Tag: chapter-14

Introduction

As sociologist Max Weber famously observed, the government is unique among social institutions in that it alone possesses the right to use force to achieve its objectives.[1] Members of liberal societies have generally agreed that it should exercise that extraordinary authority only to protect citizens’ rights or when there are strong reasons to believe that private ordering—individuals making their own decisions about how to use the things at their disposal—is likely to misallocate resources and thereby reduce social welfare. Common situations in which such resource misallocations are likely to occur include the classic market failures of externalities, public goods, information asymmetry, and market power.[2] Governmental commands backed by threat of force—e.g. environmental, tax, securities, and antitrust laws—have been justified as means of addressing each of these market failures.[3]

A market failure, though, is not a sufficient condition for a governmental fix. Because government interventions can themselves create losses, policymakers should always balance the expected welfare gain from averting a market failure against any welfare loss a contemplated intervention is likely to occasion. Moreover, such balancing should occur “at the margin,” meaning that the likely welfare gain (market failure loss averted) from each additional increment of restrictiveness should be compared to the welfare loss (from government failure) that the extra bit of restrictiveness is likely to produce. Oftentimes, contemplated government interventions will not be justified even though they are responding to legitimate market failures.

All this suggests that policymakers should carefully account for the ways that government interventions—like the markets they aim to correct—may systematically fail. As it turns out, government interventions regularly produce two sets of welfare losses. One set occurs when interventions misallocate resources because governmental planners lack the information or the information-processing abilities required to direct resources to their highest and best ends. Losses from this sort of “knowledge problem,” which was famously recognized by Nobel laureate F.A. Hayek, tend to increase as governmental directives become more prescriptive and less flexible, and as the governmental planners issuing them become further removed in time and space from the processes they are directing.[4] In competition policy, per se structural rules—such as absolute bans on mergers involving firms of certain sizes, regardless of specific market conditions—are likely to produce significant knowledge problem losses.

Other welfare losses from government interventions arise because government’s right to coerce may be exploited to secure private benefits. The individuals charged with managing the government’s monopoly on force—e.g. legislators and bureaucrats—will tend to make decisions that inure to their own interests and may not seek to maximize the aggregate welfare of all citizens. Outside the government, individuals and groups will seek to procure governmental directives that benefit them, regardless of the directives’ effects on others. And because voters face limitations on their time, attention, and information-processing abilities, democratic checks on government are unlikely to ensure that officials exercise state power with an eye toward maximizing overall social welfare. The branch of economics called “public choice” has predicted and documented these tendencies, so we may refer to this second set of welfare losses as “public choice concerns.”[5]

This chapter examines how public choice concerns, most prominently “rent-seeking” behavior, have been manifested in initiatives to regulate digital markets. The chapter first summarizes key insights from public choice and describes the phenomenon of rent-seeking. It then documents the existence of rent-seeking activity and other public choice concerns in the regulation of digital markets. It closes with a brief observation about how the structure of regulatory interventions may constrain or exacerbate rent-seeking and other public choice concerns in digital markets.

I. Public Choice and Rent-Seeking

Public choice is “the use of economic tools to deal with traditional problems of political science”—i.e. economic analysis of political behavior.[6] Nobel laureate James Buchanan, one of the fathers of public choice theory, described it as “politics without romance.”[7] In the romantic vision of democratic politics, citizens inform themselves of political candidates’ plans for exercising governmental power and then vote for those candidates whose plans they believe will be most beneficial. The elected candidates then enact legislation they believe will provide the greatest benefit to the citizenry as a whole. Bureaucrats, who answer to an elected executive who also seeks to maximize the citizenry’s welfare, enforce the laws and implement the programs the legislature has enacted, with an eye toward maximizing their effectiveness for the good of society. Government’s monopoly over the use of force is thus effectively harnessed to protect individual rights and prevent welfare losses that would otherwise result from market failures and other private ordering defects.

The problem with this romantic view of politics, public choice scholars assert, is that it assumes people make choices in the political arena differently than in other contexts.[8] When people make decisions about buying and selling things, they usually seek to capture as much value as possible for themselves. In selecting professions, people typically seek personal happiness, which might involve working for the public good but often does not. Even in the area of non-pecuniary relationships, people select friends and mates not to benefit society as a whole but to make themselves happy. Not only do people tend to pursue their own interests, they typically do so in a logical, internally consistent fashion. Accordingly, traditional economics has started with the assumption that people are rational self-interest maximizers.

Rejecting the romantic vision of politics, public choice theory assumes that people do not shed their fundamental natures when stepping into the political arena.[9] Public choice instead embraces the economist’s “rational choice” model of human behavior and applies it to political decision-making.[10] Citizens pursue their own interests in deciding how (and whether) to vote. They generally “vote their pocketbooks,” and, given the low probability that any individual vote will sway an election outcome, they invest little in educating themselves on the candidates and the issues at stake. People running for office, who apparently derive utility from holding positions of power, take reasonable steps to secure their election. They embrace positions that will generate votes in their favor, which means the positions are either popular with voters generally or are favored by and salient to individuals or groups that are especially likely to provide campaign financing. Once in office, politicians make decisions to promote, support, or oppose legislation according to the decisions’ effects on their reelection prospects. The non-elected bureaucrats charged with enforcing legislation or adopting and implementing regulations to fill its gaps make decisions that will benefit them personally. On discretionary matters, they tend to support outcomes that expand their agency’s turf and budget and enhance their own prestige, authority, income, and future job prospects.

Public choice theory also makes predictions about the behavior of business organizations. Because the individuals who manage those organizations typically benefit when their companies do well, they will try to harness government power to enhance their firms’ profits. And because firm managers are rational self-interest maximizers, they will take the tack most likely to generate success: they will play upon government officials’ self-interest.

Economists refer to private entities’ efforts to enhance their profits by co-opting government’s extraordinary right to coerce as “rent-seeking.”[11] The economic term “rent,” first introduced by David Ricardo in the 19^th century, means the payment to a factor of production in excess of the amount required to keep the factor in its current use.[12] For example, if an employee is paid a salary of $100,000 but would remain in her current job for $90,000, she is capturing $10,000 in rent.[13] Of course, there is nothing inherently troubling about pursuing rent; any employee who would stay in her job at her current salary but nevertheless asks for a raise is technically seeking rents. The term rent-seeking, however, is typically used more narrowly. The concept, which originated with Gordon Tullock in 1967 and was given its label by Anne Krueger in 1974, refers to efforts to capture above-normal returns not by creating additional value or bargaining with one’s transacting partner for a greater share of the surplus created by a deal, but by harnessing the government’s coercive powers.[14] For example, firms may lobby legislators to provide a subsidy for a good they produce. They may seek imposition of a tariff on competing foreign goods. They may try to persuade legislators or regulators to enact a rule that imposes extra costs on their rivals. With all these endeavors, they seek to channel government’s coercive power in a way that benefits them, and they do so by exploiting government officials’ tendencies to act self-interestedly. As all the players in a rent-seeking scenario are acting as rational self-interest maximizers, rent-seeking is a classic public choice concept.

Rent-seeking reduces social welfare in several ways. First, it diverts resources away from the creation of wealth and toward its redistribution. The money a firm spends on lobbying, public relations, and other endeavors aimed at persuading government officials is not available for creative activities like research and product development. And it is not just money; as firm managers devote more time and attention to procuring governmental favors, less of each is available for productive endeavors. Second, to the extent rent-seeking reduces market competition—e.g. as rent-seekers hobble their rivals with regulations or tariffs—it causes a “deadweight loss” by misallocating productive resources away from their highest and best ends.[15] Finally, to the extent rent-seeking drives rivals from the market, it squanders their non-recoverable investments.[16] For example, if a firm has installed specialized equipment but then finds itself driven out of business by some sort of protectionist regulation, the value of its equipment is destroyed.

