(Washington, DC). AAI filed comments today with the Federal Trade Commission (FTC) in response to its Solicitation for Public Comments on the Business Practices of Cloud Computing Providers in docket No. FTC-2023-0028-0001. The AAI report issued today — The Cloud Technology Market: Storm of Innovation or Rainy Days for Competition? — is appended to AAI’s comment in the FTC’s solicitation. It provides expert economic and policy analysis of the structure and evolution of the cloud market. The empirical analysis and observations from the findings have important implications for the questions regarding the business practices and conduct of cloud providers that the FTC seeks response to in the Solicitation. Read the full report here.
AAI Issues New Report — The Cloud Technology Market: Storm of Innovation or Rainy Days for Competition?
(Washington, DC). The American Antitrust Institute has released a new report: The Cloud Technology Market: Storm of Innovation or Rainy Days for Competition? The rise of cloud technology has been meteoric. Within a relatively short period of time, spanning the early 2000s to mid-2010s, major providers of cloud technology built out massive capabilities. This cloud buildout occurred largely through acquisitions of smaller rivals and startups, but organic growth also played a role. Today’s cloud market features two fundamentally different types of participants. One is the large “digital ecosystem.” Cloud technology is one of three fundamental components of the digital ecosystem that also includes a platform and constellation of applications. These players include Amazon’s Web Services (AWS), Microsoft Azure, and Google Cloud. But there are also other players in the cloud market that are not digital ecosystems that specialize in cloud technology, including IBM, Oracle, Salesforce, and Tencent.
The evolution of the broader cloud market is marked by distinctive features. First, three providers—all digital ecosystems—collectively account for 65% of the market. A small fringe of other providers account for the remainder. Despite a trajectory of rapid acquisition and expansion of cloud capability, the positioning of the top three firms, AWS, Microsoft Azure, and Google Cloud, has not materially changed over time. Nor is it evident that the smaller fringe players have gained enough market share to even come close to displacing the market leaders. Whether the economic downturn, which has slowed cloud growth, shifts these dynamics remains uncertain, especially since cloud adoption is still at an early stage.
Second, as previous AAI research reveals, the digital sector—in which the cloud market is situated—is home to extraordinarily weak merger enforcement. This record of enforcement has actually deteriorated over time, with the rate of merger challenges in the digital sector falling increasingly below the average across all sectors. This enforcement record is highly relevant to the explosive and rapid trajectory of cloud acquisitions by many of the top cloud providers, which account for 45% of their total acquisitions over the last two and a half decades.
The features of the cloud market raise pressing questions about the nature of competition in cloud and the role of antitrust enforcement and competition policy in promoting it. Structural “stagnation” in the cloud market, coupled with ongoing weak merger enforcement, is seemingly at odds with the technological dynamism and potential for continued innovation in the sector. As cloud providers undoubtedly turn their attention to strategic competition to protect market positions, enforcers should do the same. However, this report explains why it is crucial to continue to focus on consolidation, rising concentration, and the emergence of dominant firms. As revealed time and again, non-competitive market structures potentially beget anticompetitive incentives, conduct designed to limit competition, and poor market performance.
The report unpacks the structure of the cloud market and its implications for competition. It examines the top players and their business models, areas of cloud where acquisition and investment are particularly focused, and markets shares and concentration. This provides an important reference point for understanding the strategic incentives facing cloud providers. These include how firms make decisions about expanding—organically through internal innovation and growth, or through acquisition; maintaining or extending their market positions; bundling and pricing cloud services; promoting customer switching; and competing on quality (i.e., security); and innovation.
