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US Government Targets Big, Innovative, Acquisition Oriented Digital Age Companies
At the beginning of the 20th century Standard Oil Co. was one of the world’s largest and most powerful corporations. While people were divided about whether monopolies were good for society, exposés by the muckraker Ida Tarbell detailing the company’s strong-arm practices against rivals, railroad companies and others eventually turned public opinion against it and in 1911 the U.S. Supreme Court ruled that Standard Oil Trust be dissolved under the Sherman Antitrust Act and split into 34 companies for which 7 are let.
Throughout the 1970s, IBM litigated the antitrust suit filed by the Justice Department in 1969. IBM was ruled to have created a monopoly via its 1956 patent-sharing agreement with Sperry-Rand. American antitrust laws did not affect IBM in Europe, whereas of 1971 it had fewer competitors and more than 50% market share in almost every country. Customers preferred IBM because it was, Defamation said, "the only truly international computer company", able to serve clients almost anywhere. Despite the antitrust challenges which essentially failed rivals such as ICL, CII, and Siemens began to cooperate to preserve a European computer industry and they failed, So did Burroughs, Sperry, Digital and a host of others.
Breakup of the Bell System was mandated on January 8, 1982, by a consent decree providing that AT&T Corporation would relinquish control of the Bell Operating Companies, splitting it into 9 entirely separate companies and Western Electric.
At the beginning of the 20th century Standard Oil Co. was one of the world’s largest and most powerful corporations. While people were divided about whether monopolies were good for society, exposés by the muckraker Ida Tarbell detailing the company’s strong-arm practices against rivals, railroad companies and others eventually turned public opinion against it and in 1911 the U.S. Supreme Court ruled that Standard Oil Trust be dissolved under the Sherman Antitrust Act and split into 34 companies for which 7 are let.
Throughout the 1970s, IBM litigated the antitrust suit filed by the Justice Department in 1969. IBM was ruled to have created a monopoly via its 1956 patent-sharing agreement with Sperry-Rand. American antitrust laws did not affect IBM in Europe, whereas of 1971 it had fewer competitors and more than 50% market share in almost every country. Customers preferred IBM because it was, Defamation said, "the only truly international computer company", able to serve clients almost anywhere. Despite the antitrust challenges which essentially failed rivals such as ICL, CII, and Siemens began to cooperate to preserve a European computer industry and they failed, So did Burroughs, Sperry, Digital and a host of others.
Breakup of the Bell System was mandated on January 8, 1982, by a consent decree providing that AT&T Corporation would relinquish control of the Bell Operating Companies, splitting it into 9 entirely separate companies and Western Electric.
IBM remains but it is shell of the 1960s version. Big oil is a virtual monopoly as it slid from 34 to 6 companies and for telecom 3 replaced 9, the innovative Bell labs is gone, and broadband doesn’t service the poor. The competitive threat is now from China, where the government decides winners and losers and mandates monopolies.
The anti-trust mania that died down in the 80s, has re-awakened due in large part to the emergence of the digital age and legislators are pushing bipartisan bills to take advantage of the clamor to declaw the FANNG.
Last week, a Washington, DC, judge threw out two landmark Facebook lawsuits. One case, seeking to unwind Facebook’s acquisitions of Instagram and WhatsApp, is permanently dead. But the judge told federal prosecutors to refile the second case, this time with more math to prove Facebook is the world’s dominant social media company. The ruling was a reminder that antitrust lawsuits now hinge on the vagaries of convoluted economic models more than legal arguments about Big Tech’s moves to squash competition. Then a Congressional committee passed six tech-focused antitrust bills, with proposals ranging from the banal (raising merger filing fees) to the extreme (legally mandated breakups of big tech conglomerates). That all the bills made it out of committee marks a stark shift from the government’s tech-worshipping 2010s, and the vote also surfaced new bipartisan voting coalitions.
