Jul 29, 2020

DealBook: A Handbook to Today’s Tech Hearing

By Jack Nicas, Daisuke Wakabayashi, Karen Weise and Mike Isaac



The C.E.O.s are likely to argue before Congress that their companies aren’t anticompetitive. Here are the facts.
Credit...From left: Kyle Johnson for The New York Times, Erica Yoon for The New York Times, Jessica Chou for The New York Times, Erik Tanner for The New York Times; Photo Illustrations by The New York Times
Jeff Bezos of Amazon, Tim Cook of Apple, Mark Zuckerberg of Facebook and Sundar Pichai of Google are set to testify before Congress on Wednesday to make their case about why their companies actually are not that powerful.
The four will answer questions from House lawmakers who have been investigating their companies’ business practices for more than a year to examine if they stifle competition and harm consumers. Because of the coronavirus pandemic, the chief executives will be testifying remotely via videoconference, starting at noon Eastern time.
Each C.E.O. is expected to offer a full-throated defense of his business, with some like Mr. Bezos already laying out their arguments in prepared testimony. To make following along easier — the companies face scrutiny for complex and varied issues — The New York Times prepared this guide to what you are likely to hear and what you should know.
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Credit...Erica Yoon for The New York Times
Companies and app developers have accused Apple of abusing its control over its iPhone App Store to set burdensome rules on their apps and charge some of them up to 30 percent of their revenues.
Mr. Cook is likely to argue that competition is alive and well in the App Store.
Competition may be fierce, but the playing field is not level. Apple’s own apps have long enjoyed different rules in the App Store. Developers do not have to pay Apple’s 30 percent commission. They are not subject to user reviews or ratings like other apps. They do not deal with what other companies call Apple’s capricious enforcement of opaque rules. And they have regularly ranked ahead of the competition in the App Store’s search results.
Mr. Cook is likely to argue that Apple is not a monopoly because it controls just 15 percent of the global smartphone market.
While that number is accurate, it downplays the iPhone’s importance. Overall, Google’s Android software dominates when measured by global users, in part because cheap Android devices have blanketed the developing world. But the iPhone has a much higher market share in industrialized nations, including about 42 percent in the United States, according to International Data Corporation, a research firm.
Most app developers also care more about dollars than the number of users — and by that measure, iPhones regularly beat Android devices. So far this year, iPhone users have spent about $36.8 billion on digital goods and services like in-app features and subscriptions, or 65 percent of the global total, according to Sensor Tower, an app data firm. App developers said that made Apple’s App Store necessary for their business, leaving them with little choice but to comply with its rules and fees.
There is also one fact that no one disputes: By any measure, the smartphone industry is a duopoly. Apple and Google create the software that underpin just about every smartphone in the world. And both companies enforce effectively the same fees on developers.
Mr. Cook is likely to argue that Apple does not take a fee from a vast majority of apps.
This is true. Apple does not charge up to 30 percent commission on the sale of physical goods or advertising, which make up a vast majority of commerce on iPhone apps. (This includes all of the physical goods Amazon sells over its iPhone app, and all of the ads Facebook and Google show in their apps.) In 2019, Apple said it received about 15 percent of the $519 billion in overall commerce in the App Store.
But it is also true that Apple takes a fee from many of the apps it competes with. The company charges commission on the sale of “digital goods and services,” such as subscriptions to a music app like Spotify or a video-streaming service like Hulu, which are categories in which Apple offers its own services.
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Credit...Erik Tanner for The New York Times
Companies accuse Google of using the dominance of its search engine to direct people to its own products and to force companies to advertise to remain visible in search results.
Mr. Pichai is likely to argue that Google has plenty of internet-search competition and that its high market share is because people like its products.
Yes, there are segments in which Google has more search competition, like shopping. But the notion that 90 percent of people use Google solely because they prefer its search engine is misleading because there are other factors that play into its large market share.
Google actively preserves its search dominance, for example. One of its biggest expenses is the fee it pays Apple to be the default search engine on Apple devices. It does not make much sense to pay Apple billions of dollars each year if you believe that consumers will ultimately end up on Google anyway because it is better.
Mr. Pichai is likely to argue that Google has helped drive down prices in advertising and increased choices for advertisers.
In the past, Google has argued that digital advertising prices have come down more than 40 percent since 2010.
In response, Britain’s Competition and Markets Authority said in a report this month that it found that Google’s market power had a significant impact on prices. Its analysis showed that Google’s prices were 30 percent to 40 percent higher than those for Microsoft’s Bing search ads, when comparing like-for-like terms on both desktop and mobile.
