Regulating the internet giants
The data economy demands a new approach to antitrust rules
The Economist Print edition | Leaders May 6th 2017
A NEW commodity spawns a lucrative, fast-growing industry, prompting antitrust regulators to step in to restrain those who control its flow. A century ago, the resource in question was oil. Now similar concerns are being raised by the giants that deal in data, the oil of the digital era. These titans—Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft—look unstoppable. They are the five most valuable listed firms in the world. Their profits are surging: they collectively racked up over $25bn in net profit in the first quarter of 2017. Amazon captures half of all dollars spent online in America. Google and Facebook accounted for almost all the revenue growth in digital advertising in America last year.
Such dominance has prompted calls for the tech giants to be broken up, as Standard Oil was in the early 20th century. This newspaper has argued against such drastic action in the past. Size alone is not a crime. The giants’ success has benefited consumers. Few want to live without Google’s search engine, Amazon’s one-day delivery or Facebook’s newsfeed. Nor do these firms raise the alarm when standard antitrust tests are applied. Far from gouging consumers, many of their services are free (users pay, in effect, by handing over yet more data). Take account of offline rivals, and their market shares look less worrying. And the emergence of upstarts like Snapchat suggests that new entrants can still make waves.
But there is cause for concern. Internet companies’ control of data gives them enormous power. Old ways of thinking about competition, devised in the era of oil, look outdated in what has come to be called the “data economy” (see Briefing). A new approach is needed.
Quantity has a quality all its own
What has changed? Smartphones and the internet have made data abundant, ubiquitous and far more valuable. Whether you are going for a run, watching TV or even just sitting in traffic, virtually every activity creates a digital trace—more raw material for the data distilleries. As devices from watches to cars connect to the internet, the volume is increasing: some estimate that a self-driving car will generate 100 gigabytes per second. Meanwhile, artificial-intelligence (AI) techniques such as machine learning extract more value from data. Algorithms can predict when a customer is ready to buy, a jet-engine needs servicing or a person is at risk of a disease. Industrial giants such as GE and Siemens now sell themselves as data firms.
This abundance of data changes the nature of competition. Technology giants have always benefited from network effects: the more users Facebook signs up, the more attractive signing up becomes for others. With data there are extra network effects. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. The more data Tesla gathers from its self-driving cars, the better it can make them at driving themselves—part of the reason the firm, which sold only 25,000 cars in the first quarter, is now worth more than GM, which sold 2.3m. Vast pools of data can thus act as protective moats.
Access to data also protects companies from rivals in another way. The case for being sanguine about competition in the tech industry rests on the potential for incumbents to be blindsided by a startup in a garage or an unexpected technological shift. But both are less likely in the data age. The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat. Many think Facebook’s $22bn purchase in 2014 of WhatsApp, a messaging app with fewer than 60 employees, falls into this category of “shoot-out acquisitions” that eliminate potential rivals. By providing barriers to entry and early-warning systems, data can stifle competition.
Who ya gonna call, trustbusters?
The nature of data makes the antitrust remedies of the past less useful. Breaking up a firm like Google into five Googlets would not stop network effects from reasserting themselves: in time, one of them would become dominant again. A radical rethink is required—and as the outlines of a new approach start to become apparent, two ideas stand out.
The first is that antitrust authorities need to move from the industrial era into the 21st century. When considering a merger, for example, they have traditionally used size to determine when to intervene. They now need to take into account the extent of firms’ data assets when assessing the impact of deals. The purchase price could also be a signal that an incumbent is buying a nascent threat. On these measures, Facebook’s willingness to pay so much for WhatsApp, which had no revenue to speak of, would have raised red flags. Trustbusters must also become more data-savvy in their analysis of market dynamics, for example by using simulations to hunt for algorithms colluding over prices or to determine how best to promote competition (see Free exchange).
The second principle is to loosen the grip that providers of online services have over data and give more control to those who supply them. More transparency would help: companies could be forced to reveal to consumers what information they hold and how much money they make from it. Governments could encourage the emergence of new services by opening up more of their own data vaults or managing crucial parts of the data economy as public infrastructure, as India does with its digital-identity system, Aadhaar. They could also mandate the sharing of certain kinds of data, with users’ consent—an approach Europe is taking in financial services by requiring banks to make customers’ data accessible to third parties.
Rebooting antitrust for the information age will not be easy. It will entail new risks: more data sharing, for instance, could threaten privacy. But if governments don’t want a data economy dominated by a few giants, they will need to act soon.
