The Sheriff of Silicon Valley: Lina Khan’s FTC agenda for M&A, AI Acquisitions, and Non-Competes

0:05Hi, listeners, and welcome to KnowPriors. Today, we're talking to Lena Khan, Chair of the Federal Trade Commission. When she was appointed at 32 years old, she was the youngest chairperson in the history of the FTC and one of the youngest leaders of a government agency today. Lina has made a significant impact during her time at the FTC, focusing on high-profile antitrust cases. Within tech, her FTC has challenged NVIDIA, Meta, and Microsoft, as well as taking actions within healthcare and pharma. We're going to discuss how she thinks about AI, the structure of the markets best for consumers, non-competes, predicting whether or not M &A will happen, and her approach to increasing competition.

0:43Well, Chair Khan, thank you so much for joining us today on No Priors. Thanks so much for having me. So when you were 32 years old, you were appointed the youngest chairperson in the history of the FTC. Can you tell us a little bit about your career and what led you to the FTC in government? Yeah, happy to. So I got my start as a business reporter and journalist, And one of my jobs was to document how various markets across the U.S. economy had evolved. So I had to do deep dives in areas like the airlines, book publishing, chicken farming, the aluminum market, really all sorts of nooks and crannies that gave me a deeper appreciation for the ways that over the last four decades, our markets had become much more consolidated, primarily through waves of mergers and acquisitions, which in part were permitted through a much more lax approach to antitrust laws and policing mergers.

1:37And through that research, I really got a direct view of how consolidation and concentration in markets affects everyday people, be it consumers who are having to drive much further to get to the nearest hospital, to chicken farmers who can only sell to a single company, And that leads to all sorts of exploitation to entrepreneurs and small businesses about how, you know, when you have a handful of gatekeepers controlling access to markets, that can also lead to much worse terms for them. And so it really got me just interested in this question of market structure and the fact that how we structure markets is, in fact, a policy question.

2:18Do we want monopolies in every market or do we want more competition? And historically, America has chosen the path of more competition. And I believe that's what's contributed to just the phenomenal economic growth that we've seen and the birth of so many fantastic companies. While you were at Yale, you published this very influential essay about Amazon and the antitrust paradox. Can you describe the theory behind the essay and how that might differ from traditional antitrust and if it still applies in your thinking today? The big caveat here is that I wrote this paper as kind of a law student.

2:56It's very different from being a law enforcer. But that paper followed a lot of this market research that I had been doing. And before I went to law school, I spent a good six months just talking to a lot of the businesses that were selling through Amazon and then also talking to various investors and market analysts about how they viewed Amazon from a more long-term perspective. This was a time when, you know, Amazon's returns were still fairly low. And there was just a question about what the end game here is going to be. And it was really interesting through talking to those set of market participants, they were already seeing and experiencing the structural dominance that this company was starting to achieve, even though that structural dominance was not necessarily resulting in higher consumer prices right away.

3:45And so the essay was a way to use Amazon as a way to tell a broader story about the history of our antitrust laws and how we had evolved from, you know, viewing this issue of dominance and monopolization through a broader prism and a broader understanding of the different ways that companies can exercise their monopoly power to a much narrower, thinned out version of just viewing short term price effects and output effects primarily. as the metric of whether you do or don't have a monopoly that's abusing its power. And so that's what the paper was about. Given that you've now run the FTC for a few years, what is your view today in terms of the right framework on what's a competitive market or not, when the government needs to intervene or not?

4:30I think, for example, the FTC pursued a case against Meta for a small sort of 30-person fitness VR application acquisition. And in that case, you know, it was a very early market. There wasn't a lot going on yet there, but in part simply because there wasn't as much technology progress and traction. How do you think about more broadly from your lens today, having now practiced this for many years, when is the right time to intervene or how do you even think about that? So the right framework for all of these questions is making sure we understand what is the market reality here and what are the dimensions on which firms are competing?

5:06and how do we make sure that as we are reviewing some of these mergers and acquisitions, we're making sure that they're not being used to snuff out a competitor, be it in an existing market or in a future market. It's worth noting up front that merger enforcement is inherently a predictive exercise. So Congress has told the antitrust agencies, you all need to be on the hook for reviewing and investigating mergers and determining whether they may substantially lessen competition. That's language. And it's up to us to figure out, OK, what is this market about? What are the terms and the dimensions on which firms are competing?

5:46Are they vigorously competing to drive prices down? Or is this really a market where they're instead competing on some type of quality dimension or some type of innovative dimension? And then how do we make sure that we're actually safeguarding that competition. It's a really important question that you raise around how do we think about nascent markets or markets that are still fully emerging and it's not entirely clear, you know, is this going to just die out and fizzle out in a few years or is this really the next great thing? And that's where the predictive component comes in. The context for the DOJ and the FTC's work these last few years is we went through basically two decades where, as a general matter, the view among enforcers was that digital markets are so fast moving, are so dynamic, that we really need to err on the side of being hands off.

