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A Pyrrhic Victory for Meta Over the FTC?
Meta beat the FTC in a hearing over the Meta-Within merger. The Biden administration attacks junk fees. And the hundred billion dollar bank hustle...
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Today I’ll be writing about the Meta court victory over the Federal Trade Commission in its attempt to buy virtual reality app producer Within. Believe it or not, this outcome might actually be good news.
As rates rise, keep your eyes on the $109 billion bank hustle.
Biden escalates the war on junk fees.
Private equity giant Brookfield gets dinged by the Antitrust Division.
Cheerleading monopolist Varsity settles one of three major lawsuits.
Yesterday, Judge Edward Davila ruled against the Federal Trade Commission in its challenge to Meta’s acquisition of a virtual reality app maker named Within. Within produces a popular game called Supernatural, and the purchase is part of Mark Zuckerberg’s attempt to dominate what he once thought was going to be the next big computing platform, the ‘Metaverse.’ The merger challenge is one of Lina Khan’s first big cases. So what just happened? What does this outcome mean? And what’s next?
First, the loss was a bit of a surprising decision. Based on how Judge Davila acted throughout the hearing, I thought the FTC was going to win. The loss here looks, on first blush, bad for Khan, the FTC, and the anti-monopoly project. A lot of antitrust lawyers are saying this decision will weaken enforcement going forward. For instance, Leah Nylen wrote in Bloomberg that “Davila’s apparent rejection of that argument could bode poorly for the FTC in its effort to block Microsoft from buying Activision"
I don’t buy it. If this decision mattered for that acquisition, you’d expect a positive response to the news in the stock price of Activision. There wasn’t any, so the market signals didn’t interpret it as meaningful.
In fact, the more information I’m gathering, the more I think this decision will be an important springboard for more assertive enforcement. In other words, while the FTC did not prevail in the outcome of the hearing, the actual decision will be pretty helpful to enforcers going forward. Now, we won’t know for sure for a few more days, because the judge decided to temporarily seal his ruling in the case to the public, which means all we know about his reading is what involved lawyers have leaked to the press. However, what we have learned is that the judge ruled against the FTC on the facts, but not on the underlying legal theory.
Here’s Naomi Nix and Cat Zakrzewski in the Washington Post.
Though the judge did not find that this particular deal was anticompetitive, the order did affirm some of the arguments that the FTC made in its case, including that acquisitions of nascent companies can hurt competition and that companies not currently in a marketplace can still have influence over the marketplace, the person said. This is the first time since the 198os that a court has affirmed such theories, the person said.
The court also provided a road map for future cases involving potential competition in rapidly changing and digital markets, where new businesses are being created all the time, the person said. The court accepted the FTC’s definition of the market in the case, the person said. That has historically been a pain point in bringing antitrust cases against tech companies.
Again, I’m annoyed I can’t read the decision itself yet. But if this reporting is correct, basically the judge said ‘Yes, Lina Khan’s theories on antitrust are correct, but the FTC didn’t prove its case.’
So why does this ruling help anti-monopolists? The answer is that it opens up an entire area of law that hasn’t been used for four decades. Most antitrust cases these days are plain vanilla, a ‘rival wants to buy a rival in a market for widgets and raise prices’ type complaint. While no case is easy to litigate, those kinds of cases, like AT&T/T-Mobile or Office Depot/Staples, have recognizable theories of harm. Confining oneself to orthodox cases, however, means that all sorts of mergers go unchallenged, which is something I noted in the Conglomerate Problem. Big tech roll-ups are often not straightforward rivals buying rivals, but involve nascent markets and conglomerate or other relationships between the acquiring and acquired firms.
With Meta-Within, the FTC colored far outside of the lines and used an aggressive reading of antitrust law. The FTC didn’t argue Meta was buying a direct rival, it argued that Meta is a dominant firm buying a potential rival in an adjacent space it might otherwise enter. Meta has a monopoly over virtual reality headsets and virtual reality app distribution, while Within sold the leading fitness app for Meta’s systems. Meta could have chosen to challenge Within by building its own fitness app, argued enforcers. Instead, it sought to buy the firm. Moreover, ‘the Metaverse’ is a nascent market, so the FTC had an aggressive theory on market definition.
The strategic rationale for the case was to establish that dominant firms cannot monopolize new markets, the way that Google did when it bought DoubleClick in 2007, or Facebook did when it bought Instagram in 2012. We have no idea if the Metaverse will turn out to be as important as Mark Zuckerberg thinks it might be (or least thought it might be before his attention moved on to AI). But ensuring that a dominant firm monopolizing an adjacent space can be an antitrust violation is critical to address technological inflection points, like the one we’re seeing with Adobe-Figma or Microsoft-Activision. And the FTC, if the reporting from the Washington Post is correct, achieved that.
