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Earlier this year the UK government announced it was adopting the main recommendations of the Furman Report into competition in digital markets and setting up a “Digital Markets Taskforce” to oversee those recommendations being put into practice. The Competition and Markets Authority’s digital advertising market study largely came to similar conclusions (indeed, in places it reads as if the CMA worked backwards from those conclusions).

The Furman Report recommended that the UK should overhaul its competition regime with some quite significant changes to regulate the conduct of large digital platforms and make it harder for them to acquire other companies. But, while the Report’s panel is accomplished and its tone is sober and even-handed, the evidence on which it is based does not justify the recommendations it makes.

Most of the citations in the Report are of news reports or simple reporting of data with no analysis, and there is very little discussion of the relevant academic literature in each area, even to give a summary of it. In some cases, evidence and logic are misused to justify intuitions that are just not supported by the facts.

Killer acquisitions

One particularly bad example is the report’s discussion of mergers in digital markets. The Report provides a single citation to support its proposals on the question of so-called “killer acquisitions” — acquisitions where incumbent firms acquire innovative startups to kill their rival product and avoid competing on the merits. The concern is that these mergers slip under the radar of current merger control either because the transaction is too small, or because the purchased firm is not yet in competition with the incumbent. But the paper the Report cites, by Colleen Cunningham, Florian Ederer and Song Ma, looks only at the pharmaceutical industry. 

The Furman Report says that “in the absence of any detailed analysis of the digital sector, these results can be roughly informative”. But there are several important differences between the drug markets the paper considers and the digital markets the Furman Report is focused on. 

The scenario described in the Cunningham, et al. paper is of a patent holder buying a direct competitor that has come up with a drug that emulates the patent holder’s drug without infringing on the patent. As the Cunningham, et al. paper demonstrates, decreases in development rates are a feature of acquisitions where the acquiring company holds a patent for a similar product that is far from expiry. The closer a patent is to expiry, the less likely an associated “killer” acquisition is. 

But tech typically doesn’t have the clear and predictable IP protections that would make such strategies reliable. The long and uncertain development and approval process involved in bringing a drug to market may also be a factor.

There are many more differences between tech acquisitions and the “killer acquisitions” in pharma that the Cunningham, et al. paper describes. SO-called “acqui-hires,” where a company is acquired in order to hire its workforce en masse, are common in tech and explicitly ruled out of being “killers” by this paper, for example: it is not harmful to overall innovation or output overall if a team is moved to a more productive project after an acquisition. And network effects, although sometimes troubling from a competition perspective, can also make mergers of platforms beneficial for users by growing the size of that platform (because, of course, one of the points of a network is its size).

The Cunningham, et al. paper estimates that 5.3% of pharma acquisitions are “killers”. While that may seem low, some might say it’s still 5.3% too much. However, it’s not obvious that a merger review authority could bring that number closer to zero without also rejecting more mergers that are good for consumers, making people worse off overall. Given the number of factors that are specific to pharma and that do not apply to tech, it is dubious whether the findings of this paper are useful to the Furman Report’s subject at all. Given how few acquisitions are found to be “killers” in pharma with all of these conditions present, it seems reasonable to assume that, even if this phenomenon does apply in some tech mergers, it is significantly rarer than the ~5.3% of mergers Cunningham, et al. find in pharma. As a result, the likelihood of erroneous condemnation of procompetitive mergers is significantly higher. 

In any case, there’s a fundamental disconnect between the “killer acquisitions” in the Cunningham, et al. paper and the tech acquisitions described as “killers” in the popular media. Neither Facebook’s acquisition of Instagram nor Google’s acquisition of Youtube, which FTC Commissioner Rohit Chopra recently highlighted, would count, because in neither case was the acquired company “killed.” Nor were any of the other commonly derided tech acquisitions — e.g., Facebook/Whatsapp, Google/Waze, Microsoft.LinkedIn, or Amazon/Whole Foods — “killers,” either. 

In all these high-profile cases the acquiring companies expanded the service and invested more in them. One may object that these services would have competed with their acquirers had they remained independent, but this is a totally different argument to the scenarios described in the Cunningham, et al. paper, where development of a new drug is shut down by the acquirer ostensibly to protect their existing product. It is thus extremely difficult to see how the Cunningham, et al. paper is even relevant to the digital platform context, let alone how it could justify a wholesale revision of the merger regime as applied to digital platforms.

A recent paper (published after the Furman Report) does attempt to survey acquisitions by Google, Amazon, Facebook, Microsoft, and Apple. Out of 175 acquisitions in the 2015-17 period the paper surveys, only one satisfies the Cunningham, et al. paper’s criteria for being a potentially “killer” acquisition — Facebook’s acquisition of a photo sharing app called Masquerade, which had raised just $1 million in funding before being acquired.

