The principal battlefield in Washington’s war on big tech is mergers and acquisitions. Throughout 2021, lawmakers from both parties and antitrust enforcers at the Federal Trade Commission and Department of Justice have taken increasingly aggressive steps to block proposed mergers and acquisitions as well as retroactively attempt to break up previously approved ones.
While an increasingly assertive approach to mergers and acquisitions may be politically popular given Americans’ deeply hostile views of big tech and their perceived influence, this new approach ignores the real benefits mergers and acquisitions bring to consumers in terms of innovation and lower prices. Ignoring these pro-consumer consequences of mergers and acquisitions will not only represent poor policy formulation but could leave consumers picking up the pieces.
Congress and federal antitrust enforcers should rethink their current approach and instead craft antitrust policies that prioritize consumers and consumer welfare.
In Congress, Senators Amy Klobuchar (D-MN) and Tom Cotton (R-AK) introduced the Platform Competition and Online Activity Act that would make it substantially harder for digital platforms such as Amazon, Facebook, and Apple to acquire competitors. Klobuchar has publicly stated that these rules are needed because “big tech firms have bought up rivals to crush their competition, expand their monopolistic market share, and to harm working Americans.” Klobuchar and Cotton’s bill has a companion in the House that currently enjoys some bipartisan support.
Antitrust enforcers have also been active in opposing mergers and acquisitions. For example, in August, the FTC filed a lawsuit to unwind Facebook’s acquisitions of WhatsApp and Instagram. In their lawsuit, the FTC has alleged that “Facebook has hindered, suppressed, and deterred the emergence and growth of rival personal social networking providers and unlawfully maintained its monopoly…through means other than competition on the merits.”
Increasing hostility to mergers and acquisitions ignores the reality that they can provide consumers with lower prices. For example, in 2017, Amazon announced it had purchased the grocery store chain Whole Foods for $13 billion. After Amazon acquired Whole Foods, it was able to use its buying power and optimized supply chain to slash prices by up to 30%. Not only did this allow the company to shed its nickname Whole Paycheck, but it made high-quality and organic food available to more consumers. Amazon was also able to expand the grocers’ footprint into new cities.
Mergers and acquisitions also allow companies to develop better and more innovative products. This dynamic was most prominently displayed after Facebook acquired WhatsApp in 2014. Before being acquired, WhatsApp was a fee-based subscription service and only able to offer consumers limited texting options. Since being acquired, however, WhatsApp now offers free end-to-end encryption, business services, and voice and video calling.
These new, innovative services could only be developed because Facebook “freed the messaging service to focus on the consumer experience and relieved the pressure to become profitable before it was ready.” Regulators should know that consumers are always better off with free services, compared to fee-based services.
Prohibiting mergers and acquisitions would also destroy a tech ecosystem that drives innovation. A 2020 survey revealed that 58 percent of U.S. start-ups expect to be acquired, and acquisition is a principal incentive for creating start-ups. As research from Bain and Company has shown, acquisitions incentivize entrepreneurs to create start-ups, exit, and then “pour money into the next wave of deals.” Bain and Company also found that “over the past decade, independent venture capital firms and corporate venture funds that sold 11% to 20% of their start-up portfolio invested in 40% more deals than funds that sold 10% or less of their portfolio.”
Without the prospect of acquisitions, tech entrepreneurs would be less likely to continue to begin start-ups that deliver innovative goods and services for consumers. Further regulation of how big tech platforms operate may be politically expedient for politicians and federal agencies seeking to ingratiate themselves to doing something about big tech, but it could inflict substantial harm onto consumers by denying them access to lower prices and innovation.
Rather than crafting a punitive regulatory environment that reflexively disincentivizes mergers and acquisitions, lawmakers and federal antitrust enforcers must recognize the tangible benefits they can bring to consumers. Failing to do so will only leave consumers paying the literal, rather than metaphorical, price.
This article was published in The Economic Standard.