So if the FTC was right on the law, why did enforcers lose? Maybe it’s because the judge thought Meta isn’t intending to enter the market, or maybe he thought the firm can’t do it. Maybe the FTC simply didn’t prove to a standard he set out that Meta was a potential competitor. I mean, high level Meta executives are now saying the firm is too incompetent to build good products, and Mark Zuckerberg seems to be losing interest in the Metaverse. Regardless, had the FTC proved Meta was going to enter the market but for its purchase of Within, the social networking giant would have lost the case.
In other words, if the judge accepted the basic legal arguments of the FTC, but ruled for Meta on the facts, then it’s a bit of a Pyrrhic victory for big tech and dominant firms. It still stings, but it’ll be the kind of stinging opinion that a lot of enforcers will cite going forward.
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Last October, Consumer Financial Protection Bureau Director Rohit Chopra stood up at a banking conference and gave an unsettling message to the assembled crowd. He said, you make too much money by locking in your customers. He didn’t use those exact words, of course, but in a speech, Chopra talked about a shift in how he’s thinking about regulating banks. Instead of intrusive rules preferred by Obama era regulators, or no rules preferred by Trump ones, he is going to seek simpler market rules to foster fair competition in banking. Specifically, he wants to end the practice of banks making it hard to switch bank accounts and credit cards. This ‘lock-in’ method of business is costly to businesses and consumers who use our banking system, and in this piece, I’ll try to put a dollar amount on it.
Right now, credit card interest rates are at their highest level in forty years, despite delinquencies being very low. That’s not necessarily bad or unfair. After all, the Fed has been raising interest rates, which is the cost of wholesale credit, so banks are raising prices on the retail credit they deploy. However, if the Fed does cut rates, banks likely wouldn’t respond by cutting prices as quickly as they raised them. The expression of ‘up light a rocket, down like a feather’ applies. And we can see this dynamic, in reverse, with how banks handle deposits.
Most people and businesses keep their money in a deposit account, and get paid a bit of interest from their bank. Banks use deposits to finance loans, and keep the difference between the interest rate they receive on loans and the amount they pay to depositors, minus any loans that don’t get paid back. This is called the Net Interest Income, and it’s a big source for bank profits. JP Morgan alone earned $70 billion from NII in 2022.
The Commerce Department gives a weird name to bank revenue, calling it ‘financial services furnished without payment at commercial banks.’ This is because most people don’t actually pay any cash out of hand for a deposit account, but pay indirectly by getting a below-market rate on their deposit interest rate. And this amount has been going up, way up. In absolute amounts, the dollar values are significant. I pulled data from the U.S. Bureau of Economic Analysis, and here’s the revenue increase over time in chart form.
Now, there’s nothing wrong with banks making money, but over the past decade, this increase occurred without any increase in the amount of value provided. Here’s Matthew Klein noting this phenomenon in the Financial Times:
Since the start of 2013, American consumers have boosted their spending on “financial services furnished without payment at commercial banks” by about 57 per cent. It’s been decades since this category of consumer spending has grown so rapidly.
So what’s going on? I’ve gone over how a credit card oligopoly - concentration in just six banks - squeezes us in various ways we don’t notice. But deposit accounts also foster higher profits, especially when interest rates are going up. Net interest margin - the difference between deposits and loans - goes up when the Fed raises interest rates, because banks immediately raise the interest rates of loans and credit products, but take their time raising interest rates they pay to depositors.
Theoretically, banks should correct this spread themselves through competition. If JP Morgan is paying me 0.5%, and another bank is willing to pay 1.5% for deposits, that bank should solicit my business. And to some extent that happens. Banks do compete over deposits by bidding to capture depositor money with offers of higher deposit rates.
But this process is quite slow. Even though there are banks that try to lure depositors, most consumers and small businesses don’t switch accounts very quickly because of lock-in costs. As Chopra said, “changing a bank account is a huge pain,” as ”direct deposits need to be reset, as do scheduled payments linked by ACH or debit card.“ To change bank accounts means redoing all of this, while making sure you have enough money to pay everything you need to pay. This ‘lock-in’ effect is somewhat similar to switching phone carriers without being able to move your phone number, or changing email providers without being able to forward email. It’s usually not worth it, because the friction - intentionally put there by incumbents - is too high.
