The Daily - Is Washington Finally Ready to Take On Big Tech?

Episode Date: June 29, 2023

In a San Francisco courtroom, federal regulators are fighting to block one of the biggest deals in the history of Silicon Valley. David McCabe, who covers technology policy for The New York Times, talks about Lina Khan, the F.T.C. chair who is the architect of the lawsuit, and the growing campaign to finally rein in big tech.Guest: David McCabe, a New York Times correspondent covering technology policy.Background reading: The Federal Trade Commission sued Microsoft to stop the company from closing its purchase of the video game powerhouse Activision Blizzard, escalating government efforts to stymie the largest consumer technology deal in decades.Satya Nadella, the chief executive of Microsoft, appeared in federal court on Wednesday to defend the deal by pledging support for open platforms and consumer choice.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Katrin Benhold. This is The Daily. This week, in a San Francisco courtroom, federal regulators are fighting to block one of the biggest deals in the history of Silicon Valley. deals in the history of Silicon Valley. Today, my colleague David McCabe on the architect of that lawsuit, Lina Khan, and the growing campaign by the Biden administration to finally rein in big tech. It's Thursday, June 29th. David, this is only the second episode I've hosted of The Daily, and I think it is the first the show has ever devoted to the Federal Trade Commission. And that may be because, frankly, even saying those words just made me a little sleepy.

Tell me why I shouldn't be sleepy. You shouldn't be sleepy because the Federal Trade Commission is the regulator that is tasked with making sure that capitalism works in the United States. So the cases that they bring are bellwethers for how big companies end up getting regulated and how powerful they're able to become. And one of those cases is playing out this week. That makes a lot of sense. And that has woken me up. Good. Okay, so tell me about this case. We're going to start with one of the biggest deals of the decade, Microsoft's long running $69 billion acquisition of Activision Blizzard.

So the Federal Trade Commission is trying to stop Microsoft, which makes the Xbox video game console, along with being involved in a ton of other businesses, from buying Activision Blizzard, which publishes some of the biggest video games in the world. Including Activision's first person shooter, Call of Duty. Probably most importantly, the Call of Duty franchise. And one of the most popular mobile games, Candy Crush. And right now in San Francisco, a judge is deciding whether or not the FTC's case is good enough, that they should temporarily block this deal from closing, so that this big challenge to this acquisition can go forward.

After all, while it was pitched as an acquisition, in some ways it's more of a merger between two of the five biggest gaming companies globally. And this case is actually important in a bigger way, which is that it's a key indicator for whether or not government agencies like the Federal Trade Commission can stop big tech from getting bigger.

So explain that. How do you mean? So over the last five or so years, there's been really mounting concern, not just in Washington, but in world capitals like Brussels and London, over how big Silicon Valley companies have gotten. And we're talking really here about five companies, Amazon, Google, Apple, Meta, which owns Facebook and Instagram, and Microsoft. And the critics of these companies believe that they've become these kind of insurmountable gatekeepers for commerce and communications and basically like our whole lives online. And governments have responded by saying there's a problem here. But now the question is, can anybody actually take action to rein these companies in or will they just get more powerful? And it seems to be one of those rare issues where you actually have support on both sides of the aisle, where you kind of have mainstream figures, you know, from Bernie Sanders to Joe Biden and Josh Hawley, all of whom sort of agree something needs to be done to regulate big tech.

big tech. That's right. It's the rare bipartisan consensus in Washington right now that these companies have gotten really big and really powerful and the government maybe should do something about it. But Congress in particular has really struggled to figure out what that is. They proposed a lot of laws and they haven't gone anywhere. And so when Congress can't make new laws to regulate the tech giants, it means the only tool that the government has to pursue these companies is the laws on the books. And that means that the questions about are these companies too powerful and what should the government do have really fallen to regulators like the Federal Trade Commission. And that agency has started to take on these tech giants in a way that it hasn't before. And the architect and face of that pivot is the FTC's new chair, Lina Khan. Okay, so tell me about Lina Khan.