Despite the fact that the policies and rules sought by rent-seekers routinely reduce social welfare, they are frequently enacted. There are several reasons for this. One is that voters, who have the power to punish legislators and bureaucrats who employ government’s coercive power in a welfare-reducing manner,[17] are often unaware of how those officials’ decisions have harmed overall welfare—and the officials know it. As rational self-interest maximizers, voters will invest in information needed to exercise their voting right effectively only to the point at which the (decreasing) marginal benefit of additional information equals the (increasing) marginal cost of obtaining it. Because each individual vote is so unlikely to sway an election, the marginal benefit of additional information on how to vote is quite low, and so voters spend little to become informed.[18] They rationally remain ignorant of how their elected officials are exercising government power, which frees those officials to make the decisions that benefit themselves even when those decisions reduce overall social welfare. Rent-seekers, in turn, are adept at ensuring that the decisions they prefer will somehow inure to the personal benefit of the government officials asked to make them.

Voters’ rational ignorance interacts with another dynamic that makes rent-seeking initiatives particularly likely to succeed. The policies sought by rent-seekers always concentrate special benefits on their proponents, who therefore have an incentive to lobby for their adoption. Many times, however, the costs of the initiatives are distributed broadly throughout society as a whole. A tariff, for example, concentrates a benefit on the domestic producers of a product—likely a small group—but imposes costs in the form of slightly higher prices on all the domestic consumers of that product—likely a large group. The total cost of the tariff may well exceed the benefit to the domestic firms it favors, but because each consumer bears just a tiny portion of that cost, no one is willing to incur the cost of counter-lobbying against the tariff. After all, anyone who did so would bear all the cost of her lobbying while capturing only a small portion of any benefit produced by her efforts.[19] Public choice thus predicts that policies involving “concentrated benefits and diffused costs” will be enacted even when they are, on the whole, welfare-reducing.

Of course, lobbying for a special benefit at the expense of the general public is difficult. Consumers may withhold business from firms they think are abusing government power, and, despite voters’ rational ignorance, government officials will want to avoid any appearance that they are favoring the interests of a few over those of the public at large. Rent-seekers may therefore seek to hide behind groups that share their policy goals but for public-spirited, rather than self-interested, reasons. Bruce Yandle has dubbed this dynamic the “bootleggers-and-Baptists” syndrome, in honor of the two groups that in the early 20^th century pushed hardest for liquor prohibition.[20] Baptists, who emphasized the social evils of alcohol, made a passionate and public “pro-social” case for prohibition. Bootleggers promoted prohibition too, but did so behind the scenes and in the hopes of squelching competition and earning monopoly profits on their illegal products.

Taken together, voters’ rational ignorance, the fact that protectionist rules often create concentrated benefits but diffused costs, and the bootleggers-and-Baptists dynamic render rent-seeking an often successful strategy for enhancing private profits. And success is especially likely when the officials wielding government power have broad discretion, regular contact with those they regulate, and little direct political accountability. That combination frequently exists when a government agency is charged with continual oversight of some narrow sector of the economy. A key insight of public choice theory is that such agencies tend to become “captured” by their regulatees and end up exercising their discretionary authority in a manner that preserves or enhances the regulatees’ profits by protecting them from competition.[21] In exchange, the regulatees provide benefits—from personal affection, to perks, to future job prospects—to the officials wielding power. Once again, all individuals are pursuing their own interests.

Having laid the foundation, we turn now to consider some recent examples of rent-seeking activity and other public choice concerns in the regulation of digital markets.

II. Rent-Seeking in Digital Markets

The regulation of digital markets presents all sorts of opportunities for rent-seeking, and examples of such behavior abound. While there are many different ways to co-opt the government’s coercion right to secure a private benefit, most instances of rent-seeking fall into two categories: seeking some sort of subsidy or seeking to foreclose competition. Parts A and B of this Section describe recent examples of those two strategies. Part C then considers why such strategies may succeed in digital markets even when the policies being sought would reduce overall welfare.

A.  Procuring a Subsidy

Two prominent examples of firms’ seeking to exploit government power over digital platforms to procure some sort of subsidy are the campaign by traditional news publishers to extract payment from Google and Facebook and the efforts of certain software and digital content providers—most notably, music streaming service Spotify and video game producer Epic Games—to free-ride off the investments Apple and Google have made to attract users to their mobile ecosystems.

1.     News Publishers and Payment for Snippets

The newspaper industry is struggling. In 2018, newspaper circulation in the U.S. fell to its lowest level since 1940, and between 2008 and 2018, revenues at U.S. newspapers fell from $37.8 billion to $14.3 billion, a 62% decline.[22] During the same period, U.S. newsroom employment dropped by nearly half, from 71,000 to 38,000 workers.[23] Similar trends are occurring across the globe.[24]

The primary reason for newspapers’ difficulties is competition created by the Internet.[25] Newspapers’ revenues from classified advertisements plummeted as websites like Craigslist, which offers consumers free classified advertising for most products and services, eroded newspapers’ ability to charge monopoly rates.[26] It did not help that newspapers cannibalized their own classified revenues by creating sites like Cars.com and Autotrader.com.[27] With respect to non-classified advertising, the Internet has cut into newspapers’ revenues by dramatically expanding the number of ad placement options available to advertisers. In the competition for consumer attention—advertisers’ chief concern—physical newspapers must contend with the entire Internet, and even the digital versions of newspapers must vie with millions of non-news websites.

In light of the challenges the Internet has created for their advertising-focused funding model, newspapers have sought to employ the government’s coercive power to increase their revenues. Outside the U.S., media groups have successfully lobbied for rules requiring Google and Facebook to make payments to newspapers. News organizations in Germany, France, and Spain procured copyright law amendments requiring the platforms to pay licensing fees when they display excerpts or photographs from a publisher’s news articles.[28] In Germany, Google was able to avoid such fees by procuring liability releases from publishers, which found that traffic to their websites would plunge without Google’s help in directing readers to them.[29] The Spanish legislature foreclosed that possibility by declaring that Spanish publishers’ rights to license fees was “inalienable,” leading Google to remove its Google News service from its Spanish site.[30]

When the French government required Facebook and Google to pay for the use of photos and snippets, the two companies again sought to procure the sort of liability releases used in Germany.[31] For French publishers that did not release Google from liability for the display of snippets and photos from their news stories, Google began displaying only titles and URLs linking to the stories.[32] Publishers then complained that such a display format reduces their traffic, whereupon the French competition authority entered an interim order requiring Google to continue displaying snippets in accordance with publishers’ wishes.[33] At least temporarily, then, French publishers have succeeded in persuading the government to force Google and Facebook to display the snippets publishers believe will maximize their traffic and to pay the publishers for use of those snippets.

