Are Big Tech firms monopolies? My long-read Q&A with Nicolas Petit

Big Tech firms like Amazon, Google, and Apple are some of the most popular companies among American consumers. However, among policymakers in Washington, they’ve become much less popular for many reasons. Chief among these reasons is the concern that these companies have become too powerful and need to be broken up, or otherwise heavily regulated. Recently, I spoke with Nicolas Petit about whether these concerns are well-founded, or whether Big Tech’s critics underestimate the consumer value these firms provide.

Nicolas is a professor of competition law at both the
European University Institute and the College of Europe in Bruges. He is the
author of the recently released book, Big Tech and the Digital Economy: The Moligopoly Scenario.

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on Apple Podcasts or Stitcher. Tell your friends, leave a review.

Pethokoukis: In
the book, you focus on Apple, Microsoft, Amazon, Google, Facebook, and Netflix.
Four of these companies are worth over a trillion dollars each, which is pretty
big. Now, some people like to say that ‘every billionaire is a policy failure,’
and I get the sense they would say that every firm as big as these Big Tech
companies is a policy failure as well. I assume you disagree with this?

Petit: Yeah, I do, and my book is basically trying to
debunk this idea that there’s a problem with bigness in itself. And the
distinctive feature of Big Tech is not that they are monopolies or gatekeepers
or systemic firms. I think that the distinctive feature is that they’re highly
flexible firms and they operate in these environments of deep uncertainty,
where a lot of products and service recombination can arise due to the modular
nature of data. And so I think what defines them first and foremost is that
they’ve been able to overcome this deep uncertainty, but also, there’s much
efficiency that goes with the size of these firms on the supply and the demand
side, and therefore we should get accustomed to a world in which the future of
the economy is in large-scale organizations.

I know, as a side note, that none of these companies seems
to me to operate in a risk-safety-critical area, and none of them seems to me
to be “too big to fail” like a bank. So frankly, I don’t really buy all that
obsession with bigness. There might be problems, but they’re not in the bigness
of these firms.

How did they
get that big? I think some people think that while these companies used to be
young and scrappy — that a long time ago, that sort of entrepreneurial
innovative model that made them successful — somehow they’ve abandoned that
model and now they’ve gotten big by buying up potential competitors when
they’re small and by somehow influencing Washington now that their growth model
is really crushing competition. That, rather than innovating and providing
great services and great products to people.

Look, I think the reason behind bigness is really that
they are providing a compelling value proposition to users. And the best way to
think about that is probably to do a thought experiment like, “How would we
live in a pandemic 20 years ago without Facebook, Google, and Netflix?” It
would be unbearable. I mean, I myself live in Italy today and my family is in
France and Belgium, and it would be impossible to communicate with my relatives
in the pandemic. And the efficiency that we enjoy by virtue of these network effects
is the source of tremendous service. The problem, of course, is that people like
stories about things going wrong, and after the financial crisis we needed new
culprits for the evils of the time. So I think a lot of energy has gone into
looking at these firms as the source of a systemic problem. Again, I’m not
saying that there are no problems with Big Tech, but I’m saying that the scale
of the problem that they create is much smaller than the scale of the policy
energy that goes towards the sector.

Are these companies

The answer is “no,” and it’s on the cover of the book: I
say they are “moligopolies” — a mashup of monopoly and oligopoly — because you
cannot understand these firms just by looking at their share of outputs in
narrow markets, like search for Google or e-commerce for Amazon. And so all of these
firms to some extent compete as oligopolies in a wide area of market segments
and at the same time enjoy a core position in an origins markets, but it would
be, I think, foolish to think about the competitive pressure bearing on these
firms by just looking at the segment in which they have a large market share.

If you think about Google, it of course is very dominant
in search but at the same time competes with Apple for attention on mobile
devices by placing its operating system in Androids, with Microsoft in software
and productivity applications like docs and spreadsheets, and so on. And you
cannot make sense of what Google is doing in search without making sense of
what it’s doing in the other markets and how these dynamics work together. So I
call them moligopolies. Some people call them ecosystems, and I think once you take
this perspective of Big Tech firms’ size as ecosystems, you can see that
there’s a lot of complexity that the monopoly moniker tends to ignore, and this
is pretty bad.