So Lina Khan has had a meteoric rise to lead the Federal Trade Commission. And it all really starts in 2017. Yeah, I'm Lina Khan. I'm a visiting fellow at Yale Law School. So in 2017, not that long ago, Lina Khan was a law student. And she was at Yale Law School. So in 2017, not that long ago, Lena Kahn was a law student and she was at Yale Law School. I wrote a piece called Amazon's Antitrust Paradox that tells the story of Amazon's rise. And she writes this essay for the Law Review, as a lot of law students do, right, about Amazon. I think increasingly businesses are not able to compete on the merits with Amazon. And I actually think the way that she describes it in the paper is really instructive of how she views the company and these tech platforms.

So she writes, in addition to being a retailer, Amazon is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Wow. I mean, we all know how huge Amazon is in our lives, but it's quite startling to hear this list of things that it does. You know, one company that spans so many industries and roles basically sells things, competes against others selling things, and owns the platform where all of these transactions happen as well. That's right. And this idea of a platform business is really crucial to understanding Lena Khan's concerns. Because it's not just Amazon. Amazon is a clear example of it. But Apple runs a platform in the form of its App Store, right? Apple sells apps. They also run the main

store where other people sell apps. Google runs a search engine that includes results from websites like, say, reviews of a restaurant. Google also has its own review service. So what she's articulating is that these sort of mega platforms have grown without a lot of attention from government and are posing real problems for competition in the economy. So David, what is the solution she proposes in this paper? So this is where we go back to the past a little bit. Alina Khan is telling a story about history. Antitrust laws were passed around the turn of the century at a time when there were these

big trusts, the most classic of which is Standard Oil, which made the Rockefeller family rich. the most classic of which is Standard Oil, which made the Rockefeller family rich. And over time, they were used to break up Standard Oil, to break up other big companies. But the reality is that some of antitrust law is written down in the laws, and some of antitrust law is about how judges interpret it. And what Lina Khan is saying is that in the 1970s, conservative lawyers, academics, economists were able to shift the way antitrust law is understood by the courts. And that instead of considering a whole range of harms

to competition, to the economy, that the courts were now basically considering, in most cases, one factor to decide whether or not something violated antitrust law. And that was whether or not it hurt consumers, and particularly whether or not it hurt consumers in the form of higher prices. So what you're saying is that since the 1970s, the definition of antitrust in a way was that as long as prices remained low and consumers happy, regulators left big companies alone.

Yeah, for the most part. And so in this paper, Lena Kahn is basically saying that the government and the courts should widen the scope of what falls under antitrust laws in a way that she would argue basically returns it

to the tool it once was in American history. That even though Amazon keeps prices very low, that it's still engaging in all these practices that could harm competition, potentially to the detriment of people, including other smaller companies who sell on its platform. So price alone is no longer like a useful and valuable indicator for when to apply antitrust practices. That's exactly what she's saying. So, David, one way to think about this as I'm listening to you is that even though antitrust laws were originally designed to prevent the concentration of corporate power, ironically,

it seems that in recent decades, it's almost like they have favored market concentration by focusing so much on lower prices and consumer happiness. And now, Lina Khan wants the FTC to return to that original mission. That's right. That's how she sees the central failing of the government in the preceding, you know, 30 years, that they essentially were asleep at the switch while these companies got extremely big and extremely powerful. And ultimately, I think the case that Lean Economy is making is that, yes, consumers are one part of the broader world. But the government needs to think about the economy more broadly than it needs to think about.

Does concentration in the economy mean workers get paid less? Does it mean that it's harder to start a startup that might come up with some sort of genius, innovative product? And that when you consider all of those things together, that you have a healthier and more dynamic economy and ultimately democracy. And how do people react to her paper?

So with the caveat that we're talking about a law review article, it goes viral. Yeah, in a report for the Yale Law Journal, Lena Kahn writes that Amazon's dominance may soon challenge current antitrust laws. She joins us now to explain why. And Lina Khan, who, again, is in her 20s at this time, has just finished up law school, is suddenly subject to a ton of media attention. This woman's name is Lina Khan. She's kind of rising to prominence among the antitrust circles down in

D.C. She wrote a big paper for the Yale Law School. And suddenly she's kind of a celebrity. She's profiled in The New York Times by my colleague David Streitfeld. She's also profiled in The Atlantic, in The Washington Post. There was a piece out of Yale Law School that I sent around as well. It would be a different approach, though, to antitrust doctrine, to make it clear. And part of what this article triggers is a big debate about whether or not Lina Khan is right or coming in with basically an attack on bigness for bigness' sake that actually won't be good for consumers. We have a society that says consumers come first, investors come second, and workers come third. And I think we're beginning to question that rubric.

