By: Amarins Laanstra-Corn and Roshni Padhi (Stanford University)
Photo: Ian Hutchinson (Unsplash)
Introduction
On July 29th, 2020, four of the most powerful men were virtually sworn in to the United States House of Representatives Judiciary Committee to testify regarding the current state of antitrust and competition regulation as it relates to the technological sector. Collectively, these four men – Amazon CEO Jeff Bezos, Google CEO Sundar Pichai, Facebook CEO Mark Zuckerberg, and Apple CEO Tim Cook – and their respective companies have amassed a net worth of roughly $5 trillion, and over the course of the past three decade, these four companies have, in total, bought and absorbed over 720 additional companies
Current Legislation and Standing on Competition in Technology Sector
One of the biggest questions surrounding big tech and competition is whether or not antitrust laws should be rewritten or merely reinterpreted. Given the fact that the most notorious statute on market competition currently holds as the Sherman Act, a piece of legislation written in 1890, there is room for argument that the parameters set in place by this specific act could have never even conceived the challenges but forth by the technology companies of the present. This being acknowledged, the Sherman Act’s Section Two broad language on monopolization, which states it is “unlawful to monopolize, attempt to monopolize, or conspire to monopolize” as well as “engage in exclusionary conduct to achieve, maintain, or enhance [monopolized] power,” could potentially be applied regardless of sector. However, in practice, the Supreme Court has maintained that Section Two can only be enforced when both clauses are proved true, companies must engage in active exclusionary activities, and the Supreme Court has never deemed a company to possess monopoly power when their market share has been demonstrated to be below 75%, (lower courts have set different precedents on thresholds).
The Supreme Court’s mandate that violations of antitrust legislation must establish significant and monopolistic market power has proved to be an incredible hurdle for federal regulators, as exclusionary practices in the digital market are significantly different from those in a traditional one. One of the most prominent tests in determining monopolistic practices is the “small but significant and non-transitory increase in price” (SSNIP) test. This seeks to determine if a monopolist could impose a profitable price increase to consumers of about 5%. However, when it comes to digital markets, this test becomes almost moot. Since the majority of the major software companies are zero price markets, as they don’t charge users for their services (search engines, social media platforms, etc.), this is no longer a suitable manner for determining market dominance. Additionally, regulators face barriers when attempting to demonstrate imposed entry barriers for the digital market. This is due to market phenomena limited to the technology primarily network scale, the larger the network offered by a service, the more likely it is to attract new users while driving business away from smaller competitor platforms, and the advantage of big data, companies with aggregate sources of data collection can offer more personalized tailored experiences, an advantage not offered by nascent competitor companies.
In addition to proving monopoly power, regulators also must deal with the hurdle of proving exclusionary practices. Exclusionary practices usually fall into the categories of predatory pricing or price gouging, refusals to deal, and exclusive dealing and product design. All of which have been demonstrated as more difficult to prove for tech based companies when compared to traditional ones. This again is due to zero price markets and digital packages designed to be provided by only one service.
Furthermore, the Clayton Act, under Article Seven of the Sherman Act, details the processes of unlawful Mergers and Acquisitions (M&A) of which result in “lessened competition.” This section reviews both horizontal (intrasector) and vertical (across-sector) M&As. It qualifies “lessened-competition” through the use of exclusionary and monopolistic practices as listed above, with the same challenges. The Hart-Scott-Rodino Antitrust Act (HSR) regulatory agencies, specifically the Department of Justice and the Federal Trade Commission (FTC), then have the power sue the involved merging companies to block the presented merger or acquisition. These bodies also have the powers beyond ex-ante regulation, as they can also act to effectively undo previously closed mergers and acquisitions.
Previous History of Tech Acquisitions
From the beginning, big tech companies have acted in bold and brazen manners in order to stifle competition through acquisitions. This trend can be seen consistently, from Facebook’s purchase of Instagram ($1.1bn) in 2011 and later WhatsApp ($22bn) in 2014, Microsoft's acquisition of LinkedIn ($26.2bn) in 2016 and then its subsequent all cash purchase of GitHub ($34bn) in 2018, which currently stands as the most expensive software M&A of all time.
