Wilmington Trust’s Capital Considerations with Tony Roth
Anti-Antitrust? Pros and Cons of Reining in the Giants
Tony Roth, Chief Investment Officer, Wilmington Trust Investment Advisors, Inc.
Bill Baer, former Assistant Attorney General, Antitrust Division, U.S. Department of Justice
BILL BAER: The cost we as consumers are paying is in the data, the information we’re providing that platform about where we live, what our shopping preferences are, the sorts of search we may be into, the products we like to buy. The way in which consumers may be injured by a dominant platform is that we’re surrendering data we don’t even know we’re surrendering. It’s being sold without our knowledge and in some cases without our consent. So, it does create a challenge for antitrust enforcement under the current court interpretation of what’s problematic and what’s not.
TONY ROTH: That was Bill Baer, a leader in antitrust and competition enforcement. Bill led antitrust enforcement as Assistant Attorney General in charge of the Antitrust division of the DOJ and as Director of the Bureau of Competition at the Federal Trade Commission. In today’s episode, Bill will walk us through how the current sentiment against the tech giants may result in legislation and possible breakups and ultimately together we will breakdown what this means for shareholder value. Welcome to Capital Considerations, the podcast that takes complex ideas from the investment world and makes them accessible to everyone. I’m your host, Tony Roth, chief investment officer of Wilmington Trust.
As we continue in this remote work environment and, in fact, remote everything environment, I'm reminded of just how reliant we’ve all become on technology, more so than ever before. And we’ve seen massive growth in the tech space, particularly in the heavyweights, Facebook, Amazon, Apple, Google, who are positioned like never before to be market leaders in their spaces. Look at Facebook, for example. It started as a fun photo sharing space for Millennials and today it encompasses Baby Boomers and pretty much all generations. In fact, 70% approximately of U.S. adults use it and of them three-quarters visit the site at least once a day. Google has become a verb and the same can be for the other companies in their domains, which is to say they’ve sort of become monopolies, they’ve sort of become the only real player in their spaces.
The question that we’re going to be exploring today is have they become too influential? Are they actually now in some sense hurting the consumer? Are they anti-competitive?
And although Capital Considerations takes no political position, it’s hard to deny that both sides of the aisle in Washington think that these big boys have become too big for their britches.
Here to help us walk through this issue is Bill Baer. Bill is the only person to have led antitrust enforcement in both US antitrust agencies and during his tenure as Assistant Attorney General, the division brought and won more cases than at any point in its history. Bill, thank you for joining us today.
BILL BAER: Tony, thank you. It’s a pleasure to be here and I look forward to our conversation.
TONY ROTH: So, let’s just jump in. We’re talking about antitrust in the context of these big names in the tech space that I’ve mentioned where there’s a lot of focus. But before we dive into those companies specifically, I think the starting point is the tools that we have to enforce antitrust.
We have things, laws on the books, called the Sherman Act, the Clayton Act. These are more than 100-years-old. Can you give us a backdrop on what these tools are and what they permit the government to do and how they are intended to be used and how they’ve been used historically?
BILL BAER: Sure. The statutes you mentioned, are all pretty broadly worded statutes that are designed to allow the government and private plaintiffs to challenge behavior that has the potential and/or the effect of limiting competition and ultimately injuring consumers. They are, as I said, broadly worded. The FTC Act talks about unfair methods of competition. The Sherman Act talks about behavior that tends to create a monopoly. The Clayton Act deals with many things, but particularly mergers, and outlaws mergers that may tend, substantially, to limit competition or tend to create a monopoly.
The way our court system works in the United States is it’s left to the judges to apply those broad prohibitions to the conduct at issue. And so, we develop a common law of what is problematic behavior and what is behavior that is not problematic.
TONY ROTH: So, Bill, one of the really interesting aspects of the current antitrust groundswell of thinking in the country is that even though we’ve had the antitrust rules in their current form used I would imagine you would say successfully for many years, we had Standard Oil 100 years ago. We’ve certainly had since then things like Microsoft, AT&T, and other situations. For some reason in this context as we look at these big technology companies, there seems to be a proposition that the tools that we've used historically are no longer adequate.
Amy Klobuchar, Senator from Minnesota, about a month ago introduced legislation to significantly lower the bar, for court action against companies that could be merging in a way that could be anticompetitive. The Biden administration I know has proposed to bring in some new people to the Federal Trade Commission, some scholars from one woman named Lina Khan, as an example, who is proposing that the current tools, historical tools are no longer adequate to protect consumers. What do you think about this?