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Now, let me just give you one last point about that. The
behavior of these companies is inconsistent with monopoly behavior. A
monopolist is a lazy company, doesn’t invest in R&D, doesn’t invest in
marketing, doesn’t invest in employment. What you see here for some of these
firms is investments into demand expansion that are orders of magnitude higher
than what you would meet in a standard monopoly situation. So there’s clearly
no way just by looking at the evidence — but just also by thinking analytically
— to categorize these companies as monopolies.

What do you
mean by “investing in demand expansion”?

So, you know, they are constantly investing into
complimentary products that increase value for users connected to the
ecosystem. For instance, when Google adds emails, calendar functionality,
navigation functionality to the search engine, every minute I spend on Google’s
search provides increased utility to me being connected to the network because
these complements work together to generate even more value. So it’s like Apple
putting you into its ecosystem where the AirPods work seamlessly with the
iPhone, which works seamlessly with the iMac, and so on. The difference between
Apple and Google is that Apple does that in a way which is very closed, whereas
Google does that in a way which is more modular and open and working maybe with
less internal resources and relying more on external providers.

But I think what matters is that these ecosystems of
complimentary products raise the utility to consumers. What I’m saying also is
that the set of ecosystems that we will be using as consumers is not finite,
and it might change. I mean, today we have one ecosystem for search, one
ecosystem for handset devices, and one for e-commerce, but there might be new
ecosystems of applications which will rise, as we saw with Zoom during the
pandemic. So it’s a very dynamic environment.

That’s an
interesting point, because the picture Big Tech critics give is that this is
not a dynamic environment. You have these big companies. Google is dominant in
search. Amazon is dominant in e-commerce. So there are these companies, they
have this business that they dominate, and unless government acts, we are done.
These are forever companies who now are so powerful that they cannot be
challenged. No one would fund you if you tried to go create a company that
would challenge Google in search (that’s an example that’s often given), and
they’re all in their little silos that they dominate. And “ecosystem” is the
wrong word, because that suggests it’s a living, breathing, organic, dynamic
market, but really these are dead — or unchanging, stagnant — markets dominated
by these big companies. That’s where we’re at, and there’s no sense that
there’s a dynamic, evolving, churning aspect.

But you’re
saying all of that’s not true?

Yeah, so I’m saying that it’s a matter of not looking into
the right place. Anyone trained in a business school — and probably the people
working in these companies and in competing companies — are trained to think
that they should not go try to compete in a red ocean, and they should search
for a blue ocean — meaning that you need to look for a product line where there
are large margins to make, and that you’re not going to make your profits and
find economic opportunity by trying to commoditize what exists. And so it might
be true that there’s six or five platforms that we know they have already conquered
a red ocean. But if that’s true, then you should watch elsewhere and see
whether firms are trying to find a blue ocean upstream or downstream or in adjacent

It’s like the drunk person looking for the keys under the
lamppost: It’s where the light is, but it’s probably not where the keys are.
And so if you turn your eyes away from the red oceans and you try to watch the
blue oceans, you’re going to see a lot of activity. You’re going to see
intense, competitive entry and attempts to penetrate this market. So let me
just give you —

Yeah, so what
are the blue oceans where these companies are attempting to sail?

Right, so driverless cars is a low-hanging fruit. They are
all going there, right? And the equilibrium in this market is not yet there. I
mean, we don’t know where the value will be in the software, in the navigation
system, in the AI brain that will cover all that in the car itself. So there’s
a lot of concerns here, and this drives hundreds of millions — or even tens of
billions — of dollars of investment every year. Let’s think about B2B
middleware markets — companies like Stripe, Salesforce, Zoom, Slack, Nextdoor,
Twilio, Shopify — I mean, these companies did not exist 20 years ago. So
actually, the point is: We are probably not looking at the right place. We
should look elsewhere, and there, we would see a lot of activity, but also our
time horizon is surprisingly short. I mean, we seem to expect more entry from
digital than from any other industries and less stability. That’s very weird.

