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An Antitrust Analysis of Google’s Waze Acquisition: Disruptive Competition and Antitrust Merger Review

· June 12, 2013

Google’s acquisition of Waze, the startup that bridged the gap between social networks and turn-by-turn navigation, raises some interesting antitrust questions. Particularly relevant to DisCo is how U.S. antitrust law deals with “disruptive competitors” in merger analysis (which I will get to a little later).

There are two related questions to consider: (1) Will authorities stop this deal? And: (2) generally, how do antitrust regulators evaluate startup acquisitions by large players? These are not easy questions.

First, given that Waze reportedly makes well under $50 million in annual U.S. revenue, this merger will likely not have to go into pre-merger limbo (known as Hart-Scott-Rodino review).  This doesn’t mean that the antitrust agencies can’t challenge it.  However, it does mean that challenging the acquisition would be messier (and therefore less likely), because the Department of Justice would have to unwind the deal (as opposed to what usually occurs, where antitrust agencies block the consummation of a deal).

Beyond the fact pattern of this particular deal, the general topic begs an interesting question: when is an asymmetric acquisition of a startup by a major technology company an antitrust concern?  (Deals like Google-YouTube, Facebook-Instagram or Yahoo-Tumblr could also fall into this category.)

Typically, antitrust regulators block major transactions among big companies that threaten to control a huge share of a given market.  In fast-moving tech markets, the answers (and the markets themselves) are often unclear (although the antitrust authorities have a slightly more interventionist history when it comes to small tech mergers in cutting-edge markets).

Although it is theoretically possible for the antitrust cops to define Waze’s market narrowly and attempt to block the merger on grounds that it would be too consolidating, the most likely antitrust market for the purposes of this merger analysis is the turn-by-turn navigation market.  Since that market features a variety of strong companies, including Telenav and TCS (which power AT&T and Verizon navigators respectively), it is unlikely for antitrust regulators to block the merger on the grounds of its concentrating effect.  Furthermore, Apple has thrown its hat into the ring, and since a dynamic open source mapping project exists, OpenStreetMaps (in fact, Foursquare used OpenStreetMaps to replace Google Maps), it is not that much of a stretch to think that other social networks or major tech companies could build their own Waze competitor if they were so inclined.  Barriers to entry, particularly for companies that already have a large user base, appear low.

However, another angle regulators have to attack these types of mergers can be found in section 2.1.5 of the DOJ’s Horizontal Merger Guidelines, which focuses on the “disruptive role” of the acquired party:

The Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm, i.e., a firm that plays a disruptive role in the market to the benefit of customers. For example, if one of the merging firms has a strong incumbency position and the other merging firm threatens to disrupt market conditions with a new technology or business model, their merger can involve the loss of actual or potential competition. Likewise, one of the merging firms may have the incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices. A firm that may discipline prices based on its ability and incentive to expand production rapidly using available capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition.

Unfortunately, this is not a cut-and-dry analysis either.  Sometimes, new entrants or startups are actually more of a pro-competitive force if they acquired by a major company and integrated into their platform and products (Apple’s acquisition of Siri and Google’s acquisition of Android being recent examples of this).  In fact, acquisition is an extremely common startup exit strategy, and many startups wouldn’t have an exit scenario without it.

However, there are certainly instances where the acquisition of disruptive technologies can be anticompetitive.   If a disruptive competitor threatens to undercut the revenue of an incumbent (or their entire business model), incumbents have an incentive to buy the competitor and bury its technology, so regulators should be suspicious about the acquisition.

Let me elaborate on that last point more.  Disruptive competition often undercuts the business model of big incumbents by providing a similar good and service at much cheaper prices.  If barriers to entry for that market are high, then the incumbent could acquire the dynamic startup for the purpose of killing it (or, at the very least, slowing down the disruptive innovation) and protecting its legacy revenue stream.  For example, regulators might be suspicious if American Express tried to acquire Square or Hilton tried to acquire Airbnb.

I am not privy to the underlying details of how Waze planned to make its money in the future (and it apparently doesn’t make that much of it yet), but the regulator’s question would be: is Waze’s social mapping business model one that might undercut Google’s revenue stream, which the latter would like to mothball?  Or is it likely that Google will integrate the best of its own mapping features (and advertising business models) with Waze to create a better, more competitive product.  If regulators believe the answer to be the former, they would probably attempt to unwind the merger.  If regulators think the latter is more likely, they would have no problem with the merger.  Only time will tell.

One recent acquisition that may shed light on the DOJ’s views on challenging acquisitions of potentially disruptive competitors is the January merger of Avis and Zipcar.  If anyone should be concerned about the effect of Zipcar on their future profits and revenue models, it would be traditional rental car companies.  However, antitrust authorities did not stand in the way of that merger. (Which is probably a good thing, as Avis has been using its bigger bankroll to aggressively expand Zipcar’s services.)  While similarities to precedents are no guarantee that regulators will treat a particular case similarly, a DOJ challenge to the Waze transaction would seem to signal a change of heart.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.