A New Antitrust Doctrine


Stable Diffusion prompt: the heads of FTC chair Lina Khan, Supreme Court Justice Louis Brandeis, economist Milton Friedman and President Teddy Roosevelt replacing the original heads on Mount Rushmore. '70s psychedelic style. bold colors. 

DALL-E said this prompt conflicts with its content policy.  ¯_ (ツ)_/¯

MidJourney: did not try as they're CCP censorship stooges
Generative AI and/or my prompt chops still have room for improvement

Tl;dr: Sorry but you’re not getting off that easily with this post.

There are different schools of antitrust thought. Each has principles and priorities it seeks to translate into an actionable and consistent framework for enforcement and policymaking.

But the inevitably messy collision of intellectual frameworks with the real world makes antitrust a highly subjective discipline. With apologies to Winston Churchill, antitrust is ideology, wrapped in revisionist history, swaddled in stultifying econometric analysis. It is often easier to just pursue a good villain.

The muddle that is antitrust means there is always room for another doctrine. But before suggesting yet another, let’s first look at some of the existing schools and how the game is progressing with the current antitrust villain, the technology industry. Then I’ll suggest a better villain.

The Brandeisian School

Louis Brandeis coined the phrase “the curse of bigness” and lent his name to one of the earliest antitrust schools. The Brandeisians battled two orthogonal adversaries: “the evils of excessive bigness are something distinct from and additional to the evils of monopoly.”

The Brandeisians saw antitrust as a means to attack broader social and economic maladies, were early to grapple with the network effects of “natural monopolies” and introduced economic analysis into antitrust (though economies of scale seem to have eluded them).

Critics might say this sweeping doctrine “created too much leeway and unpredictability” as judges chose “among multiple, incommensurable, and often conflicting values”, while even its supporters admit it begot “outlandish failures”.

The Chicago School

The Chicago School of antitrust has been dominant in the US for nearly a half century, emphasizing economic efficiency. Primarily using price as a lens, its “consumer welfare” standard narrowly asks if a competition issue inflicts harm on consumers or not. No consumer harm, no antitrust problem. Competition is to be protected, but not specific competitors.

In part a reaction to that overreach of prior policy, this more constrained doctrine is simpler to put into practice. But the Chicago school is under increasing fire for contributing to high concentration and diminished levels of competition across multiple industries. And, because of its fixation on price, it throws an exception when confronted by free digital goods.

The European Approach

Compared to the US, European Union antitrust policy places greater weight on presumptions of both technocratic omniscience (details, schmetails) and the well-being of companies as opposed to just consumers, particularly the well-being of European companies. They even extend that local preference to companies that don’t exist, like the European technology industry. And that is why Google often has a line item on its income statement for EU fines (future post: the case to impose a countervailing nuclear umbrella service fee on the EU).

Hipster Antitrust

Bubbling up from the ferment of podcast populists and Twitter trustbusters is the so-called Hipster Antitrust movement. This nascent school sometimes brands itself as Neo-Brandeisian to add intellectual heft. Hipster Antitrust upgrades the Brandeisian “big is bad” to “big TECH is bad” and likes to shout “break them up!” But it is hard to fit a comprehensive approach to antitrust in a Tweet, so hipster antitrust is more a set of rallying cries than a functional policy framework.

Contemporary Antitrust

Like the proverbial dog that catches the car, the hipsters somewhat unexpectedly find themselves at the helm of US antitrust policy. Most notably, Lina Khan, a hipster antitrust heroine, is chair of the Federal Trade Commission, while Tim Wu was until recently special assistant to President Biden for competition and tech policy.

Wu previously served at the Obama-era FTC that approved Facebook’s acquisition of Instagram. The Instagram acquisition is hipster antitrust’s original sin, white whale and metaphorical last war all rolled into one. That acquisition both haunts and animates the movement, while Wu seems determined to atone for and reverse that prior decision.

Translating bumper sticker slogans (as plastered on our aforementioned proverbial dog’s new car) into actual policy is challenging.  Nevertheless, today’s antitrust policy is leaning into two hipster passions: “Big Tech is bad” and a fierce opposition to acquisitions.

Going After Big Tech

The presumption that if they are big, they must engage in anti-competitive behavior, has been channeled into antitrust suits aimed at establishing the big tech companies are monopolies that have abused their market dominance. Antitrust suits have been filed against Meta and Google, with Amazon and Apple suits rumored to be coming soon.

