Facebook: What is the Australian law? And why does FB keep getting caught for fraud?

Facebook is engaged in a giant crime spree to steal ad money. A battle over speech in Australia shows what top executives really think of the rule of law.

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Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

On Wednesday of this week, Facebook blocked the nation of Australia from sharing news on its dominant platform, censoring an entire continent. The corporation is reacting to a law mandating dominant digital platforms negotiate terms with publishers over news distribution. On Thursday, unsealed court California documents revealing that the firm has been defrauding advertisers, with the knowledge and participation of Sheryl Sandberg.

Today I’ll explain how these events are connected. I’ll describe what’s in the controversial Australian law and how it works, and why Biden’s Department of Justice should probably be investigating Sheryl Sandberg for fraud.

In other words, what happens when Facebook’s crime spree meets the rule of law?

Also…

• A reader shares a story of how Logitech monopolized universal remotes with its Harmony line, and is now going to shut down the entire industry because it doesn’t feel like competing with voice assistants.

• Another reader who does live jazz music recordings got blocked from sharing them on Spotify’s podcast service with the note from the audio giant: “Our podcast service is not intended to be a music distribution tool.” Hmmm…

• What does hyper-aggressive semiconductor monopolist Nvidia want?

• Odds and ends on private equity, supermarket consolidation, and airline regulation.

And now…

The Latest Facebook Crime

On Thursday night, a judge allowed the unsealing of legal documents showing that Facebook has been engaged in fraud against advertisers. The firm told advertisers that its ads reach many more people than they actually do, inducing ad buyers to spend more money on the platform than they otherwise would have. The documents revealed that Facebook COO Sheryl Sandberg directly oversaw the alleged fraud for years.

The scheme was simple. Facebook deceived advertisers by pretending that fake accounts represented real people, because ad buyers choose to spend on ad campaigns based on where they think their customers are. Former employees noted, that the corporation didn’t care about the accuracy of numbers as long as the ad money was coming in. Facebook, they said, “did not give a shit.”

The inflated statistics sometimes led to outlandish results. For instance, Facebook told advertisers that its services had a potential reach of 100 million 18 to 34-year-olds in the United States, even though there are only 76 million people in that demographic. After employees proposed a fix to make the numbers honest, the corporation rejected the idea, noting that “the “revenue impact” for Facebook would be “significant.” One Facebook employee wrote, “My question lately is: how long can we get away with the reach overestimation?”

According to these documents, Sandberg aggressively managed public communications over how to talk to advertisers about the inflated statistics, and Facebook is now fighting against her being interviewed by lawyers in a class action lawsuit alleging fraud.

Facebook’s Decade of Crime

Antitrust law can be complex, but these actions aren’t. It’s just stealing. Facebook wants people to see this suit as just some disgruntled media outlets or advertisers, and some frustrated ex-employees angry at a successful business. The problem, for Facebook, is that this isn’t a one-off. It is the THIRD time Facebook has been caught for lying to advertisers in order to steal their money.

The first time was the famous ‘pivot to video’ moment when Facebook lied to advertisers and media outlets about video metrics, causing media outlets to rearrange their business models and then lay off journalists. Facebook eventually paid off some advertiser to go away after they sued, but the scandal also came up in the House Antitrust Subcommittee hearing, when Congressman Jerry Nadler confronted Mark Zuckerberg with it. Then, late last year, Facebook told advertisers in November it had been over-estimating the performance of their ad campaigns. It had known about the lie for two months before telling the defrauded parties, and, chalking it up to a technical glitch, gave advertisers not money back but coupons for Facebook services.

There’s more bad behavior. In 2018, there was the Cambridge Analytica Federal Trade Commission settlement where Facebook paid a $5 billion fine for mishandling customer data, which was itself a response to a 2011 consent decree over Facebook mishandling customer data. And guess what? Facebook has likely violated the 2018 decree already! The New York Department of Financial Services just criticized the firm for “collecting unauthorized data about people’s medical conditions, religious practices and finances” and then using this data to engage in targeted advertising. So that’s a violation of a consent decree over data fraud that was reached as a result of an earlier consent decree reached over data fraud.

