Can You Teach Me How To Google...

With a November 2022 announcement, the FTC may have changed the game for monopolists

“The errors which arise from the absence of facts are far more numerous and more durable than those which result from unsound reasoning respecting true data.” — Charles Babbage

Last week’s note on measurement seems to have struck a chord, with most readers indicating general agreement. There was one comment, however, that caught my attention from Mike in New Zealand:

“It's funny that in closing you trip over what is arguably the most important consideration in setting tax policy but appear not to notice that on which you stubbed your toe: sovereigns (tax jurisdictions in this context) compete to attract capital and labor:

We can ATTRACT people from OTHER states, and fuel the economic engine that will drive it all even faster".So capital and (to a much lesser degree) labor will arbitrage differences in rates and structures to maximize after-tax returns; which in the absence of agreement among sovereigns results in a race to the bottom and a huge collective net loss to global society. With all the attendant absurdities ranging from uneconomic local development grants to double Irishes with Dutch sandwiches on the side.

Competition between sovereigns is the problem not the solution which renders any discussion of optimal rates or structures entirely moot.” — Mike in NZ

The idea that competition is the problem does not sit well with me. But it’s a problem that Peter Thiel recognized many years ago. If you have not read it, Peter’s book “Zero to One” is a primer for the next decade as we unwind many of the monopolies he identifies. From his book Zero to One:

“Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites.”

“Capitalism and competition are opposites”… quite a profound statement. And this is true as a definition refresh reminds us:

So if capitalists don’t want competition, what is their objective? Monopoly. Again, from Peter:

“Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.” - Peter Thiel, Zero to One

And American corporations have done a fantastic job, in aggregate, moving “to one.” Both pre-tax and post-tax profit margins have exploded in the past two decades, rising to unseen levels. Like the 1960s, when monopolies AT&T, IBM, General Motors and Sears dominated the landscape, post-tax profit margins briefly exceeded 11%:

In a prophetic 2018 piece, the Roosevelt Institute wrote:

“If the federal antitrust enforcement agencies do not make significant changes to the enforcement of antitrust policy, first by acknowledging that many markets are highly concentrated, fewer and fewer firms will continue to expand their dominance. Market concentration and market power lead to stagnant wages, fewer new businesses, and a weakened supply chain.”

Section 7 of the Clayton Antitrust Act of 1914 states that a merger is unlawful if “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly” (DOJ 2010) The rising levels of corporate profits are often attributed to industry mix — information companies supposedly have “network effects” that are unique. In my view, these are no more unique than the network effects of an automotive company with a network of dealers and service centers or a retailer with a warehouse network. What we are seeing is unchallenged monopoly power at work.

So to bring it full circle and address the observation from Mike in New Zealand, the problem is not governments competing. The problem is governments not ensuring competition.

“When critics confront us with corporate malfeasance, structural poverty, or socioeconomic marginalization, we should be clear that market principles do not require defending big business at all costs, and that much of what our critics condemn results from government regulation and legal privileges.” - Charles Johnson, Foundation for Economic Education

That may have begun to change meaningfully. In July 2021, the FTC rescinded prior guidance on FTC enforcements against unfair competition, and in November 2022, they released new guidance

This past week, we’ve now seen a second antitrust lawsuit against Google for anti-competitive behavior. Exactly the reasons Google was so attractive to investors, as Peter Thiel outlined in his book, led to the enforcement actions:

“A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything.”

And the lawsuits against Google are coming at an important time. Like Microsoft in 1999, Google is suddenly facing competition with ChatGPT entering the fray (supported by none other than Microsoft). While many of the breathless ChatGPT headlines need to be taken with a grain of salt, they are indicative of the risk that behaviors could change rapidly while Google, like Microsoft and IBM before it, is forced to tread carefully due to antitrust enforcement even as it tries to address this new risk:

Google, of course, denies that it has engaged in anti-competitive activities:

In a statement, Google said the advertising sector has plenty of competition and that prosecutors' case against the tech giant will make buying advertisements more expensive.

"Today's lawsuit from the DOJ attempts to pick winners and losers in the highly competitive advertising technology sector," a Google spokesperson said. "DOJ is doubling down on a flawed argument that would slow innovation, raise advertising fees, and make it harder for thousands of small businesses and publishers to grow."

Unironically invoking the language of conservatives and libertarians (“the government picking winners and losers”), famously Woke Google has shown that Peter Thiel wrote the book we should all re-read. It is highly probable that the next 20 years will play out very differently than the last twenty with implications for corporate profits and asset markets:

“Monopolists lie to protect themselves.” — Peter Thiel, Zero to One

Well said.