Acquisitions in the Time of COVID: Big Tech Gets BiggerApril 7, 2020
In the pilot of HBO’s recently-ended show, Silicon Valley, fictional mega-platform Hooli offers protagonist Richard Hendricks the deal of a lifetime: $10 million for his music app and the compression algorithm behind it. Richard, despite his own dire financial straits, turns Hooli down—resulting in a six-season long corporate battle filled with absurdity. Today, real-world Richards and their technology start-ups are struggling in the midst of the global pandemic. And the dominant platforms—Apple, Amazon, Google, Facebook and Microsoft—all of which Hooli is meant to parody, are uniquely poised to exploit their misfortune through acquisition offers you can’t refuse. Because of this, we need a heightened review process for mergers in this period to ensure both consumers and competition are protected.
Even promising tech start-ups can struggle to become profitable and thus may have low valuations despite having high value to a prospective monopolist facing actual or potential competition from the start-up. A dominant company can swoop in and acquire a fledgling competitor in its infancy, sometimes even avoiding having to notify antitrust enforcers. Under the Hart-Scott-Rodino (HSR) Act, merging companies must notify and file with both the Federal Trade Commission and the Department of Justice if their transaction is above certain U.S. revenue thresholds. Since many tech start-ups don’t yet have sizable revenues, the Act might not apply to them.
Technology start-ups have been particularly hard hit by the sudden economic downturn as a result of COVID-19. Although showing promise to investors, these companies run on tight margins and lack deep cash reserves to endure short-term challenges. Given that the biggest expense for most companies is payroll, the predictable result has been mass layoffs—7000 tech start-up jobs lost since just March 11. E-scooter company Bird laid off 406, WeWork laid off 250, and perhaps most foreboding, recruiting site ZipRecruiter laid off 400.
It would not be hyperbole to say the dominant platforms are perhaps in the best position of any in the world to take advantage of the downturn. As of November 2019, Microsoft was sitting on $136.6 billion in cash reserves, Google’s Alphabet had $121.2 billion, Apple had $100.6 billion, Facebook had $52.3 billion, and Amazon had $47.3 billion. The five dominant platforms all fell within the top six most cash-rich companies in the world. There would be no better time to put these cash reserves to use than gobbling up competitive morsels at bargain-basement prices.
And in the times of economic uncertainty and “stay at home” orders in many states, the platforms are seeing more engagement than ever. Amazon has become a delivery lifeline for those unwilling or unable to brave crowded supermarkets and drugstores. As there are no sports to watch or billboards to drive by, advertising in Google search results or Facebook social media feeds has become an increasingly important conduit to consumers. There is no more walking down the street to discover a new restaurant—instead it’s a Google search for special takeout menus and hours.
The dominant platforms were once start-ups themselves—with origins as humble as a California garage or a Harvard dorm room. Many believe that their competitors are just around the corner and can follow the dominant platforms’ path to success. Yet, even pre-downturn, it was not that easy. Dominant platforms benefit from “bottleneck power,” such as strong network effects, economies of scope and scale, and the limiting power of defaults. The Silicon Valley start-up boom was already beginning to deflate. Investors are now looking for immediate profitability—a potentially insurmountable hurdle the now-dominant platforms did not face.
The platforms are charging ahead with acquisitions. Last week, Apple bought popular weather app Dark Sky. Dark Sky won plaudits from users for precise weather forecasts and a streamlined design. The acquisition immediately showcased two competitive pitfalls. Dark Sky is almost immediately shutting down its Android app and becoming an iOS exclusive. This quick move illustrates the mobile operating system duopoly battle for dominance between Apple and Android. Second, the acquisition could be Apple expanding into a new vertical. Apple currently relies on IBM-provided weather data, but there is speculation that the Dark Sky acquisition could be the beginnings of Apple building out its own weather data.
The FTC, in a recently announced 6(b) study, is already looking at acquisitions by the dominant platforms that may have evaded antitrust scrutiny due to their small size. The dominant platforms have been on a company buying spree the past several years. Facebook has acquired over 80 companies since its inception while Alphabet has acquired well north of 200. These acquisitions have supported the platforms’ trajectory to become among the most powerful companies in the world.
There are several possible solutions to this conundrum that policymakers should consider to make sure antitrust enforcers give acquisitions during the COVID emergency special scrutiny. Congress could instruct the FTC to significantly lower the HSR Act reporting threshold for the duration of the crisis, ensuring that no deal slips through the cracks because of a temporarily low valuation due to the COVID crisis.
Additionally, the agencies could set up a special review process for COVID-era acquisitions, not limited to small transactions involving start-ups. Agencies should establish a process and team of experts to re-examine mergers approved during this period, potentially unwinding troublesome ones after the crisis. Without changing the law, it is particularly important for antitrust enforcers to consider, post-crisis, whether increased concentration of power resulting from specific transactions may substantially harm competition. Some would counter that acquisitions might be the only way to stay afloat during hard times. Acquisitions represent a permanent solution to what, in some cases, should be a temporary path to survival. If these start-ups and other businesses need help, there are far more competition-friendly ways to go about it—such as ensuring they have access to the small business loans in the COVID stimulus package. Congress could further incentivize competition by requiring an acquiring entity to immediately pay back the loans upon acquiring a smaller recipient.
The dominant platforms have gobbled up small upstart potential rivals time and time again, and we can’t let them accelerate now. If we do nothing, we risk living in a world where Google is the only way to find a flight or Facebook is the only way to find a job. The dominant platforms could collect undue financial benefits from consumers over their control of bottlenecks like these yet face no threat of a competitor entering the market. Small companies need to stay afloat somehow and they should be disincentivized from selling out to the dominant platforms in this moment of weakness.
Richard and his fledgling company, Pied Piper, eventually become big enough to rival their old nemesis Hooli. They launch a series of products to compete with Hooli’s once-dominant offerings and even attempt to acquire Hooli itself at one point. All would have been impossible had Richard taken the tantalizing offer from the pilot. It remains to be seen if our market will mirror the competitive nature of a TV sitcom’s. But it is not too late to stop the platforms from dominating more and more of our daily lives. A truly competitive post-pandemic economy depends upon it.
Image credit: Hypnotica Studios Infinite on Flickr
About Alex Petros
Alex is a Policy Counsel at Public Knowledge, where he focuses on digital platform competition issues. Prior to joining Public Knowledge, Alex worked for Senator Amy Klobuchar, Senator Richard Blumenthal, the House Committee on Oversight and Reform, and Senator Joe Donnelly. Alex received his J.D., cum laude, from Georgetown University Law Center and his B.A. from Yale College in Economics and Political Science with distinction. He was born and raised in Lexington, KY and enjoys Kentucky basketball, trivia, fantasy football, and romantic comedies.