[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
ONLINE PLATFORMS AND MARKET POWER,
PART 5: COMPETITORS IN THE DIGITAL ECONOMY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND
ADMINISTRATIVE LAW
of the
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 17, 2020
__________
Serial No. 116-70
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available http://judiciary.house.gov or www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
40-788 WASHINGTON : 2020
COMMITTEE ON THE JUDICIARY
JERROLD NADLER, New York, Chairman
ZOE LOFGREN, California DOUG COLLINS, Georgia,
SHEILA JACKSON LEE, Texas Ranking Member
STEVE COHEN, Tennessee F. JAMES SENSENBRENNER, Jr.,
HENRY C. ``HANK'' JOHNSON, Jr., Wisconsin
Georgia STEVE CHABOT, Ohio
THEODORE E. DEUTCH, Florida LOUIE GOHMERT, Texas
KAREN BASS, California JIM JORDAN, Ohio
CEDRIC L. RICHMOND, Louisiana KEN BUCK, Colorado
HAKEEM S. JEFFRIES, New York JOHN RATCLIFFE, Texas
DAVID N. CICILLINE, Rhode Island MARTHA ROBY, Alabama
ERIC SWALWELL, California MATT GAETZ, Florida
TED LIEU, California MIKE JOHNSON, Louisiana
JAMIE RASKIN, Maryland ANDY BIGGS, Arizona
PRAMILA JAYAPAL, Washington TOM McCLINTOCK, California
VAL BUTLER DEMINGS, Florida DEBBIE LESKO, Arizona
J. LUIS CORREA, California GUY RESCHENTHALER, Pennsylvania
MARY GAY SCANLON, Pennsylvania, BEN CLINE, Virginia
Vice-Chair KELLY ARMSTRONG, North Dakota
SYLVIA R. GARCIA, Texas W. GREGORY STEUBE, Florida
JOE NEGUSE, Colorado
LUCY McBATH, Georgia
GREG STANTON, Arizona
MADELEINE DEAN, Pennsylvania
DEBBIE MUCARSEL-POWELL, Florida
VERONICA ESCOBAR, Texas
Perry Apelbaum, Majority Staff Director & Chief Counsel
Brendan Belair, Minority Staff Director
------
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND
ADMINISTRATIVE LAW
DAVID N. CICILLINE, Rhode Island, Chair
JOE NEGUSE, Colorado, Vice-Chair
HENRY C. ``HANK'' JOHNSON, Jr., F. JAMES SENSENBRENNER, Jr.,
Georgia Wisconsin, Ranking Member
JAMIE RASKIN, Maryland KEN BUCK, Colorado
PRAMILA JAYAPAL, Washington MATT GAETZ, Florida
VAL BUTLER DEMINGS, Florida KELLY ARMSTRONG, North Dakota
MARY GAY SCANLON, Pennsylvania W. GREGORY STEUBE, Florida
LUCY McBATH, Georgia
Slade Bond, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
JANUARY 17, 2020
OPENING STATEMENTS
Page
Honorable David Cicilline, Chairman, Subcommittee on Antitrust,
Commercial and Administrative Law.............................. 1
The Honorable Ken Buck, Member, Subcommittee on Antitrust,
Commercial and Administrative Law.............................. 3
WITNESSES
Patrick Spence, Chief Executive Officer, Sonos, Inc.
Oral Testimony............................................... 6
Prepared Testimony........................................... 9
David Barnett, Chief Executive Officer, PopSockets LLC
Oral Testimony............................................... 16
Prepared Testimony........................................... 18
David Heinemeier Hansson, Chief Technology Officer, Basecamp,
LLC.
Oral Testimony............................................... 23
Prepared Testimony........................................... 26
Kirsten Daru, General Counsel, Tile, Inc.
Oral Testimony............................................... 39
Prepared Testimony........................................... 41
APPENDIX
Responses to Questions for the Record from Patrick Spence, Chief
Executive Officer, Sonos....................................... 73
Statement for the Record from Patrick Spence, Chief Executive
Officer, Sonos................................................. 77
Responses to Questions for the Record from David Barnett, Chief
Executive Officer, PopSockets.................................. 79
Responses to Questions for the Record from Kirsten Daru, General
Counsel, Tile.................................................. 83
Letter from Kyle Andeer, Vice President, Corporate Law and Chief
Compliance Officer, Apple Inc.................................. 122
Statement for the Record from Jeff Haley, former President,
OralHealth Corporation......................................... 126
ONLINE PLATFORMS AND MARKET POWER,
PART 5: COMPETITORS IN THE DIGITAL ECONOMY
----------
FRIDAY, JANUARY 17, 2020
House of Representatives
Subcommittee on Antitrust, Commercial,
and Administrative Law
Committee on the Judiciary
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
University of Colorado Law School, 2450 Kittredge Loop Road,
Boulder, Colorado, Hon. David Cicilline [chairman of the
subcommittee] presiding.
Present: Representatives Cicilline, Neguse, and Buck.
Also Present: Representative Perlmutter.
Staff present: Amanda Lewis, Counsel; Joseph Van Wye,
Professional Staff Member; Lina Khan, Counsel; and Slade Bond,
Chief Counsel.
Mr. Cicilline. The subcommittee will come to order.
Without objection, the chair is authorized to declare
recesses at any time. We welcome everyone to today's hearing,
``Online Platforms and Market Power, Part 5: Competitors in a
Digital Economy.'' I now recognize myself for an opening
statement.
It is a pleasure to be here at the University of Colorado
Law School for today's hearing, the fifth in the subcommittee's
series on online platforms and market power and the
subcommittee's first field hearing in more than a decade.
In July, the subcommittee received testimony from
executives representing the four dominant online platforms--
Google, Amazon, Facebook, and Apple--along with a panel of
leading experts about the effective market power in the digital
economy on innovation and entrepreneurship.
Through both that hearing and other parts of the
subcommittee's investigation it has become clear these firms
have tremendous power as gatekeepers to shape and control
commerce online.
Stacy Mitchell, the director of the Institute for Local
Self-Reliance, testified, and I quote, ``A growing share of our
commerce now flows through a handful of digital platforms.
These powerful gatekeepers not only control market access but
also directly compete with the businesses that depend on
them,'' end quote.
It is apparent that the dominant platforms are increasingly
using their gatekeeper power in abusive and coercive ways.
Because these platforms function as bottlenecks for online
commerce, they are able to set the terms and conditions of
competition, giving them immense power to pick winners and
losers in the online economy.
It is far too common to hear horror stories from startups
and other small businesses about how a dominant platform's
abrupt changes have destroyed their business.
A single sudden change of algorithms, a software update, or
new product design can be disastrous for the millions of
companies that depend on these platforms to get to market.
And because these platforms actively compete with the very
business they rely on--that rely on them, what may be portrayed
as an innocent change could very well be a deliberate strategy
to crush any existing potential competition.
Companies across the online ecosystem both large and small
have found themselves dependent on the arbitrary whim of these
platform giants, one algorithm tweak away from ruin.
In many cases, there is little notice or any real recourse
for the companies that are disadvantaged by the platforms'
conduct.
Because their decisions are largely unaccountable, opaque,
and result in sweeping consequences, the dominant platforms
effectively serve as private regulators.
The dominant platforms can also use their gatekeeper power
to dictate anti-competitive take it or leave it contract terms.
Startups and small businesses have had to sign away certain
basic rights or even hand over valuable data to a competitor as
the price of accessing their customers through the platform.
Such coercive terms of doing business would undoubtedly be
absent in a competitive marketplace. For locally-owned
businesses that are the economic lifeblood of their communities
as both job creators and engines of prosperity, this gatekeeper
power and how the platforms are exercising it is of tremendous
concern.
Many small businesses are forced to rely on dominant
platforms to advertise or sell their products and services
online. In many cases, they do not have an alternative.
Earlier this week, my staff spoke with an online seller
whose entire economic livelihood and his family's health has
been jeopardized by one of the dominant platform's sudden,
arbitrary, and reckless decision to suspend his business and
block access to his inventory.
Not only does this dynamic threaten ongoing competition but
it also has lasting effects as a powerful disincentive for new
entrants to try and compete with powerful incumbents.
As Patrick Spence, the CEO of Sonos, will testify today,
``This shuttering of competition online dries up the venture
capital new companies need to develop the next inventions and
to bring them to market.
Venture capital firms are well aware of the kill zone that
surrounds startups that pass within striking distance of the
dominant platforms. They stay away from those investments,''
end quote.
Today, we will hear from the CEOs, founders, and senior
executives of several dynamic and innovative companies that
must confront this economic nightmare.
Each of the innovative companies represented here today--
Sonos, PopSockets, Tile, and Basecamp--are American success
stories. I applaud them for their courage to share their
testimony in the face of potential retaliation by the dominant
platforms.
We have been in touch with a number of companies with
similar perspectives that understandably will not testify due
to this very real concern.
With that, I want to thank the esteemed panel of witnesses
for joining us today. I also want to thank Subcommittee Vice
Chair Congressman Neguse. He represents Boulder, Colorado, and
advocated strongly that the field hearing be in his district.
I also want to thank Dean Jim Anaya and all of the hard
working professors and professional staff at Colorado Law who
assisted us in having this hearing today.
I thank them for hosting, and I particularly want to
welcome and thank Congressman Ken Buck from Colorado who is an
esteemed member of the subcommittee who has been very active in
this investigation and the representative of Colorado's 4th
Congressional District.
And I would now like to recognize him for the purposes of
making an opening statement.
Mr. Buck. Thank you, Mr. Chairman, and I very much
appreciate you holding this hearing in God's country and
joining here in God's country for the hearing, and I am very
appreciative that my friends, Congressman Neguse and
Congressman Perlmutter, have left the swamp with me last night
on a plane to get here, and we are here safely and working on
this important issue.
Today, as we continue our oversight of the state of
competition in the tech center, our focus is shifting from
looking at how larger digital platforms operate to hearing what
it is like to compete with these platforms.
Each of our panelists represent companies that are in the
arena innovating and competing daily to deliver value to
customers. They have real skin in the game and we look forward
to learning from their unique perspectives.
To begin, I want to review the principles that I think
Congress should focus on in our inquiry.
First, innovation and competition in the tech center have
produced enormous value for consumers. We should not forget
about those benefits as we consider the current state of
competition in the tech center.
Second, any legislative proposals that emerge from our
inquiry should be consistent with maintaining a free and
competitive marketplace.
Proposals to construct broad new regulatory regimes must be
viewed with caution. Experience has shown that burdensome
regulations often miss the mark.
Regulations often come too late to resolve anything and
this approach is often less efficient than the free market.
Regulators are often not nimble enough to keep pace with a
dynamic marketplace so that the regulatory regime has the
effect of entrenching incumbents rather than encouraging
competition.
Third, big is not necessarily bad. Anti-trust laws do not
exist to punish success but to promote competition. Congress
should help foster an atmosphere where ideas flourish and
startups can innovate fairly, fairly compete, grow, and
succeed.
With these principles in mind, over the past few years we
have seen the largest platforms continue to expand and increase
their market power.
The increased concentration and market power of a small
group of companies has raised concerns from a diverse array of
constituencies about how that power is being used.
This includes domestic and international regulators and
enforcement authorities, small, medium, and large companies,
and consumers.
Our task during these hearings has been to evaluate whether
true anti-trust harms are occurring in the tech center and, if
so, whether the existing anti-trust laws are adequate to
address these harms.
To understand these complex questions, we have invited a
diverse panel of market participants, companies that compete
directly with the large platforms, that relies on services of
the large platforms and, in some cases, both compete with and
rely on the large platforms.
Companies that both compete with and rely on the largest
digital platforms have become more and more common, especially
as Google, Facebook, Amazon, and Apple have continued to expand
into broader and more diverse business lines.
