President Biden has appointed high profile antitrust activists to top positions at the Federal Trade Commission, Department of Justice and the White House. How do their views of market fairness fit into the U.S. history of antitrust? And will they be able to successfully reduce the power of today's tech behemoths? (June 20, 2022)
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For institutional investors only. TD Global Investment Solutions represents TD Asset Management Inc. ("TDAM") and Epoch Investment Partners, Inc. ("TD Epoch"). TDAM and TD Epoch are affiliates and wholly owned subsidiaries of The Toronto-Dominion Bank. ®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries. The information contained herein is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information is distributed with the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein as well as any risks associated with such proposal or services. Nothing in this presentation constitutes legal, tax, or accounting advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Certain information provided herein is based on third-party sources, and although believed to be accurate, has not been independently verified. Except as otherwise specified herein, TD Epoch is the source of all information contained in this document. TD Epoch assumes no liability for errors and omissions in the information contained herein. TD Epoch believes the information contained herein is accurate as of the date produce...
President Biden has appointed high profile antitrust activists to top positions at the Federal Trade Commission, Department of Justice and the White House. How do their views of market fairness fit into the U.S. history of antitrust? And will they be able to successfully reduce the power of today's tech behemoths? (June 20, 2022)
Important Disclosures:
For institutional investors only. TD Global Investment Solutions represents TD Asset Management Inc. ("TDAM") and Epoch Investment Partners, Inc. ("TD Epoch"). TDAM and TD Epoch are affiliates and wholly owned subsidiaries of The Toronto-Dominion Bank. ®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries. The information contained herein is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information is distributed with the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein as well as any risks associated with such proposal or services. Nothing in this presentation constitutes legal, tax, or accounting advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Certain information provided herein is based on third-party sources, and although believed to be accurate, has not been independently verified. Except as otherwise specified herein, TD Epoch is the source of all information contained in this document. TD Epoch assumes no liability for errors and omissions in the information contained herein. TD Epoch believes the information contained herein is accurate as of the date produce...
Speaker 1:
Hello, and welcome to Actively Speaking. I'm your host, Steve Bleiberg. Join us each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.
Speaker 2:
Welcome to another episode of Actively Speaking, and , uh, today we're gonna talk about antitrust. Now that may seem like a , a dry topic, but , uh, I really think it's not, if you frame it , uh, in , in terms that we're gonna be talking about today, which is antitrust really is all about what is fair competition in the marketplace, and , uh, how do you define it? How do you measure it? And different people have had different opinions about that , uh, over the years. And right now, we're at an interesting point in time because we have , uh, in the last year or so, a a new chairman of the Federal Trade Commission, which is one of the two government bodies that gets involved in antitrust. The other one being, of course, the Department of Justice. Uh, and there's also now a majority just in the last few weeks , uh, with the swearing in of a new, there , there are five commissioners on the FTC. So now we have a, a democratic majority of three to two. Uh , so it seems like a , a good time to talk about what's potential changes we might be seeing coming down the road in antitrust enforcement. And to do that, I'm joined once again by Kevin Hebner, Epic's Global Strategist. So thanks for coming on again, Kevin.
Speaker 3:
Oh, thank you, Steve.
Speaker 2:
So why don't we start off , uh, give me a little historical background on sort of how people have traditionally thought about this question of what is fair competition? That , that that's, I think everybody agrees, you know, if you polled on this question, you get a lot of people saying, sure, I, I want the markets to be fair. But , uh, it's not as simple as it sounds, defining what fair means. And, you know , is it, is it all about price? Is it, are there other things that even if the price is falling, can , can a , can a merger still be a bad thing for consumers if we use other metrics? So how did , uh, you know, when , when antitrust first came along the United States, which is over a hundred years ago, what did people think? And then take us, you know , briefly through how that has evolved over time.