BILL BAER: Well, there are a couple of phenomena going on here. One is for the last 40 years or so the courts have narrowed considerably what kind of behavior is or constitutes a violation of the antitrust laws. Your listeners are probably aware of the Chicago School of Economics, which has basically set a very high standard of proof before the courts will find certain behavior or a possible merger to be a violation of the antitrust laws. And that Chicago School philosophy focuses on demanding a fairly high level of certainty that behavior will cause an increase in price consumers will pay for a product or a service.
So, you have on the one hand that narrowing of what constitutes an antitrust problem. And then, you have these platforms which are a little different from most of the buy and sell that has gone on in the market over the years. Part of that difference is what we call a two-sided platform. If you look at Facebook, they are attracting or working to attract consumers to their platform and not charging consumers a monetary price for being on the platform. You know, you just go on. You sign up.
But the cost we as consumers are paying is in the data, the information we’re providing that platform about where we live, what our shopping preferences are, the sorts of search we may be into, the products we like to buy. That is invaluable data that we’re surrendering to the platform and the platform then turns around and monetizes that by going to sellers and to advertisers and say, you know, pay me. I’ll share this data and you can target consumers in a unique way.
So, we’ve got a, an unusual confluence of narrow focus on what is an antitrust violation and focused particularly on price effects, when in fact the way in which consumers may be injured by a dominant platform is that we’re surrendering data we don’t even know we’re surrendering. It’s being sold without our knowledge and in some cases without our consent. So, it does create a challenge for antitrust enforcement under the current court interpretation of what’s problematic and what’s not.
TONY ROTH: What’s fascinating about what you’re describing to me is that obviously there’s a potential privacy issue here. But at this stage of our conversation, you’re not even getting to that point yet. You’re just saying that as a commercial matter the appropriation of this information, this data, and the reuse of it in some competitive way is difficult to get at and for us to potentially circumscribe appropriately from a competition standpoint under the current antitrust regime. That's separate and apart from whether or not it may be problematic from a privacy perspective, right?
BILL BAER: That's right. And part of the challenge here and part of what explains the persistent dominance, the near monopoly status of these platforms is they have become essential for us to communicate with others or to shop or to search. They’ve become dominant in a very significant way. And so, there isn’t much opportunity for competitors to come in and compete away market share, perhaps again, going back to privacy, offer more privacy protection because a Facebook faces as a practical matter in terms of what services it offers the consumer not a lot of competition.
TONY ROTH: Bill, let’s posit that unless we have a elimination of the filibuster in the Senate, the Republicans seem generally to be fairly hostile to a broadening of the antitrust regime. But a lot of the concern with these companies is bipartisan. It doesn’t seem like there’s going to be success with new law, legislation would be successful.
So, let’s look at the existing regime with the new theories that may be brought to the Federal Trade Commission and Department of Justice. Where do you see right now looking at the big four companies, Amazon, Apple, Facebook, and Google, where do you see the greatest chance of success on the part of the government doing something meaningful in this space?
BILL BAER: Well, let’s look first at the two pending cases, one against Apple brought by the Justice Department and State Attorneys General, and the other against Facebook, brought by the FTC and, again, a number of State Attorneys General. In the Google case, the concern is that they have basically locked up the market for search by among other things entering into exclusive arrangements with a company like Apple to have Google search be the de facto search engine installed on all of their products with and paying Apple a lot of money to be the exclusive search engine. That has resulted over time, according to the DOJ complaint, with Google accounting for 90% of all search and something like 95% of the search on mobile phones. So, they’ve locked up a when it comes to Facebook, it’s a little bit of a different pattern of behavior that the FTC and the states are going after. There they’re saying Facebook scours the Silicon Valley environment looking for startups that could be a competitive threat and very early on in these startups’ existence buys them out for a very significant premium so that there is not an opportunity for the startup to be bought by somebody else and pose a competitive threat to Facebook. The two examples that are most cited are Facebook’s acquisition of Instagram and its acquisition of WhatsApp. These are a number of years ago and they, they’ve become a successful part of the Facebook offering and the government is kind of asking the question but wait a minute, that really helps maintain your dominance and maybe those acquisitions never should’ve been allowed and we’re going to go back, challenge them, and if we convince a court we’re right, we’re going to require some sort of breakup down the road.
