How much profit is too much? Tech companies and the surprising truth about their returns

Do tech companies, like Google, Apple and Facebook, make too much money? Some people seem to think so. What these critics might fail to realize is that if these winners in the technology marketplace are treated as “too profitable,” then the next Apple or Google may never appear. Why do critics believe these companies are too profitable? The reasons vary. Professor Clemons of The Wharton School thinks that the profits of companies like Google demonstrate that such companies are monopolies, leading him to the conclusion that they should be subjected to antitrust investigations. Others argue that big tech companies cause income inequality by engaging in stock buybacks, charging exorbitant prices for minor technology upgrades, or exploiting their less-skilled workers and their customers. It is true that familiar tech firms make a lot of money, as do their owners and executives. Apple made headlines when its quarterly profits jumped 38% last year. Three of the most profitable companies in the world in 2014 were information technology companies (Apple, Samsung, and Microsoft). Forbes’ list of the 25 wealthiest people in the United States includes eight from the tech world (Bill Gates, Larry Ellison, Mark Zuckerberg, Larry Page, Sergey Brin, Jeff Bezos, Steve Ballmer, and Michael Dell). Of course, we know about these success stories because they are success stories. The failures tend to go unreported. But do the successful make too much money? The answer depends on whether you want there to be another Apple, Google, etc.

Read “How much profit is too much? Tech companies and the surprising truth about their returns” on AEI.

Applying Title II without embarrassment

Is there a way for the FCC to apply Title II regulations to the Internet without embarrassing itself? Yes, but it would require a change in direction. “Title II” is the section of the Communications Act that was intended to regulate monopoly telephone companies as public utilities. Its roots go far back in history, but an effective starting place for understanding Title II is an 1876 Supreme Court case, Munn v. Illinois. The case involved grain elevators that the court found were situated uniquely between a river harbor and railroad tracks, giving the elevators monopoly control over grain movements from farmers in certain Midwestern states to markets on the East coast. The elevators extracted economic rent to such an extent that they seriously hindered the agricultural economies in the affected areas.

Read “Applying Title II without embarrassment” on AEI.

The importance of regulatory humility

It’s hard to be humble. In fact, most of us fail at it systematically: 93% of drivers believe they have above-average driving abilities. 94% of professors believe they are above average relative to their peers. 75% of competitive chess players believe they are underrated even though the rating system is demonstrably accurate and chess players tend to know their ratings. 66% of people believe they have an above-average sense of humor. Curiously this overconfidence is negatively correlated with ability (that is, the lower our ability, the more optimistic we tend to be about our abilities) and positively correlated with news consumption (that is, the more news we consume, the more we overestimate how much we know). This illusion that we know more than we really do has frightening implications for regulators who seem to be asked to make ever more detailed assessments and decisions. As FTC Commissioner Maureen Ohlhausen – who will be addressing regulatory humility at an event at AEI tomorrow – recently wrote, government officials “should resist the urge to simplify, make every effort to tolerate complexity, and develop institutions that are robust in the face of complex and rapidly changing phenomena. Unfortunately, regulation too often is a procrustean bed for the regulated industry, due to the limits of regulators’ knowledge and foresight.” “Procrustean bed” is a reference to Greek mythology, in which Procrustes physically forced his guests to fit his bed by stretching those who were short and amputating limbs from those who were tall.

Read “The importance of regulatory humility” on AEI.

What Google Fiber is teaching us about vertical integration

Google is becoming a major investor in fiber optics and other networking technologies, and in doing so is demonstrating the value of vertical integration in information technology. Google’s most well-known fiber initiative is Google Fiber, which launched its first project in Kansas City in 2012 and, according to the company, recently completed 7000 miles of fiber investment in Kansas and Missouri. Google Fiber focuses on the consumer market and offers high connection speeds, integrated Wi-Fi, content recording and storage, and devices. Since the initial launch in 2012, Google Fiber has gone live in Austin and Provo, announced launches in four more metro areas encompassing 18 cities, and revealed that it is exploring expansions into Phoenix, Portland, Salt Lake City, San Antonio and San Jose.

Read “What Google Fiber is teaching us about vertical integration” on AEI.