When investors and business leaders tuned into coverage of the Capitol under siege on January 6, they witnessed a riot that shook the country to its core.
Catalyzed by waves of misinformation on social media, the insurrection fit like a bookend to last summer’s Congressional subcommittee hearing in which chief executives from such tech giants as Amazon, Apple, Facebook and Google were grilled for five hours by lawmakers, countering their antitrust allegations.
The two events have brought the inescapable conclusion that it’s not whether big tech will come under scrutiny from the White House and Capitol Hill, but how severe the scrutiny will be from government officials. The public sector, no more than ever, feels big tech wields too much economic and political power.
It’s coming from both sides of the aisle and lawmakers appear primed to take swift action against big tech and its monopolistic behaviors. They have the public’s backing. A recent Consumer Reports survey shows three in four Americans “worry about the power wielded by today’s biggest tech platforms.”
All of which has investors and other observers of the venture industry concerned that government will overstep and muck up the marketplace and their exit strategy because it doesn’t understand how tech and innovation work.
Meanwhile, some early-stage investors think antitrust actions will create a healthier climate for entrepreneurs who can innovate in areas where market domination has stifled ideas and made it tough to compete, including reworking Section 230 of the 1996 Communications Decency Act to set boundaries around harmful content knowingly disseminated by platform companies without redress.
On the flip side, some claim these tech giants have created innovation ecosystems around their platforms that will be harmed. Notwithstanding, history has shown that in the wake of antitrust actions and market disruptions – such as the pandemic – new innovations will arise to fill the void left by regulators seeking to throttle back the control of dominant players.
Big tech impact
Knowing the rough waters that lie ahead, big tech and those who benefit from its ecosystems will argue against regulation as stifling the marketplace. Market interventions by policymakers will certainly upset big tech’s status quo, and will also undoubtedly spawn new innovative companies driven by entrepreneurs looking to exploit those market disruptions.
Antitrust is a relatively recent phenomenon that the world of business has had to reckon with. The Sherman Antitrust Act of 1890 was enacted to curb concentrations of power that interferes with trade and reduces economic competition.
Monopolies are historically known to harm economies in three key ways: they slow the pace of market innovation; create exploitative rent extraction at the expense of society; and lead to diminished quality of service. Today, experts believe these trends are firmly established in the case of big tech.
Antitrust action has been taken before against big tech. Some market economists say one of the most important rulings in US history was the 1956 consent decree against Bell System. This settled a seven-year old antitrust lawsuit that sought to break up Bell, the dominant provider of telecommunications services in the US at the time, because it allegedly monopolized “the manufacture, distribution, and sale of telephones, telephone apparatus and equipment.”
In 1984, the breakup of the American Telephone & Telegraph Co, left the parent company, AT&T, to provide long-distance services and seven regional ‘Baby Bell’ companies to provide local phone services. More recently, in 1999, one of the largest antitrust suits ever was brought against Microsoft, which found that the company had attempted to create a monopoly position in internet browser software. A court-ordered break up of Microsoft, however, was overturned by an appeals court in 2001.
All of these major antitrust events opened up market opportunities for new players with innovative products and services needed by businesses.
Then, on February 4, senator Amy Klobuchar, unveiled a major antitrust reform bill – the Competition and Antitrust Law Enforcement Reform Act. The Democratic senator for Minnesota is a frequent critic of what she and others in Congress consider a lax enforcement of existing antitrust laws. She has called for strong measures against big tech.
Klobuchar, who now chairs the Senate Judiciary Subcommittee on Antitrust, helped design the comprehensive proposals calling for an extensive revamping of policing standards and greater scrutiny of big tech. If enacted, the proposals could draw even more risk and scrutiny to such tech behemoths as Amazon, Apple, Facebook and Google, among others.
Visa-Plaid deal terminated
“What I think is certain is that there is going to be greater scrutiny in the tech space,” says Kurt Wolfe, a member of Troutman Pepper’s government investigations, compliance and enforcement practice. “We just saw this with the Visa and Plaid deal not standing up to Department of Justice scrutiny.”
In November last year, the DOJ filed a civil antitrust lawsuit to stop Visa’s proposed $5.3 billion acquisition of Plaid, which was announced pre-pandemic in early 2020. The lawsuit alleged that Visa is a monopolist in online debit services, charging consumers and merchants billions of dollars in fees each year to process online payments. The deal was terminated in January 2021.
Plaid is a venture-backed fintech company that has developed a payments platform potentially challenging Visa. The complaint maintained that the merger would have enabled Visa to eliminate Plaid’s competitive threat to its online business before Plaid had a chance to succeed, thereby enhancing or maintaining Visa’s monopoly.
But some investors didn’t see it that way. “When I saw the action of the DOJ regarding the merger of Visa and Plaid, I was surprised,” says Anis Uzzaman, general partner and chief executive of Pegasus Tech Ventures in San Jose, California. “The two companies are complementary, not competing and create a complete platform.”
Many observers say while the antitrust movement is playing itself out, the European Union is moving ahead of the US as it aggressively pursues antitrust actions. Specifically, it is addressing data privacy concerns.
