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September 2020 Issue [Report]

The Big Tech Extortion Racket

How Google, Amazon, and Facebook control our lives
Illustrations by Doug Chayka. Source images © iStock

Illustrations by Doug Chayka. Source images © iStock


The Big Tech Extortion Racket

How Google, Amazon, and Facebook control our lives

Popular histories present the Boston Tea Party as a rebellion against taxes. Yet what the colonists objected to more than anything was the idea of an all-powerful corporate middleman regulating commerce. They viewed the 1773 protest in Boston Harbor as a victory for liberty and a blow against the British East India Company’s trade monopoly.

That corporation owed its dominance not to any proprietary advantage but to an exclusive British government charter. The artificial nature of this power was made clear soon after the Congress of the new United States signed a peace treaty with Britain. Six weeks later, the American ship Empress of China sailed from New York, bound for Canton. When the ship returned, its traders sold tea and porcelain on the open market. Without the active backing of the British state, the East India Company could not stop the sale—let alone determine who sold what, or where and how they sold it, in America.

But around the middle of the nineteenth century, Americans began to develop technologies that could not be broken into component pieces. This was especially true of the railroad and the telegraph. These expensive and complex networks were built across vast areas of land and required large teams of people to operate. This made the earlier solution to monopolies—dissolution—impossible. If Americans planned to take full advantage of these technological advances, they would have to regulate the actions of the corporations that controlled them.

Such corporations posed one overarching challenge: they charged some people more than others to get to market. They exploited their control over an essential service in order to extort money, and sometimes political favors. The system of “discriminations made between individuals . . . is the most serious evil connected with our present methods of railroad management,” the Yale professor Arthur T. Hadley explained in 1885. “Differences are made which are sufficient to cripple all smaller competitors. . .  and concentrate industry in a few hands.”

Americans found the answer to this problem in common law. For centuries, the owners of ferries, stagecoaches, and inns had been required to serve all customers for the same price and in the order in which they arrived. In the late nineteenth century, versions of such “common carrier” rules were applied to the new middleman corporations.

Today we rightly celebrate the Sherman Antitrust Act of 1890, which gave Americans the power to break apart private corporations. But in many respects, the Interstate Commerce Act of 1887 was the more important document. This act was based on the understanding that monopoly networks like the railroad and the telegraph could be used to influence the actions of people who depend on them, and hence their power must be carefully restricted, in much the same way that we restrict the power of government. As Senator Sherman himself put it,

It is the right of every man to work, labor, and produce in any lawful vocation and to transport his production on equal terms and conditions and under like circumstances. This is industrial liberty, and lies at the foundation of the equality of all rights and privileges.

For a century and a half, Americans used common carrier policies to ensure the rule of law in activities that depended on privately held monopolies. These rules served as a pillar of American prosperity through much of the twentieth century. By neutralizing the power of all essential transport and communications systems, the regulations freed Americans to take full advantage of every important network technology introduced during these years, including telephones, water and electrical services, energy pipelines, and even large, logistics-powered retailers. Citizens did not have to worry that the men who controlled the technologies involved would exploit their middleman position to steal other people’s business or disrupt balances of power.

In the 1970s and 1980s, Robert Bork, Richard Posner, and other neoliberal Chicago School legal scholars set out to overturn America’s antimonopoly regime, targeting the traditional prohibitions on discrimination that common carrier laws had established. Their scholarship later played a major role in the writing of Section 230 of the Communications Decency Act of 1996. In that bill, Congress simultaneously exempted internet platforms from any responsibility to police the content on their sites, and failed entirely to impose on them any requirement to provide equal and just service to all who depend on their networks.

As a result, Amazon, Google, Facebook, and other platforms were free to develop business models that treated every seller and buyer—every citizen—differently. These corporations exploited this license to the fullest, and have used their power to reorganize entire realms of human activity. Amazon, Google, and Facebook match individuals to specific shoes and clothes, specific restaurants and hotels, specific movies and music, specific jobs and schools, specific drugs and hospitals, specific sexual partners, and even specific books, articles, speakers, and sources of news.

These companies are the most powerful middlemen in history. Each guards the gate to innumerable sources of essential information, services, and products. Yet thus far no governmental entity in the United States has signaled any intention of limiting the license these corporations enjoy to serve only the customers they choose to, at whatever price they decide.

