After months of political grandstanding in Washington, the opening shot has finally been fired in the battle to restrain Big Tech.
In a complaint against Google this week, backed by the Republican attorneys-general of 11 US states, the Department of Justice ended years of inaction on the part of US antitrust authorities.
The complaint received resounding support from the company’s opponents. It has landed at a time when there is rare bipartisan political support for action. And it reflects a careful legal strategy designed to maximise the odds of success, while also acting as the first part of a broader legal campaign against both Google and the rest of Big Tech.
The willingness of the authorities in Washington to really take on Big Tech will only become apparent after the election battle between Donald Trump and Joe Biden. But the broad political support in Washington for this week’s action helped to set the stage for other cases against large technology companies. The Federal Trade Commission has been investigating Facebook alongside several states, and people involved in that case expect it to be filed before the end of the year. Federal investigators have also opened probes into both Amazon and Apple.
“We are looking at a once in a century opportunity to realign what the political economy of the United States should look like,” says Barry Lynn, founder of the Washington-based Open Markets Institute.
The Google lawsuit is not quite the ambitious attempt to stretch the boundaries of antitrust law that some critics of the digital giants had hoped for. Instead, the DoJ has opted for a more limited and traditional antitrust action that many lawyers believe has a better chance of winning.
Sridhar Ramaswamy, a former head of advertising at Google who is launching a new search engine, was among those to welcome the limited nature of the case. “One of the real fears I have is, how do we get the word out there is an option, so that people can ever consider us?” he says. The US action is “straight and narrow, and a really important case. It gives me heart.”
Much of the criticism from politicians of both Google and for other big tech companies has centred on the way they wield their platform power. In a sweeping report from a House of Representatives subcommittee last month, the companies were accused of channelling users from their dominant search engines, app stores and ecommerce sites to their other services, deliberately cutting out competitors.
By contrast, the DoJ’s opening salvo is aimed at a far more limited issue: the contracts Google employs to ensure its search engine stays prominently in front of users. These include paying billions of dollars to Apple and others to make it the default search engine on most smartphones. It also stands accused of using a series of contractual arrangements to make sure it keeps pole position on phones running its own Android operating system.
Coming years after Google turned its search engine into the centrepiece of an array of widely used and self-reinforcing services, from Maps to Gmail, there are also serious questions about how any single legal case could loosen its grip. An official at one Google rival summed up the frustration: “It’s too damned late.” The case is unlikely to get to court before 2022. With possible appeals, relief could be years away, even if the US were to win.
By limiting itself to the company’s contracts, it could be the closest thing to an open-and-shut case, says Gary Reback, a US antitrust lawyer who spent years representing American companies fighting Google in Brussels and Washington.
“If they had gone after other parts of Google’s business, they would have got caught up in questions like how they should define the market Google operates in,” says Gene Kimmelman, a former senior antitrust official at the Department of Justice. “For example, with advertising, there would have been questions on whether Facebook should be counted as a competitor, or whether the part of the business dealing with advertisers should be counted as separate from that dealing with publishers.”
Google, for its part, called the lawsuit “deeply flawed”. According to the DoJ, the case is modelled closely on the agency’s successful antitrust action against Microsoft two decades ago. But Google rejects the comparison.
Today’s users can switch between search engines far more easily than users of Microsoft’s Windows software could pick a web browser other than Internet Explorer, the company argues. It adds that, unlike Microsoft, it had not imposed exclusive contracts that forced distributors to shut out its rivals.
Kent Walker, Google’s senior vice-president of global affairs, compares the huge sums it pays to search distributors — amounting to $30bn globally last year — to the money that makers of breakfast cereals pay to get the best shelf space in a supermarket.
According to opponents, that fails to reflect the reality of how people use modern digital services, and switching a search engine is not like reaching for a different brand of cornflakes on a lower shelf. “The reality is that 99 per cent of people are not going to change their defaults,” says Mr Ramaswamy.
Rather than occupying only a slice of prime shelf space, Google has guaranteed its search engine almost ubiquitous exposure. “It’s like they bought every store in the neighbourhood,” says Mr Reback. The combined effect of all its contracts is a textbook case of trying to block opponents, he says, adding that if consumers could switch so easily but chose to use Google anyway, then why would it pay such huge amounts for the best placement?
However, some antitrust experts say it is unlikely that a court would try to block what look like open commercial arrangements. Apple and other companies seem to have a perfect right to auction off the default positions in their devices to the highest bidder, says Randal Picker, a law professor at the University of Chicago, adding that it would not be “an easy case to win” for the DoJ.
