Welcome to BIG, a newsletter on the politics of monopoly power. If you’re already signed up, great! If you’d like to sign up and receive issues over email, you can do so here.

Normally I have one theme for a newsletter, but today I’m going to do shorter pieces on a bunch of different topics.

The Adobe-Figma Design Tool Merger
How to Address Our Railroad Crisis
A Swedish Lock Giant vs the U.S. Government
California Attorney General: Amazon Prime Is an Economy-Distorting Scam
Google Wins One, Loses One in Key Case Over Its Control of Online Advertising

Weigh in on Adobe-Figma

Yesterday, software giant Adobe, which makes design software such as Photoshop, announced the $20 billion acquisition of Figma, a fast-growing competitor. I am not a designer by any stretch, which you will know if you have seen any of my attempts at making graphics, which look like the scrawling of someone writing a kidnapping note. But from my understanding, Adobe makes its money from desktop graphic design programs that can be used offline, while Figma makes web-based ones that foster collaboration. Think Microsoft Word vs Google Docs. With $400 million of revenue this year, Figma has gained significant share in what looks like the future of design.

Figma was started in 2013 with the explicit goal of taking on Adobe, and achieved its market position due to widespread frustration with the design giant. And Adobe makes a competitive design collaboration product, which it will now kill after buying Figma. So the attempt at the acquisition is pretty brazen.

These two headlines tell the story of both Adobe and Figma, and modern antitrust law.

There are other reasons to be wary of the deal. Adobe is paying 50 times the revenue of Figma, which is a crazy price unless it is trying to maintain its market power. It feels sort of like Facebook buying Instagram, which seemed wildly overvalued at the time, but in retrospect was a clear way for Facebook to prevent disruption of its business as social network moved from the desktop to the smartphone.

It’s also not the first time that Adobe has bought a competitor to retain its monopoly revenue stream. I found this comment on Hacker News pretty compelling.

“Many years ago, when Adobe bought Macromedia, they acquired a tool called Fireworks. Fireworks was cheap, powerful, and hugely ahead of its time. After the acquisition, Adobe starved Fireworks of resources and marketing. They broke things, left major bugs and performance regressions unfixed, and eventually discontinued it altogether. I'd argue this wasn't simply negligence, but a calculated decision to kill an innovative product because it threatened the profits of their cash cows.
As much as I hope otherwise, I believe the acquisition of Figma will go the same way. Once it's under the Adobe umbrella, the simple mathematics of profits from Photoshop and Illustrator vs. those from Figma will result in the latter being starved, stripped of functionality, and eventually left broken.”

While Adobe will no doubt try to assure the market otherwise, this fear is eminently reasonable. Adobe has not been an innovative company for a long time.

What’s also interesting about this transaction from a political standpoint is that, broadly speaking, most people in the industry know this. I’ve never seen a merger foster such immediate widespread anger online. Tens of thousands of designers furiously let fly on Twitter and other online forums how much they hate Adobe and fear it ruining Figma.

Stacie @staciestreams

Congratulations @Adobe and @figma you’ve pissed off an entire profession

Adobe @Adobe

We’re excited to share our intent to acquire @Figma. Together, we will usher in a new era of collaborative creativity. Key info: https://t.co/9wDSHPhyvE https://t.co/U5SduJUVvc

Given that there’s so much public frustration, and designers really know this industry, I figured I’d do something special. I’ve set up a form where anyone can weigh in on this merger. I’m going to use your feedback to inform my analysis, but I will also send your comments to the relevant antitrust officials who are looking at the deal. You can submit anonymously if you want. So if you are in the industry, or you have a point of view here on either Adobe or Figma, or just want to have your say, please offer your feedback on the merger. You can do that here.

My instinct is that this merger is illegal and that it will be blocked or abandoned. But I’m not 100% sure, as there are also technical issues here that I’m still trying to wrap my head around. But even within the merging parties, there is genuine concern about whether this merger will close. Internally, Adobe executives are already telling employees not to write anything down about the merger for fear it will be found by government investigators.

So help me out. And let’s make sure the government hears our point of view.

(Frankly I wish the FTC/Antitrust Division would have open comment dockets for big mergers like this.)

The Sliding Scale Plan for Railroads

There was a near-strike and shut down of the freight railroads last week. And I thought this quote was pretty compelling as to why.

“The problems we are experiencing today are not solely the result of the COVID-19 pandemic. Years of railroad decisions to cut staff, eliminate switch yards, and slash customer service resources have gutted network resilience, making service crises like this one entirely predictable, if not inevitable.”

If you think that quote is from a lefty union official, you’d be wrong. That’s the President of the American Chemistry Council - a trade group for Exxon, Dupont, Honeywell, and so forth - complaining about layoffs at the railroads. Why is a big business lobbyist complaining about worker mistreatment in another industry? The reason is the American economy runs on freight, and the mass layoffs by the railroads over the last five years - done despite the immense profitability of the industry - have made service so bad that every major company in America that ships anything is angry about bad service.