In your group
of companies, some are obvious, like Apple and Amazon. But why is Netflix in
that group and not, say, Tesla? Do you consider Tesla a technology company, or
is it a software company trying to be a car company? Could you speak a little
bit about why you picked certain companies and not others, or how you classify

Right, so let me be clear: There was no cherry-picking. I
actually followed the press, and the press decided to use the acronym “FANG” (Facebook,
Amazon, Netflix, and Google). In Europe, we have another acronym: We call them “GAFAM,”
so that’s Google, Apple, Facebook, Amazon, and Microsoft. And so I decided to
put the two acronyms together and use the names used by the press because I
didn’t want to be accused of cherry-picking.

Now, you could probably reproduce some of the analysis in
my book for other tech firms like IBM or Salesforce. As for Tesla, I don’t know.
Maybe, or maybe not. You could say it’s an energy company to some extent. It’s
also competing with a bunch of players in energy markets, so, I mean, I’m not
sure, but there is a lot of sense in the idea that Tesla is also a tech

How concerned
are you about these companies purchasing all of these smaller companies in
order to prevent competition? The classic example I would give is Facebook
buying Instagram, but more broadly, do you think that’s a problem — that they’re
buying up too many potential competitors whose full potential we’ll never see?

That’s a great question, and it’s a subject of
considerable importance, because if policy decides to put an end to that
practice of intense M&A with small firms by Big Tech, then this will have a
lot of counter-incentive effects on entrepreneurship and innovation. You have
to know that most venture capitalists which fund these small startups really
expect this M&A to take place. They don’t expect IPO as a dominant way for
a startup to exit a market. A startup is there to die, to exit, and in two
thirds or three fourths of the cases, VC funders really expect exits by
acquisition. So you certainly do not want to kill the acquisition routes for
the startups to exit. I think we have to be serious about the counterfactual
worlds that we think about when we think about the ideal world and the real
world, and the real world is one in which you see a lot of M&A and this is
the normal way for startups to enter and scale and then exit.

Now, one thing I want to add to this is: People talk about
Facebook and Instagram all the time as the canonical example of something that
went wrong with policy, with the failure being that we didn’t prohibit Facebook
from acquiring Instagram. Now, people tend to forget, when Facebook acquired
Instagram, Facebook was a very young, publicly listed company. There was a lot
of uncertainty around it, and what happened after? Facebook didn’t kill
Instagram. It scaled Instagram to be really, really big. So regarding this idea
of killer acquisitions where large Big Tech firms acquire small startups to
kill them, Facebook-Instagram is clearly not the best example to use. The capabilities
of Instagram have been grown and increased to a huge extent under Facebook
ownership. So you might be unhappy today, but back in the day, this was not
obvious. And clearly when we look at the history, we can see that we’ve not
seen a killing. We’ve seen a rise.

Photo taken Dec. 10, 2020, shows the logos of Instagram, Facebook and WhatsApp. Via REUTERS/Kyodo

It’s unclear
to me if we had separate Facebook and Instagram companies — and we had Google
North, Google East, Google West, Google South — it’s not clear to me how that
would deal with the issues which are commonly brought up as the biggest
problems with these Big Tech companies: issues about privacy, about what we
might call “fake news,” and about hate speech. I don’t understand how antitrust
is the solution to these problems. Antitrust seems to be just the most obvious thing
to talk about because we have this history of antitrust in this country, and
these are big companies, and we remember other big companies in the past like
AT&T and Standard Oil. But I don’t really understand the relationship
between the most common critiques of these companies and antitrust as the

I agree. I think there’s two lines to that argument for
breakups. One is, I think, emotional to some extent. So some people are angry
with these big companies and they want to do something about them and a breakup
is a vindictive, punitive way to show muscle and show who’s the boss here. It’s
a sort of emotional way to act on a perceived frustration about policy and do

And then there’s, of course, the more analytical idea: When
you break up companies in multiple segments or subsidiaries or business units,
then you are going to create competition by rivalry, right? And so rivalry will
lead to better outcomes, because competition is generally a good thing. This idea
ignores two problems.

