Key Takeaways
- Unprecedented jumps in the scale of consolidated corporate power have prompted the FTC to inquire if anticompetitive practices are behind the shift.
- Tech giants are central to fueling the digital economy, but their outsized and growing role raises regulatory, ethical and social challenges.
- FTC lawsuits set legal precedents that influence entire sectors, with future decisions determining everything from pricing and innovation to privacy and access.
The Federal Trade Commission's (FTC) purpose is simple: to protect consumers from anticompetitive and deceptive business practices. However, how the FTC tackles this has evolved dramatically in its century-long history, aligning its policies to reflect changes in technology, consumer behavior and presidential administrations. A docket of monumental antitrust cases demonstrates the FTC's ability to reshape industries, but more recent actions by the agency mark a new era of antitrust sentiment. Growing oversight on corporate power and monopolies would have massive, cascading effects, changing how consumers interact with everything from social media to grocery shopping.
Criticism of consolidated corporate power is far from new. Massive growth on national and global levels has brought forth a moment of reckoning for modern business and now leaders must ask themselves: how big is too big?
Data reveals that, over time, the US's biggest companies have only gotten bigger. A 2022 report from S&P Global shows the number of industries where the top five companies have a 100.0% market capitalization nearly doubled from 12 in 2000 to 22 in 2022, indicating a growing trend of complete market control by a small number of dominant companies in specific sectors. This expansion is particularly evident in sectors like communication services, where the market share of the top five companies jumped from 39.7% in 2000 to 68.3% in 2022; the top companies' share in consumer discretionary also spiked, 34.3% to 54.0% in the same period.
As a few companies gain overwhelming control over specific industries, concerns about monopolistic practices have mounted. The FTC's evolving approach to tackling monopolistic practices will have ripple effects throughout the economy. The agency's ongoing efforts to rein in consolidated corporate power reflect an unprecedented urgency to ensure fair competition, protect consumer privacy and maintain a dynamic marketplace. Exploring the impact of antitrust efforts across various sectors is crucial in understanding the broader implications for consumers and the economy.
Antitrust in technology
Today's tech sector is a complex ecosystem, ranging from biotechnology to software and artificial intelligence (AI). The tech sector is also where a handful of dominant companies exert extensive influence over the economy, consumer privacy and competition. This dynamic looks and operates entirely differently from just two decades prior, when the industry was more fragmented and competitive. When the tech sector became a major economic driver in the 1990s, smaller companies were vying for market share. Apple, Microsoft and Google were not the dominant market forces they are today. The shift to the current landscape has been driven by rapid tech advances, strategic mergers and acquisitions and the powerful network effects of platform-based business models, propelling a few to massive scale and dominance.
Natural monopolies are a common phenomenon within the tech sector, resulting from the need for massive capital investments, network effects and economies of scale. Rapid advances in AI has strengthened these monopolistic tendencies, allowing a few tech leaders to leverage their vast resources and data pools to maintain an unassailable lead. While the FTC has historically sought to strike a balance between preventing the abuse of monopoly power and fostering economic growth, the current pace of innovation has made this more challenging.
A clear sign of FTC's expanding oversight is its landmark ruling against Google in August 2024. Arguments against the search engine giant purported that the company illegally maintained its monopoly by paying companies to automatically direct users to Google, weakening competition. In the aftermath, Google's stocks have tumbled and the company faces being split into pieces by the Justice Department.
Tech giants are paying close attention to these outcomes. These rulings set precedents with huge ramifications. The FTC's historic 1996 ruling against Microsoft, for example, reshaped the company's future strategies and sent a clear message to other tech firms about the consequences of anticompetitive behavior. Tech companies today are keenly aware that similar regulatory actions would significantly impact their operations and market dominance.
OpenAI/Microsoft/Nvidia
Microsoft finds itself in the FTC's crosshairs again in 2024. The Federal Trade Commission is scrutinizing Microsoft's role in OpenAI, focusing on whether and how anticompetitive practices shaped their top positions in the artificial intelligence industry. The company invested billions into the AI innovator, with Microsoft holding a 49.0% stake in OpenAI in 2024. Scrutiny surrounds whether or to what extent one of the world's largest tech companies should engage with a pioneering AI firm.
Other companies haven't been shy about investing in OpenAI and other innovative AI firms, but the close relationship between OpenAI and Microsoft brings the most attention. For instance, Microsoft supplies OpenAI with the computing resources that fuel its ChatGPT system; Microsoft's Bing and Microsoft 365 are fully integrated with OpenAI's technology.
Artificial intelligence systems, like those run by OpenAI and Microsoft, can't operate without specialized semiconductors. Nvidia, a global leader in chip production, supplies nearly 80.0% of the chips used in AI applications. After the AI frenzy of 2022, demand for Nvidia chips climbed, tripling sales and pushing the manufacturer to be one of the most valuable companies in the S&P 500.
The explosion of artificial intelligence in the tech sector has prompted the FTC to inquire about launching antitrust probes into the roles of Microsoft, OpenAI and Nvidia. The purpose of the FTC inquiries would be to determine whether Microsoft and OpenAI engaged in anticompetitive practices and whether these behaviors suppress innovation and stifle competition.
The outcomes of antitrust inquiries and potential lawsuits will shape the future trajectory of AI and how it is integrated into daily life. The FTC's actions will regulate current practices and determine precedents defining the landscape of tech innovation, competition and consumer rights.
Antitrust in pharmaceuticals
Pharmacy benefit managers (PBMs) are the behind-the-scenes middlemen connecting pharmaceutical manufacturers with patients. While PBMs are only one part of the complex, global pharmaceutical supply chain, their ability to influence access and determine drug pricing has attracted intense public response and growing FTC scrutiny.
