Any Remake of Antitrust Law for the Digital Economy Should Advance the Principles of Consumer Protection and Free Competition

Editor’s note: This post is excerpted from “Breaking Up Is Hard To Do—Why Any Remake of Antitrust Law for the Digital Economy Should Advance the Principles of Consumer Protection and Free Competition,” UCLA Journal of Law & Technology, Vol. 28, No. 3, May 23, 2023.

New proposals advanced by the Biden administration’s Department of Justice (DOJ) and Federal Trade Commission (FTC) to revise antitrust standards stray from notions of protecting consumers and curbing monopoly behavior. Instead of traditional yardsticks, these proposals focus on business models, dominant intermediaries, and control of profits. The danger of moving in this direction is that as technology companies and their business models continue to rapidly evolve, antitrust enforcement will come to resemble a carnival shooting gallery with random targets and random results that shift based on political whims. The Biden administration’s apparent rush to break up “Big Tech” simply because these companies are big and exercise tremendous market power challenges traditional antitrust principles.

As illustrated by the antitrust cases brought against the motion picture studios in the 1940’s and 50’s, the long IBM antitrust saga that commenced in 1969 and was abandoned 1982, and the effort to break up Microsoft Corporation in the late 1990s, the law and its enforcement will always lag behind technological developments. Often, by the time a remedy is put into place, consumers have moved on to new products offered by new companies. Antitrust cases seem to have their maximum impact in altering a company’s market behavior when the company is operating under a consent decree and extracting a cost in terms of time, legal fees, and timid corporate behavior. Antitrust enforcement, therefore, is a blunt instrument requiring sustained investment and effort on the part of government regulators and defenders. The continuous thread woven into cases brought under the Sherman Act over the past 130 years is a desire to achieve consumer protection by stopping the bad behavior of a dominant firm, which is usually a monopoly, not breaking up the monopoly per se.

Yet, under the Biden administration, the FTC, and DOJ seem to be embracing a new antitrust paradigm, encapsulated in their recent statements of endorsing new antitrust principles and rejecting the merger guidelines endorsed by previous administrations.

In September 2021, FTC Chair Khan issued a staff memo, urging a new “integrative approach” to antitrust enforcement, suggesting that the agency focus on these three policy priorities:

1. Addressing consolidation across industries by revising merger guidelines for businesses and deterring deals that are illegal on their face and have overwhelmed commission resources. The agency has seen such an influx in transactions that it’s begun telling some businesses to merge at their own risk even when it hasn’t finished reviewing their deals.
2. Going after “dominant intermediaries and extractive business models.” Khan wrote, “Business models that centralize control and profits while outsourcing risk, liability, and costs also warrant particular scrutiny, given that deeply asymmetric relationships between the controlling firm and dependent entities can be ripe for abuse.”
3. Assessing how contracts can set up unfair methods of competition or deceptive practices. Khan mentioned non-competes and repair restrictions in the memo.

While the first and third points of Khan’s memo seem to make common sense on their face, the second point’s emphasis of “going after … extractive business models” represents a new horizon for the agency and would deeply entwine both the FTC and the DOJ in parsing out how companies operate and making judgments about nebulous concepts of control and outsourcing. We might ask, for example, what an “asymmetric relationship” means under Khan’s vision of antitrust law.

This reading of antitrust history is both activist and vague. If we are to extract a lesson from the Paramount Studio Decrees and attendant court cases, the prolonged IBM litigation of nearly three decades, and the Microsoft case regarding its desktop operating system monopoly, it is that a dominant firm will use its market power, but that the long term effect on market dynamics are unclear and sometimes counter-intuitive.

Over many decades, great resources of the federal government were expended to curb the behavior of these firms, divest motion picture companies of their theaters, limit IBM, and restrain Microsoft’s desktop monopoly. Yet, as the economics of these industries evolved, these antitrust remedies soon became irrelevant. The motion picture industry was allowed to vertically reintegrate in the past forty years, with production and distribution now combined in streaming media services. Mainframe computing and desktop dominance gave way to much more distributed computing as well as new services incorporating “freemium” business models. Indeed, it appears that, just as regulators are applying the most regulatory pressure on a company, the technology landscape changes, making their efforts seem irrelevant.

