What if Facebook had never bought Instagram? This question keeps competition regulators like the Competition and Markets Authority (CMA) up at night. In 2012, Instagram had just 30m users, 13 employees, and made no money. The $1bn valuation was mocked and appeared to many to be the sign of a tech bubble ready to burst. Almost ten years on, $1bn looks like the bargain of the century.
If Instagram was an independent company today with 1bn users, there is no chance that Facebook would be allowed to buy it. Many competition authorities regret approving the deal.
As concern about competition in digital markets grows, the Government wants to make it harder for Facebook and Google to buy the next Instagram. Their plan is to lower the burden of proof needed to block a deal on competition grounds. Currently, mergers are blocked if the CMA thinks they are likely to reduce competition.
Under the new standard, any deal involving digital platforms, such as Google or Facebook, that has a “realistic prospect” of reducing competition – defined in law as being “greater than fanciful, but less than 50 percent” – would be blocked. In other words, the CMA will be instructed to block deals that it thinks on balance are likely to be neutral or positive for competition. In practice, this is likely to become a de facto ban on acquisitions for tech giants with grave consequences for the UK’s tech startups.
Facebook will not be able to buy the next Instagram, but at what cost?
Failure is a fact of life for entrepreneurs. Most startups fail and tech startups fail more than any other type. Venture capitalists still invest because the returns from a single successful exit could be large enough to offset any failures.
There are two main routes to exit for tech entrepreneurs. You can either list on a stock exchange, as Deliveroo did in March, or you can sell up to a larger firm. Almost as many British startups (eight) were bought by Microsoft, Google, Facebook, Amazon, and Apple last year – the companies likely to face this crackdown – as those that exited through IPO (nine) in 2019. As noted in a report by the Entrepreneurs Network, more than half of startup owners expect to be acquired at some point. CMA’s plan would slash the opportunities available to those trying to disrupt the market.
If VCs are forced to put all their eggs in the IPO basket, then startups become a much less attractive investment option. Over the past decade, London has seen an enormous growth in VC investment, but if exits are harder and rarer, then investment will inevitably fall.
One academic study found that US states which pass anti-takeover laws see VC investment decline by 25 per cent.
And London’s investors have signalled that upcoming merger changes will lead to them investing less. When they were polled about a tougher M&A regime by startup lobby group Coadec, half said they would significantly curb the amount they invested.
The Government’s plans to promote competition in tech will be for naught if a startup trying to disrupt Google and Facebook cannot get funded. There’s also a risk that London could lose its crown as Europe’s VC capital. The merger proposals are more extreme than anything the EU is currently considering. And congressional gridlock means it is highly unlikely that the US will follow our lead. The UK may become a uniquely difficult place to sell your business. Singapore-on-Thames, it ain’t.
There are other risks too. Google, Facebook, and Apple’s main competitors are each other. And mergers play an important role in keeping them on their toes.
Google’s acquisition of Android increased competition faced by Apple’s iPhone; Apple’s acquisition of Beats by Dre increased competition faced by Spotify; Google, Amazon, and Microsoft all compete in cloud computing and have used acquisitions to build their services.
If the Government’s proposals became law, future deals of this sort would be in jeopardy. There would be less, not more, competition in tech. Competition enforcement is vital in a market economy, but you can have too much of a good thing. Overuse it and you risk stifling the dynamism you want to protect. A rethink is needed.