A Setback in the F.T.C.’s Fight Against Big Tech – The New Yorker

When Lina Khan, the chair of the Federal Trade Commission, appeared before the House Judiciary Committee on July 13th to discuss the F.T.C.s record under her leadership, she faced almost comically hostile questioning. Leading up to the hearing, the Republican-led committee had described its goal as to examine the agencys mismanagement and its disregard for ethics; the meetings tone followed predictably from this blueprint. In his opening remarks, Jim Jordan, the committees chair, thanked Khan for appearing and then went on to condemn her tenure, describing Khan as trying to usher in a radical departure from the norms that made the American economy great, to a system where her and her cronies have unchecked power over business practices in our country. He called the agencys investigation of Twitters data-security practiceswhich have been the focus of public attention and whistle-blower complaints since 2020, following major breachesa shakedown. (Some of the lawmakers comments echoed a request that Twitter filed in federal court that morning, asking a judge to end the F.T.C.s monitoring of its data-security practices.) Later on, Darrell Issa called Khan a bully, and Kevin Kiley, referring to recent court setbacks for Khans agency, said, You are now zero for four in merger trials. Are you losing on purpose?

Throughout the proceedings, Khan seemed unperturbed. At times, she wore a tight facial expression that suggested she was trying not to smile. But the hearing comes at a challenging moment for Khan and her ambitious agenda for the F.T.C., which has launched a campaign to restrain the economic reach of tech giantsinstitutions, such as Meta and Amazon, that Khan and many other members of the Biden Administration believe harm the economy and threaten democracy. Khans plans have been dogged by controversy and legal setbacks from the beginning, and, last week, a federal judge issued a fresh blow to the agency by ruling that it could not prevent Microsoft from acquiring the video-game producer Activision Blizzard, a merger that would create the third-largest company in the gaming industry by revenue.

Microsoft and Activisionwhich produces, among other games, Candy Crush and the Call of Duty franchisewent public with plans to merge in January, 2022. The F.T.C. announced it would challenge the Microsoft-Activision deal in court that December, an aggressive move that signalled the agency was not afraid to pursue potentially controversial, high-profile cases. In its complaint, the F.T.C. asserted that Microsoft, which manufactures the Xbox, could make it harder to access Activisions most popular games outside of its own universe of products. Its argument was based on two ideas that have not traditionally been central to antitrust law, but which Khan and the F.T.C. believe should be taken more seriously. One is the notion that vertical mergersdeals that unite companies operating on different levels of the same businesscan create serious problems for competition by making it more difficult for new firms to enter markets. The other is that considering how a market might evolve is as important as considering its present state. In this case, the F.T.C.s underlying concern revolved around the idea that the evolution of online gaming and virtual reality will be one of the next major advances in the tech industry; given that Microsoft produces the HoloLens, a V.R. headset, the combined companys advantage might suppress competition. Everyones in a race to control this market, and I think network effects are going to be really important here, Rebecca Haw Allensworth, a law professor at Vanderbilt University who specializes in antitrust issues, told me. Being a first mover, being a dominant player, is extremely valuable. So, its a really big deal from that perspective. All the things that Professor Kahn was writing about before she became the F.T.C. chair are going to be front and center.

Microsofts rationale for purchasing Activision is that integrating a game studio into its business will make it easier for the company to develop new products and cut costs, leading to lower costs for consumers. The companies have also vigorously defended themselves against the F.T.C.s charge that they would limit the availability of what are currently Activisions products from players using consoles produced by other companies. As part of Microsofts campaign to gain approval for the merger in other jurisdictions around the world, it promised to sign an agreement with Sonywhich produces the PlayStation and is one of Microsofts chief competitors in the gaming industryto keep Call of Duty available on the PlayStation for ten years. Microsoft has already indicated that several games produced by another company it recently acquired, ZeniMax, will only be available on Microsofts own hardware. Still, the F.T.C. has faced a steep challenge trying to prove the risk that Microsoft might eventually restrict Activisions products from other companies machines. As a former agency official told me, Usually, because companies make money by selling more, not less, you have to do some complicated math modelling to see why they would withhold their games. The official noted that the most similar recent case, wherein the Justice Department challenged the merger of A.T. & T. and Time Warner, in 2019, on the ground that the combined firm could limit access to its content, also resulted in the governments loss. Vertical-integration cases, of the sort that Khans F.T.C. has indicated it will continue to pursue, are particularly difficult to win, the official noted, because the theory of harm requires some pretty complex math about the future, and because you have to weigh any harm against the benefits of integration.

