Regulate? Innovate!

Regulate? Innovate!

This article from the August 2019 IPA Review is by IPA Adjunct Fellow, Chris Berg

Suddenly, we live in a world of policy dilemmas around social media, digital platforms, personal data, and digital privacy. Voices on both sides of politics are loudly proclaiming we ought to regulate Facebook and Google. From the left, these calls focus on antitrust and competition law— the big platforms are too large, too dominant in their respective markets, and governments need to step in. From the right, conservatives are angry that social media services are deplatforming some popular voices and call for some sort of neutrality standard to be applied to these new ‘utilities’.

Less politically charged but nonetheless highly salient are the concerns about the collection and use of personal data. If ‘data is the new oil’—a commodity around which the global economy pivots—then Facebook and Google look disturbingly like the OPEC oil production cartel. These firms use that data to train artificial intelligence (AI) and serve advertisements to consumers with unparalleled precision. No more is it the case that 50 per cent of advertising is wasted.

Facebook is not just central to our lives… but central to our politics

These policy dilemmas have come about because the digital environment has changed, and it has changed sharply. Facebook only opened to the public in 2006 and by 2009 already had 242 million users. In the second half of 2019 it has 2.38 billion users. Facebook is not just central to our lives— one of the primary ways so many of us communicate with family, friends and distant acquaintances—but central to our politics. The first volume of the Mueller investigation into Russian interference in the 2016 American presidential election focused on the use of sock-puppet social media accounts by malicious Russian sponsors. There’s no reason to believe these efforts influenced the election outcome but it is nonetheless remarkable that, through Facebook, Russian agents were able to fraudulently organise political protests (for both left and right causes)—sometimes with hundreds of attendees—by pretending to be Americans.

There always have been and always will be a debate about tax rates, free trade versus protectionism, monetary policy and banking, Nanny State paternalism, or whether railways should be privatised or nationalised. The arguments have been rehearsed since the 19th century, or even earlier.

But we are poorly prepared not just for these topics of digital rights and data surveillance, but for new dimensions on which we might judge our freedoms or economic rights. Private firms are hoovering up vast quantities of data about us in exchange for providing services. With that data they can, if they like, map our lives—our relationships, activities, preferences—with a degree of exactness and sophistication we, as individuals, may not be able to do ourselves. How should we think about Facebook knowing more about our relationships than we do? Do we need to start regulating the new digital economy?

THE SURVEILLANCE ECONOMY

One prominent extended case for greater government control is made by Shoshana Zuboff, in her recent book The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power(PublicAffairs, 2019). For Zuboff, a professor at Harvard Business School, these new digital technologies present a new economic system, surveillance capitalism, that “claims human experience as free raw material for translation into behavioural data”. Zuboff argues these new firms look a lot like the industrial behemoths of the 19th and 20th century. Google is like General Motors in its heyday, or the robber barons of the Gilded Age. Using Marxist-tinged language, she describes how firms claim the ‘behaviourial surplus’ of this data to feed AI learning and predict our future desires—think Amazon or Netflix recommendation engines.

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Harvard academic Shoshana Zuboff wants more Government regulation of Google and Facebook. Photo: Michael D. Wilson

More sinisterly in Zuboff’s telling, these firms are not simply predicting our future preferences, but shaping them too: “It is no longer enough to automate information flows about us; the goal now is to automate us.” Netflix can put its own content at the top of its recommendation algorithm; Pokémon Go players tend to shop at restaurants and stores near the most valuable creatures.

Where many people spent years worrying about government surveillance in the wake of Edward Snowden’s leaks about the National Security Agency, she argues NSA learned these techniques from Google—surveillance capitalism begets surveillance state. At least the NSA is just focused on spying. Silicon Valley wants to manipulate: “Push and pull, suggest, nudge, cajole, shame, seduce,” she Harvard academic Shoshana Zuboff wants more Government regulation of Google and Facebook. Photo: Michael D. Wilson writes. “Google wants to be your co-pilot for life itself.”