Speaker 3:
Yes . The , the notion of fairness in markets, you know, this goes back a , an awful long time , um, in , uh, Athenian Greece. So a couple millennia ago , um, the market was called , uh, an Agora, and there was a , a pithy saying at the , at that time that , uh, the definition of Agora was a place marked off for the purpose of cheating. And so people were well aware , aware that there were , um, incentives to behave badly. And this is also key to the thinking of Adam Smith. And it's a , a key part of the walls of nations , uh, which has really been the consensus among economics, the key points that Adam Smith highlighted, that business, people normally will try to, it's left on their own , will try to form monopolies that seems, you know , just , um, their incentives and the policy needs to protect the consumer and protect the consumer rather than protect the incumbent businesses. Um, and that if you have , uh, a pro market pro competition, it encourages innovation. It's not necessarily pro big business, pro incumbent business , uh, but ultimately that is what's better for the nation that Adam Smith is focusing. Um, and certainly for, for the consumer. And it was , it was very innovative the time when Adam Smith wrote it , uh, 1776, so , you know , roughly 250 years ago. But, but actually that, that does remain the , the root of the way economists still think about it. Now, this came to the fore , um, in the US say, you know, just over a hundred years ago. And at that time, we had the big trusts, the big business conglomerates , um, dominating industries , uh, like steel oil railways. The most famous trust is probably Standard Oil, which had 90% of the market. And, and , um, certainly the way they managed to get 90% of the market, it was an efficient company. Oil prices were going down, but extremely aggressive behavior. Uh, and, and I think, and under any definition , um, behavior that , uh, a pro market , pro innovation , uh, government would not want to be encouraged. And so with that , we had two big pieces of , of legislation around that time. And , and the big test case was Standard Oil. And that, that case was 1911, just around the time that , um, the Model ts were rolling off the assembly lines, and we were entering the, the age of the auto.
Speaker 2:
And , and so , uh, I think that's, you already , um, mentioned now one of the issues that comes up apart from just price and that's innovation. And so that already, I think has sort of a long history as being a relevant metric for judging, you know, fair competition. Um, talk about that, about how innovation has been seen as a , a basis for antitrust enforcement, particularly in recent years with things like, you know, Microsoft.
Speaker 3:
Yeah. So even with the big case with Standard Oil. Yeah . At that time, you know, when the case was brought , uh, 1911, the key product wasn't the sort of oil we get at gas stations. Now, it was kerosene, and this did change a lot with the age of the auto. Um, but at that time, you had standard oil, 90% of the market, they had no interest in spending on innovation. They had the market wrapped up, they didn't have to do it. But once Standard Oil was broken up into lots of different pieces, then the individual companies did have , uh, lots of incentives to compete and innovate. And , and with that, we did get , uh, thermal cracking, which was a , a much superior , um, product for automobiles from auto Ts relative to kerosene. And then later on you got catalytic cracking and so on. So even back then, with a product you could think is as boring as , um, oil , uh, innovation was, was very important. Then as antitrust evolved through cases like , uh, DuPont at t up to Microsoft , uh, innovation was important, but you'd give a company that had one product that was very good, it gained a lot of market share, but then it ended entered into a lot of anti-competitive behavior, exclusionary deals , uh, acquisitions, whose intention was to stifle competition , um, to cement and extend , um, their market dominance. And as that's, you know , that's certainly , that describes a lot of what Standard Oil did, but also through DuPont at t Microsoft and then modern day , um, with the, the big tech companies, which are the focus is on now , uh, whether it's Google, Facebook, apple, or Amazon. Um, these features continue to be at , at the core of the discussion.
Speaker 2:
Okay. So, so clearly price and innovation are two ways we have historically measured the impact of, of, you know, mergers , uh, and antitrust enforcement. Uh , now let's, let's bring in , uh, Louis Brandeis, the Supreme Court Justice in the first part of the 20th century, because his name's gonna become important as we bring the discussion up to the present day. Uh, he had a view, if I'm, if I'm remembering this correctly, or from what you've told me , uh, about the sort of evils of bigness, just per se, you know, on , on, on its own, that, that , um, you know, bigness was gonna have negative consequences, not just on consumers directly in terms of price renovation, but just , uh, on, in terms of the , um, our democratic society that he thought it was, it was bad for that. Um , tell me about that.
