The Journal. - FTC Chair Lina Khan on Microsoft Merger, ChatGPT and Her Court Losses

Episode Date: July 20, 2023

When Lina Khan took over as Chair of the Federal Trade Commission, she vowed to stiffen antitrust enforcement. Two years in, her attempts to rein in big mergers through the court system have been mostly unsuccessful. We speak to Khan about her big tech losses and why the FTC is concerned about ChatGPT.  Further Reading: - ChatGPT Comes Under Investigation by Federal Trade Commission  - Lina Khan Is Taking on the World’s Biggest Tech Companies—and Losing  Further Listening: - Microsoft’s Big Win Against the FTC  - Biden’s New FTC Chair Squares Off With Big Tech  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi. Can you hear me okay? I can hear you great. Can you hear me? Okay. Kate, I am so, so, so sorry to keep you waiting. Today's been a bit of a crazy day over here. No problem. Yeah, you've had some announcements. I heard you met the president. How'd that go? It was good. He's excited about the merger guidelines, so. All right. So you're all set up and we're ready to go?

Yes. Yesterday, we spoke with Lina Khan. She runs the Federal Trade Commission, or the FTC, the agency that's tasked with enforcing antitrust laws, basically preventing business monopolies and protecting consumers. And under Khan, the FTC has been busy, taking a tougher stance on big business deals. The FTC suing Microsoft to officially block its planned deal with Activision. FTC is accusing Meta of trying to exert undue dominance in the metaverse. The Federal Trade Commission is suing to block NVIDIA's $40 billion arm merger from going through. to block NVIDIA's $40 billion arm merger from going through.

Do you think that there's a monopoly problem in the U.S. economy right now? The president said that markets across our economy have become extremely consolidated, that those markets have become dominated by incumbents, and that this lack of competition is bad for consumers, it's bad for small businesses, it's bad for citizens. And so that was a mandate that the president laid out. But as the FTC has tried to execute that mandate by trying to block some deals in court, the agency has had some big setbacks. The agency has had some big setbacks.

Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Thursday, July 20th. Coming up on the show, a conversation with FTC Chair, Lina Khan. At Air Miles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time dinnering with them. How's that spicy enchilada? Very flavorful.

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Ah, it's good, being a journalist. I actually simultaneously applied to law school and a job at the Wall Street Journal. No way. Did you get the job? I did. Yeah. I had the option to come be a commodities beat reporter. Amazing. Lina Khan didn't take the job at the Wall Street Journal. Instead, she went to law school. While she was there, she published a paper in the Yale Law Journal about Amazon, and it got a lot of attention. Her paper argued that Amazon had gained enormous power in the market and was damaging competition. She argued that the FTC and its antitrust laws had failed when it came to Amazon, that the company should have been restrained and it wasn't. Khan went on to teach law at Columbia.

And when Biden took the White House, he tapped her to lead the FTC, signaling that the administration was taking a more aggressive posture. was taking a more aggressive posture. There is empirical research showing that in certain markets we have seen a decline in competition, that that's correlated with higher markups, with lower rates of innovation or lower rates of quality improvements. So that is all research that we take into account. But from an enforcement perspective, we really look at every case and every matter based on the facts before us and assess how the law is applied in that context.

Last year, the FTC and the Justice Department filed more merger lawsuits than they had in any year for over a decade. But they've lost some big ones. over a decade. But they've lost some big ones. In December, the FTC tried to block a big Microsoft deal. Microsoft, which makes the gaming console Xbox, was trying to buy video game maker Activision. It wanted to expand into cloud gaming, and Activision owns popular video games

like Call of Duty and Candy Crush. The FTC said the merger posed a, quote, clear threat to competition because Microsoft could make games exclusive to the Xbox. Microsoft said it would keep selling the games to competitors. competitors. And last week, there was a decision. A judge ruled against the FTC. The FTC is now appealing. How do you reflect on that loss? What's the lesson you take away? So this case is still pending, and so I'm not going to be able to talk in substance about it. Of course, when we do suffer setbacks in the courts, we look very closely at the opinion to assess where we fell short and use that experience to inform our future efforts, as well as our assessment of whether an appeal is warranted. Have you picked the wrong battles? So look, we only bring cases where we believe that there is a law violation. The

