The uproar between Facebook and Australia over news platforms, and the UK Supreme Court decision in favor of Uber drivers. Both bound by the glacial pace of institutional change.

Both of these cases exhibit the tension that emerges during this period of societal change, and regulation unfit-for-purpose.

 

22 February 2021 (Chania, Crete) – One of the areas I have enjoyed writing about over the last few years has been the battles between fast-moving technologies and the glacial pace of institutional change to those technologies as institutions scramble to establish new rules for the road. Two beautiful examples last week: the uproar between Facebook and Australia, and the UK Supreme Court decision in favor of Uber drivers, rejecting a proposal from the ridesharing firm that the drivers were self-employed entrepreneurs. Both of these cases exhibit the tension that emerges during this period of societal change, and regulation unfit-for-purpose.

 

“Move fast and break things” runs the Silicon Valley aphorism. In Uber’s case, one of those things turned out to be British employment law. Oops. Last week the UK Supreme Court dismissed an appeal by the taxi booking app against a lower court’s judgment that its drivers should be classified as “workers” rather than self-employed. That grants them entitlement to holiday pay, sick pay and the minimum wage. The decision strikes not only at the heart of the company’s business model but the gig economy generally.

The key point made by the Court: Uber drivers work for Uber, not for the passenger, and so need to be treated as part-time workers, not independent contractors (though also not full-time employees). This means they’re eligible for the minimum wage, and the court ruled that time logged into the app and available to take a ride counts as time working for Uber, not just the period of the ride itself. This also covers things like holiday pay and employment taxes, and means Uber will need to charge VAT at 20% on rides (VAT hasn’t been paid so far, since the individual drivers were supposedly liable as contractors, not Uber, and most will be under the £85k threshold). And now UK Inland Revenue is sizing up whether Uber might need to pay this retrospectively – amounting to about £2bn says Deloitte.

Three immediate questions: (1) can Uber be economic on that basis? If not, (2) can it change its model to fit the court’s test of “contractors”? That would require far less power for Uber to cut off bad drivers and passengers, so probably not. And (3) how much does this reshape other “gig economy” companies, such as Deliveroo’s restaurant delivery?

And this is by no means the first case that Uber has lost. In California, courts similarly backed the idea that drivers using the service ought to be classed as employed by the company rather than independent contractors — though this was significantly weakened by an election ballot referendum in November 2020 which pretty much negated those court decisions. In the UK, the question rested on the degree of control the company enjoys over drivers. Lord George Legatt, who wrote the Supreme Court’s unanimous ruling, said “the question  . . .  is not whether the system of control operated by Uber is in its commercial interests, but whether it places drivers in a position of subordination to Uber. It plainly does.”

Gig working mediated through digital platforms has been a thing for nearly a decade. I began writing about it (and Uber specifically) six years ago when I participated in a MIT Technology event on the sharing economy. Everyone was starting to worry about “being Ubered” – the idea that you suddenly wake up to find your legacy business gone, your clients confused, and your brand/business model upended. No sector seemed to be safe from the “digital tsunami” causing it. It was the onslaught of the “on-demand economy”, the best example of “convenience tech” then sweeping our society. The popularity and success of Uber inspired many entrepreneurs to build similar services in many other verticals and to call themselves “Uber of X”. Instacart for groceries, Upcounsel for legal services, and Healthtap for medicine were just a few examples at the time. As I noted in my MIT presentation, this would be the ultimate impact Uber has on society: urging many other businesses/services to think about digital transformation. This would have far more profound implications for the future of “full time employment”.

At the time the most salient point was to look at Uber not as a taxi company but as a logistics software company.  I had been researching the on-demand economy (at the time focused on the legal industry) and found it to be a fascinating global trend that, in many ways, was more advanced outside of the U.S. than inside. China was the best example where, in many densely populated cities like Beijing, you can have almost anything delivered to your front door within an hour. There are unique circumstances that have allowed China to beat the U.S. to this punch, including a few that may never exist at mass in the U.S., a point relevant to any full on-demand economy analysis. But, like Uber, there are services that exist in China to let you track your package in real time, via a car or bike courier, letting you see exactly how long until your noodle soup or fresh groceries arrive at your house.

It was why, as I noted, Uber bid $3 billion for Nokia’s map software was so important. Much of the Nokia value derived from the scarcity of comprehensive mapping technologies, which require significant investment and infrastructure to develop. Called “Here” — which was acquired by Nokia from Navteq in 2008 — it was one of just a handful of companies that sought to create their own mapping systems, together with Google, TomTom, and Apple. It’s extraordinarily difficult to get this type of mapping data. Other than Google, “Here” was one of the few companies that offered this data right now. It was the steroids Uber needed.

