By Professor, University of Utah and Assistant Professor of Economics, University of Utah. Originally published at the Institute of Economic Thinking website
The Big Tech companies, including Google, Facebook, Amazon, Microsoft and Apple, have individually and collectively engaged in an unprecedented number of acquisitions. In a new paper, Big Tech Acquisitions and the Potential Competition Doctrine: The Case of Facebook we document the 90 completed acquisitions made by Facebook since 2007 and consider the applicability of the potential competition doctrine to two of their largest purchases.
Tech giants like Facebook operate in markets with unique features such as strong network effects that can “tip” the market toward domination by a single firm. But these effects are a two edged sword. Creative start-up companies with innovative products can also capture network effects that allow them to scale quickly, gain a large user base, and blossom into a competitive rival of the dominant firm. This potential for start-ups to challenge market leaders reinvigorates the competitive process within the dominant firm’s core market. In this context, acquisitions of nascent competitors by dominant firms undermine both current and future competition and reinforce the incumbent’s dominance in the face of technological shifts.
So why has there been so little attention by the antitrust agencies in the face of hundreds of mergers involving potential future competitors by the Big Tech companies? We argue that the potential competition doctrine that would be directly applicable to these situations was an early casualty of the Chicago School revolution that swept through the antitrust world in the 1970s and 1980s. In particular, Justice Powell’s 1974 decision in United States v. Marine Bancorporation undermined the applicability of the potential competition analysis in a manner that rendered it virtually impossible to apply to online platform markets. Following the election of Ronald Reagan, the Department of Justice followed suit with new merger guidelines hobbling the doctrine even further.
We illustrate the consequences of the attenuated potential competition doctrine in the context of Facebook’s $1 billion purchase of Instagram in 2012 and its $19 billion WhatsApp deal in 2014. Both of these mergers avoided challenge by the antitrust authorities, yet have been strongly criticized by antitrust commentators. The details of these acquisitions are revealing. In 2012 Facebook was under pressure from investors ahead of its IPO while simultaneously struggling to reorient its network from a desktop-based platform to a mobile user base. In this period mobile-native applications with social features such as Instagram and Foursquare were attracting growing user numbers and threatened to draw user engagement away from Facebook precisely when its revenue base was under scrutiny. Instagram was particularly popular among younger users who focused on mobile photo sharing. Industry analysts suggested that Instagram was posed to challenge Facebook in its core social networking market. By applying the evidentiary standards required for a challenge under the potential competition doctrine, we show that even the strong prima facie case for Instagram as a potential competitor is difficult or impossible to establish under the extraordinary levels of proof required by the doctrine.
Similarly, in 2014 WhatsApp was the largest and fastest growing messaging application in the world. It was reliable, affordable, worked across national borders, and offered end-to-end encryption. Importantly, WhatsApp was popular in markets where Facebook Messenger was a late entrant and it was growing at a record rate. At the time of the acquisition WhatsApp had 450 million monthly active users and was gaining one million users per day. WhatsApp users were also unusually engaged; more than seventy percent of WhatsApp users accessed the app daily. WhatsApp could have been a critical entry point into the social network market and a challenge to Facebook. However, once again the relevant antitrust agencies did not see a problem based on an analysis of potential competition.
We contend that the problem of merger control in high tech industries is not related to technological innovation or changes in market structure. Instead, it is related to the continued hold of the Chicago School of Antitrust which hobbled the potential competition doctrine in a manner that made it for all practical purposes irrelevant. The Instagram and WhatsApp examples demonstrate how the potential competition doctrine is designed to fail. We argue that to untie that hands of the antitrust agencies, the enormous upfront proof requirements of the prima facie case imposed by the Chicago School on antitrust plaintiffs must be replaced with a simple structural presumption that high tech firms in concentrated markets that purchase start-up companies in adjacent or proximate markets creates a rebuttable presumption of illegality. At that point the burden would shift to the proponents of the acquisition to demonstrate that the merger would not harm competition in any market. Under this approach the current barriers to challenge potential competition mergers can be lessened without sacrificing the importance of a full competitive analysis.