First, if you create rivalry, you’re going to raise
outputs. So now, if you complain about the existence of fake news or not enough
privacy or too much personalized advertisements, you don’t want to raise
outputs, right? I mean, you have to be consistent. You don’t want to raise the
output, the number of news, you don’t want to raise the number of ads, you
don’t want to raise competition for personalization. So that’s one.

And the second thing is that economic theory shows very
clearly that there are large network effects on the supply and the demand side.
So you’re going to lose a lot of efficiency if you break these companies into
multiple business units.

These Big Tech
companies are American companies. Why aren’t half of the biggest tech companies
European companies?

That’s a very hard question. I mean, if I knew that I
would probably be a billionaire.

I think Europe has a bunch of structural, cultural, and
economic problems that explain that. The cultural problem is that Europeans are
generally more risk averse than American entrepreneurs. The structural problem
is that we don’t really have a single market, contrary to what people often
say. So very trivial things, like opening a bank account from one country to
the other in Europe, are very difficult if you’re not a resident of the
country, so think about a startup willing to expand the number of geographic
markets in which it’s operating in Europe. This is already a hurdle.

So you have these problems and, of course, there are
things like language — Europe has many, many languages, and this puts a break
on labor mobility, which explains a lot of things, I believe.

Do you think
any of it has to do with specific public policies, whether it’s taxes or
regulation or anything like that?
Here’s one reason
I ask: I remember reading a Financial Times piece saying that Europe has
decided that regulation of technology was going to be its comparative
advantage. That doesn’t sound very entrepreneurial to me.

Yeah, that’s right. I mean, exactly. I think there’s often
the belief in policy circles that you can create and promote innovation by
legislation. And some people have referred to that in the academia as the “Brussels
effect” regarding Brussels dictating norms and standards for the worldwide
community, but there’s also this idea in the policy community that the Brussels
effect is also trying to create innovation by legislation. I prefer to call
that the “Brussels defect,” because I don’t think this is the way to create
innovation. One deep, ingrained belief in Brussels is that competition creates
innovation. And I think this has a lot of truth to it, but I think that it’s
probably more true that innovation creates competition, much as Joseph
Schumpeter said before. And I think Brussels is too much into the “competition
creates innovation” and not enough into the “innovation creates competition”

In the past,
there have been technology companies that seemed to be dominant, like Nokia and
MySpace. People thought they might be around forever, but then they were
replaced. Do you think that the current tech titans are just so powerful that
this process of churn has ended? Will today’s tech giants still be dominant 25
years from now?

Yeah, that’s a great point. It’s true that it’s been a while since we’ve seen a Nokia or a MySpace in the tech community, and it’s true that it has been a while as well that Google and Facebook and Amazon have been around. Now, what I said before is: Maybe we’re just not looking in the right place and there’s a lot of indirect entry.

The other thing is: The history of innovation suggests
that new platforms or innovation often arrive all at once. So there are windows
in history in which most of the innovative deliveries come around the same time
space and we have to wait until the next window. That’s pretty well-documented,
and it’s not a surprise.

Now, I would nonetheless submit that there is a lot of
indirect entry. These firms are also extremely flexible. I mean, a company like
Google could have experienced a near-death predicament when Apple created the
smartphone industry with the iPhone. And they were very clever to have the
capabilities to scale Android; they had acquired Android a little while ago,
and they invested a lot into that to stay on top of the business. And so you
cannot discount the dynamism that goes behind all these apparent monopoly
positions. And so I hear people say, “Oh, Facebook has been a monopoly for 10
years.” I’m like, “That’s an interesting question, but the more interesting
question is: Is Facebook today the same firm as it was 10 years ago?”

And there’s reason
to think that while these companies may remain big and powerful, they will not
be exactly the same companies as they were 10 years ago. It’s not a story of


My guest
today has been Nicolas Petit. Nicolas, thanks for coming on the podcast.

Great to be with you, Jim.

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