Revising the paradigm on anti-trust in the United States

I have blogged here about the new era in anti-trust activity within the US government. The new paradigm calls on regulators to look beyond the test of just immediate consumer welfare to cover anti-competitive practices which creates the structural conditions for market concentration and consequent abuse. 

FT reports that the US Federal Trade Commission (FTC) has filed a lawsuit to stop Meta from buying Within, a small start-up which creates experiences for virtual reality (VR). Its biggest hit, Supernatural is a fitness app that's one of the most popular on Meta's VR marketplace. FTC's argument is that halting the deal was necessary to prevent Meta from quashing a competitive threat in a potentially large market. With this, FTC is testing for the first time its new theory of harm which deals with structural conditions. 

Part of Khan’s antitrust thesis argues that regulators have previously dropped the ball by waiting until companies became multibillion-dollar players before becoming concerned about takeovers or mergers. Technology companies have proven themselves to be adept at spotting cheap newcomers and making offers that almost cannot be refused... The FTC argued in its court filing that Within, while a minnow today, exists in a new market that may become a major new platform, following the same trajectory as the smartphone. Others note the potential for fitness games to be a “killer” app, the term given to breakthrough uses that spur widespread adoption of a new technology platform. The FTC argued a company that had found early success, such as Within, should remain independent, because doing so would force Meta to build its own fitness products, increasing competition in the marketplace. Instead, acquiring the company would remove Within as a competitor and discourage others from entering the VR fitness space, the FTC said, noting that Meta had already acquired seven similar companies in the metaverse industry.

The NYT writes about how this suit seeks to upend the prevailing anti-trust paradigm,

At the heart of the F.T.C.’s lawsuit is the idea that regulators can apply antitrust law without waiting for a market to mature to the point where it is clear which companies hold the most power. The F.T.C. said such early action was justified because Meta’s deal would probably eliminate competition in the young virtual-reality market. Since the late 1970s, most federal challenges to mergers have been in large, well-established markets and aim to prevent already clear monopolies. Regulators have mostly rubber-stamped the purchases of start-ups by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still emerging. As a result, Ms. Khan faces an uphill climb. Regulators have been reluctant to try to stop corporate mergers by relying on the theory that competition and consumers will be harmed in the future.

As the FT article reports, the industry and its lobbyists have sought to paint this as regulatory over-reach and have warned that this could have a chilling effect. 

Should it become more difficult for big companies to acquire promising start-ups, they argue, it would deprive early-stage investors of one of their primary means of cashing in on their support.

This is an important moment in the new-found anti-trust activism. It could set precedents. 

However, it may be very difficult to establish the likelihood of harm before a court of law. It's required to convince the judge on the promise of VR and in particular Supernatural, and that Meta's acquisition would, in the net, be damaging to market development.

What makes Khan’s move groundbreaking, said one antitrust academic, was the degree to which the decision may well hinge on a judge’s assessment of VR. Its prospects of commercial success are by no means certain, with adoption still lagging far behind that of traditional video games.

Then there is the risk that any policy maker faces while making decisions - is this the right time to take the decision?

But leading experts in antitrust law said the FTC’s lawsuit was “high risk”, and questioned whether Within will genuinely provide a huge boost to Meta’s dominance at the expense of consumers... A loss might undermine the FTC’s newly zealous approach, and give credence to claims that Khan’s impartiality on tech is compromised because of her prior academic work about the monopoly power of Big Tech.

But Ms Khan's response may be in terms of how the suit could shift the reference frame and the set of possibilities on anti-trust debates,

For Ms. Khan, winning the lawsuit may be less of a priority than showing it’s possible to file against a tech deal while it is still early. She has said regulators were too cautious in the past about intervening in mergers for fear of harming innovation, allowing a wave of deals between tech giants and start-ups that eventually cemented their dominance.

The paradigm set by the originalist interpretation of the US Constitution by conservatives like Robert Bork is now under serious attack for the first time in over forty years. Given the massive stakes involved and the enormously powerful interests behind them, it's unlikely to give way quickly. The struggle between the Borkian thesis and its emerging anti-thesis led by the triumvirate of trust-busters in the Biden administration is most likely to be long-drawn. 

Update 1 (27.08.2022)

FT long read on how the US trust busters are training funds on private equity firms and their buyout deals. The PE industry has risen spectacularly over the last three decades to hold nearly $10 trillion in assets under management, which are mostly management control of Main Street businesses. In 2021, PE did $1.2 trillion worth deals, and in 2022 till date PE deals formed 25% of all transactions.

The FTC and DoJ argue that the traditional application of antitrust laws — focusing on single, bilateral acquisitions — misses buyout groups’ anti-competitive behaviour as their portfolios involve multiple acquisitions that relate to each other in ways that are not immediately apparent... Bill Baer, former head of the DoJ’s antitrust division under Barack Obama, says that the approach of Khan and Kanter recognises “that private equity is a special kind of buyer in the M&A context and that some . . . firms have a record of buying assets or companies and then diminishing their competitive significance.” This marks a departure from competition policy in recent decades, where “the general view was: if it’s a private equity deal it would not get the same attention as a deal that [impacts the structure of a market],” says Rule. Among the agencies’ main concerns are private equity’s roll-up strategy and its buy, strip and flip model, whereby undervalued companies are acquired, restructured and sold off shortly thereafter... 

Both the FTC and DoJ have sounded the alarm on buyout groups acquiring assets that companies have been ordered to divest to complete another tie-up... The agencies are also scrutinising “interlocking directorates”, where private equity executives sit on boards of competing companies, which Kanter has said could violate existing antitrust legislation. And they are considering broadening disclosures in pre-merger notification forms, including on private equity’s involvement, and overhauling merger guidelines with tougher measures against unlawful deals and a stronger focus on buyout groups... The DoJ is investigating ways to challenge private equity on monopoly grounds, a violation of section two of the 1890 Sherman Antitrust Act, which could entail criminal charges. “In addition to examining whether a single acquisition violates the law, certain industry roll-ups have the potential to constitute attempted monopolisation as well when examined as a whole,” says Kanter, adding: “Antitrust enforcement must evolve to keep pace with market realities.”

This is an important point

But Kanter and Khan have already made it clear they are not afraid to lose in court. If parties “know that we’re not going to be afraid to take on a tough fight against well-resourced opponents,” he said earlier this year, “they’re going to think twice”.

See this McKinsey Report on PE industry.