Further lawsuits against Google look almost certain to follow. A group of state AGs, who have had a parallel investigation and who did not join the DoJ’s case, said on Tuesday they were planning to file their own suit in the coming weeks, and that this would probably be appended to that of the federal government.
Most observers expect the case to broaden out further as the pre-trial period continues. Advertising technology might yet come under scrutiny, as might Google’s practice of putting its own products — such as Google travel and shopping — at the top of search results.
“It would not be surprising to see additional suits filed by the state AGs or by the DoJ that are broader,” says Michael Kades, director for competition policy at the Washington Center for Equitable Growth.
If Washington’s legal strategy for taking on Big Tech is starting to come into focus, the timing of the first legal action has confounded many. Coming only two weeks before a presidential election, it has left many questioning whether the case was rushed through for maximum political impact. By pre-empting the results of the separate investigation by the states, it has also robbed regulators of a chance to present a more united front.
Some involved in the state AGs’ case still felt they had work to do. “They were only weeks away from being ready,” said the person. “The only reason to push the button now was to get it out before the election.”
The progress of the case may now turn on the outcome of the election. Compared with other senior Democrats, Mr Biden has said relatively little about what he thinks about corporate power in the technology industry; and some on the left worry that he will continue Barack Obama’s friendly stance towards Silicon Valley.
Others, however, believe Mr Biden will not want to look weak in tackling corporate power in comparison with Republicans, and will push ahead with the case.
“I would expect a new administration to want their own people to be in charge to tackle such a high-profile and important lawsuit,” says Mr Kimmelman. “That will take time, but there is no reason it shouldn’t continue.”
For Mr Reback, the most important question is whether future leaders push aggressively for serious sanctions against the tech companies, or if they settle in return for relatively minor behavioural changes, as the George W Bush White House did with Microsoft in 2001.
Ryan Shores, associate deputy attorney-general, would not say what outcome he wanted, but this week insisted: “Nothing is off the table.”
The betting on Wall Street was that any action would be limited, and shares in Google’s parent, Alphabet, did not lose value. A similar case in Europe, launched in 2016, led to relatively minor contract changes, along with a move to give users a choice of search engines. Neither measure has done anything to weaken Google’s grip on search.
A more draconian step would be to bar Google from buying up the best shelf space. But given the huge payments it currently makes, that could provoke widespread opposition. As a Google official says, it would not go down well with the many companies that benefit from the current arrangements — starting with Apple, but including other handset makers, browser companies and mobile network operators that share in Google’s advertising revenues in return for promoting its service.
According to some of Google’s foes, that leaves a break-up as the surest way to create a more open search market. Europe’s failure to rein in Google after fighting the same battle shows that this is the only sanction that will work, says Thomas Vinje, the lawyer whose complaint prodded Brussels to take on Android’s arrangements.
“The only really effective remedy would be forcing Google to divest Android,” he says. “The separate company wouldn’t have the incentive to leverage Android to benefit search.”
For now, it is simply “too early to know” whether there will be political backing in Washington for breaking up Google or other tech companies, says Roger McNamee, a Silicon Valley investor and former ally of Facebook who has since become one of Big Tech’s harshest critics.
But while the endgame may still be years away, this week’s lawsuit shows that something profound has changed in US antitrust. “The laissez-faire, low-touch policy that has existed for the last 40 years is giving way,” Mr McNamee says. “The question is, how far will they go?”
‘Their hair is on fire’: Trump fans await return to political stage
On his final day in the White House last month, Donald Trump told a small crowd of supporters at Joint Base Andrews, the military airport, that he had no intention of leaving the stage quietly.
“I will always fight for you, I will be watching,” the outgoing president said before boarding Air Force One for the last time. “We will be back in some form . . . we will see you soon.”
Now the 45th US president is set to make a splashy return to the fray on Sunday with a keynote speech at the Conservative Political Action Conference (CPAC), an annual gathering of Republican politicians and media personalities that has become a kind of rock festival for rightwing activists, especially college students.
Ford O’Connell, a Trump supporter and former Republican congressional candidate, said attendees were “dying” to hear from Trump, whom he described as the “leader of the Republican party, even if he is not in office in the traditional sense”.
“These folks are unhappy about how the 2020 elections turned out, but their hair is on fire after a month-and-a-half of the Biden administration,” O’Connell said.
“What they want to hear from Trump is: how do you move forward in 2022 and 2024,” he added, referring to the midterm elections in two years and the next presidential contest.