Vertical integration underscores PBMs' undue influence over drug pricing, as their control over multiple stages of the supply chain, ranging from negotiating with manufacturers to managing pharmacy networks, enables them to set prices with minimal competition. This combination of control and influence has increasingly caught the attention of the FTC, concerned about the potential for anticompetitive practices and harmful impacts on patients.
While vertical integration isn't foreign to pharmaceuticals, its scale and scope have left the industry's structure unrecognizable today from just five years ago. Before 2019, two independent PBMs managed around half of the prescription claims in the US – an outcome of horizontal integration over several decades. In late 2018, Cigna's purchase of Express Scripts, the largest PBM and CVS's buy of Aetna marked a change in the industry, where PBMs and health insurers are tightly woven. By 2023, the top three PBMs (all are vertically integrated) had processed 80.0% of prescription claims in the US.
These practices are coming under fire by the FTC. A three-year investigation into PBMs culminated in July 2024 when the FTC filed a lawsuit against the country's three leading PBMs (CVS Caremark, Express Scripts and Optum Rx). Antitrust regulators assert that the leading PBMS have engaged in anticompetitive behaviors, ultimately leading to inflated drug prices and reduced consumer choice.
The FTC's lawsuit could be a seismic shift in the pharmaceutical landscape, dismantling the power of PBMs and fostering a competitive environment with fairer drug pricing. If successful, this legal challenge would set a powerful precedent for curbing anticompetitive practices and ignite transformative changes across the health sector. These measures could revolutionize transparency in the pharmaceutical market, ensuring patients receive more affordable medications and have greater control over their health decisions.
Antitrust in grocery stores
In February 2024, the FTC sued to block the largest supermarket merger in history: Kroger Company's $24.6 billion acquisition of the Albertsons Companies. The agency's bid to block the combination of the two supermarket giants is ongoing, with multiple other legal challenges following. The lawsuit is another example of how it demonstrates the FTC's escalating efforts to regulate and oversee significant market consolidations more rigorously.
Kroger contends that the lawsuit is unfair because of the FTC's narrow, outdated definition of the grocery market that excludes competitors like Costco and Amazon. For proponents of the merger, excluding these larger players misrepresents the reality of the modern grocery landscape. These proponents claim that allowing the Kroger-Albertsons merger would enhance competition rather than stifle it.
The trial's outcome could significantly reshape the grocery landscape and set a precedent for the extent of the FTC's regulatory authority. If the merger is blocked, it could discourage future large-scale consolidations in the grocery sector and signal a more aggressive regulatory stance from the FTC, prompting supermarket chains to rethink their merger and acquisition strategies. If approved, the merger could incentivize more market consolidation, potentially leading to greater efficiencies and innovations in the sector. The outcome's influence will also extend beyond grocery stores, ultimately impacting other sectors facing similar consolidation pressures.
Strategies for success
Strategies for M&A professionals
Comprehensive antitrust risk assessment: Before pursuing a merger or acquisition, M&A professionals can conduct a thorough risk assessment to identify potential regulatory concerns. Assessments include evaluating the competitive landscape, market share implications and any areas where the transaction might trigger regulatory scrutiny. Early identification allows for proactive adjustments to deal with structures or strategies.
Engage with regulators early: Establishing early and transparent communication with antitrust regulators can help address potential concerns before they escalate. By presenting the deal's benefits, such as increased efficiency or innovation and providing remedies or concessions, M&A professionals can often mitigate regulatory risks.
Strategies for consulting professionals
Antitrust risk assessment and management: Consulting professionals should assist clients in evaluating their current market position and identifying potential antitrust risks tied to their business practices or planned mergers. This process includes assessing market concentration, pricing strategies and contractual agreements that might attract regulatory scrutiny.
Compliance program development: With the expertise of consulting professionals, clients can develop and implement robust antitrust compliance programs. These programs should empower employees with knowledge of antitrust laws, establish clear and enforceable policies for competitive behavior and include proactive monitoring mechanisms to ensure ongoing compliance. By adopting this approach, businesses can mitigate the risk of litigation and foster a culture of competition.
Strategic advisory on market positioning: Consulting professionals should advise clients on strategically positioning themselves to avoid antitrust scrutiny. Examples of these approaches involve diversifying product offerings, entering new markets or adjusting pricing strategies to demonstrate a competitive versus monopolistic approach. Conducting planning exercises to evaluate potential antitrust actions and develop strategies for various outcomes can help clients adapt their business strategies to minimize disruption and maintain a competitive advantage in response to regulatory challenges.
Final Word
The trajectory of antitrust enforcement appears poised for a period of heightened scrutiny and robust action. The FTC’s aggressive stance on high-profile cases, from tech giants like Google and Microsoft to pharmacy benefit managers and supermarket mergers, signals an era where corporate consolidation and market dominance will be more rigorously scrutinized. The FTC’s vigor reflects broader societal concerns about monopolistic practices, high consumer prices and the centralization of power that stifles innovation.
From a political standpoint, antitrust has emerged as a bipartisan concern, although motivations and methods may differ. Democrats often emphasize the need to protect consumer rights and prevent predatory practices, while Republicans may focus on maintaining competitive markets and fostering entrepreneurial innovation. While bipartisan interest likely ensures sustained regulatory vigilance, a potential shift in the political administration after the November 2024 election could determine the future pace of FTC oversight.
Final thoughts for adapting to this evolving landscape revolve around proactivity and flexibility. Businesses should prioritize comprehensive antitrust risk assessments and cultivate open, cooperative relationships with regulators to navigate complex compliance requirements effectively. Developing robust antitrust compliance programs will be crucial, not only to avoid legal pitfalls but also to maintain competitive integrity. Embracing these strategic shifts can enable businesses to thrive in an increasingly regulated environment, fostering an environment benefiting consumers and rewarding innovation.
