebook to maximize the time you spend on Facebook

so that they on purpose edit. So they are editors. It’s not that they publish everything because

if they were to publish everything, OK, they don’t take the responsibility. No. They actively

choose of all the news in a sense the worst one, the one that clearly have more attractive

content in order to induce people to look at them. So they play a negative role, and it puts

sort of gasoline on the fire. It’s not that they help the fire spread. They actually put gasoline

on the fire.

And I think that that’s a source of concern, and to me it’s much better to address

through inducing competition than to having some regulator, especially because, I think

you wrote a very interesting article about the level in which Facebook is embedded in the

political campaign. So these guys basically own the government, and they can do whatever

they want because they are bipartisan. So they own the government on both sides, and who

protects us against this power?

DR. MCAFEE: You don’t think Facebook owns the government is a touch hyperbolic?

MR. HAGEMANN: Just to be clear, I did not write an article suggesting that Facebook

owns the government. (Laughter.)

DR. MCAFEE: You see, Luigi’s demonstrating that if it’s outrageous, it’s contagious.

MR. PETHOKOUKIS: Well, I think we have about 20 minutes left, and I kind of

do want to go to questions if no one minds. So we’re going to — so I’ve been given things

I must say before questioning. And while I’m saying this, you can think of your question.

Remember, this is a livestreamed event. Please wait for the microphone to be

handed to you before asking your question so we can hear you. Please speak clearly into

the microphone. Keep your questions brief and make sure they’re questions — questions

and with a question mark — and they’re not soliloquies ending with a question mark. Again,

no statements. So if we want to think of a question, raise your hand. And we’ll start right

here since you asked a question before the event even started so you’re the early bird.

Q: Thank you. Netra Halperin, Peace Films. I want to talk about one of the things

you said —

MR. PETHOKOUKIS: A question, not a talk about. Just a second. We do want a

question, not a talk about.

Q: OK. My question is about antitrust and the fact that all mainstream media is

owned by six companies. There was a banking crisis in 2008. The banks are now bigger,

et cetera, et cetera, et cetera. So I don’t think we should throw antitrust out. That’s just a

comment. But anyway, regarding Facebook — I mean, my biggest interest is also like you,

in democracy. And I don’t really think that we have a forum of democracy because all of

the questions are being — the discussion is being controlled. So one of my questions to

you was about the possibility of porting your profile. I’m a big Facebook user, and I wish

I wasn’t only on that one platform because they do control things. They do have their

algorithms. How could we port our Facebook profile and have all our friends follow us?

MR. PETHOKOUKIS: Like the social graph and the issue of who — you know,

do I own my own data and some people — they want to be paid for their data as well.

DR. ZINGALES: I think it’s very simple because the European Union has already

done with financial transactions is a regulation that will come in place in January 2018.

It’s called PSD-2. And it brings data portability from one bank to the next. So exactly the

same which if you are a cell phone user and you want to switch from Verizon to AT&T,

you go to AT&T and say, get all my information, include my phone numbers in this transfer.

In Europe, it’s possible to do that from generally with your bank data, and they’re going

to get all the bank data.

And you can apply the same idea with your social graph. And if you change laws

like this Computer Abuse and Fraud Act, that makes it difficult for third parties to use your

password to access and transfer, then you have a much easier portability of data and social

graph. But this must be acquired by law. But it is not that the law is neutral today. The law

today is actually favoring tremendously the incumbent. And what I propose is that the law

is changed in order to favor new entrants to promote competition.

DR. MCAFEE: So I like that idea of changing the law. It sounds a little restrictive

to me. It won’t make any difference. You can’t port your social network. You can’t —

Q: And all my friends.

DR. MCAFEE: You can’t ask all your friends to come over to Facebook or

whatever Facebook’s alternative is with you. In addition to which, let’s say you take all

of your data. Let’s say I comment on one of your posts. That’s my data. Does that come

over when you want to port or not? The questions tumble out very easily, and they lead

me to the conclusion that if Facebook let you download all of your data immediately, it

would make absolutely no difference. These are winner-take-all markets.

DR. ZINGALES: You know, it’s interesting, but Facebook is fighting tooth and

nail Power Ventures, which is a little startup, in order to protect this. So it must be that

they care about this, otherwise they wouldn’t spend their money fighting this.

DR. MCAFEE: It must be that they care about airplanes then because they spend

their money on that, too.

MR. CLEWS: I think it’s more fun to spend money on airplanes than in legal cases.

DR. MCAFEE: Or it could be your words, it could be a free cash flow problem.

MR. HAGEMANN: To be clear, high-altitude solar-powered drones to deliver

internet access.