It’s pretty basic answer and that’s the fact that executing code unknown runs on the back ends of the tech platforms, nobody but the tech company has access…consumers all think the platforms are just what they see on the “front” ends loaded with dopamine and are oblivious to what goes on with the back ends. The back ends is where all the control is at, you can defy anti-trust, create all kinds of human scoring values to benefit the wealthy and more. That’s how they do it, with computer code and when they buy up other companies, regulators don’t understand how powerful merging data and queries ends up being. Work goes into the back end, engineers load up the front end with dopamine and whatever else they want to portray as their marketing perception and off they do. The talent here is to keep the back end operation completely separate from what gets seen on the front end when all the clicking sheeples show up..pretty basic and simple description here I know, but its a summary of what is going on out there and puts corporate algorithms in control and power all the time. Its scary this is where the power is today and not from day dreaming politicians walking around with magic wands of what you could call “magic pixie dust perceptions” that go nowhere of course, as it’s all virtual stuff that creates a desired perception to make folks like them. It’s like saying your are empowered by your phone, quite the opposite, the phone controls you and your behavior, and that’s not empowerment in my book:)
The backends and associated customer-specific pricing schemes with special deals for specials customers also fall to some sort of gray area. As far as I know, offering special deals to your competitor’s customers that are far cheaper deals than you would otherwise offer publicly is considered ‘predatory pricing’, but please do correct me if I’m mistaken.
Everyone is obsessing with free and open markets, but how open are the markets if every market actor is operating their own non-transparent pricing systems which base their pricing on the web behaviour profiles of these customers? I suspect that many services will soon enough start offering these limited time offer flash deals to tie down their customers and I’m seeing increase in these already. Main idea is to reduce customer propensity to actually evaluate different service providers (another change, everything is becoming a service instead of single-transaction-bought product) against each others, instead the customers shop around for flash deals, but they come to you instead of you getting them when requested so there is the psychological effect of seizing the moment, but this doesn’t always work to customer’s favor.
Thanks for this comment. Russell Jacoby had a chapter in his book ‘Boxed In’ (I think)
called ‘Big Brother is You, Watching’ (I think) showeing where we were headed, quite
awhile back. The concentrated power that you and that author describe is formidable.
This cartel-ization of industry has been progressing since the end of WWII. The I.G. Farben cartel supported Hitler’s rise to power, and after the war, Wall Street Nazis like the Dulles brothers at Sullivan & Cromwell, made sure that the post-war economic order would make the world safe for American cartels in the future.
James Stewart Martin was a lead negotiator on anti-trust issues in Europe after the war. As he points out in his book, “All Honorable Men:”
Stewart’s book is a must-read.
It is my understanding that great capitalists seek to unite a coterie of agreeable economists in a venture to deplore competition and raise monopoly or cartels as the most efficient way to conduct commerce. This would approve the early purchase by the existing giants of any new tech start-up that appeared capable of creating a following and give their dominance more permanence perhaps leading to legislative recognition of market control by firms of a certain size.
It’s much simpler. Knowledge is Power.
In earlier centuries priests got the Benefit Of Clergy because priests heard confessions and knew secrets. Deepstate agencies like FBI are immune to punishment for the same reason. Now Google and Twitter are the biggest confessionals in history, and they have thousands of acolytes gathering and filtering secrets, especially the secrets of politicians who might think of controlling Twitter.
I think back in the early ’00s, Cisco ingested almost a company each month, so this is not really new, only bigger.
One of my college friends co-founded one of those companies.
After the sale, he and his business partners were golden handcuffed to Cisco for something like three years. Believe me, as soon as that time span was over, they were outta Cisco like they were on a jailbreak.
Hardware and the social media companies are quite different. THere is no problem with some small hardware company creating cheaper/better switch and selling a few hundred copies.
A new social media company needs a lot more scale than a few hundred users.
I wrote a note on this some years back, under the title Understanding Social Media “Insanity” — which includes a simple Markov analysis of how the competitive game is played. The basic ideas are these:
– In a world of compute clouds, the barriers-to-entry for social media startups is low
– The social media space is new enough that many firms with “one-stripe zebra” distinctive competencies might still carve out and defend niches successfully — they play well
– Publicly traded firms (like Facebook and Google) are compelled to increase market share and earnings and have powerful incentives to change the nature of competition — to “shake up” the transition matrix from time to time
– Nothing shakes up a transition matrix like the acquisition of a competitor
– Technology tends to produce natural monopolies, but only if a leader can acquire enough share that higher-order monopolistic effects take over
Matt Stoller’s “Goliath” is out, and not a moment too soon. Antitrust, anyone?
What in particular does the argument about the Chicago School of Antitrust and the burden of evidence have to do with tech? Doesn’t everything in the last paragraph apply equally to other monopolistic corporations?
And this misses an interesting question: why has the Chicago School of Antitrust continued to hold for so long despite its obvious ongoing harm to the public? I’d assume a big part of the reason is lobbying. Corporations with profit margins that depend on their market domination spend a lot on it.
“…why has the Chicago School of Antitrust continued to hold for so long despite its obvious ongoing harm to the public? I’d assume a big part of the reason is lobbying. Corporations with profit margins that depend on their market domination spend a lot on it.”
