Time to Regulate the FANG?

By
Branko Terzic

What has been the criteria by which an industry has been regulated as a “public utility” or “public service” company? Could those criteria be applied to internet media giants Facebook, Amazon, Apple, Netflix, and Google (sometimes collectively referred to as FANG or FAANG)?

The answer to the first question was supplied by James C. Bonbright in his classic text Principles of Public Utility Rates, in which he observed that an industry is regulated because regulation is necessary not because the service or product is necessary. The determination of what to regulate “in the public interest” is made by the state legislature or federal Congress. Thus, natural gas and oil pipelines are regulated by the FERC, but existing and proposed carbon dioxide and hydrogen pipelines are not. At least not yet any way.

Thus, state regulatory agencies, usually called public service commissions (PSC) or public utility commissions (PUC) have by direction of state law ,since the late 19th century and early 20th century, regulated electricity, telephone, natural gas utilities as well as taxis, city buses, railroads, trucking, auctioneers and grain elevators.

The legislators for the most part have not regulated hospitals, bakeries, restaurants, car dealers or other clearly necessary industries. Well actually Wisconsin set up a Hospital Rate Setting Commission in the 1980s but wisely included a sunset provision which shut it down a few years later. The problem wasn’t monopoly by hospitals but monopsony, a dominant single customer, in the form of Medicare which set its own rates for payment.

The call for regulation of the FAANG companies has its basis in two facts 1) that each has all or some aspects of a monopoly and 2) that the use of customer data has or could cross some publicly acceptability threshold.

The issue of whether a business is or is not a monopoly can be addressed by legislation or by existing anti-trust law. The law then applies breakup as a solution not public utility regulation.

The issue of use of consumer data by third parties is one familiar to state PSC regulators. Modern electric and natural gas utilities now collect massive amounts of real time data on customer use from “smart” meters connected via the internet to utility company computers. This data can be mined for data and algorithms developed concerning consumer lifestyle, appliance ownership, and even medical insights.

State PSC’s have universally accepted the principle that the consumer is the owner of this data and that utility use will be regulated and limited to uses concerning service safety and reliability.

This is the opposite of the FAANG model where the data is used to develop revenue streams from advertising and marketing programs. The obvious difference between public utilities and social websites is that only the former are granted a monopoly by government. However, critics of social media (FAANG) claim that such companies evolve and grow into monopolies as each becomes dominant in a particular category or service. The Standard Oil Trust, for example, was treated as a monopoly by “trust busters” do to the size, reach, and share of market without a utility like government franchise.

If the public does not call for public service regulation, as occurred when railroads were dominant form of transportation, then I see little support for legislation moving ahead to regulate the FAANG media empires.