The Merger Filing Fee Act is pretty simple but could have wide-ranging effects. It increases the administrative fee for mergers, which is what funds the Federal Trade Commission. A bigger budget will mean more investigations. It has 13 Democratic and 8 Republican co-sponsors at last count. The effects of this bill will depend largely on who is running the FTC and the Justice Department at any given time. Those people change with elections, and as happened in the 1990s Microsoft antitrust case, a new Attorney General in 2001 lost interest. This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors. The Act is looking for a do-over of something the Representatives would have preferred not to happen — the Facebook purchases of WhatsApp and Instagram. The other bills may go right after that combination. But the point of this one is to give the FTC a larger budget to challenge future mergers, and pursue more enforcement actions, like the recent one with Facebook.
American Choice and Innovation Online Act has 9 Democratic and 5 Republican co-sponsors. This bill is about large companies with platforms that compete with third parties, whether it is in software, hardware or services. The bill prohibits anything by platform owners that:
This bill could be called the “Kill the iOS App Store Act,” but it also blows up the Android model are include:
Ending Platform Monopolies Act could have been called the “Destroy How Apple Does Business Act.” It has 7 Democratic co-sponsors, and 5 Republican. This bill skips right to divestment making it impossible for a company to provide an integrated product with hardware, software and services. Just about every announcement Apple just made at their recent Worldwide Developers Conference would be illegal. It would put an insane amount of power in the hands of the FTC and would lead to all five FAANG companies being sliced up into a series of parts less valuable than they are consolidated. Both iOS and Android would be worse for it.
Platform Competition and Opportunity Act bill essentially bans all M&A activity by the affected companies. The exceptions:
ACCESS Act stands for "Augmenting Compatibility and Competition by Enabling Service Switching,” requires platform owners to create public APIs so users could transfer their data and social graph to competing services. It is co-sponsored by 10 Democrats and 7
These bills form a framework for future negotiations and should take them seriously. The next step is these bills move to the full House, likely in the fall.
Apple
If Apple is not number one on the committee’s hit list, then its Amazon and Facebook. Apple products have a market share ceiling at being a large minority.
These bills put a big hole in that cycle on step 3. Apple has a practice of buying small companies in all-cash deals without involving bankers. In the past 6 years, they have bought around 100 companies, which works out to about one every three weeks on average and the M&A activity has been accelerating since fiscal 2018.
The anti-trust mania that died down in the 80s, has re-awakened due in large part to the emergence of the digital age and legislators are pushing bipartisan bills to take advantage of the clamor to declaw the FANNG.
Last week, a Washington, DC, judge threw out two landmark Facebook lawsuits. One case, seeking to unwind Facebook’s acquisitions of Instagram and WhatsApp, is permanently dead. But the judge told federal prosecutors to refile the second case, this time with more math to prove Facebook is the world’s dominant social media company. The ruling was a reminder that antitrust lawsuits now hinge on the vagaries of convoluted economic models more than legal arguments about Big Tech’s moves to squash competition. Then a Congressional committee passed six tech-focused antitrust bills, with proposals ranging from the banal (raising merger filing fees) to the extreme (legally mandated breakups of big tech conglomerates). That all the bills made it out of committee marks a stark shift from the government’s tech-worshipping 2010s, and the vote also surfaced new bipartisan voting coalitions.
The Merger Filing Fee Act is pretty simple but could have wide-ranging effects. It increases the administrative fee for mergers, which is what funds the Federal Trade Commission. A bigger budget will mean more investigations. It has 13 Democratic and 8 Republican co-sponsors at last count. The effects of this bill will depend largely on who is running the FTC and the Justice Department at any given time. Those people change with elections, and as happened in the 1990s Microsoft antitrust case, a new Attorney General in 2001 lost interest. This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors. The Act is looking for a do-over of something the Representatives would have preferred not to happen — the Facebook purchases of WhatsApp and Instagram. The other bills may go right after that combination. But the point of this one is to give the FTC a larger budget to challenge future mergers, and pursue more enforcement actions, like the recent one with Facebook.
American Choice and Innovation Online Act has 9 Democratic and 5 Republican co-sponsors. This bill is about large companies with platforms that compete with third parties, whether it is in software, hardware or services. The bill prohibits anything by platform owners that:
- Gives their own products or services an advantage.
