A notorious Silicon Valley tactic – operating at a loss using massive stockpiles of investor cash to wipe out traditional businesses and less-well-funded startups – has recently been under fire. (It’s about time!)
Most recently, Facebook started a newsletter platform to compete against Substack and is offering financial terms Substack can’t possibly match. Substack makes money by taking a 10% cut of writers’ revenue. Facebook’s cut of subscriptions on its platform, Bulletin, will be 0%… at least for now. The company also paid best-selling authors like Malcolm Gladwell and Mitch Albom to sign on for the launch.
Bulletin may be useful for writers, many of whom will likely welcome the pressure on Substack to lower fees, but it is emblematic of a tactic that other tech giants have employed to quash competitors as they expand their business empires. From Uber to Google Photos to Apple TV Plus, the world’s wealthiest companies routinely launch new products free or at money-losing costs that smaller rivals can’t possibly match without going out of business.
For decades, U.S. courts have taken a hands-off approach to what was once known as “predatory pricing,” partly on the theory that lower prices are good for consumers regardless of the motivation. If a company wants to take a loss on a product in hopes of gaining market share, the free-marketeer’s thinking goes, that’s its prerogative. That laissez-faire approach has emboldened tech giants to wield free products and below-cost pricing as weapons, but the broader trend of tech giants using loss leaders to undermine upstarts may come under fresh scrutiny amid a wider societal rethinking of corporate power, particularly of tech companies.
In July, at the first open meeting of Lina Khan’s tenure as chair of the Federal Trade Commission, the FTC voted to revoke a 2015 policy that constrained its role in regulating “unfair methods of competition.” While the commission said nothing about any specific tech giants, the move paves the way for it to go after those companies for practices that have long been tacitly permitted in the tech sector, potentially including pricing products below cost to undermine rivals.
It’s something Sandeep Vaheesan, legal director for the think tank Open Markets, has been calling for. The charge of predatory pricing – selling goods at a loss to drive out competitors, presumably to raise them later – has gone out of fashion in antitrust law, where courts have adopted stringent tests that make it near-impossible to prove. Vaheesan says the FTC has an opportunity to revive it, perhaps even ban certain practices by companies above a certain size or market share.
“We want companies to compete by making better products, investing in new equipment and tech – not purely relying on their financial advantages to capture market share,” Vaheesan said. Vaheesan says such rules should apply not only to the largest Internet platforms but also to venture-backed insurgents seeking to disrupt established industries by operating at a loss for a decade or more. He cited Uber and Lyft, the ride-hailing companies that have outcompeted taxi companies in part by charging people less money for a ride than it costs to provide. Recently, Uber and Lyft have been hiking prices dramatically amid a shortage of drivers.
Source: Washington Post