In lieu of any actual analysis of mergers in digital markets, the Report falls back on a puzzling logic:

To date, there have been no false positives in mergers involving the major digital platforms, for the simple reason that all of them have been permitted. Meanwhile, it is likely that some false negatives will have occurred during this time. This suggests that there has been underenforcement of digital mergers, both in the UK and globally. Remedying this underenforcement is not just a matter of greater focus by the enforcer, as it will also need to be assisted by legislative change.

This is very poor reasoning. It does not logically follow that the (presumed) existence of false negatives implies that there has been underenforcement, because overenforcement carries costs as well. Moreover, there are strong reasons to think that false positives in these markets are more costly than false negatives. A well-run court system might still fail to convict a few criminals because the cost of accidentally convicting an innocent person was so high.

The UK’s competition authority did commission an ex post review of six historical mergers in digital markets, including Facebook/Instagram and Google/Waze, two of the most controversial in the UK. Although it did suggest that the review process could have been done differently, it also highlighted efficiencies that arose from each, and did not conclude that any has led to consumer detriment.

Recommendations

The Report is vague about which mergers it considers to have been uncompetitive, and apart from the aforementioned text it does not really attempt to justify its recommendations around merger control. 

Despite this, the Report recommends a shift to a ‘balance of harms’ approach. Under the current regime, merger review focuses on the likelihood that a merger would reduce competition which, at least, gives clarity about the factors to be considered. A ‘balance of harms’ approach would require the potential scale (size) of the merged company to be considered as well. 

This could give basis for blocking any merger at all on ‘scale’ grounds. After all, if a photo editing app with a sharing timeline can grow into the world’s second largest social network, how could a competition authority say with any confidence that some other acquisition might not prevent the emergence of a new platform on a similar scale, however unlikely? This could provide a basis for blocking almost any acquisition by an incumbent firm, and make merger review an even more opaque and uncertain process than it currently is, potentially deterring efficiency-raising mergers or leading startups that would like to be acquired to set up and operate overseas instead (or not to be started up in the first place).

The treatment of mergers is just one example of the shallowness of the Report. In many other cases — the discussions of concentration and barriers to entry in digital markets, for example — big changes are recommended on the basis of a handful of papers or less. Intuition repeatedly trumps evidence and academic research.

The Report’s subject is incredibly broad, of course, and one might argue that such a limited, casual approach is inevitable. In this sense the Report may function perfectly well as an opening brief introducing the potential range of problems in the digital economy that a rational competition authority might consider addressing. But the complexity and uncertainty of the issues is no reason to eschew rigorous, detailed analysis before determining that a compelling case has been made. Adopting the Report’s assumptions — and in many cases that is the very most one can say of them — of harm and remedial recommendations on the limited bases it offers is sure to lead to erroneous enforcement of competition law in a way that would reduce, rather than enhance, consumer welfare.

[This post is the second in an ongoing symposium on “Should We Break Up Big Tech?” that will feature analysis and opinion from various perspectives.]

[This post is authored by Philip Marsden, Bank of England & College of Europe, IG/Twitter:  @competition_flaneur]

Since the release of our Furman Report, I have been blessed with an uptick in #antitrusttourism. Everywhere I go, people are talking about what to do about Big Tech. Europe, the Middle East, LatAm, Asia, Down Under — and everyone has slightly different views. But the direction of travel is similar: something is going to be done, some action will be taken. The discussions I’ve been privileged to have with agency officials, advisors, tech in-house counsel and complainants have been balanced and fair. Disagreements tend to focus on the “how, now” rather than on re-hashing arguments about whether anything need be done at all. However, there is one jurisdiction which is the exception — and that is the US.   There, pragmatism seems to have been defenestrated — it is all or nothing: we break tech up, or we praise tech from the rooftops. The thing is, neither is an appropriate response, and the longer the debate paralyses the US antitrust community, the more the rest of the world will say “maybe we should see other people” and break with the hard-earned precedent of evidence-based inquiries for which the US agencies are famous.

In the Land of the Free, there is so much broad-brush polarisation. Of course, there is the political main stage, and we have our share of that in the UK too. But in the theatre of American antitrust we have Chicken Littles running around shrieking that all tech platforms are run by creeps, there is an evil design behind every algo tweak or acqui-hire, and the only solution is to ditch antitrust, and move fast and break things, especially break up the G-MAFIA and the upcoming BAT from Asia, ASAP. The Chicken Littles run rings around another group, the ostriches with their heads in the sand saying “nothing to look at here”, the platforms are only forces for good, markets tip tip and tip again, sit back and enjoy the “free” goodies, and leave any mopping up of the tears of whining complainants to fresh “studies” by antitrust enforcers.  

