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Welcome to The Corner. In this issue, we look at how dominance of cloud services helps Microsoft, Google, and Amazon control Gen AI.
Generative AI Concerns Fuel Federal Trade Commission Scrutiny of Cloud Services
Karina Montoya
Amid several Congress hearings in the last two weeks on how to police generative AI, reporters largely missed an important discussion on cloud service business practices hosted by the new Office of Technology at the Federal Trade Commission (FTC). The meeting, which focused on Amazon, Microsoft, and Google, is part of an investigation the FTC launched in March to tackle competition and security issues in this sector.
The scrutiny of Big Tech’s dominant position in cloud services has been building for years, as ever more private and government services have come to depend on the cloud. Concerns have accelerated in recent months with the rush by developers to build more sophisticated AI tools, such as ChatGPT and the like, that are designed to run on the cloud.
Cloud services are typically divided into three overlapping layers. Infrastructure-only cloud allows users to store data and install software on their networks. Platform services enable users to develop and run applications on third-party servers, an example being Netflix’s reliance on Amazon Web Services for its basic operations. The third layer is made up of retail software services offered directly by the giants, like Microsoft’s Office 365 or Google’s Workspace. Amazon, Microsoft, and Google combined control 65 percent of the worldwide cloud services market share.
The FTC meeting focused mainly on the antitrust concepts of bundling and tying. These refer to how corporations can link products or services in ways that leverage their dominant position in one market to fortify another line of business. Microsoft, for example, requires users of its Teams platform to also subscribe to Office 365. More recently, Google announced it will sell access to one of its most powerful AI tools, the Pathways Language Model, exclusively to developers that use the corporation’s cloud services.
Other bundling tactics are more “clever,” Salil Deshpande, founder of the venture capital firm Uncorrelated Ventures said, noting Amazon’s cloud services discount program, whereby clients who commit to large volumes of long-term spending are rewarded with major discounts on Amazon-branded products and up to a 50-percent discount on products sold by third-party merchants on the Amazon marketplace.
Participants in the FTC meeting also discussed behaviors that lock in demand. One example is egress fees — designed to add cost to moving data out of a cloud provider. Amazon, Microsoft and Google charge between 5 to 20 cents per gigabyte every time data is moved from their cloud to a private data center or competitor, according to reports. Although it is feasible to work with multiple cloud providers at a time, the high costs of data transfer leads most companies to stay with one provider, the panelists said.
Big Tech’s harms to open-source software were also discussed. In the open-source market, developers make programs available for free, along with the source code and a license that allows users to try the program out. If the users want more features to integrate the code with their own applications, they can purchase a more complete version of the same program. Ideally, this model allows developers to cover production costs and support research to develop more free tools.
But according to panelists, tech giants like Amazon have the power to “hijack” open-source code designed to run atop multiple cloud providers and sell it as part of its own solutions, effectively “siphoning off customers from the open-source project,” Deshpande explained. This is what happened to the data management company MongoDB in 2019. Amazon admitted to using an “older version” of MongoDB’s open-source code to design a new service “from the ground up” in a move that sent MongoDB’s shares down, as CNBC reported.
These same practices appear to be widespread in other countries, according to regulators. U.K. telecommunications regulator Ofcom recently published its preliminary findings on competition in cloud services, and made a recommendation to the Competition and Markets Authority to further investigate the cloud market. In the U.S., the investigation is just starting. To further support the FTC in this matter, all market players in cloud services and the general public can submit their comments by June 21.
The main problem with this structure is that the tech giants can use insights from all sides of the market to inflate ad prices, extort advertising from captive suppliers, and divert ad dollars from news publishers to their own business. A recent Department of Justice antitrust case against Google’s advertising business, for instance, alleges that this system allowed Google to manipulate ad prices to increase its ad exchange revenues, and to siphon at least $200 million in ad spending from publishers that chose not to use Google’s publisher ad server.
Advocates also claim the greater competition created by the AMERICA Act would result in lower prices for digital advertising and would curtail the ability of the platforms to leverage audience data from third-party publishers to their own benefit. Currently, the personal data Google obtains from the publishers’ side of the ad tech market is used to feed its own offer of targeted ads on its web properties.