Why are the railroads firing their workforce if they are making so much money? One key problem is that the railroads are run by financiers who seek to extract whatever cash they can from their capital heavy industry, regardless of the cost in service. They understaff their trains, they run unreliable schedules, they underinvest in capacity, and they let their capital stock degrade, all so they can pay out the $190B in buybacks and dividends they have done since the early 2010s.

So what’s the right reform? There are complex regulatory schemes we probably need to re-implement, but the reality is that no one actually knows how to regulate the railroads, and just figuring that out is going to take years. But there is a simple temporary solution. Let’s just make the ability of the owners of railroads to pay themselves dividends or engage in stock buybacks contingent upon them delivering good service to customers. To do that, they will need to hire enough workers and run the rail lines operationally well. And if they don’t, and increase profits by suppressing workers and service, they still won’t be able to pay themselves out via dividends and buybacks.

The Surface Transportation Board can start implementing this proposal by actually measuring rail service more accurately. And then, using either regulatory authority or seeking statutory grants from Congress, the STB can implement a sliding scale to require railroads to make their payouts to investors contingent upon reliable service.

Such a regulatory model has been tried, and worked, by none other than Louis Brandeis and the Public Franchise League over a hundred years ago. At the time, Boston was having trouble with its gas utility, until it implemented such a scheme with the Sliding Scale Act of 1906, which drew from the British system and implemented "the automatic and interdependent adjustment of the price of gas to consumers and the rate of dividends to stockholders of gas companies."

The new regulatory scheme worked fantastically well. The gas company management, after fighting the law, came to focus on making their company work more efficiently. The price of gas declined, profits for the utility increased, and payouts to shareholders and the share price went up. Eventually, the gas company management began rewarding employees for ideas and schemes to increase operational efficiency.

It became a big happy family, if you leave out the brutal fifteen years of political fighting during which the utility resisted such public utility rules. We don’t have that much time to fix this, so let’s hope the Biden Administration gets rolling in the right direction on the issue soon.

Locked Out

Since Jonathan Kanter took over the Department of Justice Antitrust Division ten months ago, the DOJ has challenged or blocked eight mergers, litigating more merger trials than in any fiscal year on record. Even still, corporate America is not getting the message. Mergers that should not even be considered because they are obviously illegal are being proposed and going to trial. One such merger is that of a Swedish company named ASSA ABLOY, best known for its Yale locks brand, attempting to buy Spectrum Brands’ Hardware and Home Improvement Division, which also makes locks. To put it simply, these kinds of mergers are ridiculous.

Why is this merger illegal? In internal documents, the company justified the merger by noting that, as a result of the transaction, one of its residential door hardware brands would be “in a better pricing negotiation position and can expect to increase prices.” The CEO might as well have said, “We are merging because we think enforcing the Clayton Act is for losers.”

BIG is a reader-supported newsletter focused on the politics of monopoly and finance. If you’re a paid subscriber, thank you! You make this work possible, and every comment, like, or forward of this newsletter is how we build this movement together.

If you are not yet a paid subscriber, please consider becoming one. BIG is journalism and advocacy that challenges power. You can always get lies for free. The truth costs a few bucks, but in the long run it’s much cheaper.

Subscribe now

Beyond that, the facts support the Antitrust Division’s case. It’s a highly consolidated market already. There are three significant lock makers, and this combination would shrink the industry down to two, with ASSA ABLOY controlling 65% of the mechanical residential door hardware market, and 50% of the smart lock market. (It didn’t used to be so consolidated - ASSA ABLOY engineered it that way, buying more than 300 businesses in 27 years.)

These two firms are vigorous competitors in markets that are hard to enter, and which are already immensely concentrated. It speaks to the degraded status of merger law that these firms would even consider merging, let alone litigating this at trial. Then again, that’s mostly what ASSA ABLOY’s leadership knows how to do, exploiting weak antitrust enforcement. More importantly it’s what their lawyers, who encourage lawlessness, are pushing them to do. It’s good that Kanter is working to strengthen merger law and move away from the rampant monopolization across the economy. And in this case, the DOJ also asked the merging parties to pay their litigation costs. That’s only fair, because this transaction should never have gotten out of the board room.

California Attorney General: Amazon Prime Is an Economy-Distorting Scam

Last May, I wrote up an antitrust case filed by the D.C. Attorney General against Amazon’s scheme to inflate prices economy-wide via its Prime service. This week, the California Attorney General Rob Bonta filed a similar case in California court.

The gist of the claim is that Amazon doesn’t offer low prices, but offers the illusion of low prices. It’s true that the retail giant does have the lowest prices around. But the way it achieves this feat is not to have low prices, but to force its competitors to raise their prices. Here’s how.