News publishers in Australia have achieved a similar outcome using competition law rather than copyright. In late 2017, after an intense lobbying campaign by news publishers including Rupert Murdoch’s News Corporation, the Australian government directed the Australian Competition and Consumer Commission (ACCC) to investigate whether multinational digital platforms—chiefly, Google and Facebook—were abusing their market power.[34] The Commission released a Preliminary Report on its findings in December 2018[35] followed by a Final Report in June 2019.[36] In the Final Report, the Commission recommended that Google and Facebook collaborate with news publishers to produce a voluntary code of conduct that would include an obligation on the part of the platforms to negotiate a revenue-sharing arrangement with news publishers whose snippets they displayed.[37] In December 2019, the Australian government accepted that recommendation and directed the ACCC to see that such a voluntary code was negotiated by November 2020.[38]

In April 2020, shortly before Google was to report its progress in negotiating the voluntary code, the Australian government changed course and directed the ACCC to set forth mandatory rules requiring digital platforms to share their advertising revenue with news publishers and to provide the publishers with advance notice of any algorithm changes that could affect page rankings and displays. The government cited news publishers’ loss of advertising revenue due to the COVID-19 pandemic as a basis for its abrupt shift to a mandatory code.[39] In announcing the change, Australian Treasurer Josh Frydenberg acknowledged the Spanish and French experiences in which Google and Facebook removed news snippets in response to payment obligations, and he insisted that Australia would avoid such evasion to “become the first country in the world to successfully require payment for content.”[40] The ACCC unveiled a draft of its mandatory code on July 31, 2020.[41]

Throughout their lobbying campaigns, news organizations have insisted that digital platforms are unfairly taking and profiting from their content.[42] But news publishers can easily prevent digital platforms from displaying their published material. They can use the Robots Exclusion Standard (Robots.txt) to prevent content scraping,[43] and Google provides tools publishers may use to block snippets or control their length.[44] Despite these capabilities, newspapers typically refrain from restricting the display of snippets for an obvious reason: they benefit from the traffic digital platforms provide. Traditionally, newspapers paid to have headlines and short excerpts of content publicized in order to increase readership and thereby enhance sales, subscriptions, and advertising revenue.[45] Google and Facebook provide such publicity for free, and newspapers obviously value it, as evidenced by the ease with which Google was able to procure liability releases for copyright infringement in Germany and France.[46]

Far from simply protecting their content, which they could do themselves, powerful legacy media companies have succeeded in convincing the Australian government to force Google and Facebook to continue providing news publishers with free publicity, to pay the publishers when they do so, and to give the publishers information needed to secure a preferred place in search rankings. The media companies insist that these mandates are needed because the platforms’ ad tech services extract an excessive portion of revenues from advertisements on the publisher’s websites.[47] But the publishers need not utilize those services in selling display ads. They could sell their advertising space directly and pocket all the advertising revenue, or they could utilize competing intermediaries; as the ACCC acknowledged, competitors exist at every stage of the digital advertising sales chain.[48] News publishers that continue to use the digital platforms’ ad tech services presumably do so to maximize their advertising revenues. They understand that Google’s ad tech is extraordinarily efficient at allocating ad space to the advertisers willing to pay the most for it. Google, of course, demands compensation for that valuable ad-matching service, but it charges similar fees to all web publishers that use its services—blogs, affinity group webpages, medical informational portals, and digital news sites alike. When news organizations lobby for special rules for their websites, they are simply seeking to use government power to extract rents.

The Australian news media’s success in procuring an effective subsidy is unsurprising in light of public choice theory. It stands to reason that elected officials pursuing their own interests would more likely support news outlets than digital platforms. The former control press coverage and therefore have great sway over voters who, again, are unlikely to expend significant resources to inform themselves on election matters. Digital platforms may have money to spend on campaigns and can publicize or attempt to hide news stories, but they do not actually create the stories that may affect votes.

News organizations have also enlisted a chorus of “Baptists” to put a pro-social spin on their rent-extraction campaign. Throughout the newspaper publishers’ campaign to force platforms to share advertising revenues and favor the publishers with advance notice of algorithm changes, various public interest groups have offered their support by emphasizing the importance of professional journalism to democracy itself.[49] Government officials who might normally be reluctant to take revenue from one set of private businesses and give it to another with greater political sway could therefore reassure themselves—and any skeptical voters—that they were simply taking the actions necessary to preserve democracy and promote the public good.

In the United States, news publishers have sought to extract rents from digital platforms by lobbying for an exemption from the antitrust laws.[50] Their efforts culminated in the introduction of the Journalism Competition and Preservation Act of 2018.[51] According to a press release announcing the bill, it would allow “small publishers to band together to negotiate with dominant online platforms to improve the access to and the quality of news online.”[52] In reality, the bill would create a four-year safe harbor for “any print or digital news organization” to jointly negotiate terms of trade with Google and Facebook.[53] It would not apply merely to “small publishers” but would instead immunize collusive conduct by such major conglomerates as Murdoch’s News Corporation, the Walt Disney Corporation, the New York Times, Gannet Company, Bloomberg, Viacom, AT&T, and the Fox Corporation.[54] The bill would permit news organizations to fix prices charged to digital platforms as long as negotiations with the platforms were not limited to price, were not discriminatory toward similarly situated news organizations, and somehow related to “the quality, accuracy, attribution or branding, and interoperability of news.”[55] Given the ease of meeting that test—since news organizations could always claim that higher payments were necessary to ensure journalistic quality—the bill would enable news publishers in the United States to extract rents via collusion rather than via direct government coercion, as in Australia.

2.     App Developers’ Efforts to Free-Ride off the Investments of Mobile Platform Providers

A second example of firms’ seeking rents in the form of an effective subsidy involves attempts by Spotify, Epic Games, and other developers of digital applications to use antitrust law to take a free ride on investments made by the producers of mobile operating systems.

a.     Mobile Operating Systems and Third-Party Apps

In January 2007, Apple released the first generation of its revolutionary iPhone—the “iPhone 2G”—with a number of preinstalled applications (“apps”) for accomplishing tasks or providing entertainment.[56] The iPhone’s operating system, iOS, was originally configured to prevent installation of non-Apple software, including apps.[57] Apple quickly realized, however, that the availability of additional, high-quality apps would enhance the iPhone’s attractiveness. On July 10, 2008, the day before the second-generation “iPhone 3G” was released, Apple debuted the App Store, a platform for distributing iPhone apps created by third-party software developers.[58] Originally launched with just 552 apps,[59] the App Store now hosts nearly 1.85 million, the vast majority of which are produced by third-parties.[60] The iPhone ecosystem, however, remains closed; Apple does not license its iOS operating system to other hardware producers, and the App Store is the only outlet through which an iPhone user may license an app without violating the terms of use on the iOS and thereby voiding the warranties on the iPhone and disabling a number of its security features.[61] Apple’s revenue from the iPhone primarily comes from hardware sales,[62] so it takes pains to ensure that all software operated on the iPhone—its iOS as well as any third-party apps—works flawlessly. Any software glitches would degrade the user experience, reducing iPhone sales.

