October 29, 2019 Reading Time: 5 minutes

In an article titled “How We Can Break Up Big Tech,” Senator Elizabeth Warren details her aggressive plan to remake firms like Amazon and Google that most of us use almost every day. Perhaps the headline item in Warren’s plan is the separation of platforms (think Amazon Marketplace or Google Ad Exchange) from businesses that participate in them (Amazon and Google’s retail and search businesses, respectively).

Warren’s concerns are justified, but her plan borders on reckless. Anecdotal evidence abounds of Amazon and Google using their platforms in ways that give preferential treatment to the businesses they own that also participate on the platform. For Warren, the issue stops there, and separating the businesses will eliminate only what she deems bad conduct–our almost-daily relationships with these companies will continue as though nothing happened:

Here’s what won’t change: You’ll still be able to go on Google and search like you do today. You’ll still be able to go on Amazon and find 30 different coffee machines that you can get delivered to your house in two days. 

Not so fast. Warren sees the costs in Amazon and Google owning their own platforms, but entirely ignores the value to consumers and even small businesses that these relationships create–value that her “solution” risks destroying.

The plan, spelled out in a short article on Warren’s campaign website, leaves many questions unanswered. But if one takes what she does say at face value, Warren risks destroying the Amazon Marketplace platform upon which many small retailers depend, and compromising Google’s model of free internet search.

Does David Need Goliath?

Antitrust scrutiny of firm size has long focused the power to raise prices or stifle innovation versus the efficiencies gained by direct economies of scale. The consumer harm standard, with its focus on prices, is essentially about this tradeoff. 

The first generation of large tech companies birthed by the internet, including Amazon and Google, make the size issue more complex. A large part of their business model hinges on creating value by bringing huge numbers of consumers together, and then monetizing that value by selling access to other businesses on a platform.

A closer look at Amazon reveals why splitting up a tech giant’s core business from its platform is far from a straightforward win for consumers or even competing firms. The interconnectedness of Amazon’s various lines of business make it hard to sort out exactly what Warren wants to separate. There are three entities potentially in play:

  • Amazon retail, which stocks and sells products with other brands, and is generally the line of business most commonly associated with the Amazon name.
  • Amazon Marketplace, which integrates other retailers into the Amazon ecosystem through search results. These retailers pay Amazon to be listed.
  • Amazon Basics, in which Amazon retail sells consumer items specifically branded with the Amazon name.

A large part of what makes Amazon’s Marketplace platform an attractive place for small businesses to sell their wares is its largest participant, Amazon retail. Consumers are familiar with Amazon retail, largely trust its fulfillment services, know how to use its website, and know it provides unparalleled product selection even before considering the millions of independent sellers on Amazon Marketplace.

To be sure, Amazon retail and Amazon Marketplace under the same corporate umbrella raise thorny issues, but entirely separating the two may drive the latter straight out of business. Small Marketplace sellers are willing to pay rates starting at $39.99 per month in order to access the enormous amount of traffic generated by Amazon retail, including the look and feel of its website and sometimes piggybacking off its order fulfillment services.

If Amazon retail and Amazon Marketplace are split apart, the retail business would only see the millions of small businesses listing on Marketplace as competitors rather than customers. Why would Amazon retail even participate in Marketplace? In this scenario, it’s likely that Amazon the giant retailer would choose not to participate in Marketplace at all, thus destroying the platform’s value proposition to small retailers and unraveling the current arrangement. 

Amazon Marketplace would be no different than eBay, just a way to match buyers and small sellers with nothing beyond that matching to bring them in. Small retailers currently dependent on sales from the platform would likely be collateral damage–many could go out of business entirely.

The one potential way to rescue Amazon Marketplace in a split from the retail business would be a highly contrived agreement where immediately after separating, Amazon Marketplace began paying Amazon retail to participate in the platform (while other retailers continued to pay Amazon Marketplace). To fully realize the current value of the Marketplace platform there might also need to be an agreement to share technology and branding materials. The door to special deals between the two firms would once again swing wide open, leaving Warren with nothing other than a more complicated version of the status quo.

Warren does leave herself some wiggle room by invoking Amazon Basics, Amazon’s branded line of consumer products sold on the site. If the ultimate result is separating Amazon Marketplace and Amazon Basics, rather than the whole retail business, we’re left with a smaller version of both the costs and benefits discussed above. Basics could no longer be given special treatment by Amazon’s search engine, but other merchandise directly sold by Amazon retail could. And without its relationship to the site, the Basics brand might simply die, depriving consumers of a low-cost option.

Searching for a Business Model

Like Amazon, Google creates value by bringing together a staggeringly large amount of web traffic. In Google’s case, its size has two benefits. First, it strengthens the company’s search algorithm, making it so far and away the most popular search engine that its name has become a verb. Second, it makes Google an extremely attractive platform on which to advertise. Enter Google Ad Exchange, which accounted for 85 percent of the parent company’s revenue last year.

Google’s size also raises issues, including its use of our data and alleged manipulation of the order of search results. Frankly, it’s not entirely clear what Warren means when she says “Google’s ad exchange and businesses on the exchange would be split apart. Google Search would have to be spun off as well.”

Does this mean Google would no longer be able to sell ads on its search pages? If so, would we be left with a model where consumers pay per Google search (or rather, use much smaller and lower-quality not-for-profit engines for free). If Warren’s plan isn’t quite that severe, what does it mean for Google search and Ad Exchange to be seperate businesses? 

One thing is clear–Warren doesn’t want Google search and Google Ad Exchange sharing data. That may sound comforting to consumers but ads tailored to consumer data are a large part of Google’s value proposition to advertisers. Warren may threaten the entire business model of Google and other for-profit search engines even if she doesn’t go so far as to force them into a pay-per-search model.

Where’s the Innovation?

Senator Warren’s plan to “break up big tech” raises more questions than it answers. With the novel issues regarding markets and regulation raised by these firms, it would be difficult to expect anything else from a 1,700-word document. What seems abundantly clear, however, is that a President Warren would aggressively pursue an antitrust policy against big tech largely informed by an antiquated view of what firm size means for consumers.

Amazon and Google are both cases where a core business (retail and search, respectively) is a core part of the value proposition of a platform which they own. Such businesses and platforms are not readily separable without compromising the value of at least one of the two.

Even those generally favoring active antitrust enforcement must take a step back as we come to terms with a new kind of large company. Amazon and Google deliver phenomenal value to consumers because of innovation. Should Senator Warren or others choose to apply a decades-old rulebook to split up or regulate these companies, their lack of innovation risks costing consumers dearly.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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