complaint that the commission voted out in that matter lays out what the commission's viewed as the likely legal concerns that would be raised from this transaction. So I'll let that complaint speak for itself. One of the key things that the complaint does discuss is the future of this market and how, especially in instances where you have newer markets developing, the antitrust agencies have a particular mandate to protect that competition and make sure that we're not seeing walled gardens and that we're instead preserving open, vibrant competition. Does it make you rethink future actions? So again, is there a, like, what is the value you take from attempting a case like this, even if it doesn't fall in your favor? So we study the outcomes very closely to determine where we fell short.

Oftentimes, judges are providing more clarity in terms of the law. And so that can be useful, especially in instances if, you know, some of these cases are involving newer markets. There is an opportunity for courts to be applying antitrust statutes that go back decades in new contexts, and it can be important for enforcers to be seeing how that law, how courts are applying that law in new contexts. You know, one case that we brought last year, where we got a decision this year, was our efforts to seek a preliminary injunction to block Meta's attempted acquisition of Within.

Khan is referring to Meta's purchase of a virtual reality fitness company called Within Unlimited. The FTC tried to block the deal in court, arguing it would reduce competition. But the FTC lost and has said it won't appeal the ruling. That was another instance in which we lost. But that decision by Judge Davila really laid out in great detail how some of these traditional principles, including the mandate the agencies have to protect future competition and protect potential competition, how those principles apply in digital markets. competition, how those principles apply in digital markets. So you've just released a new set of draft guidelines for mergers and acquisitions. What's new in these guidelines?

So the merger guidelines are basically the enforcement manual that the Federal Trade Commission and the Antitrust Division use to lay out how it is we go about analyzing deals and assessing whether they may violate the law? Merger guidelines have been around for decades, and every so often they're updated to take into account changes in the market and important court decisions. The last time these were updated was in 2010. The new guidelines spell out the kinds of mergers that the FTC and the Justice Department say may break the law. Why is it necessary to update the guidelines now? Our economy has changed significantly since 2010. Markets have changed since then. And so it's good practice for our enforcement manual to be kept up to date to reflect current market realities as well as the current law. And so that's why we

undertook this revision. And in these guidelines, what has changed? So there are a few things that have changed. One thing that these guidelines do is lay out some particular considerations that are warranted in special contexts. So we have one guideline that lays out how we think about competition involving platforms. Platforms like Uber, Amazon, or Google. Companies that operate websites and apps that connect people with each other and with various products and services. And so we lay out in some detail different ways that competition occurs in these markets. What is it about the economy today that is out of step with how the previous guidelines were? So the previous guidelines did not explicitly discuss platforms

or digital markets. And there's been a whole lot of learning over the past decade about the ways in which competition occurs in the context of platforms. There's also been a ton of economic and empirical research over the last decade surfacing the fact that labor markets are often concentrated and that concentration can have an effect on wages, where workers are making less when they don't face as much competition between employers or less competition in job opportunities. And so the guidelines also directly lay out how it is that the agencies will think about whether a merger may lessen competition for labor. You're releasing these guidelines after the FTC had a loss in the Microsoft Activision case.

Do you think they will help your cases going forward? Look, so, you know, we were disappointed in that outcome, and I'm not really able to talk about ongoing litigation. The goal of these guidelines is to provide guidance to the public, to antitrust practitioners about how it is that the agencies go about doing their work and doing that analysis. Historically, courts have also looked to these guidelines. And so we're hoping that these guidelines can be illuminating and instructive for a whole set of entities out there. instructive for a whole set of entities out there. Coming up, we ask Chair Kahn about another investigation into ChatGPT. How do stop losses work on Kraken? Let's say I have a birthday party on Wednesday night, but an important meeting Thursday morning. So sensible me pre-books a taxi for 10 p.m. with alerts.