6:40Because if there ever were some type of monopoly power or market power to emerge, that would quickly be disciplined by the rush of new entrants that would come in. Since you have, you know, low startup costs, You can have like a few people in a garage, just launch the next best thing. What we've seen instead over the last couple of decades is that digital markets are different. And in fact, they can lend themselves to tipping. It can actually become much more difficult to break in once you have a firm that's become dominant and is protecting that dominance through network effects, through self-reinforcing advantages of data and that it can really risk innovation if you are totally hands off and are not policing whether dominant firms are in fact muscling out the next great thing.

7:28There are some major lawsuits pending right now, both filed by the Justice Department and the Federal Trade Commission, alleging that acquisitions by companies like Facebook and Google that were made over the last couple of decades ultimately were designed to snuff out competition and were illegal. I'll say that this work, I think, is especially important when we are looking at potential technological inflection points, right? These technological inflection points are oftentimes the ones that present the greatest opportunity for a fundamental paradigm shift in the way that we're using technology.

8:05These inflection points are also the moments where the incumbents are most fearful. and just to go back a couple of decades, the reason that Microsoft was looking to elbow out Netscape was not because Netscape risked replacing it as the dominant operating system. It was because Netscape risked disintermediating it and making it irrelevant whether you were using Microsoft or something else. And it was that enforcement action that ultimately allowed the Googles and Amazons and Facebooks of the world to actually grow and scale and flourish rather than be strangled in the crib by Microsoft. And so antitrust enforcement just plays such an important role in technology markets in particular.

8:49I guess one related question is there are some second order effects right now relative to the M &A market and in particular relative to AI, because to your point, there's now this big inflection point happening in technology. AI is changing very rapidly in terms of the landscape and potentially some of the participants or competitors. and there's a number of AI companies that probably won't end up working or we think are highly likely to end up working, but may get acquired and therefore the people and sort of the capital gets recycled into the next wave of companies. And some people worry that in a stronger enforcement environment, some of those M &A transactions won't happen or that recycling won't happen.

9:26How do you think about those second order effects relative to, you know, how to think about this broader approach or framework? Yeah, it's an interesting issue. And, you know, I visited Silicon Valley a few times. And whenever I sit down with founders, this is a question that we get. Stepping back, it's important to first of all note that you don't need mergers and acquisitions to be able to have higher talent. And so the goal is to make sure that these people are landing in places that make best sense for them. That can help outside the M &A environment. More generally, though, even if the goal is for a startup to ultimately exit through acquisition, Our job is just to make sure that that acquisition is not deepening some type of monopolistic moat.

10:09There are still thousands of acquisitions that go through every year. It's actually less than 3 % of all deals that are reported to the FTC and DOJ that even get investigated and even smaller component that ultimately get challenged in court. So there is a lot of dealmaking that's still happening that, you know, sometimes we determine that there is no legal issue. Just to give a concrete example here, last year, the FTC sued to block Sanofi, a big pharma company, from buying up this firm, Mays, that had been developing an alternative drug for Pompe disease, which is where Sanofi had been a monopolist.

10:53And what maize was potentially going to bring to the market was going to deliver an enormous set of benefits to patients. Right now, with Sanofi's drugs, you basically have to go get hooked up to an IV every couple of weeks. And maize is producing something that could allow people to just take medicine orally. could have enormous benefits for the patients that have to take these drugs. When we investigated, we worried that allowing the existing monopolist to buy up a drug that could actually create competition for that monopolist's drug would be really harmful to the market because you could see how Sanofi's incentives may not be to bring this innovator quickly to the market since they're already doing pretty well and may have concerns about cannibalizing their existing sales and their existing product.

11:42And so we sued to block that. Sanofi Mays abandoned. Mays ended up then partnering up with a different firm that did not already have a monopoly presence in this market. That transaction went through. We did not have legal concerns with it. It was on as good terms for Mays, if not better. And that drug is going to be hopefully brought to the market even sooner. So that's just a concrete example of how, you know, a drug or a product being bought up by the existing monopolist will raise legal issues in ways that a totally different player will not. Maybe it changes the economic structure of these markets in a way that is positive for the consumer in some cases.

12:25And the tradeoff of taking away part of the positive distribution of M &A outcomes is worth that. That's kind of the trade-off I'm hearing. But from the entrepreneur and investor perspective, there is, there feels like there's an inability to predict, you know, when that enforcement is going to happen. What advice would you have for people from that ecosystem? I mean, the big piece of advice is, you know, if you're selling to the company that's already the monopolist in a particular market, that is more likely to raise issues than if it's, you know, selling to a company that doesn't really have a presence in the market.

