Hey, friends! Thanks for checking out issue #01 of Outside Counsel.
Before we jump into the nitty-gritty of antitrust law, I wanted to answer one simple question:
Why am I writing Outside Counsel?
I’m in law school, but at this point, I’m not sure that I actually want to become a practicing attorney. What I’m really passionate about is start-ups. I love the concept that you can have an idea and turn it into a business that can change the world. Eventually, I want to spend my time working with and helping those start-ups change the world.
But, here I am, in law school, which is not exactly part of the typical path into the world of start-ups. However, I believe that having a legal background can make you an asset to start-ups. This newsletter is my attempt to fuse my legal education with my passion for start-ups.
My goal is to provide value to you by writing simply and explaining legal topics that are often complicated, in a way that is interesting and fun. I’m just a law student, so I don’t know much, but this newsletter is a really great mechanism for curiosity, research, and sharing. I look forward to digging into the law and sharing my learnings with you.
Now, let’s jump into the good stuff!
Over the past few weeks, I’ve spent a significant amount of time digging into antitrust law. To many, including myself three weeks ago, antitrust law is a completely foreign concept that seemed to have no impact on my daily life. But, after learning about the history of antitrust and the core rules it has developed, I feel confident in saying that antitrust law is important and will have a large impact on our world over the next 5-10 years, specifically in relation to the Big Tech companies we have come to know and love/hate.
This essay will dive into three main topics:
What is antitrust law?
How is it affecting big tech companies today?
What can growing start-ups learn from this?
*DISCLAIMER: I’m not a lawyer and this is not legal advice. Full disclaimer here.*
First, what is antitrust law?
Beginning in 1890, with the Sherman Act, Congress has sought to “protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.”
But what does that actually mean, in real people terms?
I’ll try to use an example that everyone can relate to. Remember how, when you were a kid, there were certain things that your parents wouldn’t let you do, like play in the street, fight with your siblings, eat too much ice cream, stuff like that? Well, in the world of antitrust, businesses are children and the government is their parents. Beginning in 1890, Congress started laying down some rules for their children, the businesses, starting with the Sherman Act.
The Sherman Act outlawed "every contract, combination, or conspiracy in restraint of trade." It also outlawed monopolies, attempts at monopolies, or conspiracies to monopolize. At the core of it all, what the Sherman Act was really meant to do was prohibit the unreasonable restraint of trade. Essentially, Mom and Dad didn’t want the bigger, stronger kids working together to keep the littler kids from playing the schoolyard games. So, while many agreements that benefit one business inherently do restrain trade, Congress wanted to ensure that nothing unreasonable was going down A few things are automatic violations of the Sherman Act (in the law we call these “per se” violations), such as price-fixing, market dividing, and bid-rigging.
Mom and Dad hate the unreasonable restraint of trade so much, that there are serious punishments when businesses cross that line. These punishments can range from losing your allowance (civil penalties) to groundings + lost allowance (up to a $1 million fine along with 10 years of prison time for an individual and a maximum $100 million fine for corporations). The Sherman Act also empowered the Department of Justice (DOJ), to keep an eye on antitrust behavior and enforce the Sherman Act. Mom and Dad aren’t messing around with this stuff. If they catch you, they’re not likely to let it slide.
Next, Mom and Dad passed the Federal Trade Commission Act, in which they added some new rules as well as a babysitter to the mix. You see, Mom and Dad decided that the unreasonable restraint of trade stuff was good, but they wanted more “fairness” in their kids’ playing. So, they banned "unfair methods of competition" and "unfair or deceptive acts or practices." They also hired a babysitter, (a more accurate telling of this story would involve Mom and Dad going out to the garage and inventing a babysitter from scratch, but that seems a little bit wacky for this essay…) named the FTC, to keep an eye on all of the kids and make sure that when a kid violated antitrust laws, that the kids were properly punished.