An escape from a shopping bag triggers an idea
The experiment behind the paper was inspired when Federica Bertocchini, an amateur beekeeper who is also a biologist at Cantabria University, in Spain, was looking at some of the honeycombs in her hives and noticed caterpillars chewing holes through the beeswax and lapping up the honey. Such pests are not uncommon, so to be certain of what she was dealing with, she collected some of the caterpillars and took them home in a plastic shopping bag for subsequent examination. She assumed the larvae would be unable to escape from this bag, but she was wrong. When, a few hours later, she got around to looking at her captives she found the bag pierced by holes and the caterpillars roaming around her house.
After rounding them up, she identified them as the larvae of the greater wax moth, a well-known pest of bee hives. On considering their escape from their shopping-bag prison, though, she wondered whether they might be put to some sort of use as garbage-disposal agents.
Past attempts to employ living organisms to get rid of plastics have not gone well. Even the most promising species, a bacterium called Nocardia asteroides, takes more than six months to obliterate a film of plastic with a thickness of a mere half millimetre. Judging by the job they had done on her bag, Dr Bertocchini suspected that wax-moth caterpillars would perform much better than that.
To test her idea out, she teamed up with Paolo Bombelli and Christopher Howe, two biochemists at Cambridge University. Dr Bombelli and Dr Howe pointed out that, like beeswax, many plastics are held together by structures called methylene bridges (molecular units consisting of one carbon and two hydrogen atoms, with the carbon also linked to two other atoms). These bridges are impossible for most organisms to break, which is why plastics based on them are not normally biodegradable, but the team suspected wax-moths had cracked the problem.
One of the biggest constituents of rubbish dumps is polyethylene, which is composed entirely of methylene bridges linked to one another. So it was on polyethylene that the trio concentrated. When they put wax-moth caterpillars onto the sort of film it had taken Nocardia asteroides half a year to deal with, they found that holes appeared in it within 40 minutes.
On closer examination, Dr Bertocchini and her colleagues discovered that their caterpillars each ate an average of 2.2 holes, three millimetres across, every hour, in the plastic film. A follow-up test using standard shopping bags weighing just under three grams each found that an individual caterpillar took about 12 hours to consume a milligram of such a bag.
Whether releasing wax moths on the world’s surplus plastic really is a sensible approach to the problem is not yet clear. For one thing, it has yet to be established whether the caterpillars gain nutritional value from the plastics they eat, as well as being able to digest them. If they do not, their lives as garbage-disposal operatives are likely to be short—and, even if they do, they will undoubtedly need other nutrients to thrive and grow. Another question is the composition of their faeces. If the droppings produced by eating plastic turn out to be toxic, then there will be little point in pursuing the matter. Regardless of that, though, the discovery that wax-moth larvae can eat plastic is an intriguing one, for even if the moths themselves are not the answer to the problem of plastic waste, some other animal out there might be.
Maybe the Brexiteers didn’t expect to win the referendum in June 2016. To quote from the confusingly-titled iconic Brit film, The Italian Job, maybe they “only meant to blow the bloody doors off”. Possibly they didn’t intend to shatter the whole edifice: they fled the scene so fast it’s hard to know. No matter. In uncertainty, as everybody knows, there is opportunity. And for Brand Britain to grasp this opportunity, it cannot afford the British habits of self-deprecation and ambivalence. Brands need to know what they’re about. And behave accordingly.
I don’t know how Britain will emerge from Brexit – who does – but I do know that it could help to look at it from a brand-building perspective. I have a 3Bs framework for this: aligning business, brand and behaviour. Maybe if Britain learns from corporate experience, it can avoid becoming a nation of Bregretters.
Seize the moment
With the world watching, attempts to shape Britain’s brand will have a disproportionate impact, amplified internationally by the press and social media. That opportunity won’t last for ever. The British government can help people reconnect with their identity, reframe the values that define the culture, and position Britain’s role in Europe and the wider world for a new era. Political leaders should not get caught up in short-term posturing on the terms of Brexit – or its £60 billion price tag. This behaviour will reflect on Brand Britain. Rather than think of it as a cost, it should be seen as an investment. The European Union (EU) is not the only one listening and Brand Britain is a far greater prize at stake. Ultimately, brands are about identity and emotions. And, without empathy, Brexit may well have the same chilling effect of the separation of the British Isles from continental Europe following the last glacial period.
So let’s look at corporate brands for inspiration on how it could and should be done.
A branded house or a house of brands?
