GAFA – An Economy of Untamed Capitalism

[By Dhriti Mitra]

The author is a student at Symbiosis Law School, Pune.

Introduction

GAFA, an acronym coined in France for Google, Apple, Facebook, and Amazon, identifies these Big Tech companies as an entity with expansive capital infrastructure and great customer reach. However, the fact that these companies can use their popularity to ensure that its products sit on top while suppressing competition in downstream markets, have repeatedly drawn the attention of the antitrust authorities.

In today’s digital era where personal data is the currency to market power and expansion, GAFA has a tight grip over an abundance of user data. Google is the largest search engine in the world and has access to almost every search that we make with the help of the internet. Apple monopolizes through its mobile operating system platforms (iOS) and its downstream apps, for example, apple music. Facebook holds an advantageous position in the social network market, especially after it purchased Instagram and WhatsApp in 2012 and 2014 respectively. Amazon runs the most prominent e-commerce platform that allows consumers to purchase all kinds of goods from third-party vendors as well as its brand.

It can be discerned from the above, that to protect competition, it is essential to have adequate legal regulation in this ‘winner takes all’ market system. GAFA poses multiple challenges to the overall competition existing in various global markets and the same has been discussed below along with the extant regulatory framework and the tenable courses of action that will help deal with the defined issues.

Predominant Facets of GAFA

It is an established fact that the aforementioned tech quadropoly dominates our digital spaces, but that in itself is not a breach of antitrust provisions. All digital markets have a unique set of characteristics that create significant barriers to entry, access to large amounts of consumer data, and often low cost or free. It is therefore important to understand them before we delve into exactly how their behavior is a threat to competition.

Two-sided Markets:

In a two- sided market, the size of the network determines the user utility. Due to the existence of economies of scale, the overall cost incurred in providing a service automatically reduces. Hence, the reduced cost allows companies to provide the services at a lower price or for free. GAFA is characterized by this form of market and accumulates a substantial amount of data, human resources, and technology, thereby enforcing its market dominance.

Control over Data:

Algorithms and data influence indeed make our lives infinitely easier, but it is also a matter of great concern how people who have access to this data, utilize it. For example, through software and devices such as Alexa, Google Home. and Siri, GAFA has complete access to our data usage on a day to day basis.  All in all, from the news we read, to the friends we add on our social media, are all influenced by a variety of cognitive biases that we are unaware of.

Advertisement Income:

Prima facie the four companies seem to diversify into different markets, but one thread that binds them all is their advertising revenue. In order to provide inexpensive or free services, it is essential that the revenue is earned from elsewhere. Advertisement helps in subsidizing their overall costs and allows GAFA to earn a substantial portion of their revenue.

International Taxation:

The traditional models of taxation that were directed towards brick and mortar businesses are not well equipped to handle the taxation of online businesses. GAFA is known to have made large revenues by shifting all its profits to low-tax jurisdictions. For example, Amazon received undue tax benefits of around €250 million in Luxembourg.

Threats Posed by GAFA

GAFA’s omnipotence helps them to impose their products and services on the masses, thereby creating multiple threats that may kill innovation and competition in such markets. Some of the threats have been discussed as follows;

Firstly, in the case of data protection, GAFA’s algorithms have pressed us into conformity and laid waste to privacy. A great example of this is how Cambridge Analytica with the help of data collected from millions of Facebook users, were able to target messages in support of Brexit in the UK and Trump’s 2016 election in the US.  Although this episode in particular concerns Facebook alone, it has highlighted the excessive power of GAFA over our societies.

Secondly, GAFA banks on its dominance in one market to enter new markets and gain substantial market share in that sector. For instance, Facebook introduced its cryptocurrency libra, and GAFA have their respective e-wallet platforms. With its significant investments in the provision of financial services, if unregulated, GAFA may become the future of finance.

On the legal front, GAFA has often been charged for breach of antitrust provisions.  In the recent past, Google was fined 1.49 billion by the EU for abusing its market dominance for the brokering of online search adverts, Apple was fined $1.2 billion by the French antitrust authorities for the creation of cartels within its distribution network and abusing the economic dependence of its outside resellers. Germany’s top court declared that Facebook has abused its dominance in the social media sector by illegally harvesting user data for its benefit, and Amazon is under the EU’s radar for breach of antitrust provisions for its illegal use of data from third-party retailers that sell on its marketplace. Unfortunately, these cases account for only a few of the anticompetitive activities practiced by GAFA.

Lastly, as GAFA indulges in a great deal of non- price competition, most of its services are primarily free for its users. So much so, that one could argue that they promote consumer welfare. However, GAFA earns its currency from the data that its users provide, and by concealing the full extent of its, they cause more harm than good. It is also important to note the loss that is caused to small businesses that do not have the resources or ownership of other vertical platforms in the same market. Therefore, even though GAFA benefits consumers, contributes to R&D, and is proactive in its investment in social reforms, there should be a mechanism to adequately regulate them.

Working the Regulatory Framework

There is no doubt that the antitrust authorities of various countries want to incorporate a system that would adequately regulate GAFA.  However, the hefty sums of fine that have been imposed on them, is nothing but a mere dent on the large earnings of this quadropoly.

The GDPR:

GAFA’s customers in the European market automatically cause it to fall under the purview of GDPR compliance. In order to conform with the GDPR, Facebook introduced a set of new tools and Google changed its default for data retention so that the older data will get automatically deleted. However, these measures are only restricted to the EU. GAFA blatantly abuses its dominance in many other countries and should be enforcing a GDPR level of protection in all jurisdictions irrespective of the existing regulation.

The GAFA Tax:

In mid- 2019, France became the first country to enforce the GAFA system of taxation by levying a 3% tax on the sales generated by the non-tax-paying online giants. Similarly, Italy also introduced a 3% digital tax on companies generating revenues from digital services with the minimum threshold of revenue generation at 5,500,000 euros.

On the other hand, India had accommodated a 6% equalization levy in lieu of digital advertising services as early as 2016. However, this provision was amended in March, 2020 to include all online commercial activities carried out in India. Various other countries such as the UK, New Zealand, Austria, and Spain have followed suit by proposing the implementation of a separate system for digital taxation.

Breaking up GAFA:

Many have stated that the best way to regulate Big Tech is to break them up. However, breaking up large corporations and unwinding mergers are uncommon events that are difficult for regulators to enforce. However, the US has finally raised concerns about the dominant position held by GAFA and after a hearing with the CEOs of the four companies, the American Congress is of the opinion that some of these companies may need to be broken down.

Increased Government Intervention:

In a free market, inequalities are created not through lack of ability or hard work but due to existing privilege and monopoly power. The Government can intervene to create a fair market environment and promote competition by investing in startups and assisting with R&D, which is the primary area in which small companies lose out, as GAFA monopolizes not only markets but also brains.

Conclusion

GAFA, who were once the challengers that made pivotal innovations, are now nothing but powerful monopolists that create barriers to competition. Their arguments that they may not always be successful in their endeavors and that there exist other disruptive startups that are competing for them are flimsy excuses that fail to explain their combined 5 trillion-dollar representation of the US economy.

In conclusion, what is currently required is a coordinated effort by all the regulatory authorities and policy-making bodies to implement a new model of economic practice that takes into account the power of these internet behemoths and assists in effectively freeing competition by bringing down the barriers created by their monopoly.

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