A top Washington analyst weighs the risks of antitrust actions against Big Tech

Published Sun, Sep 13 20206:44 AM EDT

Key Points

Paul Gallant, a managing director of the Cowen Washington Research Group, has been trying to determine the odds of antitrust enforcement against Amazon, Apple, Facebook or Google.
In November, he had predicted Google was the most likely to see antitrust action of the four under any election outcome.
Gallant shared how he weighs information around the antitrust probes and what factors could change the level of risk each company faces.

A View from the Top is a Q & A series exclusively available on CNBC Pro . CNBC reporters will regularly speak with a business leader about decision-making, investing and industry news. It's still anyone's guess whether and when U.S. law enforcement will bring antitrust charges against the nation's Big Tech companies, but Paul Gallant, a managing director of the Cowen Washington Research Group, has been trying to determine the odds. Gallant has been closely tracking the tech scrutiny of Amazon , Apple , Facebook and Google parent Alphabet as federal and state enforcers probe their businesses for potential violations of the U.S. antitrust laws. Along the way, he's analyzed the likelihood of enforcement action against the four giants. In a November report , Gallant and his colleagues predicted the chances of antitrust lawsuits from federal or state enforcers depending on the outcome of the 2020 presidential election. What they found was: Prior to the election, Google faced a 75% chance of antitrust action, Facebook had a 60% chance, Amazon and Apple, 40%. Under a second term of Donald Trump's presidency, they estimated a 65% chance of a lawsuit against Google, 40% chance against Facebook and 30% chance against Amazon or Apple. Assuming a win by Sens. Elizabeth Warren, D-Mass., or Bernie Sanders, I-Vt., (predicted prior to their decisions to drop out of the race), Google and Facebook would face a 75% chance of a lawsuit and Amazon and Apple would face a 65% chance. A win by any other Democrat, including former Vice President and current Democratic nominee Joe Biden, would represent a 75% chance of a lawsuit against Google, 60% chance for Facebook, 40% chance for Amazon and 35% chance for Apple. Gallant's prediction that Google will face an antitrust lawsuit may soon pan out. The New York Times and Washington Post reported that Attorney General William Barr is pushing the Antitrust Division to announce a case against Google by the end of the month. In a late August interview, Gallant said certain factors could still change the calculus of his predictions for the other tech companies. Epic Games' recent lawsuit against Apple alleging anti-competitive behavior, for example, could turn the tide against the smartphone maker if the suit serves as a "catalyst" for other opponents to air their own grievances, Gallant said. Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Lauren Feiner, CNBC: You've taken on the task of predicting the likelihood of antitrust action against the Big Tech companies during this period where things seem really unpredictable. And it seems like over the past few years, the public's view of these firms like Facebook, Amazon, Apple and Google has shifted. But at what point did you begin to believe that antitrust enforcement from the federal agencies was a real possibility? Paul Gallant, Cowen Washington Research Group: Well, I think the earliest hints of it were the very early days of the Trump administration when Steve Bannon was the chief of staff and he seemed to have real concerns with the power of the Big Tech platforms. There were rumors even early on ... that the White House at Bannon's instigation was interested in moving in this direction. It's obviously a very slow moving process because here we are three and a half years later. And while there have been lots of stories about possible antitrust lawsuits, there haven't there hasn't been any action yet. Ironically, the first action was out of left field from Epic against Apple. Not DOJ, not the FTC but a private company filing an antitrust lawsuit. With all these reports that have been coming out over the past year on tech antitrust, how do you determine whether a finding or a report represents a real risk of antitrust enforcement action or if it really just adds to the noise? It is hard to predict whether the government is going to file antitrust lawsuits against anybody because they're private investigations. The best clues we have are when the regulators speak publicly before Congress or in other speeches. And it seems as though the signals we've seen in the past year and a half suggest that we're likely to see lawsuits against Google and Facebook. And lawsuits against Amazon and Apple are possible, but in my mind, less likely than Google and Facebook. You'd previously written that you saw the antitrust enforcement risk to Apple be well below 50%. Do you think that the Epic lawsuit changes those odds in any way? I do think it does, yes. It could be a catalyst for numerous other companies that have been frustrated and unhappy with the App Store to get behind this lawsuit, either officially or at least publicly voicing support, and that could, just by itself, have probably some effect on how the judge in the case evaluates Epic's lawsuit. But it also ... a real show of power by Corporate America could influence DOJ, or the European Commission or the state attorneys general to take their own action against Apple. Bringing a case to court is one thing. And there's been criticism of the agencies for not bringing as many enforcement cases against these companies in the past. But having a judge ruling is another matter. It seems like the precedent in recent years has been this consumer value standard [whereby the impact on consumer prices is a great consideration in antitrust cases]. Do you think that if these cases do end up in court, will we still see an adherence to those traditional [Robert] Bork values in antitrust? Or do you think that's changing in the courts as well? The recent antitrust rulings have suggested that the conservative, what they call a Chicago School of antitrust analysis , is still predominant in the courts. So I would expect that that's a nice starting point in court if you're Google or Facebook or another tech company. They get sued because these are business models that have never been vetted in court under antitrust law. And it's a very open question whether the government can prove net consumer harm from these companies' actions. When you say these business models haven't been tested in court before, where does Microsoft play in there? Are these significantly different than how that case was litigated? The Microsoft case is quite important here. It's the most important precedent for thinking about how the case against Google or Facebook or the other