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August was a busy news month.

The most impactful story for all of our lives is that the federal government won its landmark case against Google, with a district court declaring the company a monopoly. We don’t know yet what the court will order Google to do, nor how Google plans to fight the ruling in coming years. Still, this case may change everything about our tech landscape in the coming decades.

GOOGLE! Too Big!

The federal government also has ongoing anti-competitive lawsuits pending against mega-tech companies Apple, Amazon, and Meta (the parent of Facebook, Instagram and WhatsApp). These cases potentially build on one another. The Google ruling depended for precedent on a Microsoft ruling from 2000. The government’s win against Google strengthens its cases against Apple, Amazon, and Meta.

Implications

I believe this will be very good for markets in the long run, in the sense that successful capitalism requires innovation, which may itself require forcibly busting up giant companies every once in a while. It could be bad for US stock market investors in the short run, with its extraordinary top-heavy reliance on a few monopolistic tech giants.

My beliefs are based on past reading on the regulation of monopolies and technology innovation, which provides historical context.

The Microsoft precedent

The previous tech bubble of 1999/2000 was kicked off by the IPO for Netscape and the subsequent “browser wars.” That era concluded with Microsoft being sued by the federal government, found to be a monopolist in April 2000, and ordered to break up in June 2000.

MICROSOFT! Avoided break-up for being too big in 2020

In the end, Microsoft appealed the ruling and was not ultimately broken into two companies as it had been originally ordered to do. There are many steps still to come before Google is broken up. Still, observers believe that, because of its loss in court, Microsoft moderated its behavior and did not come to dominate the nascent internet in 2000. Remember Internet Explorer? Yeah, me neither. The rise of Amazon, Apple, Facebook and Google themselves may be owed to the fact that Microsoft did not successfully win the browser wars and manage to shut down internet innovation with its own dominance.

Regardless of the future for Google, an optimistic view on the recent monopoly ruling is that this loss in court will open up pathways for competitors to grow and compete in search, advertising, and possibly AI services.

Monopoly theory evolved

The big thing to know about the Google ruling is that the Department of Justice and Federal Trade Commission are working on a relatively novel theory of monopolies. This is the biggest win for their novel approach in 25 years.

Interestingly, in a society increasingly inclined to view everything under a partisan lens, all of the federal investigations of Big Tech for monopolistic practices began under the Trump administration’s Department of Justice and Federal Trade Commission. The Biden administration continued the investigations and launched each of the lawsuits, except for the one against Meta, which began in December 2020 under Trump.

A simple version of the novel theory of monopolies – laid out in a book I have previously recommended called “The Curse of Bigness” by Timothy Wu – is that sheer size is its own problem when it comes to tech companies.

[LINK to October 2021 column on Tim Wu’s book: https://www.expressnews.com/business/business_columnists/michael_taylor/article/Taylor-Antitrust-action-is-not-anti-business-16528601.php]

For decades prior to this argument, the FTC generally didn’t pursue this type of monopoly case. Instead, the bar for proving monopolistic behavior was that consumers were being harmed, usually through higher prices. Companies like Amazon and Google seem to bring lower prices, so have long fought off the idea that they are monopolies.

AMAZON! Too Big!

Lina Khan, the Chairman of the Federal Trade Commission, was brought aboard in 2021 specifically to pursue these anti-trust cases against big tech companies.

Khan made her reputation as a law student in 2017 initially by arguing that Amazon was a monopolistic threat to businesses, despite the fact that

1. Amazon probably reduces consumer prices overall and

2. Amazon faces extraordinary competition in each of its market segments.

So why is sheer size its own problem? A monopolist we assume will act in its own interest. Its interest is sometimes to destroy competitors and squash any threats from innovation, which big companies can typically do successfully against small and medium-size companies. And that’s pretty much it.

We can’t reliably know what innovations come next. But certainly telecommunications, software, retail, and artificial intelligence should continue to evolve and improve in the coming decades. Breaking up overly large companies that have formed tech monopolies is a way to shape the commercial landscape so that innovation can happen.

No business likes to be attacked by the federal government, and no monopolistic company will take this lying down. They will all fight vigorously against accusations of monopoly power.

Even while I cheer the break-up of Google, and possibly the other giants, I have no ill-will toward them.

I’m typing this column into my Google Docs account, saving it to my Google Drive while checking my Google Calendar and using Google Search continuously throughout the day, before I Gmail the column over to my editor or go on YouTube to watch some important video.

Google is convenient, excellent, universal, and mostly free. But if Google’s current dominance prevents the emergence of the next world-beating technology – as monopolies typically have the power to do – then this ruling is good news.

I’m also cheering this news knowing that it could cause rocky times for the stock market.

Implications for the Magnificent 7

The other three companies being sued – Amazon, Apple, and Meta, along with Google parent Alphabet, NVIDIA, Microsoft and Tesla – constitute the so-called Magnificent 7 stocks that have absolutely determined and dominated returns of the S&P500 and Nasdaq 100 over the past three years.