Khan, who was appointed to the F.T.C. by President Biden, was sworn in as its Commissioner in June, 2021. She was the youngest Commissioner on record at the time and had relatively little experience inside the political bubble. Partly for that reason, she came into the office as the object of high hopes, both within the organization and among critics and activists who were concerned by the tech industrys growing power. In 2017, when she was still a law student at Yale, Khan established a reputation after publishing a paper called Amazons Antitrust Paradox, which argued that although Amazon offers the apparent benefit of low prices to consumers, it ultimately harms them by crushing smaller businesses that cannot afford to compete, reducing choice over time and doing damage to the wider economy. Although seeming obvious in retrospect, the article identified many aspects of the tech industry that have since come to be widely seen as negative, and presented a view of how antitrust enforcement should work that has gained traction across the field. A lot of people say, Its incredible that that paper was written by a student, but, from another perspective, it could only have been written by a student, Allensworth said. She was an outsider. There is a more commonsense way of thinking about markets and competition, and, in fact, its the way the companies themselves think about markets and competition.

But applying these principles to the real world, in a partisan political environment shaped by entrenched corporate influence, has proved difficult. Khans setbacks at the F.T.C. have been significant and high-profile, while the advances have been more subtle. One of the F.T.C.s most notable moves under its new chair was to refile a case against Meta which argued that the company had monopolized the social-media market, and which had been dismissed in 2021 owing to lack of evidence. Last January, a judge permitted the refiled casewhich featured a significant amount of new material and argued that Facebook, WhatsApp, and Instagram should be broken upto proceed. The ruling noted that, while winning at trial might still be a tall task for the F.T.C., the agency had now presented enough facts to plausibly establish that Facebook holds monopoly power in personal social networking, and that its acquisitions of Instagram and WhatsApp may have constituted anti-competitive conduct. (The case is pending.)

Last July, the F.T.C. went after Meta again, filing a lawsuit to block the company from acquiring a Los Angeles-based virtual-reality startup called Within Unlimited, which is known primarily for the V.R. fitness app Supernatural. In this case, the F.T.C. presented a similar theory to one underlying its attempt to prevent the Microsoft-Activision merger: that Meta was trying to buy a competitor in a market where it was currently a minor player but could easily become the dominant one in the future, reducing competition for fitness-related virtual-reality products. Following a trial in federal court, a judge rejected the F.T.C.s arguments, leading the F.T.C. to withdraw the case. Meta completed the takeover.

This loss loomed over the Microsoft-Activision challenge. In late June, both sides presented evidence at a five-day-long hearing in San Francisco in order to obtain a ruling before July 18th, after which the acquisition agreement could have been terminated by either party. During the hearing, Microsofts C.E.O., Satya Nadella, said that the company would have no financial incentive to block other console makers from access to Call of Duty, while the head of Microsofts gaming division reportedly raised his hand and pretended to take an oath: My testimony is: we will continue to ship future versions of Call of Duty on Sonys PlayStation. The judge hearing the case, Jacqueline Scott Corley, seems to have accepted these promises as genuine, noting, in her decision, that Microsoft had committed to making the game available on rival platforms, such as Sony and Steam. The F.T.C. appealed the ruling but quickly lost.

Allensworth noted that, while Khans commitment to pursuing big cases despite unencouraging odds had benefits, there were also risks, such as alienating the F.T.C. staff, who, according to staff surveys cited during the congressional hearing, have been suffering from low morale. Unfavorable court decisions also create precedents that could increase the legal burden for the next cases to come along. On the other hand, something had to be done. Professor Khan could have come in, been milquetoast, and done it the same way weve done it for forty years, Allensworth said. I think shes right. You cant be afraid of bringing the hard cases. I think its too early to say whether its working.

An earlier version of this article misstated the status of Microsofts agreement with Sony.

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A Setback in the F.T.C.'s Fight Against Big Tech - The New Yorker