I’ve been saying for awhile that big tech executives need to face handcuffs, not just civil penalties. And this attitude is becoming mainstream. After the lax response to the financial crisis under Obama, anger over corporate repeat criminality has become increasingly widespread among Democrats. For example, FTC Commissioner Rohit Chopra in 2018 noted in an internal memo to the enforcement agency that corporations who repeatedly break the law should be restructured and their executives held personally accountable, with the famous line “FTC orders are not suggestions.”

This latest fraud is a good example. Facebook commits crime after crime after crime, often overseen by top officials concerned about revenue impacts. After the first couple of times, it’s reasonable to criticize Facebook. But now, the question is simply, where are the cops? If no one will stop firms from committing crimes, then the result is the rise of corporate warlords like Facebook, who just bludgeon and steal without consequence. These firms will in turn finance public relations specialists who make arguments about how all of this theft is the result of technology, that the ‘internet killed media,’ as if lying to advertisers so you can steal their money is magic sorcery.

There’s one other dynamic here in the public debate. The reason Facebook’s arguments have currency is because its victims - seeing no action from law enforcers against this crime spree - are afraid of fighting back. Facebook and Google are dominant providers of services, revenue, and ad inventory to publishers, ad buyers, and advertising agencies. Their power is immense; Facebook uses 400 law firms, simply to ensure that every firm is conflicted out of representing any opponents who might sue them. Google and Facebook can withhold services or revenue and pretty much destroy anyone in publishing or ad buying at this point, and then hire corrupt economists to explain to credulous enforcers that blackmail is efficient.

Digiday reported on fear in the publishing industry over the behavior of Google and Facebook, reporting that few will go on the record critical of the monopolists for fear they will be downgraded in search results or lose ad deals. “Google and Facebook have such power that I’m afraid of repercussions, so we play nice with them,” said one anonymous publishing executive. As a result, the armies of Facebook PR people, often laundered through fancy schools and prestigious media outlets, have little public opposition from those industries most immediately affected by the firm.

The rising anti-monopoly movement, inchoate but increasingly influential, is a cultural response to this lawlessness. And this movement isn’t just U.S. based, it is global. And it is getting results. Finally, this week, a big tech oligarch finally met the rule of law.

Which brings me to Australia.

An Unstoppable Force Meets an Australian Object

Facebook stopped allowing the sharing of news in Australia, after the government put forward a law requiring the firm to negotiate with news publishers over the terms of content distribution. The firm also stopped letting Australian publishers be shared anywhere in the world on Facebook. Facebook also did their usual ‘move fast and break things,’ accidentally censoring much of the South Pacific, but the result is that when you try to post Australian news, this is the message you get.

There’s a lot of noise about this law, as one might expect. Pro-Facebook libertarians are saying it’s a “link tax” written by Luddites, and some prominent fancy people are even saying it will break the internet, while news publishers are saying it’s about time for this kind of law. This law does matters, because unlike Europe’s constant noisy pretend attempts to address big tech, this is the first time we’re really seeing a nation actually attempt to force the platforms do something they don’t want to do. And fortunately, we don’t have to trust any of these people in the debate, and we can read the law itself, or read the explanatory document the Australian legislature provides to explain it.

As longtime readers know, I’ve been paying close attention to Australia’s antitrust policies for years, because the Australian Competition and Consumer Commission head Rod Sims has been on the leading edge of investigating the privacy, data practices, and market power of big tech platforms. This law comes out of the Digital Markets Inquiry launched in 2017; it is one of the first recommendations by the ACCC on addressing big tech, but it certainly isn’t the last one. (Here, for instance, is the ACCC’s groundbreaking report on the complex adtech supply chain released late last month, which built on the Texas AG antitrust case against Google. We can expect Australia to lead in this realm as well.)

The law is designed to target a specific problem, which is the death of newspapers resulting from the monopolization of the Australian advertising market. Australia has lost 15% of its newspapers since 2008, and dozens of small cities now have no newspaper coverage. This graph from the ACCC digital platform inquiry shows part of the monopoly problem driving the collapse.

What Does This Australian Law Do?

The law says that if you are a dominant digital platform, then you have an obligation to engage in good faith bargaining with news outlets whose content you distribute over the terms of that distribution. The law only applies if there is a bargaining imbalance with media outlets. So this isn’t a tax, it is an anti-monopoly law.