Harrowing stuff. But these concerns would be more compelling if Zuboff had seriously engaged with the underlying economics of the business models she purports to analyse. Her argument—structured around an unclearly specified model of ‘surveillance assets’, ‘surveillance revenues’, and ‘surveillance capital’—is a modification of the internet-era adage, “If you’re not paying for the product, you are the product”. Many services we use online are free. The platforms use data about our activities on those platforms to make predictions—for example, about goods and services we might like to consume—and sell those predictions to advertisers. As she describes it:

… we are the objects from which raw materials are extracted and expropriated for Google’s prediction factories. Predictions about our behaviour are Google’s products, and they are sold to its actual customers but not to us. We are the means to others’ ends.

… the essence of the exploitation here is the rendering of our lives as behavioural data for the sake of others’ improved control of us.

This argument misses a crucial step: what is this control? For the most part, the product derived from our data that is sold to other firms is advertising space: banner ads on news websites, ads dropped into social media feeds, ads threaded above our email inboxes. Seeing an advertisement is not the same as being controlled by a company. The history of advertising dates back at least to Ancient Rome. We are well familiar with the experience of companies trying to sell us products. We do not have to buy if we do not like the look of the products displayed on our feeds. It’s a crudely simple point, but if we do not buy, all that money—all that deep-learning technology, all those neural networks, all that ‘surveillance’—has been wasted.

TWO-SIDED MARKETS

So how should we think about the economics of the big technology companies? Google and Facebook are platforms; what Nobel-winning economist Jean Tirole described as ‘two-sided’ markets. Until recently the dominant market structure was a single-sided market: think a supermarket. A supermarket has a one- directional value chain, moving goods from producers to consumers. Goods are offered to customers on a take-it-or-leave-it basis. In a two-sided market, customers are on both sides of the market. The service Google and Facebook provide is matching. They want advertisers to build relationships with users and vice-versa. Since the first scholarly work done on two-sided markets, economists have observed platforms that take three or more groups of users and match them together.

Two-sided markets are not new, of course. Newspapers have traditionally done this: match advertisers with readers. Banks match borrowers with lenders. French economics professor Jean Tirole’s first work looked specifically at credit card networks. But two- sided markets dominate the online world, and as the economy becomes more digital they are increasingly important. When we try to define what is unique about the ‘sharing economy’, we’re really just talking about two- sided markets: AirBnB matches holidaymakers with empty homes, Uber matches drivers with riders, AirTasker matches labour with odd jobs. Sometimes single and two-sided markets co-exist: Amazon’s two-sided marketplace sits alongside its more traditional online store.

The economic dynamics of two-sided markets are very different dynamics to what we are used to in the industrial economy. They are strongly characterised by network effects: the more users they have on both sides, the more valuable they are. So firms tend to price access in strange ways. Just as advertisers subsidised the cost of 20th century newspapers, Google and Facebook give us free access not because we are paying in personal data but because they are in the relationship business. Payments go in funny directions on platforms, and the more sides there are the more opaque the business model can seem.

Seeing an advertisement is not the same as being controlled by a company

An ironic implication of Zuboff’s arguments is that her neo-Marxian focus implicitly discounts what most analysts identify as the two key issues around these platforms: whether these networks are harmful for privacy and whether they are monopolistic. First, the monopoly arguments. In Australia the ACCC has been running a digital platforms inquiry whose draft report—released in December 2018—called for using competition law against the large platforms on the basis they have started to monopolise the advertising market. There are many problems with the ACCC’s analysis. For example, it badly mangles its narrative account of how newspaper classifieds migrated online, implying Google and Facebook captured the ‘rivers of gold’. In fact, classified advertising went elsewhere (often to websites owned by the newspapers, such as Domain).