Over the years, Mom and Dad began to see holes in their rules and began passing more specific rules. They outlawed things like multiple kids teaming up to become one kid who can do all of the things that kids need to do for a particular game (i.e. mergers and acquisitions that substantially lessened competition or created a monopoly). Or one brain making decisions for two kids (i.e. interlocking directorates, which is when one person is leading two competing companies). They banned discriminatory practices and began requiring the kids to ask Mom and Dad for permission before they teamed up. They also allowed kids to sue other kids for “triple damages” when the suing kids were injured by the rulebreaking kids’ rulebreaking (as a quick refresher, damages are what people claim are required to compensate them for their injury in a lawsuit).
As if this wasn't all confusing enough already, all of the States have their own rules too, so the kids really have to keep their eyes open and make sure not to break any of the many rules.
What this all comes down to is this: Mom and Dad want to make sure that all of the kids play nice and that nobody is bullied.
Antitrust in Action
To understand the history of antitrust, you need to understand the political climate of the early 1900s. During this time period, the United States saw the rise of “trust-busting,” a movement where pro-small business leaders sought to break up monopolies lead by the likes of J.P. Morgan, John D. Rockefeller, and company.
Things on the antitrust front cooled during the two world wars but saw a resurgence post-WWII as people began to fear that the monopolization that led to Hitler’s rise to power in Germany could happen in the United States. The FTC and a largely liberal Supreme Court were highly skeptical of mergers at this time. AT&T was a big casualty of this era, as in 1982 its monopoly ended and it was broken up. However, the AT&T breakup was largely the end of antitrust law’s heyday.
In 1979, a United States Supreme Court case flipped the script and saw the court embrace a consumer welfare standard. A later court explained that behavior is anti-competitive “only when it harms both allocative efficiency and raises the prices of goods above competitive levels or diminishes their quality.” This new standard, combined with the election of pro-business Ronald Reagan, spelled the end of size-based antitrust actions, at least until 1999, when the DOJ brought a highly-publicized case against Microsoft. The government and Microsoft eventually settled out of court and Microsoft agreed to halt its anti-competitive practices.
Now, we are living in an era where Mom and Dad are firmly focused on consumer welfare instead of size.
For a more in-depth look at antitrust history, check out this video:
Next, how is antitrust law affecting big tech companies today?
Fast-forward to 2020, and in the last year, we have seen tech giants Facebook, Google, Amazon, and Apple grilled by Congress’ Subcommittee on Antitrust, Commercial, and Administrative Law. These four companies, plus Microsoft, are the five largest US public companies by market capitalization, and it’s not particularly close... Apple, Amazon, Google, and Microsoft have all cleared $1 TRILLION market capitalization, and Apple just cleared $2 trillion! Facebook isn’t far behind with over $750 billion in market cap. Facebook is 50% larger than the 6th biggest US public company, Berkshire Hathaway. Even outside of tech, we have in many ways seen a return to the monopolization of the late 1800s and early 1900s. As of August 2019, the airline, telecommunication carrier, drugstore, and beer industries had less than four companies combining to comprise at least 60% of the market share.
You’re probably thinking, “The big tech companies are huge. Cool, who cares? You just said that Mom and Dad are much more concerned with consumer welfare than they are with size now, so why are Facebook, Google, Amazon, and Apple in the hot seat?”
Well, Mom and Dad are not jazzed about how these four behemoths are running their businesses.
Google is facing multiple antitrust allegations surrounding its dominance in search, online ads, and phone software. Google has been accused of abusing its power by strong-arming review competitor Yelp.
Facebook is accused of anticompetitive behaviors in its negotiations with purchased competitors Instagram and WhatsApp.
Amazon is dealing with accusations that it has abused its power to unfairly affect sellers on its platform that are competing with Amazon’s own products.
Apple is facing accusations that it is using its monopoly as the only iOS app store to charge unreasonably high commissions and disadvantage competitors.
Congress just held its second hearing, and to me, things don’t look great for at least a few of these companies. Here’s why: these four tech companies have the possibility of being hit from all sides.
