In 2020, I started publishing monthly guest articles written by some of the world’s most renowned antitrust scholars. The series continues in 2021. The one for April is authored by Douglas H. Ginsburg, Judge, U.S. Court of Appeals for the District of Columbia Circuit, and Professor of Law, Global Antitrust Institute, Scalia Law School, George Mason University, and Jacob Philipoom, Law clerk to Judge Ginsburg. In it, Judge Ginsburg and Jacob Philipoom respond to Scott Hemphill’s article on “Uncertain Harms: The Case of Nascent Competitors” and discuss the approach courts & agencies should take when it comes to potential killer acquisitions. I am confident that you will enjoy reading it as much as I did. To both of you, thank you very much!
All the best, Thibault Schrepel
A Certain Harm Overlooked: The Case of Nascent Competitors Revisited
Scott Hemphill, writing of Uncertain Harms: The Case of Nascent Competitors, posited the following hypothetical situation: If an antitrust agency knew it could prevent a 20% chance of a billion-dollar harm to consumers, then doing so would provide $200 million in expected benefits to consumers, so the agency should act.1C. Scott Hemphill, Uncertain Harms: The Case of Nascent Competitors, Concurrentialiste (June 16, 2020); see also C. Scott Hemphill & Tim Wu, Nascent Competitors, 168 U. Penn. L. Rev. 1879 (2020) (for a longer discussion of this topic). That being the case, Hemphill argued acquisitions by incumbent firms of potentially competitive startups (nascent competitors)2A nascent competitor “is a firm whose innovation represents a serious, albeit not completely certain, future threat to an incumbent,” as Netscape’s internet browser did to the Windows operating system. Hemphill & Wu, supra n.1, at 1883-84. should be given closer scrutiny than they currently get. We agree that antitrust law should prevent a substantial risk of competitive harm where it can; the problem is that an agency or a court (or a merging party, for that matter) could never arrive at such a precise figure with any confidence because the future evolution of a technology market is always too uncertain.
As Hemphill notes, the optimal policy choice would maximize consumer benefits by minimizing the sum of costs from blocking good acquisitions and from allowing bad ones. This “error cost analysis” is generally accepted in antitrust policy circles. The costs of allowing an acquisition will be huge in the rare case where the target really was the next big thing that would evolve into a serious rival to the dominant platform or platforms if only it stayed independent. Even the typical nascent competitor, which will be defeated by the incumbents and soon forgotten, can still have a significant salutary effect on the market, for example, by spurring innovation, as long as incumbents perceive it as a potential threat. As economist Joseph Schumpeter pointed out long ago, creative destruction “acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks.”3Joseph A. Schumpeter, Capitalism, Socialism & Democracy 85 (1943).
So far, so good. Where we part ways with Hemphill is that he downplays some ways in which society benefits from startup acquisitions.
First, in many cases, the buyer’s talent and resources would help the acquired firm grow to a scale it could never achieve independently.4See Jonathan Jacobson & Christopher Mufarrige, Acquisitions of “Nascent” Competitors, The Antitrust Source (Aug. 2020). At the least, access to the larger firm’s userbase will in many cases distribute the benefits of the startup’s innovation more quickly and more widely than the startup could have done by itself. These effects benefit the consuming public. To be sure, in the ideal but rare case the start-up would evolve into an independent force that invigorates competition in the market, but the product’s growth under the umbrella of an established firm is a surer bet – so it is not true that the expected value of blocking acquisition of a nascent competitor will always be higher than the expected value of allowing it.
Consider Google’s offer to buy Groupon for nearly $6 billion in 2010. Groupon turned Google down, in part because Groupon executives thought Groupon could be more successful independently, and in part because they feared an expensive antitrust review.5See Frank Sennett, Behind Groupon’s $6 Billion Brushoff, Wall St. J. (2012), https://www.wsj.com/articles/SB10001424052702303640104577440580610986086. The company has been in decline since it went public in 2011, with its market cap hovering around $1 billion in recent years. It is reasonable to expect the company – and consumers – would have done materially better under Google’s management.6Id. (describing Groupon’s leader as an “inexperienced CEO hiding a brilliant analytical mind behind a goofball demeanor, turned 30 on Oct. 22 in the midst of dismissing interest from Yahoo. A few weeks later, Google came calling.””). Contrast that with Waze, which has nearly tripled its userbase since Google acquired it in 2013.7Ingrid Lunden, Google Bought Waze for $1.1B, Giving a Social Data Boost to Its Mapping Business, TechCrunch (2013), https://techcrunch.com/2013/06/11/its-official-google-buys-waze-giving-a-social-data-boost-to-its-location-and-mapping-business/ (Waze had fewer than 50 million users at the time of acquisition); Waze, https://www.waze.com (last accessed March 28, 2021) (boasting “140+ million drivers”).
Second, if antitrust enforcers are overzealous in disallowing the acquisition of startups – making investor exit more difficult – they will impede investment in future startups.8Michael Mandel & Diana G. Carew, Progressive Policy Institute, Innovation by Acquisition: New Dynamics of High-Tech Competition (2011), https://www.progressivepolicy.org/wp-content/uploads/2011/11/11.2011-Mandel_Carew-Innovation_by_Acquisition-New_Dynamics_of_Hightech_Competition.pdf; D. Daniel Sokol, Vertical Mergers and Entrepreneurial Exit, 70 Fla. L. Rev. 1357 (2018). Hemphill and his coauthor Tim Wu elsewhere acknowledge but minimize this effect: They say their approach would not block deals that “involve merely complementary or otherwise noncompetitive technology.”9Hemphill & Wu, supra n.1, at 1893. But nascent competition often comes from firms in complementary markets – think of Netscape’s browser and Microsoft’s Windows operating system. They also point out that “startups are not an end in themselves” – that is, startup financing benefits society only to the extent the money translates to innovation and competition, and so “[l]owered investment in startups that fail to provide these benefits, because they end up in the hands of an incumbent, is a feature of antitrust enforcement rather than a bug.” Venture capital does finance innovation, however, even if the financiers hope to exit some day in a sale to an established firm. Empirical research shows that a healthy M&A market encourages startups to be more innovative.10Gordon M. Phillips & Alexei Zhdanov, R&D and the Incentives from Merger and Acquisition Activity, 26 Rev. of Fin. Studies 34 (2013).
The correct approach is for the antitrust agency or court to consider the evidence for and against the merger with an open mind, presuming nothing and following where the evidence leads. It will not do to write off any synergies as “not merger specific,” any more than it is sensible to assume the incumbent is the best home for the target, i.e., the most beneficial for consumers. The deal should be blocked if a preponderance of the evidence shows the effect of the acquisition “may be substantially to lessen competition.”11Clayton Act, Sec. 7, 15 U.S.C. § 18. Therefore, the antitrust enforcer or court should ask itself questions such as: Does the target plan to compete with the buyer? Does it have access to the resources and expertise it needs to succeed? What will be the added value of integrating the target’s product into the buyer’s platform?
This does not mean the agency must show the target more likely than not would have become a significant competitor.12Contra Jacobson & Mufarrige, supra n.4. An agency that shows the startup, if it remains independent, is reasonably likely to provide significant innovation benefits (either by itself or as a spur to others) can meet its prima facie burden. The buyer will then have a chance to rebut this by showing the startup likely would be more innovative as part of its organization than it would be as an independent firm.
Douglas H. Ginsburg & Jacob Philipoom
Citation: Douglas H. Ginsburg & Jacob Philipoom, A Certain Harm Overlooked: The Case of Nascent Competitors Revisited, CONCURRENTIALISTE (April 2, 2021)
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