This means that Jeff Bezos, Sergey Brin, Larry Page, and Mark Zuckerberg enjoy much the same power as God did in Babel. We live in the world they manufacture for us. Their vision for what we should do, where we should go, how we should think, and who we should be is now our vision, too. As their manipulation machines increasingly deliver different information to each member of the public, it becomes harder for people to engage in debate and have any chance at bringing these companies under control.

the manipulation of the seller

Traditionally, retailers operate by purchasing someone else’s product and reselling it to consumers. Amazon calls this its first-party business, and it remains a large driver of revenue. But as Bezos detailed in his 2018 letter to investors, Amazon in recent years has focused more on connecting companies that want to sell a particular product with people who want to buy that product, then charging a fee for this service. After noting that annual first-party sales had grown from $1.6 billion in 1999 to $117 billion in 2018, Bezos added that during that same period, third-party sales grew from $0.1 billion to $160 billion.

This new model was so successful, Bezos claimed, because Amazon had done such “a great job” of helping independent sellers “compete against” the company’s own business. Amazon, he wrote, adding his own italics, had provided other sellers with “the very best selling tools we could imagine and build.” “To put it bluntly,” he went on, adding more italics, “Third-party sellers are kicking our first party butt. Badly.”

But to the third-party sellers, the arrangement looks somewhat different. These companies sell on Amazon because there are few other places to find customers online. According to data collected last year, 66 percent of all online shoppers start their search on Amazon. Of those looking for a specific product, the figure is 74 percent. In short, when it comes to commerce in consumer goods, if you are not on Amazon, you are not really in the market.

Sellers who come to depend on Amazon soon find that the corporation can manipulate their sales in seemingly infinite ways. That’s because Amazon controls how information is presented to the potential buyer, down to the price of every good—including, of course, whether that information is ever presented at all. The result is that Amazon has been able to carve out a bigger and bigger share of each deal made on its website. Last year, the company’s average cut of a given sale on its platform was more than 40 percent—roughly triple what it was only a few years before.

What’s more, these sellers don’t have the ability to raise their prices, even if they spot an opportunity to do so. Amazon has long controlled pricing decisions on goods it buys and resells, and has long manipulated the prices of other people’s products for its own purposes. But it used to allow third-party vendors to manage their own pricing. As Amazon’s power has grown, however, it has begun to manipulate these merchants’ prices as well. Just before Christmas in 2017, for instance, Amazon arbitrarily slashed a number of third-party vendors’ prices by up to 9 percent.

There’s a reason these vendors don’t complain. If they did, there’s a good chance Amazon would simply kick them off the platform. In 2014, in the midst of a fight over pricing with the book publisher Hachette, Amazon vanished Hachette’s titles from its website for six months. This was costly for Hachette and devastating for many authors. Despite loud complaints from writers, editors, publishers, and readers, the agencies charged with enforcing America’s antimonopoly laws barely raised an eyebrow. So Amazon continues to exercise the same license to shut down whomever it will whenever it will, be that a writer of books or a seller of shirts.

Amazon also routinely ignores the sale of counterfeit items on its website, even when sellers harmed by such counterfeiting complain—as Birkenstock has repeatedly—and the company must know the items are bogus. So far, not a single U.S. law-enforcement agency has acted to protect citizens from Amazon’s abuse.

The government’s lack of response has made clear to these companies that Amazon’s wishes—Jeff Bezos’s wishes—are the law of the land, no matter how arbitrary. As one seller put it in a recent news article, “Amazon is the judge, the jury, and the executioner.”

One of the best measures of Amazon’s power is the phenomenal surge in advertising sales on the site, which went from a tiny line item in 2017 to $10 billion in 2018. In an open market, in which there are many sellers and many buyers, advertising is a way to attract attention. In a closed system, in which a single corporation controls access to the market and enjoys a license to open and close the gate as it sees fit, advertising is just another tool of the extortionist. If you want Amazon to carry your goods, you must pay whatever Amazon demands to handle them, as well as whatever it demands to “advertise” them to buyers.

Back in the day, Walmart’s goal was simply to force manufacturers to offer it lower prices in order to undersell and bankrupt rival retailers. Now that Amazon has effectively killed off all its online rivals, its model is to pit every seller and trader on its website against one another in a carefully orchestrated scramble to be placed first before the eyeballs of the busy buyer. Amazon gets to sell both access to the market and protection from its own thuggish behavior.

the manipulation of the buyer

Thus far, Amazon has profited mainly from the same model used by the railroads in the nineteenth century, during those periods when their bosses were able to skirt common carrier rules. Bezos’s message to sellers is simple: I control the road to the market. If you want to ride, you pay what I demand.