Expensive, long-term prosecutions must not be undertaken lightly or in order to send a message to a given industry because these cases come with huge costs for both firms and consumers. If large companies are engaged in anticompetitive business practices, such as using data to disfavor competitors or shut them out of markets, then existing laws allow for prosecution under traditional unfair competition standards. In cases in which existing laws do not reach new digital realities, new privacy and data governance laws would yield a much more targeted and efficient result than the threat of a firm break-up.

Accelerating antitrust prosecutions to scrutinize large, successful firms without evidence of them engaging in unfair competition threatens to undermine both innovation and economic growth. The adoption of such an official policy would discourage investment and development, precisely at a moment in history when the United States is struggling to stay competitive in the global technology marketplace, characterized by fierce competition with China and other nations.

Before executing fundamental changes to antitrust law and practice, the FTC and DOJ should review the consequences of large government interventions in rapidly evolving markets and understand the historical practice of firms leveraging their market power in one sector to enter into, and compete, in other sectors. Without this phenomena, competition within markets would tend to fossilize around a few incumbents who had no fear of vigorous challenges from well-funded, established companies. Very often, as was the case with Amazon’s acquisition of Whole Foods, the acquiring company brings new business methods and incorporates new technologies into a more traditionally managed business, thereby creating positive change.

This is different from scrutinizing a company that uses monopoly or near-monopoly power from leveraging that power to influence a related activity in an unfair manner. For example, Microsoft used its desktop monopoly and unfair tactics to influence consumer browser choices in order to favor its own web browser, Internet Explorer. Enforcement in such cases is warranted and does not require a rethinking of antitrust law or its underlying principles.

While both members of Congress and federal officials have recently called for a break-up of Big Tech companies, few go beyond the suggestion that the world would be a better place if Amazon, Google, Meta and others were simply split apart, as if they could be quickly disassembled. Aside from the disruption, loss of jobs, and potential loss of shareholder value inherent in a large company break-up process, what would real “break-ups” look like in the context of these specific companies?

Amazon could be split into several firms by isolating: (1) Amazon Web Services; (2) the ecommerce and physical distribution company; (3) Amazon Studios; and (4) Amazon’s advertising business. The theory of such a suit would be that competition in each separate business area would increase, while consumers would continue to benefit from the activities of the new, smaller companies. Yet this theoretical gain must be weighed against the negative effects of the break-up, as already mentioned, in addition to millions of dollars in legal fees and the economic uncertainty caused by an antitrust battle that would dissuade many potential investors and newcomers from participating in the affected economic markets. And of course, the chilling effects on future innovators who would rightly worry that success would bring the federal sledgehammer.

It is also apparent that the FTC would like to roll back the clock on Facebook’s—now Meta’s—acquisitions of Instagram in 2012 and WhatsApp in 2014. The District Court for the D.C. Circuit rejected the FTC’s first effort to revisit these mergers in 2021, but the agency has refiled its case. It seems that the agency rejects the notion of respecting merger review decisions of previous administrations and denies the disruption that would result to a company that had spent anywhere from five to seven years integrating a merged entity into its business operations. Efforts to pare down Meta by geography or demographics would tend to reduce the power of its network effect, but perhaps reducing such power would be the administration’s goal. And it’s very likely it would reduce consumer welfare, especially given that these services are free.

Finally, breaking up a Big Tech company like Google would create unique problems for regulators. While Google has a few relatively distinct business units, such as the Waymo autonomous vehicle division and its broadband effort, its core advertising and search products are deeply entwined. The reach of Google’s search algorithm and web crawling also determines its accuracy for potential advertisers. Therefore, tampering with one function would diminish the efficacy of the other.

These difficulties bring us back to first principles of antitrust theory and remind us that the Sherman Act and Standard Oil cases were grounded on the dynamic ideas that antitrust law should protect consumer welfare and advance competition in markets where monopolies were behaving badly. Substituting new guidelines for these foundational values might suit the political whims of the moment but would provide very little practical guidance for future regulators, who would have to guess at which “economic facts” warranted attention and which behaviors demanded structural remedies.

The new problems posed by the current digital economy deserve careful scrutiny and new laws focused on protecting user privacy and properly valuing user data should be debated and passed. As study of the salient media and technology cases brought in the past 80 years reveals, the history of major antitrust actions against dominant tech firms suggests that the federal government would be wise to always move with precision and an eye toward the evolution of business models and underlying technologies in our dynamic economy.