Why Breaking Up Companies is an Old Solution to a New Problem

Progressive front runners Bernie Sanders and Elizabeth Warren have both committed to the monopoly busting of the big tech giants Amazon, Google, and Facebook.  It’s a Progressive vision drawing inspiration from the breakup of AT&T, Standard Oil, and JP Morgan.  But breaking up Big Tech is an entirely different obstacle than breaking up the communications, energy, and finance monopolies of 100 years ago.  It’s an old solution to a new problem, and we can do better.

The first problem with breaking up big tech is that it’s not going to work.   Warren’s argument connects the big tech firms to the past monopolies in their dominance of networks.  While the comparison is accurate, it fails to capture the real nature of monopolistic tech companies.  

It’s correct because all of the mentioned organizations have distinct network monopolies.  As Warren explains, nearly half of all internet sales go through Amazon, and more than 70% of all internet traffic goes through assets owned by Google (Alphabet) or Facebook.  These organizations rely on both investment in research and development, and consuming innovators to expand their dominance and insulate against competition. It is fair to compare them to the companies of the Gilded Age in their reach and market dominance.

Where the plan falls short is the conclusion that past measures will solve present problems.  The big tech firms are fundamentally different organizations than the old monopolies. I’ll support my claim by presenting three reasons why the previous statement is true and share ideas about a better path forward.  

Problem #1 – Physical vs. Virtual Networks

AT&T has historically had the choice of acting within its existing telecommunications infrastructure or financing new infrastructure to expand their business.  Standard Oil’s resource extraction required locations that had energy resources to operate. Splitting up these organizations meant carving up existing territories that would create clear boundaries of operation for the resulting spin-offs.  

Compare that to the virtual network powers of Facebook, Google, and Amazon.  Excluding the possibility of an expanded Google Fiber network, the physical infrastructure of the Gilded Age  companies far surpasses the footprint of the existing tech giants. The big tech organizations are only encumbered by server farms and administrative buildings; their products and services extend beyond a limited geographic infrastructure.    

The first challenge to breaking these organizations up as per Warren’s plan is that forcing these companies to spin off their assets into platform utilities is less restraining than it sounds.  Facebook’s platform, Amazon’s marketplace and Google’s traffic assets can operate from anywhere in the world. Breaking them up is inconvenient and costly, but does nothing to stem their monopolistic potential or encourage competition.   The spin-off utility still exercises network monopoly and despite a redirection of profit incentive, these new organizations will hold dominance of the networks and their potential.

Problem #2 – Transferability of Assets & Wealth Creation

In spinning off sections of these big tech firms into regulated independent organizations, we encounter a separate but similar challenge presented in problem #1.  Big tech firms have virtual products that, in many respects, can be recreated and redesigned to work around and escape regulations rapidly when compared to the monopolies of the Gilded Age.  

In what direction these redesigns may take shape is still to be determined.  But based on their history of aggressive expansion and market dominance, it is unlikely that we’ll stifle big tech by breaking up virtual assets.  

We can imagine new products with similar functions that escape the boundaries of the regulation.  The sale of the assets to a separate (but linked) organization, and numerous backdoors built into the spin-off products that may “accidentally” leak information that could be used for profitable purposes in the future.  

Compared to physical assets, virtual assets are significantly more flexible in their ability to change direction.  How do you restrain something flexible by design? It is unrealistic for us to believe that spinning off virtual assets will have the same restraining impact on big tech firms as the spin-off of physical assets had on past monopolies.  Again we highlight why the breaking up of the companies is an old solution to a new problem.

Problem #3:  The New Economy

Breaking up the big tech firms lays the framework for dealing with tech monopolies, but omits the fact that companies are becoming monopolies more and more frequently due to the changing nature of our economy.  This trend will only continue to accelerate as technologies advance.

Firms like Google, Amazon, and Facebook all operate within the new Knowledge Economy.  They utilize highly skilled, highly transferrable labor allowing them to be pulling new and innovative talent continually.  Research and development is a central aspect of their business models. They consistently challenge and change their directions and offerings as innovations redefine the possible.   They also can generate the most efficient returns on inputs invested, helping to fuel new expansion continuously.

Compare the above to former monopolies that operated within an economy where manufacturing was the most advanced form of production.  Innovation happened slowly, and when it did, it was a long drawn-out process to retrofit all of the existing infrastructures to support it.  The primary difference being that big tech firms have challenge and change encoded into their very structure.  

New tech startups typically share a similar aim — become a “unicorn” and reach a billion-dollar valuation.  It’s a big goal that requires a large amount of planning, action, and luck to achieve, but is achievable. In the process, these organizations become monopolies in very niche verticals.  This is the new reality of tech startups; monopolization is going to occur consistently and more frequently as we move forward because the nature of innovation has become niche-centric.

