The Clairvoyant FTC

In Minority Report, a 2002 science fiction film directed by Steven Spielberg, the government has a program under which individuals are prosecuted for crimes that they are expected to commit in the future even though the targeted individuals have no present intent to commit a crime. In the film, the government bases its prosecutions by relying on psychics with foreknowledge.

Minority Report is a piece of fiction. But the Federal Trade Commission (FTC) is now following a similar program and is prosecuting Tech companies for future crimes. This is because the FTC now believes it is prescient and can perfectly predict how markets will evolve, and what crimes companies will commit in the future.

The FTC has a thesis: When entering any market, Big Tech companies will ultimately hurt competition and consumers. Period. Market share or intent in the present are irrelevant. Instead, the FTC will prosecute based on how the FTC predicts the future to unfold.

Here’s a perfect illustrative example of future crime prosecution: the FTC has sued to block Meta (formerly named Facebook) from acquiring Within Unlimited, an early-stage company with a virtual reality fitness app. Within Unlimited has an immaterial share of the fitness app market. But that doesn’t matter to the FTC. Instead, the FTC is convinced that Meta's entry into the business of virtual-reality fitness apps would scare off potential rivals in the future from trying to create alternative virtual-reality fitness apps. And, therefore, hobble competition and consumers in the future in the “metaverse” – a market so nascent that it even lacks a commonly accepted definition.

The FTC is also suing to halt the acquisition of Activision Blizzard, a video game publisher, by Microsoft. This would be irrespective of a post-deal Microsoft still representing less than 14% of the video game market and continuing to lag the market leaders: Sony PlayStation and Tencent. Microsoft has offered to make a 10-year legally binding commitment to make Activision content available on competing platforms. But that is insufficient for the FTC as it believes that sometime in the future Microsoft will do something to hobble competitors and consumers.

It doesn’t matter to the FTC that this new approach to antitrust enforcement contravenes existing legal precedent. For FTC Chairperson Lina Khan, filing against tech deals that might create monopolies in the distant future is a higher priority than adhering to existing antitrust standards. In a New York Times article this year (F.T.C. Chair Upends Antitrust Standards with Meta Lawsuit, NYT, July 28, 2022), Chairperson Lina Khan was quoted as saying: “Even if it’s not a slam-dunk case, even if there is a risk you might lose, there can be enormous benefits from taking that risk.” The resultant chilling impact on the business climate is a low priority variable in the FTC's new calculus. Beyond just handicapping America's leading global tech champions, the FTC's new approach is also raising the barriers to exit for early stage companies seeking to sell out to large tech companies.

Even if one concedes that existing laws may fall short of enabling effective antitrust regulation of technology markets, it remains the role of Congress to create new laws. It should not be within the purview of the FTC to regulate outside existing legal precedent and beyond the scope of generally accepted antitrust standards.

Beyond the lack of supporting legal precedent, even history doesn't definitively prove Chairperson Khan’s thesis that the entry of "Big Tech" into a new market always destroys future competition. Microsoft Internet Explorer went from majority to minority market share based on disruption from Chrome. Once dominant Meta and YouTube are currently rapidly losing share in their core businesses to TikTok. Microsoft acquired Skype, but Zoom was still able to enter the market of video conferencing and is thriving. Oracle dominated in CRM before being disrupted by Salesforce. And the list goes on. Innovation and competition continue to thrive in technology markets. For each example of Big Tech dominance (e.g., the PC Operating System, Search), there’s an opposing example of market incumbents being disrupted. It remains impossible to predict future monopolies in new markets with credible accuracy.

An alternative approach for the FTC and DOJ could be to pivot to behavioral remedies (e.g. non-discrimination provisions, transparency obligations) that address specific anti-competitive situations, as opposed to structural remedies (e.g. blocking acquisitions). However, the FTC has shown a bias towards structural remedies because, well, it's easy to just shut down Big Tech M&A. On the other hand, it's complex to negotiate behavioral remedies tailored to present market dynamics. But that then begs the question: if the FTC finds it too complex to prescribe behavioral remedies tailored to the present, how can the FTC plausibly be prescient enough to prescribe structural remedies that will impact the future? In the case of Meta and Within Unlimited, the FTC could have recommended a behavioral remedy of making it easy for consumers to transfer their personal data and preferences to competing fitness apps, hence reducing consumer switching costs and lowering barriers to entry for new competing entrants. In the case of Microsoft and Activision, the FTC can recommend a behavioral remedy of having Activision games remain available for the Sony PlayStation on terms in line with gaming industry norms. Unfortunately, the FTC has shown no appetite for negotiating behavioral remedies, and instead is relying on cancelling M&A as its policy tool of choice.

To conclude, it is sadly unlikely that the FTC will change its current stance. So it now remains up to individual companies to have the courage to stand up to a litigious FTC. And for the courts to enforce the rule of law and curtail the flagrant overreach of an FTC that is now on a self-defined mission to oppose Big Tech - a mission that increasingly has no clear link to the FTC's historic mandate to protect consumers and ensure vibrant, competitive business markets.