Much of the bill has to do with designating who gets to be a news publisher. The bill says pure opinion stuff doesn't count, and neither does pure sports and entertainment. Media outlets have to register with the government to get bargaining rights. The bill mandates that digital platforms tell media outlets in advance what data they collect and when they are going to change important algorithms on which those outlets rely, like if they are going to change referral traffic in a way that would eliminate more than 20% of the audience and revenue. That’s totally reasonable, basically saying Facebook has to give you two weeks notice if it is going to destroy your business.

The law also has non-discrimination and anti-retaliation provisions, to make sure that dominant digital platforms don’t use fear to bully publishers. Platforms have to treat non-news entities like news entities in how they distribute content, and they can’t retaliate if a news entity chooses to register and demand bargaining rights.

Once you are a news outlet, you get certain rights. Platforms have to tell news outlets about the data they collect - they don't have to share the data, but they have to explain what they are collecting. And during bargaining, parties have to give information to one another showing how they make money, so there’s no opaque hiding of how one uses data to profit. This is a transparency measure to force big tech to show how they price and allocate advertising (which is something Facebook constantly seems to be using to defraud advertisers.)

News outlets and platforms can negotiate however they want, for a short period of time. The platform can pay based on traffic or simply cover a percentage of news gathering costs. But only, and this is the key point, if there is a bargaining imbalance, aka if the platform is taking all the ad revenue. If a digital platform doesn’t have bargaining power against media outlets, aka it’s not dominant, then there is no requirement for any sort of negotiations.

What happens if negotiations fail? If a dominant digital platform and media outlet can't reach a deal, then an arbitrator steps in. The arbitrator must consider the the value that both the platform and news outlet provide, as well as the bargaining imbalance between them, meaning that if, as Facebook claims, media outlets offer zero value to platforms, then it can simply prove this in arbitration and pay nothing. The arbitrator doesn’t micro-manage the process, but does ‘baseball style’ arbitration, meaning both sides give an offer, and the arbitrator picks one of them. This kind of arbitration is both faster and less intrusive that standard government regulation, and creates the incentive for both sides to offer non-extreme proposals they can live with, for fear the arbitrator will simply pick the other side if they suggest something outlandish.

The idea behind the law is to mimic a healthy market, where there is transparency of data and a robust set of buyers and sellers instead of a few dominant platforms. As the legislature notes, "This allows the panel, in making their determination, to consider the outcome of a hypothetical scenario where commercial negotiations take place in the absence of the bargaining power imbalance." A better solution would be to create a real market, to break up these firms, like Newscorp recommended and the ACCC rejected (so much for Murdoch bogeyman). But Australia rejected that approach, probably because it’s a small country without the leverage to force a break-up.

This law wouldn’t work as written in America, because we wouldn’t want publishers to register with the government, but it’s a fairly reasonable conceptualization of how to organize an anti-monopoly provision in a small country without the ability to break up the foreign tech behemoths its citizens use.

(UPDATE: The big problems with this legislation are (1) government licensing of new gathering (2) min revenue requirement of $150k makes it hard to start new news outlets and (3) public broadcasters not included, though News Corp lobbied for them to be included while other media barons lobbied otherwise.)

In other words, despite what Facebook’s PR armies are saying, it isn’t a link tax, it is an anti-monopoly law that Facebook is opposing because the law will undermine the firm’s ability to monopolize the ad market and force transparency in how the firm gathers and manages its vast data horde. In some ways, it is an existential threat to the company (which I think might be hiding some things about its business model, considering its revenue is growing at 20-30% a year even though its user base in the U.S. and Europe where it makes most of its money is flat).

Facebook’s response to this law was to flex some serious muscles, and block the sharing of news in Australia on its platform. Doing so was a disaster, at least PR-wise, because it revealed how much power Facebook really has. The social media monopolist lost credibility globally, with Canadian and UK politicians attacking the firm as a bad faith actor. Facebook even lost American support; as late as last month, the United States Trade Representative was supporting the company against Australia’s law, but the American government seems to have switched course, and is now neutral. It’s now only a matter of time before Facebook is broken up and regulated.