Antitrust enforcement is divvied up between the Department of Justice Antitrust Division and the FTC (“break them up” indeed!). The FTC got Amazon and Facebook, while DoJ drew Google and Apple for reasons that are completely inscrutable.

The FTC’s first target was Meta (company slogan: “we put the meh in metaverse”). The suit was actually launched in the lame-duck days of the Trump administration. The Trump FTC might not admit it, but they were fellow travelers even if not card-carrying hipster antitrusters, sharing both the “Big Tech is bad” conviction and the aversion to deeply understanding how a specific industry works (also a nod to the European approach).

The charge was Facebook/Meta was obviously a monopoly, had bought Instagram and WhatsApp to preserve that monopoly, and done some other nefarious stuff with their API (as one generally does with APIs, though no one can ever quite understand what). As a remedy, the FTC wanted those acquisitions unwound.

The case was dismissed in June 2021, with the Federal judge pointing out that tagging a company as a monopoly under the Sherman Act requires more than just saying “obvs” . Khan’s FTC filed an amended complaint that wasn’t immediately thrown out, but the v2.0 case has been called “surprisingly weak” and “still feels phoned in”.

On the Google front, the Trump DoJ filed an “insanely weak” suit against Google around search distribution, which was followed by a different suit in January 2023 focused on the display ad business. The second case seems more serious, but there are still some fundamental questions about this suit and the government’s understanding of industry dynamics.

These suits are somewhat ironic in that they are playing out just as Facebook and Google’s online advertising duopoly is slipping away, which undermines the monopoly claim. It almost reminds you of the last big technology antitrust action.

Just Say No to Acquisitions

While hindsight is perfect, and despite the $1 billion price tag for a company with only 13 employees, it was far from obvious at the time the Instagram acquisition would be a success, much less a huge success. It is also far from certain that Instagram would have been nearly as successful as an independent company or could have blossomed into a real challenger to Facebook, which is the argument made for preventing this and other large company acquisitions.

The Instagram episode instilled a deep antipathy amongst the hipsters towards acquisitions of any kind. They make an assumption that acquisitions tend to work, and even the smallest can be hugely successful, and therefore dangerous. This, of course, is at odds with both the broad history of mergers and acquisitions as well as the FTC’s own analysis of acquisitions by Big Tech. One estimate is 60% of acquisitions broadly destroy value and 90% don’t realize their premise. Yet philosophically, the hipsters are optimizing to prevent another Instagram, no matter how big an outlier that deal was.

The most extreme example of acquisition animosity (and Meta malice) was the FTC’s attempt to stop Meta buying Within, a small virtual reality fitness company. The FTC went to the mat over this minor acquisition, with Khan overruling staff (which is becoming a habit) and employing a relatively novel set of arguments because if this deal was not stopped, “Meta would be one step closer to its ultimate goal of owning the entire Metaverse” (I was only barely able to resist putting that in all caps). They lost. It seemed more vendetta than antitrust:

It appeared to be a clear case of an antitrust case being brought for punitive reasons, rather than any legitimate pro-competition rationale. The key point we [TechDirt’s Mike Masnick] made is that it seemed impossible to believe that the case would have been brought if Oculus wasn’t owned by Meta. In other words, Oculus buying Within wasn’t the issue, it was just a statement trying to say “Meta shouldn’t be allowed to acquire anyone any more.”

And that’s not how antitrust should work… or (more importantly) does work.

Maybe an even bigger leap into the unknown is the FTC’s attempt to stop Microsoft buying Activision. This $69 billion deal would be a vertical acquisition, meaning it is at a different layer of the stack, a type of acquisition that has long been less concerning to antitrust authorities. The FTC is also breaking new ground in this case (with Sony lobbying intensely in the background).

With all this activity, we can once again liken the FTC to our proverbial dog, but now surrounded by squirrels. Meta is a monopoly! Squirrel! Meta-Within! Squirrel! Microsoft-Activision! Squirrel! Amazon-Roomba! Squirrel! Amazon-MGM! Squirrel! Elon Musk giving Twitter documents to the press! Squirrel! It has even been suggested Amazon is intentionally making the frenzied FTC play “whack-a-mole”.