- Has discriminatory rules towards third parties that advantage some over others.
- “[R]estrict or impede the capacity of a business user to access or interoperate with the same platform, operating system, hardware and software features that are available to the covered platform operator’s own products, services, or lines of business.” I read this as no private APIs.
- Ties access or status on the platform to other payments. This could affect advertising.
- Uses data generated from third parties on the platform to create or improve platform offerings.
- Restricts third party access to their data.
- Prevents uninstalling shipped apps or changing defaults.
- Bans steering customers to alternative payment methods.
- Manipulate search rankings to favor the platform’s products or services over others.
- Controls pricing.
- Restricts interoperability.
- Retaliates against third parties for seeking regulatory relief.
This bill could be called the “Kill the iOS App Store Act,” but it also blows up the Android model are include:
- Up to 15% of total US revenue, or 30% of US platform revenue, whichever smaller.
- Restitution for damages.
- Disgorgement for unjust enrichment.
- Injunctions of violating practices.
- Forced divestiture for conflicts of interest.
Ending Platform Monopolies Act could have been called the “Destroy How Apple Does Business Act.” It has 7 Democratic co-sponsors, and 5 Republican. This bill skips right to divestment making it impossible for a company to provide an integrated product with hardware, software and services. Just about every announcement Apple just made at their recent Worldwide Developers Conference would be illegal. It would put an insane amount of power in the hands of the FTC and would lead to all five FAANG companies being sliced up into a series of parts less valuable than they are consolidated. Both iOS and Android would be worse for it.
Platform Competition and Opportunity Act bill essentially bans all M&A activity by the affected companies. The exceptions:
- Acquisition target does not compete directly now, or potentially.
- Acquisition target does not enhance current offerings or help maintain market position.
ACCESS Act stands for "Augmenting Compatibility and Competition by Enabling Service Switching,” requires platform owners to create public APIs so users could transfer their data and social graph to competing services. It is co-sponsored by 10 Democrats and 7
These bills form a framework for future negotiations and should take them seriously. The next step is these bills move to the full House, likely in the fall.
Apple
If Apple is not number one on the committee’s hit list, then its Amazon and Facebook. Apple products have a market share ceiling at being a large minority.
- This keeps them safe from antitrust concerns and allows them to exercise an extraordinary amount of control over their ecosystem.
- This lets them keep making products so great that people are willing to pay more for them.
These bills put a big hole in that cycle on step 3. Apple has a practice of buying small companies in all-cash deals without involving bankers. In the past 6 years, they have bought around 100 companies, which works out to about one every three weeks on average and the M&A activity has been accelerating since fiscal 2018.
Political Engineering of Apple’s Income Statement
This “Kill the iOS App Store Act” attacks a small, but growing part of Apple’s top line, at 5.2% in calendar 2020. An even bigger blow is if the chairman’s bill resulted in Google’s search engine default payments to handset makers and carriers being deemed illegal, representing ~$10 billion to Apple. They do almost nothing for it, so it goes straight to EBT. That’s 11.5% of their EBT in the TTM and would lower their EBT margin from 27.5% to 24.5% if they lost it. Flipping that around, Google puts that in their cost-of-goods. It is 11% of their TTM COGS and getting rid of that payment would increase their gross margin to 59.4% from 54.3%. Apple would have to open up the entire system to third party services. If the chairman’s bill were to pass unamended, Apple would be forced to, for example, to allow PayPal to be the default wallet on iPhone rather than Apple Pay and would be forced to allow Dropbox (DBX) to be set as the default cloud storage provider. The way Apple treats all their services would have to change.
Google
Google’s exposure is mostly through Android, the cornerstone of their ecosystem.
Google does not break out Android revenues, since they are so intertwined with the rest. Android is a key part of the overall Google suite, and was their most important move in remaining relevant as everything switched to mobile.
- Has discriminatory rules towards third parties that advantage some over others. Real world goods and services are exempt from the 30% App Store commission, but digital goods and services are not. There are many discriminatory App Store rules like this.
