In 1998, The Simpsons aired an episode where Bill Gates destroyed Homer's office for his company, Compu-Global-Hyper-Mega-Net; 26 years later, we once again see a reflection of The Simpsons in the world of Big Tech…
AI markets are bringing BigTech companies into head-on competition with each other and concern is growing that traditional monopolies in the tech industry are strategically acquiring interests in emerging AI start-ups to consolidate their positions and gain a competitive advantage.
Regulators in both Washington and Brussels are concerned that large BigTech corporations, with their powerful servers and vast troves of data, are seizing upon promising AI start-ups to consolidate their market dominance. Andreas Mundt, president of Germany's Federal Cartel Office, suggests that while the AI landscape is still open to competition, regulatory oversight is crucial to ensure it remains so.
The US Department of Justice (DoJ) and the Federal Trade Commission (FTC) recently agreed to work in tandem to examine competition in the emerging AI sector.
How is this happening?
Quite simply, BigTech companies such as Microsoft and Meta are swallowing start-up tech companies that are developing AI by directly acquiring them. These quasi-mergers are referred to as "killer-acquisitions" given their impact of stifling innovation within the market. This technique essentially eliminates the start-up, thereby avoiding a possible future competitor in the market.
Another method being used is "acqui-hiring"; a roundabout way of achieving the same outcome whereby the employees of the start-up are recruited. In reality, the start-up's thought leaders, executives and innovators are acquired which drains the start-up of its resources. The BigTech company is then able to take control of the start-up and have direct influence over it.
Recent attempts at taking on BigTech
BigTech AI competition issues have already started to emerge in both the US and the EU. Corporations such as Google and Microsoft have faced scrutiny from the Competition and Markets Authority (CMA) of trying to evade regulatory analysis by entering into partnerships with AI startups that are designed to fall outside of the EU's merger control regime, but nonetheless increase their monopolistic power.
Microsoft's OpenAI partnership, and similar arrangements between Alphabet, Amazon and Anthropic, have triggered scrutiny on both sides of the Atlantic as competition regulators seek to understand how these deals affect competition. The European Commission recently concluded that it could not investigate Microsoft's investment in OpenAI under the EU merger control regime, but the arrangement could still face an antitrust investigation if the Commission finds evidence that it restricts competition.
Similarly, the UK's Competition and Markets Authority (CMA) announced in April of this year that it was examining Microsoft's hiring of DeepMind co-founder Mustafa Suleyman and its investment in French AI start-up Mistral, however merely weeks later concluded that the partnership did not qualify for investigation under the relevant legislation.
In January, the European Commission launched a call for contributions on competition in virtual worlds and generative AI and stated that it is investigating the impact of BigTech-AI partnerships on market dynamics. The FTC is also probing these relationships in the US, where Microsoft is coming under scrutiny for hiring the founder of AI start-up Inflection and most of its 70-person staff in an alleged attempt to circumvent merger control through 'acqui-hires'. No assets were acquired in the deal so it bypassed antitrust regulatory scrutiny. Interestingly as part of the Inflection deal, 30 million USD was ringfenced to pay for waiving the legal rights relating to Inflection non-compete clause applicable and the Inflection investors got the economic benefit. Inflection has now pivoted away from the AI race (their alternative offering to OpenAI) and will now focus on providing API's (Application Programming Interface) to other businesses removing Inflection as a maverick in this market..
Antitrust regulators on both sides of the Atlantic are keen to take on BigTech, however given the recent manoeuvres by BigTech it begs the question now whether they are outmatched by the big players in a sector that is moving at break-neck speed. It is no secret that competition regulators have missed a beat in the digital era. BigTech has deepened its roots in the sector and solidified its market dominance over the past decade, while regulators have struggled to keep pace. Competition experts argue that rules must be updated and regulatory powers expanded to prevent BigTech AI killer acquisitions, and cases like Inflection, slipping through the cracks.
The situation with Inflection far from an isolated example. Nvidia is a California based chip designer which was recently valued at 3.34 trillion USD, overtaking Microsoft and Apple as the world's most valuable company. It recently participated in the latest funding round (€600 million) of Mistral, the French AI start up that develops secure open source large language models. This will allow Nvidia (as a shareholder) an advance look at the emerging AI technology and potentially dictate the direction of the AI development in a similar fashion to the Inflection deal. While these companies are in different sectors, it does raise concerns if such strategic investments will help or hinder advances in AI innovation in the long term.
There is a fine line between stifling innovation as a result of these recent acquisitions and investments and future proofing the regulation of the emerging AI technology. This balance is key and antitrust regulators should consider other aspects of AI commercialisation in this rapid changing sector. For example, should data and its value to BigTech be considered for antitrust and merger control purposes in addition to traditional market shares and turnover? The data collated by these start-ups, their market valuation and the technical advances made by AI teams are key considerations in getting the balance right.
As antitrust battles start moving through uncharted AI territory, it would be wise for regulators in Washington and Brussels to collaborate to take on these BigTech companies and come up with practical routes for the benefit of all stakeholders.
The role of AI regulation
The recent adoption of the EU AI Act, the Digital Markets Act (DMA) and the UK's equivalent Digital Markets, Competition and Consumers Act (DMCC) has changed the regulatory landscape for BigTech and the digital sector in general throughout Europe.
These preliminary regulatory regimes aim to foster a fair and open market in respect of AI investment and innovation while equipping regulators with a set of effective tools. For example, the DMA requires 'gatekeepers' such as Google and Apple to provide access to their platforms on fair, reasonable and non-discriminatory grounds. Meanwhile, the DMCC introduces an 'acquirer-focused' threshold for merger review. This removes the need for overlap where one party has a significant market presence in the UK, enabling the CMA to intervene in killer acquisitions.
However, the US has not implemented a similar set of ex ante regulatory policies. Instead, US regulators rely on traditional ex post competition rules to enforce competition in the digital sector.
This divergence risks making the development of a universal regulatory approach to tackling BigTech-AI entrenchment more difficult.
Bilateral Cooperation
EU and US competition authorities cooperate on the basis of a number bilateral MOUs dating back to the 90's. These agreements provide for the exchange of information, reciprocal notification of investigations and coordinated enforcement actions.
In December 2021, the EU and the US launched the Joint Technology Competition Policy Dialogue (TCPD) to strengthen cooperation on competition policy and discuss emerging threats in the rapidly evolving digital sector.
The fourth TCPD took place in April this year and it made clear that both regulators have set their sights on BigTech and AI. Johnathan Kanter, assistant attorney general at the DOJ, noted that "the growth of data monopolies and the rapid expansion of artificial intelligence expand the competitive threats we face from dominant digital gatekeepers" and highlighted that the exchange of cross-Atlantic competition best practices is essential. Meanwhile, Margrethe Vestager of the European Commission reiterated that "it is essential to anticipate and address such challenges through close cooperation, leveraging our respective experiences".
The discussion centred on critical issues both regulators are facing due to the rapidly changing digital sector, AI oversight and merger control in the digital economy. While this dialogue is certainly helpful, one cannot ignore the reality that that diverging regulatory regimes and political uncertainties on both sides of the Atlantic are likely to hinder effective cooperation between regulators and limit their ability to curb BigTech dominance.
For more information on our AI and competition offerings, please contact Tim Ryan or Joanne Finn.
In addition, a detailed review of the regulatory position will be coming from our Data, Privacy and Cyber team later this month. To sign up to receive our Data, Privacy and Cyber newsletters please click here.