The Chicago School’s approach to antitrust essentially shifts the burden of evidence from the standard of a civil proceeding’s “an overwhelming preponderance of evidence” to something closer to a criminal proceeding’s requirement of “proof beyond a shadow of a doubt” which is nearly impossible when trying to “prove” that an acquisition/merger will harm competition in the future.
(At least that’s my simpleton’s take from reading Glick & Ruetschlin’s paper. Perhaps someone with a backround in antitrust law is able to explain it better)
Civil standard is not “overwhelming preponderance of evidence,” just simple “preponderance.” https://www.nolo.com/legal-encyclopedia/legal-standards-proof.html
As to why no trust busting these days, look no further than the hiring practices and stacking of interests at the so called United States Department of Justice. And ditto S Attorneys’ offices, and probably most state prosecutorial offices. The lower you go in the jurisdictional hierarchy, the greater the paucity first, of enforcement-minded personnel, and second, of ability to actually litigate a criminal or civil case against a monstrosity like Amazon or Google, with tens of thousands of lawyers, law clerks, computer resources and phalanxes of expert witnesses all spouting the corporate “truths.” http://www.corruptionofjustice.com/
Also the standard for guilt in a criminal trial is “beyond a reasonable doubt” not a shadow of a doubt.
Part of the reason may be that the vast majority of companies that are bought out are not anywhere close to being profitable.
I mean, would anyone really object if Facebook purchased WeWork?
Yes, and although unprofitable as stand-alone businesses, some certainly become profitable once plugged in to the scale of the acquisitor’s business…it’s not always about preempting competition.
The driving ethos of Big Tech has always been to establish a monopoly position in a company’s particular space, as the actions of Microsoft over the years have shown. The EU has actually tried to take on predatory practices of Tech, but the practicalities of “deconsolidation” or breakup have eluded regulators so far. US is late to the party, especially as the tech majors – AMZN, FB, GOOG, UBER, et al, have set up huge lobbying efforts in DC to thwart any encroachment upon their monopolistic tendencies. The fight has only begun.
The Chicago School may have built an edifice rationalizing Cartel Building: “… continued hold of the Chicago School of Antitrust which hobbled the potential competition doctrine in a manner that made it for all practical purposes irrelevant.” But this neither explains the “continued hold of the Chicago School of Antitrust”, nor its accent to policy, nor its “continued hold” in Economics Academe and government policy long long after this rationale has proven disastrous, extremely ill-conceived, and less than well argued even in its origins. A school of economics may rationalize government action like the complete abandonment of anti-trust policy [except when applied to Labor] but it can not shift Government. That takes a different kind of power than mere argument and rationalization.
The same reason that they continue to get away with petrifying privacy violations and reputation scoring™ billions? Because they were initially DOD/NSA/CIA, et al subsidized to become DC Revolving Doored Quasi Governmental Entities unto themselves to begin with?
They certainly operate as such quasi governmental entities in the Silicon Valley Area. and no doubt the Seattle Area. I recollect reading of Microsoft software and Government backdoors to it many years before Snowden. Bezos’ mentor grandfather was a DARPA/Arpanet hot shot. Facebook was first in literally buying its own (Menlo Park,California) Police Force, Google presides over NASA/Moffet Field, Apple and backdoor biometrics, etcetera.
In Silicon Valley this quasi governmental status became very obvious when all presidential candidates were holding exclusive townhalls in person at Google –which seemed an unspoken requirement – for just one example.
(Revolting photo epitomizing this quasi governmental reality from the not that distant past. Sergey and Larry were too important to attend.)
Thanks for this comment.
You’re very welcome.
Regarding that photo, taken at the home of host John Doerr (the Chairman of Kleiner Perkins, the Sandhill Road, Menlo Park, California International VC firm), I guess Al Gore and Colin Powell -both then and current partners at that firm – were told to stay home for appearances sake, wouldn’t want the photo to look too fascist.
And speaking of Cisco (in marcel’s comment above), of course then CEO John T. Chambers was in attendance there. I’m near positive he was the Silicon Valley CEO who donned a kilt and rode a tank down the street (however illegal that probably was) with his bride, Elaine, for his wedding in Santa Clara County (so much for online news archives, can’t find a link anywhere to the Silicon Valley CEO from a Multinational Corporation who did that). Haven’t driven by there in quite a while, but last time I did Cisco was blocks long, had it’s own traffic lights.
Of course, the UK Daily Mail notes all of those in that feasting table photo (except the person who’s head is hidden, to the right of zuckerberg: