The Coronavirus Crash + a Merger Boom
Intuit-Credit Karma, Kronos, Morgan Stanley-Etrade
|Matt Stoller||Feb 26, 2020|| 28||15|
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Normally I write one main essay, but today I have a bunch of small stuff to go over because there’s so much happening. First some housekeeping:
I wrote a piece for Wired on how the coronavirus is leading us to a very different form of politics, away from the basic assumption that stuff always just shows up in stores.
There are now comments enabled on these posts, and I’m learning a ton from readers of this newsletter. This comment from my last issue is a wonderful observation from a manufacturer of how overpriced military/aerospace products combined with Chinese dumping erodes domestic manufacturing capacity. You can comment by clicking on the title of this post and going to the bottom.
I was on Rising with Saagar Enjeti and Krystal Ball talking about the Democratic Party as a monopoly. I always love that show. I was also on the John Fredericks show discussing the previous Democratic debate (not the one last night but the one before that).
The Coronavirus Crash
Last year, the Chief Scientific Officer of the Zhejiang Medicine Company, Choon Teo, said something brutal to U.S. government officials who were trying to figure out what tariffs to levy against Chinese products. Teo’s company is a large scale producer of, among other things, antibiotics, and he was discussing why his company should not be subject to tariffs.
It is important that we be intellectually honest with each other. The products of which I speak are made in China because the United States made a choice, as a society, not to produce them domestically. The last plant in the United States closed decades ago because of the environmental and health regulations made it virtually impossible to manufacture these products…
China has invested heavily in facilities and infrastructure to enable the manufacturing of these products. Coupling this with the focused training of human capital, China has created a mature environment to manufacture these products.
Teo is correct. What happened in the last twenty five years, through a variety of legal changes, was the creation of a globalized Just-In-Time economic system with pockets of hidden risk everywhere. And largely it happened because American and European policymakers enabled it through consolidation and the creation of the World Trade Organization.
This globalized system is coming apart; we have very little visibility into the production and distribution because in the West we’ve relied purely on financial markets for information. Now the stock market has noticed there are problems, so it’s a bit panick-y out there. Going forward, I’ll be doing an analysis of items for which we are dependent on China, and I’ll have more soon.
Here are some observations based on talking to some supply chain and logistics professionals. They are contradictory, because no one has a complete picture of what’s happening in China.
In some sectors, production is simply not returning. For example, production of kitchenware, an industry that is located primarily in China, has collapsed. The government has pushed factories to reopen, but workers are not returning to work. In terms of logistics and shipping, I’ve heard different indications. One air freight specialist told me that though there are truly large backorders in the U.S. waiting to be flown to China, air freight operators are beginning to dig themselves out. Cathay Pacific, for instance, has cleared its backlog of inventory from Chicago, and that’s the major operator out of Hong Kong. Still, it’s really bad, steamship lines are losing $400 million a week and logistics companies with weak balance sheets are going to go bust. Moreover, because airplanes and shipping containers are used in global routes, from say Shanghai to Chicago to Frankfurt, cutting out the China leg ends up eliminating U.S.-European trade as well. It is, as I’m told, “disruption anything like we’ve experienced in our history.”
Production levels are probably uneven. In some areas, like Wuhan, production is still shut down, while in others capacity might be at 50% or 70%. So depending on what you need and where it’s made, you might be able to get access. Of course, we don’t really have visibility into China, and their data isn’t particularly reliable. Experts I talk to seem to believe that their trend line of lower disease rates is real, but also warn that it could flare up again as people go back to work. It could be like experiencing a big wave crashing on you, only to see another big wave right behind the first. Or not.
The long-term effects of the supply chain disruption aren’t obvious, but corporations are beginning to accelerate plans they had on the shelf to move away from dependency on China. For a few years, largely because of Trump and more coercive Chinese actions, Western corporations have been considering diversification of supply chains, and making plans to move production into other countries, most notably Vietnam. But they mostly haven’t pulled the trigger, because it’s expensive and difficult. I suspect that this event will induce them to do so.
A Merger Boom
Lots on the merger front.
