Collateral Damage in Khan’s FTC War on Big Business: Entrepreneurship, Innovation, Consumers

By at 16 December, 2022, 12:51 pm

by Raymond J. Keating –

Lina Khan, who chairs the Federal Trade Commission (FTC), is waging war on so-called big business, but not surprisingly, entrepreneurship will suffer collateral damage.

If you think that’s a bit strong, consider the two most recent headline cases being brought by Khan’s FTC.

First, the FTC inexplicably is challenging Meta’s acquisition of VR (virtual reality) startup Within Unlimited, Inc. Second, the FTC also has filed suit to block Microsoft’s acquisition of the video game Activision Blizzard.

Why? The reasons amount to little more than the FTC’s Khan believing that regulators not only have a better grasp of current market realities than do consumers, and the entrepreneurs, businesses and investors working to serve those consumers, but these regulators also possess a crystal ball as to where individual businesses, entire industries, technology and markets are headed.

Of course, if this were all simply the ramblings of some detached professor in a classroom, while it still would warrant concerns (after all, some students would buy into such nonsense), one might be able to chuckle and offer a shake of the head. But these fantastical notions are accepted and being acted upon in the highest echelons of political power.

The Meta-Within Case

At the risk of stating the obvious, antitrust regulators moving to stop the Meta acquisition of Within, which makes the virtual reality app Supernatural, does not just border on the absurd, but buys land and sets up house in the land of absurd.

Just consider how the New York Times summed up the FTC’s undertaking here:

“In the case, which is the first challenge to a tech giant developed under the F.T.C. chair Lina Khan, the agency is employing an uncommon argument that Meta’s deal would hurt potential competition in a market for virtual reality products that could be robust in the future.”

The word “uncommon” is generous. Quite frankly, “economically unhinged” would be far more accurate. Antitrust actions (which are supposed to at least somehow be related to monopoly) based on possible competition in a future market that no one knows what it will look like amounts to nothing less than an absurd government power grab.

Indeed, though, this fits with the Khan FTC’s use of vague, nonsensical, detached from economic reality assumptions to justify a vast expanse of federal powers. SBE Council noted this in a recent analysis, and pointed out that few businesses and investors should feel comfortable under such a regulatory regime:

“Again, this is nothing less than an attempt to empower FTC regulators with the ability to interfere and dictate operations and structures in businesses across industries. After all, you never know what might lead to a monopoly. This is grave and dangerous, and no business or industry should feel safe.”

The Microsoft-Activision Blizzard Case

As for the Microsoft acquisition of Activision Blizzard, the detachment from market realities continue.

In this case, the FTC uses a ridiculously narrow market definition, and chooses to ignore the dynamism at work in gaming, including, but certainly not limited to, subscription cloud gaming streaming services.

Of course, companies like Microsoft, as well as Sony and Nintendo, aren’t simply competing against current rivals, but against emerging and future businesses as well. Indeed, who knows where entrepreneurs might take gaming a year, five years or a decade from now?

The unmistakable point is that the current leading gaming manufacturers and creators will need to keep innovating or they’ll be left behind by the competition and consumers. Clearly, Microsoft’s efforts to create a subscription cloud-based gaming services, including having an ample library of games – hence the acquisition of Activision Blizzard – are central to the company’s work to innovate, compete and serve consumers.

Political Ideology, Not Economic Common Sense or the Facts – U.S. Startup Ecosystem will Suffer

Unfortunately, none of these economic realities interest regulatory activists who assume that being a large business automatically means being bad, and therefore, war must be waged with such businesses in order to bring them under control of, well, big government. Apparently, big government, which most certainly is not disciplined by competition or consumer sovereignty, but is guided by assorted political impulses and incentives, is assumed to be righteous.

But, again, the collateral damage in war can be severe, and to the extent that this regulatory war on so-called big business damages the U.S. entrepreneurial ecosystem, the ills will spread far and wide given the central role that entrepreneurship plays in economic, income and job growth.

What signals are the Biden-Khan war on so-called big business sending to entrepreneurs and the investors that finance startups and small business growth?

It’s pretty clear: Government must have pre-approval for mergers and acquisitions. And again, keep in mind that while these cases focus on the tech arena, the implications are clear for whatever industries happen to strike the fancy of regulators. And it must be understood that mergers or acquisitions are vital for entrepreneurs and their investors in terms of exit strategies. Consider the following, for example:

● 43 percent of small-business owners say a merger or acquisition is important to their business exit strategy. (Source: NSBA, October 2022 Business Survey on Business Planning and Digital Utilization.)

● 13 percent of startups launched during the pandemic said: “My goal is to create and grow a business with the hope of it being acquired or sold.” (Source: SBE Council Pandemic Startups Survey, March 2022.)

● In an analysis of the Meta-Within case, the Information Technology and Innovation Foundation made a critical point: “In 2020, nearly 90 percent of all venture-backed startups exited their venture-funding through an acquisition. The looming threat that this exit strategy may no longer be available, or will face costly litigation, will limit the ability of small studios to access venture capital and thereby reduce VR app innovation.”

This type of regulation, while said to be about promoting competition, actually winds up protecting established firms, while limiting opportunities for entrepreneurs. After all, the enormous risk and uncertainty that comes with this kind of regulatory activism will limit investment in smaller entrepreneurial firms that already face significant market risks and uncertainties, as the opportunities for returns would be controlled, at least in part, by the whims of regulators.

That’s a recipe for further entrepreneurial stagnation in a nation where entrepreneurship already has been undermined in recent years due to counter-productive tax, regulatory, trade and government spending policies.

Opportunity and Innovation Lost: Kahn’s “Test Cases”

Finally, as widely reported, the fact that Khan is open to trying to use cases that antitrust regulators might or have lost as means for pushing Congress to act on expanding the power and reach of antitrust regulators serves as another warning against activism on the regulatory front.

Rather than taking the setbacks and failures of activists like Chairwoman Khan as reasons to expand regulatory powers, the clear lessons for legislators should be that given the dynamism of the marketplace, the time is long overdue to rein in the powers and reach of antitrust regulators.

Entrepreneurs, investors, businesses, employees, and consumers shouldn’t be left wondering if the courts, due to vaguely written laws, will suddenly decide to side with an activist interpretation of the law and give a greenlight to regulatory overreach. Rather, the lesson is to clarify and limit the reach of the law and regulatory powers.

Let’s rein in opportunities for nonsensical economic warfare, and thereby limit the damage, collateral or otherwise, wrought by government on American businesses, entrepreneurs, investors and workers in an increasingly competitive marketplace.

Related content:

FTC Chair Lina Khan: Startup Spoiler, Small Business Insider blog post, December 1, 2022.

Innovation and Startup Ecosystem at Risk: Revamping the U.S. M&A Regulatory Framework, Small Business Insider, July 5, 2022.

The FTC’s Bizarre Attempt to Rationalize Regulatory Overreach, November 18, 2022.

Corporate Power, Competition and Small Business Policy, May 27, 2022.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


News and Media Releases