The details of this law are interesting, but the real point of what Australia is doing is to that it is asserting the rule of law against a monopolist. In response, Facebook is saying, we are more powerful than your democratic officials.

Freedom from Fear

So far, I’ve only discussed Facebook, and not the other behemoth, Google. Google has escaped notice, because the firm simply decided to cut deals with Australian news outlets to pay them money. It’s worth noting that Google did in fact threaten to shut down their search engine in Australia, but Facebook’s behavior has been so gross that Google comes out of this looking, relatively speaking, like the good guy.

Still, Google is not off the hook. It is likely a massive thief of publishing revenue, which we know because a few years ago, when it was temporarily blocked from monopolizing the software underpinning how people buy and sell ads, the price publishers received for their ads jumped by 40%.

My guess is that Google is costing publishers in the U.S. between $8B to $30B a year, in, as the Texas Attorney General put it, “cold hard cash,” all because of how it manipulates the technology that underlies the ad market. But that analysis is for another day, and is complicated. What Facebook has done is not. It’s crime and bullying.

Today we know two things. Mark Zuckerberg’s firm stole money from advertisers with the knowledge of Sheryl Sandberg, and was caught publicly for doing so, for the third time. And two, Mark Zuckerberg’s firm decided to censor the nation of Australia rather than submit to a law that checks the corporation’s monopoly power.

These are related. No one has yet stopped Zuckerberg from repeated flagrant violations of the law, but American capital markets have rewarded him with a net worth of over $100 billion. So he has rightfully concluded that he might as well openly challenge the power of Australia to regulate its own media.

Still, Zuckerberg and Sandberg aren’t Gods or monsters. They are badly-brought up pets, biting and snarling because that’s what gets them treats. It’s not hard to fix this situation, just push back. Australia’s Rod Sims has shown all of us how.

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• Logitech Shows Monopolies Are Not Efficient: I got this fascinating note on the rumor that Logitech will soon be shutting down its Harmony universal remote control line, largely because it doesn’t want to defend its monopoly position by innovating.

Hi Matt,

Big fan. Just wanted to point your attention toward another monopoly that has gotten a bit of a pass for many years because its products appear decent enough: Logitech’s Harmony remotes. These remotes, if you are unaware, can control a massive array of A/V devices including TVs, cable boxes, disc players, streaming boxes, amplifiers, and more recently IoT devices like lights, blinds, and plugs. Their market dominance has been ironclad because of their database: they have infrared codes for hundreds of thousands of devices, from brand-name TVs to random HDMI doodads on page fourteen of Amazon. For obvious reasons, they haven’t open-sourced this database.

From the time Logitech snapped up Harmony (2004) until recently, no one has been that mad about this because their products appear decent enough. The hardware has always been slick, and while the software is atrocious—buggy as all hell and insecure to boot—most people who aren’t professional installers only see the software once or twice. As a professional installer myself, however, I can tell you that the polished veneer is mere microns thick, and any sustained attention reveals shoddy workmanship in every part of the software. But alternatives to Harmony remotes, when they are needed, are few, far between, and usually either expensive or terrible (or both). Our primary option is Control4, a home automation system that is just as proprietary, more expensive, less polished, and less reliable. Or remotes from a company called URC (itself a seeming monopoly in a sense, as they make the remotes for every cable provider around here), but their general-purpose universal remotes are straight out of 2003, aesthetically (and, possibly, literally).

So we stuck with Harmony, until now. Logitech now claims privately via reps that Harmony can no longer compete in the marketplace it dominates, because their remotes are locked out of voice assistant functionality (Alexa, Google Assistant, Siri), and so have decided to shut down the Harmony lineup entirely. My concerns with this are manifold. Firstly, I don’t buy their excuse—if Harmony were its own company, I highly doubt they’d decide to shut down due to abject hopelessness. Secondly, by shutting down, and probably destroying their database in the first place, Logitech may be singlehandedly eliminating the universal remote business. Genuinely, there is no alternative. Our advice to customers has been to redesign their systems so that they no longer need a universal remote. It’s insane. And thirdly, because much of the Harmony software is cloud-based, countless systems may become inoperable, or impossible to update as new devices (e.g. the PS5) aren’t added to the database, or else vulnerable to hacking as security issues go unpatched.