We know that many tech companies rely on the infrastructure
services provided by large platform companies in order to serve
their customers while simultaneously having to directly compete
with the platform companies.
To demonstrate, consider the hypothetical company A that
competes with one of Google's products but also relies on a
different Google product to run its business, or relatedly,
company B relies on Amazon or Apple's platform for its success
and then Amazon or Apple launches a new product that competes
directly with company B.
In these circumstances, the question arises of where the
line sits between fierce and healthy competition and anti-
competitive conduct.
Do the large platforms use their market power in one
business line to harm competitors in another business line? And
if that does occur, how do we determine whether the allegedly
harmful conduct was motivated solely by a desire to improve the
product or whether there was anti-competitive motive?
I hope that our panel can discuss these and other related
questions today. Each of our panelists has significant
experience competing in the digital economy and they have a
unique perspective to offer us today.
I look forward to learning from them so that we can better
understand what competing with or relying on the largest
platforms looks like in the real world.
I yield back.
Mr. Cicilline. Thank you, Mr. Buck.
Before I introduce our panel of witnesses, we are also
joined by the distinguished representative from the 7th
Congressional District, Mr. Perlmutter, who serves both on the
Financial Services, the Rules Committee, and Science and
Technology, and has been involved in this area in a number of
different ways, and I would ask unanimous consent of the
committee to allow Mr. Perlmutter to participate in full in
this hearing.
Without objection, so ordered.
It is now my pleasure to introduce today's witnesses. Our
first witness is Patrick Spence, the chief executive officer at
Sonos. Mr. Spence joined Sonos in 2012 as their chief
commercial officer and has played a central role in the
development and launch of some of the company's most successful
products.
Before starting at Sonos, Mr. Spence spent more than 14
years at RIM BlackBerry in a variety of roles, ultimately
become executive vice president of sales and marketing.
He was named one of Canada's Top 40 Under 40 in 2007. Mr.
Spence received an honorary degree from the Richard Ivey School
of Business at the University of Western Ontario.
Our second witness is David Barnett. He is founder and CEO
of PopSockets, LLC. Before founding PopSockets, Mr. Barnett was
a professor of philosophy at the University of Colorado,
Boulder, specializing in philosophy and language.
He developed an interest in entrepreneurships and began
designing products to prevent ear bud cords from dangling. In
the process of developing a specialized iPhone case founded
through a successful kickstarter campaign, Mr. Barnett stumbled
upon the pop grip. It has gone on to become PopSockets'
flagship product and one of the most popular mobile device
attachments on the market.
In 2015, Mr. Barnett left the University of Colorado to
focus full time on running PopSockets. Mr. Barnett received his
B.A. in philosophy from Emory University, his B.A. in physics
from the University of Colorado, Boulder, and his Ph.D. in
philosophy from New York University.
Our third witness is David Heinemeier Hansson. Mr. Hansson
is the chief technology officer and co-founder of Basecamp,
LLC, a project management and communications software used by
hundreds of organizations like Shopify, NASA, and the
University of Miami.
He is also the creator of Ruby on Rails, an open-sourced
web framework used by programmers at GitHub, Airbnb, Startup,
and Goodreads.
Mr. Hansson is also the author of multiple books about
successful business management including ``It Doesn't Have To
Be Crazy At Work'' and the New York Times bestseller
``Rework.''
Mr. Hansson received his Bachelor's degree from the
Copenhagen Business School.
The last witness on our first panel is Kirsten Daru, vice
president and general counsel of Tile. Prior to joining Tile in
2019, Ms. Daru served as the chief privacy officer at
Electronic Arts.
There, she led all elements of EA's internal data privacy
compliance, employee data privacy training, and litigation
involving consumer claims.
She was also the lead attorney for all international
privacy matters. She started her legal career as an attorney at
Reed Smith LLP.
Ms. Daru received her B.A. from the University of
California at Davis and her J.D. from the University of San
Francisco School of Law.
We welcome all of our very distinguished witnesses and we
thank you for participating in today's hearing.
Now, if you would please rise I will begin by swearing you
in. Please raise your right hand.
Do you swear or affirm under penalty of perjury that the
testimony you are about to give is true and correct, to the
best of your knowledge, information, and belief, so help you
God?
[A chorus of ayes.]
Let the record show the witnesses answered in the
affirmative. Thank you. You may be seated.
Please know that each of your written statements will be
entered into the record in its entirety. Accordingly, I ask
that you summarize your testimony in five minutes.
To help you stay within that time, there is a timing light
on your table. When the light switches from green to yellow you
have one minute to conclude. It is actually here.
When the light turns red it signals your five minutes have
expired and I would like you to conclude.
And we will begin with Mr. Spence. You are recognized for
five minutes.
STATEMENTS OF PATRICK SPENCE, CEO, SONOS; DAVID BARNETT,
FOUNDER AND CEO, POPSOCKETS LLC; DAVID HEINEMEIER HANSSON, CO-
FOUNDER AND CTO, BASECAMP LLC; KIRSTEN DARU, VICE PRESIDENT AND
GENERAL COUNSEL, TILE
STATEMENT OF PATRICK SPENCE
Mr. Spence. Thank you.
I would like to thank Chairman Cicilline, Ranking Member
Sensenbrenner, and distinguished members of this committee for
the opportunity to appear here today.
It is my privilege to lead a company that is a classic
American success story. Sonos was founded in Santa Barbara,
California, in 2002 by a handful of entrepreneurs that wanted
to make it easier and better to be able to listen to great
music throughout their home.
Today, we employ over 1,500 people and our products have
been welcomed in more than 9 million homes. We are a classic
innovation and growth story.
We have grown our customer base, our product portfolio, and
our revenue every year since our founding almost 20 years ago.
In mid-2018 we enjoyed another rite of passage of many
American success stories. We became a public company on the
NASDAQ stock exchange.
The scope and scale of our innovation is reflected in our
portfolio of over 750 patents, a number that continues to grow
every year as we invest heavily in new innovation.
We believe that if we keep working hard to make great new
products we will win new customers and they will come back and
buy more products.
I welcomed this committee's invitation to testify because I
am concerned that the market conditions that allowed us to
innovate and thrive over the past two decades are being
endangered by the rise of a small group of dominant companies
with unprecedented power.
We believe that this committee needs to act urgently to
rein in the power of these dominant companies in order to
support the market conditions for the next big ideas to emerge
and to create a fair playing field for new emerging innovative
companies.
Today, I would like to focus in on three trends in
particular. The first trend is how these dominant companies are
using their power in one market to conquer or destroy adjacent
markets, especially markets that may one day present a
challenge to their current dominance.
Voice technology has transformed smart speakers into the
latest gateway to the internet. They connect you to the music
you love and to many of the most important services on the
internet e-commerce to Search.
For Google and Amazon specifically, the development of the
smart speaker market--the one in which we invented and
operate--presents both a threat and an opportunity.
The threat that if other companies were to be successful in
the smart speaker market they might stand between these
dominant companies and customers.
The opportunity for these companies is to dominate yet
another important consumer market and, more critical, to use
smart speakers to collect vast amounts of consumer data, which
can be monetized on their already dominant platforms.
These dominant firms have seized this opportunity. They
have flooded the market with dramatically price-subsidized
products, giving them away at steep discounts or even for free.
Indeed, there are records stating that the products
themselves are money losers. Now they control, roughly, 85
percent of the U.S. smart speaker market. This is terrible for
the innovative dynamic created by fair competition because it
hamstrings those companies that have better products that
cannot afford to be sold at a loss.
And in the long term, prices are sure to go up once these
dominant companies have driven the other companies out of the
market and reduced competition.
The second issue is that these dominant companies are
exploiting their role as essential business partners and to
tilt the playing field in favor of their own products and
services.
These companies have such dominance and breadth across a
variety of markets they become essential business partners for
every company. Our relationships with them at times are
productive and mutually beneficial, as these firms also value
access to our large and growing customer base.
But these dominant companies have a huge amount of power.
Gaining access to their platforms and integrating their
services are becoming more and more of a take it or leave it
proposition with demands such as early and technically-detailed
access to our future products, sharing proprietary business
data including sales forecasts and waiving essential
contractual rates.
These companies have gone so far as demanding that we
suppress our inventions in order to work with them. The most
recent example of this is Google's refusal to allow us to use
multiple voice assistants on our product simultaneously.
And a third important issue is the practice of efficient
infringement. These dominant companies disregard inventions and
patents because they are so powerful and they are doing the
cost benefit analysis for infringing now and paying later once
they have achieved dominance and moved past the point where
they have to worry about competition in that market.
They are exploiting today's system and enforcement to
extend their dominance from one market to the next, and a
recently filed patent infringement case against Google
illustrates our point. We have provided more details in our
written testimony.
We believe in competition and have competed and won through
innovation and hard work against much larger companies to get
to where we are today.
However, we are at a moment now, and I say this with 20
years in the consumer technology industry where today's
dominant companies have so much power across such a broad array
of markets and continue to leverage that power to expand into
new markets that we need to rethink existing laws and policies
to determine if they are still achieving the spirit in which
they were set out.
We believe that independent companies and a system which
fosters new startups have never been more important to the
future of innovation because fair competition breeds creativity
and progress and makes America better for everyone, not just
dominant and powerful few.
Thank you.
[The statement of Mr. Spence follows:]
[GRAPHIC] [TIFF OMITTED]
Mr. Cicilline. Thank you, Mr. Spence.
Mr. Barnett, you are now recognized for five minutes.
STATEMENT OF DAVID BARNETT
Mr. Barnett. First, thank you, Honorable Chairman and the
other members of the committee, for having me.
So I will tell you first the story of PopSockets and then
some challenges that we have had with Amazon.
PopSockets started about six years ago in my garage just
west of where we are sitting right here when I was a philosophy
professor at the University of Colorado.
I launched the business around our flagship product, which
is a--well, I have it on my phone--but a grip and a stand for a
phone. So that is how it started. We now have a full family of
products around this product.
In these six years we have grown to about 270 employees.
There are thousands of people around the world whose
livelihoods depend on PopSockets indirectly through different
businesses.
We have sold over 165 million units of this product and I
feel lucky to have realized one version of the American dream,
in part by participating in America's free market economy and
being able to transact with millions of Americans and thousands
of companies in order to create this success.
So today I want to talk about two challenges that we have
had with Amazon, one involving counterfeits, the other
involving bullying, or strong arming.
So we started our direct relationship with Amazon about a
year and a half into business. So the middle of 2016 we started
selling product to Amazon.
Amazon, in turn, would sell our product on the marketplace.
It was immensely successful. Within five months Amazon became
our largest customer and we became one of Amazon's most
significant players in the mobile electronics accessory
category.
We were--pop socket was the number three search term at
some point on Amazon. So we had immense success but despite the
success we never felt like we had a genuine partnership with
Amazon.
So the problem with counterfeits is the first problem we
will talk about. We had enormous amounts of fake product that
were taking our sales, creating bad customer experiences, and,
of course, it was illegal, so illegal activity on behalf those
selling them.
And when Amazon was the seller, Amazon was, clearly,
engaged in this illegal activity and multiple times we
discovered that Amazon itself had sourced counterfeit product
and was selling it alongside our own product.
For a year and a half we requested that Amazon take some
action--some serious action and just require evidence from
sellers that they were selling authentic product.
After a year and a half, finally in exchange for about $1.8
million of retail marketing funds, which my team deemed
ineffective, Amazon agreed to work with their brand registry
department to require this evidence and things then changed
dramatically.
So that problem, largely, went away. There was another
problem of knock-off products not using the PopSockets name
that took a lot longer to go away.
At one point, we were--we were reporting a thousand
listings a day of fakes. Every day a thousand different
listings of fakes that were eating away at our revenue and,
really, harming our brand, too.
