Earlier this week, the Federal Trade Commission (FTC) lost a court case against Meta. Talk about a sexy start to an article.
Winning means that Zuckerberg is cleared to finalize the purchase of Within, the VR company behind the VR fitness game Supernatural. As a side note, the game looks incredibly fun – like silent disco meets Fruit Ninja – but I digress.
I wasn’t planning on digging into it further, but then I read an editorial in a major publication, and it set off alarm bells. In the editorial, they absolutely roast FTC Chair Lina Khan for losing the case. They paint her as young, inexperienced, and worst of all — ambitious. There’s no byline. It just says the article is “from the editorial board.” Red flag. On top of all that, it sounded like it was written by a pissed-off teenager. I know that’s the point of the editorials section, but it left me with lots of questions.
Question 1: What is the FTC again?
They’re an independent agency created in 1914, tasked with enforcing antitrust laws and protecting consumers. They can write rules and regulations, and they can enforce laws passed by Congress. The Department of Justice has some authority here too, but they differ in that:
They traditionally handle different industries
DOJ takes telcos, banks, railroads, and airlines
FTC takes healthcare, professional services, energy, and tech
They bring different flavors of legal cases
DOJ does criminal cases
FTC does civil suits
And the commission has five members, who are nominated by the President, subject to Senate confirmation, and serve seven-year terms.
Let’s meet them.
Lina Khan (Chair) – Democrat nominated by Biden in 2021 – She hails from Yale.
Rebecca Slaughter – Democrat nominated by Trump in 2018 – She hails from Yale.
Alvaro Bedoya – Democrat nominated by Biden in 2022 – He too hails from Yale.
Christine S. Wilson – Republican nominated by Trump in 2018 – Not from Yale, sadly, but Georgetown.
[Unfilled – Republican Noah Phillips resigned in October 2022]
Biden can only nominate a Republican for seat #5, since the FTC restricts the commission to a max of 3 members of a single party. So it’s weird that he hasn’t nominated someone, but any party-line votes the commission takes would be 3-1 anyway. It doesn’t make a huge impact.
Question 2: Why did the FTC lose the case against Meta?
Two reasons.
First, because there’s a 100-year war going on in the antitrust community between two massive schools of thought. Recently, one side has been doing all the winning. And this case is no exception.
Their arguments basically boil down to this:
School #1 (Consumer Welfare Standard), the theory that won the day, says that company actions are anticompetitive only if they raise prices or make goods/services worse for consumers, directly. For example, if Starbucks were to buy Dunkin, then triple prices or start making crap coffee, that would be anticompetitive.
School #2 (Brandeisian – after Supreme Court Justice Louis Brandeis) agrees that Starbucks shouldn’t do those two things, but also thinks there are other creative things Starbucks could do that hurt competition and ultimately hurt consumers. They could give out free coffee until all other coffee shops are forced to close (or pull off any number of other coffee-related capers) without immediately hurting consumers.
Since the 1960’s, School #1 has been the standard used by judges to make decisions on suits the FTC brings. It wasn’t carved in stone, but it was gradually adopted and shaped by case law. Over time, it has decreased the number of antitrust challenges raised by the FTC. Check out this graph showing the volume of antitrust cases in the last 50 years:
Prior to the 1960’s, it was School #2 that ruled the day, and that was how judges evaluated cases in the FTC’s early years.
Because of concerns about how powerful our largest companies are today, the court of public opinion seems to be swinging back towards School #2. But in the actual courts, not so much. Each of the last three US Presidents has tried introducing big tech regulation, but as discussed in a recent article (Apple’s Cyber-Pirate Beetles), they haven’t been very successful.
So Meta won this one. VR and the metaverse are still very new, and the judge (following School #1) couldn’t see how this would hurt consumers or raise prices. On the flip side, Khan and the FTC argued for School #2. They said that Meta buying the maker of one of the most successful VR apps – especially when it’s such a new space with very few successes – would basically reduce competition to zero.
Now stay with me – there’s another reason the FTC lost: Lina Khan brought a rolled-up magazine to a knife fight, and she’s not Jason Bourne. By that, I mean she’s outgunned. Take a look at the FTC budget compared to Meta’s legal accrual.
Note: An accrual is a pile of cash set aside for expenses you’ve incurred without having a specific bill to pay. This isn’t all of Meta’s legal spend for 2022 … but it’s the best proxy.
If you assume the FTC blew their whole ~$380M budget on this one suit, and that Meta only spent 10% of theirs on this case, then it would be a fair fight. But as you would guess, this isn’t the only thing the FTC is doing. So…
Question 3: What else is the FTC doing?
One major announcement in January was the FTC’s proposed rule to ban all non-compete agreements. Lots of companies use them, not just tech. In fact, according to the Financial Times, 1 in 5 American workers are working under one right now. Even your freaky fast Jimmy John’s sandwich delivery workers had them until 2016!
The FTC argues that non-competes create harm by:
Locking in employees who could earn higher pay at competitors
Hurting innovation since fewer startups get founded
They estimate the rule would raise US wages by ~$300B per year. For the tech industry, where pay is already higher than national averages, this could be a really expensive counterpunch by the FTC. Tech and other companies are obviously pushing back. Their argument (which I find compelling) is that non-competes are one of the most effective ways to protect trade secrets, since NDA’s can be hard to enforce if you are safely behind the walls of a competitor. I think protecting that IP matters. However, it does conveniently hamstring the creation of startups that can rise up to challenge the incumbents. Here’s a great article from Vox with more.
Lastly, in December the FTC announced a lawsuit against Microsoft’s bid to acquire Activision-Blizzard. They’re concerned about Microsoft making classic games like Call of Duty into Xbox exclusives (a potential harm to consumers that made the bad decision to have a PlayStation or a Nintendo).
Microsoft responded that it has no interest in doing that, but they promised something similar when they bought another game maker, Bethesda, and then promptly made games Xbox exclusives anyway. You can read more on that from the New York Times at this link.
Wrapping-up
So while there’s a lot more to the story of the FTC’s loss to Meta than just youth, inexperience, and ambition, I will agree with the not-to-be-credited “editorial board” on one thing. Ambition. There are some ambitious targets being set here.
Going after some of the biggest giants in tech, individually (Meta/Microsoft) and collectively (non-competes), with a relatively modest budget, is not an enviable position. It’s one government org vs. many impressive companies. Like you’re playing tag with the US Track Team. But even when the FTC loses cases, it can still be slowly shaping case law in a new direction.
Beyond just playing defense in courts, big tech should seriously consider ways to play offense that line up with that new direction. Spinoffs of non-core businesses can create huge shareholder value (Ebay/Paypal for $49B; Altria/Kraft Foods for $46B; etc.). Building your own vs. buying competitors can protect company culture and save transaction/integration costs. There are lots of ways to create win-wins here.