The bill will not dismantle the overall power of Big Tech corporations, since their footprint goes far beyond digital advertising. In addition to the current antitrust tech bills, it will be critical to impose non-discrimination rules on all platforms acting as gatekeepers of essential online services, so that no one company has the ability to pick and choose which content reaches consumers and which doesn’t.
📝 WHAT WE'VE BEEN UP TO:
- Open Markets Institute legal director Sandeep Vaheesan wrote an article for Harvard Business Review contrasting corporations that grow through internal expansion with those that grow through mergers and acquisitions. “The structure and growth of bigness matter: Production in large plants and internal expansion can yield social benefits that dispersed holdings and growth through acquisitions generally do not,” Vaheesan argued.
- Open Markets’ senior fellow Johnny Ryan authored a report for the Irish Council for Civil Liberties (where he also serves as a senior fellow) called “5 Years: GDPR’s Crisis Point,” critiquing the General Data Protection Regulation (GDPR), the policy aimed at reining in Big Tech the EU implemented in 2018. “Europe remains unable to police how Big Tech uses our data,” the report found, noting that just 18% of the decisions via the GDPR’s ‘one-stop shop’ to date have led to fines. The report, which is particularly critical of Ireland’s data regulator, is covered in the Irish Examiner and Fieldfisher.
- Open Markets’ executive director Barry Lynn was quoted in Politico responding to recent comments by Treasury Secretary Janet Yellen suggesting regulators would be open to bank mergers amid current turmoil. Lynn said Yellen’s comments on mergers “will not age well.”
- NPR interviewed Caroline Fredrickson, Open Markets Institute’s strategic councilor on democracy and power, on the fallout from Senator Dianne Feinstein’s health issues and frequent absences. “She missed a lot of votes while she was away, and that meant that there were delays in these very important judicial nominations,” Fredrickson told NPR.
- The Guardian quoted Open Markets’ senior fellow Johnny Ryan responding to the imposition of massive fines on Facebook by Ireland and the EU for mishandling user information. “A billion-euro parking ticket is of no consequence to a company that earns many more billions by parking illegally,” Ryan said, noting Facebook needed to fundamentally change its user data-reliant business model. He was also quoted in the BBC and AP on the topic.
- Ryan also appeared in an episode of Bloomberg “The Big Take” podcast to discuss the vast amount of data acquired and distributed by advertisers and apps.
🔊 ANTI-MONOPOLY RISING:
- A federal court forced American Airlines and JetBlue to abandon a partnership on flights in the U.S. northeast that the Department of Justice (DOJ) deemed a merger in all but name. The DOJ argued that the partnership would give too much control to the two airlines on flights out of New York City and Boston, ultimately raising airfares. (Politico)
- Pittsburgh-based hospital system UPMC was hit with an antitrust complaint by a coalition of unions accusing the giant of wielding monopsony hiring power that depresses wages and harms workers. According to the complaint filed with the DOJ, workers are prevented from “exiting or improving these working conditions through a draconian system of mobility restrictions and widespread labor law violations that lock in sub-competitive pay and working conditions.” (The New York Times)
- In what could represent a third attempt to rein in monopolistic practices in the airlines sector, the Biden administration is weighing a lawsuit against Korean Air for its planned acquisition of Asiana Airlines. The DOJ believes the merger would harm competition on passenger and cargo traffic between South Korea and the United States. (Politico)
- Competition regulators in Canada are suing Toronto-based cinema giant Cineplex for advertising movie tickets at a lower price than what many consumers actually have to pay. Competition Bureau Canada alleged that Cineplex was breaking the law by adding an additional fee that raises the price of its tickets purchased online. (Reuters)
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📈 VITAL STAT:
$84 Billion
The amount that JPMorgan, the biggest U.S. bank by assets, discloses that it would make in net interest income this year, $3 billion higher than was expected just last month. This rise in income stems from the bank’s government-brokered takeover of First Republic this month.
📚 WHAT WE'RE READING:
“Traffic.” (Penguin Random House, Ben Smith). As websites that relied heavily on social media and clickbait content start to shut down this year, the author and former editor-in-chief at BuzzFeed News tells the story of how the race for infinite traffic reshaped the internet and brought unintended consequences for the future of news media.
🔎 TIPS? COMMENTS? SUGGESTIONS?
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