I should say down the road is really important here, because these cases, the case against Google, the case against Facebook, and potential cases against Apple and against Amazon, they take a long time. That's one of the challenges of antitrust law enforcement. The Google case was filed last October. It is not scheduled to go to trial until September of 2023. That's almost three years after the case was brought. And then, there’ll be a trial at some point and there’ll be appeals. So, we are years away from determining whether or not, a court determining whether or not the Google behavior DOJ is challenging is in fact unlawful.
The same is going to be true of Facebook. There’s no trial date set there. But these cases take a long time to go through the process. And at the beginning of our discussion, you asked about whether our current laws are adequate to deal with the dominance of the high-tech platforms. And one response is we take too long to get to a resolution and does that mean we’re at risk of consumer injury and limits on competition that will persist for years before we get to the end of the game and find out whether or not the behavior was anticompetitive and anti-consumer.
TONY ROTH: So, Bill, what do you think the remedy would be? In the Google situation, I would imagine that I know there are many—it’s multifaceted, but certainly with regards to being a default search engine that could certainly be easily addressed without breaking up Google. These are very slow-moving actions that the companies can adjust themselves to over time as they potentially get visibility into what might happen, it doesn’t impact their revenue and ultimately their stock price. And so, we don’t, we’re not overly concerned as investors about these actions, at least given current law. And I'm wondering if you see the remedies here as being big hammers or more just little picks if you will in terms of these particular, these two companies?
BILL BAER: Well, at this point in the Google action and in the Facebook action, the government hasn’t specified what it’s going to want at the end of the game. It has certainly reserved the right to call for some kind of breakup. But in my experience, those things are hard to do, you know. Once the WhatsApp and Instagram code has been integrated into the Facebook operating system, its algorithms, the notion that you can break them apart and spinoff a separate company that is viable is really going to be a challenge for the government.
So, very often in these cases where you’re addressing conduct that’s gone on for a long time, the remedy is what we call conduct limitation. So, Google, for example, may be limited in terms of the exclusivity arrangements it can enter into with Apple and other providers of hardware. So, it can’t lock up the market. Facebook may well be limited in terms of what future acquisitions it can make so it cannot continue that pattern of buying startups that allowed its dominance to persist.
But, Tony, you also mentioned at the top of the podcast the question of what’s happening on the Hill. And I think there is some possibility that there will be two kinds of legislation that could result in the next year or two. It’ll take a while. It’s not clear it’s going to happen. But one is what Senator Amy Klobuchar is proposing in her bill, which is to tweak the antitrust statutes in a way that would effectively direct the courts to broaden their view of what constitutes harm to competition and harm to consumers. So, a privacy violation could be or a series of strategic acquisitions by a dominant firm of little companies that are not yet rivals would be seen as a potential antitrust problem.
The second kind of action that could come out of Congress is some sort of prospective rulemaking authority given to the Federal Trade Commission or the Federal Communications Commission that would set standards of conduct for companies like Google, Amazon, Facebook, Apple and guide their behavior in ways that reduce or eliminate the risk of anti-competitive outcomes. And you can do that consistent with good competition principles.
One of my favorite examples is, you know, that back in 2003 the Federal Communications Commission adopted a rule that said we can move the phone numbers associated with our land line and with our cell phones to a different carrier. You know, until that point it wasn’t our phone number. It was AT&T’s phone number and we, if we wanted to go elsewhere, we had to get a new number and go through all the cost associated with updating everybody.
And once that rule was in place, suddenly people were more mobile, able to move their business elsewhere. And so, you could see Congress embracing some notion of data portability, which would allow us to take the information we’ve provided Google, for example, and transfer it to a different search engine. Google would be required, if these rules were adopted, to basically delete all of our information. It would give consumers more power to move their search capability around and create a competitive environment where maybe Google is more protective of the information it is seeking from us. There is support I think in Congress to do this.
There is some bipartisan agreement that these four successful platforms are dominant and dominant in ways that are limiting competition and limiting consumer choice.
TONY ROTH: We did talk about the privacy issue earlier and there is a feeling that—and it’s much stronger in Europe I think but it exists here as well, of course—that apart from the commercial aspects of their behaviors, there’s something that’s inherently troubling around their appropriation of personal data and their reuse of that personal data. And Apple, has made a significant point to be out in front on this issue to protect privacy. Do you think that Apple is less exposed here in general from an antitrust standpoint than the other companies we’re talking about?