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The FTC has been investigating ChatGPT and is examining whether the AI app harmed people by publishing false information. Have you used ChatGPT? I have, yes. When it was introduced and everybody was having fun asking it questions, I also had the opportunity. And it's, you know, a remarkable technology. It's just incredible to see how many strides

have been made. Do you remember what you asked, ChatGPT? I think I had seen someone mention that you could, that ChatGPT was good at putting together a claim, you know, disputing an insurance bill. And so I think I was dealing with that situation and so gave it that prompt. And did it work? It gave me something to work with for sure. What prompted this probe and what are the harms you see in AI? So I'm limited in being able to talk about any ongoing investigations, but we've laid out some of the concerns that we are seeing. So the FTC has both a competition mandate, but we've laid out some of the concerns that we are seeing. So the FTC has both a competition mandate, but we also have a consumer protection mandate where we are charged

with prohibiting unfair or deceptive practices. We've already been seeing how some of these AI tools are being used to turbocharge fraud and scams. So some of these technologies are basically enabling scammers to disseminate fraudulent content much more quickly, much more cheaply, and on a much wider scale. And so we're already seeing through our complaint database instances in which these technologies may be used to promote fraud. On the competition side, you know, these moments of technological disruption are so important. And there is no doubt that AI as a technology presents huge opportunities for advancement, huge opportunities for injecting preserved and that some of the technological incumbents are not seizing on this moment as an opportunity to really solidify their dominance or maintain their monopoly. The other issue that we've been hearing about is concerns about the data that is being

inputted into these machines and the way that there is just very few checks on that information. And so we're hearing concerns about automating discrimination or automating bias that may be out there in these data sets. We're also hearing concerns from creators and other artists about the ways in which some of their creations are being appropriated and creating concerns. So those are just some of the issues that we're hearing about. Sam Altman, the chief executive of OpenAI, the company that developed ChatGPT, tweeted that the company is confident it followed the law and it will work with the FTC. OK, I've got to ask you about Amazon.

The Wall Street Journal has reported that the FTC is preparing an additional antitrust lawsuit against Amazon. How soon could we see that? Again, I'm not able to comment on any ongoing non-public law enforcement matters. But Khan could talk about another case against Amazon. Amazon. Our Bureau of Consumer Protection filed a lawsuit against Amazon within the last couple of months alleging that Amazon had used dark patterns and other deceptive design tactics to trick users into signing up for Prime and then making it extraordinarily difficult to cancel Prime subscriptions. And so that matter is ongoing. An Amazon spokesman dismissed the allegations as,

quote, false on the facts and the law. Your thoughts about Amazon are famous from that paper you wrote in Yale Law. Do you feel like now in your current position that you need to do something about Amazon's market power? So look, I have the profound honor to be serving in this job. One of the obligations of this job is to be looking at every matter based on the facts before me and based on how the law applies. You know, as an academic, you have certain freedoms and certain liberties to be taking. And in this job, it's really all about being faithful to the law and making sure that we are looking at every matter based on the specific facts and not prejudging any outcome. How has your time at the FTC thus far changed the way you think about competition in the U.S. economy?

U.S. economy. So we at the FTC have the benefit of getting to hear from a lot of market participants, a lot of businesses, a lot of capital allocators, venture capitalists. I do a whole set of meetings, including recently with some VC folks and entrepreneurs to understand what are they seeing in the markets, because we want to make sure that we're fully understanding how people in these markets are viewing competition, what their experience of it has been like. And, you know, there's so many times that we hear from businesses about how difficult it is to compete in markets that have been locked up by dominant firms and just the variety of tactics and mechanisms that firms can be using to block competition. And so I think we've been able to get a 360 view of some of the issues that market participants are facing, and that's always extremely instructive for us. Thanks so much for talking with us. Thanks, Kate.

That's all for today, Thursday, July 20th. The Journal is a co-production of Gimlet and The Wall Street Journal. Special thanks to Dave Michaels for his help with today's episode. Thanks for listening. See you tomorrow.