Originally quite unique, the iPhone soon encountered close competition with the release of the first Android smartphones in 2008.[63] Android is an open-source operating system sponsored by Google and licensed for free to hardware producers throughout the world.[64] Google’s compensation comes primarily in the form of enhanced advertising revenue, as Android products typically include Google Search, from which Google generates search ad revenue, and Google’s Chrome browser, which enables Google to collect user data for targeted search ads.[65] Google also earns revenue from its own app store, Google Play, which is usually included in Android devices.[66] Unlike Apple’s iOS, Android permits users to install apps acquired from sources other than the app store that is included with the operating system.[67]

Apple and Google offer different value propositions to smartphone consumers. Because producers of Android-based products need not pay for the operating system (as Google’s compensation comes primarily from advertising), Android devices tend to be cheaper than iPhones.[68] And as the operating system is open-source, Android permits innovation by smartphone producers and greater customization by users.[69] This openness, though, also means that Android products are more susceptible to viruses, malware, and other security risks.[70] When it comes to apps, Android offers more variety,[71] as app review in Google’s Play Store is less stringent than in Apple’s App Store[72] and Android app developers may also distribute outside the Play Store. Again, however, this openness comes at a cost: Android apps tend to be of lower quality than iOS apps, largely because app developers must support many more versions of Android than of iOS.[73] In terms of users, Android barely edges out iOS in the United States, with 51.8% of smartphone subscriptions versus 47.4% for iOS, but it dominates globally, with a 74.14% share of global revenues, as compared to iOS’s 25.16% share.[74]

Both Apple and Google earn revenues through their app stores. Apple retains 30% of revenues from app licenses and in-app purchases of digital goods.[75] It earns no revenue, however, from distributing free apps, which are typically ad-supported; from the use of App Store apps to purchase physical goods and services such as household items, delivered food, and ride-sharing services; or from out-of-app purchases of digital goods that purchasers then enjoy on App Store apps, such as when a user who has downloaded a free streaming video app then subscribes to the relevant streaming service outside the app.[76] For in-app digital subscriptions, Apple’s revenue share drops to 15% after the first year.[77] Google’s revenue share from sales of Android apps through Google Play closely mirrors Apple’s take through the App Store: 30% for paid apps and in-app purchases of digital goods, with in-app subscription takes falling to 15% after the first year.[78] Other Android app stores determine their own revenue shares. Some collect a lower percentage of revenues on app sales,[79] and some developers of paid Android apps avoid fees altogether by distributing their own apps.[80]

There are, of course, significant costs in running a third-party app store. Apart from developing and maintaining the technology required to produce apps, catalogue them and bring them to the attention of interested users, and process distribution and payment, platforms must ensure that the apps they distribute will work as described and will not create technological glitches for users. App stores create value for the developers whose apps they distribute by implicitly certifying that those apps are “safe and effective.” And that requires close examination of each app submitted for distribution, both free and paid. Apple’s vetting process is particularly rigorous,[81] and consequently App Store apps are generally considered to be of higher quality than those distributed through Google Play and other Android app stores.[82] Not surprisingly, then, distributing through the App Store is more lucrative for app developers.[83] In the third quarter of 2019, for example, the App Store generated revenue of $14.2 billion on 8 billion first-time downloads, while Google Play earned just over half as much ($7.7 billion) on nearly three times as many first-time downloads (21.6 billion).[84]

b.    Spotify’s Campaign Against Apple

Founded in 2006, Swedish music-streaming service Spotify has long benefited from the services app stores provide. As of March 2020, Spotify had 286 million monthly active users, the vast majority of whom downloaded its app through Apple’s App Store or Google Play.[85] Through the App Store alone, users have downloaded the Spotify app or an update to it more than 300 million times.[86] Around 55% of Spotify’s active users use its free service.[87] As they pay nothing to Spotify, distributing to them generates no revenue for the App Store or Google Play. It does, however, make money for Spotify, which sells ads on its free service and can earn more as the number of free users grows.[88] Any revenues the app stores receive for certifying, marketing, and distributing Spotify’s app would come from in-app subscriptions to Spotify’s ad-free service, Spotify Premium.

Spotify, however, has made it difficult for the app stores that certify and distribute its app (and its many upgrades) to receive any compensation for their efforts. In 2016, it removed iOS users’ ability to upgrade to its Spotify Premium service using Apple’s in-app payment system (“In-App Purchase”), and it thereby circumvented the requirement to share revenue with Apple.[89] Users of the iOS app must leave the app and go to Spotify’s webpage to purchase a Premium subscription. In the Android version of Spotify’s app, users may upgrade to Premium by remaining in the app and submitting a credit card number directly to Spotify, but they may not use Google’s more convenient in-app payment system, Google Play Billing, which would retain a share of revenue for Google.

Both Google and Apple have continued to support Spotify’s app and upgrades despite the lack of payment for doing so. Apple, however, has refused to allow Spotify to include an option for in-app payments that evade Apple’s revenue share by foregoing Apple’s In-App Purchase system. It has also refused to approve versions of Spotify’s app that would explicitly direct users on how to sign up for Spotify Premium outside the app, and it has insisted that Spotify not directly notify app users about how to do so. Apple understands that allowing app developers to use a “freemium” model—i.e. a free-to-download app with the ability to upgrade to enhanced service for a fee—while using other in-app payment systems or directing users to pay for upgrades outside the app could quickly dry up its App Store revenues, which are used to cover the considerable cost of vetting, marketing, and distributing apps. Under the policies Spotify is demanding, any developer of a paid app could avoid contributing to the App Store by charging nothing for the app itself, locking all its functionality, and directing users outside the app to make payment and thereby unlock the app.

Since 2015, Spotify has engaged in an intensive effort to persuade government officials to force Apple to certify and distribute the Spotify app and updates without sharing in Spotify’s revenues. The company first launched a lobbying campaign to procure legislation or regulation that would achieve its goals.[90] It arranged meetings with congressional leaders and hired a team of lobbyists to press the case that Apple’s insistence on compensation for app distribution was a means to promote Apple’s own streaming music service, Apple Music, over Spotify’s.[91] Spotify also pressed its case to officials from the U.S. Department of Justice and to the Federal Trade Commission’s Technology Task Force.[92] And in March 2019, with much fanfare,[93] it filed an antitrust complaint against Apple in the European Union.[94]

Spotify’s efforts are paying off. On June 16, 2020, the European Commission announced that it had opened an investigation of Apple’s App Store policies.[95] It will examine whether Apple has violated European antitrust law by (1) refusing to allow payments within the app using non-Apple payment methods and (2) restricting app developers’ ability to instruct users to make payments outside the app.[96] The Commission will determine whether these policies, which are aimed at preventing free-riding on Apple’s efforts to certify, market, and distribute apps, nevertheless “breach EU competition rules on anticompetitive agreements between companies . . . and/or on the abuse of a dominant position.”[97] The impetus for its investigation, the Commission explained, was Spotify’s 2019 complaint along with a similar complaint by “an e-book and audio book distributor.”[98]

Spotify’s campaign against Apple appears to be an effort to force the company—for no compensation—to certify, promote, and distribute Spotify’s app to the attractive customer base Apple has assembled. The fact that Spotify has pursued action against Apple but not Google, which shares Apple’s position as both the effective gateway to a base of mobile phone users[99] and a Spotify rival in music streaming,[100] suggests that Spotify aims to require Apple to follow Google in permitting Spotify to evade revenue-sharing requirements with no adverse consequences. (Apple currently allows Spotify to evade payment, but not while maintaining a seamless app experience for its users, who must leave the app to upgrade.)

Google and Apple, however, are not in the same position when it comes to Spotify. Google provides extensive paid services to Spotify—e.g. Google Analytics 360, Google Optimize 360, Google Ads—and therefore benefits as Spotify’s user base grows.[101] Apple, by contrast, earns no significant revenue from Spotify apart from commissions on in-app purchases. Google also obtains user information from Spotify,[102] and because Google’s revenue comes primarily from targeted advertising, such information is of special value to it. Apple, whose revenue comes primarily from hardware sales, gets little benefit from the information it acquires in distributing apps. Apple also offers a value proposition different from Google’s. Because of its more closed operating system and the extra vetting it applies—at considerable cost—to app submissions, the apps in its store are perceived to be of higher quality, and its certification is therefore more valuable for developers.[103] At the same time, Apple’s relentless efforts to upgrade the user experience have attracted devoted, high-end users who are more likely to spend on apps.[104] The App Store thus offers a particularly attractive distribution outlet to Spotify and other app developers.

