How new antitrust rules may affect tech startups

In Washington and Brussels, lawmakers are increasingly vocal about expanding the application of antitrust rules within the tech sector. Recent activity includes a report from Democrats on the House antitrust subcommittee, the Trump administration preparing an antitrust suit against Google, and the European Union (EU) considering new antitrust rules following billions of dollars in fines to major tech companies. While much of these actions’ coverage focuses on how changes would affect the companies that are being targeted by these efforts, the impacts would affect the entire tech sector.

The degree to which tech markets are currently concentrated depends on how the market itself is defined. From a broad lens, there are many competitive tech companies, but when viewed more narrowly, several subsectors are dominated by relatively few actors. The House report primarily looks at online search, online commerce, social networks/media, mobile app stores and mobile operating systems as sectors with market share largely concentrated in one or two companies. The EU has reportedly identified the search and social network markets as dominated by single actors but is also monitoring online commerce.

Regulators are considering a host of possible interventions to limit the market power of major tech companies, and each would have ripple effects for startups and other companies in the sector. These potential actions include the following:

Requiring enhanced interoperability

Regulators imposing interoperability would dictate that companies allow customers the ability to move their content from one platform to another (e.g., Facebook and posts, contacts; Apple and apps, music). The purpose of interoperability is to remove a barrier for customers to switch from a dominant platform to a rival. Such rules would most likely be applied only to platforms above a certain size.

Interoperability requirements ought to make it easier for new companies that are entering a dominated sector to achieve traction. The House report notes venture capitalists’ concerns about backing companies that want to challenge monopolies, and this is one solution to that problem. This regulatory approach would be less restrictive on existing companies, and less directly impactful to market competition, than some of the other proposals being considered.

Restricting acquisitions

Another regulatory tool under consideration would place limitations, possibly to the point of prohibition, on the mergers and acquisitions (M&A) activities of major tech companies. In the U.S., existing enforcement options have not been utilized: the House report states that four top tech firms (Alphabet, Amazon, Apple and Facebook) purchased more than 500 companies since 1998, and only one of those deals was subjected to any limitations.

In theory, restricting M&A activity would foster competition in at least three ways. First, major firms would be limited in their ability to strengthen their size advantages through vertical integration. Second, these firms would not be able to purchase their way into new industry subsectors. Third, the companies would not be able to use acquisitions to end direct competitors to their monopoly.

In practice, the impact of restricting M&A activity seems less certain. While major companies cannot force startups to accept their offers (although investors on the startups’ boards certainly can), data from PitchBook indicates that more than 75 percent of all exits over the past five (or more) years have been acquisitions. Many startups presumably are formed with the expectation of exiting via acquisition. As Steve Blank, author of the federal government’s I-Corps curriculum, writes in his how-to guide for being acquired, “Realistically, M&A is the most likely path for a startup to achieve liquidity.”

If larger companies are restricted from acquisitions, then the outcome may be that more companies become independently successful — but the outcome may also be more startups surviving in name only (i.e. ‘zombies’) or entrepreneurs refusing to enter a sector that has limitations on exits through acquisition. M&A restrictions would need to be enacted alongside other tools to more definitively push the market toward competition.

Breaking up existing companies

The ‘sledgehammer’ of antitrust regulation is breaking up the dominant companies, and regulators in Washington and Brussels are talking about this option. One of the more popular targets of this conversation is separating Instagram and Whatsapp from Facebook Messenger (which may have been part of the motivation for Facebook’s tighter integration of these services last year), but all of the major tech companies compete across multiple subsectors of the industry and could be separated into parts.

Breaking up a company entails a number of complex considerations, including how the action would affect consumers and the resulting competitiveness within affected markets. Numerous commentators have written about these impacts (see, for example, ITIF and Vox).

For tech startups, the potential impact of dividing major companies into smaller components appears to be more competitive markets in which to operate. Such actions may see the major tech company continue its dominance in one subsector, but its spin-outs may be on more level footing in others (e.g., Google continuing to dominate search while an independent Chrome would become part of a more competitive browser market). Further, if regulators pursue a breakup strategy instead of a ban on M&A activity, startups pursuing an acquisition strategy (as discussed above) may have more opportunities to exit.

Any changes to antitrust regulations in the U.S. or Europe will likely be implemented over a period of years. The EU has been approaching the issue through a series of escalating steps, beginning with fines and seemingly likely to move next to requiring consumer-friendly practices before directly affecting companies’ legal structures. The U.S. approach is at least partially dependent on the outcome of this year’s elections, although there is bipartisan displeasure with the status quo.