Speaker 3:
Yeah , so he, he's extremely important, I , I think broadly as a justice, but certainly in his role in antitrust. He was appointed the Supreme Court in 1916. So just as World War I was getting going. And, and I think it's important to remember, you know, the time period, you know, when , when he was studying law and acting as a judge and , um, became , you know, was appointed to the Supreme Court , uh, at that time he did have the big trusts, and they're engaged in lots of anti-competitive behavior , uh, anti-innovation. Um, you also had, the labor movement was starting to grow , um, the Soviet Union was formed. People were concerned about communism , uh, and you , and you had even more extreme wealth inequality than you do now, at that time, say the top 10% of Americans own 90% of wealth, the , the current number is about 70%. So we , we've improved a lot since that day. So he , in his view, monopolies were inherently harmful to consumers, to innovation, but he also thought they were harmful to workers. And so he was concerned about the impact of the big trust, the big monopolies on, on wages , um, and the labor share , uh, relative the profit share of the economy. Um, and so that's something which was important to him. Uh, and it was important, I think, in terms of how antitrust , um, cases were brought forward really until the , um, the sixties and , and maybe early seventies when the Chicago school that became dominant.
Speaker 2:
Okay . And what was, tell me about their , uh, way of thinking about antitrust
Speaker 3:
And , and so yeah , in many ways this reflects, you know, there was a perception , um, in the United States, in the UK and other places that there, you know, there had been government overreach in , in many areas leading up to the, the sixties and seventies. And, and President Reagan had, you know, his , um, famous nine most dangerous words in the English language , um, from the government. I'm here to help you . So there's perception by, and this is then focused on the Chicago school , um, so University of Chicago , uh, which now actually has a very different view on antitrust, but their view at that time was when the government gets involved, pretty much government gets involved in anything. So not specifically about , uh, antitrust, but it would've been monetary policy, fiscal policy , uh, regulation, any area of the economy , uh, that they do more harm than good. And so what they did is they defined , um, the harms from antitrust very, very narrowly, that is a mergers only deemed anti-competitive when it raises the prices of goods above a competitive level. I , I've really no idea how you'd ever have a merger that would be deemed to be, to violate , um, the antitrust statutes given a really narrow definition like that. But that was part of their agenda. And with that , um, they gutted the FTC and the DOJ , their staffs went down by about 50%, but they really wanted to have a , a much less active government and certainly much less active , uh, antitrust actions either from , um, the DOJ or for , for the FTC going forward. And, and ultimately they thought markets work best when they're unshackled. If you do get a company that gets too big, markets are gonna work it out, new incumbents will come in, they're challenge them , they're innovate, and then the monopolists will lose their power. And overall government regulations, government involvement, they just make things worse. So that was their review . And so in the decades after that , um, in the seventies, eighties and into the nineties , uh, we saw very few antitrust cases filed , um, either by the DOJ or the FTC. And really the , the need or the low point in that was from , uh, around when Reagan was, you know , first became president, 81 until the, the early nineties. Um, so very few cases, very little antitrust. And , and what we have seen as a consequence of that is in many sectors of the US economy, we have seen big increases in , um, sector concentration. This partly reflects, you know, this view on antitrust also reflects the nature of the increasingly digital economy and the economies of scale and network effects that go along with that. Um, but with that, this increasingly concentrated economy, and , and this is going on in many different sectors , um, um, you know, in the US and , and other places as well. But with that, you know, you do get , uh, higher prices, less innovation , um, less competition, and ultimately not in the best interest of consumers, which going back to Adam Smith should be the, the key focal point for this type of policy.
Speaker 2:
Well, I mean, and did globalization play some role in that too? You know, in the past it was, if you were a large company in the US the idea was you were competing against other possibly large companies in the us . And so if you combined that , that that was potentially anti-competitive, but if, if in fact, now you are competing against large companies in Europe and in Asia, that uh , maybe it's not so bad if the, you know, if two large US companies tie up to enable them to compete better against foreign companies, was that, was that part of what was going on?