- “[R]estrict or impede the capacity of a business user to access or interoperate with the same platform, operating system, hardware and software features that are available to the covered platform operator’s own products, services, or lines of business.” I read this as no private APIs. Apple typically opens up most APIs to developers but likes to keep some private for their own use, sometimes only for the first year.
- Ties access or status on the platform to other payments. This could affect advertising. Not sure, but this could prohibit App Store ads. But it also may put the kibosh on Apple’s search engine default deal with Google, worth a purported $10 billion a year, which goes straight into EBT.
- Uses data generated from third parties on the platform to create or improve platform offerings. Apple does not collect much data, but they certainly know what does well in App Store.
- Restricts third party access to their data. A big developer complaint is that Apple disintermediates them from their customers.
- Prevents uninstalling shipped apps or changing defaults. Apple would have to make changes to comply, though they are mostly on board with this now.
- Bans steering customers to alternative payment methods. Apple prevents apps from pointing to cheaper web payment alternatives.
- Manipulate search rankings to favor the platform’s products or services over others. This has happened, but not to my knowledge since 2017.
- Controls pricing. Apple hasn’t done this for many years, since the book price-fixing case.
- Restricts interoperability. iOS does this in many ways, usually by using Apple APIs to intermediate between services so they cannot directly interact.
- Retaliates against third parties for seeking regulatory relief. Epic would still be on the App Store while they sued Apple.
Political Engineering of Apple’s Income Statement
This “Kill the iOS App Store Act” attacks a small, but growing part of Apple’s top line, at 5.2% in calendar 2020. An even bigger blow is if the chairman’s bill resulted in Google’s search engine default payments to handset makers and carriers being deemed illegal, representing ~$10 billion to Apple. They do almost nothing for it, so it goes straight to EBT. That’s 11.5% of their EBT in the TTM and would lower their EBT margin from 27.5% to 24.5% if they lost it. Flipping that around, Google puts that in their cost-of-goods. It is 11% of their TTM COGS and getting rid of that payment would increase their gross margin to 59.4% from 54.3%. Apple would have to open up the entire system to third party services. If the chairman’s bill were to pass unamended, Apple would be forced to, for example, to allow PayPal to be the default wallet on iPhone rather than Apple Pay and would be forced to allow Dropbox (DBX) to be set as the default cloud storage provider. The way Apple treats all their services would have to change.
Google’s exposure is mostly through Android, the cornerstone of their ecosystem.
Google does not break out Android revenues, since they are so intertwined with the rest. Android is a key part of the overall Google suite, and was their most important move in remaining relevant as everything switched to mobile.
The first two columns represent what an Android licensee has to sign on to in order to make an Android phone. Samsung has their own apps and services, but everyone signs on to that middle column of Google apps and services. Samsung can make their apps and services unremovable, but Google would not. OEMs could ship Android phones with no Google services or apps. The chairman’s bill could make the revenue sharing agreements in the right column illegal, which would actually be doing Google a huge favor, and cost Apple and the Android OEMs a lot of revenue. The Google Play Store would be similarly impacted like iOS, but Google has far fewer rules. They already allow much more third party service integration, but they would have to allow more. The burden would largely be on them to show they are not favoring their own rankings over others. Google also likes making small acquisitions that would be off the table.
The 2013 bump was a number of acquisitions, most notably Nest and Waze.
Amazon
If Amazon has a private label offering, it will usually show up in the top-5 results, having backed off making it the top result. Amazon would be excluded from using data gleaned from the store to inform their private label, but not Walmart, Costco and a host of other retailers where their strategy preceded Amazon. Netflix even uses it to choose what shows to produce. Only Amazon would be prevented.
Amazon’s is building an ecosystem of products and services similar to Apple and Google, offering
The chairman’s bill will have a broader effect on the way Amazon does business. Much of their retail strategy, not just Amazon Basics, uses the data they get from the store. Amazon also likes to buy other companies:
Amazon
If Amazon has a private label offering, it will usually show up in the top-5 results, having backed off making it the top result. Amazon would be excluded from using data gleaned from the store to inform their private label, but not Walmart, Costco and a host of other retailers where their strategy preceded Amazon. Netflix even uses it to choose what shows to produce. Only Amazon would be prevented.
