PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Bill to Aimed to Promote “Platform Competition and Opportunity” Would Harm U.S. Consumers and the Startup Ecosystem

By at 19 November, 2021, 9:12 am

by Raymond J. Keating –

In early November, two very different U.S. senators came together to propose “big tech” legislation. The “Platform Competition and Opportunity Act,” cosponsored by U.S. Senators Tom Cotton (R-AR) and Amy Klobuchar (D-MN), would undermine not only U.S. firms that rank as global technology leaders, but also entrepreneurs, small businesses, investors and consumers.

The legislation would supercharge the powers of antitrust regulators and bureaucrats to stop acquisitions by large, politically-disfavored technology firms, thereby hurting the entrepreneurs and investors who took on enormous risks and uncertainties to build the firms to be acquired. And this draconian action by government would be allowed if a merger was deemed by bureaucrats to be, according to the press release from Senator Cotton, an acquisition by a dominant platform of “direct competitors,” companies that would “reinforce or expand a platform’s market position,” “potential competitors,” or “data that strengthen or expand a platform’s dominance.”

If passed, this would be a sweeping power grab by the federal government.

The message is clear: Certain technology firms should not be allowed to acquire any other business that would improve their own operations, competitiveness or effectiveness. This amounts to government imposing stagnation on select companies.

For good measure, the legislation would shift the burden of proof from the government to the firms targeted by regulation to prove that the merger is not anticompetitive. That’s convenient for the government, and deeply disturbing for those who believe our system should work so that the burden of proof is on the government if it wishes to seek to penalize a private entity.

This legislation, if passed, merely would be a license for politicians and regulators to run roughshod over large technology firms that find disfavor with politicians.

What is a monopoly?

It is critical to understand that the politically disfavored companies that this legislation currently targets – i.e., Amazon.com, Apple, Facebook and Google – are not monopolies in any true sense of the word just because elected officials call them “monopolistic big tech firms,” as in Senator Cotton’s release.

As a reminder, a monopoly exists when a market is served by only one seller, and there must be no close substitutes for the product and high barriers to enter the market must exist. That is, in order to be a monopoly, a firm must control the entire market; there can be nothing close to the good or service provided; and potential competitors must be eliminated due to high barriers of entry. None of this exists in today’s highly dynamic, fast-paced, innovation-rich, uncertain technology markets.

It also pays to understand how a true monopoly would act. That is, a true monopoly operating in the marketplace would mean reduced supply, significant price increases, and a diminishment in innovation and quality. Are any of these large tech companies behaving this way? Hardly.

In reality, markets are dynamic, and companies that have gained significant market share must compete against current, emerging and future competitors, with consumers served accordingly. Indeed, another central point ignored by today’s antitrust crusaders is that the only way for businesses to gain and keep significant market share is by serving consumers well.

Harming the startup ecosystem.

The ills of antitrust regulators being unleashed by (the bill number) Senators Cotton and Klobuchar would not be limited to these large technology firms, again, as bad as that itself would be.

In particular the Cotton-Klobuchar legislation and similar measures would hurt entrepreneurial technology firms by discouraging venture capital investment.

For example, in a recent study (“Irreplaceable Acquisitions: Proposed Platform Legislation and Venture Capital”), Susan E. Woodward of Sand Hill Econometrics looked at data from August 2002 through the first quarter of 2020. She reported:

“The bills envision a ‘kill zone’, in which competition from large tech firms discourages the formation of smaller companies and inhibits investment in startups. The idea is that the big companies would kill potential competitors, making investments in them fail. I present the data on several measures of startup success, but most important is the trend of overall deals done and money invested. The number of deals rose 3.4-fold from 2006 to 2020, and the dollars invested rose 5.5-fold. 2021 is set to be double both deals and dollars from 2020. It is difficult to imagine what ‘but-for’ conditions would have led to even more startups receiving even more funding. There appears to be no ‘Kill Zone’ discouraging investment at present, though the bills themselves are likely to discourage investment.”

Dr. Woodward stated:

“The proposed legislation would be a serious and pointless blow to startups and venture capital investing. The drafters of the bills seem to have little familiarity with how venture capital works or what its outcomes are. I hope my contribution is persuasive that interfering with the acquisition process in this coarse, broad-brush way is a bad idea. The amount of funding being invested and the number of companies being started right now is larger than ever. These investment levels show that the concerns reflected in the bills are not generally an issue, and that the venture capital world does not expect legislation like this to pass.”

Also, consider what a Bain & Company study found:

“When the facts are reviewed, most big tech M&A spending actually benefits consumers and doesn’t hamper competition. That’s according to Bain’s analysis of all $300 million-plus acquisitions, totaling more than $150 billion, from 2005 to 2020 by the five US hyperscalers: Alphabet, Amazon, Apple, Facebook, and Microsoft…”

The authors further explained:

“We conducted a series of double-blinded case studies based on data analysis, which assessed the effect of each acquisition on end consumers (did it drive down prices, increase access to innovative products or services, or improve the products or services themselves?); and market dynamics (did the level of competition increase, did the deal put pressure on incumbents to innovate, or did it result in more external investment?).”

Their findings?

“Excluding deals from the past 18 months and the LinkedIn acquisition, which our analysis determined had a neutral effect on consumers and competition, we found that 72% of US hyperscaler M&A spending since 2005 created value for consumers. Competitive intensity and investment pace also increased after the majority of those deals. The share of hyperscaler M&A spending that benefited consumers rises to 89% when the Google and Microsoft acquisitions of Motorola’s and Nokia’s handset businesses, which were falling behind competitors and arguably no longer viable on their own, are removed from the mix.”

Consumers – not politicians or regulators – are the ultimate judge.

In the end, as with any other investment made in the marketplace, consumers will decide what mergers work and which do not. And among those consumers are small businesses – indeed, that is quite clear with market leaders like Amazon, Apple, Facebook and Google providing valuable products, tools and services to entrepreneurs and small businesses, from platforms to sell products, to affordable options for marketing goods and services.

The benefits and value of services and tools provided by large technology companies to entrepreneurs, small businesses and consumers perhaps become most clear during the holiday shopping season, and yet, here are elected officials looking to diminish or undercut the benefits that the market is presenting. And, as our economy struggles to recover.

The idea of supplanting consumer sovereignty with political preferences should give all of us pause. The path of politics overruling the market has been taken many times, and it has never worked. Instead, entrepreneurship, consumers and economic growth suffer.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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