12:58The agency has also put out new merger guidelines at the tail end of last year that lay out kind of what are the main frameworks that we use to assess whether a deal may reduce competition or not. I also think it's worth noting that there may be kind of a tension between what's good in the short term versus what's good in the long term. Right. Partly how we've gotten to the markets of today where you have five major players for the most part is because they were allowed to buy up some of these nascent competitors and lead to a market that was much more consolidated and much less competitive. For startups, I imagine that that means that the set of potential buyers and the set of potential suitors is much smaller, right?

13:43And even if you want to sell, a market in which you have, you know, eight or nine or 10 potential buyers is going to be better for the startup than a market where you just have one or two, both in terms of your negotiating leverage, you know, the valuation you might get, your ability to negotiate better terms. And so the market that we want in the long term is one that has great competition, that is more open. And just to step back, I mean, if you reduce what antitrust is about, it's about making sure that the best ideas can win. That if you have a founder or an entrepreneur with a great idea, they're able to get capital, that they have an opportunity to actually fairly compete and figure out, you know, can I get a foothold in this market?

14:27Can I grow? And to have that genuine opportunity to compete without getting snuffed out by one of the big guys who feels threatened and can use their leverage in some other line of business to really cut off your oxygen, right? And that's historically what has been a key driver of so much innovation in America. And antitrust is about making sure that those arteries of commerce and those opportunities for founders remain. How do you think, given that, about AI and foundation model companies then? Because if the idea is, you know, allowing ideas to win in the marketplace, I think there's a big question about how much ideas and research matter versus investment GPU data centers at scale.

15:13Yeah, it's an interesting question. I mean, I'll say generally speaking, you know, I've spoken out in favor of open weight models and wanting to make sure that in as much as you have layers of the stack where there could be risks of depriving some of these companies of key inputs, actually having open weight models can be just such a key driver and catalyst of allowing more tinkering without, you know, everybody having to have those enormous startup costs. And so we've seen historically that openness can be a key driver of that innovation. There is a big question right now, I think, especially among creative professionals, publishers, journalists, about what this is going to look like in the long term for them.

15:57The FTC sat down with a bunch of creative professionals a few months ago, including authors, graphic designers, even fashion models who all had stories about how, you know, one day they woke up and their life's work had been ingested by these models without anybody asking them, without anybody compensating them. And now they were, you know, in some cases seeing these models spit out content that is directly appropriated from them and in some cases even competing with them. And that viscerally felt unfair to a lot of these people. And many of them were quick to say, look, we're not anti-AI. We totally recognize that these technologies could have a really beneficial role, both for us as creators and for the public.

16:42But over the long term, if you allow this appropriation, one worry is that there's not going to be an incentive to invest in the production of information, in the production of robust and vigorous journalism. And so that's why getting that piece right is going to be really important. How do you think about other efforts to regulate AI? So for example, some people have called for registration of models over a certain parameter size or other things that seem to largely favor some of the larger incumbents. Do you think those sorts of approaches make sense? Or do you think, you know, there should be a different mix of sort of regulatory action?

17:17Yeah, I mean, there's a big policy conversation going on right now, both in Congress, both at the state level. You know, I'm a law enforcer. And so my job is not to come up with like rights. What's the right way to regulate this stuff? It's to enforce the existing laws that we have in place. One concern that I did hear from founders and startups has been this risk of creating regulations that will just protect and favor the big guys and lock out everybody else. And from where I sit, I think it's really important that we remember that not all rules and regulations are created equal. And there definitely are rules and regulations that are designed in a way to favor the big guys and end up having that effect, both because they mean you have to hire up hundreds of lawyers.

18:03The rules are kind of like complicated. So it's not really clear what does it mean to abide by them versus be in violation. And the FTC's work in as much as we've issued rules, we've always tried to be on the side of clear, simple rules that are very easy to understand, that are easy to follow and that don't necessarily require hiring this army of lawyers that big companies have access to, as well as the access to the big armies of lobbyists. And so just to give a concrete example, a few months ago, the FTC finalized a rule that would ban non-compete clauses in the vast majority of employment contracts.

18:43California, as you know, for centuries, has said that non-competes are non-enforceable. And there's research suggesting that the non-enforceability of non-competes in California has actually been one of the drivers of so much innovation because it's allowed this more organic diffusion of ideas in a way that's just been really, really healthy and led to a lot of creativity and great outcomes. So we finalized this rule. It's very easy to follow. It doesn't create, you know, privileges for the big guys because it'll be easier for them to follow than the small guys. And so that's just an example of, you know, clear rules rather than the really complex, exhaustive, onerous ones that are going to, you know, ultimately favor the big guys.

19:28It's also why I think it's important to have policymaking processes that are really open. I can totally understand for founders that are seeing, you know, big CEOs coming to D.C. and having the red carpet rolled out for them and some of these decisions just being made behind closed doors, that understandably leads to concern that are we just going to get regulations that are good for the big guys and protect them from competition from the small guys. And so the FTC, since I've been there, we've been really focused on making sure that we're hearing from a much broader set of market participants.