Under such a system, the consumer is manipulated in ways that enable Amazon to charge the seller more. The harms to the consumer—such as being steered to buy an inferior product or a less interesting book—are byproducts of a system designed to exploit the seller.

But Amazon’s license to discriminate is fast moving into something else, a system where each consumer is charged the maximum amount that he or she can pay.

Many businesses have long dreamed of charging individual buyers different prices, or delivering different levels of service for the same price. But until the advent of the internet and the ability to spy on the most intimate thoughts and actions of individuals, businesses could not do so effectively. And more to the point, for much of the twentieth century such discrimination was illegal.

Two decades ago, however, not long after Congress lifted restrictions on online corporations with Section 230, a few visionaries started devising ways to exploit their new license.

One of the first to understand its promise was a Berkeley economics professor named Hal Varian. In 2001, Varian cowrote a paper titled “Conditioning Prices on Purchase History,” which explained that the “rapid advance in information technology now makes it feasible for sellers to condition their price offers on consumers’ prior purchase behavior.”

Varian then offered a suggestion to online businesses: “if enough customers are myopic, or the costs of anonymizing technologies are too high, sellers will want to condition pricing on purchase history.” The paper included a warning to the buyer: “purchasing at a high price is not the best strategy, since it guarantees that [you, the consumer] will face a high price in the future.”

In short, online sellers are free to provide you with prices, terms of service, and information tailored to exploit your weaknesses. And there’s nothing you can do about it.

Today this practice is normal. The OECD described the problem in a paper last fall:

The current evidence . . .  shows that the technological means for online personalisation and price discrimination are extensive and developing rapidly, and difficult to detect in market monitoring research by authorities. It also shows that online marketplaces, platforms, and social media use or can use data analytics and profiling techniques . . .  to rank and target offers on the basis of estimated maximum willingness to pay.

To understand this power and its implications, consider Uber, whose service was designed to manipulate both buyer and seller using personalized price discrimination, as the company has admitted.

The corporation’s initial expansion strategy resembled those of earlier monopolists. In 1901, it was J. P. Morgan who engineered a near monopoly in steel production in the United States. In 2011, it was Japan’s SoftBank and Saudi Arabia’s sovereign wealth fund that armed Uber with enough money to price its service below cost for years.

But Uber differs from older monopolists in at least two key respects: it enjoys the ability to capture and make sense of vast amounts of data about individuals, and it enjoys a license to discriminate.

Absent common carrier rules, Uber’s bosses are free to favor some drivers with more rides and disfavor others with fewer, for whatever reason they choose. They are free to pay some drivers more per mile than others, for whatever reason they choose. They can make some drivers travel farther than others to earn the same fare. And they can pay a particular driver a certain rate one day and a different rate the next. They have even adopted techniques typically used in video games to more effectively manipulate their drivers.

Uber’s bosses are also free to do the same thing to riders. In a statement admitting to price discrimination, Uber implied that its goal is to charge richer people more for the same level of service. The corporation’s pricing system is designed to determine how much the people in a particular region are willing to pay, then charge accordingly. But people agree to pay more for a particular service for many reasons other than a higher disposable income, including lack of economic sophistication, or just plain desperation.

Although what you see on your screen has been designed to look a lot like a market system, in which the price of each particular ride you take is regulated by supply and demand—with prices, for example, “surging” during rush hour—what is actually happening is much different. Fluctuations in pricing have nothing to do with demand; prices go up during rush hours and during off-hours. Uber’s system is designed to carefully study your travel and shopping habits so it can figure out how to charge you the maximum amount for any particular ride, without leading you to decide to take the bus or walk instead.

Uber’s vast cache of data about where people go and when provides an ever more perfect map of traffic to and from a community’s bookstores and coffee shops and churches—and to its backroom casinos and drug dealers and sex clubs.

All this information gives the corporation the ability to understand just how badly you need a ride. Do you rush off every Thursday at 8 pm to see your boyfriend? Do you like to squeeze your Sunday visit to mom in between a morning round of golf and the afternoon NFL game? Every Tuesday and Thursday at 3 pm, do you have to get to your psychiatrist and back without your boss knowing?

Well, your boss may not know, but Uber does. And it exploits this knowledge to extract more money.

Nowhere has Uber demonstrated its capacity to deliver different service to different people more perfectly than in its treatment of officials charged with ensuring the provision of safe and affordable taxi services. The corporation has repeatedly been caught providing false information to regulators around the world.

