July 18, 2024
1 Solar System Way, Planet Earth, USA

FTC Chair Lina Khan on Startups, Scaling, and “Innovations in Potential Law Breaking”

FTC Chairwoman Lina Khan was the youngest person appointed to her position when she took office in 2021. But once her term ends in September (after which she will remain until a successor is named), her age It could be the last thing people remember. about her reign.

Khan's legacy is more likely to take on Big Tech and do so in a very public way. Unlike his decidedly low-flying predecessors, Khan routinely speaks to the media about how the FTC executes its mandate to enforce antitrust laws and protect consumers, putting today's tech giants on constant alert.

The strategy is even more remarkable given how small the FTC really is, with just 1,300 employees working approximately 150 cases simultaneously and supported by an annual budget of just $400 million. That's a drop in the ocean for some of the groups the agency investigates.

We spoke to Khan about her approach (and what she thinks Silicon Valley misunderstands about it) in a Sit down Earlier this week at one of TechCrunch's most intimate StrictlyVC events, this one held in Washington, DC, outtakes from that conversation have been heavily edited below. You can listen to the full talk. here.

Over the past two decades, Washington has become dominated by massive players like Google and Microsoft. I was hoping we could start with the Wall Street Journal report. report that federal regulators are moving forward with an investigation of some of these big players (Microsoft, OpenAI and Nvidia) if there is anything I can say about their plans.

You're right that there is a lot of interest across DC and making sure that we can take advantage of the opportunity and the potential that these tools present while also making sure that these markets remain open, fair and competitive, rather than allowing certain types of bottlenecks or choke points arise that can undermine that competition, that opportunity and that innovation. . . I was in Silicon Valley a few months ago and it was really interesting to hear those founders in particular say how right now there's a lot of opacity around who has access to some of these key inputs, whether it's IT, whether it's in the models, whether it's any guarantee that proprietary information is not being fed back. So I think there's a lot of enthusiasm, but we're also hearing some fatigue that can come when you realize that there's already a lot of concentrated power, and that concentrated power could preclude innovation and competition.

It also appears that some of the people it's trying to regulate are getting more creative about the deals they're striking, such as Microsoft's deal with Inflection AI, an artificial intelligence company whose co-founder and employees were hired by Microsoft in March. . and Microsoft is now paying him a $650 million licensing fee to be able to resell the (InflectionAI) technology. It's not technically a fusion. Did you talk to your agency or other regulators about what you were doing?

I am limited in what I can say about some of these specific agreements or specific potential matters. I will say that we are interested in being vigilant to make sure that there are no evasions of existing laws. We have been very clear that all existing laws still apply: laws prohibiting mergers that can substantially reduce competition, laws prohibiting price fixing and collusion. Whether you're setting the price through an algorithm or through a handshake, both are still illegal. So across the board, we're trying to analyze and make sure that we don't see some of these innovations in potential violations of the law. We want to make sure everyone plays by the same rules.

I will say that earlier this year we also launched an investigation into some of these strategic partnerships and investments to make sure that we understood what was really happening here. We had heard some concerns about, for example, whether some of these partnerships and investments could result in privileged access for some or exclusionary access for others. . and that work also continues.

Apple also made a lot of announcements (this week at WWDC). It said it is integrating OpenAI into some of its offerings; He said he is also open to working with other third parties, potentially including Google Gemini. It seems like a lot of the partnerships are between the players themselves, which is probably worrying you a little right now. What did you think of what came out of that event?

We've seen that some of the most important innovations historically come from startups, entrepreneurs and small guys who are able to see things differently, see an opening in the market and really disrupt in ways that disintermediate the big guys. guy . . .

It's true that right now what we might be saying is that some of the existing incumbents may be controlling access to the inputs and raw materials that are needed for some of these innovations. Therefore, we must be vigilant to ensure that this moment of competition, innovation and disruption is not co-opted by the current incumbents in a way that closes the market and prevents us from truly enjoying the innovations and competition. that have historically kept our country at the forefront. . .

I know you don't buy the argument that these companies need to be protected (from antitrust measures) because if you stop them in any way, you weaken the United States as a country. And, on the one hand, many people agree; They want to see things divided so that new companies can breathe. Others might say, “This technology is advancing much faster than anything we've seen before.” Autonomous weapons can incorporate this technology.' How do you make the arguments for dividing things without putting the country at any risk?

Even 40 or 50 years ago, when the Department of Justice was investigating AT&T, it was the Department of Defense that stepped in and said, “Hey, we really need to tread carefully because taking antitrust action against AT&T could pose a national security risk.” . And so, even back then, we heard a lot of these analogous arguments.

There are some natural experiments. At various times, we were faced with the choice of whether we should protect and coddle our monopolies or, instead, whether we should protect the laws of fair competition. And time and time again we choose the path of competition. And that is what ended up driving and catalyzing so many of these revolutionary innovations and much of the remarkable growth that our country has enjoyed and that has allowed us to remain at the forefront globally. If you look at other countries that chose that model of national champions, they are the ones that were left behind. I think we should keep those lessons of history in mind when choosing a path again.

There are founders and venture capitalists in this audience who have mixed feelings about you because they want their companies to thrive and are worried that you've expressed interest in big tech so much that companies aren't making any (acquisitions). ). Exits are a huge path for venture capitalists and founders; How can you make them feel comfortable knowing that you are doing what is best for them in both the short and long term?

Certainly, we understand that for some startups and founders that acquisition is a key exit route that interests them. Really, what the law prohibits is an exit or an acquisition that strengthens a monopoly or allows a dominant company to take out an incipient threat and a competitive threat. . . Just to take a step back, in any given year, we see up to 3,000 merger filings reported to us. About 2% of them receive a second review by the government, so 98% of all deals, for the most part, are in place.

I will also say that if you are a startup or a founder who is eager for an acquisition as an exit, I would think that a world where you have six, seven or eight potential suitors is a better world than one where you have only one or two.

Are there 1,500 people at the FTC?

Around 1,300, which is actually 400 fewer people than in the 1980s, despite the fact that the economy has grown 15 times more. . We're a small agency, but we definitely punch above our weight.

I don't know if you're taking more action than your predecessors or if you're just more visible about it. Do you know if you are moving at a faster pace than your predecessors in office?

You can look at the numbers and there are some increases there. But in my opinion, counting the number of lawsuits or the number of investigations is just one way of trying to capture the impact. The types of cases you present are also important. One thing that's been important to me is making sure that we're really looking at: where do we see the most damage? Where do we see actors that we think are more systematically causing some of these problems in illegal behavior? So, just as being able to go after the mob boss will be more effective than going after some of the henchmen below, you need to be effective in your law enforcement strategy. That's why we've been looking up and taking on lawsuits that can really take on some of the big boys; We believe that if we are successful, it will have a really beneficial effect on the market.

As far as deterrence goes, I think we're already seeing some of that. We routinely hear from high-level negotiators, high-level antitrust lawyers, who say quite openly that five, six, seven years ago, when a potential deal was being thought about, antitrust risk or even antitrust analysis was nowhere near the top. of the list. conversation, and now it's front and center. For a law enforcer, if companies think about that legal issue from the beginning, that's a really good thing because then we won't have to spend as many public resources on deals that we think violate the laws. .

To expand your relatively small office, which has a fairly limited budget, are you using AI?

We're thinking about: Are there ways, especially with some of our economic analyses, that we can benefit from some of these tools? Obviously, being able to do that requires some pretty significant IT upgrades, which we're asking Congress for more funding to be able to (secure them).

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