MR. PETHOKOUKIS: Over here.

Q: Hi. Luther Lowe from Yelp. Do you think that there’s a reason that we didn’t

have bad actors attack our democracy and have enjoyed the economies of scale in 2012,

in 2008 and whether it might have something to do with the internet being more pluralistic

and open and, you know, therefore things are getting more concentrated? You know, even

over the last four years, as Luigi noted, 85 cents — it’s actually 99 cents — of every new

dollars in online advertising last year went to Google or Facebook.

And then the second question is: Isn’t this really Silicon Valley using experiment-

based behavioral economics to design its products in kind of Bork-based neoclassical

economics to defend its monopolies? And really the premise of Borkian economics saying

that we don’t have information so let’s kind of plot the domain curve thus, when really we’ve

got information coming out of our ears in these markets. That’s why you’ve got Steven Levitt

at Chicago plotting real demand curves with Uber. And don’t you think some of that data

that these firms are sitting on could help us better understand these dynamics?

MR. HAGEMANN: Could help us better understand the dynamics of — I’m sorry.

I didn’t quite follow the connection there.

Q: So, for example, if — you know, how Varion these days will cop to the claim

competition is a click away suggests there’s zero switching cost, but if you look at the

data, people are far more likely to actually give up on their searches and assume the

information is not out there than move a few pixels up to your L bar and type in Bing.com.

And so it suggests that there’s something that is not being detected under sort of the current

analysis.

DR. STRAIN: Or to suggest that people don’t think that Bing.com is going to do

any better for them than Google.

DR. ZINGALES: No, no. But I think he’s raising a very good point. And, basically,

the way the antitrust is conceived today is neoclassical economic in which people are rational

and they basically are not affected by biases and so on and so forth. And the irony is that

when these firms operate in the marketplace, they actually use behavioral economics in a

massive way to obtain. But when it comes to discuss what should be done to address them,

they say, no, no. Let’s look at the old economics, and according to the old economics, we

are fine. I think there is a contradiction that needs to be resolved. I think he’s absolutely

right.

DR. STRAIN: I agree with that, too.

DR. MCAFEE: And on your first question, my understanding is that in this new

world that we’re creating with global social platforms. This is very new territory. The way

we used them in the 2008 election changed a lot to 2012, and the way we used them in

2012, 2016 changed a great deal as well. I don’t know the answer to your question. My

guess is the Russians, for example, just weren’t as aware in 2012 that this kind of thing

was possible and effective.

DR. STRAIN: Or, you know, look, I mean, it’s not foreign power is trying to

interfere in other countries’ elections is a new phenomenon. The United States —

DR. ZINGALES: As an Italian, I can tell you is not.

DR. STRAIN: The United States —

MR. PETHOKOUKIS: That’s an easy one for Luigi.

DR. STRAIN: — did quite a bit of that in the 20th century as well. And it could

just be that Vladimir Putin really didn’t like Hillary Clinton or really thought it would be

good for him for whatever reason if Donald Trump were president. You know, it could be

a thousand things.

DR. ZINGALES: But what I find paradoxical is that we are here agonizing over

$100,000 spent by Russia when the two parties spent $18 million just on Facebook. So if

really sort of money can buy consensus, my first order of magnitude is, wait a minute, those

$18 million, where do they come from, and what are the objectives? So if democracy is

for sale so cheaply, I think that that should be our main concern, not the $100,000 of the

Russians.

DR. STRAIN: And I agree with that, too. But, again — I mean, there’s a classic —

I’m not sure if you’re aware of it, you know, “Why Do We Spend So Little on Elections,”

written long before —

DR. ZINGALES: “The Man in the Golden Tower.” Yeah.

DR. STRAIN: Yeah, written long before Google and Facebook came on the scene.

So this has been — this is an old — it’s an old problem.

MR. PETHOKOUKIS: All right. We’re going to go all the way to that wall.

Q: One of the things that you guys haven’t really talked about is the politicization

of antitrust and how a lot of the current conversation on the whole hipster antitrust movement

could potentially allow for politicization, which I think we’re seeing already some allegations

of that in the AT&T-Time Warner case the Department of Justice is bringing. I just wondered

if you guys could talk about that.

MR. HAGEMANN: Yeah. I think this is — I think this is a big concern that we

probably should have hit on, right? Like any tool that you give the government can be

politicized to achieve the ends of that political actor, right? And it’s not uniquely the case

with antitrust. It’s the case with pretty much any regulatory tools and any law that you enact.

And so that’s part of the reason that I’m a big proponent of interpreting that antitrust

in a very narrow context and interpreting it as empirically well-sounded as we possibly can,

right? The broader the authority, the more likely it is to be abused. And so if you have a

problem, it’s better to use a scalpel than to take a hammer or a cudgel to it, right? You want

to get at the actual symptom of the disease. You don’t actually want to get at the boils that

result from it, right?

So I think that that is a very real concern and one, especially in the current AT&T

deal that we’re seeing right now — is something that should really be at the forefront of

our mind when we start to consider how expansively we want to use these types of tools

to achieve whatever ends that we as policy folks and academics might desire.

DR. ZINGALES: I’m very sympathetic to this concern of politicization. First of

all, I will distinguish between two things is sort of politicization of antitrust decision and

think about political consideration in antitrust in the sense of, say, too much concentration

of power.

So antitrust by design of the Sherman Act was considering the aspect of excessive

concentration of power as something that we should be worried about. And that in response

of the fear of a political use, we went to a very narrow definition. Now, this narrow definition

does not eliminate the politicization because do we think that the decision not to pursue

Google was completely nonpolitical? This is — do we know that Google employees visited

the White House 451 times during the Obama administration, of which 17 meetings with

the president himself? Do you think that there is no connection between this and the fact

that the FTC had a report saying that there was abuse of dominant position decided not to

pursue the Google antitrust?

I think that politicization unfortunately exists. It exists in both direction. We should

watch for it, but if you say that we fear politicization, then we should give up any political

decision. I think that we want to have a healthy democracy that held people accountable

for who they appoint to a particular position and how this person behaves. And I think

that that’s all. Otherwise we have entities that are governed by the industry itself, and

there’s no control.

MR. HAGEMANN: Important points. I would just point out two things real quick,

right? Like it’s not just Google folks who were going to the Obama White House. It’s

basically every industry, content industry, pharmaceutical industry. Like this is the problem

that isn’t unique to big tech.

DR. ZINGALES: How many consumers were going to the White House complaining?

MR. HAGEMANN: How many consumers get into the White House, right? And

I’m not saying that that’s not potentially a problem, right? But the other quick point is,

you know, the FTC during the Obama years did have a consent decree with Google for

violating its privacy policy. The biggest fine that the FTC has ever handed out went to

Google back in 2012, so it’s not quite fair to say that Google is somehow —

DR. ZINGALES: Can you give me the size of the fine?

MR. HAGEMANN: It was like — someone out there might know better than I do.

What I want to say it was around like $20 million. And, yes, I know. I know. But the point

is there are other tools in the tool kit, and this is — you know, the problems with revolving

doors and, you know, industries having access to high-level actors in politics is not unique

to big tech.

DR. ZINGALES: No, no. Absolutely.

MR. HAGEMANN: Sure.

DR. ZINGALES: I wish we were unique with that because it meant it was more

limited, the problem. No, it’s much bigger. I agree.

MR. HAGEMANN: Yeah. OK.

MR. PETHOKOUKIS: Is anybody concerned that we have these very big platform

companies that it encourages more bigness elsewhere in the economy to compete with these

companies?

DR. STRAIN: I don’t understand why you’re so concerned about success.

MR. PETHOKOUKIS: I’m jealous, just jealous. (Laughter.)

MR. HAGEMANN: Why do you hate America?

DR. ZINGALES: Let me tell you very simply. I understand. This is an argument

that Chicago economists have made for now two generations about we should not punish

success, and he’s right. On the other hand, there is the following concern. So my ability

to offer sort of valuable position as a revolving door and basically get my way is very

much linked to my dominant position of power. So if I am Chuck E. Cheese and I’m not

sure I’m going to be around tomorrow, offering a position in Chuck E. Cheese tomorrow is

not very valuable. And I don’t get to get what I get in my — at the government. If I’m

Citigroup, and I offer you a position as nonexecutive chairman paid $10 million a year in

the future, I get what I want, OK? So being big naturally gives you more political power.

And this is what I define as the Medici vicious circle, because it comes from the

Medici Family in Florence that they made their money in the bank industry very competitively.

Once they became big, they became the lord of Florence and remained there three centuries

exploiting Florence with that, OK? So the problem is that money gives you power, but power

gives you money. That vicious circle is what I’m concerned about.

MR. HAGEMANN: I agree entirely.

MR. PETHOKOUKIS: I’ve taken no one from the way back so we’re going to try

in the way back.

Q: I have a question that goes along the lines of the politicization and also the point

just made about government and some of these big companies having close relationships.

And the point is just that government is a consumer of the data that’s produced by these

platforms as well as, you know, considering consumer welfare, but the government as a

consumer of these — the output of these companies.

Does that over time — suppose there isn’t such a big problem right now, but in the

future if there were some sort of monopolistic behavior, then does that relationship of the

government as a consumer of the data produced by these companies disincentivize some

kind of government action in the future? So if some of you agree that there’s maybe no

reason or no good reason to intervene now, does the government’s relationship as a consumer

of the data produced by these companies cause some kind of problem potentially moving

forward?

DR. MCAFEE: I take a lot of comfort from the fact that the tech companies were

trying hard to be allowed to make public the requests that they got from the government

about — I forget exactly which statutes or what the requests were. But tech companies

tried pretty hard to say, we want to make that information public. They got fought by the

government on that. The tech guys are on the good side of this of the point that you raise.

Q: Interesting discussion. And you have lots of things — my name is Anne Krueger.

And my question is something else and that is, of course, that there’s a great deal of discussion

between the US and particularly Europe right now about antitrust with regard to the big tech

firms. And we’ve discussed this as if market power was all within the United States and it

had nothing to do with competition internationally. And I’d be interested in comments or

observations or whatever.

MR. PETHOKOUKIS: Thank you for asking the question about Europe that I should

have asked.

DR. ZINGALES: I think that’s an excellent question. It is not only Europe and the

United States. There’s also China, which is big, and the rest of the world. I think that, initially,

I thought that much of the action of the European antitrust was simply an anti-American

thing. I think that that’s not necessarily the case. It seems that there is a stronger attention

to competition in Europe because it’s the only thing in which Europe is popular about. If

you go about in Europe and say, what is the European Union sort of good for, it is freedom

of movement, of people, and competition in the European Union. So they have a strong

sense of legitimacy. And it is the only sort of point. It’s really not an elected commission.

It’s not really elected by people. It’s the only thing in which they feel they have a mandate

and they are very aggressive.

And The Economist had an article saying that all this activity of Margrethe Vestager

is because she has political ambitions. And I said, what’s the alternative? If a politician

has political ambition and tries to do something because it is popular, I think that’s good

because the alternative is doing something because she’s paid to do something by somebody

else. So I think adding political ambition of all things for a politician is a good thing. So I

think the activity of the antitrust in Europe is more aggressive for that reason.

Now, there is a tension which I regard as very dangerous — the idea of the national

champions, that we should protect and give monopoly here in order to have them stronger

and win outside. France is the country of national champions. I don’t think they’ve done so

well recently. I don’t think it’s the model we should use in the United States, but naturally

there’s a tendency in that direction.

MR. HAGEMANN: I tend to agree with most of that. There’s also the case that the

Europeans are far more bullish on how they think about privacy. At least this is the case

with the older generation. My understanding is that the younger generation is a little bit less

privacy conscious than a lot of those folks here in the US who share that same demographic

spread. But, you know, some of the history especially of, you know, some of the Eastern

European countries in recent memory —

DR. ZINGALES: Even Germany.

MR. HAGEMANN: Oh, especially Germany, especially Eastern Germany. I mean —

DR. ZINGALES: Even West Germany.

MR. HAGEMANN: Even Western Germany. Sure. Sure. So, you know, things

like the GDPR and other sort of like EU-level privacy regulations I think also factor into

this equation in addition to the, you know, different conception that the Europeans have

as it relates to — as it relates to antitrust.

Q: But should we think competition is only within the United States, or should we

think of competition as partly between firms in the US and firms in other countries when

we think of our antitrust policy?

MR. HAGEMANN: When we think about antitrust policy here, domestic —

DR. STRAIN: We shouldn’t think of the US as a competitive entity — a competitive

singular entity that is competing with other countries.

Q: No, no — (off mic) — the US market share.

MR. PETHOKOUKIS: Right. I mean, should we care about the Chinese platforms?

MR. HAGEMANN: Our policy tools here can only be applied to companies that are

located here. So we should be concerned broadly about global competitiveness, but we don’t

have the tools that the domestic — at the nation level to deal with those types of concerns.

Q: I meant it the other way around, that there are good European or Chinese firms.

Why don’t they count as part of the competition?

MR. HAGEMANN: They do, not for —

DR. ZINGALES: When is the last time you used Baidu?

MR. HAGEMANN: True. True, true, true. But that’s — I mean, there’s a lot baked

in — there’s a lot of reason that, you know, like Alibaba doesn’t have the type of market

share that Amazon does here in the United States. And it’s not simply — it’s not simply

antitrust related.

MR. PETHOKOUKIS: Well, I think we’ve actually gone a bit over. So thanks for

coming. Remember, check us out on Facebook. (Applause.)

(END)