In the end, Spotify is attempting to use antitrust to force Apple to act like Google even though (1) Spotify confers benefits on Google that are not available to Apple; (2) the certification service Apple provides is more valuable, and costlier to produce, than Google’s; and (3) the user base Apple has cultivated is more desirable than that offered by Google. In seeking to use antitrust law to extract greater value than it could obtain in an arms-length transaction, Spotify is engaged in rent-seeking.[105]

c.     Epic’s Antitrust Claims Against Apple and Google

Whereas Spotify has directed its campaign against Apple alone, another prominent app developer is attempting to use antitrust to extract greater surplus from transactions on Google’s platform as well. In August 2020, Epic Games, producer of the popular Fortnite video game, filed antitrust suits challenging the app store policies of both companies.[106] Epic complains that the companies restrict app distribution to their own stores—Apple, by expressly disallowing iOS app distribution outside the App Store[107] and Google, by creating practical impediments to other avenues for Android app distribution.[108] Epic also challenges each platform’s requirement that in-app purchases be processed through the platform’s proprietary payment system (In-App Purchase for iOS; Google Play Billing for Android).[109] These restraints, Epic asserts, enable Apple and Google to collect a supracompetitive revenue share on most in-app digital purchases, including those that Fortnite players make when they buy access to such game features as digital “skins” for their on-screen avatars and “battle passes” that allow them to participate in certain contests.

While the Epic lawsuits are in their early days and may look different after discovery, the company’s claims currently appear to be weak under United States antitrust law. As an initial matter, the policies Epic complains of are not the product of market power; they were put in place when Apple and Google had minuscule shares of the mobile operating systems market.[110] The fact that the two companies now earn substantial revenues from their app stores because their mobile operating systems have enjoyed success is not illegal under U.S. law. As Judge Learned Hand famously explained, “The successful competitor, having been urged to compete, must not be turned upon when he wins.”[111] The Supreme Court has concurred, observing that

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.[112]

There are also obvious business justifications for the complained of policies. The first policy—placing restrictions (or, in Google’s case, warnings) on outside app distribution—helps prevent harm to users’ mobile software and hardware and builds user trust in the mobile ecosystem. Because Apple’s primary revenue from mobile systems comes from sales of hardware with preinstalled software (iPhones with iOS), it has a particularly strong interest in ensuring perfect performance of the units it sells, and it therefore exerts more control over app distribution than does Google, which earns substantial revenue off mobile search. But Google, too, has an interest in protecting the Android brand by limiting the distribution of harm-causing apps. The second complained of policy—requiring use of the platform’s own payment system for in-app purchases—enables each platform to receive compensation for the tremendous value it provides to app developers by assembling an installed base of users and certifying and marketing the developers’ apps. Producing such value is costly, which helps explain why nearly all app stores demand a cut of developers’ revenues.[113] Indeed, the fees charged by Apple and Google appear to be in line with industry norms.[114]

The most significant deficiency in Epic’s antitrust claims is that the complained of policies in no way enhance the market power Apple and Google possess. Regardless of their app store policies, Apple and Google control their operating systems and may thus determine which, if any, third-party apps may operate on their platforms. They may impose technological barriers to the development and operation of unauthorized apps, license their operating systems on the condition that users not install apps that have not been approved, and create adverse consequences—both technological and legal—for doing so. Their control over access to their operating systems—a power they will possess whatever their app store policies are—enables them to extract a sizable share of the surplus created when an app developer transacts with a licensee of the operating system. They currently extract such surplus by taking a cut of the app developer’s revenue, and the app developer often responds by charging higher prices to users. If, however, Apple and Google were not able to capture surplus from app developers and users in that fashion, they could easily do so in another manner. They could, for example, charge app developers for access to critical application programming interfaces (APIs) or for the right to be included on some list of approved apps that could bypass any technological barrier to operability and any restrictions in the licenses held by users of the operating systems.[115] Because the policies Epic complains of do not create market power that would not otherwise exist, a court is unlikely to conclude that they violate United States antitrust law.

Victory in a court of law, though, is not likely Epic’s goal. The circumstances surrounding the filing of Epic’s lawsuits suggest that the company is primarily pursuing victory in the court of public opinion. Epic’s lawsuits were part of a tightly orchestrated publicity campaign. On August 13, 2020, the company breached its contracts with Apple and Google by submitting app updates that contained obscure code allowing users to bypass the platforms’ in-app purchasing systems and thereby avoid revenue sharing.[116] Apple and Google responded by exercising their contractual rights to remove the non-conforming apps from their stores.[117] Within hours of the removal, Epic filed pre-drafted complaints—one 62 pages in length, the other 60—against the two companies. Epic then peppered social media with a sleek video mirroring the iconic television commercial Apple released in connection with its 1984 debut of the Macintosh home computer but replacing the purportedly monopolistic villain Apple had sought to displace—IBM—with Apple itself.[118] Epic’s clever commercial directed viewers to a Twitter hashtag, #FreeFortnite, and the company soon hosted a “#FreeFortniteCup” to draw further attention to its cause.[119] A few days after filing its complaints and commencing its publicity blitz, Epic generated further publicity by filing 197 pages in a pre-packaged motion for temporary injunctive relief.[120] Of course, no such “emergency” relief would have been needed had Epic filed its antitrust claims without first breaching its agreements. Epic’s dramatic removal from the app stores, however, drew attention to its cause and upped the public pressure on Apple and Google to make changes to their app store policies.

The question remains as to why Epic would launch a lawsuit-based publicity campaign to induce Apple and Google to alter their app store policies when any changes would not reduce the platforms’ market power but would simply induce them to extract surplus using alternative means. As Dirk Auer has observed,

One potential answer [to that question] is that the current system is highly favorable to small apps that earn little to no revenue from purchases and who benefit most from the trust created by Apple and Google’s curation of their stores. It is, however, much less favorable to developers like Epic who no longer require any curation to garner the necessary trust from consumers and who earn a large share of their revenue from in-app purchases.[121]

Under the current system, paid apps that achieve great success effectively subsidize upstarts, niche apps, and apps that are advertiser-supported. Epic may not like that outcome, but the system has the advantage of getting developers of new and small apps on board, expanding the offerings in each platform’s app store, and thereby building the installed base of users from which Epic and other app developers benefit. As Auer further observes, the current system, by facilitating a 30% revenue share from paid apps, also reduces the incentive for Apple and Google to imitate successful apps and may thereby operate as a “soft commitment not to expropriate developers, thus leaving them with a sizable share of the revenue generated on each platform.”[122]

Apple and Google have many ways to monetize control over their mobile operating systems. Given the intense competition between the two platforms, each has an incentive to choose monetization strategies that maximize the availability of high-quality third-party apps so as to grow their user bases. Epic’s legally deficient lawsuits represent an effort to put public pressure on Apple and Google to revamp their app store policies, not in a manner that would reduce their market power—any such power would persist even absent the complained of policies—but in a way that would advantage Epic at the expense of other app developers and the mobile app ecosystem itself. In short, Epic is engaged in rent-seeking.

B.   Raising Rivals’ Costs

In addition to employing government power to procure some sort of subsidy, a firm may extract rents by inducing the government to raise its rivals’ costs and thereby give it a competitive advantage. Rivals with higher costs must charge higher prices, which permits a cost-advantaged firm either to follow their lead and earn higher margins or to grow its market share by underpricing them. In an extreme case, higher-cost firms may lose so much business that they are driven from the market altogether. In all these scenarios, competition is weakened, and consumers suffer. We consider here several recent examples of firms’ seeking to exploit government power to hobble their digital rivals.

