Antitrust Division Launches Broad Investigation of High-Tech Industry
When it comes to the Justice Department and reading the tea leaves, I often rely on a very obvious point – DOJ tells you in advance what it is planning and then executes its plan. This has been true in the FCPA arena, prosecution of the opioid cases, targeting health care fraud and a history of initiatives. DOJ is fairly transparent on its priorities.
Recently, the Antitrust Division led by Makan Delrahim confirmed it is conducting a broad antitrust investigation of the high tech industry. In a fascinating speech delivered on June 11, 2019, AAG Delrahim outlined some of the issues to be reviewed. (Here). The speech itself reflects the scope of the inquiry and puts on notice the industry and its players. As a subject of the inquiry, high-tech companies need to conduct their own internal inquiry to prepare for the government’s investigation.
DOJ has a long history in conducting market-changing investigations. Going back to AT&T and the nation’s telephone system break-up, and continuing with the prosecution of Microsoft in the 1990s, the Antitrust Division has a record of focusing on markets dominated by one or two competitors.
The Antitrust Division often cites potential anticompetitive concerns caused by “network effects,” when companies link together various functions, at some point, they earn important procompetitive benefits. The difficulty lies in defining where such benefits result in market power that can be used to enter and distort related competitive markets.
In the Microsoft case, the Antitrust Division challenged Microsoft’s use of its dominant operating system (i.e. Windows) to control products tied to its operating system such as its internet browser, Internet Explorer, and excluding its competitor Netscape. Ironically, the government’s successful prosecution of Microsoft paved the way for companies like Yahoo, Google and Apple to provide desktop and eventually mobile products.
The Antitrust Division’s inquiry will test its ability to understand the market operation of the so-called digital economy. Competition is focused on clicks or Internet attention and companies rely on their respective proprietary technologies. Market forces push them to attract customers while minimizing costs. Like many other predecessor industries, these companies are seeking the benefits of network effects, at some point they amass enough customers and the platform becomes more valuable to users and eventually advertisers.
Traditional antitrust principles apply to this market (as they would in any other market). The danger to consumer welfare arises when a participant (or a small number operating together, i.e. a combination) acquire market power and use it for anti-competitive purposes. A market player who becomes dominant may in fact use its market power to create barriers to entry by otherwise competitive businesses.
The tricky part about our digital economy is that a myopic focus on price ignores the real potential for anti-competitive conduct. Many digital markets offer free services to consumers in order to establish the network benefits of a large base of users to whom access and information can be translated into significant financial revenues (e.g. Facebook, Amazon, Google). Amazon’s ability to offer lower prices than its competitors reflects its unique market position and access to so many customers. Google charges zero for its browser services but has amassed a large number of users to whom it has access and the ability to earn significant revenues through related offerings and valuable information.
In this marketplace, the Antitrust Division appears to be examining a number of important issues, including:
(1) coordinated conduct to enhance market power;
(2) exclusivity agreements involving customers or suppliers or variations such as requirements contracts or certain volume discounts where a dominant firm can use exclusive dealing to foreclose competition; and
(3) anti-competitive acquisitions of early stage companies if the purpose and effect of an acquisition is to prevent competition or protect a monopoly.
The focus of the Antitrust Division’s inquiry is broad. The digital technology industry should be mindful of these issues and the Justice Department’s inquiry. Once DOJ focuses its attention, and given the serious concerns about the digital economy, there is a strong likelihood that DOJ will eventually act.