But there was the other side. It did not take technology to spur the on-demand economy. It took masses of poor people. The conventional narrative was this: enabled by smartphones, with their GPS chips and internet connections, enterprising young businesses are using technology to connect a vast market willing to pay for convenience with small businesses or people seeking flexible work. That narrative ignored another vital ingredient, without which this new economy would fall apart: inequality.

A good friend, Leo Mirani (now a writer for The Economist), has written extensively about the on-demand/sharing economy and he has noted that:

“there are only two requirements for an on-demand service economy to work, and neither is an iPhone. First, the market being addressed needs to be big enough to scale—food, laundry, taxi rides. Without that, it’s just a concierge service for the rich rather than a disruptive paradigm shift, as a venture capitalist might say. Second, and perhaps more importantly, there needs to be a large enough labor class willing to work at wages that customers consider affordable and that the middlemen consider worthwhile for their profit margins. There is no denying the seductive nature of convenience — or the cold logic of businesses that create new jobs, whatever quality they may be”.

The notion that brilliant young programmers are forging a newfangled “instant gratification” economy is a falsehood. Instead, it is a rerun of the oldest sort of business: middlemen insinuating themselves between buyers and sellers. All that modern technology has done is make it easier, through omnipresent smartphones, to amass a fleet of increasingly desperate job seekers eager to take whatever work they can get. Ask any contract attorney in the e-discovery market. They’ll tell you.

For the UK Uber case my best read has been John Bull who is the editor of London Reconnections. He has been posting a blow-by-blow analysis of the Uber case on his blog and he said back in 2019 “refusing basic benefits to UK Uber drivers was Silicon Valley Bro culture at its worst – a massive own goal”. He wrote detailed features which noted “the legal difference between golf caddies and pole dancers, the worst Uber lawyer in the world and an explanation of the difference between cabs and apps”. He also provided analysis of the economics of the taxi business and Uber’s operational costs.

And in a wonderful favor to all of us, over the weekend he posted all his primary pieces and major thoughts on the UK Uber case is a very long Twitter thread which you can access by clicking here. It is an excellent read.

Being seeped in the legislative incompetence of U.S. institutions, I’ll offer a few thoughts on UK legislative incompetence which marked the Uber case. As you read the UK Supreme Court decision (and you must to get a feel for the morass all Western governments are in; I have a link below) you realize the Court had to step in and make do with existing statute and case law, which pre-date gig working. Whether the UK Parliament will ever step up and actually restate its employment law to reflect modern working arrangements is anybody’s guess. In a Zoom chat yesterday about the UK Uber case (yes, a business Zoom chat on a Sunday) one UK solicitor noted a restatement  of law could still bar Uber’s existing practices. But really – to create a modern, “fit-for-purpose legislation” was beyond the reach of “this Parliament gang”.

Links you’ll find of interest: Links: the Court decision, a very good discussion on Wired, and the Uber lobbying paper on gig economy jobs.

 

Newspaper revenue really started to collapse well over a decade ago, and we’ve been discussing what to do about it for almost as long. None of the issues have changed much: newspapers had an oligopoly of attention and an oligopoly of a certain kind of advertising reach, and the internet removed both of these. People read many more things in many more places and advertisers have many more and better options, and so newspaper ad revenue is down by three quarters or more. Meanwhile, Google and Facebook created huge new ad businesses on the internet, that advertisers prefer, and some newspaper companies think that somehow or other they should get some of that money. That was the case in 2010 or even 2000, and it’s the case now, except that the numbers got worse.

Having been in the media business all of my professional life (even longer: I had a newspaper delivery route when I was a kid, and started my neighborhood’s first newspaper), I have closely followed the uproar between Facebook and Australia – Facebook banning news appearing on its platform in Australia due to a proposed new Australian law which would force Facebook to pay news outlets for content. That law, the “News Media and Digital Platforms Mandatory Bargaining Code”, is a humdinger that most media commentators find “hopeless and muddle-headed”, but if it becomes law social media firms must adhere to.

NOTE: France already has a (slightly less irrational) linking policy which Frederic Filloux explains very well here and other counties are now talking about something similar, and several US states are proposing a “tech giant tax”.

And some of the nonsensical statements: “Facebook has left users without access to the websites of some charities and government health and emergency services”. No, you idiot. Facebook has no power to remove access to any other website beyond those it owns. It took down the Facebook pages of organizations because they had self-identified as news/current events sites. In turn, those Facebook pages are created by the external organizations independent of any action by Facebook, ie the organizations created their own presence on Facebook. Facebook was simply obeying the law. All of the sites which got blocked could be accessed by other means. Try a search engine, dork.

