The Bear’s Lair: De-FAANGing the world

Last weekend, Ben Carson’s Department of Housing and Urban Development filed suit against Facebook, claiming that its methods of segregating consumers for advertisers constituted redlining, violating Civil Rights legislation. The battle between Big Data and civil rights has thus begun, rather earlier than had been expected. It is just one of the forces that will ensure that the 2020s will be the decade of the FAANGs’ eclipse, not of their final triumph.

Carson’s HUD suit looks to have considerable merit. Facebook, in its literature to advertisers, advertises the ability to display housing ads to either men or women alone, not to show Facebook ads to readers searching for “assistance dog,” “mobility scooter” “accessibility” or “deaf culture,” not to show ads to people interested in “child care” or “parenting”, and to red-line particular zip codes.

Each of those categories would seem to offend the central principles of civil rights. You may wish you could discriminate on the basis of race, sex, handicap or geographic location when selling goods and in particular housing, but legally, you can’t. Enabling the ability to block certain groups of consumers from ever seeing specific housing advertisements seems likely to fall under the same prohibition. We’ll see what a judge has to say in the HUD case, but it looks very likely that the central business model for the gigantic advertising sales of both Facebook and probably Alphabet is in deep trouble.

The potential civil rights violation is a serious problem for Facebook and, if it has the same problem, for Alphabet/Google. It is little use proclaiming that your corporate motto is “Don’t be evil” if you then provide facilities for your advertisers to segregate consumers as if they were Bull Connor, hoses, police attack dogs and all. I said in 2004 that Google’s “Don’t be Evil” moral preening was a pretty good indication that the company would in fact end up committing several different varieties of evil, and this is just one of them. Another may be its return to China, where it appears to be abandoning the principled stand it took in 2010 and falling in with the Chinese government’s demand for heavy censorship of search.

The central problem is that the FAANGs have become monopolies, and that is very definitely not in the interests of their users. Take for example the area of “chat apps” where users can communicate with each other — the most ubiquitously used smartphone applications, with 1.3 billion users of WhatsApp and Facebook Messenger and nearly 1 billion users of WeChat and QQ Mobile.

A decade ago, the large number of chat apps could communicate with each other, so that apps devoted to people with particular interests or political views could proliferate. Today, the takeover of the largest apps by the FAANGs and their Chinese competitors has limited such interactivity, so that each app has become effectively a “silo” communicating only with other users of that app. There was no need for this to happen; WhatsApp gained very little operationally from its $19 billion purchase by Facebook; it merely became part of a gigantic conglomerate.

Those conglomerates are highly suboptimal, both to their workers and to their customers. Their workers are no doubt motivated by the financial gains that the FAANGs’ continual stock price rises have yielded, and thereby suppress their doubts about the conformist monoculture that is now enforced among employees. Soon enough, especially if interest rates are allowed to continue increasing, the FAANGs’ stock price increases will end. There will then be no reason whatever for anybody sensible and intelligent to want to work there, and they will quickly be populated solely by the talentless office-politicking drones who like such places.

General Motors, at its peak, had 1 million employees, but most of them were undertaking simple mechanical tasks, with only rudimentary supervision. The FAANGs will have a similar population of employees at their peak, but consisting of “brain” workers, all brought up to demand personal fulfilment. The result will be a uniquely poisonous office atmosphere. With their stock prices languishing at levels occupied by the rest of the universe, the overblown FAANGs will then resemble the more unpleasant government offices.

In terms of their business, the FAANGs will no longer be able to operate the 1960s conglomerate trick of using their overpriced stock as currency to buy smaller companies on relatively attractive terms. A $19 billion acquisition of a profitless WhatsApp, once Facebook is trading at a more normal 15 times earnings, will involve a real $1.3 billion dilution of the earnings available for Facebook’s stockholders. This will quickly lead to stockholder unrest, and the discontinuance of overpriced startup acquisitions.

The FAANGs are now in some danger of break-up from the world’s antitrust authorities. Alphabet has already suffered a fine of more than $5 billion from the EU antitrust authorities, but the true danger is not heavy fines but a full breakup. After all, the U.S. government broke up Standard Oil in 1911 and AT&T in 1982, and it can easily be argued (and has been by Roger Simon recently) that the FAANGs are much more dangerous monopolies than Standard Oil and AT&T because they have an altogether unhealthy level of control over our intellectual output, as distinct from merely over some commodity or service. Alternatively, as I suggested in a recent piece, the FAANGs will be broken up into national champions, each with their own views on what can be published, and with no ability to control such matters outside their home market.

Such a break-up, and even a deflation of the FAANGs’ stock prices, will be an enormous benefit to the independent developers who are all the time producing new utilities and enhancements for the billions of cellphone users, and will now be able to do so independently, without being swallowed up by the FAANGs. A multi-verse of new apps will appear tailored to particular interests and belief systems of consumers, with no central Big Brothers able to ban consumers and views they dislike.

The political and social freedom this will bring for consumers is immeasurable. Facebook and Google may at present ban only Alex Jones and Infowars, and other conservative and libertarian websites may not feel themselves directly threatened. But all the time such websites must run through their minds a contemporary version of the famous Pastor Martin Niemöller formulation from Nazi Germany: “First they came for the libelers of innocent school shooting victims, and I did not speak out because I was not a libeler of innocent school shooting victims. Then they came for the White Nationalists, and I did not speak out because I was not a White Nationalist. Then they came for the purveyors of reactionary Austrian economics, and I did not speak out because I was not a purveyor of … whoops!”

You see what I mean. There can be no intellectual freedom when one monopoly information toll-gate can choose what to ban based on the prejudices of its ignorant brainwashed techie Millennial masters. As is only too obvious, the dozy Marxists and inverted racists of the left have perfect freedom, but only in a world where there are a wide variety of information providers, search engines, chat rooms and the like can that freedom be extended to all citizens, as it should be. If the Chinese government wishes to censor the Internet, that is for its commissars to decide, and its citizens to reject if they can find the means to do so, but there is no reason why we should accept a similar censorship from a bunch of pimply-faced nerds in Mountain View. Within the very modest limitations on speech imposed by the government, accountable to the entire populace, discourse should be free – that’s what the First Amendment is all about.

The only economies of scale in the FAANGs’ business are ones that as consumers we should not want deployed against us. Fortunately, government, market and technical forces will combine over the next decade to remove the purely temporary monopolies with which we are currently saddled. Corporate giganticism in manufacturing was a purely temporary phenomenon of the middle 20th Century; we are not now Organization Men. Fortunately, the giganticism of the last decade in the information sector will be equally temporary.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)