20:02You know, being in D.C., sometimes the natural course of things is that you're over-indexing for hearing from big incumbents and under-indexing on hearing from entrepreneurs and small businesses and founders. And we've sought to, you know, recalibrate that so that we are actually hearing from a broader set of people. That's why I've come out to Silicon Valley a couple of times. We do regular commission meetings where anybody can show up just to have a more participatory process. That's really great. And I know that the non-compete was viewed as sort of entrepreneurial catnip. So I think people definitely appreciated that.

20:37You know, to change topic a little bit, if you look at the history of the U.S. government, often younger folks have had a massive impact. So the founding fathers were largely in their 20s and 30s. The first head of the NIH was 26 when appointed. JFK joined the House at 29. You know, you became chair of the FTC quite young. Why do so few young people have positions of power in government today? And what do you think could be done to change that? That's a really good, interesting question. And I think, you know, it is always exciting to see, you know, a greater mix of people having the opportunity.

21:13It's been a great honor for me to get to lead in this position. I will say generally, you know, people who came of age during the Great Recession and for a lot of millennials who've kind of just seen how things have unfolded over the last couple of decades. I think there's been a greater awareness of how what government does and what policies it puts in place or doesn't have place can just have a huge impact. I know the Great Recession ended up really being quite harmful for just so many young people who graduated into the Great Recession. You know, job opportunities were scarce. It's been difficult to make that up for people who, you know, feel priced out of being able to buy a home and just feel like that ladder is being pulled out.

21:59figuring out how can we use laws and policies to actually create markets and an economy that create that opportunity for millennials. I mean, it's kind of analogous to how we're thinking about, you know, markets not wanting the incumbents to kind of lock out that opportunity for everybody else. I think there's an analog in how we think about government as well. And then one question that we ask a lot of founders and CEOs who come on the show is around, you know, how they think about running their company management style. Now, given that you come from a different area and type of organization, we were just curious, you know, what was the most unexpected thing about running a government agency?

22:35And also, how would you typify your management style or how has that evolved over time as you run the FTC? So one of the biggest adjustments for me was, you know, in prior jobs, I really had just the privilege of going really, really deep on like one thing or a couple of things and feeling like I totally had it mastered inside out, new kind of every last detail. And in this job, you have to just have more capacity for breadth over depth. And you're relying so much more on the expertise of other people. And we have a really fantastic team. And so making that transition from greater capacity for focusing on breadth rather than depth and just being able to switch contexts very abruptly.

23:17I mean, you know, the types of things that go into running an agency range from, you know, really substantive decisions about what investigations you're doing, what cases you're bringing, how to think about what theory you're including versus not, to, you know, much more administrative stuff relating to the budget and how are you allocating, you know, your resources and what is the future of workplace flexibilities look like at your agency. And so, you know, really adapting to that full range. You know, for me personally, it's been important to figure out what is my comparative advantage in this job and how do I protect my time to make sure I'm spending as much of that time on that area of comparative advantage and build a team around me that's kind of slotting in for the other areas.

24:04And so, you know, it can take a time to get the right people in place to build that team. But I've just been so phenomenally fortunate to have a really fantastic team. And it's really what has allowed us to fire on all cylinders. How do you think we should measure government agencies like the FTC? Like what's what how do we decide what's effective? You know, there are a lot of different ways to measure impact. And several people have noted that the FTC has been historically active these last few years. measured in terms of, you know, how much we're doing, how much of an impact we're having in the market in terms of deterring bad behavior.

24:41I think at the end of the day, the way I measure impact is, are we addressing the major problems that people face that are within our purview to fix? And that's why we've been really focused on healthcare markets in particular, taking on hospital consolidation, taking on tactics by big pharma companies and other entities in the supply chain that we think are ultimately hiking the cost of medicine, hiking the cost of health care for people in ways that lead people to ration health care, to skip medicines in ways that can lead to sickness and even death. I think the other thing is, you know, how are we making sure that the markets are really staying open and allowing the next great idea to really come and flourish?

25:24And how do we make sure that you have an ecosystem where you can have, you know, a thousand flowers bloom rather than the incumbents just being able to maintain their dominance and lock out that opportunity for the next wave of entrepreneurs and founders. Awesome. Lena, thank you so much for doing this and engaging with us and, you know, the investing and technology and entrepreneurship community. Thanks so much. Nice to see you both. Find us on Twitter at NoPriorsPod. Subscribe to our YouTube channel if you want to see our faces. Follow the show on Apple Podcasts, Spotify, or wherever you listen.

25:58That way you get a new episode every week. And sign up for emails or find transcripts for every episode at no-priors.com.