Uber has developed a system that enables it to gather intimate information about you, your habits, and your needs, then jack up the price you pay for its service whenever and however it chooses. This system also allows the corporation to cut you off, for whatever reason, whenever it wishes.

the manipulation of perception

Google appears highly complex, but the corporation’s business model can be boiled down to three simple steps.

First, Google assembled a cluster of information-manipulation platforms and tied them together. In-house engineers created a better search engine and a slicker email service. But after the corporation went public in 2004, it promptly set out on the greatest acquisition spree in history, buying up more than two hundred other companies.

These deals made Google the dominant player in mobile phones, operating systems, web browsers, artificial intelligence, online advertising, word processing, and maps, as well as a major power in managing electricity flows on the grid, undersea cables, even educational publishing. And these efforts continue. In June, Google confirmed plans to buy the wearable-technology company Fitbit.

Second, Google learned how to organize, study, and wield all the secrets it gathers. Soon after Hal Varian published his paper, Google hired him as a consultant. In 2007, the corporation named him chief economist. It was a classic variation on vertical integration: hire the expert and lock him inside so he can help you—and only you—master the techniques he identified.

In 2018, an Irish technologist named Dylan Curran downloaded the information Google had collected about him. All in all, Curran found, the corporation had gathered 5.5 GB of data on his life, or the equivalent of more than three million Word documents.

In an article for the Guardian, Curran wrote that within this trove he found

every Google Ad I’ve ever viewed or clicked on, every app I’ve ever launched or used and when I did it, every website I’ve ever visited and what time I did it. They also have every image I’ve ever searched for and saved, every location I’ve ever searched for or clicked on, every news article I’ve ever searched for or read, and every single Google search I’ve made since 2009. And . . . every YouTube video I’ve ever searched for or viewed, since 2008.

In addition, Curran discovered that Google keeps a detailed record of what events he attends and when he arrives, what photos he takes and when he takes them, what exercises he does and when he does them. And it has kept every email he has ever sent or received, including those he has deleted.

Third, Google built a business renting its technology and data, allowing anyone to steer individuals to buy a particular product, read a particular article, vote for a particular person, or hold racist beliefs about a particular group. Put another way, Google built a business on its ability to manipulate individuals’ thoughts and perceptions and fears and desires.

The model has proven phenomenally successful. In 2019, Google earned almost $135 billion from such “advertising.” The only other corporation that comes close is Facebook, which last year earned more than $70 billion by renting out its manipulation machine. Together these two corporations captured some two thirds of online ad revenue, and the total is growing fast.

There’s little evidence that Google’s founders imagined, in the early days, that the corporation would gain such power. When Google engineers first began to assemble its manipulation machine, they expected that Procter & Gamble might use it to steer buyers to, say, a more expensive version of Tide. Or that American Airlines might use it to steer buyers to a last-minute ticket to Cancún. Or that Exxon or Subway might use it to steer buyers to a particular gas station or sandwich shop.

But while Google might not have set out to cause harm, every time its business model has posed political, social, or economic threats to the American people, the corporation has opted to press on. The same is true of Facebook. Even after it became clear that Vladimir Putin and Alex Jones were using Google and Facebook to spread the lies and misinformation that have so disrupted our society in recent years, the companies accepted their money. When America’s newspapers, magazines, and online news publications laid off tens of thousands of reporters and editors because Google and Facebook were diverting so much advertising revenue into their own pockets, those checks kept getting cashed. When even the most powerful corporate executives and publishers dared not speak out against Google or Facebook, the bosses smiled and raised the rent.

Most people who drive have become accustomed to being steered through the world by Google. Even those who don’t drive follow the corporation’s directions whenever we get in an Uber or a taxi. We simply surrender ourselves to the blue line on the map. As it directs us down particular streets, we zone out, oblivious to the fact that Google has the power to steer some of us along better routes, to offer us swifter ways of reaching our destinations. And conversely, that Google has the power to steer others toward side streets and dead ends.

Does Google discriminate in mapping? Frankly, we have no idea. What we do know is that it can, that there are many ways for the company to profit by doing so, and that no government agency in the free world is watching to prevent such blatant abuses of the power that comes with providing an essential service.

Our failure to apply common carrier rules to Google, to prevent the corporation from discriminating in the pricing and services it provides, has left the corporation free to build a system that micromanages the movement and actions of millions and millions of people, moment after moment after moment, perhaps forever.

the public atomized

During his 1912 campaign for president, Woodrow Wilson spoke of the political dangers that come from allowing a few corporations to control access to the market.

