WASHINGTON—Critics accuse big technology companies such as Amazon, Facebook, or Google of stifling innovation by buying start-ups just to kill them or by exerting market dominance that discourages entrepreneurs. But a new report released today by the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, shows these claims—asserting that large Internet companies are impeding competition by engaging in “killer acquisitions” or by creating “kill zones” through market dominance—are vastly exaggerated.
“Concerns about so-called ‘kill zones’ are overstated, as evidenced by the fact that there has been no negative impact on venture investing, which has grown dramatically in the last decade,” says Joe Kennedy, a senior fellow at ITIF, who authored the report. Moreover, “While it is true that big Internet companies have engaged in hundreds of acquisitions, very few have drawn any criticism—and the heavy focus on the few deals that have proven to be highly successful ignores those that have failed. Acquisitions serve useful purposes, such as motivating investments in new companies, obtaining workers with key skills, and putting technology in the hands of those that can develop and scale it the fastest.”
According to the ITIF report, acquisitions can in fact be beneficial to innovation if they allow the larger firm to apply economies of scale or network effects, and enable the smaller firms to reach more customers more quickly with higher-quality products. Moreover, the prospect of being purchased by a larger company often motivates founders and venture capitalists to invest.
In addition, antitrust agencies have all the power necessary to stop problematic acquisitions when they see fit. They should base decisions on a detailed understanding of markets, including current and future sources of innovation, and focus on increasing overall economic welfare.
“Rather than looking at big tech companies as a start-up deterrent, it is more accurate to view them as an innovation enabler. Through their acquisitions, they are guiding entrepreneurial resources, such as talent and capital, to areas that have the best chance of success,” adds Kennedy. “As for regulators, they have sufficient authority to protect competition and carefully review acquisitions by dominant companies. There is no need to significantly change antitrust statutes or embrace structural remedies such as structural separation or breakups, as these would likely slow innovation and harm consumers.”