The Corner Newsletter: August 01, 2024
Welcome to The Corner. In this issue, we explore how antitrust enforcers around the world are cracking down on tricks Big Tech uses to dodge merger review.
Global Antitrust Enforcers Finally Crack Down on Big Tech’s Dominance of AI Space
Sander McComiskey
Modern antitrust laws have always empowered federal enforcers to scrutinize any aspect of how companies compete — or don’t compete — with each other. In recent years, however, enforcers have focused almost entirely on formal merger proposals, only rarely examining partnerships, licensing deals, minority investments, and similar arrangements. But a promising set of Federal Trade Commission and Department of Justice investigations into the market for artificial intelligence may signal the restoration of some of competition policy’s most powerful tools.
Until recently, tech giants snapping up AI startups seemed to have successfully gamed the typical merger review process. Take, for example, Microsoft’s absorption of Inflection in March. If Microsoft had simply acquired the flagging startup, the move would have raised enforcers’ eyebrows on both sides of the Atlantic. Instead, the firm hired away Inflection’s CEO and most of its staff and paid $650 million to license its technology. The result was, by almost any standard, a de facto acquisition. But until news broke in June that the Department of Justice was investigating the deal as an “informal acquisition,” it looked like Microsoft had dodged review entirely.
Microsoft/Inflection is one in a sequence of investments, partnerships, and quasi-acquisitions in AI that antitrust officials have started to pay attention to. The FTC and DOJ recently launched an array of inquiries and formal investigations on the topic. Enforcers in the UK and EU have joined in, investigating high-profile partnerships and contemplating antitrust cases against the major players.
In its initial inquiry in January, the FTC wielded its broad investigatory powers to request information from Amazon, Google, and Microsoft on their large investments in AI startups. The agency requested the firms turn over all documents pertaining to “the practical implications” of the partnerships on business decisions, the effect on “competition for AI inputs and resources,” and potential impacts on competitors. Underlying the inquiry was concern that Big Tech’s control over AI startups could reduce head-to-head competition, dampen incentives to innovate, and further entrench dominant players in adjacent markets like cloud computing.
It’s easy to see why enforcers are worried. Microsoft’s investment in OpenAI bought the corporation a 49% stake in the startup, exclusivity as OpenAI’s only cloud computing provider, and a non-voting board seat (which it recently surrendered under growing antitrust scrutiny). The deal also gave Microsoft the exclusive license to much of OpenAI’s intellectual property, a remarkable arrangement for two firms theoretically competing to develop the same product. Similarly, Amazon’s $4 billion minority share in the Claude 3 creator Anthropic involved commitments by Anthropic to make Amazon its primary cloud provider, use AWS chips to train its future models, and commercialize its offerings on Amazon-owned platforms.
The FTC and DOJ agreed to divvy up responsibilities for formal investigations into Big Tech players in AI markets, with the FTC evaluating cases against Microsoft’s partnership with OpenAI and its virtual acquisition of Inflection, and the DOJ contemplating a suit against Nvidia.
The European Commission is unlikely to examine the Microsoft/OpenAI partnership as a merger given the absence of formal control, but its regulators have discussed bringing a case involving the exclusivity clauses included in the deal. The Commission also followed the FTC’s lead in March by sending inquiries to Microsoft, Google, Meta, Facebook, and TikTok about their AI partnerships.
The UK is more likely than the EU to bring a merger case against Microsoft, as the level of influence required to treat a partnership as a merger under UK law is lower. The UK’s Competition and Markets Authority launched inquiries into Microsoft and Amazon for their respective investments in OpenAI and Anthropic. And just this week, the agency announced a probe into Google’s $300 million dollar investment in Anthropic, a deal that included a minority share and a cloud computing contract.
This flurry of investigations follows research, reporting, and recommendations on the monopoly threat in generative AI by the Open Markets Institute, AI Now, and other civil society groups. An OMI report released in November 2023 detailed some of the ways that platform monopolies already dominate the market for AI, given their tight control over the complementary assets needed to produce AI models and willingness to leverage their power across adjacent lines of business. The report also called for unwinding these informal arrangements.
The recent moves from enforcers signal a determination not to repeat the mistakes of the early tech era when Amazon, Apple, Meta, Google, and Microsoft were allowed to subsume over 900 companies without facing a single antitrust suit until 2020. Aggressive scrutiny of partnerships and investments in AI startups by Big Tech firms is necessary to protect competition and stave off a consolidated, dominated future in artificial intelligence.
