Breaking up Facebook 'doesn't solve competition long-term': MIT Professor

House Democrats look to break up Big Tech, claiming they have "monopoly power". 'The Hype Machine' Author and MIT David Austin Professor of Management Sinan Aral joins the On the Move panel to discuss.

Video Transcript

JULIE HYMAN: And one of the other factors that Cameron mentioned was the volatility that we have seen in big tech. Some of that being triggered once again today by the House Judiciary Subcommittee on Antitrust, coming out with some recommendations for large technology, and saying Apple, Amazon, Facebook, and Google are indeed monopolies. They give different recommendations for how to remedy fact-- what they say is that fact-- in their recommendations.

To talk more about this, we're joined now by Sinan Aral. He is David Austin Professor of Management at MIT. And he is also author of the recently-released "The Hype Machine," which looks at big tech and how they operate. So Sinan, as I mentioned, there are different remedies that this subcommittee is proposing when it comes to these different companies. Republicans on the committee have their own ideas. This is mostly the House Democrats who have come out with these recommendations. Which of them do you think is the likeliest to happen, both because in terms of how realistic they are, and in terms of how much political agreement we can see? If you could sort of pick one likely scenario.

SINAN ARAL: Well, I think there's three different interventions that we need to consider. First is essentially breaking up big tech. We've been talking about this for months and years. Each one of these cases is very different. But you can imagine somehow breaking up the companies into smaller pieces. The second one is what you could consider a kind of Glass-Steagall for the internet. So it's separate lines of business, essentially, the idea that somebody that controls the market, say, as in Amazon's case, should not also be selling goods in that market, especially where they control the recommendation algorithms, as well as the advertising platform on Amazon, as well as, for instance, the ratings and reviews and what gets shown first and second, and so on.

And then the third is a broad category of what I call interoperability and data portability, which I think is an important element of this that is largely ignored sometimes. Let's take the case of Facebook. I think that imposing interoperability, and data portability, and social-network portability is essential for getting competition in the social media market. Because without that, network effects will tip the next Facebook-like company into market dominance even if you were to break up a Facebook.

The point of interoperability is that it allows consumers to vote with their feet, to choose which platform they go to in the same way that we made number portability required by legislation, which created almost a billion dollars in consumer surplus per quarter in Europe for years and years when they allowed people to take their cell phone numbers from one carrier to another.

And I'll make one final point, which is that, if you break up a company like Facebook without requiring interoperability, you destroy a lot of network value without allowing people to create that value by reaching out and making the connections that they would want to make from one side of the platform to the other.

ADAM SHAPIRO: Sinan, I want to get back to why break them up. And you've hit on this. But I'm trying to understand and comprehend it. Because if the genie is already out of the bottle, and if the business model is to get us addicted to the likes and the notifications, all this, what good is breaking them up?

SINAN ARAL: That's exactly right. I mean, my feeling is that we have a lot of market failures that deserve their own legislative scrutiny. We need legislation on privacy. We need legislation on political advertising on the internet. We need legislation on all sorts of harms that are specific to the harms and the market failures themselves.

Breaking up Facebook is about competition. But it doesn't solve competition long term. It only solves the current leader in the market. If you want competition long term, sustainably, you need to create the underlying economic forces that create competition. And that's interoperability, social-network portability, and data portability. Breaking up Facebook will not solve election integrity. It will not solve privacy. It will not solve fake news. Each one of those is its own market failure that deserves its own legislative scrutiny.

AKIKO FUJITA: Sinan, while we're talking about big tech, there are some recommendations in this report that have ramifications for other sectors as well. And I am curious what you make of this recommendation of putting the onus on the merging companies in the case of a merger, essentially starting with the stance of, the merger between two dominant companies would inherently be anti-competitive. That would be a significant shift from where things stand right now. What are the implications for something like that to pass and to go-- what are the implications beyond tech in general?

SINAN ARAL: Well, you have to understand, we're at a pivotal moment in our conceptualization of antitrust. We are moving away from-- I think rightly-- the idea of Bork and the Chicago School of prices or the harm towards an understanding that there are other harms created by concentration, including all the market failures that I just described to you.

In addition, we're talking about different ways of thinking about remedies. And in the case of two large entities joining, being anti-competitive by definition, I think it's much better to think about the actual market and the size of the competitors, the competitive landscape that they face and so on, on a case-by-case basis. I'm very much in favor of forward-looking merger oversight. I'm much less optimistic about the ability for breaking up companies that have been together for a long time.

These type of antitrust cases typically take 10 years. By the time you get to the end, the company, the market, and everything looks completely different than it did when you started. Forward-looking merger oversight, however, is a good idea. But it should be done on a case by case basis, assessing the specifics of the companies that are attempting to join, the markets in which they operate, the levels of concentration, and the market definitions as well.