Nearly every third party seller or producer of branded consumer goods sells through Amazon, because Amazon has 160 million Amazon Prime members who are loyal. If a business can’t access those members, it is essentially shut out of the online retail market. So Amazon has a lot of leverage with suppliers. It uses this in two ways. First, it charges very high fees to sell through Amazon, up to 45% of the price of the good being sold. And second, it says that you cannot sell your products more cheaply anywhere else. So anyone who makes anything and sells to consumers must pay a large tax to Amazon, and then raise prices both on and off Amazon to compensate.

As Bonta noted in the complaint, “Individual third-party sellers and wholesale suppliers have told the Office that they would offer lower prices or allow discounting on competing sites if Amazon did not demand price parity.” In other words, Amazon is ensuring that, while you get high prices on Amazon, you get even higher prices everywhere else. To put it another way, Amazon just started giving $1 billion a year to the NFL so it can stream Thursday Night Football to Prime members. Who do you think is paying for that? It’s not like Amazon Prime membership is now more expensive. The answer is, every single American who buys anything online is paying a disguised private sales tax to Amazon.

Big Bad Google Wins One, Loses One

In December of 2020, the Attorney General of Texas Ken Paxton, joined by multiple other states, filed a dangerous antitrust complaint against Google. In it, Paxton argued, that Google had monopolized all the software plumbing that underpins online advertising markets. That is, Google controls the software publishers use to manage ad inventory, the software advertisers use to buy ads, and the exchanges that connect the two of them.

Google used a number of techniques to do so, like tying its various products together, so advertisers couldn’t buy YouTube ad inventory or get Google search data unless they also used Google’s software for ad buyers. In doing so, Google fostered a giant financial exchange-like system where advertising slots were traded, billions of times a day, with itself in the middle. It exploited its position in this exchange to rig bids for itself, and siphon money from advertisers and publishers.

Last year, Paxton added a new claim, that Facebook had colluded with Google, getting preferential placement in this marketplace in return for not building a competitive system where advertisers and publishers could buy and sell ads. This was a charge of price-fixing between the two giants.

Earlier this week, Republican-appointed Judge Kevin Castel wrote an 88-page decision. He will let the monopolization claims go to trial, but dismissed the Facebook collusion charge. While both Facebook and Google internally said their agreement for Facebook to have better placement was a market-allocation scheme, Castel argued that the agreement itself didn’t say that.

Overall, this decision is a pretty good result, because the monopolization claims are significant. Still, the loss of the price-fixing charge hurts. Importantly, price-fixing is a more dangerous charge. This is because it’s much easier for a plaintiff to win - all they have to show is that there was price-fixing, they don’t have to do any real economic analysis. And price-fixing is often a criminal act.

Still, the possibility of showing a market allocation scheme between Google and Facebook isn’t over. If the Department of Justice picks up the adtech suit, and I suspect it will, then antitrust enforcers could choose to resurrect this charge between Google and Facebook. They could even choose a criminal charge against executives personally. That would give enforcers more leverage over the companies.

It would be an aggressive move, but I think enforcers should do it. Remember, Silicon Valley CEOs won’t believe anything will happen to them until something happens.

What I’m Reading

The Fire Monopoly, by Mindset Value. This is just an astonishing story about a firm that has monopolized equipment and chemicals in firefighting. I’ll note the key architect of this firm is Nick Howley, best known for ripping off the Defense Department via his first firm Transdigm, which specializes in aerospace monopoly components.

Treasury urges SEC, CFTC crack down on crypto industry in wide-ranging new reports, Yahoo Finance

A Constitutional Challenge to the FTC’s Very Existence, NY Times

CFPB Study Details the Rapid Growth of “Buy Now, Pay Later” Lending, Consumer Financial Protection Bureau

American healthcare did a fuckery, Pluralistic

Big Firms Dominate Post-Merge Ethereum Validation, Decrypt

Big Trucking Wants to Kill Overtime Pay for Truckers, Land Line

How Smugglers Buy Ads on Facebook and TikTok to Entice Undocumented Immigrants to Come to the U.S., Tech Transparency Project

Texas Social-Media Law on Web Censorship Upheld by Federal Appeals Court, Bloomberg

And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.

cheers,

Matt Stoller

P.S. From a reader.

I love the newsletter and always read it. I know you're always on the lookout for monopolies. I'm not sure if this fits, but I thought it might. We have a HS senior getting ready for graduation, and as such need to buy him Cap/Gown/Tassel. The only way we can get them, at least that I know of, is through Josten's, which is the same company that I purchased my cap and gown from more than 25 years ago. Anyways, their prices are sky high | $70 minimum for just the basics let alone something like a letter jacket or class ring. Anyways, just thought it might be something you could look into.

I’m not sure if it’s a monopoly, but Josten’s is owned by a private equity firm, Platinum Equity Partners, which I’ve written about here. That usually means price hikes. Platinum Equity Partners is run by billionaire Tom Gores, who owns the Detroit Pistons, and has made his money through among other purchases a roll-up of portable toilets, as well as a buy-out of a company that overcharges prisoners for phone calls. Charming.

BIG by Matt Stoller

Should the Government Block the Adobe-Figma…