Time Travel as an Antitrust Tool

As they descend from the commanding heights of Twitter and ascend reality’s learning curve, the hipster antitrusters have refined their doctrine in at least one area: the use of time travel as an antitrust tool. Instead of making decisions in the present, they have shown a preference to journey back in time to relitigate events that occurred a decade or more ago. And they have a surprising certitude about how industries will evolve, as if they had visited the future to see how it played out.

The antitrust suits seek to unwind the Instagram (2012), WhatsApp (2014) and Doubleclick (2008) acquisitions. These requested remedies are extraordinary and would vastly reshape Google and Meta, but also demonstrate a very poor understanding of how businesses actually work. Acquisitions from 10 to 15 years ago, particularly successful ones, are not just sitting nicely siloed where they can be easily carted off.

Opposition to the Activision and Within acquisitions assumes regulators can see multiple steps into the future and prevent predestined future monopolies. The FTC opposes the Activision deal because it believes cloud gaming will supplant the console, and Call of Duty is the fulcrum for Microsoft’s future dominance. And while others, including perhaps Meta, question whether the metaverse will ever be a thing, the FTC believes the Within “VR dedicated fitness app” is the keystone for Meta’s future monopoly.

The ability to see multiple steps out how markets will unfold and who will dominate is an extraordinary skill. If only investors and tech visionaries had such clear perspectives of the future (don’t miss my forthcoming book on this subject: The Antitrust Time Travel Paradox).

The Price of Obsession

Khan’s FTC has been characterized as “sputtering”, “pretty embarrassing”, a “train wreck”, and “fighting all the wrong fronts”. And “the first few cases of the Khan FTC have been… almost astoundingly weak”.

Perhaps not surprising, given her lack of any institutional or managerial experience, Khan has struggled to run the FTC and set priorities, resulting in “sagging morale and declining productivity” at the agency. A recently departed FTC commissioner added, perhaps partisan, charges of abuses of government power.

Some of these issues are managerial, but also stem from not having a coherent and concrete model to turn antitrust passions into policies that apply not just to the villains de jour, but to all industries. (I come now not to bury the intellectual framework but to praise it).

Distortions multiply in multiple dimensions. An FTC that focuses on everything (even if just across Big Tech) focuses on nothing. A simplistic philosophy that big is bad (and success can only come from ill-deeds) yields an inexhaustible pool of villainous targets but no way to prioritize amongst them. (Things were so much easier when there was only one tech villain to go after – ah, more nostalgia for the Microsoft era).

The intense focus on Big Tech means other industries and issues get ignored. Khan has had to acknowledge a lack of resources for other demands. It seems banks can still merrily collude (especially if they frame their collusion as competing against Big Bad Tech). And many of those other industries probably have less natural turnover than technology, making antitrust attention more important. But all industries would benefit from coherent policy with clear red lines.

And the single-minded focus on stopping any acquisition by Big Tech, no matter how small, means less oversight of other acquisitions. The relentless push to reverse the Instagram acquisition almost guarantees that the next great generational antitrust regret will happen at the much less scrutinized level below Big Tech (I have one candidate so far).

Saying you’re “willing to lose” to advance novel antitrust theories may become self-fulfilling if the inability to prioritize (“leave no Big Tech company unsued!”) means you file weak cases. Establishing new antitrust standards demands superlative effort, not subpar. Stressing quantity over quality (i.e. chasing squirrels) may leave the hipsters empty-handed.

And an overemphasis on the crude implement that is antitrust comes at the expense of other regulatory tools. Instead of trying to slay the villain of your story as a proxy for other issues, it is also possible to regulate specific behaviors. Big Tech amputations don’t do anything to address specific concerns around, say, privacy or how the ad market works.

Given current antitrust policy is struggling with both thinking and execution, perhaps there is an opportunity to retrench, refocus and reap some quick societal wins? Hold that thought.

Perfidious Private Equity

Meanwhile, there are economic actors beyond technology worthy of antitrust attention, regulatory redress, and social scorn. As an example, perfidious private equity prowls the planet, leaving predation and privation in its path.

Having successfully rebranded the distinctly unsympathetic “leveraged buyout” to “private equity”, these financial entities buy companies using equity leveraged up with debt. They hope to sell those businesses rapidly for a quick multiple on their sliver of equity. Getting dividends back from a profitable business over the long term is also a payout option, but who has time for that?

