When Is Success Illegal?

There is a sea change underway in U.S. antitrust policy, and it has the potential to wreak havoc on corporations and harm consumers in the process.

For decades, policymakers and scholars have agreed that the point of antitrust laws should be to protect the interests of consumers from the influence of undue corporate power. This legal premise, known as the consumer welfare standard, generally has required regulators to show that corporations are harming consumers by raising prices, reducing quality or slowing innovation before exercising the authority to step in and block mergers and acquisitions, bar certain practices or break a company up. In the absence of consumer harm, the consensus held, regulators should generally adopt a permissive approach to market competition.

But a vocal group of activists, pundits and scholars in recent years have started blaming lax antitrust enforcement for a wider range of social ills — from wage inequality to privacy erosion. Some support radically overhauling antitrust laws to make it harder for firms to get big or stay big. These advocates are less concerned with consumer welfare and more concerned about the purported threats large companies pose to smaller companies and other interests. Virtually all of these alleged abuses are either flat wrong or vastly overstated.

A key allegation that advocates make is that regulators have been too lax in letting large companies acquire other companies, thereby appropriating their innovations and squashing potential competitors. A recent report by the Democratic majority of the House Subcommittee on Antitrust, Commercial and Administrative Law alleges: “In some cases, a dominant firm evidently acquired nascent or potential competitors to neutralize a competitive threat or to maintain and expand the firm’s dominance. In other cases, a dominant firm acquired smaller companies to shut them down or discontinue underlying products entirely — transactions aptly described as ‘killer acquisitions.’”

These concerns are significantly overblown, but they nonetheless received a strong endorsement last month from Federal Trade Commission Chairman Joseph Simons, one of the country’s lead antitrust enforcers, who spoke at the American Bar Association’s fall forum.

Simons made two general points that few would disagree with: The first was that antitrust regulators must be vigilant in preventing large companies from gaining market power simply by purchasing their rivals. The chairman acknowledged that most acquisitions, even those by large companies, are not competitive threats in and of themselves. But he noted acquisitions that significantly increase market power generally are forbidden. The second point is that regulators must look forward and try to anticipate the likely effects of a prospective acquisition on future competition.

The problem is how to do those things. Some advocates would like to forbid large companies from making any acquisitions, no matter how small or remote from their existing markets. Such a draconian policy would be unwise. But while the chairman ostensibly shares the concern that more aggressive merger enforcement could slow innovation by reducing incentives to invest in new companies, this policy seems to be the one he hints at.

For example, Facebook is often criticized for acquiring WhatsApp and Instagram, even though both purchases have proved to be enormously successful and beneficial to consumers.  For example, when Facebook purchased WhatsApp, it was a paid service. Today it is free.

But it’s also is important to realize that the FTC reviewed and approved both acquisitions, as did regulators in Europe and elsewhere. Moreover, the 2012 Instagram purchase was widely criticized for lavishing too much money on a new company with an unproven product. As late as 2016, ZDNet listed it as the 15th worst acquisition by a tech firm, stating that “the $1B acquisition of the photo sharing service by Facebook is still somewhat questionable and it remains to be seen if the merger ends up being a successful one.”

What made each deal a success was Facebook’s willingness to invest significant resources to develop the smaller company’s technology and integrate it into Facebook’s broader platform so that millions of users could enjoy the new products for free. Meanwhile, a close competitor of WhatsApp — Snapchat — struggled. It went public at $27 a share in March 2017. The price fell to $5 by the end of 2018 before rebounding to $20 last January. It has since benefitted from the COVID economy.

Unfortunately, nothing in Simons’ remarks get to the question of what regulators may do after an acquisition has been consummated. While retroactive studies of past decisions can help an agency improve its ability to make future decisions, retroactive enforcement would subject past and future deals to constant uncertainty.

It is always easy to spot successful acquisitions after the fact. It is also easy to forget the many failures. Doing so gives the impression that Facebook and other large companies are brilliant market manipulators — and makes their successes inherently suspect — when the truth is, they often operate in a fog of uncertainty about the future. That’s why a significant portion of mergers and acquisitions fail to earn back their cost of capital. Regulators face this same uncertainty in predicting which ones will be successful. It is very unlikely that they will make better decisions.

Joe Kennedy is a senior fellow at the Information Technology and Innovation Foundation.

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