The last time the government found the most important tech company of the time – Microsoft – a monopolist in the Spring of 2000, things got volatile and scary. The Nasdaq dropped more than 36 percent in 2000, 32 percent in 2001, and 37 percent in 2002. Obviously the Microsoft story was not the only thing going on then. But the volatility of early August 2024 is a reminder that markets do not like uncertainty and they generally do not like governmental attacks on highly successful companies. So maybe we are in for some rocky days with respect to these court cases.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related post:

Book Review: The Curse of Bigness by Timothy Wu

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The Amazon HQ announcement is coming to your headlines soon. CEO Jeff Bezos said by the end of the year, even though others believe they’re going to Northern Virginia. I’m thankful neither Houston nor San Antonio played that game, although Austin was named a top-20 finalist.

The game, if you need a refresher, is that Amazon intends to build a new 50,000-employee second headquarters, and invited city and county leaders last year to inundate the company with slavish economic incentives to woo Amazon and those sweet, sweet, jobs.

Economic Development: Left and Right

One of the things I think about economic development incentives, which is clearly quite naive of me, is that partisans on the Left and Right should always, for ideological reasons, oppose targeted tax breaks for specific companies.

On the Right, a targeted tax break incentive seems the very antithesis of free-market capitalism. This involves a government, usually a state or city or county, putting its thumb on the scale to pick winners and losers. Pro-market folks should see this as a clear disruption of the way markets are supposed work. Worse, the incentives usually come with intrusive requirements like minimum numbers of jobs created, minimum salaries, and further government interference. From a free-market perspective, when the government picks winners and losers we get a bad mixture of misallocated resources and opportunities for corruption.

To the Left, a targeted tax break for a specific company should appear as clear corporate welfare. When a government cuts property taxes or other fees for a specific business, the small number of capitalist owners of that specific company get a direct benefit to their bottom line, while the general population bears a greater burden for all the rest of the taxes. That’s the very definition of benefitting the few on the backs of the many, and should present clear problem for ideologues on the Left.

Setting aside my naïve brain, however, it seems like both the givers of government largesse and the recipients of the largesse believe in tremendous personal benefits from economic incentives. Meanwhile PR announcements inevitably focus on some amount of “good paying jobs,” or praise the “job-creating government.”

Again, this is just one man’s dumb opinion, but when you incentivize companies to move to your city because of a supposed tax break, and that company is willing to submit itself to a specific requirement for creating a certain number of jobs at a certain salary, there are two highly likely scenarios.

The optimistic scenario is that the company is well-run, planned the expansion anyway with or without government incentives, and is cynically happy to receive government freebies because, hey, free money. That’s at least a clever, but cynical, company.

The pessimistic scenario is that the company makes important executive decisions based on tax incentives. That kind of company will be gone in five years, either because their executives have their priorities wrong and the company is badly run, or because another city or county has another better set of incentives to offer five years from now.

To be clear, I’m confident Amazon is extremely well-run, will extract maximum value from its already preferred and chosen location, and they’re interested in incentives because, hey, free money.

The Academics’ View on Economic Development Incentives

UT Austin Professor Nathan M. Jensen and Duke University professor Edmund J. Malesky recently published a book Incentives To Pander: How Politicians Use Corporate Welfare For Political Gain addressing these problems. They review what economists already know, which is that there’s scant evidence that economic incentives work. Or if they work, the public benefit cannot be justified by the public cost.

Their study focuses less on the economic case for incentives and more on the political advantage city and county leaders get by offering these corporate goodies. It doesn’t matter so much that incentives don’t work, but rather it matters that voters think they work. And voters have far less information than leaders, so generally can’t prove that incentives don’t work. Jensen and Malesky further argue that even an unsuccessful attempt to woo a company with tax breaks, for example, helps a political leader, because they can at least claim to have “tried their best.”

One Mayor’s View on Amazon

In the light of Jensen and Malesky’s book, and leaders’ incentives to pander, San Antonio Mayor Ron Nirenberg and Bexar County Judge Nelson Wolff’s early and decisive NO to Amazon HQ in October 2017 stands out as particularly courageous.

I asked Nirenberg recently whether he had any regrets about declining to compete for Amazon HQ. His short answer is, no, no regrets.

His longer answer is that they didn’t so much say no to Amazon as they started a different economic opportunity conversation about what San Antonio has to offer.

“With respect to HQ2 and the sweepstakes, that narrative of San Antonio’s bright future is weaved right into it. When the stories are written about the Amazon RFP, there is a subplot, which is San Antonio’s response,” Nirenberg said.

I have to say, because I hate incentives so much, that it’s refreshing to see an earnest refocus on the economic advantages of a place rather than dangling public goodies to a private company.

Nirenberg continued, “We are investing in the fundamentals in terms of housing, water supply, a reliable energy grid. And we have a workforce that mirrors what the rest of the country will look like 20 years from now. We are making investments in that workforce before most cities have even woken up to that reality.”

Says Nirenberg, “if a company is interested in a 5-year return, and cashing out, there are many other cities. But if companies are interested in the 30-year return, I feel the fundamentals of our city are extremely competitive.”

Brother, can I get an Amen? This is the kind of talk professors Jensen and Malesky would welcome.

Northern Virginia, early congrats on your future “win.”

Please see related posts:

Need Transparency on Economic Development Taken To Eleven

Amarillo By Mornin’ – Stadium Building

Economic Development for Solar – Turtles All The Way Down

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