What is the national brand in question anyway? Brexit is an abbreviation for “British exit” where “British” refers to the people of the United Kingdom, which includes Great Britain – comprising England, Scotland and Wales – and Northern Ireland. As such, the UK is not a branded house like London Business School (LBS). Rather, it is a house of brands such as Unilever that owns power brands such as Dove, Axe (or Lynx), Lipton and Knorr, to name just a few. Unilever is also the world’s leading ice-cream maker, with brands such as Magnum, Carte D’Or, and Solero that are part of the Heartbrand, and Ben & Jerry’s that is not. Unilever’s Global Chief Marketing Officer, Keith Weed’s views on the repositioning of their brand can be usefully applied and can be heard in an interview I carried out with him here.
The brand architecture is complex, but purposeful. Brands such as Carte D’Or and Solero have a different functional positioning – sharing and refreshment, respectively – but are united under the Heartbrand’s umbrella positioning of “euphoric fun”. This aims to turn Carte D’Or’s sharing into a much more active “bonding” and Solero’s refreshment into an emotional “uplift”. Furthermore, Unilever’s corporate brand has the purpose of “adding vitality to life”, which for example, drives product development into lower-sugar ice creams.
Britishness too is a layered identity. Think of the UK as Unilever, Great Britain as the Heartbrand – with England as Magnum, Scotland as Carte D’Or, and Wales as Solero – and Northern Ireland as Ben & Jerry’s. And, of course, each comes in different flavours, just like London, the Lake District and Cumbria are all English yet different. Britishness is layered on much older identities of being English, Irish, Scottish and Welsh, which continue to resist a homogenised British identity. People differ in the degree to which they consider themselves as English versus British, for example, with some rejecting either aspect entirely. And it gets even more complicated when considering the EU: Remainers might add a dollop of Europeanness to their identity, which surely is a concept entirely foreign to the identity of most Brexiteers.
Business: British brand DNA
These complex concepts must be defined when it comes to establishing the ‘B’ for “business” in my 3B branding framework, whether for a company or a nation. William Hesketh Lever, founder of Lever Brothers, defined the purpose for Sunlight Soap in Victorian England in the 1890s: “to make cleanliness commonplace; to lessen work for women; to foster health and contribute to personal attractiveness, that life may be more enjoyable and rewarding for the people who use our products”. These ideas still guide Unilever’s business, brands and behaviours today.
But what is the identity-defining purpose of a nation? A nation is a body of people of a particular territory, united by common heritage, history, culture, or language. And to (re)define the British brand, one must deep dive into its DNA, values, culture, key moments in history and the iconic people that continued to shape it.
The British national identity finds its roots at least as far back as Magna Carta in1215, still an important symbol of liberty today. Britishness has political and moral foundations, such as tolerance, meritocracy and freedom of expression. It is an identity formally established with creation of the unified Kingdom of Great Britain in 1707, when England and Scotland agreed “a hostile merger”. What was the purpose of this union? What led to its expansion to include Wales and Ireland later on? Or the demerger of the Republic of Ireland in 1922?
Purpose and identity are closely linked, and the notion of Britishness was strengthened during the Napoleonic wars, when it was one defined primarily by virtue of not being French or Catholic. A more pragmatic purpose was the growth and wealth creation of the British Empire, one that cemented the union. Money is also part of the Brexit equation, but the Remainers missed a vital ingredient by ignoring the role that identity played during the vote. And the government is in danger of playing a short game by focusing on the uncertain economics of Brexit without understanding the vital long-term implications of a strong British identity. The Brexiteers certainly knew how to play up historic identity battles with the Continent and the otherness of immigrants to fuel patriotism. Identity is a powerful card being played around the world, and the UK government ignore it at their own peril – not just with respect to the UK’s role in the world, but the union itself.
To redefine Brand Britain, it is worth looking at what accompanied the Empire’s planting of the Union Jack across the globe: tea, tubs, sanitation, obscure sports and churches, as well as a love-hate relationship to Britishness. In making its mark in the world, the UK has needed a range of soft skills: persuasiveness, diplomacy, creativity, ingenuity. These are skills that Brexit Britain should consider rediscovering and using to their maximum potential.
Mass immigration to the UK from the Commonwealth after the British Nationality Act 1948, and from all over the world since, has created an eclectic and vibrant expression and experience of cultural life exemplified in London. More than 250 languages are spoken in the capital, which has the largest non-white population of any European city. The UK’s membership in the European Economic Community in 1973 and European Union since 1993 has left indelible traces of Europeanness on the British identity.
Akin to how corporate brand identities are established, it’s instructive to look at who the British celebrate as the best examples of themselves. In November 2002, a BBC poll of more than a million people identified their greatest Britons of all time. Winston Churchill topped the chart, with engineer Isambard Kingdom Brunel in second place and Princess Diana in third. The list included artists, writers, royalty, scientists, explorers, military giants and, of course, a Beatle.
