Debunking “Big is Bad”: The Economics of Big Tech
By Liam Sigaud, American Consumer Institute
Though calls to break up “Big Tech” — Amazon, Apple, Google, and Facebook — have intensified over the last few years, the logic behind the movement is as tenuous as ever. From the perspective of consumer welfare, the standard that has guided competition policy in the U.S. for nearly half a century, there’s good reason to think giant tech companies actually deliver significant benefits to the public.
Today’s Big Tech bears little resemblance to the Standard Oil of the early 20th century or the Bell System of the 1970s. These companies held monopoly positions in the oil and telephony markets until the federal government intervened to restore competition.
But unlike the behemoths of the old days that allowed innovation to stagnate because consumers had nowhere else to turn, the rivalries between tech companies have created one of the most dynamic sectors in our economy. Platforms face intense competition in many markets, from personal computing and cloud services to social media and entertainment.
As a result, Big Tech invests enormous sums in R&D to discover the next great idea, improve features, and retain a highly-mobile consumer base. Among the world’s top 1,000 publicly owned corporations, Amazon and Alphabet (Google’s parent company) are the top two spenders in R&D; Apple was seventh and Facebook was fourteenth.
Even for giant tech companies, the costs of complacency are high. Over and over, once-dominant companies have cratered when they failed to innovate fast enough and allowed start-ups to gain a foothold; just consider the fates of AOL, Yahoo!, and Myspace. More recently, Facebook’s hegemony in social media has been threatened by TikTok’s rapid rise in popularity, especially among young people.
Large tech platforms have achieved their size and scope because they deliver what consumers wanted and do it better and cheaper than the competition. Facebook and Google’s most popular services cost nothing, while Apple gives users access to millions of free apps and Amazon offers lower prices and broader product selections than rival marketplaces.
Consumers derive enormous value from these services. In a study published last year, researchers found that, on average, individuals required $17,530 to give up search engines for a year, $8,414 to give up email, and $3,648 to give up digital maps — all of which are essentially free.
The nature of information technology favors giant companies that can spread their high fixed costs across a large number of customers, create consumer benefits and lower prices through economies of scale, and maximize network effects. Network effects occur when a product or service becomes more valuable as the total number of users increases. As more of my friends join Facebook, for example, the benefits I get from my Facebook account grow. Consumers actually benefit from the scale of Big Tech platforms.
Since some Big Tech are mostly in the businesses of facilitating online interactions rather than selling something directly to consumers, network effects are central to their business model. According to one estimate, network effects have accounted for 70 percent of the value creation in tech over the last quarter-century.
At the same time, Big Tech’s economic power is often overblown. The top five Internet platforms — Amazon, Apple, Google, Facebook, and Microsoft — represent less than 20 percent of the total value of the S&P 500. In the early 1960s, the top 5 companies accounted for more than 30 percent of total value.
To be sure, Big Tech deserves to be monitored for anti-competitive behavior that tangibly harms consumers. Investigations into potential antitrust violations have been launched by Congress, the Federal Trade Commission, and other agencies. Targeted regulatory action may be needed to rein in abuses or shield smaller competitors from unfair practices.
With that said, however, the notion that size of Big Tech platforms makes them inherently dangerous and harmful to consumers is not only wrong, it’s almost exactly backward.
Liam Sigaud writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.