There is also an endemic American debate which is pitched as a deep existential crisis, but seems more of a distraction: this says let’s change the consumer welfare standard and import broader social concerns — which is matched by a shocked response that price-based consumer welfare analysis is surely tried and true, and any alteration would send the heavens crashing down again. I view this as a distraction because from my experience as an enforcer and advisor, I only see an enlightened use of the consumer welfare standard as already considering harms to innovation, non-price effects, and lately privacy. So it may be interesting academic conference-fodder, but it largely misses the point that modern antitrust analysis is far broader, and more aware of non-price harms than it is portrayed.   

The US though is the only jurisdiction I’ve been to lately that seems to generate the most heat in the debates, and the least light. It is also where demands for tech break-ups are loudest but where any suggestion of regulatory intervention is knee-jerk rejected with abject horror. So there is a lot of noise but not much signal. The US seems disconnected from the international consensus on the need for actual action — and is a lone singleton debating its split-brain into the ground. And when they travel to the rest of the world — many American enforcers say — commendably with honesty — “Hey it’s not me, it’s you.”   “You’re the crazy ones with your Google fines, your Amazon own-sales bans, and your Facebook privacy abuse cases, we’ll just press ahead with our usual measured prosecutorial approach — oh and do a big study.”   

The thing is: no one believes the US will be anti-NIKE and “just do nothing”. If that was true there wouldn’t have been a massive drop of tech stock value on the announcement of DOJ, FTC and particularly Senate inquiries.   So some action will come stateside too… but what should that look like?

What I’d like to see is more engagement in the US with the international proposals. In our Furman Report, we supported a consumer welfare standard, but not laissez-faire. We supported a regulatory model developed through participative antitrust, but not common carrier regulation. And we did not favour breakups or presumptions against acquisitions by tech firms.  We tried to do some good, while preventing greater evils. Now, I still think that the most anti-competitive activity I’ve ever seen comes from government not from the abuses of market power of firms, so we do need to tread very carefully in designing our solutions and remedies. But we must remain vigilant against competitive problems in the tech sector and try to get ahead of them, particularly where they are created through structural aspects of these multi-sided markets, consumer inertia, entrenchment and enveloping, even in a world of “free” “goods” and “services”  (all in quotes since not everything online is free, or good, or even a service). So in Furman, we engaged with the debate but we avoided non-informative polarisation; not out of cowardice but to produce something hopefully relevant, informative, and which can actually be acted upon. It is an honour that our current Prime Minister and Chancellor have supported our work, and there are active moves to implement almost all of our proposals.   

We grounded our work in maintaining a focus on a dynamic consumer welfare standard, but we still firmly agreed that more intervention was needed. We concluded this after laying out our findings of myriad structural reasons for regulatory intervention (with no antitrust cause of complaint), and improving antitrust enforcement to address bad conduct as well. We sought to #dialupantitrust — through speeding up enforcement, and modernising merger control analysis — as well as #unlockingdigitalcompetition by developing a pro-competitive code of conduct, and data mobility (not just portability) and open API and similar remedies. There’s been lots of talk about that, and similarly-directed reports from the EU Trio and the Stigler Centre. I think discussing this sort of approach is the most pragmatic, evidence-based way forward: namely a model of participative antitrust, where the tech companies, their customers, consumer groups and government work out how to ensure platforms with strategic market status take on firm conduct obligations to get ahead of problems ex ante, and clear out many of the most toxic exclusionary or exploitative practices.  

Our approach would leave antitrust authorities to focus on the more nuanced behaviour, where #evidencematters and economic analysis and judgment really need to be brought to bear. This will primarily be in merger control — which we argue needs to be more forward-looking, more focussed on dynamic non-price impacts, and more able to address both the likelihood and magnitude of harms in a balanced way. This may also mean that authorities are less accepting of even heavily-sweated entry stories from merging parties. In ex post antitrust enforcement the main problem is speed, and we need to adjust the overall investigatory and appeal mechanism to ensure it is not captured not so much by the defendants and their armies of lawyers and economists, but by the mistaken focus on victory of our own team.   

I’ve seen senior agency lawyers refuse to release a decision until it has been sweated by 10 litigators and 3 QC’s and is “appeal-proof” — which no decision ever is — adding months or even years to the process. And woe betide a case team, inquiry chair or agency head who tries to cut through that — for the response is always “oh so you’re (much sucking of teeth and shaking of heads) content with Legal Risk???”.   This is lazy — I’d much rather work with lawyers whose default is “What are we trying to achieve?” not “I’ll just say No and then head off home” — a flaw that pervades some in-house counsel too. Legal risk is inherent in antitrust enforcement, not something to be feared. Frankly so many agencies have too many levels of internal scrutiny now which — when married to a system of full merits appeals — makes it incredible that any enforcement ever happens at all. And don’t get me started on the gaming inherent in negotiating commitments that may not even be effective but don’t even get a chance to operate before going through years of  review processes dominated by third party “market tests”. These flaws in enforcement systems contribute to the perception (and reality) of antitrust law’s weakness, slowness and inapplicability to reality — and hence fuel the calls for much stronger, much more intrusive and more chilling regulation, that could truly stifle a lot of genuine innovation.   

