The Unbounded Modern Empires

We still have antitrust busters in this world. They remain necessary as it is evident that many businesses do not play fair. As Disney tries to pick some parts of Fox, AT&T merges with Time Warner, and Meredith buys Time, we would see the regulators examining the deals. The goal is usually to prevent market dislocations that will negatively impact consumers. In other words, you do not want pricing power to concentrate in the hands of few, giving them the positioning to raise prices, when consumers have fewer alternatives.

That has been the spirit behind antitrust regulation, at least in America. In the European Union, it is a bit different, in that antitrust does not just work for consumers, it also considers the impacts of any merger or market positioning on other competing companies, which may not necessarily be part of a deal. For example, if Google makes its products free, and those free products cause many EU companies to struggle, the EU would be worried, despite the fact that consumers are better, as they are not paying more. In America, no one cares how the competing companies fare: provided the consumers are happy, and they are not negatively impacted by price, it is irrelevant if Google is the only one standing.

In my Business Law class in the University of Calabar (Nigeria), during my MBA, the professor explained that antitrust was based on the construct of discreet marketplaces across industrial sectors, and participating companies should not be allowed to have capabilities to impose undue price burdens on consumers. In other words, there are geographical elements, in some deals, which are considered by the regulators, as they make decisions, to ascertain the power of market leaders on price equilibrium. When I took that class, the digital platform economy was still at infancy. Largely, most things he taught have evolved: they remain valid, even though they have been severely weakened, as the key thesis of the antitrust was geographical dominance.

Facebook does not operate on isolated geography; it is the geography. The same goes for Google. Technically, there is nothing you can do to narrow their influences because they work across all domains. Now, because they have huge scalable advantages due to their near-zero marginal cost business models, they can fill the whole geography (yes, the world). The question becomes: how do you regulate Facebook and Google if you use the same playbook developed many decades ago? Simply, you cannot – you have no chance!

And that is the problem. With their high scalable advantages running on aggregation construct, digital empires like Facebook and Google can take up offline empires, and may still not be within the crosshairs of the regulators. No one can effectively regulate Facebook, for example, unless you want another company (not named Facebook) to take its position. The operating structure of the business is mutative, and that means that it can grow through network effects which reward the best: a better service brings more users, and the more the users, the better the service, setting up a positive continuum. So, if you break Facebook, one part could grow and over time could dominate other parts, provided that part is the surviving best. Or another company with stronger advantage, post-Facebook breakup, would take over the new market and become the new category-king.

In a perfect internet market, as I have noted many times, the marginal cost for a digital product tends to zero. Companies like Google and Facebook that get close to this zero cost find huge success. Others like Groupon and Blue Apron that may require incurring costs to add new users or serve them, cannot see big valuations. (Groupon employs many people to meet and market merchants on its mass discounting business, disguised as an ecommerce operation).  While Groupon is limited by the physics of locations, Facebook does not have such burdens since the latter can add users easily. While it seems that Groupon has users as the main customers, the supplier base is more strategic for its business. So, I think it has to do more to handle the supplier (the real users, in my opinion) before the consumer facing side can do well. Facebook deals with publishers but the publishers largely come to it, and not the other way round. Facebook product is very appealing even without publishers, unlike Groupon, which must first perfect the suppliers’ side before value can be created for the typical consumer.

It would be very unfair to stop Disney from buying Fox when Netflix is growing with the whole world as its geography. Yes, regulators are not constraining Netflix by geography while broadcasting entities like Fox are curtailed. Disney-Fox is an opportunity to take up the asymmetric warfare posed by Netflix, in the digital space, which must be battled ferociously. If you kill the deal while allowing Netflix unfettered growth, in a redesigning market, the spirit of capitalism would be diminished, because over time Netflix would become stronger to consume Disney and possibly dominate the markets unchallenged.

The works of modern antitrust busters have become very complex because even when they have to deal with the potential short-term impacts on price, for cable subscribers, if Disney and Fox come together, they have to examine the long-term implication if Netflix has no strong competitor. Netflix belongs to the unbounded, unconstrained and antitrust-able empire group which can grow massively because of their high scalable advantages. Because they begin with the whole global geography, the web, constraining them does not seem workable. The only way to handle them would be allowing the typical playbooks used in the meatspace (offline) antitrust to fade: yes, even if antitrust playbook may not favor Disney-Fox deal, the presence of Netflix should allow the deal to go through.

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