How much does this lock-in effect matter? Well, Klein showed that two fifths of the increase in bank service revenue is a result of organic growth, aka people saving more money, while the other three fifths is pure pricing power. As he put it, “banks have made a lot of money off of consumers in the past few years by failing to adjust the interest rates they pay by changes in market conditions and by failing to adjust the interest rates they charge by changes in default risk.” So there’s been “a boom” for banks “with almost no increase in the value of the service provided.”
How much is this pricing power in absolute dollars? Banks had $239B in annual revenue from this line item in 2013, and $421B this last quarter. If you take three fifths of that amount, it’s $109 billion of extra revenue banks are getting from doing nothing except locking in consumers to their bank accounts.
And this brings me back to Chopra. The CFPB, because of a provision in the Dodd-Frank Reform Act, has authority to require banks to force interoperability of banking data. That means people would be able to more easily switch their bank accounts and credit card products, without having to lose all of their ledger data or having to redo all of their direct deposits. Neither the Obama nor the Trump administration did anything with this authority, but Chopra is going to exercise it, starting with letting people have freedom to move their own financial data.
Chopra is a leader of a new generation of regulators who see regulated competition, not intrusive rule-making, as the right way to redress inefficient and unfair practices. This rule-making, along with future rule-making to full ‘open banking,’ could save hundreds of billions of dollars of costs to consumers and businesses, who will benefit from removing friction in our highly inefficient and sticky payments system. It’s not that people will necessarily move their deposits or credit card accounts, but that after interoperability becomes the rule, they could do so. And that’ll mean banks will raise deposit rates and lower credit card rates more quickly just to make sure that consumers don’t leave.
The power to refine and improve our financial system, in favor of consumers and businesses alike, is already in place. Chopra is poised to use it.
War on Junk Fees
One of the more annoying facets of a monopolized and corrupt economic order is the prevalence of junk fees, which is a way firms can tack on extra price hikes without disclosing the price upfront. For instance, if you go to a hotel, and the hotel adds a ‘facility fee’ that you cannot avoid, that’s a junk fee. It’s basically a deceptive practice.
Yesterday, the Biden administration started attacking junk fees in earnest. First, the Consumer Financial Protection Bureau is going to put out a rule cutting credit card late fees to $8. That’s a good idea, because credit cards already charge interest for non-payment, so fees of up to $41 are excessive.
More broadly, Biden is seeking an actual law, called the “Junk Fee Prevention Act,” which Congress will have to pass. This law would address ‘resort’ or ‘facility fees’ that hotels use to hide their pricing, roll back high early termination fees for TV, phone and internet services, and stop excessive ticketing or concert fees. In addition, such a law would ban airlines from charging fees for families to sit with their children, which is both a good idea and a troll of Pete Buttigieg. Buttigieg has the authority to ban this practice, but just hasn’t, and with this action, the White House is telling him to get going. (Nonetheless, the airline lobby is absolutely in a rage against the Secretary of Transportation.)
We’ll see how far this war on junk fee goes. Regardless, ‘junk fee’ is a great name.
I’m starting a new section of BIG dedicated to the outcomes of actions that enforcers have taken or that we’ve written about.
I’m hearing from A LOT of people in the industry about Equifax and the Work Number. I’ll have more soon, but let’s just say that this firm is not well-liked, and does not have the best reputation in terms of being willing to follow the law.
As I’ve written, antitrust chief Jonathan Kanter has made it a point to resurrect the Clayton Act prohibition on interlocking directorates, which is a key mechanism PE firms use to control portfolio firms. Well, private equity giant Brookfield just got dinged after the Department of Justice started investigating the firm for appointing board members on rival firms. Brookfield will not keep its board representative on the board of American Equity Investment Life Holding, an Iowa firm that sells annuity and life insurance products. Brookfield owns 19% of American Equity.
Cheerleading monopolist Varsity Brands has settled one of three lawsuits against it. The terms are sealed, but this case is the one brought by gyms against the firm’s exclusive dealing arrangements requiring commitment “to near exclusive attendance at All-Star Competitions and completely exclusive patronage by the Gyms and their Team members of All-Star Apparel.” Varsity has made inroads in the college market and cheerleading has been recognized by the U.S. Olympic and Para-olympic Committee. At the same time, it is still facing another antitrust suit, as well as multiple sex abuse claims.
The Federal Trade Commission has fined GoodRx for sending consumer data to Facebook, Google, Criteo, and other data brokers. The firm violated “sensitive personal health information for years with advertising companies and platforms—contrary to its privacy promises—and failed to report these unauthorized disclosures as required by the Health Breach Notification Rule.”
Ticketmaster is now being watched carefully.
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