The report lays the groundwork for assessing the competitive evolution of the cloud market. It tees up fundamental questions. For example, do the structural characteristics of the cloud market raise concerns about the trajectory of competition and how much weight should be given to the role of technological dynamism and innovation to ensure that critical cloud services are delivered competitively? How aggressively should enforcers monitor consolidation and the structure of the cloud market? At the same time, how can they get ahead of the ball on strategic firm conduct that could be designed to limit competition? Major takeaways from the analysis include:
• The cloud market has grown exponentially, with cloud-related acquisitions accounting for 45% of total acquisitions by the top cloud providers. Market structure is stagnant across the largest providers and smaller fringe players, despite the underlying dynamism inherent in cloud technology. Incentives to defend market positions could shape entry moving forward and foster practices designed to entrench market power and limit competition.
• Expansion of cloud capability by the top cloud providers occurs, acquisition, investment, and organic growth. How firms deploy these strategies is becoming clearer. The roles of economic control of cloud assets and the competitive incentives resulting from different types of firm integration are important for how firms position themselves to grow and the types of competitive strategies they employ.
• The buildout of cloud technology that occurred from the early 2000s to mid-2010s appears to be maturing. It bears little resemblance to broader M&A cycles. This is likely a function of explosive growth in the digital sector and the drive to catch up with rivals that rely more on organic, versus acquisitive, growth. The dynamics of growth are likely to continue to affect how firms compete in the cloud market.
• The cloud market contains a mix of dominant, digital ecosystem cloud providers and non-digital ecosystem fringe players. Different business models and degrees of integration will affect how firms compete in selling cloud services. These include the digital ecosystems’ strategies for maintaining their positions in platform and applications markets. Other types of cloud players may not have these same incentives, which will complicate analysis of merger and monopolization cases.
• Weak merger control remains a serious competition concern for the digital sector. Without more scrutiny of cloud consolidation, including acquisitions of smaller and nascent rivals, any competition enforcement program will increasingly lag behind. The first line of defense to anticompetitive conduct resulting from higher concentration and dominant firms is strong merger enforcement.
Private Equity’s Impact on Physician Practices: Unpacking Markets, Competition, and Prices
On this episode of Ruled by Reason, AAI President Diana Moss hosts two leading healthcare competition experts. Laura Alexander is Director of Markets and Competition Policy at the Washington Center for Equitable Growth and Brent Fulton is Associate Research Professor of Health Economics and Policy at the University of California at Berkeley and Associate Director of the Petris Center on Health Care Markets and Consumer Welfare. They take up an increasingly troubling issue in healthcare competition: growing private equity ownership of physician practices. The conversation previews major takeaways from a soon to be released study between AAI, UC Berkeley, and WCEG, funded by a grant from the Arnold Foundation. Moss, Alexander, and Fulton discuss the penetration of private equity ownership in the U.S. across a variety of physician practice areas, growth in market share and concentration, and effects on prices. This episode is a must-listen for those following consolidation in critical healthcare markets and its implications for prices, healthcare costs, antitrust enforcement and healthcare policy.
Laura Alexander is the director of markets and competition policy at the Washington Center for Equitable Growth. Her primary areas of research include healthcare markets, private equity, residential real estate sales, privacy policy, and labor market monopsony. Previously, she was the vice president of policy at the American Antitrust Institute. Alexander also is an experienced litigator, having represented plaintiffs and defendants in antitrust and other cases through trial and appeals. Alexander is also Adjunct Professor of Law at Georgetown University.
Brent D. Fulton is Associate Research Professor of Health Economics and Policy in the School of Public Health at the University of California at Berkeley and Associate Director of the Petris Center on Health Care Markets and Consumer Welfare His research examines how markets and regulation can improve the delivery of healthcare, including its cost, quality, and access. He has analyzed healthcare mergers and acquisitions, healthcare payment and delivery system reforms, accountable care organizations, health workforce, and cost analysis.
AAI Urges the Northern District of California in Google Play Store Case Not to Exclude Harms To Innovation and Consumer Choice from Recovery in Private Suits
On May 26, 2023, AAI filed for leave to submit an amicus brief in the Northern District of California supporting Plaintiff States’ and Consumer’s Opposition to Google’s Motion to exclude certain expert merits opinions. Google attempts to exclude the expert testimony of Dr. Mark Rysman on the grounds that loss of “variety” is allegedly a personal injury and not an injury to “property” that is compensable in private actions under Section 4 of the Clayton Act.