Essentially, Logitech was allowed to buy up a competing company, use their brand to dominate the market for over a decade, until finally they faced other monopolists (Amazon, Apple, Google) and decided to give up and shut down, leaving customers, to borrow a recently-overworked phrase, holding the bag. Pretty well every step of it has been infuriating to watch.

• Spotify Says No Music Podcasts: And this is a good note from a reader on Spotify’s dominance in podcasting, which is leading to the marginalization of jazz musicians.

Here's a fun story for you from the podcast world. I produce and fund a live jazz performance podcast from a non-profit based organization. Essentially, we take live recordings of artists performing jazz music, edit them down and both broadcast them on radio stations and provide expanded versions as a Podcast.

We get permission from the artists, permission from the artist's label and fully list the composer/lyricist of each song in the notes of the podcasts in addition to the legal notes that we have permission from the artists to air the podcast. We also retain the artists permission on file.

We get a notice today from our podcast provider (libsyn) that Spotify has taken us down.

This morning, we get the following notice:

From: Spotify Podcast Takedown <[email protected]>

Subject: Podcast takedown notice

Date:

Hi,

We have removed some shows from the Spotify podcast service. Please check your spreadsheet for details, or reply if you’re not able to find it. We will be updating these sheets regularly. Regardless of the licensing status of the music, our podcast service is not intended to be a music distribution tool. Please see our FAQ for more information.

In an effort to enable all creative artists the opportunity to live off their art, creators who wish to share their music on Spotify should use a music distributor. Creators can check out Spotify for Artists to get started.

Best regards,

Spotify

As we've taken great pains to ensure everything we issue is podsafe, this is a curious response, until, and I think you see it, you reach the following line:

Regardless of the licensing status of the music, our podcast service is not intended to be a music distribution tool.

I mean, I guess they have the right to do this, but what this really means is "we don't want anyone who would compete against our music streams."

And I suppose that's their right, but it seems duplicitous in light of what the podcast platform was widely acknowledged as being able to do prior to them getting into the distribution business to begin with.

Get to a monopolization point and this could be a real problem, you know?

Love your work as always. Keep fighting the good fight.

Hopefully, our next antitrust enforcement regime will begin paying attention to this kind of lawless behavior.

• I am learning more about semiconductors, because it’s one of the most interesting industrial segments in the world, not just because of the dynamics of the business, but because it is a flashpoint that could lead to war between the U.S. and China. (I found this podcast episode of the Knowledge Project with Jon Bathgate and Brinton Johns to be a great explainer.)

  At any rate, one of the key firms is Nvidia, a firm that started producing graphics chips for gamers, but eventually found that its architectural choices also made its products suitable for artificial intelligence and crypto-currency development. It has become one of the most important firms in the industry, with a market cap greater than Intel’s. However, unlike Intel, the corporation doesn’t produce its own chips, but relies on Taiwan Semiconductor, which is overloaded with orders. Nvidia is dealing with a chip shortage by intentionally crippling its own chips so they are less attractive to crypto-currency miners and can be reserved for gamers.
  
  All of this is being done in the context of a major merger in the industry. Nvidia is now attempting to buy ARM, which has a dominant position in licensing chip designs for low power devices, used in mobile phones, cars, and increasingly many other industrial products. ARM is known as a neutral chip design platform, the ‘Switzerland’ of chips, and licenses to all comers. This is terrifying the industry, because Nvidia has a reputation as a hostile and ruthless competitor that uses every weapon in its arsenal to foreclose competition. Google, Microsoft, and Qualcomm are coming out in opposition to the deal, due to fear that Nvidia will leverage ARM’s dominant position in chip licensing into market power in new semiconductor segments.

  Stay tuned.

• Private equity funds seem to lie about their returns when trying to raise money from investors. What a shocker.

• Independent grocery chains are merging, and saying the quiet part out loud - they are simply responding to the rise of goliaths everywhere else in the economy.

• The Department of Transportation is reexamining the American-JetBlue alliance, which is intended to box out competition in the northeast of the United States. Baby steps for enforcers.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. I’m still looking for help understanding the market for guns and ammunition, particularly primers and the shortage of ammo gun owners are experiencing.