In 2018, the EU’s General Data Protection Regulation significantly increased requirements for how consumer data is stored and shared. California followed with its own Consumer Privacy Act.
While some advocates have suggested that the CPA does not go far enough to protect privacy, it remains the most stringent consumer privacy law on the books in the US.
Not everyone is in favor of big tech regulation, of course. “Whenever you politicize these issues you run the risk of overcorrecting. Congress doesn’t understand innovation and economics,” says Robert Ackerman Jr, founder and managing director of AllegisCyber Capital. “We’re an innovation economy. Public policy should focus on what is healthy for the innovation ecosystem, because if we lose that then we lose the foundation of our economy.”
Similarly, Josh Mendelsohn, managing partner of Hangar, which supports and advises companies working in the public sector, says that “Washington doesn’t understand how technology works” and will use interventions that are reactive.
“[Interventions] will carry dire consequences, not unlike Civil War surgeons who cut off the leg to save the soldier’s life,” adds Mendelsohn.
Reconstructing Section 230
Regulation appears to be inevitable, however. The Biden administration as well as its predecessor have said that Section 230 should be reconsidered and reconstructed. The law essentially affords internet platform companies immunity from liability for almost all forms of objectionable or even illegal user-generated content that flows over their platforms.
“We do prohibit content that will lead to imminent risk of harm,” said Facebook chief executive Mark Zuckerberg in his testimony during the hearings last summer. “Stating that there is a proven cure for covid when in fact there isn’t one might encourage someone to take something that could have an adverse effect, so we do take that down,” he added in reference to false claims over hydroxychloroquine.
Many agree that Section 230 needs to be reconstructed. It has evolved into a blank check. It allows lies about sitting politicians, death threats and many other forms of harmful content to be knowingly disseminated. And it allows platform companies to leave such content online.
Then there is the Capitol Hill riot. “Once January 6 happened, people now see themselves under attack because of words posted, leading to agreement to repeal Section 230,” says Bradley Tusk, a venture capitalist and a former political strategist who founded Tusk Ventures to invest in early-stage start-ups in highly regulated markets.
Nevertheless, investors are nervous about how new regulation will ripple through the start-up landscape and negatively impact innovation, which many consider to be the US economy’s foundation and main export, points out AllegisCyber Capital’s Ackerman.
Others are concerned these antitrust actions on large platform technology companies will dampen and slow innovations that work with these platforms.
“Innovation comes from outside nowadays because platforms open up an environment where innovators can bring their new ideas. Some of those very large platforms are the domain of big tech titans like Google, Apple, Amazon and Facebook that antitrust actions will be directed toward,” says Tim Derdenger, associate professor of marketing and strategy at the Carnegie Mellon’s Tepper School of Business.
Impact on venture activity
Others suggest that the ongoing threat of antitrust actions will spur start-ups to pursue other innovative avenues for raising capital and going public.
“Increasingly for VCs and founders, their focus is on the exit strategy,” and making sure it isn’t impeded by antitrust investigations that delay their companies from going public or being acquired, says Wolfe of Troutman Pepper.
The result is the rise of the public funding instrument called a Special Purpose Acquisition Company, or SPAC, which serves as an alternative to IPOs and has become a hot topic and a popular exit strategy in the last year.
SPACs are funding vehicles that use money to acquire a private company. While the SPAC is already public, the process of the merger is still considered a SPAC IPO. And because the SPAC is a public company, the private company becomes public as well. Earlier this year, capital market experts declared 2020 a banner year for SPACs.
All of which could help a company like Plaid avoid the potential costly delay of being caught in the crosshairs of antitrust investigation and suits.
The question then is what other opportunities lie ahead for VCs and other investors now that big tech is under increased scrutiny by lawmakers?
Make no mistake, the pandemic has wreaked havoc with the economy and is turning everyday life upside down. Tech has managed to pivot and adapt as other industries have struggled with the disruption to everyday business and living. For example, many businesses have benefited from using Zoom and other online video technology as a substitute for in-person meetings.
Mendelsohn says the use of data in healthcare offers a cautionary tale of how to treat tech. Looking ahead, he adds, there’s a lot of opportunity to address health economics and patient healthcare in the US.
There was great frustration when it came to monitoring the spread of covid-19 and obvious shortcomings of contact tracing that could benefit from networked solutions that bridge consumers and medical service providers.
Some believe this failing in healthcare technology could become an impetus that drives lawmakers to examine and ease back on healthcare privacy laws, so companies can bring stronger solutions to the market.
Digital medical records, for example, are an example of much-needed advancement to take healthcare into the 21st century, with doctors and the medical profession moving away from paper and converting to electronic formats. The problem is that the progress and full realization of digital medical records has been stymied by healthcare privacy concerns over moving these records across networks between providers.
As a result, these electronic records became digital islands of information never fully realizing the potential of moving them across networks of medical service providers.
Perhaps the road ahead for big tech will follow the arc of the past and regulation of electricity, gas and cable TV monopolies.
“While everyone is reliant on technology services, they effectively become utilities,” says Tusk. “In the same way the gas, electric and cable companies were not liked as utilities because of their market prowess, consumers came to realize they were stuck with them.”