AAI’s brief points out that harms to variety, innovation and consumer choice at issue in Dr. Rysman’s damage models are not, as Google argues, the kind of personal injuries that have been excluded as compensable antitrust damages. Instead, these are core values that the antitrust laws are intended to protect. As a result, AAI argues, it is vital to antitrust enforcement efforts that private enforcers can seek redress for such injuries. This is particularly important for future antitrust enforcement because innovation is a primary aspect of digital competition. AAI bases its arguments on the Supreme Court’s previous readings of Section 4 and the long-established recognition by antitrust agencies and courts of harm to variety, innovation and consumer choice as an antitrust injury.
The brief was written by AAI Vice President of Legal Advocacy Kathleen Bradish, with assistance from AAI Summer Intern Oscar Rodas-Falla.
New Study by AAI and AFREF Calls Attention to the Growth of Private Equity Ownership in Home Healthcare
Washington, D.C. – Today the American Antitrust Institute (AAI) and Americans for Financial Reform Education Fund (AFREF) issued a new report: The Growth of Private Equity Ownership in the Home Healthcare Market. The report takes a close look at the incursion of private equity into a critical healthcare market – home healthcare. Home health companies, working like employment agencies, hire aides to provide a range of medical services to patients, primarily the elderly or disabled, directly in their homes.
Private equity’s rapidly growing presence in the home healthcare sector has contributed to the consolidation of hundreds of providers across the country into three dozen flagship parent brands. This weakens incentives to deliver high-quality services at affordable prices, according to the AAI-AFREF report. Private equity now profits from a consolidated marketplace for home healthcare, a trend that is particularly pronounced at the local level.
“This report is a red flag for competition enforcers and policymakers. It shows concentrated home healthcare markets, rapid incursion by private equity, and the presence of large players,” said Diana Moss, AAI President and economist. “This should serve as an early warning that these markets should be carefully monitored and consolidation scrutinized.”
The report highlights the incompatibility of the private equity investment model with the delivery of high quality healthcare services and the stability of healthcare markets. The analysis is based on a novel dataset that finds that private equity firms currently own more than 500 home healthcare providers. These companies collectively receive $1.4 billion in public funding through Medicare payments each year.
Private equity is a Wall Street creation that uses money raised from pension funds, endowments, insurance companies, and wealthy individuals to buy companies, with the intention of maximizing profits and selling them on a 3-5 year time horizon. Extensive research has documented the negative impact on employment and product and service quality under private equity ownership, but information is often hard to come by because the ownership structure is very opaque.
“The presence of private equity in home healthcare is undoubtedly larger, but without meaningful disclosures, regulators and the public are left in the dark about the full impact of private equity ownership on competition and patient well-being,” said Oscar Valdes Viera, research manager at AFREF. “Private equity’s own-to-plunder business model is incompatible with delivering health care in general, as the evidence from hospitals and other sectors shows. Concentration in home health care can only exacerbate these harms.”
Major takeaways from the report include:
- Home healthcare is a rapidly-growing and high return on equity market in the healthcare sector that is attracting significant interest and potential disruption from private equity investment.
- The private equity investment model raises concerns over its compatibility with promoting competition, affordable and high-quality healthcare, and stable and resilient healthcare markets.
- Private equity accounts for a relatively small proportion of ownership but its rate of acquisition is far greater than other ownership types and only a few private equity players control a large proportion of Medicare payments.
- MSA-level home healthcare markets display higher levels of concentration overall and private equity owned or backed firms have made significant and rapid incursions, now operating in over 50% of all markets.
- High market concentration, the role of large home healthcare firms, and the potential for further incursions by private equity emphasizes the need for antitrust enforcers and regulators to engage early.
