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The Winner-Takes-All Tech Corporation


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Former CACM Editor-in-Chief Moshe Y. Vardi

The five largest U.S. corporations—Alphabet, Amazon, Apple, Facebook, and Microsoft—are all tech companies with combined market capitalization of over four trillion dollars. Tech is often called "Big Tech" these days. Furthermore, a small number of corporations have come to dominate the IT industry, as within each industry segment one corporation often dominates.

The phenomenon whereby corporate dominance seems to be entrenched is often referred to as "winner takes all." In the context of tech, such a phenomenon can be partly explained by two "laws:" Metcalfe's Law asserts that the effect of a communications network is proportional to the square of the number of connected users. This makes Facebook, with over 1.5B daily users, dominant as a social network. Kai-Fu Lee's Virtuous Cycle asserts "More data begets more users and profit, which begets more usage and data." This explains, for example, the dominance of the Google search engine. Metcalfe's Law and the Virtuous Cycle make tech companies into natural monopolies, some claim.

As I argued earlier this year, we need laws and regulations, instead of an ethics outrage, to deal with undesired business models and conduct of tech corporations. What may have been a radical position less than a year ago has become a conventional wisdom now. There are several initiatives to regulate tech; the question now is how rather than if. The biggest regulatory issue on the table is how to deal with overly dominant corporations. In a 2018 book, The Curse of Bigness: Antitrust in the New Gilded Age, legal scholar Tim Wu argues the U.S. must enforce anti-trust laws against such corporations.

Public concerns about overly dominant corporations have been aggravated by what has become a dogma in the U.S. business community over the past generation, which is the Shareholder-Primacy Principle, asserting that shareholders should be assigned a priority relative to all other corporate stakeholders, such as employees, customers, and the like. According to this view, the goal of a corporation is just to generate profits, period! This approach, which has emerged in the 1970s and became dogmatic in the 1980s, has replaced the earlier approach of "corporate responsibility," which made corporations accountable to multiple stakeholders.

Sensing public frustration with the narrow profit motive of U.S. corporations, the Business Roundtable, an association of close to 200 influential U.S. CEOs, recently abandoned its 1997 shareholder-primacy position and declared that "the paramount duty of management and boards of directors is to the corporation's stakeholders." "Society gives each of us a license to operate," declared Ginni Rometty, IBM's CEO. "It's a question of whether society trusts you or not."

But doubts have been expressed about whether corporations can be trusted to regulate themselves, even after their stakeholder-primacy declaration. In a recent book, The Anarchy, historian William Darlymple describes the history of the East India Company, the most successful and most ruthless start-up in history. "Yet if history shows anything," write Darlymple, "it is that in the intricate dance between the power of the state and that of the corporation, while the latter can be regulated, the corporation will use all the resources in its power to resists."

One of the formidable resources that corporations can marshal is that of corporate personhood, which gives corporations the same legal rights enjoyed by natural persons. In fact, under U.S. law, some essential rights of the 14th Amendment, which addresses equal protection of the laws, belong not only to U.S. citizens but also to corporations. This has far-reaching implications. For example, the U.S. Supreme Court ruled in 2010 that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment because of corporate personhood. This had led to a significant flow of corporate funds into U.S. political campaigns—and money buys influence in politics.

But the 14th Amendment was passed in response to issues related to former slaves following the American Civil War. How it came to be interpreted to grant personhood to corporations is a long and convoluted tale. Many argue that corporations should not have the same rights as natural persons. As IBM CEO Rometty said, society offers corporations a license to operate, so it makes sense for society to define the terms of that license, including rights and responsibilities, the issue of corporate personhood, and the relationship between shareholders and other stakeholders. Perhaps the time has come to formally define the terms of the relationship between society and corporations via a constitutional amendment that explicitly addresses the rights and responsibilities of corporations.

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Author

Moshe Y. Vardi ([email protected]) is the Karen Ostrum George Distinguished Service Professor in Computational Engineering and Director of the Ken Kennedy Institute for Information Technology at Rice University, Houston, TX, USA. He is the former Editor-in-Chief of Communications.


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Comments


Martin Smith

"Corporate responsibility"--meaning corporate goals that extend beyond long-term financial success (i.e, profits) and adherence to law--is a bad idea. The job of corporation is to produce things of economic value (that people willing to pay for) at the lowest possible resource cost. That is a difficult task and one that has provided and continues to provide rising global living standards based on innovation. It's the job of other social actors to define the constraints and context within which corporations must operate: governments define and enforce rules (for corporations and everyone else); consumers define value by their purchasing and voting decisions. We do not want to delegate those jobs to corporations exactly because their governance is not structured to make value decisions for society. But they are structured to perform their role as economic producers and innovators.

We have seen the eye-rolling results when corporate CEOs are pressured to fill the gaps where the political system has not come to consensus on appropriate rules of the road. Or when a CEO decides to implement his or her own idea of "social responsibility" via dropping a supplier or retail outlet. (Or perhaps these are just "profit-seeking" appeals to retail customers who are thought to be influenced in their purchases by a corporation signaling certain political views.)

If laws need to be changed, let's do that, but without the goal of making corporations take into account values that are not expressed in law or consumer preferences.

Regarding the need to change anti-trust policy to deal with network effects or other situations of increasing returns to scale, caution is also in order. To be brief: (1) the ability of competition to "find a way" (to counter very rare "natural" monopolies) is often underestimated; (2) and almost all monopolies are created directly or indirectly and are enforcement by governments themselves; (3) let's drill down to the threatened harms of monopolies. We aren't rebelling against the most common ones we use every today: water, sewer, and electric utilities. Why is that?


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