Tech Regulatory Overhaul Series: Bad Policy Choices
Categoriesacquisitionsantitrustbig techcompetitioninnovationmergersPlatform RegulationStartupsTech Regulatory Overhaul
Last Friday, several Democratic members of Congress introduced a series of antitrust-related bills with the aim of regulating a select group of digital service providers, so-called “covered platforms”. The antitrust bills represent a shift from market-oriented principles that have thus far characterized the American economy, towards industrial intervention in an effort to prevent the covered platforms from successfully conducting regular business.
Why should you worry about the proposals to regulate successful U.S. tech companies?
As a consumer, this regulatory approach will prevent you from enjoying tech services as you know them. From a geopolitical perspective, these bills will represent a cessation to American leadership in tech. Finally, from an innovation perspective, these bills will eliminate the most common exit strategy for startups to date, i.e. being acquired. Inevitably, all these reasons make the regulatory proposal a very bad idea.
Consumers won’t enjoy digital services as we know them
The bills introduced by several Democratic members of Congress are aimed at attacking successful business models that have been adopted by many digital service providers, although these business models are often found in the offline world as well. In essence, many digital businesses offer integrated services to their users that unequivocally make the user experience a more valuable one.
The success of many digital companies lies in the fact that they are consumer/user-centric, and have contributed to making our lives easier. For instance, users enjoy being shown a map with the location of a search — e.g. a restaurant, shop, or doctor’s office. Other examples include how consumers often enjoy when they can receive their purchases the next day or take advantage of certain subscription services offered by marketplaces where companies also sell their own products. We all enjoy the ability to connect our LinkedIn profiles when searching for jobs or to speak with candidates via Skype or to be able to upload our resumes using Microsoft Office technology.
However, the antitrust bills introduced in the House want to ban these user-centric business models and prohibit them from offering these integrated services to consumers. Indeed, members of the House have concluded that users taking advantage of the efficiencies brought about by vertically integrated business models are not good for consumers, do not contribute to maintaining a dynamic and vibrant economy, and harm the American economy. These Representatives believe that this is the case only for the services offered by a handful of companies, paradoxically, the ones users like the most.
This leads to the conclusion that it seems that there is a clear disconnect between the proponents of these bills, and what these regulations will represent in practice. It is unmistakable how these bills will damage the welfare and advantages that have characterized the use of technology in the last decades, and seriously impair the user experience. Therefore, it is urgent that before moving forward with this regulatory proposal, the House takes a consumer centric approach to their regulatory anxiety, and ensures that any of their proposals do not harm consumers as the current bills do.
The House bills sabotage U.S. leadership in the tech race and are a geopolitical mistake
Undoubtedly, the future of geopolitical strategy and national security entails a strong and solid tech industry comprising digital services among others. Europeans seem to have acknowledged this fact, and thus, are trying with protectionist measures to revamp/create a European tech sector. But these Members of Congress do not seem to understand that the red dragon in the room is the U.S.’s biggest competitor, and that the bills that have been introduced only give China a competitive advantage.
While reconciling competition and competitiveness is one of the most difficult challenges to overcome, shackling the U.S. tech sector under a false premise of lack of competition, ironically, in one of the most dynamic industries the U.S. currently has, is simply bad policy.
As we will further analyze in this series of blog posts, the bills that have been introduced will alter the business models of leading U.S. digital service providers, turning them into common carriers with limitations on the way they do business. By doing so, any other market participant will be able to build services by receiving essential input from these covered platforms, including Chinese services. In other words, and because digital services lack borders, these Members of Congress want to impose obligations on some of the most successful American tech companies so that they must share their technology with competitors that will surely take advantage of the investment carried out by these U.S. companies.
Eventually, and because investments and running businesses are at core a matter of incentives and expectations in terms of returns for such investments, these successful companies won’t find the right motives to maintain their services at the cutting edge of worldwide technology. Essentially, these Members of Congress aspire to have a handful of leading tech companies investing for everyone else to obtain free returns for their money, but the corporate world simply doesn’t work this way. Eventually, these U.S. companies will stop leading the worldwide tech industry, limit their investments, and maintain poor services as required by the law, to the detriment to the U.S. itself.
The U.S. innovation ecosystem will be seriously impaired
Finally, the proposed bills that include a total ban on leading tech companies’ ability to engage in any meaningful mergers and acquisitions (M&A) activity will have a negative impact on the U.S. startup ecosystem.
As the bills consider that leading companies acquiring start-ups or any other market participant that would likely enhance the services that covered platforms provide are harmful for the U.S. economy, risk takers aspiring to be acquired by these same companies will refrain from investing in their ideas.
Indeed, one of the main reasons why the U.S. has been leading in technology innovation is because of the ecosystem that has been created whereby innovators understand that one of the exit strategies they can count on is being acquired. In this respect, it is worth noting that acquisitions are the most common way start-ups eventually manage to scale up and succeed. More precisely, “acqui-hires”, whereby bigger companies acquire a start-up because of the human capacities, and provide these innovators with sufficient resources to grow, is a formula that has worked well in the innovation ecosystem.
By imposing a ban on these potential acquisitions, the U.S. House of Representatives is sending the wrong message to risk takers, and innovators. In fact, it is not unreasonable to think that because of these legislative proposals, many innovators will stop seeing the U.S. as the place to be in order to succeed, and will look for new ecosystems in other countries that offer them better opportunities, including the option to be bought out.
As discussed above, these antitrust legislative proposals are bad policy overall, and will have very negative side effects for consumers, innovators, and the U.S. economy. In this series of blog posts we will have the opportunity to analyze each of the bills that have been introduced in detail with the hope to engage in constructive dialogue with policy makers before the passing of ill-born legislation.