1.     Google, Facebook, and the Regulation of Privacy, Artificial Intelligence, and Content Moderation

The European Union’s landmark General Data Protection Regulation (GDPR), adopted in 2016 and effective as of May 2018, endeavors to give individuals control over the information about them that is collected or processed by digital firms.[123] GDPR requires digital firms that process personal data to implement technical and organizational measures to comply with certain data protection principles.[124] Business and data collection processes must be designed in light of those principles, and information systems must use the highest possible privacy settings by default.[125] A user’s personal data may not be processed unless the user has expressly consented or the processing occurs under five other lawful bases: contract, public task, vital interest, legitimate interest, or legal requirement.[126] Where information processing is based on consent, the data subject may revoke it at any time.[127] Firms must clearly disclose any data collection, declare the legal basis and purpose for processing the data, and state the length of time the data will be retained and whether it will be shared with third parties.[128] Data subjects may demand a portable copy of their data presented in a common format,[129] and they have the right to have their data erased under certain circumstances.[130] Any business whose core activity consists of regular or systematic processing of personal data must employ a data protection officer (DPO) to ensure compliance with GDPR,[131] and any data breach must be reported within 72 hours if it threatens an adverse effect on user privacy.[132]

Given the high cost of complying with these extensive requirements, one might expect that GDPR would have impaired the European business of Google and Facebook, both of which process vast troves of personal data. In actuality, GDPR has been a boon to the two companies. An early study compared the tracking reach of digital advertising firms (“ad tech vendors”) from one month before GDPR’s implementation to one month after.[133] It found, unsurprisingly, that web tracking had decreased in the EU during the period: trackers per page fell by 3.4% in the EU even as they grew 8.9% in the United States.[134] But the bulk of the loss in web-tracking, which is crucial for targeted advertising, was suffered by smaller ad tech firms. Whereas the website tracking reach of the top fifty ad tech firms besides Google and Facebook fell by 20%, and the tracking opportunities of “especially small” ad tech firms—those ranked 100 to 150—fell by around 32%, Facebook’s website reach fell by only 6.66%, and Google’s actually grew slightly (by 0.93%).[135] The study authors thus concluded that “smaller advertisers lose” and that “Google is the biggest beneficiary of the GDPR.”[136]

In June 2019, the Wall Street Journal reported on the first full year of GDPR and confirmed that the law appears to have benefited Google and Facebook, with both companies earning a greater share of European digital ad spending following GDPR’s implementation.[137] Industry experts interviewed by the Journal suggested two reasons for the relative good fortune of Google and Facebook under GDPR. First, the companies have much greater resources for compliance, and firms prefer to concentrate their ad budgets with companies whom they trust not to violate the rules.[138] In addition, because GDPR makes it harder for third-parties to collect the personal information that is so valuable for targeting ads, it benefits digital firms that have direct relationships with users and can more easily procure consent to use their data.[139] With their many user-facing services that connect them directly to data subjects, Google and Facebook are far less reliant on third-party data. In fact, Google recently announced its intention to phase-out support for third-party cookies—tiny data files that enable advertisers to track website visitors across the Internet—in its market-leading Chrome browser.[140] That move, made in the name of furthering user privacy, will greatly benefit Google and Facebook vis-à-vis their ad tech rivals that lack direct user contact and therefore depend on third-party data.[141]

In its recent report Online Platforms and Digital Advertising,[142] the United Kingdom’s Competition and Markets Authority (CMA) suggested that GDPR may have provoked Google’s decision. The CMA acknowledged “hear[ing] concerns that large platforms use data protection regulations such as [GDPR] as a justification for restricting access to valuable data for third parties, while retaining it for use within their ecosystems, thereby consolidating their data advantage and entrenching their market power.”[143] It further observed that Google and Facebook “have an incentive to interpret data protection regulation in a way that entrenches their own competitive advantage, including by denying third parties access to data that is necessary for targeting, attribution, verification and fee or price assessment while preserving their right to use this data within their walled gardens.”[144] It explicitly highlighted “Google’s recent announcement that it was phasing out support for third-party cookies on the Chrome browser, restricting publishers’ ability to offer personalised advertising.”[145]

Given the competitive benefit GDPR has conferred on them, Google and Facebook have warmed to the sorts of rules it imposes. The companies are now actively promoting similar regulatory regimes that could entrench their dominance. For example, in a January 2020 op-ed in the Financial Times, the CEO of Google and its parent company Alphabet argued that governments should impose broad artificial intelligence (AI) regulations.[146] Asserting that “[e]xisting rules such as Europe’s General Data Protection Regulation can serve as a strong foundation,” he highlighted Google’s own AI principles and actions as a model for government mandates.[147] Facebook has similarly called for governments to mandate actions it already takes. In meetings with EU regulators about digital platforms’ content moderation, Facebook recently proposed what tech writer Josh Constine characterized as “a moat of regulations it already meets.”[148] As Constine observed, the sort of initiatives Google and Facebook are now proposing offer them a competitive benefit they did not obtain from GDPR: “[I]n the case of GDPR, everyone had to add new transparency and opt out features,” but implementation of these new proposals would allow their proponents to “sail forward largely unperturbed while rivals and upstarts scramble to get up to speed.”[149]

2.     The Diverse Coalition Opposing CDA Section 230[150]

Section 230 of the Communications Decency Act (CDA) provides significant legal protection for digital platforms that allow users to post public content. Paragraph (c)(1) of the provision states that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”[151] The Act includes some exceptions to that rule, such as for copyrighted material,[152] but it generally exempts digital platforms from liability based on user-posted content on their sites. Because it encourages digital platforms to allow user interaction—a key feature of what most people think of as “the Internet” as distinct from one-way, digitally delivered entertainment—cybersecurity expert Jeff Kosseff has dubbed Section 230(c)(1) “The Twenty-Six Words that Created the Internet.”[153]

A second key provision of Section 230 is paragraph (c)(2), which provides that “[n]o provider or user of an interactive computer service shall be held liable on account of . . . any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected. . . .”[154] This provision allows digital platforms to moderate content posted by users without fear of liability to either the content generator or third-parties, who might assert that the platform’s moderation of content renders it a publisher of the content it allows.[155] As Kosseff has explained, these two provisions of Section 230, which were enacted before any of the currently prominent Internet platforms existed, allowed the open Internet we now have to flourish: By freeing digital platforms from liability for user-generated content, Paragraph (c)(1) allowed the Internet to be interactive; by insulating platforms from liability arising from good faith content moderation, paragraph (c)(2) enabled platforms to prevent their sites from becoming flooded with objectionable content that would drive away users.[156]

In recent months, a diverse group of firms—from computer hardware and software companies, to giant entertainment conglomerates, to hotel chains—have pressed legislators to cut back on Section 230’s protections.[157] On first glance, these varied companies appear to have little in common. They are alike, however, in that each (1) faces little to no potential liability for user-generated content but (2) competes with firms that do.

