Should Big Tech companies be able to buy their competitors?
Economic concentration has been the rule for the American economy for decades.
In the past few weeks we’ve seen some pretty big developments in the tech market. Amazon bought One Medical and then immediately after the acquisition killed off their own offering that was called Amazon Care. It hard to build a business and compete in the market; it’s much easier to buy a company that’s done the hard work of hiring people and acquiring and retaining customers. As Christina Farr, health-tech investor at Omers Ventures said:
Physician recruitment is really hard, building insurance contracts is really hard, building employer relationships is really hard. All of those things take a long time and One Medical was available to purchase.
One Medical has contracts with other big tech firms like Google, offering them healthcare and telemedicine for employees. Amazon was able to acquire the One Medical network instead of building their own through Amazon Care. If Amazon Care and One Medical existed as separate companies they would have to compete with each other to hire doctors, to hire employees and to acquire and retain customers. Competition between firms is fundamental to capitalism and free market economics. Competition is what makes the system work to spur innovation, improve service and lower prices. When big tech firms acquire their competitors the rest of us lose.
Big Tech firms have been buying their competitors for decades. Some other examples of Big Tech firms acquiring their competitors or emerging competitive threats include:
Amazon buying MGM Studios (2021) to not compete with Prime Video or MGM launching their own streaming service.
Facebook buying Oculus VR (2014) to not have to build their own virtual reality headset business. Facebook acquired their way into the Metaverse.
Google buying Waze (2013) eliminated a competitor of their Maps product and resulted in higher prices for developers.
Facebook buying Instagram (2012) eliminated an existential threat to their business in mobile social networking.
Amazon buying Diapers.com (2010) after ruining them with predatory pricing allowed them to become the primary player in online shopping for diapers and baby care items.
Google acquiring DoubleClick (2008) rolled up the internet display advertising space.
Google buying YouTube (2006) allowed them to sunset Google Video and rolled up the video search market.
These instances are all cases where big existing tech firms were able to enter or dominate a new market or fortify their existing dominance. The list goes on: to date Google has acquired 250 companies, Amazon has acquired 113 companies and Facebook has acquired 95 companies. Historically, mergers have been challenged or blocked by the government but in this generation the Clinton, Bush, Obama and Trump administrations have done very little to block any mergers. In fact since the Reagan Administration rewrote the merger review guidelines in 1982 we’ve been on a merger wave that continues to this day.
What’s wrong with companies buying their competitors?
Today we get low prices from Amazon, free internet searches from Google, tantalizing networking and entertainment products from Facebook and a plethora of other services from tech giants. It’s easy to see the argument that consumers have never been better off. The government hasn’t been blocking these mergers and things are great so why start now? In some cases the companies didn’t even have a business model, like when Google bought Android and those acquired businesses could become viable with subsidies from other parts of the business. This can be great for consumers but for American society to function well and democracy to flourish there’s more at stake than consumer welfare.
These are some of the problems with dominant firms buying their competitiors:
Reduced innovation — big companies are hard to manage
The heart of the FTC’s lawsuit against Facebook is that they don’t innovate but instead illegally “buy or bury” their competition. In the social media space new competition comes from other countries like TikTok from China or BeReal from France. TikTok is basically the same as Vine which Facebook killed through bait and switch tactics involving their API over a decade ago. When big companies can simply buy up innovative new ones it reduces the incentive for big companies to innovate themselves.
Additionally, as companies grow bigger they become harder to manage. Senior Facebook engineers recently admitted to Congress that they have no idea where they keep user’s personal data. In the words of The Intercept report:
The hearing amounted to two high-ranking engineers at one of the most powerful and resource-flush engineering outfits in history describing their product as an unknowable machine.
In the course of acquiring and merging together hundreds of companies these firms have become so bloated and complicated that their inner workings are unknowable to any individual. This complexity combined with reduced incentive to innovate leads to stagnation.
Predatory pricing and cross subsidizing businesses
Once a company wins in one sector, even a niche sector like online book sales, they can use those profits to win in another sector like Cloud Computing or Healthcare. Buying competitors makes this process even easier. In the case of Amazon they can enter new markets through acquisition and then loose money for years if not decades, decimating competitors until they are the only one left.
Government corruption and collusion
If an industry has 100 firms that all compete with each other and there’s legislation coming to regulate that industry it’s going to take a lot for everyone to chip in and coordinate to buy lobbyists and influence the legislation. If a firm spends too much on lobbying other competitors that don’t spend on lobbying could eat their lunch. There’s a coordination problem too getting one hundred different firms to all agree on what they should be lobbying for and how to achieve their ends.
If there are two or three firms that dominate an industry, like Google, Facebook and Amazon for the digital advertising space, then those firms can easily coordinate and spend millions on targeted lobbying to influence the American government. Additionally, it’s much easier for firms to collude and price fix, which is exactly what Facebook and Google did in the digital ads market under the code name “Jedi Blue”. Additionally, firms can collude to keep worker wages down, which is what Big Tech companies like Apple, Google, Adobe, Intel and Intuit did to suppress tech salaries.
What’s being done to stop it?
The good news is that America has faced this problem before where firms got too big and bought all competitors or politicians that threatened them. Laws like the Sherman Act (1890), Clayton Act (1914) and the Robinson–Patman Act (1936) are all on the books and have never been repealed by Congress. Since the 1980s though the executive branch simply hasn’t enforced laws that distribute economic power, instead favoring an economy comprised of powerful firms. These antitrust laws need to be enforced even though turning the government around takes time.
Last year the Biden administration issued an Executive Order to promote competition within the American economy.
Lina Khan, chairwoman of the Federal Trade Commission (FTC) is doing lots of good things including updating merger guidelines to be more restrictive of vertical mergers.
There’s a growing populist movement to revise the antitrust laws and throw out the consumer welfare standard that’s dominated antitrust legal thinking for decades.
Anyway, this is the tip of the iceberg on this topic but I’m planning on exploring more about how we can build a more decentralized economy in future issues.
On the data front
We’ve been working on a new jobs search dashboard using Next.js. You can see a sneak peek at employbl dot com slash jobs. If you’re hiring or looking for a job let me know I’d love to chat!
We’ve pulled the latest data from the public web for over 9,000 tech companies and startups. You can see the latest funding rounds on the Employbl dashboard, like Pinata — a web3 company out of Nebraska that raised an $18 million Series A round.
That’s all for now! If you are hiring or looking for a job let me know by replying to this email or sending directly to connor at employbl dot com.