Robber Barons 2.0: Tech Companies and the New Threat of Corporate Oligarchy

Conrad Copeland

Since the busting of Microsoft for anti-competitive behaviour in the 1990s, tech companies have emerged as some of the largest market players in the world.  Over 6% of the US economy is tech companies, with the big five (Apple, Amazon, Facebook, Alphabet, and Microsoft) comprising the lion share of this.  These five companies are also the largest companies in the US by market capitalisation, dwarfing all their rivals.  This dominance has created new challenges for regulatory authorities. Why should we be worried about this Robber Barons renaissance? The threat is two-fold: first, these companies exist within a market space that is still new in a regulatory sense.  The internet and related technology sectors is notoriously hard to regulate and companies that derive most of their business from these areas are equally outside the bounds of securities regulation designed to combat large manufacturing and distribution companies.  Second, the rise of these tech behemoths coincides with a marked weakening of securities regulation and enforcement capabilities in an effort to make government more ‘business friendly’.  The risks of this in terms of finance were made very much apparent and have been moved to the fore of the political debate, but Silicon Valley remains outside the vision of this new wave of regulators for largely idiosyncratic reasons.  This is dangerous, both for the economy and the public, as these companies accumulate market power they will increase their efforts to flex that newfound economic muscle and consumers and smaller business will be on the losing end of that game.

Rise of the Leviathans

After an initial slump in the early 2000s, when the Dot-Com bubble collapsed, the growth of the tech industry has captured the hearts and minds of both investors and the public at large.  This has been fuelled in part by the nature of the tech industry and Silicon Valley and its ability to inspire the imaginations of people.  The public views these companies, and the sometimes enigmatic individuals who lead them, as visionaries at the forefront of technological and human progress.  This view feeds itself in a never-ending cycle as tech CEOs announce new projects and far-off goals, building their companies and seemingly confirming themselves as avant-guard creatives.  One planet being too small, they now even look to the stars to expand their reach and feed their egos.  So long as these companies remain relatively benign, or at least less pernicious than politicians and governments, and so long as they continue to feed the dreams of the public they will be given a free pass on the immense economic power they are quietly, and not so quietly, accumulating and exercising.

Never before have we seen companies of the size and scope that the largest tech companies have achieved.  Apple became the world’s first trillion dollar company, Amazon quickly followed, with more surely on the way, all of them with roots in technology.  Amazon is worth more than nearly all store-front retailers put together.  Alphabet, Google’s parent, is one of the largest companies in the world.  Microsoft continues to be the world leader in software.  Facebook is worth over US$350 billion without actually selling any material products.  This is, to some extent, to be expected.  As the 3rd industrial revolution continues, human society will grow more digitised and more integrated with technology in our daily lives.  What is worrying, however, is the extent to which just a few technology companies have come to dominate the market and our lives and the effect this dominance has on competition, freedom of choice, and consumer welfare.

These companies have already started to use this market power to increase and preserve their dominance, crushing competition and dictating market outcomes on their terms.  Apple is the most blatant offender.  The idea that Apple builds obsolescence into its products has long been suspected, and was recently confirmed in terms of the newer iPhone software updates.  Similarly, restricting hardware compatibility has been an issue for some time, with Apple products not correctly ‘registering’ other pieces of non-Apple hardware.  Even in its dealings with other companies, Apple likes to throw its market muscle around, as was demonstrated in its spat with Adobe in 2010.  Other companies, while less obvious, pursue analogous policies towards their products and competitors.  Amazon has expanded its tentacles so far into the retail and logistics sector that it is able to hinder competitors merely by refusing to list their products on its websites.  Facebook, meanwhile, has been trying to acquire as many information sharing platforms as possible and when it cannot, as was the case with Snapchat, it seeks to use its ubiquity to drive competitors from the marketplace.  Google, or Alphabet as its new parent has been dubbed, may seek to not be evil, but this doesn’t seem to extend to its manipulation of its search algorithm to maximise its ad revenue and promote its product sales.  Added to this, is the way in which many companies in Silicon Valley voluntarily agree to not hire former employees of other companies – effectively restricting the ability of employees to compete between companies for wages and benefits.

These companies, the power they possess, and the ways in which they use this power has created a new set of corporate oligarchs that blight the global economy.  They are a modern incarnation of the so-called robber barons of late 19th century America and they operate in very similar ways.  Efforts to supress competition, monopolise their sectors, and accumulate as much wealth and power as possible mirror exactly the Vanderbilts, Rockefellers, and Carnegies of yesteryear.

Plus Ça Change

Looking at the situation that developed in the 19th century and how it was dealt with provides a useful analogy for our current times.  How the US economy suffered under the robber barons and the innovation needed in that period is instructive as it shows the necessity of creating new tools and outlining strong objectives to break the stranglehold these companies had and that tech companies have now.

The first industrialist to be identified with the moniker of ‘robber baron’ was Cornelius Vanderbilt, a shipping magnate from the mid-19th century who forced other companies (many of which were subsidised by the government through political connections) to pay him non-compete fees to stop him from shipping along their routes.  His plundering of other companies and these companies corruption turned the public’s attention to the activities of the emerging corporate titans of America’s industrial revolution.  American corporations continued to grow and squash opposition and competition, either buying up rivals or creating conditions through market dominance that made it impossible for other companies to compete.  The epitome of this practice was John D Rockefeller of Standard Oil, which by the end of the century had either purchased or driven from the market all of its serious competitors.  It was the first company to reorganise itself as a ‘trust’ in which a number of disparate companies were held under an umbrella board of directors.  Other companies began to follow suit and established themselves as trusts to facilitate anti-competitive practices and mergers.

