Uber-Grubhub: How the Pandemic Is Launching the Era of Online Platform Regulation

As French and Australian enforcers try to get Google and Facebook to pay newspapers, cities crack down on food delivery apps.

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Today the main focus of this newsletter is how the pandemic is forcing us to regulate tech platforms as public utilities. Also some quick stories on how the Trump Antitrust division is spending its time bothering British judges on behalf of American monopolies, Google’s attempts to kill Zoom, and rumors of a possible Amazon-AMC theaters merger.

(photo credit to torbakhopper)

Era of Platform Regulation Begins: Yesterday, the Wall Street Journal broke the news that Uber and Grubhub are considering a merger, which could give the combined company more than 50% market share in New York, Chicago, Miami, Philadelphia, and Boston. It’s an explicit play for more pricing power.

For several years, food delivery apps have opened up a world of possibilities for consumers, offering the ability to get take-out or delivery across a much wider spectrum. Yet at the same time, this paradise hasn’t benefitted restaurants. Why? The middlemen. Restaurants have been increasingly complaining about the pricing power that food delivery apps increasingly have over their businesses, with high commissions, tickey tack fees, etc. Here’s a tweet that went viral last month which illustrates the point.

High prices are pervasive across the delivery app world, from Grubhub to Uber Eats to DoorDash. As one industry consultant told the Guardian, “The delivery fees and service charges from these websites are murder. They’re incredibly high rates… It’s almost impossible to profit at all.”

And yet, the the food delivery network business paradoxically isn’t doing very well. Uber and Grubhub are considering merging because prices they charge to restaurants are too low to support their overhead. These apps should probably be a modestly profitable regional services, connecting local eateries to local eaters, like taxicab stands or co-working spaces before WeWork. But our global monopoly-centric public policy framework has flooded capital into the space, leading to money-losing attempts to build global empires. It’s a variant of counterfeit capitalism, where investors hoping for monopoly rents are subsidizing an artificial and predatory business model.

The pandemic has put this dynamic into stark relief. Food apps are seeing a flood of new business. At the same time, the disease has changed the food service business. Most restaurants focus on takeout and delivery, because they are otherwise shut down. The restaurant industry always lived on thin margins, and these apps charge up to 30% of the total order amount. When delivery was a side business for most restaurants, high delivery app fees were manageable. But since restaurants have gone to a mostly takeout/delivery business during the pandemic, they have become dependent on this new sales and distribution channel. (Investors have noticed; KKR just invested in pizzeria software specialist Slice.)

As a result, over the past few weeks, Seattle and San Francisco fought for their restaurants; both cities imposed price caps on food delivery apps, setting a maximum fee of 15% of the total amount of the order. Seattle mandated that 100% of all tips go to the driver doing the delivery. More cities are considering acting, and there’s a class-action antitrust lawsuit of consumers in New York City against these delivery apps. So that’s a political response, as people decade that restaurants shouldn’t have to hand over nearly a third of their revenue in a crisis to an online platform.

Now, delivery apps are a network business, serving as a utility that connects restaurants with customers. The apps need a network of restaurants, and restaurants need the apps, but the bargaining power is not even. A delivery app has thousands of restaurants, so while restaurants in aggregate are critical to the business, any one particular restaurant is not. The converse is not true. If you own a restaurant and you get dropped from a delivery app, you can lose a lot of your revenue.

In other words, these app delivery businesses are network utilities with market power, and like all utilities, they have the power to set prices. There are three basic routes to address the price-setting power of a utility. The first is to allow the utility to set the price without interference from public agencies. The second is to force competition in the sector among different networks and have the price set through this competitive framework. The third is to simply set public pricing rules through either public ownership or price caps. (There are other variants, like allowing cooperatives to bargain with utilities, but they often boil down to a combination of the three routes.)

In principle, what Seattle is doing to its delivery apps is just a public utility regulation in the form of a price cap. And it works because the situation is pretty simple. A delivery app is easy to understand, and the fee charged to restaurants is relatively easy to see, and thus regulate. Restaurants know how much they charge, what they sold, and what they were paid. All it requires is (a) getting the politics right on a local level and (b) shaking out the overly capitalized structure of food delivery app empires.