Trump’s speech will end an unprecedented stretch of near silence for the former reality TV star, who built his political career on regular cable television appearances and constant tweeting. After leaving Washington, he took off for Mar-a-Lago, his resort in Palm Beach, Florida, and has stayed there since, playing golf and shunning the spotlight.
Shorn of his ability to communicate with to his millions of supporters on Twitter and Facebook — which banned him for his role in the deadly January 6 siege on the US Capitol — Trump has made just two notable interventions: he called in to Fox News to eulogise the late rightwing radio host Rush Limbaugh, and released a blistering statement attacking Mitch McConnell, the top Republican in the Senate.
Advisers had encouraged Trump to keep a low profile during his impeachment trial, which ended this month with his acquittal.
Trump will be the final speaker at the four-day conference, which is being held in Orlando, Florida — a city that is just two-and-a-half hours drive from his home and that has looser Covid-19 restrictions than CPAC’s usual location of Washington, DC. The former president is expected to speak in person, although event organisers have not confirmed the details of his speech.
The list of the other CPAC speakers reads like a who’s who of his fiercest defenders, including Florida’s governor, Ron DeSantis, and Republican senators Josh Hawley and Ted Cruz — all of whom have been suggested as possible 2024 contenders that could carry Trump’s torch if he does not run again for president.
Trump has not ruled out another bid for the White House, despite mounting legal troubles, including criminal investigations in New York and Georgia.
His appearance at CPAC — an event dating back to a speech by Ronald Reagan in 1974 that has become increasing populist and Trump-centric in recent years — has also drawn attention to Republican party infighting.
Mike Pence, the former vice-president, who fell out of favour with Trump supporters after he certified Biden’s election win, is not attending the event. Nor is Nikki Haley, the former South Carolina governor who told Politico in an interview that ran earlier this month that Trump could not run for office again because “he’s fallen so far”.
The party’s divisions were laid bare in an awkward encounter on Capitol Hill this week, when reporters asked House Republican leader Kevin McCarthy whether Trump should be speaking at CPAC.
McCarthy replied, “Yes, he should,” before Liz Cheney, one of his deputies, interjected: “I’ve been clear in my views about President Trump . . . following January 6, I don’t believe he should be playing a role in the future of the party or the country.”
After Cheney contradicted him, McCarthy abruptly ended the press conference, saying: “On that high note, thank you very much.”
Cheney was one of 10 House Republicans who joined all House Democrats in voting to impeach Trump last month, and is among a handful of critics on Capitol Hill who have openly castigated the former president despite knowing they run the risk of losing the support of party voters.
While a few elected Republicans, like McConnell, have joined Cheney in rebuking the former president, CPAC will serve as a stark reminder of how popular he remains among party activists.
A Suffolk University poll out this week found 46 per cent of people who voted for Trump last November said they would abandon the GOP if the former president broke away and formed his party. Half of those polled said the Republican party should be “more loyal to Trump”, compared to one in five said the party should be less loyal.
Matt Schlapp, a Trump ally and chairman of the American Conservative Union, the group that organises CPAC, told Fox News this week the Republican establishment should recognise that it must now cater to a much broader church; one made up by the old party faithful and the supporters that Trump brought into the fold with his “Make America Great Again” movement.
“It’s Republicans, it’s conservatives — who are this big, big minority in this country — and then it is these new MAGA supporters,” Schlapp said. “This is now a coalition.”
But more moderate Republicans warn that by sticking with Trump, the party will never be able to win back the centrist conservative and independent voters who abandoned the party at the ballot box in November.
“It is important to remember there is a whole other wing of the party, and virtually no one from that . . . wing is being represented at CPAC,” said Whit Ayres, a veteran GOP pollster. “It is a gathering of the most conservative and some of the most active members of the Republican party, but it represents only a portion of the party.”
McKinsey partners sacrifice leader in ‘ritual cleansing’
The news this week that Kevin Sneader would be McKinsey’s first global managing partner since 1976 not to win a second three-year term stunned many of the consultancy’s partners and influential alumni.
Few could point to any one mis-step that had felled the 54-year-old Scot. “It added up,” one veteran said simply of the litany of reputational crises he had tried to resolve.
But nor did many think that Sven Smit or Bob Sternfels, who beat Sneader to the last round of voting, would represent a cleaner break with the past — or that whoever won the final vote in the next few weeks would face an easier task than he had.
Within days of taking over in 2018, Sneader flew to South Africa to apologise for failures that had embroiled the firm in a corruption scandal. “We came across as arrogant or unaccountable,” he admitted in a speech that began with the word “sorry”.