tech companies might play out, because it was the dominant tech company of its time, just like Google, Facebook and others are today. And the ruling by the DC circuit in the Microsoft case was unanimous, meaning not a partisan split. So it's a powerful opinion. And that was very carefully reasoned and influenced, and it has been influential since then. So it's a good road map for how a Google or a Facebook or other case could play out where the government gets to make their initial showing that the target company is a monopoly and that they have abused that monopoly. And then if they make that showing if the judge turns to the company and says, What's your answer to that? Are you benefiting consumers? Are you being just [a] very aggressive competitor, or what's your defense? It's very much a balancing test and in the eye of the beholder. And it's going to be a very close call whether the government can win that kind of a, 'on the one hand, on the other hand,' analysis in a fast-changing market like this. In terms of the courts themselves, the one thing that could maybe change that precedent is a change to the laws. And I know [House Judiciary subcommittee on antitrust Chairman and Rhode Island Democrat David] Cicilline's panel is looking at that now. Do you think a change to the antitrust laws will be an important factor for the four companies facing antitrust scrutiny right now, just given the pace of congressional action and the sort of discussions that you're seeing around it right now? I do expect the Cicilline report to call for revised antitrust laws, in part to make it easier for the government to challenge Big Tech platforms. But how that syncs with any pending lawsuits is a little hard to know. A lot depends on the election for multiple reasons. If the Democrats were to sweep in November, and if they got rid of the filibuster in the Senate, you could imagine changes to the antitrust laws that would make it easier for the government to successfully challenge tech platforms. If the Democrats don't sweep, then the chance of antitrust legislation passing is a fair amount lower — not impossible. I do think that both sides of the aisle have real concerns with the power of the tech companies for slightly different reasons. And that is still a recipe for something to happen on tech legislation next year and [in] 2022, but the straightest line between here and legislation passing is if the Democrats sweep in November. On the topic of the election, I know in your November report about antitrust action you had said that there were different outcomes for how likely an antitrust case against each of the four companies would be depending on who was elected. But under any of the circumstances, including Elizabeth Warren or Bernie Sanders being elected, or Biden being elected, or Trump being reelected, Google's chance of an antitrust lawsuit remained at 75% [under a Democrat and fell to just 65% under a second Trump term]. So why do you think Google is the most likely to be at risk under any of those potential outcomes? It's the nature of certain lines of business that Google is in that creates the exposure. Their ad tech business, opponents would say, creates a conflict of interest where Google is both the middleman but also a buyer and seller on the ad platform. And that opens it up to claims of anti-competitive bias. And then separately, there's been periodic interest for a long time among regulators here and in Europe about the issue of search bias. And whether that harms competition as well and enables Google to preserve their search dominance. So when you put those two things together, potentially along with owning the mobile platform or owning a mobile platform in Android, there's some shots on goal there that you could see regulators deciding one or more is is worth taking. ... I think that there's just more more points of exposure there for Google than the others. How do you think political will factors in here? If you're saying that Facebook, Apple and Amazon would have different enforcement [odds] under different presidents, how does political will factor in when you're looking at Google having the same percentage chance of antitrust action under any presidency? Political will is a big piece of any potential lawsuit against a major American company like these tech platforms. And for the most part, these platforms are still very well-liked by by consumers. Public opinion has turned a bit though, in the past few years with specific problems around content on Facebook and Google and then the effect of Amazon on Main Street businesses. But it is important for the administration to feel like they're doing the right thing in challenging these great American companies and the card that these companies play is, "We're in a global competition, especially against China, and especially on AI. And if you crack down on us in some way that reduces our access to data and our ability to innovate, AI could be a winner-take-all game globally. And of the top seven companies that could dominate in AI four are American and three are Chinese, so please think carefully before you act against us." You were starting to talk about why the Facebook case is different in this circumstance, that the odds are different whether Biden is elected or Trump is elected. Why do you think that is? What makes that case so different from what Google is facing? It's probably a tougher legal case for the FTC to make against Facebook than it is for DOJ to challenge Google. The theory with Facebook may be that they acquired lots of small companies out of concern that they would become big competitors to Facebook. And that while no one of those transactions preserved Facebook's monopoly, collectively they did. That's the argument that the FTC would likely make. And it's, it's fair but it's not used often. And it will be an extremely tough fight in court, if that's where we end up. If we do get past the election and Trump wins, the prospects for a lawsuit may drop a bit, because there's less incentive to sue to any of these companies after the election since there's no electoral benefit at that point to doing so. By contrast, I think if Biden wins, my general sense is that he'll be, at a minimum, just as tough and probably a bit tougher on the on the tech platforms as Trump. It's a little bit hard to know what question to answer at this point because we still don't know whether Trump will sue any of these companies, but my general view is that Biden is a clear level up in terms of risk for these companies in Washington, both on antitrust and then ongoing or new regulation of these platforms by the FTC. We haven't heard a whole lot from Biden yet on what he is thinking in terms of tech policy and specifically on antitrust. So what gives you that sense of confidence that he'll be at least as tough as Trump on the tech platform? It's a good question because