📝 WHAT WE'VE BEEN UP TO:
The New York Times quoted a statement by Open Markets Institute’s Europe director Max von Thun on the global CrowdStrike outage, potentially the biggest in history. Von Thun called the “outage a clear demonstration of the dangerous and growing levels of concentration in our critical technology systems.” Similar remarks by von Thun were cited in Healthcare Brew.
OMI legal director Sandeep Vaheesan was quoted in an article in the New York Times on algorithmic price-fixing by companies like RealPage, which helps landlords collude to set rent. Vaheesan said the government can utilize their legal advantage over private attorneys through civil investigative demands that “pop open the hood” on RealPage’s software, analyzing how its algorithm works before going to court.
Vaheesan and OMI chief economist Brian Callaci coauthored an article for Roosevelt Institute’s newsletter describing the importance of the FTC’s ban on noncompete agreements. “The new rule sets the stage for further, broader use of this important authority—including via enacting economy-wide competition rules like the noncompete ban—to structure markets and competition in accordance with public values,” they wrote. “It is long past time for the FTC to claim the role Congress intended it to play in governing our public markets.”
OMI senior legal analyst Daniel Hanley published an article for National Employment Law Project’s website explaining how agreements that function like noncompetes called TRAPs are being used as workarounds after the FTC’s noncompete ban. “Training Repayment Agreement Provisions, or TRAPs … effectively prohibit workers from leaving their employer because they must pay their employer for often arbitrary ‘training’ costs,” Hanley wrote.
Europe director Max von Thun published an article in Project Syndicate on the collusive behavior by Big Tech firms that leads to poor product quality, such as Google’s AI hallucinations. “Google controls around 90% of the global market for web search and faces little competitive pressure,” von Thun wrote. “It can release an unreliable or unsafe product without fear of losing customers to rivals.”
Open Markets’ editorial director Anita Jain wrote a review of the book The Wolves of K Street: The Secret History of How Big Money Took Over Big Government, a nonfiction account of the excesses of the lobbying industry, for Washington Monthly. “High-flying lobbyists like Podesta and Boggs helped overturn a 20th-century balance of power that saw victories for consumers and labor and replaced it with a lobbyist-swarmed Capitol where the public interest is largely forgotten,” she wrote, adding that the world they built continues “to auction off American democracy bit by bit to the highest bidder.”
🔊 ANTI-MONOPOLY RISING:
A group of senators led by Oregon Senator Ron Wyden called on the Federal Trade Commission to probe automakers’ use and sale of sensitive data like location history and driving practices, which lawmakers claim the companies have obtained through deceptive user agreements. (The Register)
The Federal Trade Commission announced a sweeping probe into “surveillance pricing” practices in order to discern whether the increasing use of AI to set individualized prices is violating consumers’ privacy and systematically driving up their costs. (CNBC)
Antitrust regulators in Spain launched an antitrust probe into Apple over concerns it has leveraged dominance over the application marketplace to impose unfair limitations on developers in its ecosystem. Similar probes have been launched by several other European Union member authorities over the last year. (TechCrunch)
Meta agreed to pay $1.4 billion to the state of Texas to settle a lawsuit accusing the social media giant of violating state law in its collection of users’ sensitive biometric data. It is the largest settlement in a data privacy case brought by state authorities in U.S. history. (Politico)
📈 VITAL STAT:
$2.8 Billion
The minimum amount National Collegiate Athletics Association will pay to settle antitrust claims brought by athletes fighting for pay over their name, image, and likeness. Antitrust attorneys say the settlement still gives the NCAA the power to restrain athlete compensation, opening the door to future lawsuits to challenge the pay limits outlined in the settlement agreement. (Bloomberg Law)
📚 WHAT WE'RE READING:
The Money War: In a sweeping series of investigative and data-driven pieces in the Washington Post, White House economic reporter Jeff Stein and data reporter Frederica Cocco chart the increasing use of sanctions by U.S. officials over the last three decades. Stein and Cocco’s reporting demonstrates how unilateral American sanctions policy has become one of the primary molders of international trade and relations, especially under the presidencies of Donald Trump and Joe Biden.