For example, neither IBM—primarily a provider of computer hardware and software, artificial intelligence products, and business and cloud computing services—nor Oracle—primarily a provider of enterprise software and cloud computing services—provides a significant platform for user-generated content. But both companies compete in cloud computing with Google and Amazon, each of which hosts a vast amount of user-generated content (e.g. through Google’s YouTube and Amazon’s customer reviews and user-streaming service Twitch). In 2017, IBM and Oracle teamed up to lobby for passage of the “Stop Enabling Sex Traffickers Act” (SESTA) and the “Fight Online Sex Trafficking Act” (FOSTA), which together amended Section 230 to allow digital platforms to be liable under certain circumstances for user-generated content that facilitates sex-trafficking.[158] Sex-trafficking is a terrible thing, of course, and IBM and Oracle may have been seeking both to reduce its incidence and to win public favor by taking a stance against it. But thousands of other companies had those same motivations to lobby for SESTA/FOSTA, yet did not do so. The extraordinary efforts of IBM and Oracle perhaps stemmed from the fact that any weakening of Section 230’s protections increases the liability risk for Google and Amazon and makes each a less formidable competitor. IBM and Oracle may also have reasoned that once the door was opened to allowing platform liability for some user-generated content, it would be easier to push for additional exceptions to the liability shield.[159]

IBM has recently made such a push. In a June 2019 publication entitled “A Precision Regulation Approach to Stopping Illegal Activities Online,” IBM heaped praise on the legislators who have called for a reduction in Section 230’s protections and suggested that the law be changed further.[160] Under IBM’s proposal, a digital platform would be protected from liability for user-generated content only if it could show that it took “reasonable care” to prevent its platform from being used to further liability-creating conduct.[161] A result of this amendment would be that no legal claim against a platform based on user-generated content could be dismissed at the complaint stage. The defendant platform would always have to prove that it had taken reasonable steps to prevent the liability-causing conduct (or that the conduct did not, in fact, create liability) before the claim against it could be dismissed. Such a requirement would greatly increase platforms’ litigation costs and would likely generate “strike suits”—meritless lawsuits filed for the purpose of extracting a settlement. As an added benefit, such a requirement might induce platforms to install AI-based filtering technology such as IBM’s Watson Tone Analyzer, an AI solution that assesses what content intends, not just what it says, and has been lauded as “an important tool for sites trying to balance freedom of speech with protection of users and removal of illegal or harmful content.”[162]

IBM and Oracle were not the only companies to lobby for SESTA/FOSTA. They were joined by entertainment giants Walt Disney Company and 21^st Century Fox, both of which wrote to key U.S. Senators in support of the legislation.[163] Those companies have also lobbied to prevent the exportation of Section 230’s protections via trade agreements and thereby preserve the possibility of liability for user-generated content outside the U.S.[164]

The ultimate goal of the entertainment conglomerates appears to be two-pronged. One objective is simply to weaken platforms with significant user-generated content, such as Facebook, Google/YouTube, and Amazon/Twitch. Given that such content competes for consumers’ attention against the entertainment offerings of major film studios, anything that impairs the platforms hosting user-generated content tends to benefit traditional entertainment media. A second apparent objective is to force the technology platforms to do more to protect the film studios’ copyrights. On that front, Section 230 is not directly relevant; the provision expressly has no effect on “any law pertaining to intellectual property” and would therefore provide no protection to a digital platform accused of hosting copyrighted material.[165] When it comes to users’ posting of copyrighted materials, the legal provision that protects platforms from liability is Section 512 of the Digital Millennium Copyright Act (DMCA), which provides a safe harbor for digital platforms that engage in good faith anti-piracy efforts and honor takedown notices from the music and film industries.[166] Ginning up opposition to Section 230, however, is likely to be an effective strategy for cutting back on Section 512 of the DMCA.[167] Because the two provisions provide similar protections for digital platforms, policymakers tend to view them—and would likely deal with them—as a package.[168] And since Section 230 insulates platforms from liability for a broader scope of user-generated content, it is easier to find politically appealing groups—from child protection advocates, to anti-hate groups, to traditional value conservatives—that would like to see its protections weakened. In short, there are more “Baptists” to assist with a challenge to Section 230, which can then be broadened to take on Section 512 of the DMCA.

Hotel chains have also joined the opposition to Section 230. In 2016, the American Hotel and Lodging Association (AHLA), a trade group that includes Marriott International, Hilton Worldwide, and Hyatt Hotels, reported to its members on a detailed plan to impair the business of Internet-based short-term home rental platforms like VRBO (Vacation Rentals By Owner), HomeAway, and, most prominently, Airbnb.[169] By increasing the lodging options for travelers, these companies reduce hotel chains’ ability to charge high rates, particularly in times of peak demand. In AHLA’s private report, a copy of which was obtained by the New York Times, the Association touted its successes in lobbying three U.S. Senators to request an FTC investigation into the short-term rental industry and in procuring a number of state and local ordinances restricting short-term rentals by property owners.[170] It also announced its plans to seek a weakening of Section 230’s protections by, among other things, “[e]ngaging the copyright holder community which has similar concerns with an expansive interpretation of the CDA.”[171]

The hotel group’s attack on Section 230 is an effort to saddle Airbnb and similar sites with liability for property owners’ violations of local ordinances regulating short-term rentals. As AHLA members know, it would be extremely costly for home-sharing sites to assure that posting property owners are complying with thousands of local ordinances. Eliminating Section 230’s protections would therefore increase hotel competitors’ compliance costs as well as their likely liability. Notably, the hotel chains’ lobbying efforts appear to be paying off: In September 2019, U.S. Representative Ed Case (D-HI) introduced the Protecting Local Authority and Neighborhoods (PLAN) Act, which would amend Section 230 to permit civil actions against Airbnb and other rental sites based on user-generated content.[172] Congressman Case previously served on the board of AHLA.[173]

3.     Lawsuit Instigation

In addition to burdening rivals with costly regulatory mandates and narrowing the legal protections on which they may rely, firms may hobble their competitors by inciting legal action against them. In recent years, firms competing in digital markets have taken this tack by creating and funding groups that purport to represent the public interest but are really focused on agitating for lawsuits against group members’ competitors.

A prominent example of this is FairSearch.[174] Founded in October 2010 to oppose Google’s acquisition of travel software firm ITA, FairSearch’s original members were travel-focused “vertical”—i.e. narrowly focused—search engines Kayak, Expedia, and TripAdvisor.[175] In December 2010, FairSearch picked up a formidable Google foe, Microsoft, whose Bing search engine is Google’s most prominent competitor in general search.[176] FairSearch then began a relentless campaign to encourage antitrust enforcement against Google. In the colorful words of one commentator, “FairSearch can be most charitably described as a Google watchdog. It seeks to fan the flames of disapproval where they’ve started organically, originate them where they haven’t, and generally disseminate negativity toward the Google brand. Think of it as a PR firm working to destroy rather than create goodwill.”[177]

FairSearch has gone beyond simple rabble-rousing. In 2013, it initiated a European complaint against Google for tying its mobile search and browser technologies to its popular Android app store, Google Play, and for the purportedly predatory act of licensing Android at below-cost rates.[178] That effort paid off. In July 2018, the European Commission fined Google €4.34 billion for, among other things, “requir[ing] manufacturers to pre-install the Google Search app and browser app (Chrome), as a condition for licensing Google’s app store (the Play Store).”[179] By operating under the guise of FairSearch, Microsoft was able to obscure its role in instigating an action against its rival for behavior strikingly similar to its own past conduct.

Microsoft withdrew from FairSearch in December 2015,[180] but FairSearch continues to agitate for legal action against Google.[181] In doing so, FairSearch claims to represent “a group of businesses and organizations united to promote economic growth, innovation and choice across the Internet ecosystem.”[182] It lists at least nine companies as members.[183] According to its official filings with Belgian authorities, however, FairSearch is now controlled entirely by executives from two companies: Oracle and Napsers.[184] None of its other members has the right to vote on the group’s actions.[185] Neither Oracle nor Napsers—a South African technology and telecommunications company holding large stakes in the Chinese firm Tencent and a number of foreign technology companies—has a direct stake in the mobile markets at issue in the EU’s Android investigation. The two companies do, however, compete with Google in other markets and benefit when Google suffers. Moreover, by becoming complainants in an EU antitrust case, the companies, through FairSearch, are allowed access to otherwise confidential information related to ongoing inquiries.[186]

As an organization that appears to represent a coalition of smaller players but is really controlled by a couple of giants, FairSearch has been accused of “astroturfing”—creating the false appearance of a grassroots campaign.[187] Another organization engaged in astroturfing is the Free and Fair Markets Initiative (FFMI), which describes itself as “a nonprofit watchdog committed to scrutinizing Amazon’s harmful practices and promoting a fair, modern marketplace that works for all Americans.”[188] In addition to lobbying for legislation restricting Amazon and investigations into its practices, FFMI has sent dozens of letters and reports to members of Congress and their staffers, published numerous opinion pieces in newspapers and online media outlets, and tweeted hundreds of social media posts criticizing Amazon.[189] As FFMI has taken these actions, Amazon has faced increasing scrutiny from the U.S. Department of Justice, the FTC, the EU, and numerous state attorneys general.[190]

Claiming to represent “[c]oncerned consumers, small business owners, and taxpayers,”[191] FFMI has publicly listed among its supporters a labor union, a Boston management professor and a California businessman.[192] The Wall Street Journal, however, reported that FFMI’s asserted grassroots support is “not what it appear[s] to be.”[193] According to the Journal:

The labor union says it was listed as a member of the group without permission and says a document purporting to show that it gave permission has a forged signature. The Boston professor says the group, with his permission, ghost-wrote an op-ed for him about Amazon but that he didn’t know he would be named as a member. The California businessman was dead for months before his name was removed from the group’s website this year.[194]

FFMI’s true principals, according to the Journal, are several giant firms that stand to benefit if Amazon falters: Simon Property Group, the largest shopping mall operator in the U.S.;[195] Walmart Inc., the largest retailer in the U.S.[196] and the world’s second largest retailer, after Amazon;[197] and Oracle, which competes with Amazon in cloud computing and fiercely battled with it over a $10 billion Pentagon contract.[198] Each of the three companies was reportedly asked to pony up $250,000 to strategic communications firm Marathon Strategies to support FFMI’s work.[199] Oracle admitted to doing so, and a source confirmed to the Journal that Walmart had done so through an intermediary; Simon Property declined to comment.[200]

C.  The Supply Side

As the name indicates, rent-seeking is “demand side” activity: one party is demanding (seeking) that the government’s right to coerce be exercised in a way that enables that party to extract rents. Given the Internet’s ability to disrupt markets and challenge traditional enterprises by, among other things, reducing transaction costs and information asymmetries,[201] rent-seeking may be especially common in digital markets as legacy firms deem it the easiest way to retain or enhance their profits.[202] But if the policies sought are anticompetitive or socially harmful in some other way, would rent-seeking succeed?

Public choice theory suggests why, at this moment in history, rent-seeking efforts may be especially successful in digital markets. Recall that the fundamental premise of public choice is that actors in the political arena are rational self-interest maximizers. At least at the current time, political actors’ pursuit of self-interest seems likely to result in implementation of many of the policies rent-seekers are demanding. To see why this is so, consider the personal interests of government officials—and of those who hold them to account—with respect to digital market regulation.

Government officials’ personal interests may lead them to support even poorly designed restrictions on digital platforms. Elected officials are likely to favor such restrictions because it allows them to take credit for “cracking down on Big Tech,” a cause that is popular with both progressives and conservatives, albeit for different reasons.[203] Progressives favor a break-up or severe bridling of major technology platforms like Google, Facebook, and Amazon because they believe the firms exploit workers and suppliers, exacerbate economic inequality by creating concentrations of extreme wealth, and exercise excessive influence over government.[204] Conservatives support the same policies but for a different reason: they believe the Big Tech companies are biased against them and disdainful of their values.[205] It is hardly surprising, then, that the flurry of proposals to rein in Big Tech includes entries from such ideologically diverse legislators as progressive Senator Elizabeth Warren (D-MA)[206] and conservative Senator Josh Hawley (R-MO).[207] Politically, Big Tech restrictions are a winner, even when—as in the case of GDPR—the restrictions may entrench the most powerful firms.

Enforcement officials’ self-interest may similarly lead them to favor both additional restrictions on and more enforcement action against the major technology platforms. The greater the number and complexity of the restrictions it enforces, the greater the prestige—and often the budget—of an enforcement agency. And given the political salience of Big Tech, enforcement action against the leading technology platforms is especially likely to attract the attention of legislative appropriators. Enforcers with political ambitions seem particularly likely to take on Big Tech, as doing so may boost their electoral prospects. Empirical evidence shows that state attorneys general who actively participate in multi-state litigation like the currently pending 48-state investigation of Google are more likely to seek their state’s governorship or a seat in the U.S. Senate.[208] And across the Atlantic, EU Competition Commissioner Margrethe Vestager’s numerous actions against American technology firms have raised her profile and likely aided her quest to become president of the European Commission.[209]

When it comes to regulation of and enforcement against the major digital platforms, the groups that normally rein in improvident decisions by government officials may be ineffective. Members of the news media may harbor their own biases against big technology platforms, which they perceive as having damaged the news business by usurping consumer attention and advertising revenue.[210] Academics stand to gain favorable publicity for taking aggressively pro-enforcement/regulation stances, as evidenced by recent fawning press reports on entrepreneurial scholars pushing for action against the largest technology platforms.[211] And most voters, as usual, remain rationally ignorant; they are unlikely to learn how seemingly small and benign-sounding legal changes, such as elimination of Section 230 protections, the imposition of data-sharing requirements, various privacy mandates, and so forth, could have serious adverse consequences. In short, public choice theory suggests that the current political environment is favorable for rent-seeking endeavors in digital markets.

Conclusion – Looking Ahead

This chapter has described public choice theory and the phenomenon of rent-seeking and has documented instances of rent-seeking activity in digital markets. Understanding what rent-seeking is, what forms it takes, and why it so often succeeds is important for at least two reasons. First, such an understanding helps policymakers assess whether a particular market failure warrants a regulatory fix. Because public choice concerns are inevitable when government exercises its right to coerce, they should always be weighed against any welfare benefits government intervention could secure.

More importantly for purposes of this report, an understanding of public choice and rent-seeking can assist in crafting regulatory interventions to secure as much social welfare as possible. If individuals indeed act in the public sphere as they do in other contexts—i.e. as rational self-interest maximizers—then some forms of regulatory intervention will be less likely than others to achieve their public-spirited aims. For example, a sectoral regulator that has continual contact with its regulatees and extensive discretion to restrict or mandate market participants’ activities in the pursuit of some amorphous goal like “the public interest” is more susceptible to capture than a general, non-sector-specific regulator with minimal regulatee contact, less discretion, and a narrower mandate. Of course, the former sort of regulator will also have some advantages over the latter, such as more industry expertise and a greater ability to address unforeseen circumstances. Subsequent chapters of this report consider the tradeoffs between different sorts of regulatory regimes. Making those tradeoffs, however, requires an understanding of the losses likely to occur when rational self-interest maximizers exercise government’s extraordinary right to coerce.