BILL BAER: It’s hard to rank order who’s more exposed and who's not. I think the concern with Apple from an antitrust point of view is less about privacy. You’re correct that I think they work hard to protect privacy. But it’s more about how they use the app store and basically put people who develop apps at their mercy, that they’re able to command a high commission to be on the app store, that the data Apple acquires from consumers who then download those apps sticks with Apple. It’s not shared with the app developer and the app developers think this is anticompetitive, forces them to rely on Apple, and limits their options to take their apps elsewhere.
TONY ROTH: Right.
BILL BAER: So, competition is thwarted. The app developers are caught in a vice is what they say, and consumers have less choice. That's the concern as I understand it about Apple.
TONY ROTH: How about Amazon? What’s the primary concern? I mean they do seem to be a default for e-commerce obviously. But you’ve certainly seen, by the same token you’ve seen Wal-Mart, Target, as a result of the pandemic somewhat ironically a lot of other retailers, bricks and mortars retailers traditionally have raised their game in the e-commerce space and enhanced competition. So, what do you think about Amazon?
BILL BAER: Well, I think the concern with Amazon is less with its successful platform but what it’s doing now that it’s successful as, you know, the major go-to place for us to buy goods and services is that it is now competing with the sellers who are on the platform. And in some ways, there’s nothing wrong with that.
TONY ROTH: Competition is good.
BILL BAER: Yeah. Right. Amazon because it’s invested in this wonderful infrastructure that can get stuff to us overnight probably is in a position to develop products that they can sell at a lower cost. And so, you know, antitrust normally doesn’t try and get in the way of that. It, it’s in a sense healthy competition.
But there are allegations that Amazon may actually be engaged in predatory behavior, …
TONY ROTH: Right.
BILL BAER: … predatory pricing, you know, other behavior that basically forces companies to sell its products to Amazon so Amazon can offer them or go out of business altogether.
TONY ROTH: Right.
BILL BAER: The example that came out of the House hearings last fall was Diapers.com, a very successful seller on the Amazon platform. But there’s evidence that was developed that Amazon targeted them, basically cut the price of the Amazon diapers in a way that diapers.com could no longer compete and at the end of the day, according to House report, had to sell out to Amazon. And there’s a question of whether that is unfair competition.
TONY ROTH: Bill, one of the things that has been really interesting about this, you talked about the length of time that it takes for the government to move on these areas, these–prosecute these cases. And it feels to me like the other areas of the world that are developed have developed bodies of rules, like Europe. We saw recently the Australia case with Facebook where perhaps they have to pay for the news that they’re going to be essentially redistributing. Is that there are other areas of the world that could be moving much faster than us, and I wonder whether or not that would sort of preempt in some sense the actions in the U.S. because if these big companies are forced to adjust as a result of outcomes in other areas of the world, do they adjust everywhere or do they just accommodate the way their technology is delivered in each of the jurisdictions.
BILL BAER: If you’re one of these successful high-tech platforms, you are confronting the prospect of regulation or law enforcement all across the globe. As you say, Australia is the most recent example but there’s legislation pending in Brussels in the European Union, there’s legislation and rulemaking pending in the United Kingdom to develop prospective rules that would limit certain behaviors by the successful tech platforms.
You talk about requiring Google, Facebook to the extent they’re acquiring news headlines from publishers to pay for that. There’s talk about limiting the algorithms that these folks use if the algorithms result in misinformation being widely disseminated. There’s talk about, you know, a right to be forgotten. This is the ability to require a platform to give you back all of your information or delete it so you can either not use the platform at all or take your information to another platform.
It is a challenge for these companies around the world to figure out what to do. And recently, I’ve seen a number of ads. I think both Facebook and Twitter have talked about the need in the United States to take a look at whether we need a new regulatory regime to set the rules of conduct so that these companies can continue to do what they do but do it in a way that it’s compliant with the antitrust laws and consumer protection laws.
TONY ROTH: One of the things that I find interesting is that as an American I give a visceral reaction when I see the European antitrust body go after some of these American companies in such an aggressive way. And it’s a very patriotic reaction. It’s a protective reaction. And so, on the one hand I would think that our regulators would want to cooperate But on the other hand, there is a sense of patriotism and the fact that these countries are sort of going after our companies because they’re eating their lunch because we’ve basically come to dominate frankly this entire digital economy as the main providers, as the main platforms.