Mr. Pichai is likely to argue that it’s not in Google’s long-term interest to load its pages with ads.
In reality, Google has steadily increased the real estate it devotes to ads, especially for commercially lucrative search terms. On smaller smartphone screens, there are times when a user must scroll to avoid seeing only ads. Google has also made its ads harder to spot by making its advertising labels more discreet.
Google also lets companies advertise on the search results of their competitors’ names. Companies have argued that the policy feels like a shakedown, requiring them to pay Google to appear at the top of search results for their own name and prevent a rival from stealing potential customers. Google says it does not allow people to advertise against trademarked names if the owner of the trademark complains.
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Credit...Kyle Johnson for The New York Times
Lawmakers are investigating whether Amazon abuses its role as both a large retailer and a platform for third-party sellers who offer products on its marketplace. Because of these dual hats, Amazon might be able to use data it gathers from sellers to develop its own competing brands of products, like generic batteries and diapers.
Mr. Bezos is likely to say that Amazon is actually quite small, arguing that e-commerce makes up about only 12 percent of all retail sales in the United States and that Walmart sells more than his company.
Amazon has long said that all retailers — both online and physical ones — should be considered its competitors. Yet that 12 percent statistic, from the U.S. Census Bureau, includes large consumer categories where Amazon does not currently sell products, such as auto dealers and gas stations.
In Amazon’s oldest lines of business, such as books, toys and electronics, the market is more concentrated. The research firm eMarketer estimates that 63 percent of books and other media are bought online, and Amazon has cornered about 90 percent of the online market for books, according to Rakuten Intelligence, another research firm.
Mr. Bezos is likely to say Amazon’s third-party sellers are thriving, outpacing the growth of Amazon’s own sales directly to customers.
While many third-party merchants have seen their sales on Amazon grow, some also say their profit has shrunk. These third-party sellers are giving more money to Amazon over time to pay for services like fulfillment and advertising, which have become essential to thrive on its platform.
Mr. Bezos is likely to say that Amazon’s own branded products are a small share of its business, that they are common practice in retail and that it doesn’t use proprietary data to develop the products.
Amazon has said the percentage of sales in North America from its own branded products is in the “low single digits.” Other retailers like Target and Costco depend more on private label sales than Amazon.
But some sellers say Amazon can develop products with more data and less risk. Walmart might have 200,000 unique products in its store, but Amazon can comb through the millions of items listed by sellers to choose which to emulate.
Amazon says information on promising products are available to anyone through its public best-seller rankings, but The Wall Street Journal reported in April that the company had at times used private data, like advertising and other costs, that would give it an advantage. Amazon said that would violate its policies and that it was investigating the matter.
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Credit...Jessica Chou for The New York Times
Facebook faces scrutiny for its dominance in social media and its history of acquiring smaller companies like WhatsApp and Instagram that have helped it gain power while neutralizing the competition.
Mr. Zuckerberg is likely to point to TikTok, a Chinese-backed video app, as a sign that competition in social networking is thriving.
TikTok, which only became popular in the past few years, remains Facebook’s best evidence that it does not have a stranglehold on innovation and new products. Citing TikTok also gives Facebook political points amid a geopolitical battle between the Trump administration and China.
Even so, Facebook is the undisputed king of social networking. About 2.99 billion people around the world use one or more of its family of apps, including Messenger, WhatsApp and Instagram, each month. That dwarfs TikTok’s 800 million monthly worldwide users.
Tencent’s WeChat, which is huge in China, has 1.2 billion monthly active users. Other social networks are much smaller. Twitter has 186 million daily users, while Snap, the maker of Snapchat — which Facebook previously tried to buy — has 238 million.
Mr. Zuckerberg will most likely point to the vast digital ads marketplace to argue that Facebook has no advertising monopoly.
Google, with about 29.4 percent market share of digital advertising in the United States, is Facebook’s best argument to defend against accusations of cornering the market. The social network also has noted that Twitter, Pinterest, Snap, YouTube, Amazon and Apple are vying for the same ad dollars.
Facebook has also said there should be no distinguishing between digital and traditional outlets competing for ad dollars. If Facebook is tussling with television, radio and print outlets to court advertiser spending, then its piece of the overall pie looks smaller.
Yet there is no question Facebook is a large presence in digital advertising. The company is expected to haul in more than $73.8 billion in ad revenue this year, even with the pandemic, according to estimates from eMarketer. For 2020, its share of U.S. digital advertising is set to be about 23.4 percent, eMarketer said.

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