Biden was clearly less enthusiastic than Sanders and Warren, about tech antitrust and I do think the Biden-Harris ticket is about as good as you could hope for from the tech company perspective. But I also think that the center of gravity in the Democratic Party on tech is to the left and where Biden and Harris probably are. So that's going to be the battle. If Biden wins between those two camps, the people that Biden appoints to the key agencies will be an important early indicator of how this might play out. The DOJ, the FTC, the FCC are all key regulators of tech and telecom. So those will be early signs of where he wants to go in the next four years on tech. You had written that [Biden] would likely kind of defer to those agency heads on tech matters. If that's the case, how likely do you think it is he would appoint enforcement-minded agency heads when it comes to tech? Or do you think he might take more of a middle road there? Honestly, it's impossible to predict. Everybody is interested in what kind of names might be circulating now in Washington to head key agencies under Biden and most of them will be wrong. Because especially with someone like Biden, he has 40 years of friends and allies. And it's awfully tough to logically sift through and predict what kind of person is going to get these jobs... And sometimes it's just a matter of a personal relationship with the president more than a philosophy, which further muddies the waters on where we are a year from now or two years from now with Facebook or Amazon. A lot of has been written about Kamala Harris's relationships with Silicon Valley. But in the vice presidential role, how much influence do you think those relationships might have on a Biden administration, if he's elected? She'll probably be more influential than the average vice president in policy-making if Biden wins, and so her relationship to Silicon Valley will be helpful to those companies in at a minimum getting a very fair hearing in the agencies and at the White House. It's a much better starting point for them for the next four years than a lot of other VP picks would have been. Going back to that November report you'd written, you had called action by the state attorneys general investigating Google and Facebook an underappreciated risk. And I was wondering if you still believe that's the case? I'm not sure it's underappreciated anymore. The state agencies have been putting down markers to signal they really are focused on doing something on tech. The question is whether they might need to go it alone in court, or will they be able to link arms with the DOJ. And the first move is up to DOJ and the FTC. I would expect state agencies to join any lawsuit that DOJ or the FTC file. The harder question is if they don't file, what do the state AGs do? I think there's the political will there among a critical mass of them to move against at least Google or Facebook and they have also started cracking the door open on Amazon. So, if Trump is reelected, and we don't see lawsuits against Google and Facebook, an important question will be whether the states are really willing to go it alone or not. And I think the political will is there. I think a challenge will be can they make the commitment, especially resource-wise, to a multi-year legal battle with an ultra wealthy company? If the AGs do go it alone in some way, do you think that they can be successful given the relatively inferior resources they would have compared to the federal agencies? It will definitely be a challenge because of the friction of coordinating among multiple state AGs. Though I expect that the group of them would designate one or two as the lead and the others would provide support as needed financially and manpower-wise. And it's possible that companies also could join, certain opponents of a tech company could join with state AGs and their work as well, which would help prop up any legal action. But it would be unprecedented for the state AGs to go to court by themselves against a tech company. I think they would they greatly prefer to have the FTC or DOJ as a partner. Before, you were talking about how Amazon and Apple seemed to have a lower risk of enforcement than Google and Facebook, but it seems like more recently, we've been seeing them kind of come to the forefront with more competitors or people who use their platforms complaining about them publicly. Is there anything you're looking out for that would change your perspective on the potential antitrust enforcement risks that either of those companies face? Part of it is public opinion. And generally, the public really likes these companies and probably views them as even more essential to their lives today than six months ago. But, that can be affected by things like this upcoming House antitrust report that I suspect will cast a fairly negative light on these companies and reveal actions by them that will strike people is at least somewhat unfair, based on private internal emails and memos, some of which came out at the hearing last month. So at least at the margins, that can affect public willingness and support for government action against these companies. That wasn't really there a few years ago. Besides the election, what other wildcards are you watching out for to understand the likelihood of antitrust enforcement against any of these companies? Nothing. There's really nothing to watch. It's it's the regulator's giving statements publicly that help us understand whether they're leaning toward a lawsuit or not. I think the regulators at DOJ and the FTC are scheduled to testify again in October. So if we haven't seen lawsuits by then that will be an important event for knowing whether we're going to court. But I wouldn't be surprised if we see at least one lawsuit before then. Again, the challenge of all of this is it's behind the scenes. They don't tell you that in three months, we're thinking seriously of filing a lawsuit. [It's] a lot of reading between the lines and leaks to the press from parties that go in and talk to the regulators and come out and give their impression of whether the agency sounds dug in against one of these companies. Anything else that we haven't touched on or anything else you wanted to add? I think the one other thing that might be worth being aware of is just if Biden wins, that the goal of antitrust is promoting competition, but there are other ways to get there too, like regulation. And I wouldn't be surprised if a Biden administration opened up inquiries at the FTC about regulating these companies directly for privacy and data access and neutrality of their platforms that had some of the same effects as a potential antitrust case too. I do think that the possibility of regulation is underappreciated in the Biden scenario. Subscribe to CNBC on YouTube. WATCH: How US antitrust law works, and what it means for Big Tech