So our Furman report tries to cut through this, by speeding up antitrust enforcement, making merger control more forward looking — without achieving mathematical certainty but still allowing judgement of what is harmful on balance — and proposes a pro-competitive code of conduct for tech firms to help develop and “walk the talk”.   Developing that code will be a key challenge as we need to further refine what level of economic dependency on a platform customers and suppliers need to have, before that tech co is deemed to have strategic market status and must take on additional responsibilities to act fairly with respect to its customers, users, and suppliers. Fortunately, the British Government’s approval of our plans for a Digital Markets Unit means we can get started — so watch this space.

I’ve never said that this will be easy to do. We have a model in the Groceries Code Adjudicator — which was set up as a competition remedy — after a long market investigation of the offline retail platform market identified a range of harms that could occur, that might even be price-lowering to consumers but could harm innovation, choice and legitimate competition on the merits. A list of platforms was drawn up, a code was applied, and a range of toxic exploitative and exclusionary conduct was driven out of the market, and while not everything is perfect in retailing, far fewer complaints are landing on the CEO’s desk at the Competition & Markets Authority — so it can focus on other priorities. Our view is similar — while recognising that tech is a lot more complicated. Part of our model is thus also drawn on other CMA work with which I was honoured to be involved, a two year investigation of the retail banking platforms, and a degree of supply side and demand side inertia that I had never seen before, except maybe in energy. Here the solution was not — as politicians wanted — to break up the big banks. That would have done nothing good, and a lot of bad. Instead we found that the dynamic between supply and demand was so broken that remedies on both sides of the equation were needed. Here it was truly an example not of “it’s not you, it’s me” but “it’s both of us”: suppliers and consumers were contributing to the problem. We decided not to break up the platforms, though — but open them up — making data they were just sitting on (and which was a form of barrier to entry) available to fintech intermediaries, who would compete to access the data, train their new algos and thereby offer new choice tools to consumers.    

Breakups wold have added limping suppliers to the market, but much less competitive constraint. Opening up their data banks spurred the incumbents on to innovate faster than they might have, and customers to engage more with their banks. Our measure of success wasn’t switching — there is firm evidence that Britons switch their spouses more often than they switch their banks. So the remedy wasn’t breakup, and the KPI isn’t divorce, but is… engagement, on both sides of the relationship. And if it resulted in “maybe we should see other people” and multi-bank, then that is all to the overall good, for customer satisfaction, better engagement, and a more innovative retail banking ecosystem.  

And that is where I think we should seek new remedies in the tech sphere. Breakups wouldn’t help us stimulate a more innovative creative ecosystem. But only opening up platforms after litigating on an essential facilities doctrine for 8 years wouldn’t get us there either. We need informed analysis, with tech experts and competition and consumer officials, to identify the drivers of business developments, to balance the myriad issues that we all have as citizens, and voters, and shoppers, and then to act surgically when we see that a competition law problem of abuse of market power, or structural economic dependency, is causing real harm.  

I believe that the Furman report, and other international proposals from Australia, Canada, the EU, the UK’s Digital Markets Strategy, and enforcement action in the EU, Spain, Germany, Italy and elsewhere will help provide us with natural experiments and targeted solutions to specific problems. And in the process, will help fend off calls for short-term ‘fixes’ like breakups and other regulation that are retrograde and chill rather than go with the flow of — or better — stimulate innovation.   

Finally, we must not lose sight of one of my current bugbears, the incredible dependency we have allowed our governments and private sector to have on a handful of cloud computing companies. This may well have developed through superior skill, foresight and industry, and may be subject to rigorous procurement procedures and testing, but frankly, this is a ‘market’ that is too important to ignore. Social media and advertising may be pervasive but cloud is huge — with defence departments and banks and key infrastructure dependent on what are essentially private sector resiliency programmes. Even more than Facebook’s proposed currency Libra becoming “instantly systemic”, I fear we are already there with cloud: huge benefits, amazing efficiencies, but with it some zombie-apocalypse-level systemic risks not of one bank falling over, but many. Here it may well be that the bigger they are the more resilient they are, and the more able they are to police and rectify problems… but we have heard that before in other sectors and I just hope we can apply our developing proposals for digital platforms, to new challenges as well. The way tech is developing, we can’t live without it — but to live with it, we need to accept more responsibilities as enforcers, consumers and providers of these crucial services. So let’s stay together and work harder to #makeantitrustgreatagain and #unlockdigitalcompetition.