Next, I want to turn to bullying--the lack of a symmetrical
partnership. The way Amazon works is, you know, we sign an
agreement together, so there is what is in the written record
of the agreement. Everything looks good.
We decide on a sale price to Amazon. Then what happens in
practice is that Amazon decides what price they want to sell to
the consumer for, after lowering the price they come back to us
and demand funding for their lost margin when they lower their
price.
There is nothing in our agreement that says that we are
required to pay for this, and yet they say, we need this--we
expect this. The bullying begins.
We decided to end our relationship with Amazon over this.
This was one reason we cited what we gave to Amazon. Their
response was, no, you are not leaving the relationship. I found
that unbelievable that they would tell us that we were going to
continue the relationship after we told them that bullying was
the main reason we were leaving.
We left anyway. They proceeded to remove the listings of
our authorized reseller, all of the listings on Amazon,
preventing an authorized reseller from selling.
They refused to clarify the language around their policy
that they cited in doing this, and caused great harm to our
company. And, you know, while bullying is not technically
illegal, when there is bullying by an extremely successful
company with all these partners that continue to do business
with it, one has to ask how is it that such a successful
business maintains partnerships with so many companies while
bullying them. It is because of the power asymmetry, of course,
that companies tolerate this. They have to tolerate it.
[The statement of Mr. Barnett follows:]
[GRAPHIC] [TIFF OMITTED]
Mr. Cicilline. Thank you. Thank you, Mr. Barnett.
Mr. Hansson, you are now recognized for five minutes for
your opening.
STATEMENT OF DAVID HEINEMEIER HANSSON
Mr. Hansson. Thank you, and thank you for the invitation to
provide testimony here.
My name is David Heinemeier Hansson and I am the CTO and
co-founder of Basecamp, a small internet company from Chicago
that sells project management and team collaboration software.
When we launched our main service back in 2004, the
internet provided a, largely, free, fair, and open marketplace.
We could reach customers and provide them with our software
without having to ask any technology company for permission or
pay them for the privilege.
Today, this is practically no longer true. The internet has
been colonized by a handful of big tech companies that wield
their monopoly power without restraint.
This power allowed them to bully, extort, or, should they
please, even destroy our business unless we accept their often
onerous, exploiting, and ever-changing terms and conditions.
These big tech companies control if customers are able to
find us online, whether customers can access our software using
their mobile devices, and define the questionable ethics of
what a competitive marketing campaign must look like.
A small company like ours simply has no real agency to
resist or reject the rules set by Big Tech and neither do
consumers. The promise that the internet was going to cut out
the middleman has been broken.
We are all left to accept that these companies can and do
alter the deal, any deal, however they please and whenever they
do our only recourse is to pray that they do not alter it any
further.
Let us start with Google. Their monopoly in internet search
is near total and their multi-billion-dollar bribes to browser
makers like Apple ensure no fair competition will ever have a
chance to emerge.
Google uses this monopoly to extort businesses like ours to
pay for the privilege that consumers who search for our
trademarked brand name can find us because if we don't they
will sell our brand name as misdirection to our competitors.
Google feigns interest in recognizing trademark law by
banning the use of trademark terms in ad copy but puts the onus
of enforcement on victims and does nothing to stop repeat
offenders, unless, of course, the trademark terms are belonging
to Google itself. Then enforcement is swift and automatic. You
will find no competitor ads for any of Google's own important
properties.
Google would never have been able to capture a monopoly in
Search by acting like this from the start--misdirecting
consumers, blanketing search results with ads, and shaking down
small businesses.
In the absence of meaningful regulation, they will continue
to extract absurd monopoly rents while bribing browser makers
to ensure nothing changes.
Apple, too, enjoys the spoils of monopoly pricing power.
With the App Store they own one of the only two mobile
application stores that matter. The other belongs to Google.
This cozy duopoly has allowed Apple to keep fees on payment
processing for application makers like ours exorbitantly high.
Whereas a competitive market like that for credit card
processing is only able to sustain around a 2 percent fee for
merchants, Apple, along with Google, has been able to charge
and outrageous 30 percent for years on end.
Apple may claim that they do more than payment processing
for this fee such as hosting applications or providing
discovery. But the company undercuts this argument by giving
these services away for free to application makers who do not
charge for their applications.
But worse still is the draconian restrictions and merciless
retribution that Apple brings to bear on application makers who
dare to decline using Apple's payment services.
Even a mere link to an external webpage that explains how
to sign up for a service that doesn't use Apple's payment
system can get their application rejected or removed from the
App Store.
Every application maker using Apple's App Store live in
fear that their next update is denied or their application is
entirely removed.
All it takes is being assigned the wrong review clerk who
chooses to interpret the often vague and confusing rules
different than the last. Then you will be stuck in an appeals
process that would make Kafka blush.
Finally, Facebook's industrial-scale vacuuming of
everyone's personal data has created an ad-targeting machine so
devastatingly effective that the company, together with, guess
who, Google is currently capturing virtually all growth in
internet advertisement.
I quote a report in my written testimony that put that
capture between Facebook and Google at 99 percent in 2016. Not
even Putin dare brag of an approval rating that high.
Facebook is able to maintain this iron grip on the
collection of personal data by continuing to buy any promising
competitor. The acquisitions of Instagram and WhatsApp should
never have been approved by regulators and need to be urgently
undone.
This creates a marketplace where companies that wish not to
partake in the wholesale violation of consumer privacy is at a
grave disadvantage.
If you choose not to take advantage of this terrifying and
devastatingly effective ad machine, your competitors surely
will.
This has been but a brief taste of what it is like to live
as a small tech company in a digital world owned and operated
by Big Tech.
And I didn't even touch on the misery that it is to attempt
direct head-on competition with any of these conglomerates. But
at some point, all companies will be competing against Big Tech
simply because Big Tech is bent on expanding until it does
absolutely everything. The aforementioned companies already do
payment processing, credit card issuing, music distribution, TV
producing, advertising networks, map making, navigation
services, alarm systems, cameras, computers, medical devices,
and about a billion other things.
Help us, Congress. You are our only hope. [Laughter.]
[The statement of Mr. Hansson follows:]
[GRAPHIC] [TIFF OMITTED]
Mr. Cicilline. Thank you very much. Yes, I thank you very
much.
Now I recognize Ms. Daru for five minutes for your opening
statement.
STATEMENT OF KIRSTEN DARU
Ms. Daru. I would like to thank Chairman Cicilline and the
members of the subcommittee for convening this hearing and to
Vice Chair Neguse for hosting.
My name is Kirsten Daru and I am the chief privacy officer
and general counsel of Tile. Tile helps people find lost items.
Our devices work with our Tile app, which is available on
iOS and Android to help people find their wallet, purse, keys,
you name it. We also embed our technology into third-party
products like headphones and laptops.
Tile is a small company. We only have about a hundred
employees. But we have over 180 patent assets and much of our
success can be attributed to our ability to collaborate with a
wide diverse group of tech partners.
That includes Hewlett-Packard, Google, Amazon, and,
importantly, Apple, who we have partnered with since about
2013.
But last April, things began to change. Last April, reports
came out that Apple was developing a competing Tile like device
and shortly thereafter they told us that they weren't going to
carry us in their retail stores anymore.
But don't get me wrong. Tile welcomes competition. But it
has to be fair competition, and in the weeks and months that
followed those initial reports, Apple exploited its market
power to advance its own interests at our expense, and I will
explain.
So, first, Apple's Find My app competes with Tile.
Importantly, Find My is installed natively on Apple hardware to
the exclusion of all competing apps and it cannot be deleted.
Not so with Tile.
Also, with iOS 13, which released last September, Apple
made it more difficult for our customers to enable their Tile
devices by burying the required permissions deep within the
consumer setting.
But not so for Find My. Find My's location settings are
activated by a single selection during operating system
installation.
And then once our customers figure out how to enable our
devices, also with iOS 13, Apple started surfacing these
reminders and prompts to our customers to encourage them to
turn it off.
But Apple does not surface any reminders for its customers
to turn off Find My's location permissions. Also, in its latest
iPhones, Apple included a new nonproprietary technology.
It is kind of like wifi or Bluetooth. It is called UWB--
Ultra Wide Band. Again, it is nonproprietary. It is one of
those things that most--that would ordinarily be opened up to
all third parties to use.
What it is it is similar to Bluetooth but whereas Bluetooth
can tell you that an item is in a room, UWB can tell you
exactly where it is in that room.
Reports surfaced that Apple's competing Tile hardware
product would use UWB to enhance the experience of its
customers. But, again, by contrast, Apple is not enabling Tile
to use that technology for the benefit of its customers.
All of these examples demonstrate that Apple is acting as a
gatekeeper of third-party access to permissions and technology
in ways that favor its own interests.
Keep in mind that Apple owns the entire commercial iOS
ecosystem. They own the hardware. They own the software. They
own the App Store and the retail stores.
That gives Apple access to competitively sensitive
information including who our customers are, our retail
margins, our subscription take rates, and Apple's control over
the ecosystem enables it to make changes to the OS with no
meaningful advance consultation or notice to competitors to
enable us to evaluate or prepare for impact.
It is like playing a soccer game. You might be the best
team in the league. But you are playing against a team that
owns the field, the ball, the stadium, and the entire league,
and they can change the rules of the game in their own favor at
any time.
That is the field on which we are competing with Apple.
That is the field on which America is competing with Apple, and
it doesn't leave much incentive for entrepreneurs or investors
to bring new innovations to bear in America.
The functioning of a robust healthy app ecosystem is
dependent on open platforms that do not favor the owner. It is
our hope and preference to work with Apple to resolve our
concerns.
But in the meantime, we ask Congress to continue to explore
how Apple's exploitation of its market power to advance its own
interests is used to hinder competition and limit customer
choice.
I would like to again thank you for your time and I look
forward to answering your questions.
[The statement of Ms. Daru follows:]
[GRAPHIC] [TIFF OMITTED]
Mr. Cicilline. Thank you very much, Ms. Daru.
I will now begin questioning under the five-minute rule and
recognize myself first for five minutes. And I am just letting
my colleagues know I am going to devote five minutes to each of
the panelists.
So we will have multiple rounds. You are free, obviously,
to do it anyway you like. But I think these require kind of
more in-depth discussions.
So I will begin with you, Mr. Spence, and thank you for
your testimony. In your written testimony, you describe how
Google and Amazon have become essential business partners.
As you note, their dominance across markets from voice
assistants and operating systems to music services and cloud
computing means that, and I am quoting you, ``they are like
basic infrastructure,'' end quote.
You note that this dominance enables the platforms to issue
take-it-or-leave-it demands. Can you describe what some of
those demands involve and what they have meant?
Mr. Spence. Thanks for the question, Mr. Chairman.
It is around things like our future products. So
understanding what products we are going to be making in the
future if we want access to their services. So they will look
for that, which is really, at the end of the day, the most
important thing inside a company like ours that is trying to
keep confidential the products and any new innovations that we
are working on.
So getting access to those, getting access to the kind of
volumes that we think we will do as we go through that, trying
to understand as well just the general direction of where the
company is going, making sure that--you know, that we are
willing to engage in marketing funding for the products as well
on the platform would be another example as we go through that.
So, yeah, that is probably the--kind of a good feel for
the----
Mr. Cicilline. Thank you.
In a set of questions that I sent to Google as part of this
investigation last year, I asked the company whether it ever
requires that third parties seeking to access Google's services
give Google access to their proprietary data.
Google responded that it has likely entered into those
types of contracts but that any such contractual terms are, and
I quote, ``the product of good-faith negotiations by
sophisticated parties,'' end quote.
Does that sound accurate to you it is the case, as Google
suggests, that these contractual terms are just the product of
regular business dealings?
Mr. Spence. Thank you for the question, Mr. Chairman.