And she becomes a face of what is now kind of a ballooning movement of people who think that these big tech companies have gotten too big. My argument is that Amazon is challenging the current paradigm in antitrust, which primarily looks at consumer prices as a metric for whether markets are competitive. And suddenly all of these people are paying attention to this argument that the regulators who are tasked with reining in American corporations have failed to do so. And what happens to Lina Khan after she graduates from law school? So she goes into government.

She ends up working briefly for the FTC as an aide to a progressive commissioner. Then she goes to Congress and she's a staff member on this big investigation that Congress did into the power of the tech platforms. And then she becomes a law professor at Columbia. But then Joe Biden gets elected president. And in 2021, he's staffing up his administration, and he names her as one of the five commissioners on the Federal Trade Commission. And an important thing to understand about the FTC is that there are five commissioners who vote on whether or not they'll take actions against companies. And then one of them is the chair. And that person is the one who really

decides the direction of the agency. So she's been named one of those five commissioners, but not the chair. And so this is on its own a big win for the antitrust reformers. She's this young, rising star. And now here she is in a position of real influence. And her nomination is approved by the Senate 69 to 28. So she gets some Republican support. And then that same day, hours, hours after the Senate vote, Biden surprises everyone by announcing that she will in fact be named chair of the whole agency.

It's fascinating. So just a few years after Lina Khan published her paper criticizing Amazon as a kind of unknown law student, not even graduated yet. She is appointed to the FTC, the government body that is tasked with actually regulating companies like Amazon. That's right. She's 32 years old and the most influential person at the Federal Trade Commission. And in fact, Joe Biden also names other big antitrust reformers to key positions in the government. So now, this movement that, you know, five years earlier, was largely producing scholarly and journalistic work about what they saw as this big problem, are in the seat of power in the agencies that can actually do something about it. We'll be right back. So David, at 32 years old, Lina Khan, who has not been shy about

her ambition of going after big tech, is now the head of the FTC. So what does she do when she gets there? Well, before she does anything, it won't shock you to hear that her appointment attracts the attention of the companies she has been criticizing. So both Amazon and Facebook, within about a month of her being named chair, ask that she be recused from any investigations into the companies. They sound scared. Well, they've certainly noticed that she's in charge now. And ultimately, she has so far opted not to recuse from either matter. So pretty soon, it becomes clear that Linnecon is interested in running a more aggressive FTC. And it takes a while to build these cases. But of

course, the big question is still, what is she going to do about the big tech platforms, the ones that she highlighted in her paper? And we get the first hint towards the end of 2021, when Meta decides that it's going to buy a virtual reality startup called Within. Now, Meta, which owns Facebook and Instagram and WhatsApp, in recent years has been trying to make this pivot to what they call the metaverse. This is like a virtual reality world or an augmented reality world where people hang out, they go to work, you know, you and I record this podcast in virtual reality. And it's a big part of their strategy. And they produce virtual reality headsets as part of this. And so they buy this company that makes a virtual reality fitness game. It's a way to exercise, you know, with one of these headsets on.

And these companies, the big tech companies, traditionally have acquired a lot of startups. And this deal, it's reported to be around $400 million, which I've been in business journalism maybe too long. Anything under a billion dollars, people think of as small, certainly like not a blockbuster deal, right? This is a big company buying a small company. The small company gets paid out, the big company gets the virtual reality fitness game. And on top of that, we're talking about virtual reality, which is a really nascent technology, right? It's not proliferated throughout offices and schools, as some people think maybe it will. But in July of 2022, the FTC sues to block this deal.

So how does Lina Khan see this case? Why is she pursuing this particular case? So even though the actual number value on the deal isn't that high, She says that by acquiring this company, Meta is going to be able to try and dominate, basically, going forward, this young market for virtual reality. And remember how part of the concerns that she has are that the regulators are basically asleep at the wheel while these companies got too big? Yeah.

