Tue, Jul 28, 2020|Whitney Tilson

Congress is preparing to clash with Big Tech; Fire & Fawning; Tech Is About Power. And These Four Moguls Have Too Much of It; Tech CEOs Deserve an Apology; Bezos and Amazon under scrutiny; Crackdown on QAnon; Facebook: The Inside Story; Facebook Announces Plan to Break Up U.S. Government

It's a big week for four of the five tech giants: Facebook (FB) reports earnings tomorrow, followed by Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL) on Thursday. In addition, the CEOs of all four companies – Mark Zuckerberg, Jeff Bezos, Tim Cook, and Sundar Pichai – respectively, will appear (virtually) tomorrow before the House Judiciary Antitrust Subcommittee. Microsoft (MSFT) reported earnings last week... and its CEO, Satya Nadella, managed to escape a Congressional grilling.

These are among the most dominant, richly valued companies in history, and have become interwoven into the lives of pretty much every human being on earth – both for better and for worse – so I think they warrant careful scrutiny by investors, the public, the media, and political leaders.

When all is said and done, do I think these companies are going to change much – or that regulators might force them to change or even break them up? Sadly, probably not – though even tweaks at the margin are better than nothing (for example, see the article below about the crackdown on QAnon). And their stocks are likely to continue to outperform...

Below are the most interesting articles I've read on them recently...

1) Here's a good overview of the hearing from the Washington Post: Congress has battled airlines, banks, tobacco and baseball. Now it's preparing to clash with Big Tech. Excerpt:

On Wednesday, the industry's four most powerful chief executives are set to appear, swear an oath, and submit to a grilling from House lawmakers who have been probing the Web's most recognizable names to determine whether they have become too big and powerful. The focus is antitrust, and the extent to which a quartet of digital behemoths – representing a nearly $5 trillion slice of the U.S. economy – has harmed competition, consumers, and the country writ large.

The congressional inquiry has been more than a year in the making. Lawmakers have amassed 1.3 million documents, conducted hundreds of hours of interviews and held five other hearings featuring the industry's friends and foes. Led by Rep. David N. Cicilline (D-R.I.), the lawmakers plan to produce a report in coming months that some party leaders expect will find the industry has skirted federal competition laws because the protections haven't kept pace with the digital age.

In recent decades, similar high-profile interrogations have yielded some of the country's most important reforms, including safeguards to spare the economy from another financial collapse and rules to protect drivers, smokers, workers, and countless others from a combination of corporate missteps and lax regulation.

It remains to be seen whether an increasingly divided Congress can bring the same potency to bear against tech, remedying a long litany of past mistakes – both in Silicon Valley's practices and Washington's oversight of them.

"It's very clear to me there are very serious problems that must be addressed, and it's very clear to me these large technology platforms are not going to regulate themselves," Cicilline said in an interview. "The responsibility falls to Congress to do that."

2) Run, don't walk, to read NYU marketing professor Scott Galloway's blog post about the hearings: Fire & Fawning. Here's his overall take:

When the show starts, Zuck will be the target of the most ire, as he's an oligarch minus the charm. Bezos, on the other hand, will receive the least ire, as his command of soft power is second only to China...

Bezos has the power to take away the committee's lamb treats (he owns a powerful arbiter in the WaPo) and, maybe more important, they want invites to the best parties in DC (low bar) at the old textile museum — Bezos's man cave in Kalorama. I think Bezos lacks character and code (he gamifies the commonwealth for his own enrichment #HQ2), but I'd love to roll with him, and so would every first ballot hall of lame panelist questioning him at the hearings. Cook and Pichai will likely just try to stay out of the line of fire and fawning for Zuck and Bezos, respectively. Expect Zuck to use two words repeatedly in his defense (tik and tok) as he attempts to wrap himself in the flag and convince the committee that he's our national champion, singularly able to repel the invading Chinese... coming for our children.

But there is hope. By limiting the hearing to the antitrust subcommittee, the House gives more time to representatives who have domain expertise. The sharpest of these embers, if they take the right approach, may be able to move the needle from apathy towards outrage and build momentum for future change.