But there’s something broader here than just a change in one sector of the economy. The pandemic is revealing not just food apps but other kinds of middlemen whose power is a social problem. In France and Australia, antitrust regulators are trying to force tech giants Google and Facebook to pay newspapers. Ben Smith wrote up what’s happening, and quoted Rod Sims, the Chair of the Australian Competition and Consumer Commission. “The digital platforms need media generally, but not any particular media company, so there is an acute bargaining imbalance in favor of the platforms,” said Sims. “This creates a significant market failure which harms journalism and so, society.”

Like restaurant delivery apps, Google and Facebook are network intermediaries, sitting between producers of content and consumers. It’s a much more complex relationship than the restaurant space, but the bargaining power which Sims highlights is similar. Google and Facebook need publisher content, but they don’t need the content of any one particular publisher. But each publisher desperately needs Google and Facebook for traffic referral.

Back in August, I covered a report written by Sims on Google and Facebook, where he represented that power dynamic. Here’s a graphic representation of the power from that report showing the power Google and Facebook have over referral traffic.

In other words, like food delivery apps over restaurants, Google and Facebook have the power to direct audiences to one producer or another, between 50-80% of the traffic depending on the medium. There are significant differences between Google/Facebook and food delivery apps. Big tech is already consolidated and profitable. More importantly, unlike with restaurants and delivery apps, pricing in these markets is opaque.

Here’s the Financial Times last week on a groundbreaking study of something that you’d think wouldn’t be a secret: the price of advertising.

Publishers receive just half the money spent on their digital ads by premium brands such as Unilever and Nestlé, according to research which lays bare the fees taken by adtech companies and untraceable middlemen…

As well as finding that at least half of a brand’s digital marketing spend is absorbed before reaching a publisher, the researchers also discovered that almost a third of those ad-placing costs were completely untraceable…

“The market is damn near impenetrable,” said Phil Smith, the director-general of Isba, the trade body for UK advertisers that commissioned the study. “As you start to break down the value chain for the impressions we have matched, the erosion of value is really significant.” 

One of the crazy things about studying Google and Facebook is that it’s really hard to figure out just what they charge for their product. A large chunk of the money going into the current online advertising world is impossible to price or audit. Generally people know that big tech grabs fees as a middleman utility, and does so via a complex set of exchanges of data, which ultimately ends up with them getting advertising revenue that should go to publishers. But no one in the publishing or ad buying industries knows the specifics of what anything really costs because that data is hidden.

With that in mind, I don’t really have a sense of how France and Australia want to charge Google and Facebook. It could be like the BMI and ASCAP licensing arrangements in music, with set rates for different formats, but without more knowledge of the pricing, I just don’t know how you regulate these utilities and get them to pay publishers.

So what to do? My view is we should regulate big tech by barring them from engaging in advertising, because being in the advertising business itself is a conflict of interest for a communications utility. Such a policy change is both breaking up a corporation by forcing the spinoff of its advertising business, and a public utility model of effectively setting the terms of pricing. Increasingly this view is catching on. Tristan Harris, an ex-Googler who runs the Center for Humane Technology, has penned an important argument about regulating social networks like public utilities, though he cleverly calls these networks ‘attention utilities.’

Harris would impose health regulations on attention utilities to ban certain kinds of addictive user interface designs, micro-targeting and behavioral nudges. But he also has a straightforward pricing component. Here’s how he would do it.

Instead of relying on revenue based on advertising, attention utilities should be required to convert to a monthly licence fee model a bit like the BBC or a subscription like Netflix. They must adhere to the terms of an operating licence framed by a duty of care. EU antitrust commissioner Margrethe Vestager has suggested Facebook should use a subscription model.

Harris thinks these attention utilities should move to a subscription fee, or a break-up-and-regulate approach. One of the rhetorical challenges of the anti-monopoly movement is the idea that ‘breaking up’ a company is sufficient or even desirable. In fact, anti-monopolists usually seek a framework of regulated competition. That’s likely where we’re moving. In some areas, where the platform is simple, like restaurant apps, we can do price setting, or perhaps address contractual terms that set unfair competitive dynamics. But in others, the tools are going to have to be more subtle and far-reaching.

At any rate, the era of online platform regulation is starting.