I have been in consumer technology for 20 years. I think
there are times where you are having negotiations with
companies and it is on a--it is on a fair basis in terms of
where you are.
I think, as I have indicated, there is a--there is such a
dominant power that exists with these companies that when
Google or companies like that are asking for these things you
really, even for a company of our size, feel that you have no
choice but to provide them to the companies.
Mr. Cicilline. One remarkable thing about these companies
is how integrated they are across many different business
lines. Sonos may be negotiating with Amazon or Google over
their voice assistants services while also be dependent on
Amazon's retail platform or Google Search.
Is there a reason to think these platforms do, at the very
least, or they could use their dominance in one market to apply
pressure in a distinct market?
Mr. Spence. Absolutely. I think that is the--you know, the
risk that is here and I think it is a very fair assumption to
think that they would even with best efforts, right, and in
terms of that is that information inside companies, the larger
and larger they get it is easy in this day and age for that
information to go many different directions.
And so as we provide information to these companies, it is
certainly my concern that it can be shared across groups and
that can be used to, in effect, compete with us down the line.
Mr. Cicilline. So, just as an example, could Google demote
you in search rankings if it didn't like how negotiations over
voice assistant were going and how would something like that
affect your business?
Mr. Spence. Oh, that would be something that would
dramatically impact our business. As David had mentioned, we
have had to buy our brand name on Google just to make sure that
we are at the top of the rankings in Google Search.
But these companies have the power to be able to move you
down the rankings, put tags on your products, do all sorts of
things that would tilt the playing field.
Mr. Cicilline. And, Mr. Spence, in your testimony you
explain that Google has sought to blocking innovative service
by Sonos that would have allowed consumers to utilize multiple
voice assistants on a single Sonos speaker.
Can you tell us more about Google's role in blocking this
service and the effect of this decision on your product and on
consumers, and how was Google able to make that demand and who
benefited from the outcome?
Mr. Spence. So probably the best way to think about what it
is that we want to do is just like on your computer today you
could choose to use one search engine. You could use Google or
you could use DuckDuckGo.
We want to give customers the ability to access either
Amazon's Alexa service or Google's Google Assistant voice
service on a Sonos speaker and we have developed the technology
which enables that, which is new, innovative, and the best
thing for customers because it is choice, and we would be happy
to put other voice assistants on there as customers so deem it.
We developed that. We had it ready. We have showed it to
Google and Amazon. To Amazon's credit, they said, okay, this
makes sense.
Amazon has led recently the voice interoperability
initiative to try and, you know, drive customer choice. Google
has said, if you are going to do that, Google Assistant will
not be available on the Sonos platform.
So you will not have access to Google Assistant if that is
what you--if that is the way you want to run this.
And so they haven't allowed us and we can't offer that
today, which is, in my opinion, you know, really reducing
freedom of choice for customers.
Mr. Cicilline. Thank you very much.
I now recognize the gentleman from Colorado, Mr. Buck, for
five minutes.
Mr. Buck. Thank you, Mr. Chairman.
And I wanted to mention something that I did mention in my
opening statement and that is I think there is great
bipartisanship in examination of this, and hearing each of the
individuals testifying today I think it is clear that there is
abuse in the marketplace and there is a need for action.
The question I have for each of you really is I hear the
problem. I don't hear the solution. And I am a small government
person and I am concerned about the government interfering in
the marketplace because it may ultimately interfere with your
ability to produce the products in the free marketplace that
you want to produce.
I first want to say, Mr. Hansson, thank you for dressing
the way you did. That is the way I would like to dress.
[Laughter.]
I don't want to wear a tie either and you sort of have the
image of a tech person--a tech executive. [Laughter.]
So I--when I grow up I want to be just like you.
[Laughter.]
Mr. Hansson. I am happy to play the part. [Laughter.]
Mr. Buck. Mr. Spence, I heard you talk about Google and how
they created a competitive product. Would you advocate that the
government or regulators in some way prevent a Google from
creating a competitive product?
Mr. Spence. We have competed--we have competed, you know,
in the market against many great companies--Bose, Sony, you
know, many, many companies.
I think the difference in the case here is that these
companies are leveraging their power in one market to, you
know, go into new markets where there is predatory pricing and
they are doing it to uphold their dominance in other markets.
And so I don't know what the answer is in that particular
case but they are doing that and they are infringing the
intellectual property--the invention of a smaller company like
ours in those cases.
And so I think--I think we are in a unique position where--
I am with you in terms of small government but I think the
whole spirit of trying to encourage small companies, encourage
new innovations and new startups is at risk, given how dominant
these companies are.
I would argue that we have not seen anything like this
before and the level of dominance, at least in my 20 years of
experience. And so I think there may be----
Mr. Buck. We have certainly seen--we have certainly seen
the Rockefellers. We have certainly seen dominance in steel and
dominance in other products.
So what I hear you saying, and I want to make sure that I
hear it correctly, you aren't opposed to large companies--Bose,
Google----
Mr. Spence. No. No.
Mr. Buck [continuing]. Creating a competitive product.
Mr. Spence. No.
Mr. Buck. What you are--what you are opposed to is that
competitive product--the pricing structure of that competitive
product is something you believe is predatory, is--they are
selling it below cost or below at least market value because
they want to knock the competitors out of the market and they
are using their platform to do that.
Mr. Spence. That is correct.
Mr. Buck. And do the anti-trust laws now cover that? Are
we--are we looking at a situation where we need to adapt anti-
trust laws to high tech or are we looking at a situation where
we need to give the federal government more resources to
enforce the laws that exist?
Mr. Spence. I do not have the depth of understanding of
anti-trust laws necessarily. But I would say that----
Mr. Buck. Neither do I and I am on the committee.
[Laughter.]
Mr. Spence. What I would say is my understanding of the
spirit it is such that it would address these kind of
behaviors. So, to me, I am not sure if it is enforcement or the
laws.
But I would think that this level of power with this few
firms we should have rules in place which allow the Congress to
act or for there to be remedies that are put in place. And I
don't--I just don't see it happening today.
Mr. Buck. So I guess I am still struggling. I want to
figure out do you have--is there a way for us to receive
information about the predatory price?
Obviously, we don't know how much it costs Google. They are
such a large company they may have some benefits in terms of
the size of the company in producing something that they can do
more efficiently than a smaller company. I don't know.
But what evidence is there that they are--they are selling
something at a price that is below the cost in order to be
predatory?
Mr. Spence. There are some industry analysts that do this
kind of work to understand the cost profile. We, obviously,
understand the cost profile, given the industry we are in.
So in looking at that, we are quite confident there has
been--you know, there has been executives that have made
comments from these companies that say, you know, that they are
doing it for other strategic purposes really to get their other
services into people's homes and lock those in.
So that information is available, and I think from, I would
say as well, unbiased third parties, right, because that is
where I imagine you would probably want to get it from and that
is available.
Mr. Buck. Thank you very much for your time.
I yield back.
Mr. Cicilline. Thank you.
I now recognize Mr. Neguse for five minutes.
Mr. Neguse. Thank you, Mr. Chairman.
First and foremost, thank you for hosting this hearing here
in Colorado in the 2nd Congressional District in particular,
which is a hub national for ingenuity and technology
innovation, and so it is a pleasure to be able to welcome you
here.
And, of course, very grateful to my colleagues, Mr.
Perlmutter and Mr. Buck, for joining as well, and we want to
give our regards to Mr. Sensenbrenner, the ranking member, who
I understand had planned to attend but, of course, could not
due to a storm in the Midwest.
This hearing couldn't be more important, couldn't be more
timely, and so I appreciate the witnesses, each of you, for
coming forward today and offering your testimony.
The presence of research institutions like CU Boulder and
Colorado State University, access to a healthy venture
capitalist community, home to startup incubators, and the
ability of local government to read the tea leaves really has
turned Colorado in particular into an entrepreneurial tech
powerhouse like no other.
So it is no surprise that Boulder and Fort Collins rank in
the top 10 of America's most innovative tech hubs and I am
proud to represent both of those cities. Of course, I would be
remiss if I didn't start off my remarks on that front.
I also want to say thank you to the University of Colorado
for hosting this field hearing. It is the second that we have
been able to hold in the last year here in the 2nd
Congressional District and I am very grateful particularly here
at the University of Colorado and the law school in particular
for their generosity and graciousness in hosting this.
I want to focus my questions on two topics. The first is
data and targeted internet advertising, and I reviewed the
written testimony of each of the witnesses and, Mr. Hansson, in
particular I found your written testimony very compelling.
There is a line--I don't believe you said it during your
oral testimony but I will read it here--where you say, quote,
``Facebook's targeting capability is crushingly effective and,
therefore, truly terrifying.'' I found that to be a very
compelling sentence.
Targeted ads really are one of society's most destructive
trends. They have led to an explosion of fake news and
misinformation and it requires us to question whether it is
possible to have free and fair elections when social media
platforms like Facebook not only allow but encourage the mass
propagation of misleading information and then supply the tools
to micro target that information to its users.
So I wonder if you can provide some more detail on your
company's experience with Facebook and the use of targeted
advertising tools.
I understand that you are a Facebook-free company I think
is the way that it is--the moniker that is--that you don't use
Facebook advertising anymore. That was a conscious choice that
your company made.
So maybe you can expand a little bit about how you go
there.
Mr. Hansson. Absolutely. Thank you, Congressman.
In 2017, we ran a series of marketing campaign tests on
different platforms. We ran some on Facebook. We ran some with
Google. We ran other platforms.
It was very clear in all of those tests that Facebook was
by far and away the most effective way to market because of the
immense amount of personal data that they have.
So we could target our ads to just an astonishing degree
and no other advertising platform was able to compete. And this
is why Google, who also has the same sort of capabilities of
targeting, and Facebook is able to capture 99 percent of all
growth in internet advertisement, as was stated in that report
from 2016, because they simply have a devastatingly effective
machine.
But when you think about why that machine is so effective,
what is it that underpins it, how is it that they are able to
outcompete everyone else, it is all based on a fundamental
violation of privacy for people--that they have been able to
capture so many data points through so many sources that people
are neither aware of is happening or would consent to if they
knew all these data sources, things like purchasing records,
the fact that both Facebook and Google can track you,
everything you do on the internet pretty much because they have
their little like buttons and they have their Google sign-ins
on so many sites, that fact that Google controls things through
Search and Facebook controls the main avenue that people get
news through the news feed.
They just have so much data. No one can compete against
that trove of data. And in fact, they shouldn't have been
allowed to gather that data in the first place.
If they didn't have all that data, if there had been
regulations in place to prevent them from gathering all this
data, then they wouldn't have been able to capture 99 percent
of the growth.
So I think that this is where we need to start with the
original sin, that they are able and allowed to capture this
data without consent, without informing consumers, and
therefore they are as effective as they are.
Mr. Neguse. How has it impacted your business becoming
Facebook-free?
Mr. Hansson. Yes, so this is the other part of it. If you
look at that system and say, I want no part of it--I do not
want to be part of a violation of privacy on this mass scale,
and you opt out, as we have chosen to do, you have essentially
cut yourself off from the main effective way of reaching people
online that other companies will use.
So our competitors who have no qualms about using this
machine they will outcompete us when it comes to ads. They can
buy cheaper ads that reach more people and is more effective in
its conversation and we are, thus, at a great disadvantage in
the competitive marketplace when we choose not to do so.
So this is why the pressure is so high. It is like a
prisoner's dilemma. If the other company chooses to do it, you
are pretty much forced to do it, too, even if you don't want
to.
Mr. Cicilline. The chair now recognizes the other gentleman
from Colorado, Mr. Perlmutter, for five minutes.
Mr. Perlmutter. Thank you, Mr. Chair, and thanks to the
university and panelists. Thank you for your testimony and,
quite frankly, your courage to be here today because when you
take on, you know, dominant players as--whether it is Amazon,
Google, Apple, or Facebook, you know, you got to have a little
trepidation. I think somebody used that term in their
testimony.