And here are the best questions he suggests that each CEO should be asked (don't hold your breath):

Apple

Q: Mr. Cook, monopoly rent is when a monopoly producer lacks competition and thus can sell its goods and services at a price far above what the otherwise competitive market price would be, at the expense of consumers. Our information age is often called “the app economy,” denoting how important apps have become to commerce and consumption. Your firm and Google dominate the app ecosystem, with 62% and 38% shares, respectively. This chart shows the rents you are able to extract from every streaming video app. Every media company that wants to reach a consumer online must pay you a toll or rent. Do you think any of these firms believe that paying you this rent is a choice?

Amazon

Q: Last year, Amazon paid $162 million in federal tax while your largest competitor, Walmart, paid almost $3 billion. Do you think this level of participation in our country's infrastructure and services is appropriate for a company worth $1.5 trillion?

Q: In a five-week period during the pandemic, your firm added the value of the world's largest firm by revenue – Walmart. If your firm can accrete the value of the largest firm in the world in five weeks, and money is power, then isn't your firm the most powerful private entity in history? Hasn't your firm reached a level of soft and economic power well beyond the point when the DOJ has historically taken antitrust action?

Google

Q: You've been fined three times by the EU for acting in ways that harm competition. Google searches favor YouTube ahead of other video rivals. Searches often display results just under the question as the user types, making it unnecessary to click any links. This deprives other firms of revenue. You present search results as you see fit, independent of the cost to other businesses. Don't you think having 71% share in the search business and increasingly locking other companies out of profits through search is unfair use of monopoly power?

Q: YouTube has come under criticism many times in the past for radicalizing our children through an algorithm that suggests increasingly violent and extreme content. A user can start out with “downtown NYC” and within three videos they are being offered conspiracy theories about how 9/11 was an inside job. One of your former engineers accused YouTube of perverting civic discussion through radicalizing algorithms. Don't you think that if YouTube were its own company and had more competitors of similar size, that it would be forced to work harder to correct these algorithms that are so toxic to the public good? If the best corrective mechanism of a free market is competition, where is the competition to force you to do better?

Facebook

Q: As we saw in the 2016 elections, Facebook's power can be exploited to disrupt elections, broadcast viral propaganda, and inspire deadly hate campaigns around the globe. Facebook is an algorithmic rage machine that perpetuates conspiracy theories (including that vitamins will protect you from COVID) at a far greater rate than truth. Enragement is engagement. Nearly half of all top-performing posts that mention voting by mail are false or misleading. What good are you offering your users that outweighs the cyberwar Russia fought on your platform, and that it is prepared to fight again, the systematic surveillance of users, and the torrent of misinformation on your platform?

Q: Mr. Zuckerberg, you are in sole control of a platform whose algorithms select and deliver content (news and entertainment) to 2.6 billion people. Your algorithms are opaque to government agencies. You are the principal source of information for a cohort larger than any country or religion – a population greater than that of China and the US, combined. You cannot be removed from office, and will likely control these algorithms for the next 5-7 decades. So, we'd like to get to know you better. You know, get a feel for the real Mark Zuckerberg. A couple of questions:

Are you a pathological liar?
Do you display a lack of remorse or guilt?
And again...
Are you a pathological liar?

Few (if any) of Galloway's questions will be asked at tomorrow's hearing. But every American should demand that they be asked – and answered – before it's too late...

3) Here's Kara Swisher's take in the New York Times: Tech Is About Power. And These Four Moguls Have Too Much of It. Excerpt:

It's critical that lawmakers block out all the noise that has grown around the industry and aim at only discussing the repercussions of unfettered power. All the major problems related to tech stem directly from this, whether it be privacy violations or hate speech and misinformation or unfair market dominance or addiction or ... fill in the blank.

We must think of it all as systemic, fueled by complete control over certain areas by tech companies, without adequate guardrails from publicly elected officials, which every other major industry has been subject to. Tech does not play by the rules only because there are no rules to speak of. So why shouldn't they do as they please?