As the list illustrates, Britain has long been a hotbed of innovation, with major contributions to global culture, literature and the arts. Brits contributed to world-changing inventions in global communications (electronic telegraph, telephone, worldwide web), the media (photography, television), industry (cement, stainless steel, spinning frame, steam engine, electric motor), and even the humble toothbrush. Its education system at all levels is envied and has been copied around the world. One should also explore what people think when they see a product is “Made in Britain” and how perceptions differ from the same product labelled as “Made in Germany” or as “Made in China”.
But a brand is not simply a laundry list of all possible ingredients that make up its DNA. As the British film producer and director Alfred Hitchcock has observed: “If you confuse the audience, they cannot emote.” And, in the end, this is an emotional and not just intellectual exercise. The genes of the DNA ingredients need to be boiled down and fit together as a coherent whole.
Brand: who is it for?
But to create a compelling brand, the DNA is not enough. One has to consider the voice of the target audiences, whose attitudes and behaviours the brand should ultimately affect. It is an exercise at small scale with the Red Arrows as part of our MBA programme’s London Business Experience immersion. The Red Arrows know who they are, but in order to be a force for stimulating UK economic growth – their new remit of their air shows when travelling the world – they need to understand the goals of their different audience members, and then marry these insights up with what their DNA has to offer. To do so, you have to look for a universal insight that unites, rather than differentiates these audiences. Unilever has many audiences ranging from their own employees to regulators, communities, investors, customers and consumers. But they all can relate to their corporate purpose.
The second ‘B’ for brand therefore marries the DNA with target stakeholder insights: from businesses, immigrants, tourists, students, governments, not to mention its own citizens. For whom, in the long-term, should the brand be crafted? What are their goals? In what ways can Britain and Britishness authentically relate to these? While the brand message can be articulated in different ways to different stakeholders, the brand idea must have a consistent and coherent voice. External stakeholders too have different goals: Brexit affects them in different ways. The remaining 27 EU members will certainly feel different about Brexit than non-EU countries, who see new opportunities in a more independent UK.
Starting internally may well be the way to go: finding common ground for a nation divided. London stands apart from most of England, and Northern Ireland and Scotland voted to remain. It is therefore important to not get seduced by the notion of trying to forge a new Britishness around the identity of the Brexiteers. Exit polls and regional voting patterns suggest that they were, on average, older and less educated than the Remainers. Also, as the polling organisation YouGov showed, the brands preferred by voters differed substantially, even when correcting for demographic factors. Those who voted to leave were most loyal to traditional and warm brands like HP Sauce, Sky News, PG Tips and Richmond Sausages; whereas those voting Remain favoured more progressive and innovative brands like the BBC, Spotify, Virgin Trains and Twitter. This is no value judgement but a call to look at what unites rather than what divides them.
Behaviour: what are the moments that matter?
Whatever brand idea is created at the overlap of the DNA and audience insight, this is only the design of the brand strategy – one that needs a plan to be successfully executed. This is where the third ‘B’ for behaviour comes in, and it presents probably the biggest challenge – for business or nation alike. This is not about the big campaign. This is about the thousands of behaviours that add up. Take Southwest airlines. They are not just cheap, but their brand promise to weary travellers is that it will be a cheerful experience. And their people exhibit true missionary zeal, with constant smiles and creative in-flight announcements. This is not the 4 Ps of marketing – product, price, place and promotion – but the Southwest’s 3 Ps of “people, personal and personalities” that are at the heart of its branding efforts. All of its people processes are dedicated to attracting, selecting, developing and rewarding the hardworking “Fun-LUVing Attitude” that is one of its core values. All this so that its people can deliver fun moments-that-matter.
And Southwest is an example not too far-fetched for Brand Britain to learn from. Think of all the touchpoints that a migrant, foreign student, tourist or business traveller has. From acquiring a visa (something millions more will likely have to do post-Brexit) to arriving at an airport such as Heathrow, there are thousands of experiences that will shape people’s perceptions of this nation. When Glasgow wanted to improve its image, city leaders worked with taxi drivers. These moments all matter. And there are usually humans behind them.
What’s crucial, of course, is that leaders themselves behave in line with the identity: this is where Britain needs to take stock quickly, or else lose this opportunity. Because your people are more likely to follow your example than your carefully-crafted words. Similarly, in Brexit Britain, though the Brexiteers insisted they did not want to keep out migrants who worked and paid tax, their message is interpreted bluntly by many who hear it. But building a strong brand is not just about avoiding missteps or misperceptions. It is about behaving positively in brand consistent ways, and the government is in desperate need of a brand playbook at this critical time.