- The data collection process for this report emphasizes that significant reforms are needed to ensure that the private equity industry discloses full and meaningful data that can be used to evaluate the impact of private equity ownership on competition.
The report was authored by Diana Moss, President at AAI, and Oscar Valdes Viera, Research Manager at AFREF. This joint project between AAI and AFREF was made possible by a grant from the Antimonopoly Fund of the Economic Security Project.
AAI Asks Third Circuit to Apply Practical Approach to Ascertainability Requirement for Class Cert.
On May 15, 2023, AAI filed an amicus brief in the Third Circuit in support of Appellants’ request for reconsideration or rehearing en banc in a case alleging brand and generic manufacturers of Niaspan, a lipid disorder treatment, engaged in an illegal pay-for-delay agreement. After a district court decision denied certification of a proposed class of health insurers and health plans, a Third Circuit panel affirmed. The panel cited the Third Circuit’s heightened “ascertainability” requirement, which requires an “administratively feasible mechanism” for identifying class members as well as an objective class definition. The Third Circuit’s administrative feasibility test is controversial and arguably grafts extra-legal requirements for class certification onto the requirements set forth in Rule 23. The Third Circuit test is at odds with several other Circuits that have rejected any “ascertainability” requirement.
In the brief, AAI identifies two grounds for reconsideration. First, the brief argues the Third Circuit panel erred by deviating from the practical approach to the “administrability” requirement that other Third Circuit decisions apply. Second, the brief notes that the Third Circuit failed to give due weight to the extensiveness of prescription drug data in considering whether a person or entity meets the class definition.
On the first issue, AAI identified that the Third Circuit panel incorrectly required a “systematic” approach that meant that Plaintiffs would need to identify a single set of data could “feasibly identify and filter out” entities that appear in the data and were not class members. AAI argued that this additional requirement created a bright line that does not exist in Third Circuit precedent, and the panel’s failure to apply the less demanding practical approach necessitates panel reconsideration or rehearing en banc.
Second, AAI argued that the Third Circuit panel failed to give sufficient weight to the extraordinary amount of data in the prescription drug industry and the ways that data could be used to identify class members in conjunction with the practical aims of the administrative feasibility requirement.
The brief was written by an AAI Board of Director Joshua Davis, with assistance from Scott Grzenczyk.
AAI Issues New White Paper: Competition Enforcement, Private Actions and the Shipping Act
This white paper by J. Wyatt Fore of Constantine Cannon, together with Kathleen Bradish of AAI, introduces readers to the specialized area of private antitrust enforcement under the Shipping Act. The authors draw attention to the serious competition issues facing the ocean shipping sector and discuss how private enforcers can use the competition provisions of the Shipping Act to help address some of those problems. The authors take a critical look at the current enforcement framework and offer proposals about actions Congress and the Federal Maritime Commission can take to promote competition in ocean shipping by making private actions under the Shipping Act more common and more effective.
Read the white paper here: AAI White Paper – Competition Enforcement, Private Actions and the Shipping Act
A “Mixed Bag” for Antitrust Enforcement in the Tech Space: Implications of the Ninth Circuit Decision in Epic v. Apple
On April 24, 2023, the Ninth Circuit issued an opinion largely upholding the district court decision in Epic v. Apple. Although the decision is overall disappointing for antitrust enforcement, it also provides important corrections to some of the district court holdings, including points addressed in AAI’s amicus on appeal. We summarize both aspects of the opinion below.
There are considerable downsides in the opinion for antitrust enforcement efforts, especially in the tech space, where it has the potential to increase the evidentiary burden on plaintiffs in significant ways. Following are major takeaways from the opinion.