Tristan Harris, a former design ethicist at Google who more recently co-founded the Center for Humane Technology, put it perfectly in a podcast interview with me last year: "We need to move from this disconnected set of grievances and scandals, that these problems are seemingly separate: tech addiction, polarization, outrage-ification of culture, the rise in vanities, micro-celebrity culture, everyone has to be famous. These are not separate problems. They're actually all coming from one thing, which is the race to capture human attention by tech giants."

And it has become a completely fixed race. Because of their heft, these behemoths block every lane and there is no space for innovative small companies to pass them, especially those that are faster or with better ideas. The debate about breakup or levying fines or writing regulations should also be a debate about innovation. What about all of the useful inventions that do not happen when there is only one or maybe two real games in town in social media, in search, in online video, in apps and in e-commerce.

Here's Swisher's July 1 article about this: Here Come the 4 Horsemen of the Techopolypse.

4) Wall Street Journal columnist Andy Kessler defends the tech giants: Tech CEOs Deserve an Apology. Excerpt:

It's tech success vs. lawyers and career politicians who probably have an aide print out their emails. Broadway is closed, so this will be must-see theater.

The CEOs' task is to disarm, dissuade and dissipate. No need to upstage congressmen, who are playing a weak hand. Antitrust is driven by consumer harm. Sure, there are screw-ups: Amazon favors its own products, Apple its own apps, Google its own YouTube videos; Facebook collects too much personal data. Yet none of these habits necessarily harm consumers and all could be easily fixed without decadeslong antitrust inquisitions. Lawyers are taught: "If you have facts on your side, hammer the facts. If you don't, hammer the table." Expect loud table banging.

5) Jeff Bezos and Amazon are coming under increased scrutiny, as these articles highlight:

6) No doubt the scrutiny the tech giants are under is a major reason why other social media companies are joining Twitter to remove conspiracy theories from their sites: Twitter crackdown on conspiracy theories could set agenda for other social media. Excerpt:

Twitter's broad and continuing crackdown against hundreds of thousands of QAnon-related accounts is evidence of a newfound aggressiveness on the part of social media companies in cracking down on conspiracy theories – some of which have gained traction with the president.

Influential posts linked to the movement, which emerged from the fringes of the Internet a few years ago, have touted conspiracy theories about the pandemic and other public events and have been promoted online by President Trump.

Other Silicon Valley companies, including Facebook and YouTube, said they were also considering crackdowns on the movement, some of whom are the president's most extreme supporters.

7) I look forward to reading this book: 'Facebook: The Inside Story' author Steven Levy on how the company compares to Apple and Google. Excerpt:

Of all those projects, though, only Mark Zuckerberg's is still around. The reasons why are explored at length in Facebook: The Inside Story, Steven Levy's mammoth new account of the social network from its founding until the present day. Levy had access to Zuckerberg, Sheryl Sandberg, and many of their top lieutenants and other employees over the past three and a half years, and the result is a revealing look at what the past 16 years have looked like from the offices in Palo Alto and Menlo Park.

The broad outlines of Facebook's story are well known. But Levy adds a lot of color to subjects including Zuckerberg's early life, his monomaniacal focus on growing the user base, and the gradual shrinking of his inner circle over time. Levy also has the best account yet of the Cambridge Analytica fiasco – he's appropriately skeptical of the motives of everyone involved, and lays out in great detail how Facebook sowed the seeds for that particular comeuppance.

8) This parody from The Onion cracked me up: Facebook Announces Plan to Break Up U.S. Government Before It Becomes Too Powerful.

In an effort to curtail the organization's outsized influence, Facebook announced Monday that it would be implementing new steps to ensure the breakup of the U.S. government before it becomes too powerful. "It's long past time for us to take concrete actions against this behemoth of governance that has gone essentially unchecked since its inception," said Facebook CEO Mark Zuckerberg, noting that while the governing body may have begun with good intentions, its history showed a culture of recklessness and a dangerous disregard for the consequences of its decisions. "Unfortunately, those at the top have been repeatedly contemptuous of the very idea of accountability or reform, and our only remaining course is to separate the government into smaller chunks to prevent it from forming an even stronger monopoly over the public." Zuckerberg closed his remarks with repeated assurances that despite a likely legal battle ahead, no one government could stand up to the fortitude of Facebook.

Best regards,

Whitney