But I can tell you our family is a customer of pretty much
everything that you all are selling, although my daughter is
the one that uses Shopify that has the backstop in your
software.
So I just want to thank you for the products that you sell
and that you design and innovate. The thing that I really am
bothered with, and I will start with you, Professor, is the
bullying piece, and I think, Mr. Hansson, you used extort and
Ms. Daru, you didn't use it but the word squeeze came to mind
in what is happening to Tile.
So how in the world can Google or--I think it was Google
who was problematic for you, Mr. Barnett----
Mr. Barnett. It was Amazon.
Mr. Neguse. Pardon me. Amazon. Ignore the contract that you
entered into and just say sorry, you know, that was our
contract but you got to lower your price?
Mr. Barnett. With coercive tactics, basically, and these
are tactics that are mainly executed by phone. It is one of the
strangest relationships I have ever had with a retailer is with
Amazon.
Most of our discussions are by phone. They feel very
scripted. They don't feel authentic. And by the way, I hear the
same--what I describe I hear from lots of other manufacturers'
brands who deal with Amazon.
So what is on record is an agreement that appears to be
negotiated in good faith in terms of the agreement. It is all
there.
And then what happens in practice is that there are
frequent phone calls, and on the phone calls we get what I call
bullying with a smile. Very friendly people that we deal with
who say hey, by the way, we dropped the price of X product last
week. We need you to pay for it.
And I think to myself, well, that is odd. It is not in our
agreement that we are going to pay for it so why do you need us
to. And we expect you to pay for it. So there is some pushback,
and I say, well, it is not in our agreement--why would you
expect that.
That is strange. It is not in the agreement. The response
is, well, if we don't get it--and then the threats come--if we
don't get it we are going to source product from the grey
market. So one of your resellers----
Mr. Neguse. Do they say that to you?
Mr. Barnett. Yeah. Sure. The response is, if you don't--on
the phone. Sure. The response is if you don't fund this what we
are going to need to do is we are going to need to get a more
competitive pricing.
We are going to go to one of your resellers who is not
authorized to sell to us and we are going to start sourcing it,
and we will find it. So----
Mr. Neguse. And then your only recourse was to terminate
the contract?
Mr. Barnett. That is one of the things they say. Another
threat might be, you know, we have got too much inventory on
hand so we are going to ship it all back to you. You are going
to pay for all the fees.
There is an expense to shipping this back to you so we are
going to--we are going to end up charging you all of those
dollars. So, really, we need the money. Let us have it.
And also, you know, maybe we need to end the partnership is
another threat, and if we had the partnership that puts us in a
pretty tough position, given Amazon's dominance in the online
marketplace.
So this is tiring. I mean, it is tiring week after week
saying, no, no, no, being subjected to this sort of bullying.
And we eventually decided to end our partnership.
Mr. Neguse. Let me turn to Mr. Hansson and Ms. Daru.
So in connection with your companies, you provide all sorts
of information to Apple, to Google, to whatever, and then what
do they--how do they use that information against you?
Mr. Hansson. Yeah, go ahead.
Ms. Daru. Sure. Thank you.
Mr. Neguse. I mean, don't they have a conflict of interest
of some kind or----
Ms. Daru. Thank you for your question.
I would--I would think so, and I want to be clear that it
is not that we are giving access necessarily to Apple.
But by virtue of Apple's ownership of the entire iOS
ecosystem they get access to a lot of competitively sensitive
information like who our customers are, what other kinds of
apps they use, the demographics of people who might be looking
for Tile like apps in ways that we can't.
They have access to our retail margins they shared and our
profits. They know who is picking up our subscriptions and,
unfortunately, it is really difficult for us to know exactly
how they are using it but they certainly have access to it.
Mr. Neguse. I think my time is about to expire so I will
give you back to the chair.
Mr. Cicilline. I thank the gentleman.
I would like now to turn to Mr. Barnett.
During this subcommittee's hearing, again, in the course of
this investigation in July, Amazon's associate general counsel,
Nate Sutton, denied that Amazon wields market power in online
retail, testifying that the retail industry is full of
competitors to Amazon including companies like Wal-Mart, eBay,
Target, Safeway, Wayfair, and Kroeger, as well as Ali Baba and
Rakuten.
Mr. Sutton also claimed that sellers have numerous options
when considering where to sell their products. And so my
question for you is for businesses like PopSockets, do the
companies Amazon listed serve as reasonable alternatives to
selling on Amazon?
Mr. Barnett. Sure. I can give you some actual numbers.
We sell on the Wal-Mart platform. Our sales on the Wal-Mart
platform are about 1/38th of the sales that we had on Amazon
back when we had this relationship with Amazon. One-thirty-
eighth, and Target it is even less.
So I don't know what it is but----
Mr. Cicilline. So those aren't reasonable alternatives?
Mr. Barnett. These are small fractions.
Mr. Cicilline. Yeah.
Mr. Barnett. If you back up--what they are saying--you
know, what he is saying is in a way true. It is just
irrelevant.
If you back up and look at this, I think it is easiest to
look at it as if it is a different country that we are looking
at and ask those questions.
Suppose you discover of some country--say, it is Costa
Rica--and you discover that they have this marketplace--no,
sorry, lots of marketplaces, but most of them are really tiny.
They have one big marketplace where almost everybody goes
to trade. They trade goods and people want to exchange goods.
And then you learn it is privately run and then you learn
that the company or person running this marketplace dictates
the terms of the transactions, dictates ultimately, directly or
indirectly, the prices that are--in these transactions, which
indirectly dictates how much money companies have or
individuals for innovation, for research. There is a private
company running this marketplace.
That would be pretty alarming and that might be an instance
where you say government should probably get involved here.
Mr. Cicilline. In his 2019 annual letter to shareholders,
Amazon CEO Jeff Bezos wrote that third-party sales on Amazon
are soaring, thanks to services that Amazon provides to
merchants, and he wrote, and I quote, ``We helped independent
sellers compete against our first party business by investing
in and offering them the very best selling tools we could
imagine and build.''
Mr. Sutton, at the hearing, said, and I quote, ``We know
sellers have other ways to reach customers so we invest in
them, support them, make continuous efforts to improve their
experience, including spending significant resources to root
out bad actors and prevent fraud and abuse that harms both
sellers and customers,'' end quote.
Given your experience, do you agree with Amazon's statement
suggesting that it seeks to act in the best interest of
independent sellers?
Mr. Barnett. I disagree with that.
Jeff Bezos--I think when he makes this statement I am not
sure that he can--he can genuinely, you know, believe his
statement.
So in our own case, we are not allowed to sell in that
marketplace. PopSockets have been banned from selling in that
marketplace because Amazon retail has chosen to have this
transaction with us, and many other companies.
That is the language they use, that we are one of the
chosen ones to be coerced, basically, into a certain
relationship.
And then as far as helping these small sellers, you can do
your own survey and see what they say. I doubt many of them
will be willing to come and testify because their livelihood
depends on it, and they will tell you about retaliatory
practices.
So they are used to it.
Mr. Cicilline. And thank you again for your courage in
being here.
In your written testimony you describe your relationship
with Amazon as one where they, and I quote, ``regularly dress
up requests as demands, using language that a parent uses with
a child--more generally, that someone in a position of power
uses with someone of inferior power.''
Is it your experience that Amazon acts as though it
basically is able to dictate the terms of your dealings? What
does this look like and why do you think Amazon is able to get
away with taking this approach in its dealing with sellers?
Mr. Barnett. The answer is yes.
So throughout the relationship, strangely, it is by phone
this all happens. But that is the language. It is a language of
one party being in power over another party that is powerless--
we need this, we expect this, even though it is not in our
written agreement.
I think, in my experience, the greatest event that
highlighted this attitude at Amazon was when we said--we said
it very nicely, too--we said we are unhappy with a few things.
We are going to experiment with another model. There is an
asymmetry in the relationship. You know, we didn't call them
bullies or anything. It was very friendly.
Their response was, no, you are not going to do that. You
are not going to leave us. That is the actual response.
Mr. Cicilline. I want to just get in one more question. You
stated that you feel Amazon has retaliated against PopSockets
for speaking out on Amazon's policies.
Can you tell us more about this situation, what kind of
retaliation you experienced after terminating the relationship
with Amazon retail?
Did PopSockets experience any challenges with Amazon
representatives and do you think your experience has been
unique? I mean, I think this is really important for us to
understand.
Mr. Barnett. Sure.
So we needed to interact with various departments at Amazon
after we ended our relationship with them--our direct
relationship of selling to the retail team, and my team
reported to me that they were just getting stonewalled.
With each department--the example I gave in my testimony
was trying to get hundreds of thousands of dollars that Amazon
owed us for incorrect charge backs.
They just refused to communicate with us anymore. So
communication just stopped department after department and,
oddly, we were given the same reason.
So we got one and only one sentence back by all of them. It
said researching issues in partnership, and then nothing. They
wouldn't respond.
So we had--we had that experience and--I am losing my
thought on the second----
Mr. Cicilline. Well----
Mr. Barnett [continuing]. Experience we had. It is not
coming to me.
Mr. Cicilline. Okay. Well, we will have some time.
I now recognize Mr. Buck for five minutes.
Mr. Barnett. Sure.
Mr. Buck. Thank you, Mr. Chairman.
Mr. Barnett, you--did you get a Ph.D. in philosophy?
Mr. Barnett. Yes.
Mr. Buck. I took a philosophy class once. [Laughter.]
Mr. Barnett. Let us talk philosophy.
Mr. Buck. I didn't do so well so I went into political
science. But I think you are really smart and I always wanted
to be smart, and you invented something and I really--it is
what I love about innovation and--I mean, I always wanted to
invent the pet rock. Do you remember that?
Mr. Barnett. That would be great.
Mr. Buck. A lot of the folks up here are too young to
remember pet rocks. But they served absolutely no purpose but
people bought them like crazy, and it had all--everything to do
with marketing and nothing to do with function, and I always
thought that was amazing.
But where do you go if you don't go to Amazon? So you go to
newspapers. Less and less people read newspapers. You go to
billboards. You go to--where do you go?
It seems like Amazon is so dominant that there is no
alternative to Amazon.
Mr. Barnett. Sure. I think--I think Amazon will rightly
respond to you by saying, no, no, there are plenty of
alternatives.
In the Costa Rica hypothetical example I gave, there are
plenty of alternatives. They are just tiny, right, and some
companies can afford to live outside the large marketplace--the
hypothetical one in Costa Rica that I described--and still
survive on these tiny, you know, much smaller opportunities, a
string of them, and that is what Amazon will respond.
We are one of those companies who has survived its
termination with Amazon. So we pulled out. We are still alive.
We have lost quite a bit of money. So just last year, you
know----
Mr. Buck. So I want to get into a little philosophy with
you here.
Mr. Barnett. Sure.
Mr. Buck. What made America great? And I am not getting
into Make America Great. I am just--what made America great?
In my mind, it is the ability for you to compete fairly
with somebody else who has another product, and then you create
the next innovation and they--and that is how you compete.
Mr. Barnett. Sure.
Mr. Buck. You don't compete with somebody or you can't--you
can't innovate in a business world--and I know there are people
in this world that don't like the word profit, but you can't
compete unless you are making a profit.
Mr. Barnett. That is exactly right.
Mr. Buck. And if there is a company--if there was a country
that stifles your ability to make a profit, we will see less
and less innovation in this country.
And as we see less and less--and this is getting really
philosophical--as we less and less innovation in this country,
we will not be a dominant player in the world because we don't
manufacture at a lower cost. We innovate at a higher rate.
Do you agree?