I cannot tell you how many men of business, how many important men of business, have communicated their real opinions about the situation in the United States to me privately and confidentially. They are afraid of somebody. They are afraid to make their real opinions known publicly; they tell them to me behind their hand. That means we are not masters of our own opinions.

Today we see a similar pyramiding of power. Great corporate lords who only five years ago ranked among the top tier of economic predators, who could alter the fates of tens of thousands with the wave of a hand, now themselves fawn and fuss, flattering the real bosses. Who makes the laws in America today? Who chooses who wins and who loses?Increasingly it is the masters of Google and Amazon and Facebook.

And it’s not only businesspeople who understand that their professional lives are in the hands of these corporations. Journalists know that to upset Google or Facebook is to risk online vanishment. “Every publisher knows that, at best, they are sharecroppers on Facebook’s massive industrial farm,” Nicholas Thompson, the editor of Wired, wrote in 2018.

And journalists know that the man who owns the farm has the leverage. If Facebook wanted to, it could quietly turn any number of dials that would harm a publisher—by manipulating its traffic, its ad network, or its readers.

So, too, do politicians. Reporters at The Markup recently detailed how Google’s email platform sorts campaign advertisements in ways that can arbitrarily promote one candidate and disappear another. Major politicians from both parties have accused Google and Facebook of manipulating campaign advertising. This has yet to be proven, but that’s not what matters. What matters is that a growing number of politicians believe that the companies do this, and hence are tempted to trim their speech accordingly.

Yet something more dangerous than a simple cowing of the once powerful is taking place.

To understand, let’s look at The Wealth of Nations. Like America’s revolutionaries, Adam Smith was inspired to act by the spoliation of the British East India Company. But instead of tossing tea into salt water, he responded by writing a great treatise against the evils of monopoly.

In The Wealth of Nations, Smith developed a theory of market structures, and of the role that prices play in transmitting political information. Market prices, he believed, communicate vital information, such as a shortage of tomatoes or a bumper crop of corn, so that individual buyers and sellers can alter their economic behavior accordingly, such as by buying fewer tomatoes and more corn.

On the surface, the theory appears almost simplistic. When a price is too low, Smith wrote, suppliers turn to other lines of trade. When a price is too high, new suppliers will bring goods to market.

But Smith’s theory implies a vision of the individual as a sophisticated political actor, someone who is competing against and cooperating with others in the community.

The market price does something else as well. It allows citizens to take political action to address the reason for a shortage or surplus of a particular good. If the price of shoes goes up and stays up, this may indicate that a monopolist has captured control of shoe manufacturing and the time has come for the public to break up the monopoly. If the price of wheat goes up and stays up, then maybe the time has come to investigate whether some trader has amassed a dangerous hold over the supply of wheat or the capacity to process it. And if that proves not to be the case, perhaps the time has come to open a new line of trade with a wheat-growing land across the sea.

In other words, prices play a major role in making the public the public. It is one of the main factors that allow people to stand together in a town hall—or Congress—and compare personal experiences with one another in ways that allow us to identify patterns and structural problems so that we can make decisions as a community. Markets are not only where we exchange goods and services. Well-structured markets are also one of the primary institutions providing that most basic stuff of democracy: trustworthy information about potentially dangerous concentrations of economic and political power.

From the perspective of a political economy micromanaged by Amazon and Google, the harms that Smith feared seem innocuous. Yes, mercantilism and monopolism, just as he warned, have warped commercial activities toward wasteful and unnecessary ends. But when the prices of goods and services are out in the open, and the public is able to identify fluctuations, then we the people can take action to fix structural problems.

The danger of price discrimination is not merely that it grants a monopolist the ability to pick and choose winners and losers. It is not merely that it grants a monopolist the ability to manipulate commercial interactions to extort money and political favor from those who rely on them to get to market. The problem with personalized discrimination is that even as it empowers the masters of these corporations to atomize prices, it atomizes society at the same time.

In the world of Amazon, Google, and Facebook, not only are we subject to the will of a few private companies, manipulated moment to moment by unseen forces that rule our commerce, track our movement, and record our every thought. Each of us must now suffer alone, with less and less ability to commiserate with others about our common problems. The power of the middleman has become so great as to make each of our problems unique, solely a matter between us and the master.

 is the executive director of the Open Markets Institute and the author of the forthcoming book Liberty from All Masters: The New American Autocracy vs. the Will of the People, from which this report is adapted.

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