My source for what is happening on the ground in Australia is Joshua Gans who is an economics professor at Melbourne Business School in Australia. His research is focused on competition policy and intellectual property protection. He has written extensively on this new media law, and he has advised many governments and regulators, including the Australian Competition Commission. He was also an advisor to the Australia Digital Platforms Inquiry to frame all of the issues that eventually led to the new law, but was not involved in drafting the new law. He writes:

The entire process has the surely unintended consequence of enhancing the very market power that it was supposedly concerned about. There is no improvement in any competitive outcome whatsoever. It is the codification of an oligarchy. For those outside, notably Australian consumers, it offers nothing. Rather than increase competition, it will cement the oligarchy of digital platforms and media providers.

The broad issue is very simple. News and other content are shared on digital platforms. Some of that is by the content providers themselves posting links on social media. Some of that is by the digital platforms who look for links and post them on their platforms. Some of that is by users who post links to share with others. When that happens there are two beneficiaries. First, the digital platforms themselves who are permitting such links. Second, the content providers who are themselves permitting such links because they want people to click on them. (On the latter point, Google have long given content providers the ability to block their links appearing on that digital platform). What this means is that both beneficiaries are receiving benefits as they both have the ability to veto this practice.

For commercial content providers there are commercial interests in this arrangement. There are also competitive pressures that impact on the incentives to not veto link provision. For example, a news organisation that does not appear on Google may receive no links but because they are competing with others, they may also lose share as a result of that. The same competitive externality can apply to digital platforms. This can give rise to a situation where content providers say, “I may prefer a world where no one I compete with shares links but I have no choice because of competition.” That said, we have to remember that such incentives are often the whole point of competition: we want to apply pressure on content providers to provide content and not have a situation where they may all find it mutually beneficial to cooperate on not doing that.

It is worth emphasising that the Internet — large digital platforms and all — has increased consumer options to choose editorial rules enormously. Previously, only large media organisations could do that and they faced little competition. Now there are many more editors of content on the Internet. Thus, we are in a world where, compared to two decades ago, there is significantly more competition.

Oh, yes. Facebook has “stood on principle” and that is rather amusing. There is something interesting in the way Facebook has been so ruthlessly pragmatic on product (staple a Tiktok clone onto Instagram? Sure! No problem!) but stands on principle with things like news or political ads. It takes big public relations hits in places it could perhaps find a compromise without losing much.

But Australia has embraced the fantasy that somehow Facebook and Google “stole” all the newspapers’ money, and worse, it’s casually overturning one of the most basic principles of the web, as Jimmy Wales and Tim Berners-Lee both pointed out. The reason Facebook and Google don’t pay for links isn’t their market power – no-one on the entire web has ever paid to link. I have no market power on my blog, and I don’t pay to link to scores of other sites. Should I? If so, then this could change a great deal more than newspapers.

As to the proposed Australia code, Gans makes several key points:

Money is what what this is really about. The news organisations want more of it. Large digital platforms have it. It is that simple.

The code is perfectly designed to allow news organisations to get money from digital platforms. It does this by (a) requiring that a digital platform who does not want to pay cannot provide any links to any Australian news. This gives each individual news outlet the power to negotiate as if they can prevent a digital platform from allowing any of them to be linked to (thus, obviating the competitive pressure and so giving them monopoly power); (b) allowing deals to be made that are never authorised by any regulator acting say in the public interest; (c) ensuring that should deals not be freely made, there is a regulatory stop gap; and (d) ensuring that the regulatory stop gap is tilted in favour of an outcome that is in the private interest of one or the other parties.

This last step requires a little explanation. It is not unknown, especially in Australia, for competition policy to run by default. That is, two parties in a competition dispute are encouraged to come together and negotiate a solution and if they fail to do so they are sent to a regulatory process. But normally that regulatory process is designed to drive towards a socially desirable outcome. Also, this mechanism is put in place where it is a denial of competitive outcomes that is the issue and so the regulation will drive towards more competition — it is baked in. (Here is a paper on that from 1999).

So you would think, therefore, that the code would by all about empowering the little guy. Nope. It is, in fact, explicitly about not empowering them. They can be kicked off the platform if the platform does not like being in the news sharing business any more but actually have no role under the code. The media bargaining code is really the Big Media bargaining code. You have to be a large news outlet — in the top 0.1% of outlets banned by Facebook this week — to be empowered. In other words, rather than doing what any person would think is reasonable to promote competition, the code explicitly does not promote competition by keeping the entire thing amongst the already powerful.