Exactly, yeah. It's really about doing what she says the regulators had not done for decades, which is get ahead of tech companies and basically beat them to the future. And does she win? She does not. MEDA closes this deal. They declare victory. And it's a difficult moment because this is the first tech case

that had really been developed totally under Lina Khan. So the FTC suffers a loss, but the agency doesn't stop there. And what's the next case they go for? So even before they'd lost in the Meta case, they had sued to stop Microsoft from buying this video game publisher, Activision Blizzard. And basically, they're arguing that Microsoft will use the popular Activision games, namely this Call of Duty series, which, just to give people a sense of scale here, has made like $30 billion over the lifetime of the franchise. In 2019, Activision said that Call of Duty had earned more than the

Marvel Cinematic Universe. So these are big games. And the FTC is saying that basically Microsoft will withhold those games, these like blockbuster titles, from the companies that compete with Xbox, the console itself, the physical platform that runs the game. Basically, they're saying they're going to withhold them from Sony, which makes the PlayStation. And the FTC says Microsoft could also use this kind of new leverage through the deal to dominate cloud gaming, which is a nascent market for streaming games over the web. dominate cloud gaming, which is a nascent market for streaming games over the web. So the FTC's argument here is that there's a potential future where Microsoft owns not just one of the biggest gaming consoles in the world, the Xbox, but also one of the biggest games in

the world, Call of Duty, which could limit access to that game from other consoles. Exactly. And in turn, the FTC is arguing lore gamers, right, over to Xbox. And the FTC says that Microsoft has done this before. They've bought a studio and then made that studio's games Xbox exclusives. But in this case, Microsoft fights back hard and they say, we promise we won't do this. And we're willing to basically ink contracts with other video game console makers that guarantee that we will provide Call of Duty to them for a certain period of time. They do strike in some form one of these deals with Nintendo. They say that they have made a similar offer to Sony, but Sony hasn't

accepted. And so they basically say, this concern you have, we can alleviate it without ever going to court. But Lena K Khan doesn't believe them. Exactly. And from her perspective, all of this basically leads to a less competitive marketplace. So what are the chances, David, that she wins this case? So it's a tough case. Antitrust regulators have not brought a ton of cases in recent years in which you're dealing with two companies that are merging or one company is being acquired where they don't totally directly compete. It's more common

for them to challenge a deal like, say, this is a total hypothetical, but two meatpackers who are merging into one meatpacker, right? And so in that sense, the case potentially could be difficult. Okay, so she went after Facebook. She went after Microsoft. What about Amazon, the company that has been the focus of so much of her work prior to coming to the FTC? Well, and that was for the first 18 months of her tenure, the big question for those of us who track this every day. It's like, when is the Amazon case going to come? Is it going to come at all? And the FTC actually has two sets of powers. They can bring these antitrust

cases that argue that there's some problem with competition in the market. They also are in charge of stopping companies from doing things that they say are unfair or deceptive. So like, think about a scam or a violation of your privacy. And last week, they did take Amazon to court. They argued in a pretty sweeping complaint that Amazon had tricked customers through using basically deceptive designs into signing up without total informed consent for their Prime subscription service. And they say basically that these customers have been duped into signing up for Prime, and that then when you went to cancel Prime, it was like this maze to cancel. They would bombard you with offers saying, well, no, stay, stay, stay.

And it was like a ton of screens you had to get through if you wanted to cancel. I feel like I've been there, actually. Having lived in different countries and signing up to different Prime accounts and trying to get out of them was not always easy, shall we say. Yeah, and these are not uncommon, right,

across the internet. And critics of these are not uncommon, right, across the internet. And critics of these practices call them dark patterns, that they're basically like trickster design tactics that are meant to make your brain do something without totally understanding what it's doing. And the FTC had promised they would go after these dark patterns, and they bring this case that argues that Amazon has used these tricky tactics to pull consumers in to this really core part of its business in the form of the Prime subscription.