Mr. Barnett. I fully agree, and that is why I--if you ask
me whether I like small government or big government, I will
tell you I like exactly the right size government.
So I want to know what can government do in each instance
and if government can take action that will help protect
innovation without doing a greater harm, government should do
that.
Mr. Buck. Okay. So let me ask a question.
Mr. Barnett. And there is a harm here. Our research--we
have $10 million less to innovate this year. Ten million
dollars we could double our innovation team.
We have 30 people innovating all sorts of products. We
could have 60 people. We could double the source of innovative
products.
Mr. Buck. Let me ask you a question. We have time limits so
I just want to get to this one point.
Mr. Barnett. Sure.
Mr. Buck. What is the size of your lobbying budget?
[Laughter.]
Mr. Barnett. Zero.
Mr. Buck. Mr. Spence?
Mr. Spence. Zero.
Mr. Buck. Mr. Hansson?
Mr. Hansson. Zero.
Mr. Buck. Ms. Daru?
Ms. Daru. Nothing budgeted.
Mr. Buck. So what is the size of Google, Facebook, Amazon,
and Apple? You may not know, and you don't have to answer it
because you are under oath.
So let me just tell you something. Part of what we are
dealing with here is the reality that they walk into our
offices and they tell us their side of the story and we very
rarely hear the other side of the story, and somehow part of
this solution has to be that public policymakers elected,
appointed, have to have access to that kind of information.
So I thank you for being here and I also would encourage
you to make sure that, you know, we are accessible. We are
trying our best to make sure that we continue to create the
environment for your kinds of companies.
So thank you, and I yield back.
Mr. Barnett. Thank you.
Mr. Cicilline. I thank the gentleman.
And I would say the gentleman's comments are really
important as in that is the reason or at least one of the
reasons this investigation was launched because we really
wanted to understand the marketplace and that is why the
testimony from these four witnesses, which I am afraid
represent just a small number of examples of what we know is a
very pervasive and large problem.
So we are, again, grateful for your being here. And with
that, I recognize Mr. Neguse for five minutes.
Mr. Neguse. Thank you, Mr. Chairman. I couldn't agree more
and I think my good friend, Mr. Buck, makes a very salient
point and it is the impetus for why we are here today, to be
able to hear directly from you all.
I have been trying--the second point--the second sort of
piece of this that I wanted to discuss was some of the issues,
Mr. Hansson and Ms. Daru, that you all alluded to with respect
to Apple and trying to come up with the right analogy for the
fundamental issue that is bedeviling us here, which is the
distinction of being both a marketplace operator and a seller
of one's products. Neither of your prospective companies are
marketplace operators but you do sell products and do a good
job at that.
If one thinks of the traditional way in which we purchase a
product in a marketplace. Walk into a Target today or a
Walgreen's or a Wal-Mart and look for a flashlight you may find
a number of different companies that have created different
versions of a flashlight, right, and they all--there is a
profit motive there and they are able to sustain their
businesses by innovating and improving upon the products that
they have created.
There is no fear that the store, the place in which they
are purchasing this product, is going to take the information
that comes with this product, create their own version of it,
and essentially operate to the point that it blocks out any
other product in that--in that category, right.
And, of course, that is not the case with Apple and some of
these digital behemoths because the App Store--and the
flashlight is actually a great example, right, because prior to
Apple creating the flashlight function on the phone, there
were, my understanding, a number of apps that were quite
successful, right, in creating and providing that service.
And, of course, once Apple has decided to essentially do
the same, it renders all of those apps superfluous and
unnecessary.
And I think, Ms. Daru, part of what made your testimony so
compelling and your written testimony in particular is the
information that you are providing as a company to Apple that,
in turn, can be leveraged eventually to extinguish your
invention and I guess I am curious.
If you can kind of expound in greater detail about the type
of information that you have to provide to Apple in order to
ensure that your app is accepted into the App Store, because I
don't know that the average consumer understands that level of
detail.
I think most folks assume that when you go into the App
Store that it is a fairly basic transaction between Apple and a
company like yours where you are essentially placed into
their--into their marketplace and that doesn't strike me that
that is the case.
Ms. Daru. Thank you for your question.
Yeah, and, you know, Tile doesn't provide data, you know,
per se to Apple. But, again, by virtue of their ownership of
the entirety of the iOS commercial ecosystem they necessarily
have access to that type of information so, like, where
customers are, what our retail margins are, our subscription
take rates.
They are able to--they have wholesale access to that
information, and on top of that, you know, we are seeing other
actions by Apple, again, to further its own interest and put
companies like Tile at a disadvantage.
They put their competing apps front and center in front of
their consumers. Tile is in the App Store with the all the
other third parties. Theirs is installed natively on the
iPhones.
They can--they basically make rules about how the platform
should operate, who and under what circumstances, who should
have access to permissions, and then they exempt themselves
from all of those rules.
You know, they give themselves access to technology like
UWB but they deny access to companies who legitimately could
use it to innovate for their own customers.
You know, they make changes to the operating system in ways
that drain our engineering resources and make it difficult for
us to innovate.
And so for all of those reasons, the--you know, it is clear
that Apple is exploiting its market power and dominance to gain
an advantage in the marketplace.
Mr. Neguse. Mr. Hansson?
Mr. Hansson. I think actually the even more important point
is the economic point. To sell software on the App Store you
have to agree that Apple takes 30 percent. What businesses just
have an extra 30 percent margins to compete against someone who
will charge themselves 0 percent margin?
If Apple has a service--a competing service in the App
Store, they have a 30 percent margin advantage right from the
get-go. That is on top of all the other advantages they have in
terms of information, setting the rules, and so forth.
Just on prices alone, it is completely outrageous that they
can charge 30 percent, that that rate has stayed constant in
the 10 years the App Store has existed. Meanwhile, we get----
Mr. Neguse. That rate is standard, that 30 percent, across
the board?
Mr. Hansson. That rate is standard. You don't get to
negotiate. You don't get to--sort of they made some tiny
concessions around long-term subscriptions recently. But they
are inconsequential.
On the same hand, we have a credit card processing system
that we use on the open internet where we every week get
conversations with the processors who want our business and
they are all competing, and they are--we can do it 10 basis
points cheaper than the other guy and the rights are 1.8
percent or 2 percent.
That is what a competitive market looks like. A
incompetitive market is what it looks like on the App Store--30
percent 10 years going, no matter how much revenue that Apple
is processing through the App Stores. They face no competition
and they have such an unfair advantage.
Mr. Cicilline. Thank you.
I now recognize Mr. Perlmutter for five minutes.
Mr. Perlmutter. Thank you, and I think all of us up here on
this panel--Mr. Buck, Mr. Cicilline and Mr. Neguse--we are all
on the same page.
And so I want to start with you, Mr. Spence. In your
testimony you say dominant platforms are able to develop
copycat products by analyzing sales metrics on their platforms
and combining them with rich data profiles of their customers.
These copycat products are then sold at cost or lower with
no intent to reap a profit. They also can use remarkably
similar trade, dress, and marketing campaigns. Can you expand
on that a little bit?
Mr. Spence. Sure. So we, in our written testimony as well,
provided some examples of advertisements from some of the these
dominant platforms that look remarkably similar to ones that we
had, you know, a year or two before, that even with the same
dress with using some of the same iconography, all of it, and
they understand who has bought, you know, our products, other
competitors' products, and they can address these people in a
way that we can't and at an advantage that we can't. And so the
advantages are like nothing we have ever seen before.
Mr. Perlmutter. So talk to me about the rich data profiles.
And everybody has touched on that a little bit. Talk to me
about that.
Mr. Spence. Well, think about how dominant these companies
are across how many dimensions at this point--the mobile
operating system, the cloud services, the search, the
marketplace of e-commerce.
The list goes on and on in terms of the breadth of
information that they have that they can share back and forth
to really understand and draw a picture of almost anything,
right.
They see something that may be exploding on the cloud
services, right, and they see applications or things or areas
of interest there. They see something that might be of interest
and really exploding, like PopSockets, on their e-commerce
front end.
These are areas just by nature, I think, of companies now
that we see that then there appears to be a trend where those
become markets that then they move into, right.
If there is any market that is getting traction and is of
interest, you see these companies moving into those markets.
It is almost, like, the fear of missing out, right, and I
think it is a fear that, at the end of the day, this is a
market that may threaten their dominance of the other markets.
And so we are in this incredible cycle where every new
market that you see pop up you see these dominant firms begin
to participate.
Mr. Perlmutter. All right. Last, and this sort of goes to
my comment about, you know, everybody sitting there as--you
guys, I just appreciate your testimony and willingness to come
and share this.
So you say in your testimony Sonos is strong enough and
successful enough to say what goes, largely, unsaid but remains
very much on the minds of countless tech entrepreneurs.
Can you elaborate a little bit about why--you know, you
have 1,500 employees. Ms. Daru's company has a hundred. I mean,
why do you feel like you have a little bit of an advantage in
that respect to share it today?
Mr. Spence. We are in a--we started early enough. You know,
so almost 20 years ago. And we--when it was unfashionable
focused on profitable growth, not just growth at all costs, and
we are in the fortunate position where I think we are strong
enough financially.
I am taking a risk here, no doubt. We work closely with all
of these dominant companies, right. So I think I am taking a
risk.
But I feel that this is a big enough issue that people need
to speak out, and I feel like it is important that these issues
come to the forefront because we have a responsibility to speak
for those that can't.
Mr. Perlmutter. The last thing, and I know we have somebody
from the Attorney General's office here in the audience today
from the Office of Consumer Protection.
But I had suggested to him that that consumer protection
also be businesses such as yours when it comes to these
dominant platforms--that it isn't just Mrs. McGillicuddy living
down the street but it is, you know, Basecamp or Tile or Sonos
or PopSockets.
And with that, I yield back.
Mr. Cicilline. I thank the gentleman.
I now recognize myself for five minutes.
Mr. Hansson, your written testimony stated that Google has
a monopoly in Search. In its response to question I sent the
company last year, Google wrote that it faces, and I quote,
``robust competition from other sites on the internet with
intense competitive pressure on us to ensure users find what
they are searching for,'' end quote.
What is your response to Google's statement that it faces
intense competition in Search?
Mr. Hansson. I think that statement relies on the fact of
expanding the market so broad and so wide that everything is
competition.
It is like when Facebook said that they face intense
competition from things like sleep, right. [Laughter.]
Like, we have a limited amount of attention in the day. If
we could make people sleep two hours less, that is two hours
more they could spend looking at ads on Facebook.
Google is doing the same thing by essentially saying that
things like people searching for a product on Etsy, that is a
kind of search and that is also in our domain.
No, it is not. If you search the internet, Google is it. We
have the statistics. We see where our leads come from when they
come to our marketing site. They all come from Google.
No other search engine that matters has any market share
that matters at all. About 40 percent, which is a low number
for our industry--40 percent of all our marketing needs come
from Google.
No other search engine provides as much as 1 percent. They
have complete dominance. We could lose our listing in
DuckDuckGo and we wouldn't even be able to tell. We lose our
listing in Google and we may go out of business.
Mr. Cicilline. Well, and in fact in a subcommittee hearing
Google said, and, again, I am quote, ``When consumers search
for information they can choose among Amazon, Yelp, Microsoft,
Travelocity, and many other companies like these that
consistently report strong user growth. If you don't want to
use Google, there are many other information providers
available,'' end quote.
And as you just mentioned, the search with respect to
places like Yahoo, Microsoft, Bing, or DuckDuckGo rarely pass
even 1 percent.
Mr. Hansson. And also, just to--an example, if consumers
hear about Basecamp they want to find Basecamp on the internet.
Can they go to Travelocity to search for Basecamp? Are they
going to find Basecamp in the travel listings there?
No, they are not. There is only one place where you are
going to find businesses that are online today and that is
Google and that is why they have this tremendous power and none
of these other platforms matter in that regard.