Speaker 3:
I , I think it's part, but I think some of this is , is a bit too clever, and this is something that tech companies are , are trying to use now. 'cause there , there are a number of pieces of the legislation, several of which have cleared committee and could go to the Senate of Florida at any time . And they're trying to say, well, you know, if, if you , um, put antitrust shackles on us, then what you're really doing is you're helping the Chinese and you're really hurting American, American companies. Um, and , and I think that's the , it's really hard to think you , which Chinese company is directly competing with Apple or Google or , uh, Amazon, Facebook maybe with TikTok . But it strikes me, and it certainly right now, they're being very active in , in lobbying, lobbying senators directly , um, and other types of policy makers to make sure these two pieces of legislation, the ones that are most likely to go forward , don't. So I think there is a bit of globalization in there in terms of , um, the nature of concentration. But I think the , um, protestations of , uh, big tech, I , I think it's, it's a little bit too clever. Uh, and I think they're trying to use patriotism , uh, as a lever here where it , it strikes it , it's not a really strong argument. It may be that in semiconductors, for example, with Intel, maybe you can make the argument because clearly semiconductors , um, are key to national security. It's not as clear to me that, you know, Google search engine or the Amazon marketplace is as key to national security.
Speaker 2:
Right. Okay. So we've gone through a period really, I mean, you know , you mentioned the , the peak of it kind of was in the eighties and early nineties, but you know, even in the last 15, 20 years there, there really has not been a lot of antitrust , uh, cases brought, or or too many, you know, the number of mergers that have been blocked is extremely low, if, if not zero in some areas. And so we have had much greater concentration within industries, but now it seems like, you know, perhaps that's gonna change. We've got at least people in government now who do wanna change that. So , uh, talk a bit about the, the new or, or whatever, middle of last year, I guess about a year ago now, new head of the FTC and this whole school of quote , Neo Brandis and antitrust thought, what is that all about?
Speaker 3:
Yeah , so I think, you know, over, you know, say the last 25 years, you know, the , the big four tech companies collectively, they purchased more than 550 companies. This starting approach 600 companies. Um, the antitrust agencies, the FT C and the DOJ , uh, they haven't blocked a single acquisition <laugh> . I think that's raised a lot of eyebrows and gotten a lot of attention, and certainly the, the mistrust of tech , um, partially because of issues, for example, with Twitter and the, the role that Twitter has played , um, in, in the political arena, you know, some forms of censorship and , and sometimes promoting disinformation through covid and things. So there's a lot of concern, suspicion , distressed of tech. And so with that , you know , the , the winds have changed and, and some of the high profile neo brandand , uh, have been appointed to a very important position. Um, Lena Kahn , she's now the FTC chair, and it's interesting, her appointment. So with FTC, you know , there's , there's five commissioners, they get nominated by the president, but they , they're confirmed by the Senate. And so she had , um, you know , a pretty strong majority of senators supporting her. And partly that is because PE people are, are pretty , pretty big fans of the academic work that she's done specifically play . Um, criticizing Amazon , um, in the White House, there's Tim Wu , who's maybe the preeminent, a neo brandand , he's written some excellent books, one's called The Curse of Bigness , um, you know , taking off from a phrase that Louis Brandeis used a lot, so he's in the White House heading up competition policy. And then at the DOJ , um, Jonathan Kaner , you know, he's now assistant , uh, attorney general in charge of the antitrust division , um, at the DO OJ . And he, he's a prominent , um, tech credit . So now they've come into pretty important and to , to large extent, they're , they're pushing forward a pretty traditional view of antitrust, something that Adam Smith and the vast majority of the commerce would feel comfortable with. But sometimes they bring up, you know, one issue, well, I guess really two issues that are , are pushing the edge on, you know , what is a , a conventional view , uh, one is, and this this falls on from Louis Brandeis, is that sometimes they think that certain mergers could lead to lower wages, increased income inequality, and that's something they should take into account. Um, very few economists would support that view, but that's