That set the tone for a tenure defined by the need to make up for other crises that largely predated his promotion, from damaging headlines about McKinsey’s contracts in authoritarian countries to US states’ lawsuits over its work to boost sales of highly addictive opioids.
Speaking to the Financial Times less than two weeks before senior partners voted him out, Sneader said he had focused on making the private firm more transparent, more selective about which clients it took on and better structured to avoid surprises in a global group whose rapid growth had made it more complicated.
According to people who witnessed those efforts, though, pushing them through consumed much of the political capital Sneader needed to win re-election. For some, particularly younger staff, his reforms did not go far enough. For an older group more prominent among the 650 senior partners who vote on their leadership every three years, they went too far.
Sneader’s downfall looked like a case of “the partners not wanting to take the medicine”, one former partner said. Another argued that Sneader’s push for more oversight over partners who prized their freedom had made the firm “too corporate”, while some Sneader allies saw the “protest vote” as a rejection of his reforms rather than a clear mandate for Smit or Sternfels.
Sneader was not helped by the timing of this month’s $574m opioid settlement with 49 US states, added Yale School of Management professor Jeffrey Sonnenfeld, who said that consultants outside the US did not understand why he agreed to the payout.
Sneader might have been able to reassure them in person, but with McKinsey’s frequent-flyers grounded by a pandemic, “there are limits to what you can do with Zoom”.
‘In business, as in poker, there is uncertainty’
Laura Empson, author of Leading Professionals, said one question now was whether the vote against Sneader was “a ritual sacrifice to appease the bad PR” or a sign that McKinsey’s partners were willing to take more radical action.
The run-off between Sternfels and Smit may not resolve that issue, say people who know them both, who note that they are of a similar age to Sneader and members of the leadership council that signed off on his reforms.
Sternfels, a California-born Rhodes scholar who joined McKinsey in 1994, was the runner-up to Sneader in 2018. As head of “client capabilities”, he has a role akin to that of a chief operating officer and is closely associated with the rapid expansion of the firm under Dominic Barton, Sneader’s predecessor.
Based in San Francisco after six years in Johannesburg, the former college water polo player is known as an effective operator and, the second former partner says, “the guy who built the new business models”.
But some of McKinsey’s newer activities have dragged him into controversies: last year, he was called to testify in litigation brought by the restructuring specialist Jay Alix — the founder of rival consultancy AlixPartners — over McKinsey’s disclosures while advising clients in bankruptcy.
When a frustrated judge asked whether he was dealing with “a group of people who are so educated, so arrogant, that they just can’t admit that they’re wrong”, Sternfels apologised, insisting that “we try and not foster arrogance”.
Smit, who joined in 1992 and is based in Amsterdam, is known inside McKinsey as a more cerebral figure. Now co-chairman of the McKinsey Global Institute, the consultancy’s research arm, “there’s not a university campus he couldn’t parachute into and be received as one of the smartest people in the room,” Sonnenfeld said.
The Dutch mechanical engineer earlier ran McKinsey’s western European operations and may attract less support from US peers, but the first former partner describes him as “the conscience of the firm”, who will say no to ideas with which he disagrees. The second thinks he may “take the firm back to more of an old-school McKinsey”.
Smit’s writing on topics from urbanisation to the future of work made him popular with clients and provided a glimpse into his thinking on strategy, which he likened in one report to poker. “In business, as in poker, there is uncertainty, and strategy is about how to deal with it. Accordingly, your goal is to give yourself the best possible odds,” he wrote.
Discontent runs deep
Whether the cards fall for Smit or Sternfels, colleagues past and present question whether either will reverse the reforms that seem to have triggered unrest about Sneader.
“I don’t think Kevin had any choice but to centralise,” said one Sneader ally.
One of the former partners added: “What were the alternatives? It’s a large firm to govern and you do need structures.”
What the election result has already revealed, however, is that discontent with the state McKinsey finds itself in runs deeper than had been obvious outside the firm.
Whichever candidate triumphs, they will need to listen seriously to the concerns of alumni, clients and policymakers and make clear that he plans meaningful cultural reforms, Empson says.
Sneader’s successor will also have to defy the odds in professional services firms, she adds. “Often with partnerships, when something goes wrong, they appoint someone else in reaction to the problem and that isn’t the solution either and they cycle through another round of leaders quickly,” she says: “It’s almost as though they have to go through this ritual cleansing.”
