Countering monopolistic tendencies in tech

The Federal Cartel Office of Germany is evaluating whether it should broaden the set of criteria that it applies to investigate and approve company acquisitions. Specifically, it could start to consider the transaction volume of a deal in order to assess the significance of a planned acquisition, according to the agency’s president Andreas Mundt (interview in German).

News about enhanced examination procedures have already made the rounds over the past weeks and, according to German startup magazine Gründerszene, caused a stir within the country’s startup scene. Not surprisingly, the prospects of even more rules are not popular among German entrepreneurs and investors, who are chronically faced with the infamous German bureaucracy and hostility towards entrepreneurship.

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I don’t feel in the position to judge whether the proposed change would lead to different outcomes for the approval of acquisitions, especially when it comes to international deals. In the interview, the Cartel Office’s president mentions Facebook’s acquisition of WhatsApp as one example for a deal which has major impact but which “almost would not have been investigated by the authorities because of how little revenue WhatsApp generates.”

What is important here though is the acknowledgement of the challenges the competition authorities have to tackle in regards to the many billion Dollar acquisitions in tech, as well as the fact that the monopolization of the digital economy is advancing rapidly.

Most sectors of the digital economy have a tendency to turn into “Winner takes it all markets”. Most of these winners are U.S. companies. The top 10 of the companies with the highest market capitalization are exclusively from the U.S.. Apple, Google and Microsoft make up the top 3. They together are worth more than the 30 companies in Germany’s main stock market.

Even among so called “Unicorn” companies, the highest valued companies are predominantly U.S. American (and Chinese). Being a Unicorn does not in itself allow for a conclusion about the level of market dominance. But Unicorns usually justify their valuation towards investors with the assumed potential of completely dominating a market. Uber, valued at $62.5 billion, being the prime example here.

The quest to create monopolies is also at least a part of the Silicon Valley culture, even if it is not admitted by everyone as freely as by Peter Thiel. In his book “Zero to One”, he explains why monopolies are the ultimate form of companies and why they are good for innovation.

I read the book about a year ago and remember that I did agree with some of his points. Yet, I see too many examples of markets in which lack of competition has led to bad outcomes for consumers. The airline sector and the broadband market in the U.S. being two current examples. Basic economics teach that a lack of competition is bad for consumers, and that point seems as valid as ever. At least in the long run.

The European Union and its member states have a certain track record of decisions that are harmful to the growth and strengthening of the digital economy. But when it comes to countering the monopolistic tendencies of the U.S. tech giants, Europe and its countries must act – even if stricter rules for mergers and acquisitions might end up preventing some exits of European startups to Google, Facebook, Apple etc – which by the way is unlikely since most of Europe’s tech successes are comparatively modestly valued.

It’s only natural for tech giants to try to expand and to find ways to eliminate competition through the acquisition type championed by Facebook. But that does not mean that they should be able to always do that. There is a very fine line between healthy interventions in order to maintain a competitive market and pure, ugly protectionism. Yet looking for that line is a worthy undertaking, in my opinion.

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2 comments

  1. I found Thiel’s praise of the monopoly one of the less convincing parts of his book.

    A few further remarks on your thoughts, and since both of them are not from me, I will post only links to the original source.

    Over at Fortune, Adam Lashinsky makes a convincing argument that even near monopolies have a very short life span in tech: http://fortune.com/2016/01/11/tech-monopolists-uber-lyft/

    I would even go further and say wherever there is a near “monopoly”, there is room for a competitor. Even in the area where network effects are most prevalent, in social networks, this is the case.

    In this regard, policies such as data portability (which is part of the EU data protection regulation) should be sufficient to maintain competition.

    Another important argument against Minister Gabriel’s plan to increase oversight of transactions in the start-up sector comes from Stephan Göthel of the law firm Pier 11:

    The proposal pretends to protect competition but the transaction value does not allow any conclusions on the transaction’s impact on competition – it is negotiated by both parties and may have a different reason than market domination: http://pier11.de/schock-fuer-start-ups-2/

    • Thanks for the links, Instapered.

      “I would even go further and say wherever there is a near “monopoly”, there is room for a competitor. Even in the area where network effects are most prevalent, in social networks, this is the case.”

      There certainly is room for a competitor. However, the competitors are quickly acquired by the dominating players, and that’s kinda of an issue in the long run. I tend to think that if WhatsApp would have remained an independent company or even if it would have been acquired by a Facebook competitor, it would have been better for the users and for competition, at least in the long run. Of course, this is fictional, but worth a thought nevertheless.

      Of course, data portability could change the dynamics. But I don’t see this happening until its here.

      It is understandable that those representing the German startup ecosystem fear worse conditions for themselves. But it also means that the opposition towards that type of regulation is not motivated by what’s best for users, the digital society and the global economy, but simply by personal financial interests.

      My stance is this: A thriving German/European tech ecosystem must grow independently from the “help” of the big U.S. players, meaning, it cannot just exist for the purpose of creating companies to be sold to Google, Facebook, Apple, Microsoft etc.

      However, I am not sure if the specific proposal would be supportive in that regard or not, which is why I don’t want to defend the proposal itself. I am defending the point that it is not desirable if a few tech giants from one part of the world dominate the complete digital economy, worldwide.

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