This rapid monopolization has significant consequences for innovation, which is why it’s essential to get the solution right from the start.  Because these firms can consistently reinvent themselves and acquire potential competitors, they develop innovations in both technology and process that stay confined to organizations through legal protections.  A Progressive plan recognizes that part of the purpose of breaking up monopolies is to free innovative potential from the grasp of the monolith.

The weakness of breaking up tech monopolies is that we will find ourselves perpetually catching up to grievances instead of proactively addressing them.   It’s a well-intentioned solution that falls short of its intended goals.

New Solutions for New Problems

Warren and Sanders are right to say that big tech firms need a deeper level of social responsibility.  They are incorrect in their proposals, which are a substitution instead of a real solution. Recognizing the shortfalls of breaking their assets up, we now examine an alternative solution that may better achieve our desired results.  

A Progressive solution to this present and future problem is to reshape the institutional arrangements of the market economy.  Our objective is to give more people more access to more resources and more opportunities. Instead of breaking up big tech firms with distinct network and market monopolies, we should incorporate a tiered degree of socialization into them depending on their power.  This solution presents unique advantages unavailable to us in the asset spin-off plan.

Using metrics similar to those in Warren’s plan, we could set income tiers that, when triggered, would enact new sets of legal responsibilities and arrangements for corporations.  To keep it simple we can imagine tiers A, B, C with A ranging from smallest to largest.

At the A-tier, corporations can be required to have a certain percentage of their board be turned over to public control.  A term-limited rotating citizen board comprised of individuals with relevant niche experience acting on behalf of the general public.  

A-tier organizations would be required to extend credit in the form of access to logistical, technological, and process innovations for new startups within their vertical.  Imagine a new startup organization working on break-through medical equipment gaining access to one of the most advanced medical device manufacturers technology, procedure, and people.   A-Tier organizations become integrated into society as engines to help to maximize our innovative potential in different directions while still maintaining their existing profit structures.

Taking it a step further, organizations that achieve the B-Tier milestone gain new responsibilities in addition to their A-Tier requirements.  Upon meeting B-Tier, firms have the percentage of citizen board members increased but do not change profit distribution models.

B-Tier firms become vital educational institutions under our more progressive approach.  As we journey deeper into the Knowledge Economy here in the United States, continuous training and education become more critical for every individual.  Innovation and disruption will continue their existing trend of increasingly rapid expansion. In the face of this challenge, we recognize that the ability to change the direction of one’s life as seamlessly as possible elevates itself to a new human right.  

We address this problem by requiring B-Tier institutions to develop and maintain training programs for the general public.  These programs are provided for free and would range from entry-level to advanced industry practices and knowledge. In essence, our best companies become our best schools.  

Here we create a Progressive solution that pays actual dividends to society beyond just stifling monopolization with the hopes of a market correction.  These suggestions help shift our cultural approach to education from a hierarchy maintained by socioeconomic status to a broad approach founded on the belief of the infinite potential of every individual who has access to the necessary resources to succeed.  It’s an essential investment in ourselves and will help insulate us against inevitable economic downturns caused by the skills gap needed to transition to a full Knowledge Economy.

Finally, the C-Tier organizations who have reached a wealth level have their profit distribution changed.  At this level of organization, the companies have become institutions of society. We could use Google, Amazon, and Facebook as examples of C-Tier organizations under this new plan.

C-Tier organizations inherit all of the responsibilities of A and B tier organizations but again increase their citizen board members and have a percentage of their net profits dedicated to investment in democratically chosen social projects.  When organizations monopolize a market vertical, they are considered a staple of society. So too do they gain the responsibilities for giving back to the public that helped elevate them.

Critics of the C-Tier may argue that this would diminish innovative incentive.  It’s a common criticism with no actual evidence to support it. C-Tier founders who do not sell/exit before reaching the required wealth levels will have already become wealthy beyond comparison to the majority of Americans.  Our Progressive approach is a recognition that the nature of business and innovation is changing. We must proactively implement solutions to prevent oppressive and dishonest practices in the name of profits

Breaking up big tech is an attempt to stifle their stranglehold on industry, but will only serve as an inconvenience to these organizations.  It’s an attempt to allow more market competition and innovation that is ill-equipped to address the reality of our present markets.  

A more Progressive approach of deepened social responsibility as outlined above, takes the power of these organizations and redirects it to the innovative potential of the public.  It’s a proactive solution for a new problem that will create genuine and profound change in the way companies and innovators organize and work in the future. Instead of attempting to slow these mega-firms, we use them to raise the floor of innovation and opportunity for the majority of Americans they serve.  

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