McKinsey, which does not disclose its financial performance, earned annual revenues of $10.5bn in 2019 by Forbes’ estimate. Sonnenfeld points to the irony that the firm, which charges a premium for its services, has stumbled in this way.
“It’s odd that McKinsey doesn’t create the kind of leadership that would thrive in a crisis,” he reflected. Before the succession process starts again in 2024, “they need to go into overdrive on leadership development”.
Investors look to Sunak for clarity on new UK infrastructure bank
Ever since chancellor Rishi Sunak announced the setting up of a UK government infrastructure bank last autumn, investors have wondered what its role will be. Next week, in the Budget, they will get the answer.
The Treasury has only said it will focus on supporting new technologies that are too risky for private finance and would contribute to meeting the government’s target of net zero carbon emissions by 2050. As examples, it gave carbon capture technology and the rollout of a nationwide network of electrical vehicle charging points.
The selection process has just begun for a part-time chair, working two to three days a week, and it is scheduled to open on an interim basis on April 1.
The bank’s creation has prompted a debate about how infrastructure should be funded in the UK, at a time when the government’s finances are stretched and customers are likely to resist tax or bill increases, the means by which many sectors — such as ports, airports, energy, telecoms, water, and electricity — are funded.
Many of these assets in England are owned by sovereign wealth, pension and private equity funds, and regulated by arm’s length bodies, under one of the most privatised infrastructure systems in the world.
Dieter Helm, a utilities specialist at Oxford university, said the bank was “a good idea but it needs scale — a balance sheet and capital funding from the state, in which case you’ve essentially created a new arm of the Treasury”.
“The question is whether this is going to be the primary vehicle through which the government implements infrastructure,” he said.
John Armitt, chair of the National Infrastructure Commission, a government advisory body, suggested it needed an initial £20bn over five years to make an impact and reach projects the market might be unwilling to support.
The institution, which Sunak has said will be based in the north of England as part of the government’s levelling up agenda, will partly replace the low-cost finance provided by the European Investment Bank, which is no longer available since Brexit. But it is unclear if it will be able to match the €118bn the EIB has lent to the UK since 1973.
Sunak has promised that the government, which spends much less than most European states on infrastructure, will spend £600bn over the next five years. But ministers hope that more than half their national infrastructure plan will be paid for by the private sector. However, private finance is generally more expensive than government borrowing and requires taxpayers to underwrite the construction and financial risks.
“The government wants the public to believe that the country can have this wall of private sector investment without higher bills and taxes now but investors will only come if the government will guarantee they will receive a return and it acts as a backstop,” Helm said.
The lockdowns have taken a heavy toll, for example forcing the renationalisation of rail services. At the same time the Eurostar train service, airports and airlines have called for taxpayer bailouts, while the government is also paying for some households’ broadband.
Although the prime minister has in the past year given the go-ahead to some rail and road schemes, including a tunnel under Stonehenge, other projects — including £1bn of rail improvements — have been axed.
Meanwhile, local authorities — which are responsible for urban roads and other key infrastructure — have been forced to shift their limited financial resources to care for the elderly and vulnerable during the pandemic and so want more central government help.
Despite this growing demand, some investors have questioned the need for the new bank, even though they are popular elsewhere — such as Canada, which established one in 2017.
“Given there is at least $200bn of international capital looking for projects in which they can invest, the government has to be careful it doesn’t just crowd out existing finance,” said Lawrence Slade, chief executive of the Global infrastructure Investor Association, which represents private sector investors.
He argued the new bank, which will take over the government’s guarantee scheme, should only take on projects that are “too risky” for institutional investors, pointing out that the Canada Infrastructure Bank was mandated to lose up to C$15bn (£8.45bn) over 10 years. “It’s not yet clear what question the new infrastructure bank is trying to answer,” he said.
Ted Frith, chief operating officer of GLIL Infrastructure, a £2.3bn fund backed by UK pension funds, said the EIB loaned money at competitive rates to projects that also borrowed from capital markets. “This is a global market and there are plenty of alternative sources of finance to replace the EIB,” he said. However, he added that the infrastructure bank could play a role in addressing the shortage of available projects.
While investors will put equity into existing or smaller infrastructure projects — such as an airport extension or a wind farm — they are wary of new projects, according to Richard Abadie, head of infrastructure at consultancy PwC, because the latter carry long term construction risks and do not provide an income stream for several years.
“The NIB can play a role de-risking projects but the main challenge is how we can afford and manage the cost of energy transition, not whether finance is available to bridge the cost,” he said.
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