Case Study: Google
Ever since its creation, Google has acquired over 270 companies, with the majority (170) being both established and nascent competitors. Google (and its parent company Alphabet Inc.) found its peak in rate of acquisitions in the year 2011 and 2014, acquiring 34 companies in each year, approximately one for every ten days. Although behaving in both monopolization and market dominance practices, Google’s M&A behavior has gone largely unregulated. In the past two decades, Google has managed to buy some of its most prominent direct competitors such as the advertising firms Doubleclick (bought for $3.1bn in 2007) and Admob (bought for $750m in 2009), Youtube (bought for $1.65bn in 2006), which at the time was classified as a direct threat to GoogleVideo, and Waze, a rival to the GoogleMaps Services (bought for $1.3bn in 2013). Throughout this time, Google has only been challenged once, on their 2011 purchase of travel software firm ITA, which was eventually approved by the Justice Department for 700 million with embedded anti-competition conditions. Currently, Google is said to retain a 70% market share within search engines and online ad services. Ultimately, Google’s market behavior is not the exception to the rule, but rather serves as the archetype for other corporations of similar scale.
Case Study: Facebook
Facebook has long been the subject of antitrust regulation commentary rhetoric. First, with their acquisition of social media platform Instagram and later of the digital messaging service WhatsApp. These acquisitions in particular have led to the estimate of Facebook owning three of the top four social media applications and congressional requests for an investigation under the Clayton Act. But these estimates don’t exist without nuance. Due to the fact that Facebook exists as a zero price market, changes to lessen competition and establish market dominance, result in no net financial costs to consumers, which as previously mentioned, is one of the most traditional measures of anti-competition practices. Additionally, since there has yet to be a judgement on market classification, depending on the market used, Facebook could face varying repercussions. If it were to be decided that social media services existed as its own market, regulators could begin to define what qualified as market shares and Facebook could be viable for extreme antitrust violations; however, if the market is outlined more generally, or as it currently stands, remains undefined, Facebook will continue to exist in a grey area, to both the impediment of companies and regulators. Facebook also acquired a lesser known company Onvano Mobile Ltd., which specializes in mobile analytics, in 2013 for $200 million. This acquisition, however, was only short lived as the now Facebook Ovano division was shut-down in 2019 due to gross negligence of consumers privacy
Effects Proposed Legislative Changes/ Regulations on Mergers/Acquisitions
In March of 2018, the Trump administration prevented Singapore-based Broadcom from acquiring California-based chip maker Qualcomm in a $117bn transaction that would have been the largest technology deal in history thus far. The U.S. government cited concerns of national security, indicating that they did not want to cede national dominance in the semiconductor and wireless industry, especially in the context of competition with China. Notably, this situation set a precedent for direct government interference and regulation of the technology sector, which could result in spillage effects for companies across the tech sector. This is especially relevant in light of heightened competition with China and related protectionist policies, i.e. Trump’s desire to ban TikTok and WeChat from the United States due to their Chinese origins. Interestingly enough, on August 11th, 2020, a federal appeals court ruled against the federal government’s antitrust judgment against Qualcomm, claiming that the government hadn’t fully proven illegal monopolization.
Recently, the most notable movement in antitrust regulation came in February 2020, when the FTC announced a review on past acquisitions by large technology companies ranging from January 1, 2010 to December 31, 2019. These reviews were conducted on prior acquisitions not filed with the proper antitrust protocols. These five companies included Alphabet Inc (Google), Amazon, Apple Inc, Facebook Inc, and Microsoft Inc. The review was qualified under the HSR Act, and done in order to investigate acquisitions made against potential competitors that federal regulators may have failed to properly review, due to inconsistent measures of competition thresholds in the technological sector. Since the FTC and DOJ both possess the power to overturn already finalized mergers and acquisitions, this could potentially set off enormously consequential effects, especially since Facebook and its Instagram and WhatsApp acquisitions have been under investigation since August 2019. If the FTC were to exercise their powers to its fullest extent, the precedent of breaking up previously established acquisitions could wreak havoc on the current practice of M&A within the tech industry, with a Supreme court case likely being the end result.
While these inquiries take time, the rising pressure of regulation is something that must be considered by major tech conglomerates if they choose to engage in future M&A activity. Companies may also want to begin to consider the threat of regulation as imminent rather than a hypothetical, and seek to work with regulators in order to comprise potentially mutually beneficial legislation, instead of fighting with lawmakers now and dealing with the adverse effects later. Companies must also factor in the effects of the upcoming presidential election as well as the European Union’s Digital Service Act, and its clause on ex-ante competition regulation. For as it stands, the fight between regulators and big tech will only spiral into greater aggression if action is not taken soon.