BILL BAER: In Europe, for example, there is I think a group of enforcers who are very much committed to an even-handed application of the competition laws over there to all companies. And—but at the same time, there are politicians who see the dominance of these firms as something that ought to be blocked and ought to be blocked because they want to encourage national champions. They want to be able to have successful tech platforms that are based in one of the member countries of the European Union.
So, I think there are various people have various views about what to do. One of the things that’s happened in my career in antitrust competition enforcement is that there has been a move to try and be more even-handed around the globe in how we approach mergers, how we approach cartels, move away from national champions.
One of the challenges of antitrust enforcement under the Biden/Harris administration is going to be help see whether there could be a more coordinated approach that avoids having wildly different rules in Europe from what are in the US from what are in Japan or Australia. Big challenge. But worthwhile to put the energy into addressing that.
TONY ROTH: The last topic I want to address before we close is that as investors what’s top-of-mind for us really is, are these movements to reign in the activity in some way, in some sense of these companies going to impact the values of the companies? Is it going to impact their earnings power?
And as you’ve said, and I’ve alluded to, the ability of these companies to evolve and develop along with the current antitrust regime in a way that is quite agile and doesn’t really threaten in any material way their long-term income statement other than the legal fees is really apparent to us. And so, as investors, we are monitoring closely but absent any new legislation that really changes the dynamic we’re not seeing any significant threat to the dominance of these companies and consequently their earnings power.
Bill, is there any particular company? Is there any one in particular that as an investor you may feel a little bit more squeamish about or do you think that we have it right pretty much across the board given the current set of rules?
BILL BAER: A couple points in response to that. First, the litigation that is going on is going to take a long time to resolve. We discussed that. Second, the prospects for legislation that would mandate dramatic changes in behavior the way these platforms market themselves is a little uncertain. I think there’s some possibility of it, but it’s down the road.
On the one hand, the threat to these companies’ business model, business practices is not high. On the other hand, these companies want to be perceived as good corporate citizens, as compliant. There is a reputational cost to being continually described as a monopolist. It doesn’t care about us, disregards our privacy. And so, you may find the companies trying to get ahead of the curve a little bit and be a little more careful about their behavior.
So, you could see what I call these in terrorem behavior modifications that would have some impact on the bottom line, and it would be a calculated judgment by these companies that they want to continue to be perceived as good guys. The best example of this is Microsoft, you know, when it went through its crisis 24 or so years ago really underappreciated. Its CEO today, Brad Smith, would say the reputational costs continuing to fight the government at all costs to having evidence of anti-consumer behavior by the company and that if they had to do it all over again, they would be a little more careful in terms of what their business strategies are, even if it meant at the end of the day the bottom line was moderately affected, because having consumer trust, having consumer confidence is I think critical to being part of corporate success.
TONY ROTH: Well, Bill, maybe they should—they being these big companies today—they should engage you as a consultant to help with their strategies for negotiating this thicket of exposure that they have in the antitrust monopoly space. We’re going to have to leave it there today, because we’re out of time.
But let me, as I always do, summarize what I think the three key takeaways are from our conversation. First, I think that we’ve pretty much put our finger on it that new legislation is really required to most effectively bring lawsuits against these tech giants because there are inherent differences relative to the kinds of antitrust cases that we’ve seen in the past as a result of the appropriation and reuse of data and information that wasn’t part and parcel of the activities that these rules were designed to target.
Secondly, the sentiment against these large tech companies is global in a way that we haven’t seen in the past from governments. And as other countries see cases work their way through their own systems, it could shift a firm away from practices that may be anticompetitive viewed under the U.S. rules. And so, in some sense that global focus could help speed things up and could possibly bring companies into a realm of better behavior more quickly.
And lastly, we believe that near-term the valuations of these companies are very likely to hold up and not be importantly affected by all of this antitrust noise. It takes so many years for domestically this antitrust litigation to play itself out and these companies are so nimble in adjusting their practices, indeed because they’re technology companies, in subtle ways in order to conform themselves to what may be required that we’re just not seeing absent a change in the rules, we’re just not seeing any material risk for these companies having their earnings power significantly impacted.
So, Bill, I want to thank you again so much for your wonderful insights and for joining us today.
BILL BAER: Thanks, Tony. It’s been a pleasure.
TONY ROTH: I want to thank our listeners for joining us and I encourage you to visit wilmingtontrust.com for a roundup of our investment and planning content. You can subscribe to Capital Considerations on Apple Podcasts, Spotify, Stitcher, or your favorite podcast channel to ensure you get updates on future episodes. Thank you again for listening.
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