Yet the most critical failure of the ACCC is its bizarrely static perspective of an incredibly dynamic industry. True, platform markets are subject to extreme network effects—the more users, the more valuable—but this does not mean they tend towards sustainable monopolies. Far from it. There are no ‘natural’ limits to platform competition on the internet. There is unlimited space in a digital world. The only significant resource constraint is human attention, and the platform structure gives new entrants a set of strategic tools which can help jump-start competition. Using one side of the market to subsidise another side of the market helps ‘boot-strap’ network effects.

Consumer harm is the standard criteria for whether a firm is unacceptably monopolistic. Usually this means asking whether prices are higher than they would be if the market was more contested. Given the money prices for these services are often zero, that’s hard to sustain. Nobody pays to use Google.com. At first pass the digital platform business seems to have been an extraordinary boost to consumer surplus. But, again, platform economics can be strange. It is possible we are paying not with money but with personal data, and the role of a competition authority is to protect our privacy as much as our wallet. This is the view of the ACCC (at least in its December 2018 draft report) and has become an article of faith in the ‘hipster antitrust’ movement in the United States that competition regulators need to focus on more than just higher prices.

There is obviously a great deal to privacy concerns. In a recent book, The Classical Liberal Case for Privacy in a World of Surveillance and Technological Change (Palgrave Macmillan, 2018), I argued we currently are in an extended social negotiation about the value of privacy and its protection. But the privacy debate is characterised by a lot of misconceptions and confusions. Privacy policies and disclosures have not always been acceptable. Expectations are changing. Mark Zuckerberg would no longer get away with the reckless anti-privacy statements he made as a CEO when Facebook launched. The question is whether to wait for privacy expectations to shift—supplemented by the common law—or whether governments need to step in with bold new privacy regulation.

We currently are in an extended social negotiation about the value of privacy and its protection

The experience with privacy regulation so far has not been great. The European Union’s General Data Protection Regulation presents the single most significant attempt to regulate privacy thus far. The GDPR, which became enforceable in 2018, requires explicit and informed consent of data collection and use, informing users about how long their data will be retained, and provides for a “right of erasure” that allows users to require firms to delete any personal data they have collected at any time. The GDPR was written so broadly as to apply to any company that does business with any European citizen, in practice making the GDPR not just a European regulation but a global one.

Early evidence suggests host of consequences unforeseen by the GDPR’s designers. Alex Stapp, at the International Center for Law and Economics, argues GDPR compliance costs have been “astronomical”. Microsoft put as many as 1,600 engineers on GDPR compliance, and Google says they spent “hundreds of years of human time” ensuring they follow the new rules globally. These firms have the resources to do so. One consequence of high compliance costs has been to push out new competitors: small and medium internet companies that cannot dedicate thousands of engineers to regulatory compliance. As Stapp points out, it’s not at all clear this trade- off for privacy protection has been worth it: regulatory requirements for things such as data portability and right of data access have created new avenues for accidental and malicious access to private data.

A peculiarity of the history of early-stage technologies is they tend to trade off privacy against other benefits. Communications over the telegraph were deeply insecure before the widespread use of cryptography; early telephone lines (‘party lines’) allowed neighbours to listen in. Declaring privacy dead in the digital age is not just premature, it is potentially counterproductive. We need sustained innovation and entrepreneurial energy directed at building privacy standards into technologies we now use every day.

THE DEPLATFORMING QUESTION

One final and politically sensitive way these platforms might be exercising power is by using their role as mediators of public debate to favour or disfavour certain political views. This is the fear behind the deplatforming of conservatives on social media, which has seen a number of conservative and hard- right activists and personalities banned from Facebook, Instagram and Twitter.

Prominent examples include the conservative conspiracist broadcaster Alex Jones, his co-panellist Paul Joseph Watson, and provocateur Milo Yiannopoulos. Social media services also have been accused of subjecting conservatives to ‘shadow bans’—adjusting their algorithms to hide specific content or users from site-wide searches.

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