And what's the likelihood that she wins this case? You know, it's a little up in the air. Amazon has signaled that they're going to fight this aggressively. They said in response to the lawsuit that, in fact, things are designed to be, you know, easy to navigate and they're not going down without a fight. But it leaves the broader question unanswered, which is, is she going to bring a case against Amazon that is really about Amazon's effect on competition in the market,

an actual antitrust case against the company? Because the case that they just filed, while it's about a service that's very popular and deals with some sort of novel and interesting issues, it's not her paper turned into a case. So it seems, David, from everything you've laid out so far, that Lina Khan has taken on three very difficult cases. None of them is a slam dunk. Is it fair to say that her approach is not really going the way she thought it would? Well, that's where it gets a little interesting. So the FTC isn't setting out to lose cases. But Lina Khan and her allies believe that in order to win in the long term by shifting the law back in this direction that they think, you know, harkens back to kind of the golden era of trust busting in America,

that you have to be willing to lose, that you have to be willing to lose, that you have to be willing to bring risky cases, kind of take big swings, and know that not all of them will pan out. Some of them might be losses that trigger Congress to act. In other cases, they might just be losses. But you have to be willing to take those risks to shift the law back in a long-term sense. It's interesting. It looks like she's taking an approach that, you know, doesn't really make me think of lawyers. It makes me think almost more of activists. I mean, she's basically signaling,

we are paying attention to you and we will come after you. It's almost like it's a deterrent to companies. I think that Lina Khan and her counterpart at the Department of Justice absolutely are sending a message, right, to industry that in their mind, the cop is back on the beat, that they should think twice before they do deals that might raise concerns. successfully shifted the law in a direction that narrowed it and, in the view of Lena Kahn, damaged the law and made it a less useful tool, that that was a process that took a long time. So I think that she is trying to precipitate a similar shift in the other direction while still bringing a level of legal scrutiny to bear.

They're not filing cases that they know they're going to lose, but they are willing to lose cases in order to win in the long term. I guess one question is, can you play the long game when you're a political appointee and your time in office is limited? So that is the tension at the heart of Lena Khan's effort and the efforts by her allies. It's possible President Biden will not be reelected. Can they precipitate the kind of changes they want in a short period of time? Or will they leave behind cases and legal challenges that are continuing on without them there to fight them? But isn't there another scenario here where Lina Khan succeeds and there's

risk there too? As customers, we love Amazon because our books and our toothpaste show up the next day. So if Lina Khan does anything that changes that, is there a chance that the very people she's trying to protect from market power will actually be very unhappy with her and the FTC? Well, that's what the companies say will happen, that moves like the kind that Lina Khan is making will just make the internet a worse experience for consumers. And increasingly, there's been pushback against Lina Khan from other companies across the economy. The Chamber of Commerce, probably the biggest and

most prominent business lobby in America, has been extremely aggressive in attacking her policies. And the truth is, sometimes it takes a long time to tell whether or not antitrust policy has worked. People argue that earlier antitrust cases paved the way for companies like Google to start in the first place. But that, again, is a long-term view. What's clear right now is that this is one of the greatest battles in recent memory over how corporate power is regulated in America. And Lina Khan and her allies are right at the center of it. David, thank you so much. Thank you. Did we all stay awake?

Yes, we're all awake. We're with you. We'll be right back. Here's what else you need to know today. Thick smoke from Canadian wildfires blanketed large parts of the United States on Wednesday, moving from the east to the upper Midwest. Several major cities, including Detroit and Indianapolis, recorded some of the worst air quality in the country. The smoke is the result of one of Canada's worst wildfire seasons in decades, and it's expected to drift east. Officials in several cities, including New York, have warned of worsening conditions in the coming days.

And, according to U.S. officials, a senior Russian general had advanced knowledge of Yevgeny Prigozhin's plans to rebel against Russia's military leadership, which has prompted questions about what support the rebels had inside of Russia's governing elite. The officials said they're trying to learn if General Sergei Surovikin, Russia's former top commander in Ukraine, helped plan the rebellion, which posed the most dramatic threat to President Vladimir Putin in his 23 years in power. Today's episode was produced by Mooj Zaydi, Claire Tennis Cutter and Nina Feldman, with

help from Rochelle Bonja. It was edited by John Ketchum and Michael Benoit, contains original music by Marion Lizano and Alicia by E-Tube, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wanderley. That's it for The Daily. I'm Katrin Benholt. See you tomorrow.