Trump Antitrust Division Lobbying for Monopolies in the United Kingdom: Since Antitrust chief Makan Delrahim doesn’t believe in enforcing antitrust laws, what does he believe in? Lobbying! Last week, he published a long paper on behalf of Mastercard titled “Merricks v. Mastercard: “Passing on” the U.S. Experience”. Mastercard is embroiled in massive litigation in the United Kingdom in which a large class of consumers are challenging merchant fees of the credit card network. Delrahim had eight senior staffers at the Antitrust Division, plus two fellows, help write a paper that Mastercard can present to the UK Court of Appeals on how great it is that American courts make it hard for large groups of consumers to get together and jointly bring a case. I’m not sure why American taxpayer money is going to make sure British consumers get screwed by corporate monopolies. Maybe Congress should ask DOJ.

A Nascent Merger Boom in Hollywood? There are rumors that Amazon is seeking to buy AMC Theaters, which is the largest movie chain theater in the world, with over 8,000 screens in the United States. This purchase would let the corporation put its original content and its video game Twitch service into thousands of theaters instantly, and to block its competitors from doing theatrical releases. An antitrust decision in 1948 known as the Paramount Consent decrees makes such a purchase much harder, but Trump’s DOJ Antitrust chief is trying to unilaterally rescind it, to the consternation of smaller theater owners. More soon on what I think is going to be a very important storyline.

Democrats Flub Merger Moratorium: Nancy Pelosi introduced a grab-bag $3 trillion coronavirus response bill with a lot of spending for different programs for the unemployed, first responders, as well as a bailout for corporate lobbyists, Federal Reserve support for landlords, debt collectors, and mortgage servicers. The bill did not include a merger moratorium. This legislation was endorsed by various progressive nonprofits and unions, like Moveon, Public Citizen, SEIU, the American Federation of Teachers, and Greenpeace.

Why did they support it? Democrats have what a friend of mine called “Program Brain.” They think the job of Democrats is to fight Republicans to fund various programs for the poor and marginalized. The fundamental vision is that of government as an aristocrat who treats the peasants with kindness, not a government whose goal is to promote freedom.

Google Using Market Power to Kill Zoom? In the last major monopolization suit in the United States in 1998, Microsoft was found guilty of illegally maintaining its monopoly by bundling its free Internet Explorer browser with its Windows operating system. It seems like this practice, which apparently used to be illegal, is now fine. Ars Technica reports:

Amid the coronavirus pandemic and stay-at-home orders greatly increasing the demand for video calls, Google is slowly trying to whip together a viable video call platform after ignoring the market for years. Last week, it added a free tier to its latest video chat service, Google Meet, which was previously G Suite exclusive. The free tier opened up Google Meet to anyone with a Google account, and now you'll be constantly reminded of the service thanks to a new Gmail integration.

Antitrust enforcers are going to let Google tie a free product cross-subsidized with its search advertising monopoly to its massively popular free email service. And why wouldn’t they? They’ve been allowing Microsoft to bundle and underprice its Teams product, which is designed to destroy Slack.

House Conservatives Split on Monopoly and Big Tech: Good piece by Emily Birnbaum on how Republican Judiciary Chairman Jim Jordan is leery of antitrust crackdowns on big tech. Until recently, the committee was run by Doug Collins, who was a skeptic of Google and a supporter of the antitrust investigation. Collins moved over to the Oversight Committee, and Jordan took over. There is a lot of support in the GOP caucus for antitrust investigations, but they are wrestling with a libertarian past.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. Here’s a comment from a reader discussing what I wrote about in the last issue, the market power of the University of Pittsburgh Medical Center

UPMC epitomizes much of what's wrong with American healthcare, and with large health systems. It got into a battle with the state when it decided to stop accepting patient health insurance from ONE Blue Cross provider - Highmark, insisting that if they wanted to be treated at UPMC facilities that the patients pre-pay. UPMC continued to accept patients with other Blue Cross plans, just not Highmark's. This is because, after years of each staying in their own area of expertise, UPMC started its own competing health insurance insurance program and Highmark retaliated, by moving into the hospital business. The state didn't really care about this regional spat until UPMC expanded to the more populated east and brought its predatory practices with it. Once it reached as far east as Harrisburg the state took action. UPMC caved to the state attorney general's valid complaints and UPMC again accepts patients with Highmark insurance again. At least for the next ten years.

For UPMC, it's all about revenue. They've bought up medical practices all over and their CEO Romoff was very upfront in saying that they wanted to be the Amazon of healthcare. Many physicians who still put patients first are quite frustrated.

UPMC, like Highmark, has abused its non-profit status for decades. It's hard to tell which is worse; they're both evil in their own way. But UPMC tried to take evil to a whole new level because it thought it could.