something which , um, the FTC charity incon has , has mentioned explicitly. Um, the second thing they've been talking about is privacy, that sometimes with privacy , uh, we get excessive aggregation of data, a reduction in privacy protections, and this is something which should , should be taken in account. Um, so I think the first one, I don't think there's very much support for it. There's nothing in the legislation really, which will allow them to go in that direction. The second point about privacy is more interesting, and , and you mentioned that last month we had , um, the third Democratic , uh, FCC commissioner appointed , uh, he's a privacy specialist. He , he is been a Georgetown Law , um, RA Lia . And so he is very much focused on corporate civilians , accumulation of data , um, different types of privacy issues. And one of the pieces of legislation going, you know , like that could go to the floor , it's outta senate. In fact, it got through Senate with a vote of 20 to two. So it has pretty strong support, but , um, it's not clear if that will go forward. But I think, you know , in the years, maybe the terms going forward, we will be hearing more about privacy, but a world in which judges are inherently conservative, but precedent driven , um, I think it's unlikely that these two sort of novel antitrust theories either focused on lower wages, income equality , or on privacy are , are gonna be major factors in , uh, antitrust decisions, at least for the next few years.
Speaker 2:
Well, even if, if judges, if they can't persuade judges to go along because of lack of precedent , um, I assume there's, there's likely to be, you know, sort of a chilling effect that , uh, some mergers that we might have seen take place in an, in an environment where companies knew that the people at the helm of the FTC or the DOJ antitrust division were, were not likely to challenge them . Uh, now they know that it , you know, they might be challenged even if they might prevail in the end . Do , do you think that will have a kind of chilling effect on, on m and a activity?
Speaker 3:
Yeah , so in, in antitrust circles, this is called the, the placement at the elbow theory of antitrust enforcement. So the , the fact you have a law enforcement officer, you know, right , you know , by your side, you know, looking over what you're doing. And , and certainly with even previous cases that were unsuccessful, for example, the suits against IBM or Microsoft, it's purely clear that they have a , a dramatic effect on behavior. And it's a , it's a bit like if you're going down the highway and everyone's going 10 miles over the limit, and then someone sees a , a , a police car on the side of the road, people slow down to a couple miles below the speed limit, even , even if the police car is just sitting there and isn't going down in , in chasing anybody. So this placement at the album theory , uh, I think it's probably pretty important because, you know, certainly for big tech firms, they all know they're under the microscope and, and they have to be careful. Certainly a lot of the , uh, acquisitions over the last 25 years , uh, and the current environment definitely would not be approved. Um , and that would, that would include , uh, Facebook's acquisitions of , uh, Instagram, you know, probably the, the most high profitable , but also what's happened so forth . Um, so yes, I , I do think that , uh, at least the , the tech part of antitrust enforcement , um, just the fact that we do have a lot more discussion that this is high profile , uh, in the White House and , um, you know, in the enforcement agency , the F to C and DOJI , I do think we're see fewer acquisitions that could be challenged.
Speaker 2:
Okay. Well, thanks very much, Kevin. This has been a , a really interesting discussion. I know people , uh, they, when, when antitrust comes up in discussions, people I think do tend to think of it mostly in this sort of partisan lens of , uh, you know, like, Democrats are against this or the Republicans are against that. But I , I think it really is much more useful to think about it in, in the term terms we've been talking about, which is how do you define fair competition? And , uh, you know, reasonable people can disagree on that, you know , what are the right metrics? Is it price? Is it innovation? Is it , uh, you know, income inequalities? You know, you can make a case for any of these things being perfectly plausible metrics for , uh, for antitrust enforcement. So , uh, it'd be interesting to see what happens in the, in the next couple of years. So thanks very much, Kevin for joining me.
Speaker 3:
Oh, thanks very much Dave .
Speaker 2:
And , uh, we'll be back with another episode soon. Thanks very much.
Speaker 1:
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Speaker 4:
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