Should Big Tech Acquisitions Be Restricted?

TL;DR:

• A number of policies have been proposed to restrict Big Tech’s ability to acquire smaller tech startups. 

• These policies are driven by two primary concerns regarding such acquisitions: (i) decreased competition (ii) diminished market entry and, as a result, innovation.

• However, empirical analysis of datasets on acquisitions and venture activity shows neither concern bears out in the data. 

• Moreover, restricting Big Tech’s ability to acquire smaller startups can lead to exactly those outcomes and concerns that the proposed policies purport to address.

• My new co-authored white paper takes a closer look at some aspects of this topic.

Regulators around the world are increasingly proposing and enacting new antitrust laws that seek to surgically target the operations of large technology companies. There are several proposed pieces of interrelated legislation under consideration in the House and the Senate, including the Platform Competition and Opportunity Act of 2021 (H.R. 3826 and S. 3197), the Ending Platform Monopolies Act (H.R. 3825), the American Innovation and Choice Online Act (S. 2992 and its House equivalent, H.R. 3816), and the Competition and Transparency in Digital Advertising Act (S. 4258), all of which are linked to the same legislative agenda.

For example, the Platform Competition and Opportunity Act “generally prohibits operators of covered platforms from acquiring the stock or other share capital or the assets of another person engaged in commerce or in any activity affecting commerce. Covered platforms are online platforms that (1) have at least 50 million U.S.-based monthly active users or at least 100,000 U.S.-based monthly active business users, (2) are owned or controlled by a person with net annual sales or a market capitalization greater than $600 billion, and (3) are critical trading partners for the sale or provision of any product or service offered on or directly related to the platform.” 

The policies underlying the Platform Competition and Opportunity Act are driven by two primary concerns regarding startup acquisitions by Big Tech: (i) decreased competition (ii) diminished market entry and, as a result, innovation. 

Recent research demonstrates that the first concern is unfounded. For instance, according to a dataset compiled by Standard & Poor’s, out of the 41,796 majority-control acquisitions of technology companies operating in the Information, Communications and Energy Technologies (ICET) space during 2010-2020, Google/Alphabet, Facebook/Meta, Amazon, Apple, and Microsoft (“GAFAM”) acquired 595, accounting for less than 1.5%. On a per-firm basis, some top technology acquirers, including private equity companies and other non-GAFAM firms, have matched or exceeded GAFAM in their volume of majority-control acquisitions per year since 2018. Additionally, researchers find that GAFAM and other top technology acquirers increasingly compete with each other; moreover, competition within GAFAM has steadily increased as well.

Recent research on startup funding also counters the second concern. Specifically, in a recently published paper, researchers utilize a dataset of more than 32,000 venture-capital deals reported worldwide from 2010 to 2020 to find a positive effect of startup acquisitions by GAFAM on venture investment in startups in similar industry categories. Specifically, the researchers estimate a 20.2% increase in the number of VC deals in an industry segment in the four quarters following a GAFAM startup acquisition, and a 30.7% increase in the total amount of VC funding in an industry segment in the four quarters following a GAFAM startup acquisition. Overall, the researchers provide empirical evidence that startup acquisitions by GAFAM do not necessarily dampen market activity in the industry segment of the acquisition – on the contrary, such acquisitions can stimulate investment, entry, and innovation. These researchers’ work does not stand alone; in related work recently presented at the 2022 Conference on Competition and Regulation, entitled “Do Mega Firms’ Acquisitions Chill Startup Innovation? New Evidence from Technology Venture Investment,” researchers utilize additional data on venture investment and venture entry to find corroborating results.

Lending further support to this work, in a 2022 report published by NERA Economic Consulting researchers document the ways in which the proposed pieces of legislation regulating technology markets would reduce venture capitalists’ returns and therefore the supply of available capital for investment in startup technology firms. Specifically, the legislation would strongly discourage or prevent leading technology acquirers from acquiring startups. Investors, in turn, would have a reduced ability to raise capital, which could diminish the amount of venture capital financing available for startups and slow down their innovation. Startups, consequently, would face increased costs due to the loss of affordable funding, networking, and services. Fewer startups would be established as a result, and the ones that are established would be diminished competitors. Moreover, consumers would face potential costs from a slowdown in the broader commercialization of innovations, given that startups would lose access to established two-sided marketplaces from potential acquirers. 

The link between venture capital and the commercialization of innovations is difficult to overstate. For instance, research finds that venture capital funding is vital for the growth and success of startups – while less than 0.5% of all U.S. firms receive venture capital, they represent nearly half of the firms that become publicly traded. Moreover, venture capital is an essential component of broader U.S. economic growth; without venture capital, researchers estimate in a recent paper that the annual growth rate of the U.S. economy would be as much as 28% lower. Policymakers should be mindful not to implement policies that depress venture capital investments – doing so would exacerbate the same concerns that recent legislative proposals purport to address. 

Liad Wagman is Data Catalyst Institute Competition Fellow and John and Mae Calamos Dean Endowed Chair and Professor of Economics, Stuart School of Business, Illinois Institute of Technology. Wagman does not consult for nor hold stock in any of the referenced companies, and the views written here by Wagman do not necessarily reflect the views of the Data Catalyst Institute. His latest DCI white paper (co-authored with Prof. Cameron Miller of Syracuse University) takes a closer look at the topic of populist antitrust legislation, tech startups, and the innovation ecosystem.