Mr. Cicilline. And you noted in your testimony that Google
is erecting tollbooths everywhere. What are some examples of
these tollbooths and you state that it was not always like this
and that Google has introduced these tollbooths over time.
Why do you believe Google is imposing these tollbooths and
what are the implications?
Mr. Hansson. Yes. It used to be that Google cared very much
about the user experience. They would endlessly give interviews
about every little pixel mattering and how it was just so
important to provide fast service to people could find what
they were looking for.
Today, if a consumer goes to Google on their mobile device
and search for Basecamp, the first thing that they will find is
whoever bought that trademark term, which is usually one of our
competitors. Ergo, consumers are not finding what they are
looking for.
They are not being presented with what they are actually
looking for. They are being presented with an ad and that is
the tollbooth that they are erecting.
It didn't used to be like this. You used to be able to
search on Google for what you were looking for and you would
find it because Google has a great search engine.
The problem is they have replaced that search engine with
an ad engine instead. So now they serve up ads first and they
dominate.
You ask anyone who is in Google's listings does it matter
whether you are on page 3? No, it doesn't. No one goes to page
3. Everyone goes to page 1 and they look at the first results.
So we try very hard and have spent 20 years building a good
reputation such that we would be the number-one organic search
term for Basecamp.
It is just that that doesn't matter anymore. The organic
search term does not matter anymore. The only thing that
matters is whether you buy the advertisement.
We can pay off that, essentially, by buying ads on our own
name. Why would we do that? Customers already know they are
looking for Basecamp.
They go to Google to find us--to find Basecamp, and now we
have to pay Google to buy ads for our own name such that
competitors aren't misdirecting them.
It is a complete shakedown and it should not be allowed.
Mr. Cicilline. And two more questions.
One is you testified that your company has undoubtedly
given up growth to competitors because you have refrained from
pursuing targeted ads.
Do you think a new startup to establish itself has the
option to not work with Facebook and Google and survive?
And then, finally, you also mentioned that Apple has
retaliated against Basecamp for informing consumers that they
can sign up online rather than through the app.
Can you tell us more about this situation, how it has
affected Basecamp and how this policy affects users?
Mr. Hansson. Sure. For the first question, I think the main
thing here, just like with Sonos, is we were founded early
enough that we were able to build up a brand name prior to
these conglomerates having complete domination as they do
today.
So we have some brand equity that we continue to rely on.
But it is being diminished. And if you were to start today you
would not have this opportunity. You would absolutely have to
pay these platforms in able to allow consumers to find you and
build your reputation.
So I think the game is very different now and that is the
tragedy that we have seen. We started a business, were able to
grow it, make it successful because it was a free, fair, and
open marketplace. It no longer is today and now we are facing a
brand new threat.
In terms of the retaliation, we had one example where our
application does not use Apple's payment services. We refuse to
pay the 30 percent fee. We find it completely outrageous.
So we have to go through all these contortions to
essentially tell users when they find our app in the App Store
that we are not using Apple's payment services, that we are
using something else.
Except Apple forbids you in the terms of the agreement to
say anything of the sort. You cannot mention that you are using
an external third-party payment processor and if Apple finds
any evidence of that anywhere they will deny your application.
For a long time, for over a year, we had a small link in
the help section deeply buried within the app that would lead
you to an external help site that would talk about the fact
that you could purchase a subscription to Basecamp.
For the longest time no one at Apple cared. One time we
submitted an update to our application. A particularly
enterprising reviewer finds that, five pages buried deep,
denies our update.
Now we are no longer able to provide bug fixes, security
patches, or anything else through our update until we remove
that.
So we get completely bullied out of having any way of
telling customers how they can actually buy our product. You
see this--I submitted in my written testimony a screenshot for
Netflix--Netflix, one of the other big giants. They can't even
tell their customers how to pay for the product when they are
on the App Store. It is outrageous.
Mr. Cicilline. Thank you very much.
Mr. Buck.
Mr. Buck. Thank you, Mr. Chairman.
Mr. Spence, I want to clarify something with you. I am
sorry, Mr. Barnett.
You said that you can't buy PopSockets on Amazon anymore.
Mr. Barnett. I did not say that.
Mr. Buck. Oh, okay. You can't sell.
Mr. Barnett. So what--just to clarify the relationship, we
quit selling to Amazon. Amazon was then reselling so it would
say sold by Amazon. There was plenty of other--there were
plenty of other sellers.
Mr. Buck. So we could still buy it on Amazon?
Mr. Barnett. In addition, we are now testing a relationship
with that same team at Amazon. So as of--in the last 30 days
you will see products sold by this Amazon team that we broke up
with, you know, over a year ago. So you may even see products
sold by that team.
Mr. Buck. Okay. Mr. Hansson, I want to visit with you about
something because I think there are two issues here that most
of us agree on.
There are a lot of things that we don't agree on. There are
two things that we are talking about today. One is
competitiveness and the other is privacy, and we haven't
touched on privacy and I want to ask you to shorten your
answers a little bit for me if you can.
But one of the things that bothers me is when I buy
something online somebody now knows a little piece of
information about me, and when I buy enough things online they
know a whole lot of information about me and they use that
information to target me.
If there were 30 online vendors they would each know a
little bit about me. When there is one online vendor like--or
one search engine like a Google, that company now has a
privacy--they have my private information as well as an
interest in marketing.
And I want to, if you could--and I know you don't have the
philosophy degree, but I just want to--if you could, tell me a
little bit about what your concerns are in terms of Americans
and, really, people all across the globe giving up that private
information and how it is impacting the marketplace.
Mr. Hansson. I think that is a great question. I think
actually as a--personally, as a consumer, it is the question
that stresses me out the most--the fact that we are forced to
give up our privacy to interact with the modern world.
You cannot opt out of this data collection. If you want to
use the internet, this is being done to you. You simple have no
power.
There are some good initiatives going on--CPA in California
and the GDPR in Europe--that is starting to address this, that
companies and platforms are not supposed to be able to just
collect everything about you without your knowledge and,
essentially, collecting these dossiers that they can use to
target you, because we are all susceptible to advertisement.
Anyone who says otherwise is simply uneducated. If you know
enough about a person, you know all their weaknesses and their
fears and their aspirations, you can sell them so far more
effectively all sorts of things that they may not have bought
otherwise and perhaps they shouldn't have pursued in the first
place.
The example I give in my written testimony is the fact that
a woman who is pregnant Apple--sorry, not Apple--Google or
Facebook may well know before her family does because they can
purchase things like a sales record from CVS that maybe there
was a pregnancy test bought or the fact that she searched on
Google about becoming a new mother, and they can use that data
to then sell that to advertisers who want to reach pregnant
mothers.
That is not a piece of information that they volunteered.
They didn't sign up to say, oh, I would like to receive
advertisement on this private fact about my life and have at
it.
This is just something that is being done to them and we
need to provide consumers real protections so things aren't
done to them so their data aren't being used against their
better judgment.
Mr. Buck. And that was the short version. [Laughter.]
So I want to go sort of one step beyond that with you and
what is the answer to that? Is there--is there a limit to how
much--how big we should let a company aggregate that kind of
information?
Mr. Hansson. I think----
Mr. Buck. And I know--I got to tell you, my concern isn't--
I don't really care if they tell 15 t-shirt companies that I am
now looking for a t-shirt or 15 cowboy boot companies I am now
looking for cowboy boots.
I am concerned more about the ability of governments, the
ability of police forces, the ability of people that would use
that information for nefarious purposes to get that
information.
It is one thing to entice me into buying ice cream when I
am on a diet. It is another thing when you are trying to use
that information in ways that I explicitly don't want that
information used.
And so what is the answer there? How do we--how do we have
great search engines but not just one?
Mr. Hansson. I think the number-one issue here is simply to
ban companies from collecting this information in the first
place and then the reason they are collecting this information
is such that they can sell you targeted advertisement.
If it was no longer allowed to target advertisement based
on personal data, they would have no interest in collecting all
this data. This data is solely being collected for the purpose
of creating these ad engines.
So if you essentially say to Google, for example, you can
simply place advertisement based on my search term--when I
search for a new car in Chicago, resellers of cars in Chicago
they can advertise.
But they can't advertise on the fact that I owned a Toyota
six years ago or that I was in an accident and I might be more
susceptible to a advertisement for Volvo or something else like
that.
Ban the right of companies to use personal information for
data targeting--for advertisement targeting.
Mr. Cicilline. Thank you. The gentleman's time expired.
I recognize Mr. Neguse for five minutes.
Mr. Neguse. Thank you, Mr. Chairman.
I also want to say a thank you to our attorney general and
Congressman Perlmutter. Earlier, we had a chance to visit with
him this morning and he has been a national leader on these
issues on the anti-trust fund, working in tandem with the
attorney generals from any number of other states and we
appreciate his leadership on that front.
I guess, you know, as we get closer to the end of this
hearing, Mr. Buck asked this question I think at the very
beginning and I think it is fitting that we sort of end on it
as well, which is to say the goal of this committee at the
conclusion of its investigation, the hope, is that we would
have a number of different statutory recommendations that we
can make to the Congress to change the law, strengthen the law,
in the anti-trust and also potentially some regulatory
recommendations, ways in which the agencies that are charged
with addressing these issues can act in a more muscular way--
the FTC and others.
I am curious as to whether, and this is a question to all
four of you--as you sit here today, what recommendations would
you make?
What steps do you think Congress should take, whether that
is specific legislation you think we ought to pursue, or, as I
mentioned, perhaps on the regulatory front steps that we should
encourage and incentivize there.
And, you know, Mr. Hansson, you referenced this perspective
of privacy just now in terms of one step perhaps that we could
take. But I want to give each of you a chance to answer that
question, starting with you.
Mr. Spence. Thank you for the question.
I do need to correct the record on one thing. We have
just--we are now spending $10,000 a month on lobbying, which I
would much rather be putting into research and development, but
is a direct impact of the situation we are in today.
You know, as I think about where I hope this committee is
looking, I am not--you know, I am not educated enough to
understand necessarily all the anti-trust laws, as I mentioned
before.
But I would say looking at leveraging market dominance in
one category to be able to dominate another category is
something that has to be, you know, thought through.
Like, how--is that--is that the spirit of the kind of world
that we want to live in, at the end of the day, and I think the
other big issue is this notion of--is of efficient
infringement, as it is called, where these dominant companies
can infringe the intellectual property and invention of other
companies and they do it calculating the fact that if they have
to pay down the road--if that is enforced later on they will
pay the fee.
By that point, the competition will be out of it and it
will be so dominant that it is a rounding error, at the end of
the day.
So swift action on that front and material action is
something that I think would help.
Mr. Barnett. So I raised two issues, one around the
counterfeits and fakes on the Amazon marketplace, the other
around bullying.
As for counterfeits and fakes, we don't have the resources
to fight Amazon. We didn't sue Amazon. We never will sue
Amazon.
We spent $7 million last year in legal battles against tiny
players. I mean, really tiny players. Imagine what it would
cost to fight Amazon.
We could use some help. It would be great if the
government, at some level, stepped in and said massive
companies that are systematically violating intellectual
property rights of small players are targets for the government
and the government needs to step in. That is one thing with
fakes.
And then, second, with the bullying, there are two pieces
to it. There is Amazon as a bully as a retailer and Amazon as a
bully running a marketplace and dictating the terms of the
marketplace, and they are connected.
But it might be a good idea to separate these two out and
say, Amazon, let us break it into two companies. One, if you
want to sell on this marketplace, great. That is one company.
If you want to run the marketplace, great. But you are
going to run it according to certain rules where--especially if
this is going to take 45 percent of the online revenue.
Then there are going to be certain rules to ensure a
certain fairness and to ensure that players can play fairly on
this and dictate the terms that they--that they want, and if
you want to take a fair profit, great. We will reward you for
developing this great marketplace, right.