- Single-brand relevant market: The opinion affirms a high bar for showing a “single-brand” relevant market. The Ninth Circuit adopts a reading of the Supreme Court’s Kodak case that requires the plaintiff show that restrictions are not “generally known” by customers before they make their purchase and provide evidence of the “magnitude” of the switching costs. The Court agreed with the district court that Epic failed to provide sufficient evidence on these points. This articulation of “required” showings is particularly important for enforcement in the tech space. Being able to show a single-brand market is vital in a space where a small number of large tech companies have created broad, multi-level proprietary ecosystems to protect their market positions.
- Less restrictive alternative standard: The opinion describes a relatively onerous standard for plaintiffs to rebut a claimed procompetitive benefit by showing a less restrictive alternative. The Ninth Circuit finds that plaintiffs’ proposed alternative must be “virtually as effective in serving the defendant’s procompetitive purpose” as the challenged restriction. This demanding standard led to leaving in place the district court’s rejection of Epic’s alternative even though it was based on a system Apple already had in place for its computer-based app distribution. This part of the opinion may have the most significant negative consequences for future enforcement, especially in the tech space where the knowledge and evidence of available alternatives is likely to lie with the defendant and there may be unresolvable uncertainty about how alternatives could be implemented.
There are, however, also some important bright spots in the opinion. The Ninth Circuit corrected mistakes of the district court that would otherwise have been a significant step backwards for antitrust enforcement in the tech sector. This did not affect the outcome of the case, however, as the panel found these mistakes to be harmless, given the other facts.
- Contract under Section 1: The Court rejected the district court’s notion that a contract willingly entered into by plaintiff was not a contract covered by Section 1. The Court followed other precedent and affirmed that Section 1 covers every contract, even if a plaintiff had begrudgingly accepted the restrictive terms.
- Market definition: The Court rejected the district court’s holding that a product market must be defined around a product that the defendant licenses or sells. Instead, the Court affirmed that market definition must be based on market realities, and could include, for example, markets based on products that are free or “vertical” products.
Although this view is consistent with other precedent, it is an important point for tech markets, where products are often offered for free to one side of the market in exchange for access to data.
- Two product requirement for tying claim: The Ninth Circuit rejected the district court’s conclusion that Epic failed to show that there were two different products for purposes of a tying analysis. The Ninth Circuit here was consistent with AAI’s arguments in its amicus. It further helpfully emphasized that the burden for this showing should be light because it is only a preliminary question, not the substance of the analysis.
- Scope of Ohio v. Amex: The opinion finds that the district court took the analysis of Ohio v. Amex too far when it claimed that a two-sided market could not be broken up into multiple products for purposes of an antitrust analysis. The circuit court instead emphasized the need to consider market realities in platforms just as in other areas. The Ninth Circuit’s conclusion here seems to have stemmed some of the overbroad readings of Ohio v. Amex that could have led to immunizing a broad swath of platform conduct. This is consistent with AAI’s amicus arguments. Compared to the approach advocated by AAI, though, the Ninth Circuit missed an opportunity by not going further in cabining Amex than it did.
- Need for balancing test under rule of reason: The Ninth Circuit agreed with Epic and several amici that precedent requires a balancing of procompetitive and anticompetitive effects, even if plaintiff does not offer sufficient proof of a less restrictive alternative. The benefit of the holding is dampened, however, because it is clear the Court is dubious that adding a balancing test will change the outcome in any similar situation and seems to suggest that the last step is a matter of form rather than substance.
Finally, the Court raises the important question of whether cross-market rationales (i.e., weighing benefits in one market against harms in another) are cognizable. It seems to be leaning in favor of allowing such rationales based on precedent but sidesteps the issue in Epic v. Apple by finding instead that the harms and the benefits are in the same market. As a result, it leaves that question for another future case.
In short, the Ninth Circuit’s decision reins in some of the pro-defendant excesses of the district court decision against Epic, but it leaves intact questionable standards that can increase the challenges faced by plaintiffs in similar cases. Hopefully, future decisions will be clearer about the limits, not just the lower bounds, of what showings are required of plaintiffs.
Powerful Buyers and the Grocery Supply Chain: What Does it Mean for the Independent Grocer?
On this episode of Ruled by Reason, AAI President Diana Moss hosts David Smith, CEO of Associated Wholesale Grocers, and Chris Jones, SVP of Government Relations and Counsel for the National Grocers Association. They take up a front-line issue: consolidation in the retail grocery supply chain and the threat it poses to smaller independent grocers. The accumulation of market power has spurred an ongoing cycle of bulking up to gain bargaining leverage over suppliers and customers, with significant effects on smaller players in the supply chain, including farmers and ranchers, small food brands, regional dairy and protein processors, food wholesalers, and independent grocers. The conversation focuses on how powerful retail grocers engage in various methods to exercise their buyer power, often at the expense of independent grocers; what enforcement and policy tools are available to combat it; and what further consolidation in retail grocery means for competition and security of the food supply chain.
moderator:
Diana Moss, President, American Antitrust Institute
GUESTS:
David Smith is the CEO of Associated Wholesale Grocers, the largest cooperative food wholesaler in America. Throughout his long career, David has focused on the development and success of independent supermarket operators. He grew up in the retail side of the grocery business in a family-owned independent multi-store operation and later worked in management and leadership roles for regional wholesalers Malone and Hyde and later for Fleming Companies, Inc.
Chris Jones is SVP of Government Relations and Counsel for the National Grocers Association. He joined NGA after serving nearly 8 years as a staffer on Capitol Hill. He worked in a senior legislative role from 2010-2017 and managed the agriculture and nutrition portfolio for a senior member of the House Agriculture Committee.
AAI Tells Second Circuit that Pharma Bro’s Lifetime Ban from the Pharmaceutical Industry is Appropriate and Necessary to Ensure Effective Relief
On March 30, 2023, AAI filed an amicus brief in support of the Federal Trade Commission at the Second Circuit in Martin Shkreli’s appeal of the district court’s injunction in FTC v. Shkreli. At trial in the district court, the FTC and several states succeeded in proving that Martin Shkreli, aka “the Pharma Bro,” violated Sections 1 and 2 of the Sherman Act by a series of exclusionary acts that prevented generic competition to an important life saving drug. Mr. Shkreli’s acts allowed his company to increase and maintain a price increase of more than 5000% per tablet. Mr. Shkreli appealed only the relief granted by the district court, not the underlying finding of liability.
AAI describes why, based on its extensive work on antitrust remedies, it believes the Second Circuit should reject Mr. Shkreli’s request to drastically narrow the scope of his lifetime ban from the pharmaceutical industry and uphold the district court’s injunction in full. The AAI brief identifies a set of factors that caselaw and agency experience have shown to be necessary to an effective antitrust remedy and explains why each of these factors support upholding the injunction as issued, including the lifetime ban. Any effective antitrust relief, the AAI brief explains, must: (1) be broad enough to address future ways in which the defendant might achieve the same anticompetitive goals, (2) make it easy to detect and enforce against violations, and (3) address the incentives that led to the anticompetitive conduct. Any weaker relief than the district court’s issued injunction, the AAI brief concludes, would risk failing on one or more of these points. Further, the AAI brief notes that the district court’s injunctive relief is appropriate and consistent with accepted limiting principles of antitrust relief including ensuring relief flows from the proven harms, keeping relief proportionate with harm, and considering the effect on procompetitive conduct.
The AAI brief also discusses the effect weakening the injunctive relief in this case could have on antitrust enforcement at the FTC, especially in the pharmaceutical industry. The brief describes the FTC’s frontline role in pursuing anticompetitive conduct in the pharmaceutical space and why limiting relief in this case threatens the FTC’s ability to pursue effective remedies against antitrust violations across the pharmaceutical space.
The brief was written by AAI Vice President of Legal Advocacy Kathleen Bradish, with invaluable assistance from AAI Research Fellow Mathew Simkovits.
Read the full brief here: AAI Amicus Brief to Shkreli Motion
