Antitrust The Wrong Solution for the Wrong Problem

At the risk of oversimplifying, the apparently-growing sense that “something has to be done” about the size of today’s firms (financial, retail, telecom, internet apps and so forth) is likely ill considered.

As profit is wrung out of all value chains affected by the internet, firm revenue and profits fall, if not to zero, then always in that direction. There is only a few long-term solutions for such margin compression: additional scale in existing businesses, and a move into new businesses, elsewhere in the value chain.

Both strategies require that firms get bigger. So attacking "bigness" also means attacking chances for firm survival.

The demand for scale is--virtually all agree--a byproduct and necessity in an era of price transparency, lower protections from market entry by “outsiders,” falling prices and profits in virtually all incumbent businesses and markets.

We cannot easily repeal the economic impact of the internet, even if we wanted to do so. And make no mistake, the internet will reshape nearly every industry in certain ways, the cumulative effect of which is to wipe out profit margins. That, in turn, drives the need for scale.

Also, economic eras change. And that is why, in retrospect, lots of antitrust action seems not to work. It ultimately did not matter what we did about the size of the oil or steel or auto industries, as they were destined to lose their place as the economic engines anyhow.

The big revision of U.S. telecommunications law (the Telecom Act of 1996) aimed to introduce competition for voice services, precisely at the point that voice was shifting to mobile delivery and the rest of telecom was shifting to the internet.

Some of us question the long term value of antitrust action applied to Microsoft (the internet era displaced the PC era anyhow).

And, for such reasons, some of us are quite skeptical about the value of antitrust action against AT&T, Amazon, Facebook, Google or Apple, especially when the types of action we see are instances of vertical integration, which does not lessen competition in existing markets.

The big problem is that we humans are always “fighting the last war,” seeing dangers that already are destined to pass. Consider the U.S. Department of Justice blocking of two big mergers in the health insurance industry, and the blocking of mergers in the retail pharmacy industry, because of concerns about excessive concentration of power that seem, in retrospect, unnecessary.

Walgreens abandoned its effort to buy Rite Aid in 2017, after the Federal Trade Commission said it would review the proposed transaction on competitive grounds.

That was a horizontal merger. Now, however, a big possible wave of vertical transactions might happen, as the pharmacy benefits and insurance industries face the new threat of Amazon entry into the ecosystem.

That already is raising calls for antitrust action to block vertical deals such as insurer Cigna merging with Express Scripts. Pharmacy CVS is merging with insurer Aetna.

Other deals might happen as well, including Walmart and Humana.

The point is that, in the internet era, scale becomes a necessity, to deal with lower revenues and profits, loss of value and business model disruption.

The point is that firms and industries need to change in the internet era, and gaining scale, plus entering new parts of the ecosystem, are often necessary survival and relevance actions.

We may generally believe “bigness is bad,” but bigness might well be necessary when profits, margins, value and roles are compressed.

What is “big” in a legacy context might well be “small” in a broader internet context, where the definition of “market we are in” changes, or has to change.

Some might say antitrust concerns considered “reasonable” in a horizontal context actually make no sense in a “vertically changing” industry or market. That might especially be true when whole markets are shrinking, disappearing or are threatened with that eventuality, as value shifts.

That is why some of us view the U.S. Department of Justice antitrust case against the vertical AT&T merger with Time Warner unfortunate and misplaced. The industry is going to have to change, vertically, to survive, as AT&T’s major competitors already are doing.

Vertical integration already is happening in many parts of the internet ecosystem, meaning the question who are my competitors changes.   


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