What is more, the code obviates any risk to the powerful. The regulatory arbitration that may occur forces the arbitration to select between the two offers of the digital platform and news outlet. It is highly unlikely that either will be in the public interest. Why would they be? We are supposed to have regulators to come up with socially desirable regulators but the code pretty much says, it doesn’t want that. Well may we say WTF!

The new oligarchy

As an economist, making predictions regarding what happens from these sort of policies is my bread and butter. Given the earlier content, a policy is a good one if (a) it will promote entry by more digital platforms and better products from existing ones and/or (b) it will promote entry by more news content providers and better products from existing ones. This policy looks like it will do neither.

First, the whole process requires a digital platform being designated as “responsible” by the Minister — in this case, the Treasurer of Australia. There is no judicial process. There are no real criteria. The Minister can do whatever they want here. But if they do designate a digital platform it may well mean work for them. Suffice it to say, at the moment, everyone seems to think that Google and Facebook will be designated.

Well, not really. First, the Minister is unlikely to designate a platform that no large media organisation has a problem with as this entails work. So if some arrangement can be made that quiets news outlets, then that will save a platform. Second, the Minister cannot designate a platform that doesn’t carry any Australian news. So if a digital platform wants out, it can get out.

We have seen both of these things start to come to pass in the last day — even before the code has been legislated. Google have done deals with some large news outlets and thereby signalled they will do deals with others to ensure they are not designated. That alleviates them from being responsible for all of the other voice outcomes that I argued where likely to be a good thing.

Facebook have opted out of the news content business altogether. They decided it wasn’t worth it them. For now at least. One reason for this is that Australians can still share news from around the world and it turns out that is the majority of the news Australians share! They don’t need to link for local news as they can talk about it anyway.

But there is another part to this. The code, by pushing Facebook to that option, actually could give them license to do so as part of negotiating a better deal. Let’s face it, the best weapon in the arsenal of a firm with market power is exclusion. If, yesterday, Facebook had banned Australian news content with the explicit goal of ensuring a lower price, the ACCC could have prosecuted it under Australian antitrust law for exclusionary conduct. However, the code gives Facebook a license to undertake that very exclusion and argue that it could not have been an exercise of market power as it was simply taking the identified route laid out by the government to not be regulated. Never mind that what this really means is that Facebook (a) has now demonstrated to news outlets how much they need Facebook and (b) that when those news outlets try to negotiate an outcome that allows them back, Facebook can end up getting them to agree to a much lower price and conditions. In other words, the entire process has the surely unintended consequence of enhancing the very market power that it was supposedly concerned about.

All those games aside: where will we end up? We will end up with the large digital platforms doing deals with the largest news outlets. Those deals will be multi-year lump-sum payments which otherwise enable everyone to go about their merry business. There will be no new digital platforms. The existing ones will change nothing. There will be no new content providers. The existing ones will change nothing. But the shareholders of digital platforms will be a few million dollars poorer and the shareholders of large Australian news outlets will be a few million dollars richer. In other words, there is no improvement in any competitive outcome whatsoever. It is the codification of an oligarchy. For those outside, notably Australian consumers, it offers nothing.

It’s worse

The Australian code is being touted as “world-beating.” And the rest of the world is taking notice. I see many folks in Europe, for example, giddy with excitement that someone is seemingly harming Google and Facebook. But these companies face billions of dollars of antitrust fines and costs should antitrust actions around the world be successful. By contrast, that won’t happen in Australia. And you know what is cooler than facing a billion dollar antitrust fine? A million dollar side-payment to silence news opponents.

What is more, this entire deal — and if you can’t imagine the smoke filled rooms with politicians and news outlets dreaming this up then you have no imagination — is basically a simple way of exercising the power large news outlets have over politicians. Why else would this whole arrangement fly though Australian political circles with no criticism from either side of government? Very simple. That criticism would not reach anyone because of the news outlet power. And worse, there may be retribution. What is world-beating from Australia was the invention of news outlet political influence. Now Australia is showing the rest of the world how to do that.

That is what I fear most. This entire cosy arrangement in the name of competition will spur other governments to do the same thing and will, in the process, solidify news outlet power and subvert the policy process that needs to take place to nullify digital platform power. That latter power extends beyond simply news content but a process that harms the efficacy of advertising-based business models on the internet. For the sake of innovation and consumer welfare, it needs to be addressed. But I worry that bad policy will drive out good policy. The apple is just too tempting for the would be oligarchists not to eat.