First, Congress’s Subcommittee on Antitrust, Commercial, and Administrative Law could legislate them straight to hell.
Second, the DOJ is currently investigating big tech companies broadly, and specifically, Facebook, Apple, and Google are all facing antitrust probes by the DOJ.
Then, do you remember that babysitter that Mom and Dad hired to keep an eye on things? Well, the FTC is now looking into past acquisitions by all 4 of these companies plus Microsoft.
Finally, Apple and Google are feeling the heat from Epic Games, who has sued the companies for anticompetitive behavior, specifically their 30% commission (or tax depending on your perspective) on in-app purchases.
At this point, it seems logical that at least some of the big tech companies are destined to get hit with punishment in some form and from some entity.
The real question is whether we are actually looking at a breakup scenario or a fine scenario.
When we consider that these are four of the biggest companies on earth, a fine is unlikely to have any legitimate impact on the situation. So does that mean we will see a breakup of Apple, Amazon, Facebook, or Google? To me, it seems more likely now than it ever has before, for a few reasons.
First, there is an increasing possibility Democrats take control of the Senate in 2020. That, combined with their current stronghold in the House of Representatives provides them with plenty of legislative opportunities in the near future.
Next, there is significant data supporting a strong possibility of Joe Biden’s election in November. If Biden is elected, it is likely he appoints an Attorney General that would be less business-minded than President Trump’s appointee, William Barr.
So, there is a not too implausible future where the Democratic party holds major power in both the legislative and executive branches. From there, it’s not too far of a logical leap to assume that a breakup of the big tech companies, like the one called for by Elizabeth Warren, could be in the works.
Finally, what can growing start-ups learn from this?
Two words: be careful. What we are seeing today is incredibly successful companies being put through the wringer for operating their businesses in ways that unfairly disadvantage competitors. Apple likely brings in over $10 billion/year from Apple App Store commissions, and Instagram ad revenue makes up around 30% of Facebook’s ad revenue. These seem like reasonable business practices for these individual companies, but here we are, years later, questioning Apple’s iOS App Store dominance and Facebook’s acquisition of Instagram. It may make an early-stage start-up think twice about acquiring a competitor, building a copycat product, or gaining too much of a stronghold on a market/opportunity.
The question then becomes: as a start-up seeks to conquer the market and become the next Facebook, how do they operate?
I don’t have a great answer, but I have one recommendation: follow Stripe’s lead. Stripe is a start-up, currently valued at $36 billion, that is helping internet businesses with online payment processing. Founded in 2010, Stripe has grown into a powerhouse in the world of start-ups and has even begun investing in other start-ups. According to Crunchbase, they’ve made 20 venture investments and have even led rounds, including the Series A for the hot new one-click checkout company, Fast.
So, why is Stripe a great model for early start-ups? Because Stripe’s investing practices can, at this point, only be seen as pro-competitive. Instead of trying to copy it’s competitor’s features (*cough* FACEBOOK *cough*), and then negotiate an acquisition when their copycat product sucks, Stripe actually invests in competitors in different geographic regions. They seem to prescribe to the philosophy that “rising tides raise all boats,” and seek to fund companies that can make the world a better place. For example, if their recent portfolio company, Fast, is successful, eCommerce will be a better experience for everyone and it will only expand the pie for Stripe. Instead of trying to copy and crush Fast, Stripe seems to say, “You have a great product that will make the world a better place. Let us help you make it happen.”
As we move into what appears to be a new era of antitrust law, it feels important to be on the Stripe side of the street instead of the Facebook “destroy mode” side. Mom and Dad are unlikely to let the big kids continue to bully the other kids, so as start-ups grow, it would be wise for them to take a note out of Stripe’s playbook and seek to support and encourage the other kids in their business endeavors.
Thanks for reading!
I would love to hear what you think. You can give me your feedback (or ask follow up questions) by simply replying to this email. Or feel free to say hi on Twitter. And if you like this, please consider sharing it with a friend. Until next time…