Just a week before Reddit’s initial public offering (IPO) went live in the New York stock exchange, potential investors in the company were thrown a bucket of cold water. The company disclosed that the Federal Trade Commission (FTC) had launched an inquiry on its data licensing practices. As Reddit itself noted in its IPO prospectus, the FTC inquiry introduces uncertainty which might affect present and future business practices. Fortunately for the company, the IPO was a resounding success, despite the FTC’s meddling.
This case shows how FTC Chairwoman Lina Khan’s aggressive approach to her role is largely incompatible with her complaints of excessive concentration and lack of competition in the tech industry. The agency’s trigger-happiness to bring cases forward is paired with frequent court losses. The agency oftentimes argues novel, hypothetical, and untested theories of harm. Despite the agency’s poor track record in court, the inquiries themselves will likely prove a burden for companies looking to compete in the tech industry.
The Meta-Within challenge was a perfect example of this dynamic. The FTC brought forward a novel and unconventional theory of harm in its challenge to the acquisition. They claimed that Within was a “potential future competitor” of Meta and the acquisition would prevent that competitive threat from materializing. While the virtual reality market is still a nascent market, the FTC has already placed significant scrutiny on companies in this industry, mostly guided by Khan’s animosity towards so-called “Big Tech” companies.
In the case of Reddit, the inquiry comes in just as the company strives to make a profit for the first time in 20 years. The data licensing deals in question are the company’s answer to the rise of generative artificial intelligence (AI), as they aim to complement their mostly-ad driven revenue stream with data licensing revenue as well. Despite the company’s struggle to achieve profitability, the FTC did not hesitate to launch an inquiry that could compromise the company’s capacity to close similar deals in the future.
This case is a perfect example of how this aggressive and precautionary approach to regulation can be particularly harmful for up-and-coming companies and novel technologies. In this case, the inquiry stems from the agency’s concern with generative AI. Khan has previously expressed concerns that partnerships between smaller companies and AI companies could lead to unfair competition. However, this approach oftentimes requires disregarding important context and market realities in service of the agency’s agenda.
To make matters worse, the agency’s ideological commitment is also self-defeating in its stated objective. Recent enforcement action has been justified by a desire of the FTC to spur competition and challenge a supposed dominance by so-called Big Tech companies. However, if the agency continues its aggressive enforcement mechanism with hopes of preventing any company from becoming “too big,” it will thwart the potential of smaller businesses to compete with market incumbents. This is especially true for cases against non-dominant firms.
The Amazon-iRobot case showed that the sole threat of investigation and inquiry is enough to deter companies from conducting business. This can have an impact not only with current transactions, but also future ones. If companies can expect that they will face higher regulatory scrutiny in the future, they will think twice before negotiating mergers and acquisitions, or filing for IPOs in the future. The result is that smaller firms will have fewer options to scale up their operations and compete with market incumbents.
Ultimately, this ideological shift has done nothing but leave consumers worse off. If companies have fewer options to seek avenues for profitability, they will likely shut down operations altogether in the near future. The products and services that consumers were once enjoying will cease to exist, and market incumbents will have a lower incentive to innovate.
If the FTC seeks to avoid this scenario and truly bolster competition in the American economy, it should rethink its approach to tech and competition policy at large. Its overly precautionary approach will likely thwart potential market disruptors. The dominant firms of today were scrappy upstarts just a few short years ago. The agency should re-embrace the consumer welfare standard as the premier test for antitrust enforcement, and wait until it has demonstrable, tangible evidence of harm before bringing case forward.