Nader Tavassoli is Professor of Marketing at London Business School, where he founded the Walpole Luxury Management Programme, as well as non-executive chairman of The Brand Inside.
Exploration and production companies are poised to go on another investment spree
INSIDE the boardrooms and bars of Houston, the spiritual capital of America’s energy industry, the swagger is back. The oil price may only be at $48, or half the level it was three years ago. But shale fracking—the business of getting oil and gas out of rocks by blasting them with water and sand—is booming once again after the crash of 2014-16. Exploration and production (E&P) companies are about to go on an investment spree. Demand is soaring for the industry’s raw materials: sand, other people’s money, roughnecks and ice-cold beer.
Shale’s second coming is testament to Texan grit. But the industry’s never-say-die spirit may explain why it has done next to nothing about its dire finances. The business has burned up cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P firms collected by Bloomberg, a data provider. With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns—private firms valued at more than $1bn—shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter, as capital expenditures exceeded cashflows. The cash-burn rate may well rise again this year.
Meanwhile, the prospect of rapidly rising production is rattling global energy markets. In particular it worries OPEC, a cartel of producers led by Saudi Arabia that aims to restrain output and keep prices stable and fairly high. Khalid al-Falih, Saudi’s energy minister, warned of “irrational exuberance” on March 7th during an energy-industry conference in Houston.
When oil prices halved in just 16 weeks starting in late 2014, panic hit Texas, followed—for a while—by grim austerity. The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70bn of debt. Shale’s retrenchment helped to stabilise the global oil price. Production in the lower 48 states (ie, excluding Alaska and Hawaii), and excluding federal waters in the Gulf of Mexico, has dropped by 15% over the past 21 months, equivalent to 1m bpd, or 1% of global output.
The partial recovery in the oil price, which at one point fell as low as $26, is only one factor behind renewed enthusiasm for shale. Houston’s optimists also argue that the full geological potential of Texas’s Permian basin has only just become apparent. Some experts think it could in time produce more barrels each day than Saudi Arabia does. That has offset gloom about falling production from other shale basins, such as the Bakken formation in western North Dakota. The industry has also lifted productivity. Drilling is faster, more selective and more accurate, and leakage rates are lower. Wells are being designed to penetrate multiple layers of oil that are stacked on top of each other.
But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.
Oil bosses like to show off their newest wells in the Permian basin, which, they say, can now make internal rates of return of more than 50% over their working lives. But most firms have mediocre wells too, as well as corporate overheads, so their overall efficiency improvement has not been great. For the ten largest listed E&P firms, aggregate cash operating costs per barrel fell by $13 between 2014 and 2016; not enough to offset a $50 drop in the oil price. Because shale-energy fields run out far faster than traditional ones, firms must reinvest heavily to keep production flat.
It is instructive to compare shale with another natural-resources business that has had to cope with a collapse in commodity prices. In 2016 the mining industry’s biggest companies ground out profits, produced cashflow after capital investments and made a decent return on capital. Yet despite this unflattering contrast, capital investment by American E&P companies will probably soar over the next year, by perhaps 50% or more.
There are two theories for why this is happening. One is that the way in which executives are paid, together with lenders’ incentives, means that Houston is always vulnerable to investment mania. Not one of the ten biggest E&P firms, for example, puts significant emphasis in its pay scheme on how much return on capital it produces. Low interest rates make it easy for shale firms to borrow, and fee-hungry banks cheer on the spectacle. But the only way that the mania will end well is if oil prices rise sharply, bailing out the industry, or if E&P firms are bought by bigger energy firms. That is possible, but companies such as Exxon and Shell are too seasoned to pay a lot for small, unprofitable firms.
Houston, we still have a problem
The second explanation is oil executives’ belief in increased output from the Permian, and higher productivity. Most E&P firms reckon they can expand production at an annual rate of 10-20% over the next few years. But to justify their market values, and make an adequate return on their cumulative capital invested, listed E&P firms would over time need to make about $60bn of free cashflow each year. Assuming that both energy prices and capital spending stay flat, that would require them roughly to double production from current levels.
The trouble is that this is a circular argument. If achieved across the whole shale industry it would mean that output would be twice as high as it is now, leading to a 5% increase in global supply, which might in turn lower the oil price. There is something heroic—and baffling—about America’s shale firms. They are the marginal producer in a cyclical industry, and that is usually an unpleasant place to be. The oil bulls of Houston have yet to prove that they can pump oil and create value at the same time.