Don’t Destroy Entrepreneurship With Poorly Designed Antitrust Legislation

By Daniel D. Sokol, The Hill

Start ups are the lifeblood of innovation in the United States. Venture capital funded start ups disproportionately produce tech innovation. Yet, the proposed Senate American Innovation and Choice Online Act (AICOA), which once again was the subject of Senate hearings and focuses on “self preferencing” by large tech firms, may have negative unintended consequences regarding tech acquisitions by companies covered by the bill and companies that may be covered in the future. These consequences include a reduction of exit opportunities for tech founders and venture capitalists to cash out in successful exits. This would hurt American innovation exactly at a time when we need innovation to solve global problems including health, financial inclusion and small business growth.

AICOA severely limits the vertical integration commonplace in tech as in many other areas of the economy—what some have derided as “self preferencing.” What does this mean? The bill doesn’t define the term, leaving it to apply to a broad range of business practices, whether good or bad for competition. Imagine that unlike antitrust law, where a plaintiff must make an initial showing of anti-competitive effects, under AICOA the burden is on the target company to prove that something would not happen with most of the conduct covered by the bill.  Worse, the language of the bill is at best vague and not tied to existing case law or doctrines, which increases business risk for companies even beyond those companies covered by the bill.    

Why does this matter for entrepreneurship?  AICOA would chill acquisitions of not merely companies covered by the bill but also companies that are trying to grow their market capitalization. Many companies’ business models are based on “self preferencing”, which in many cases creates value for companies and consumers. For example, for decades many big box retailers and supermarkets have done this in their own stores and virtual shelves with their own private labels. Much of “self preferencing” creates scope economies and enhances start up value through innovation and product improvement. Without the ability to “self preference”, companies will be less willing to acquire new businesses and technologies. The combination of weaker incentives for acquisition along with the inability to use contractual self preferencing will reduce scope economies and integration efficiencies.  

Perversely, AICOA will make it harder, not easier, for new entry against existing tech companies, as competition in digital platform markets often is based on differentiation from existing products and services. This may come from covered companies making acquisitions to compete against each other.       

Large tech companies need tech start ups to drive innovation because start ups are complementary assets. That means that an online food delivery company that sells tacos and burgers might want to acquire an existing online delivery start up that sells beer because, as most people know, beer and tacos or burgers are complements. Why acquire instead of building out capabilities internally? Because internal growth takes more time and is riskier, whereas the tech startup by definition is willing to take larger risks for greater returns. The online beer delivery company on its own may not be able to scale up but might be better off as part of a larger company that has more access to cash, research and development, better online payment systems and more drivers.  Together a combined online beer and tacos company creates more value than two separate companies for beer and tacos. One can see the same with numerous tech deals, such as Apple’s acquisition of Shazam regarding music streaming.

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