Amazon’s is building an ecosystem of products and services similar to Apple and Google, offering
- Prime services
- Echo/Ring products and Alexa
- FireOS and tablets
- Amazon Sidewalk and Tile integration
- Could AirTags be forced onto Amazon Sidewalk?
- Would Echo products have to support Siri and Google Assistant? Turning that around, would iPhone be forced to support the others?
- Could Walmart get equal access to Alexa (Walmart already has a deal with Google Assistant)?
The chairman’s bill will have a broader effect on the way Amazon does business. Much of their retail strategy, not just Amazon Basics, uses the data they get from the store. Amazon also likes to buy other companies:
2018 is the Whole Foods purchase. There is also the $8.45 billion MGM deal pending.
Facebook
Facebook’s exposure comes from the ACCESS Act, for data and social graph portability, which is Facebook’s moat. The motivation for the Mergers Act continues to be the Facebook acquisitions of Instagram and WhatsApp, and the committee members sound like they would like a do-over.
Facebook’s exposure comes from the ACCESS Act, for data and social graph portability, which is Facebook’s moat. The motivation for the Mergers Act continues to be the Facebook acquisitions of Instagram and WhatsApp, and the committee members sound like they would like a do-over.
Aside from those two big ones in 2015, Facebook also likes to make small acquisitions.
Microsoft
Microsoft is straddling both sides of the fence as they have been publicly supportive of the bills and sided with Epic in their case against Apple. During the full committee markup, chairman Cicilline denied excluding Microsoft by design. Microsoft meets all the qualifications laid out in the bills — they have both 50 million US consumer customers and 100,000 business customers, and have over three times the minimum market cap. They have the Windows platform, the Xbox platform, the Azure platform, and one could even argue that Office is a platform, since Excel is now Turing Complete. They place some restrictions on the use of their IP. Xbox is a locked-down system and MS looking at rules that their competitors Sony and Nintendo do not face. They just bundled Teams into Windows 11, which would likely be frowned upon under this legislation, which could cause Azure, Xbox and Office to be split off from Windows. Microsoft also make acquisitions:
Microsoft
Microsoft is straddling both sides of the fence as they have been publicly supportive of the bills and sided with Epic in their case against Apple. During the full committee markup, chairman Cicilline denied excluding Microsoft by design. Microsoft meets all the qualifications laid out in the bills — they have both 50 million US consumer customers and 100,000 business customers, and have over three times the minimum market cap. They have the Windows platform, the Xbox platform, the Azure platform, and one could even argue that Office is a platform, since Excel is now Turing Complete. They place some restrictions on the use of their IP. Xbox is a locked-down system and MS looking at rules that their competitors Sony and Nintendo do not face. They just bundled Teams into Windows 11, which would likely be frowned upon under this legislation, which could cause Azure, Xbox and Office to be split off from Windows. Microsoft also make acquisitions:
That big bulge is LinkedIn. Not on the chart, just in April, they spent $20 billion on Nuance.
Classic economic theory says a monopoly is a company that controls supply with the power to set supply levels by themselves, which can lead to chronic underinvestment and high prices. Since the 1980s, antitrust law has focused on the effect on consumer prices. The framework created in this proposed legislation is based on absolute size, not market share, with a definition tailored to five US companies. Apple, the biggest potential loser and while it does not have a majority position in any single market, their market cap is over a certain level, they have a lot of users, and they have rules for using their IP.
Classic economic theory says a monopoly is a company that controls supply with the power to set supply levels by themselves, which can lead to chronic underinvestment and high prices. Since the 1980s, antitrust law has focused on the effect on consumer prices. The framework created in this proposed legislation is based on absolute size, not market share, with a definition tailored to five US companies. Apple, the biggest potential loser and while it does not have a majority position in any single market, their market cap is over a certain level, they have a lot of users, and they have rules for using their IP.