Mr. Hansson. I think, actually, there is a lot of history
here. The last time a single company was so dominant in
technology in particular was Microsoft in the '90s and there
was very direct enforcement of the fact that they were using
their monopoly in Windows operating systems to extend that
monopoly to browsers and cutting off the air supply to
Netscape.
The government--the DOJ had a anti-trust investigation.
Concluded that Microsoft was in violation of anti-trust laws
and tried to do things about it.
And even if that intervention was not ultimately completely
successful, it was still successful. Microsoft did not go from
having a monopoly in the Windows operating system to having a
monopoly of the internet, which was the stakes at the time. And
we can absolutely do something of the same kind.
The fact that Google has a monopoly in Search is a problem
in and of itself that should be tackled. This is simply too
important of a resource for consumers, for businesses, that
they can run it like they just so please.
Mr. Cicilline. The time of the gentleman has expired, but
if the last witness wants to get in a quick answer.
Ms. Daru. Sure. Thank you.
So we have talked about a few things that--the impacts on
Tile specifically as a result of Apple's anti-competitive
conduct, and things like, you know, throwing new requirements
at us out of left field like this new Apple ID requirement that
we have to now engineer into our products rather than innovate.
They are, you know, raising the prices of their--or the
costs of their rivals by engaging in aggressive advertising
practices.
You know, all in all, that amounts to damage to Tile,
damage to competition and, ultimately, damage to consumers and,
ultimately, we are just one company.
And so what we encourage is to continue to explore, you
know, all of the different ways that Apple has engaged in this
anti-competitive conduct so that we can shed light on what the
best ways of addressing it is.
Mr. Cicilline. Thank you.
Mr. Perlmutter.
Mr. Perlmutter. Just a couple questions. And, Mr. Chairman,
thank you, and to my colleagues from Colorado for letting me
sit in on this today, because it is very--I mean, this is very
interesting and, obviously, it affects everybody every day, and
even if you get a couple more hours sleep, you know, most of
the waking hours that we all have.
So, you know, part of what we are doing is--I would say the
last really successful measure was breaking up Ma Bell, okay,
which ultimately resulted in a lot of innovation but then
consolidation again, which is where we are.
And these companies are having their cake and eating it,
too. They provide a service but then they provide a competing
product. But they have got so much more information now you are
at a terrible disadvantage.
So there is a new product out there. Mr. Hansson, you were
sitting here this morning when I brought it up. So I serve on
the Financial Services Committee, so the banking committee,
real estate, all that sort of stuff.
We had Mr. Zuckerberg come testify to us about an effort
underway at Facebook to create a new digital currency and to
create, in effect, a banking system that is not going to be
regulated as a bank in Switzerland, kind of with some partners
called Calibra and the currency being Libra.
You know, you had it--you talked about making Kafka blush
and then you have sort of a fear and loathing comment in your
testimony.
It says, ``Back then there was excitement about the likes
of Google and Facebook and the better tools and services they
provided us. Today, the excitement is primarily replaced by a
mixture of fear and loathing.''
So in the context I brought to you of Facebook, with all of
its information and its ability to unbelievably target
information, what is your--what is your reaction to them
potentially becoming the biggest bank on the planet?
Mr. Hansson. That would be a catastrophe, and I think the
fact that they already have so much data about everyone, if we
add in all our purchasing data on top--I mean, how you spent
your money and how much money you have--no single company
should have access to this much data.
Second of all, why do we need another thing that is
unregulated that they can control? Like, we already have
problems just dealing with all the issues that they have
created in society as it is today.
We need to deal with these issues first before they sort of
venture off and try to undermine sort of currencies of
sovereign countries.
Mr. Perlmutter. And with that, I just appreciate everybody
and their testimony today, and thank you for--and thanks to my
colleagues for letting me participate in this.
Mr. Cicilline. I thank you, Mr. Perlmutter, for being part
of this.
I am going to now recognize myself for the last five
minutes and then I know Mr. Buck is going to make some closing
comments as well.
I want to turn now to you, Ms. Daru. Your written testimony
notes that Apple is a major distribution channel for Tile's
products but that Apple has introduced services such as Find My
that you spoke about that now directly competes with Tile's
business.
Apple argues that Find My is not a real competitor to
Tile's products because it does not use background data. How
would you respond to that claim?
Ms. Daru. Thanks for the question.
Find My, as its name suggests, is a location-based finding
service. So is Tile.
And Find My helps people find their Apple devices. Tile can
do that, too. And ultimately, you know, Apple renders Find My
as a native installation on all their phones and it is a
feature in every one of their phones and they sell those
phones. So they certainly are in the business of location-based
finding services.
Mr. Cicilline. Thank you.
You have described how Apple has made several changes that
make it more difficult for customers to use Tile. For example,
Apple now sends Tile users frequent prompts receiving that
they--requiring that they repeatedly confirm they have granted
Tile access to their location data.
Apple has publicly said that it makes these types of
changes to promote user privacy. Is there a reason to think
that these changes which might hurt Tile are actually good for
customers and can you describe what else is different in the
new iOS as it relates to the Tile app?
Ms. Daru. Thanks for your question.
No, the changes that they have made are not good for
privacy or for consumers. If you think about it, these changes
that they have made they actually don't make any information
more private.
The vulnerabilities that existed before still exist. Any
bad actors that are out there are still probably acting badly.
But what these changes did is they added friction. They added
confusion.
They added annoyance to the customers of Tile, who got
confused, wondering why they were getting all of these constant
reminders, wondering if it should imply that Tile should not be
trusted and, at the same time, didn't apply the same mode of
transparency to its own services.
And I think that this is a really prime example of Apple
using privacy as a shield to advance its best interests.
Mr. Cicilline. Privacy and data protection have been
recurring themes in our investigation. Our committee is also
concerned with the use of privacy as a shield for anti-
competitive conduct.
You mention in your written testimony that Apple has
justified the recent iOS changes in part to enhance consumer
privacy.
Can you discuss how Tile uses, stores, or monetizes
sensitive user data?
Ms. Daru. Absolutely. Thank you for your question.
Privacy is of the utmost importance to Tile, especially
given the nature of our business.
Importantly, Tile only exists to help people find what
matters most, to relieve a really large pain point in people's
lives. They say that people spend at least 365 days of their
life looking for lost items and that is what we are trying to
solve.
Trust is of paramount importance. Importantly, also is that
Tile doesn't have any ancillary businesses that could use this
data that is collected in a way that doesn't comport with
reasonable expectations.
We don't have an ancillary advertising business. We don't
even have revenue-generating advertising in our products and
services. Our only revenues come from selling our devices and
our subscription revenues.
Mr. Cicilline. So you don't use, store, or monetize the
sensitive user data at all?
Ms. Daru. We store--we do not monetize or sell sensitive
user data. We store some data for a very limited amount of time
only to provide the service, operate our business, and enhance
user experience.
Mr. Cicilline. Okay. And my final question is your written
testimony notes that Apple's control of the iPhone ecosystem
gives it access to competitively sensitive information.
Do you believe Apple's access to this information raises
competition concerns?
Ms. Daru. I absolutely--I absolutely do.
So in addition to the--to the examples I gave earlier, for
instance, when they were carrying us in their retail stores we
would even give them prototypes of our to-be-released products
and absolutely they have the power and they have shown the
proclivity to use that power to their competitive advantage. So
absolutely.
Mr. Cicilline. Thank you.
And I would just----
Ms. Daru. Yeah.
Mr. Cicilline. Before that I would like to--my time is up.
I am just going to ask all of you quickly to answer yes or
no.
Do you think that you would have been able to successfully
launch your companies and the products you have described to
this committee in today's internet environment?
Mr. Spence?
Mr. Spence. No.
Mr. Barnett. Yes.
Mr. Cicilline. Mr. Barnett, yes?
Mr. Hansson. Maybe.
Mr. Cicilline. Maybe?
Ms. Daru. Impossible for me to speculate.
Mr. Barnett. Can I qualify what I mean? We can stay in
business. But we wouldn't enjoy anywhere the degree of success
we have today with----
Mr. Cicilline. All right.
I am going to now yield to Mr. Buck.
Mr. Buck. Thank you, Mr. Chairman.
Ms. Daru, I want to end with you the way I started with Mr.
Spence. I am wondering about the answer--the solution--and I
hear Apple creating a product and pushing you out of the
marketplace with the creation of that product.
You can really find my wallet, by the way?
Ms. Daru. Absolutely we can. Yeah.
Mr. Buck. I am the one that 365 days----
[Laughter.]
So what is the answer to--should Apple not be allowed to
create competitive products? Should Apple be restricted in its
pricing or the way it regulates products in the App Store?
What is--what would you like to see? And I would trust the
chairman absolutely with this. You know, he could just pound
that gavel and say tomorrow this is the way it is going to be.
How--what would you like to see?
Ms. Daru. So when it comes to Apple, I would start with we
need equal transparency and visibility on their platform. We
need equal access to permissions. We need equal access to
critical technology.
We need advance notice of changes to the OS that have a
meaningful impact on our business and we need rules that are
applied consistently across the board to everyone in the
ecosystem including Apple.
So like I said, we are one company and have had a
significant impact by the anti-competitive practices of Apple.
I wish I had all the answers.
But I am here in support of Congress's continual
exploration of these anti-competitive practices to better shed
light and highlight how we have to--how we can address these
inequities because, ultimately, the future of competition in
the United States depends on it.
Mr. Buck. So you are all right with Apple creating a
competitive product; it is the way that they distinguish or
discriminate between the two products that is the problem?
Ms. Daru. So it is two things.
So, absolutely, we welcome fair competition. But it has to
be fair. You know, we are seeing time and again Apple using its
dominant market power and engaging in practices that put us at
a competitive disadvantage, for instance, engaging in these
aggressive advertising practices, putting ads online that look
like Tile ads for people who are searching for Tile, diverting
them to the App Store, raising our costs at the most critical
times of the year.
You know, they are engaging in these practices that
ultimately put us at a very--at a competitive disadvantage, and
it is those types of unfair practices that we need to curb.
Mr. Buck. I yield my time.
Mr. Cicilline. Well, I want to, first, say thank you again
to the University of Colorado Boulder for hosting us. Thank you
to the four extraordinary witnesses that we have just heard
from.
You have demonstrated tremendous courage in being here
today and describing economic retaliation that some of you have
already experienced.
And so I want you to be certain to share with us--we do not
expect that you will suffer any economic retaliation for coming
forward and testifying before Congress but if you do in any way
it would be of tremendous interest to this committee.
I think, you know, Mr. Buck raised the question of what is
being spent by some of the big large digital platforms in
lobbying their interests and there is not a corresponding lobby
for innovators and entrepreneurs and small businesses.
That responsibility falls to all of us. It is our
responsibility to make sure that they marketplace is working,
that it is promoting competition, that it is protecting
innovation.
It is protecting small businesses and entrepreneurs and
that is the focus of this investigation to figure out how we
get this marketplace working and what are the consequences that
are being experienced by entrepreneurs and innovators and small
businesses and consumers as a result of this tremendous market
concentration.
So you have contributed significantly to our work. I thank
my colleagues who are traveling back home and traveling to the
hearing, because it has added to what, as Mr. Buck said, has
been a very bipartisan effort to really understand Congress's
role in both modernizing the anti-trust statutes and making
sure anti-trust enforcement is working properly and that the
resources are available to be successful.
And so, again, with deep thanks from the entire committee,
this concludes today's hearing and without objection all
members will have five legislative days to submit additional
written questions for the witnesses or additional materials for
the record.
Without objection, the hearing is adjourned.
[Whereupon, at 11:57 a.m., the subcommittee was adjourned.]
APPENDIX
=======================================================================
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]