Paul Gallant, managing director of the Cowen Washington Research Group

H/O: Paul Gallant

A View from the Top is a Q&A series exclusively available on CNBC Pro. CNBC reporters will regularly speak with a business leader about decision-making, investing and industry news.

It's still anyone's guess whether and when U.S. law enforcement will bring antitrust charges against the nation's Big Tech companies, but Paul Gallant, a managing director of the Cowen Washington Research Group, has been trying to determine the odds.

Gallant has been closely tracking the tech scrutiny of Amazon, Apple, Facebook and Google parent Alphabet as federal and state enforcers probe their businesses for potential violations of the U.S. antitrust laws. Along the way, he's analyzed the likelihood of enforcement action against the four giants. In a November report, Gallant and his colleagues predicted the chances of antitrust lawsuits from federal or state enforcers depending on the outcome of the 2020 presidential election. What they found was:

Prior to the election, Google faced a 75% chance of antitrust action, Facebook had a 60% chance, Amazon and Apple, 40%.
Under a second term of Donald Trump's presidency, they estimated a 65% chance of a lawsuit against Google, 40% chance against Facebook and 30% chance against Amazon or Apple.
Assuming a win by Sens. Elizabeth Warren, D-Mass., or Bernie Sanders, I-Vt., (predicted prior to their decisions to drop out of the race), Google and Facebook would face a 75% chance of a lawsuit and Amazon and Apple would face a 65% chance.
A win by any other Democrat, including former Vice President and current Democratic nominee Joe Biden, would represent a 75% chance of a lawsuit against Google, 60% chance for Facebook, 40% chance for Amazon and 35% chance for Apple.

Gallant's prediction that Google will face an antitrust lawsuit may soon pan out. The New York Times and Washington Post reported that Attorney General William Barr is pushing the Antitrust Division to announce a case against Google by the end of the month.

In a late August interview, Gallant said certain factors could still change the calculus of his predictions for the other tech companies. Epic Games' recent lawsuit against Apple alleging anti-competitive behavior, for example, could turn the tide against the smartphone maker if the suit serves as a "catalyst" for other opponents to air their own grievances, Gallant said.

Here's the full Q&A: