The Senate Bill That Has Big Tech Scared
Credit to Author: Gilad Edelman| Date: Thu, 07 Apr 2022 11:00:00 +0000
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If you want to know how worried an industry is about a piece of pending legislation, a decent metric is how apocalyptic its predictions are about what the bill would do. By that standard, Big Tech is deeply troubled by the American Innovation and Choice Online Act.
The infelicitously named bill is designed to prevent dominant online platforms—like Apple and Facebook and, especially, Google and Amazon—from giving themselves an advantage over other businesses that must go through them to reach customers. As one of two antitrust bills voted out of committee by a strong bipartisan vote (the other would regulate app stores), it may be this Congress’ best, even only, shot to stop the biggest tech companies from abusing their gatekeeper status.
“It is the ball game,” says Luther Lowe, senior vice president of policy at Yelp and a longtime Google antagonist. “That’s how these guys stay big and relevant. If they can’t put their hand on the scale, then it makes them vulnerable to small and medium-size companies eating their market share.”
But according to the tech giants and their lobbyists and front groups, the bill, which was introduced by Amy Klobuchar and Chuck Grassley, respectively the top Democrat and Republican on the Senate Judiciary Committee, would be a disaster for the American consumer. In an ongoing publicity push against it, they have claimed that it would ruin Google search results, bar Apple from offering useful features on iPhones, force Facebook to stop moderating content, and even outlaw Amazon Prime. It’s all pretty alarming. Is any of it true?
The legislation’s central idea is that a company that controls a marketplace shouldn’t be able to set special rules for itself within that marketplace, because competitors who object don’t have any realistic place to go. No business can afford to be left out of Google’s search index, and few online retailers can make a living if they’re not listed on Amazon. So the Klobuchar-Grassley bill, broadly speaking, prohibits self-preferencing by platforms that hit certain size thresholds, like monthly active users or annual revenue. To take a simple example, it would mean Amazon can’t give its in-house branded products a leg up over other brands when someone is shopping on its site, and Google can’t choose to give YouTube links when someone does a video search unless those links are objectively the most relevant.
Beyond that, it’s difficult to say precisely what the law would do, because it leaves quite a bit unspecified. Like many federal statutes, it directs an administrative agency—in this case, the Federal Trade Commission—to turn broad provisions into concrete rules. And it gives the FTC, the Department of Justice, and state attorneys general the power to sue companies for violating those rules. (Last week, the DOJ endorsed the bill, an important signal of support from the Biden administration.) Inevitably, both the rules and any enforcement actions would end up being litigated in court, giving federal judges ultimate say over what exactly the law means.
This leaves plenty of uncertainty around how exactly the law would play out. Into that zone of uncertainty, the tech companies have poured dire warnings.
Perhaps the scariest talking point is that the law, if enacted, would kill Amazon Prime. According to eMarketer, more than 150 million Americans, more than half the adult population, are Prime members. That’s a lot of people who might hate to lose their “free” two-day shipping. (It’s not really free, of course, if you have to pay a subscription fee.)
The bill doesn’t mention Prime anywhere in the text. But according to the Chamber of Progress, an industry lobbying group whose funders include Apple, Amazon, Meta, and Google, the prohibition is implied. Adam Kovacevich, the group’s CEO and a former Google public policy executive, says that the issue revolves around something called Fulfillment by Amazon, or FBA. Amazon isn’t just a retailer, it’s a marketplace. A majority of products for sale on Amazon.com come from third party sellers who rely on Amazon’s marketplace to reach customers. For those sellers to qualify for Prime shipping, they have to use FBA, meaning they have to store their inventory in Amazon’s warehouse and have Amazon handle two-day delivery.
More to the point, these sellers have to pay for FBA. The Senate bill prohibits a company making “preferred status or placement on the covered platform” dependent “on the purchase or use of other products or services.” Kovacevich argues that this would kill Prime, because you can’t have Prime without FBA. “The guarantee of one- or two-day shipping is sort of inextricably linked with having as much control over the shipping and fulfillment process as possible,” he says.
But the bill doesn’t quite ban FBA. It just says Amazon can’t force sellers to pay for its fulfillment program to get the Prime label. If the bill became law, the company would have to let third-party sellers choose other logistics providers.
“What the bill would do in that case would be to force Amazon to develop a system on its marketplace so that sellers can choose alternative fulfillment partners, like DHL or FedEx or USPS or whatever,” says Sumit Sharma, a senior researcher at Consumer Reports. “And then they’ll have to ensure that what they show in the search results is not influenced by who’s fulfilling the order, as long as I’m getting it within a day or two or whatever. They can still have Prime membership.”
Amazon might say this is impossible, but it already allows some sellers to manage fulfillment themselves, through a program called Seller Fulfilled Prime. (Currently, the Amazon website says, “Seller Fulfilled Prime is not accepting new registrations at this time.” It gives no indication of when the program will reopen.)
Opening up Prime fulfillment would create at least the possibility of competition, as logistics companies would have a chance to win sellers’ business. Which helps explain why Amazon would oppose the bill. Amazon doesn’t publicly break out the share of its revenue that comes from FBA fees, but according to a report by the Institute for Local Self-Reliance, an anti-monopoly group, it amounted to roughly $57 billion in 2021—up from just $3 billion in 2014.
“It actually is very good for Prime members because if this legislation passes, it means there will be competition for who can provide the best package delivery,” says Stacy Mitchell, the codirector of the ILSR.
The bill would impose other constraints on Amazon, like preventing it from using data gleaned from third-party sellers to improve the sales of its own brands. (Last month, the House Judiciary Committee asked the DOJ to investigate Amazon executives for allegedly lying to Congress about whether the company does this.) But Mitchell, who supports the bill, says it doesn’t go far enough. She thinks a breakup is needed, so that Amazon the retailer is separate from Amazon the third-party marketplace is separate from Amazon the logistics company. “You cannot have the entity that sets the rules for how the marketplace works, and has a god-like view of everything that's going on, to also be participating in that marketplace,” she says.
Speaking of entities with a god-like view of everything—once upon a time, when you searched for something on Google, the results would be nothing but links. What made Google so good was that its algorithm was way better at providing results you actually wanted than the competition. Using a variety of objective signals, like how often a given page is linked to by other pages, Google would rank websites according to relevance and quality. To get what you wanted, you would click one of the links and leave for the open web.
As you’ve no doubt noticed, that has changed. Now, when you search, the top of the results are often curated—maps, answer boxes, shopping tools, and so on. It can be very convenient. But it’s also a way for Google to keep users within its kingdom rather than sending them out to the web. If you search for a restaurant, you get Google Maps reviews. If you search for flights, you get Google’s flight-comparison tool. If you search for videos, almost all the top results will be for YouTube. An investigation by The Markup in 2020 found that “Google devoted 41 percent of the first page of search results on mobile devices to its own properties and what it calls ‘direct answers,’ which are populated with information copied from other sources, sometimes without their knowledge or consent.” When The Markup looked at just the portion of results that would appear on an iPhone without having to scroll, that number rose to 63 percent.
Keeping users on Google properties means more opportunities to show ads and more ways to take a cut of a transaction, whether it’s a hotel booking or dinner reservation. Meanwhile, this tactic puts other businesses in a tight spot. Some 90 percent of searches take place on Google. If you’re competing against the platform that runs the search, that’s a hard battle to win. Users who don’t find you by Googling may not find you at all. One of the antitrust cases filed against Google takes aim at precisely this problem, arguing that Google has discriminated unfairly against specialized search engines like Kayak (flights) and Yelp (restaurants and other local businesses). The American Innovation and Choice Online Act would give the government a much better shot at winning that kind of case by explicitly saying self-preferencing is against the law.
Google argues that this would simply make its search results worse. A spokesperson directed me to a blog post by Kent Walker, the company’s president of global affairs and its chief legal officer. Walker argues that the Senate bill “could prohibit us from giving you integrated, high-quality results—even when you prefer them—just because some other company might offer competing answers.” The law would help competitors, he writes, at the expense of users. Nondiscrimination might sound nice in theory, but what happens when you search for directions and Google isn’t allowed to show you Google Maps results?
But the law’s supporters say it would in fact make Google show you the most useful results, just as its original ranking algorithm did. Google could still show a carousel of restaurant reviews, for example, if you searched for “burgers near me.” But it would have to give rivals like Yelp and Tripadvisor a fair chance to populate that carousel.
Google’s counterargument is essentially to deny that there is any space between what’s best for Google and what’s best for the customer. In Google’s mind, its vertically integrated product offerings are by definition the most useful. Opening up room for more competition would only benefit rival businesses, not the end user. The “vague and sweeping provisions of these bills would break popular products that help consumers and small businesses, only to benefit a handful of companies who brought their pleas to Washington,” writes Walker.
“It’s irrelevant whether the Yelp results are ‘better’ or the Google results are ‘better’ under the law currently,” says Kovacevich. “So long as Google believes they’re better, that’s enough. Google has the right to make its search results worse than Yelp’s results. And if it does, it’ll lose traffic to Yelp.”
If that last part were true, then Google would have a slam-dunk argument. But the theory of the self-preferencing bill, and indeed the entire tech antitrust movement, is that a company as dominant as Google doesn’t lose traffic even when another service offers higher quality—and that this is ultimately bad for users, who miss out on potentially better search results.
If Google and the other tech giants are right that their dominance stems purely from the superiority of their products, then perhaps they shouldn’t be too worried about the Klobuchar-Grassley bill. After all, in an open competition, the best offering should win. Perhaps Big Tech really is the best at everything. This law would just make them prove it.