Private equity has become enormous. In recent decades it has grown from a boutique business to industrial-scale and become an asset class unto itself. Private equity has nearly $2 trillion waiting to be invested (compare to roughly a tenth that number for the also overfunded venture capital industry). And private equity can leverage their buying power upwards of tenfold with debt (whatever else we might say about VCs, they aren’t leveraged investors).

The Case Against Private Equity

Anything Wall Street finds success with inevitably gets taken to excess, and private equity is no exception. It is in full bloom today, but winter approaches. There is far too much private equity money chasing too few real opportunities.

After a forty-year tailwind of declining interest rates, this debt-addicted industry is now sailing into a gale. It is hard to understate just how critical low interest rates have been to private equity’s growth and business model. Declining rates delivered a double kicker of increasing asset values and declining debt burdens, independent of any investor competence.

Live cam view of private equity financial returns

Private equity is a looming disaster for investors. A mushrooming asset class is not good for performance: “The industry has been hard-pressed to deliver any net outperformance over public equities in fund vintages since 2006”. You get to pay very high fees for illiquid investments where “long-run private-equity industry returns are fairly well matched by small-cap value stocks”.

Private equity systematically overstates its returns. Performance is miraculously disconnected from broader market downturns not through diversification but by creative games of “choose your own valuation”. Somehow private equity can go up when everything else goes down  (“This probably helps explains why private equity firms on average actually reported gains of 1.6 per cent in the first quarter of 2022 and only some modest marks downwards since then, despite global equities losing 22 per cent of their value this year”). The vast sums yet to be invested plus overpriced deals of recent years will further drag down performance. Some even ask if it is a Ponzi or pyramid scheme as private equity firms swap businesses with each other to manufacture returns.

Investors are overallocated to private equity (which is why private equity has so much money). Many large endowments have the majority of their assets in private equity. Complacency, great marketing, and an unwavering faith in the “Yale Model’ pioneered by David Swensen have led to private equity being seen as almost a sure thing. Every young person I talk to with an interest in finance aspires to do private equity as it is the top of the industry pyramid. Yet, as the legal disclaimer says, past performance is no guarantee of future returns.

Private equity’s inevitable mean reversion would not be a problem if the impact was limited to the overpaid and underperforming financiers and their wealthy clientele. But it isn’t. Private equity has stakes in many thousands of companies with tens of millions of employees.

The heroic tale private equity tells about itself is they are world-class operators and assiduously fix businesses beyond the impatient scrutiny of public markets. It is a moving story, but the reality is they are not nearly as good at bettering businesses as they claim as evidenced by the trail of destruction in their wake.

With the declining interest rate tailwind, it was enough to cut costs, eliminate jobs and ride a rising economic tide. But they’re discovering that playbook doesn’t work any more and they need to actually do real business-y things. Bain estimates a mere 6% of private equity returns came from increasing profit margins, i.e. improving businesses, and over half purely from market multiple expansion (those no-longer declining interest rates again). The rest was cutting costs and financial engineering.

When a private equity investment works, funds get a big return on their equity. But often those investments don’t work and the company is left to drown in the debt used to acquire it. And the private equity funds are very good at paying themselves special dividends and fees along the way (aka asset stripping or looting), so even if the company doesn’t make it, the funds still get paid. There is no shortage of private equity horror stories.

Private Equity Loves Software (But Software Doesn’t Love Private Equity)

The FT summarizes the private equity way of life thusly:

Even the cynical version of the above isn’t terribly complicated: buy a company, load up with debt, cut costs, shut off investment, hope for a fair wind on valuations and sell before the rot sets in.

Private equity loves software, especially boring yet incredibly sticky enterprise software. Private equity baron Robert Smith summarized their affection:

“Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can’t run his business without our software.”

Private equity’s software play is the “cynical” strategy described above. Buy software company with lots of enterprise customers. Jack up prices. Cut R&D (those engineers are expensive!). Dare customers to churn in the couple years it takes to pay off the debt and sell or relist the company.

The private equity software playbook is not limited to financial players. Broadcom has become a notable practitioner. Computer Associates was early pioneer (before being purchased by Broadcom) that inspired Oracle which at times has run the PE playbook. Elon’s Twitter misadventures are a textbook private equity deal, except with the chaos, cluelessness, and live-Tweeting dialed up to 11, plus a lot more scrutiny than the typical deal.

