But would blocking M&As starve the Big Tech beast, or hamstring their future competitors by weakening the startup ecosystem?
Last Thursday, Sen. Amy Klobuchar (D-Min.) — Chair of the Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights — introduced new legislation targeting Big Tech companies’ ability to engage in mergers and acquisitions (M&As). This legislation (S. 3197) is the Senate companion to the House Platform Competition and Opportunity Act (H.R. 3826), which was marked up and reported out of the House Judiciary Committee in June. If enacted, this law would effectively ban Google, Amazon, Facebook, Microsoft, and Apple (and potentially other large companies in the House version) from M&As with few exceptions. While that may sound to some like a narrowly targeted intervention, it would have significant negative downstream effects for the startup ecosystem and venture capital investment.
Both versions of the Platform Competition and Opportunity Act would make it illegal for any “covered platform” to acquire “the whole or any part of” the stock, share capital, or assets of “any person engaged in commerce or in any activity affecting commerce.” The only way around this ban is to affirmatively prove to the Federal Trade Commission (FTC) through clear and convincing evidence that the acquisition would not help the firm in question improve or maintain its market position.
This legislation is part of the six-bill package that came out of the House Antitrust Subcommittee earlier this year, and is one of four that specifically target Google, Amazon, Facebook, Apple, and (in some versions) Microsoft. As with the other House bills and their Senate companions, “covered platforms” are defined as any platform that has at least 50 million US-based monthly active users or at least 100,000 US-based monthly active business users, has net annual sales or a market capitalization of $600 billion or more (lowered to $550 billion in S.2992), and is a critical trading partner for any product or service offered on their platform. Unlike the other House and Senate bills, this legislation fixes the qualification threshold around the date of enactment, preventing other firms from later coming into scope. This change may have been necessary for attracting cosponsors like Sen. Tom Cotton (R-Ark.) given Walmart’s $423 billion (and growing) market capitalization.
There are a few other differences between the House and Senate versions of the Platform Competition and Opportunity Act, which are mostly small changes. S. 3197 adds an additional exclusion for acquisitions valued less than $50 million. It also cuts out the inflation adjustment for the annual sales and market capitalization requirements (since it fixes qualification around enactment), as well as allowing for injunctive relief “as necessary to prevent, restrain, or prohibit violations of this Act.”
A troubling provision that remains in both versions is the expansion of competition considerations to include “user attention.” Presumably building off of the ideas of Tim Wu, who now works for the Biden White House in the National Economic Council, the bill formalizes “competition for a user’s attention” as a relevant factor in competition law. While Wu and other academics’ opinions on the “attention economy” are worth deeper consideration, the inclusion of this provision seems overly ambiguous and vulnerable to abuse by agency bureaucrats looking to expand their authority.
How should the FTC define a user's attention? How would antitrust enforcers quantify users’ attention without invading individuals’ privacy? Should courts consider anticompetitive attacks on a user’s attention as an independent antitrust violation or as part of a broader discussion under the consumer welfare standard? The Platform Competition and Opportunity Act furnishes no answers. Here at Lincoln, we remain skeptical that popular techno-panics around attention (as seen in The Social Dilemma) offer a useful framing of the problem.
Both versions of the bill also include an individual right of action giving plaintiffs the ability to “recover threefold the damages” for injury and attorneys fees. Considering that the bill grants the FTC and state attorneys general both criminal and civil enforcement authority, the inclusion of an individual right of action seems unnecessary. Given the burden of proof placed on the companies, high damages, and litigation cost shifting, this legislation would put a chilling effect on M&As even if they’re legitimate and have no competition harms (e.g. hiring for talent acquisition).
For tech startups, there are effectively only three paths: acquisition, scaling, and failure. The vast majority of startups fail. Those that survive can either attempt to scale-up to success (typically becoming a public company), or they can have an exit through a merger or acquisition. Scaling to become profitable or attractive as an IPO is often difficult and capital intensive. This, along with other regulatory distortions, has led an increasing number of startups to seek exit through M&A.
Source: National Venture Capital Association 2021 Yearbook
By eliminating options for exit, this bill threatens to severely damage the startup and investment environment in Silicon Valley and other tech hubs. As venture investor Patricia Nakache wrote in House testimony, “One small change [to M&As] can have huge ripple effects, and it is critical that policymakers consider the broader picture of the economics of the startup ecosystem before taking significant measures.” Adding that, “for the time being the venture and startup ecosystem must rely heavily upon M&A activity for exits. Without this option, investment into startups will suffer and cause a massive drag on innovation and new company formation.” M&As play an important role in the innovation ecosystem, and ultimately will be important for setting up future challengers to today’s big incumbents, and allowing them to compete with each other in different silos (e.g. Apple entering the advertising market).
Even though Big Tech firms make up a small minority of venture-backed M&As, the existence of this exit pathway is a positive incentive for startup investment. According to the House Subcommittee on Antitrust’s “Investigation on Competition in Digital Markets,” Amazon, Apple, Facebook, and Google collectively merged with or acquired over 400 companies between 2010 and 2020 (out of about 10,000 total US venture-backed M&As in that period). Had this law applied in 2010, nearly all of these acquisitions would have been banned, regardless of whether they helped generate consumer benefits, or led to competition harms.
For Republicans, who are chiefly concerned about moderation bias and free expression, it’s unclear that banning M&As does anything to advance their policy goals. And it could actively undermine them by putting a chilling effect on startup investment in potential future competitors to today’s Big Tech firms. With its sister bills, this approach would create a super-charged progressive FTC with a mandate to reshape major sectors of the economy without congressional supervision.
Conservatives concerned about Big Tech’s grasp on the digital public square should explore more thoughtful approaches such as improving enforcement, promoting algorithmic choice and interoperability, and designing regulations targeted at industry sectors and activities (e.g. targeted advertising or e-commerce) rather than ones designed to punish specific companies.