Soon, nearly every major industry was controlled by a trust or a cabal of trusts colluding to raise prices, restrict competition, and facilitate their own market dominance.  By the late 1880s, this environment of corporate titans dominating markets and setting prices was creating problems for consumers and the economy more broadly.  Monopolistic policies throughout the economy raised prices artificially and stifled economic growth.  In economics it is well understood that monopolistic industries tend to under-produce and extort higher profits from the market.  They also, through stifling competition, reduce market dynamism, meaning that new ideas and innovative products are less frequently developed and introduced leading to stagnation and corporate sclerosis.

By the end of the century the government had decided to act and brought cases against JP Morgan’s railway holding company, which controlled nearly the entire railway network of the northern Midwest, and the hated ‘Beef Trust’, a cartel of beef producing companies which colluded to artificially increase the price of beef for consumers.  This soon ushered in the era of ‘trust-busting’ and broader efforts by the government to combat monopolistic trusts, including setting up a special directorate in the Department of Justice to pursue these companies.

These efforts proved fruitful and the large monopolies were broken up into independently operating companies again, increasing competition and lowering prices.  The cartels were stopped and corporate holding companies were dissolved.  These efforts continued into the 20th century, extending efforts beyond just corporate ownership regulation and into stock and trading regulation with the establishment of the Securities and Exchange Commission.  The SEC and Department of Justice presided over the era of post-war boom, ostensibly keeping companies in check and moderating the worst instincts of corporate America.  This era involved the largest increase in wages for workers and a dynamic marketplace with innovation and growth unheard of in previous eras.  While the SEC and Department of Justice are obviously not solely responsible for the economic growth during this period, their efforts to rein in corporate titans helped produce an environment that was conducive to post-war prosperity.

Robber Barons Redux

The modern robber barons of the tech industry differ from their historic counterparts in one very important way and it is a way that the SEC was not structured to handle.  These modern tech monsters are able to extend their market power beyond just vertical and lateral integration and have managed to bring the mechanisms that govern the market itself under their control as well.  With the ever present app stores for phones, Apple and Alphabet control who may come to market with their products.  Amazon is so synonymous with the retail marketplace that if it chooses to shut out a small retailer from its website it could mean the end of that business – as was demonstrated for the world to see when AbeBooks (an amazon subsidiary) closed the accounts of stores in a selection of countries.  Facebook’s control of information and effort to propagate its ‘marketplace’ feature pushes it into this territory as well, creating a situation where having a Facebook account – something that is not governed by anything other than the rules Facebook chooses – is necessary for access to the market.

To be clear, this is not to say that control of the marketplace is anything new, or necessarily bad.  Historically, guilds and agencies controlled access to markets all the time and even in the modern era access to stock markets and other localised marketplaces is controlled by gatekeepers.  The problem is that these new gatekeepers combine this control with a vested interest in retaining market power for themselves and remain unregulated and unsupervised in their marketplace control.  This is a problem as where before marketplace gatekeepers restricted access for the health of the market and were frequently governed by outside rules and regulations, these companies have an interest in restricting market access for their own profitability and to increase their control.

It is likely that the public does not, at large, see the threat this poses or perceives the problems down the road that dependence on these companies could create.  Similarly, the SEC and Department of Justice are not equipped or prepared to deal with anti-competitive practices on this scale or of this sophistication.  It is up to legislators and government to see the threat and fix the problem before it becomes impossible to tackle.

Trust Busting 21st Century-Style

Tackling the problems posed by these tech conglomerates is not an easy task, particularly with the lack of support given to the Antitrust Division in the Department of Justice and the SEC.  The breakup of these massive companies will be beneficial for society and the economy, and could provide a much-needed jolt to the industry.  Diversification of the industry and smashing the big five tech companies into smaller pieces would breathe new life into the economy by improving competition within the industry and unleashing the hoards of cash these companies have accumulated, releasing new capital into the sector and providing new investment for fledgling companies and products.

In order to achieve this, Congress must take the lead.  It must signal support for both the idea of pursuing these companies and the material needs of the Department of Justice to do so.  Increasing focus on the activities of these companies is required for this to happen and further congressional investigations like the one experienced by Facebook should be commissioned.  Hauling executives of these companies before congress to explain their frequently pernicious business practices will go a long way to exposing why increased regulation and enforcement is necessary.  The most attractive part of these investigations is that no new legislation is needed to begin them, and the signal they will send to both these companies and regulators is that enough is enough, hopefully spurring regulatory bodies to begin bringing cases against these tech goliaths in court.

This must go further, however.  Politicians must update the law in order to deal with the new problems posed by these companies.  Introducing salary caps, new regulatory measures on contracts, and updating taxation measures to create disincentives for corporations holding cash would significantly help in reducing the economic power and dominance of these companies.

Finally, the ability of these companies to gain monopoly-level control of market mechanisms themselves must be stopped.  Regulations must be created to address the issue of market gatekeeping and to restrict the ability of these companies to pick winners and punish losers.  If efforts are not made to combat this new type of dominance, we may find ourselves in a world where obeisance to these companies becomes a requirement to engage in the marketplace; creating a situation poisonous to both a healthy market economy and a functioning democracy.

A century after trust-busting became popular to break up large, hurtful monopolies and cartels a new set of robber barons have appeared on the scene.  Though these tech companies are more fashionable than the likes of Standard Oil and the Beef Trust, they are no less problematic for the economy and society at large.  Action to halt their growing dominance and rein in their control of markets must be taken in order to regain fairness and open competition in the market.  While congressional action on these issues is required, popular pressure must be brought to bear to force the hands of politicians.  The mythos around these companies must be pierced and the fog lifted so the public can realise the dangers of the cliff they are following these companies over.  Popular enthusiasm for the tech oligarchs is the biggest obstacle to stopping them, and if we are not careful we will be led blindly into a ruinous future – regardless of the promised technological bounty.