Private equity has a terrible track record with software. Even though every finance bro who has listened to a few podcasts thinks they can run a software company, the record says otherwise. Oh, they may see returns from financial engineering, but private equity makes software worse. It is hard to think of any software products that improved under private equity ownership. Stagnant is the new up if private equity is involved. But stagnant software is dying software.

Private equity plays all their usual financial games with software. They’re trying to roll up competing software companies, which doesn’t bode well for customers. Jonathan Kanter, head of the DoJ’s antitrust unit says, ”Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out.” And swapping companies between funds to book mark ups (with Cvent a hot potato poster child).

There is one area where private equity-owned software companies are showing uncharacteristic leadership: they’re at the epicenter of some of the largest cybersecurity breaches. Perhaps they didn’t have any cybersecurity podcasts on their playlist before drawing up the layoff list.

Needless to say, this is terrible for customers, who as Smith points out, have major business dependencies on their software. As I like to say, when private equity comes amalgamating, it is time to start migrating (rhyming is hard!). But migrating is easier said than done when complex enterprise software can take years to deploy (and even harder if private equity is buying up all the alternatives!).

Private equity’s mountain of money and enthusiasm for software come at a bad time, as we emphatically need scavengers to clean up after the zero-interest rate-fueled software investment frenzy of the last decade. We have too many software companies, and many with far too much invested capital.

Consolidation is the order of the day, which is great news for capable software operators. And perhaps some private equity practitioners will discover how to add value and manage a software company. But odds are a lot of software companies are going to get ruined by private equity in the coming years. That’s bad for businesses that rely on that software, which is all of them.

A New Antitrust Doctrine

It should be obvious by now where this is going. (And that this post is not just two random posts accidentally stuck together).

Current antitrust policy is a shambles. The hipster antitrust revolution didn’t make the migration off Twitter (few seem to have). The Neo-Brandeisian experiment foundered for some of the same reasons as its inspiration, starting with sprawling ambitions combined with lack of focus. Retrenchment inevitably follows overreach with a return to prioritizing consumer welfare the obvious path.

Big Tech meanwhile has been humbled, not by regulators, but by markets. Just look at Mark Zuckerberg’s rapid reversal from defiant defense of his metaverse dream to dramatic downsizing. Meta’s metaverse may soon only be found on a milk cartoon (next to Watson). The rest of Big Tech are suffering from a variety of new ailments. Their seeming dominance was yet another phenomenon magnified by zero interest rates.

The world has changed since the device in our hand seemed like the most important thing. Interest rates are rising. Geopolitics is back. Deglobalization and industrial policy are redrawing the economic map. Populists are now shrieking more about oil company profits than technology profits (always follow the money; Brandeis apparently also coined the delicious term “other people’s money”). It is time to end the hipster feud with Big Tech and prioritize the issues of the day. Sorry, there no antitrust mulligan for Instagram.

Even without a time machine, it is hard to miss the impending customer harm that will come from private equity’s zeal for software. So (finally!) a proposal: Antitrust authorities should channel their antipathy toward technology and acquisitions into a very high bar for approving purchases of software companies by private equity. It is hard to argue that private equity software acquisitions are in the public interest (there are others who will make the case for prohibitions on private equity ruining things beyond software). And they are hard to top as antitrust villains.

Saying no to private equity acquisitions of software companies offers multiple benefits. Even as antitrust authorities refocus their scattered approach back to consumer welfare, they can still shout some anti-technology slogans to save a little face and legitimately claim to have stopped some acquisitions. It is undeniably Hippocratic to stop harm to customers at risk if the software they rely on withers away as R&D is redirected to private equity fees and debt payments. The probability of private equity ruining an existing software company is much higher than a random VR fitness app leading to some future metaverse monopoly, so lets play the odds. And the sooner we start private equity on the mean-reverting road back to a boutique practice appropriate to a higher interest rate environment, the less damage will done.

Call it the Broadcom Doctrine.

Disclaimer: I was asked to point out that this post is not based on neoclassical economic theory nor modern legal precedent. This proposal is outside of mainstream antitrust, but not as far afield as current regulators, while offering more consumer benefit. Thanks to my reviewers, even those who wanted to put maximum distance between their field and the contents.

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