The Anticompetitive Threat of Big Tech: The Rise of Startup Acquisitions to Stifle Competition

Senators Amy Klobuchar (D-MN) and Mike Lee (R-UT), of the Senate Judiciary’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, recently launched a bipartisan probe into potential antitrust abuses by 5 members of Big Tech (Facebook, Microsoft, Apple, Google, and Amazon). (Victoria Graham, Bloomberg Law). These companies have exhibited a penchant for buying startup companies whose technology could potentially compete against their own or using “platform privilege” to crush competitors who refuse to be bought. This article identifies examples of the anti-competitive behavior in question, discusses the current legislative efforts being pursued to regulate Big Tech and explores economic arguments that support stronger regulation.

A recent blog post covered Facebook’s decision to acquire CTRL-Labs, a startup that had developed neuro-invasive technology that allows users to control a computer with their thoughts, in the face of potential regulatory backlash from the Federal Trade Commission (“FTC”). (Ryan Cole, Race to the Bottom). But Facebook is not the only member of Big Tech that has been acquiring potential competition at a rapid pace. Over the last 30 years, the 5 noted above members of Big Tech have made nearly 750 acquisitions. (CB Insights). Google’s purchase of Waze Navigation App for $996 million in 2013 (Waze directly competes with Google’s own navigation app), and Amazon’s acquisition of Zappos for $1.2 billion in 2009 (Amazon and Zappos were direct competitors in the emerging online shoe sales market) both represented acquisitions directed at stifling nascent competition. Id.

Big Tech’s means for stifling competition are not limited to acquisitions. These 5 companies have shown they are able to identify potential competition through reams of data, copy the startup’s software/idea and then use their other platforms to crush the competing nascent tech company. (The Economist). One example is the app SnapChat, which turned down a $3 billion acquisition bid by Facebook in 2013. (John Shinal, CNBC). After Snap's decision to go public, Facebook replicated its central idea with Instagram Stories and essentially rendered Snap’s original tech less attractive to consumers. Id. In essence, these Big Tech firms have "platform privilege" that allows them the ability to prioritize their own assets and crush competition, even if the competition can create a superior product. (Sally Hubbard, CNN).

In terms of governmental regulation, the most prominent law against anticompetitive acquisitions is Section 7 of the Clayton Anti-Trust Act of 1914 (Federal Trade Commission). Introduced shortly after the Supreme Court’s decision to break up Standard Oil, the Clayton Act was passed due to worries that the Sherman Anti-Trust Act of 1890 lacked the “judicial teeth” necessary to prevent harm to consumers from monopolies and subdued competition. (Robert Longley, ThoughtCo.) The Clayton Act prohibits mergers or acquisitions where the effect of such transaction would substantially “lessen competition, or to tend to create a monopoly.” (15 U.S.C. § 18). The Department of Justice (“DOJ”) has had a difficult time preventing tech acquisitions under the laws of the Clayton Act because current precedent requires harm to consumers. (Jan Wolfe, Reuters). Courts usually look at whether prices are increasing or innovation is slowing as indicators of consumer harm. Id. The nature of these tech companies though is that most of their services are free (since they make the bulk of their money from advertising), which makes it difficult to prove harm to a consumer. Id. 

The call to reign in the market power of Big Tech from politicians is gaining steam from both sides of the aisle. Leading Democratic presidential candidate, Senator Elizabeth Warren (D-MA), has also expressed her dissatisfaction with the anticompetitive behaviors of Big Tech. (Matt Stevens, New York Times). Her current position calls for increased scrutiny of Big Tech acquisitions and even the possibility of unwinding some previous deals that include Facebook’s acquisition of Instagram or WhatsApp. Id. Republican President Donald Trump has commented also on the situation, stating that “something is going on in terms of monopoly,” and it’s “a bad situation.” (Jake Kanter, Business Insider).

Besides the pressures from the executive and judicial branches, the legislative branch has also introduced a bill that will impose severe penalties on Big Tech companies that exhibit anticompetitive behavior. (Toria Rainey, BU Today). The Monopolization Deterrence Act (“MDA”) was introduced by Richard Blumenthal (D-CT) and Amy Klobuchar (D-MN) on July 23, 2019. (Congress). The bill would give the DOJ and the FTC authority to impose civil penalties of up to 15% of an offender's total US revenue for the previous year or 30% of its revenue generated over the period in which the anticompetitive behavior occurred, whichever is greater. (Makena Kelly, The Verge). Klobuchar is optimistic the MDA will give US antitrust authorities the power they need to properly regulate the anticompetitive behavior exhibited by Big Tech. Id. 

Recent economic studies also support the idea that Big Tech’s behavior has a negative effect on the market. A study by the University of Chicago, Booth School of Business found that acquisitions of startups can be “very damaging” to competition within the market. (Luigi Zingales et al., Stigler Committee on Digital Platforms). The paper argues that in “a concentrated market structure, this potential competition from very small entrants may be the most important source of competition faced by the incumbent firm.” Id. An economic report from the University of Toronto entitled, “Antitrust Limits on Startup Acquisitions” found that some limited antitrust restrictions on startup acquisitions by dominant tech firms would be socially beneficial by improving competition, maintaining stronger innovation incentives over time, and leading to greater efficiency concerning how capital is invested. (Kevin Bryan et al., Antitrust Limits on Startup Acquisitions).

The extent to which the executive branch will play a role in the regulation of Big Tech’s anticompetitive behavior is still uncertain. While President Trump has made public comments about the companies’ monopolistic tendencies, very little action has come out of his administration. It is unlikely the current presidential administration will take any steps based on Trump’s fixation with supporting capital markets and the high percentage of institutional investors who hold Big Tech stocks. It will be interesting to see if a potential changing of the guard in the 2020 Presidential and Senate elections will result in greater political pressure on Big Tech. If not, the DOJ and FTC will have their work cut out for them attempting to regulate Big Tech's acquisition of nascent startups with the current legislative landscape and judicial precedent.