Intuit-Credit Karma: This week, Intuit, which makes personal finance software and tax tools, announced a $7 billion acquisition of Credit Karma. Credit Karma offers credit reporting services and a variety of other personal finance tools. This is obviously and comically illegal. Intuit dominates tax preparation services, and Credit Karma does free tax preparation services. So Intuit is just buying market power, as it did when it bought Mint and let the product sit there with no improvements.
Antitrust agencies should be embarrassed that Intuit is confident enough to even propose this merger. Much of the tax preparation business probably shouldn’t even exist; the government has our tax information already, so filing tax returns is, at least for most people, an unnecessary annoyance designed to buttress Intuit’s bottom line.
The Federal Trade Commission… It’s ALIVE! Along with the bad is the good. The FTC is suing to block a joint venture of two publicly traded coal companies. The FTC is beginning to get more aggressive, because they are noticing anger and attention from Congress and the public. Pressure does actually work.
An HR Software Platform Monopolist? Kronos and Ultimate Software, both controlled by the same private equity firm, are merging in a $22 billion deal. Kronos is the leader of workforce management software, with what I’m told is roughly 60-70% of that market. They also have a sub-licensing agree with ADP, which essentially runs their software under a different name. Kronos is a roll-up, buying nine different corporations since 2016, so they can manage the ‘hire to retire’ cycle of an employee. They do software for applicant tracking, HR records, scheduling, payroll, tax, timekeeping, attendance, retirement, and benefits management. And naturally they have an app store, as all the big software players do these days.
With a full suite of products, Kronos can now exclude other players in different segments of the market. If you have a time and attendance product, but not a great payroll service, you may increasingly find it hard to do business, or vice versa. This seems like IBM’s control of computers in the 1960s, when it bundled products together to prevent entrants in segments like software, or Microsoft in the 1990s, with control of Windows, Office and Explorer. Kronos will build, maintain and extend power by controlling a platform and the applications on top of it. My guess is Kronos will argue for the benefits of integration, as Apple does.
Consolidation of Brokerages: Morgan Stanley bought E*Trade, which is a follow-on effect of Charles Schwab buying Ameritrade. Last year, Charles Schwab cut its brokerage fee to zero, which crushed margins for its smaller competitors Ameritrade and E-Trade. The next month, Schwab bought Ameritrade. And now, E-Trade is getting bought, because it can’t survive on its own with such a price war.
Note, however, that Schwab was not so much cutting consumer prices as engaging in what looks like predatory pricing-ish, which is to say, cutting price in one area to gain market power, while raising it in another area. Schwab finances itself not by charging fees to clients, but by self-dealing. Schwab encourages its clients to buy Schwab mutual funds and money market funds, and then it hides its fees in those products. Clients, however, don’t always realize that free stock trades from Schwab come at a hidden price. So when Schwab cut its fee to zero, the enterprise value of Ameritrade dropped, and it was able to buy Ameritrade on the cheap. And now E-Trade is gone as well.
Discriminatory pricing in microchips: Someone sent me this discussion on Hacker News about how NVIDIA charges different prices for similar chips, depending on whether you’re a gamer or you’re building a data center. Here’s the Nvidia license: No Datacenter Deployment. The SOFTWARE is not licensed for datacenter deployment, except that blockchain processing in a datacenter is permitted. This isn’t necessarily illegal, because laws these days are suggestions. But it sure is, how to put it nicely, differentiated.
That’s all, folks. I usually try to stick to one theme, but there’s lots of stuff happening.
Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. I got this great note from Yale economics professor Florian Ederer on innovation.
Although we disagree on many issues related to antitrust, I am an avid reader of your newsletter. Yes, I am an economist, but we're not all bad…
The idea that large incumbents don't want to innovate because such innovation would threaten their own cash cows goes back all the way to Kenneth Arrow (an economist that you would have liked) in the 1960s.
In our "Killer Acquisitions" paper we document the same effect in pharmaceuticals where dominant incumbents acquire small entrepreneurial startups and then kill the innovation because it would otherwise cannibalize the profits of their own existing drugs: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241707
There are also other papers that show that increasing concentration is terrible for innovation in pharma (https://econpapers.repec.org/article/eeeindorg/v_3a63_3ay_3a2019_3ai_3ac_3ap_3a283-325.htm): horizontal mergers not only decrease the innovation intensity of the merging parties, but even the incentive to innovate of other competitors.
Associate Professor of Economics
Yale University, School of Management