Competition policy needs startup perspective
What’s happening this week: State officials and federal policymakers are ramping up antitrust investigations into large technology companies amid growing concerns about market dominance and consumers’ data privacy.
Attorneys general from 48 states, Puerto Rico, and the District of Columbia announced yesterday that they are launching an antitrust probe into Google’s advertising business. Texas Attorney General Ken Paxton (R), who is leading the probe, called the investigation “preliminary,” but added that it would likely expand to other issues, including consumers’ data privacy.
Earlier this year, the Justice Department opened a wide-scale investigation into the market dominance of major tech players. The Federal Trade Commission has also been conducting its own investigation into the practices of several big tech companies.
While there has been little legislative action addressed at addressing market power issues in the tech sector, Congress—particularly the House Judiciary’s antitrust subcommittee—has also increased its scrutiny of tech platforms. As part of its ongoing probe, the antitrust panel is holding a Thursday hearing examining "the role of data and privacy in competition.” The Senate Judiciary Committee is similarly planning a Sept. 17 oversight hearing with FTC Chairman Joseph Simons and DOJ antitrust chief Makan Delrahim to explore broader antitrust issues, as well as a Sept. 24 hearing “examining acquisitions of nascent or potential competitors by digital platforms.”
Why it matters to startups: Given the ever-increasing role that technology plays in modern life, any inquiries into “big tech dominance” will necessarily cover a lot of ground. While questions of consumer welfare are certainly important, efforts to regulate competition should be top of mind for startups. Policymakers should be thinking about the potential impacts on startup competition whenever they make laws, regulations, and changes to the marketplace, not just in the antitrust context. Nevertheless, it’s always encouraging when government takes startup interests seriously.
That said, it’s still uncertain exactly how policymakers plan to address competitive concerns in the tech sector, and since some previous efforts to address the perceived power of big tech companies have only strengthened their position, any regulatory changes meant to promote competition should be thoroughly considered before deployment. The upcoming congressional hearings on data privacy and startup acquisitions are perfect opportunities to examine how well-intentioned policies designed to help startup competition could actually end up hurting small businesses.
Commentators are fond of designating data as “the new oil,” and while that metaphor is inapt in many ways, it does accurately reflect the immense value of consumer data to many tech-enabled companies. Larger, older firms have more data than newer startups, and since this data is a necessary input for many products and services, it gives incumbents a natural leg up on smaller competitors. As such, it’s not surprising that Congress is investigating how data collection and privacy rules impact competition, and it would be a boon for the startup ecosystem if policymakers could ensure that the benefits of Big Data don’t flow overwhelmingly to Big Tech. But, as the experience of Europe’s General Data Protection Regulation has taught us, enacting strict rules designed to address the data use practices of large companies may inadvertently give those same companies a competitive advantage over smaller entities that can’t afford the enormous compliance burden of conforming to the new rules. Rather than enacting costly regulations that apply equally to large and small companies alike, Congress might better spur startup activity in data-intensive sectors by promoting user choice and data portability.
The Senate Judiciary hearing later in the month on tech acquisitions presents an equally counterintuitive proposition. In recent years, there has been considerable talk of a startup “kill zone”—entire sectors of the tech industry effectively closed to startup activity because the acquisition practices of large companies that leverage their economic might to buy potential competitors before they become actual competitors. In reality, there isn’t much evidence that this kill zone is significant or that it has hurt the overall startup ecosystem. While some data suggests that investment in startups that operate in the core business verticals of large tech companies has declined—an unsurprising phenomenon in a mature market—there simply isn’t conclusive data one way or the other to suggest that big tech companies have hurt investment in ancillary markets. Aggregate data and anecdotal reporting on venture funding suggest that the growth of the largest tech companies has coincided with a general increase in startup capital. As Union Square Ventures’ Fred Wilson noted, “based on our activity and other venture capital activity that I have observed, I would say that the big tech incumbents have most definitely shaped where venture capital is going and where it is not going. That does not mean it has decreased the overall supply of venture capital. It most certainly has not.”
Total venture investment is up, but that money is concentrated into fewer deals. Does this reflect a healthy ecosystem in which investors are pouring more money into startups because big tech platforms provide low-cost tools that allow small companies to quickly scale and potential acquisitions that represent relatively fast exit opportunities for investors? Or does the smaller deal volume mean that investors are putting more money into established companies, avoiding seed-stage startups that are more vulnerable to anti-competitive tactics? Of course, even if big tech acquisitions have a net positive impact on startup investment, this does not mean that all acquisition activities are pro-competition or pro-consumer. These are complicated questions with serious implications for the American economy.
While there is an intuitive argument that increasing regulatory burdens and decreasing exit opportunities will harm startup investment, without more data, any policy changes meant to help startup competition might just as easily give large companies a greater advantage over smaller rivals. Congress needs to get this data directly from the investors and founders that will be most impacted by the unintended consequences of ill-considered policy rather than from think tanks and bureaucrats. Although it’s encouraging that policymakers are conducting hearings and investigations on these important questions before pushing potentially counterproductive proposals, it should be deeply concerning to startups everywhere that only one of the announced witnesses for the slate of September competition hearings comes from the startup community. If policymakers want to make the tech sector more amenable to startup activity—as they should—they need to make sure actual startups have a seat at the table.
On the Horizon.
The House Judiciary Committee is holding a markup beginning at 2 pm this afternoon on H.R. 2426, the “Copyright Alternative in Small-Claims Enforcement Act of 2019” or “CASE Act.” The proposed bill would establish a small claims court in the U.S. Copyright Office to deal with online copyright infringement claims.
The Energy and Commerce Subcommittee on Communications and Technology is holding a hearing tomorrow at 10:30 am to discuss legislation to improve the accuracy of broadband mapping data.
The Senate Judiciary Subcommittee on Intellectual Property is holding a hearing tomorrow at 2:30 pm to discuss the STRONGER Patents Act of 2019. Among other things, the proposed bill would restrict the availability of inter partes review as a mechanism for improving patent quality.