Unlocking Innovation Through Antitrust Enforcement — ft. Lina Khan

Scott and Ed open the show by discussing China’s stock market surge, Softbank’s investment in OpenAI, and why Gavin Newsom vetoed an AI safety bill. Then Lina Khan, Chair of the Federal Trade Commission, joins the show to discuss the need for regulation in big tech and the connection between inflation and the concentration of industries. She also breaks down how the FTC analyzes mergers and acquisitions, and explains how the FTC measures consumer harm. Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Speaker 00

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• 1:30Scott Galloway?

  Today's number, $6.6 billion. That's how much creators on OnlyFans made last year. True story, me and my favorite male escort, Patrick, have our own OnlyFans account. Boy, won't he be surprised?

• 1:53Scott Galloway?

  Welcome to Prop G Markets. Today, we're speaking with Lina Khan, Chair of the Federal Trade Commission.

• 2:01Scott Galloway?

  That wasn't an easy segue.

• 2:05Scott Galloway?

  We're not joking. That part is not a joke. We are actually speaking with Chairman Khan. Did you enjoy this conversation, Ed?

• 2:10Ed Elson?

  Incredible. First, first US government representative on the podcast, so I think that means we're officially a legit podcast now.

• 2:17Scott Galloway?

  We're big time.

• 2:18Ed Elson?

  I was so excited when she said yes to this.

• 2:20Scott Galloway?

  Yeah, she's sort of impressive. That's what I think that's what everybody, I mean, you really want people like that in government. Anyways, get to the headlines. Get enough of this.

• 2:32Speaker 04

  Now is the time to cry. I hope you have plenty of the well at all.

• 2:39Ed Elson?

  Chinese stocks had their best single day performance since 2008 with the CSI 300 rising more than 8%. Since the Chinese government's announcement of a large stimulus package last week, the index has climbed 25%. SoftBank is investing half a billion dollars in OpenAI as part of the company's latest funding round. The $6.5 billion round is expected to close this week, and notably, Apple has bowed out as an investor. And finally, California Governor Gavin Newsom vetoed a bill that would have regulated large AI models with safety measures such as a mandatory kill switch. Newsom said the bill was too focused on the size of the model and disregarded whether it was deployed in a high-risk situation. Scott, your thoughts starting with the recent rally in China?

• 3:24Scott Galloway?

  I believe markets are cyclical, and you're going to see at some point the the stock market or the S and P PE average, which I think is at a kind of a kind of a historically or cyclical high right now in the high 20s. At some point, the emerging markets or other markets become so attractive that you'll start to see flows. Now, what you need is a starting gun that says it's okay to invest in these companies again. And I would argue this is that starting gun. And if you look at the ratio, if I think it's the MSCI World Index. Sands America, so every market except America. And the ratio of that valuation relative to the S and P indices.

• 4:04Scott Galloway?

  It's at a historically low ratio, meaning the value of all markets other than the US relative to the US market is at an anomalous low. When Chinese equities rally, other emerging markets have sort of a, I don't know, a tack on effect, a shampoo effect, whatever you want to call it, because of their shared supply chains, increased tread, and basically investors saying, okay, maybe the rotation's starting. And so I think we're about to see a reversion to the mean, where you're going to see flows out of the US market potentially into Brazilian stocks, some European markets, and most specifically the Hang Seng in China.

• 4:43Ed Elson?

  Yeah, I think, I think that's an interesting setup. I feel like that's the question. Is it the starting gun for something larger and more structural, a more stable rally that we're going to see, as, as you mentioned, this idea of the great rotation? Or is it just kind of a brief sugar high that is coming off of some positive monetary and fiscal news that's coming out of the CCP? I'm sort of inclined to believe that it's the latter. I'm not totally convinced by this being, you know, a larger structural change in the Chinese market, principally because this is an artificially induced rally. I mean, this is the government coming in and injecting some monetary stimulus and some fiscal stimulus into the economy.

• 5:27Ed Elson?

  But there is nothing in China's real economy that indicates to me that things are going well. I mean, GDP growth is still slowing, their export revenue is still falling, unemployment is still high. They also have this issue of an aging population, which we all have, but they have to a larger extent. And so I think the question is, as you point out. Can the government just click a button as they have done here? And sort of turn the economy around overnight? And I understand that sounds a little bit hyperbolic. And to be clear, I don't think it's out of the question. I think that fiscal and monetary stimulus can have that effect. But I'm not totally convinced as of yet.

• 6:10Ed Elson?

  And if I were to make a personal bet on this, I wouldn't bet on this turning into much more than a dead cat bounce right now.

• 6:18Scott Galloway?

  We're usually in agreement here. We're on two sides of the bed. So we should make a gentleman's bet and say at the end of the year, we're going to look at where Chinese stocks are relative to where they are now and where US stocks are. But I think we're, my prediction is we are starting to see the beginnings of what I'll call the great rotation back into historically what are more normal ratios.

• 6:39Ed Elson?

  Yeah. And to be clear, I think it'll happen eventually. I just don't think it's going to happen right now, or let's call it by the end of the year. So yeah, let's, let's make a note of that and return to it at the end of the year. OpenAI, thoughts on SoftBank getting involved, half a billion dollars into their round? They're sort of attracting pretty much every big name investor at this point, perhaps not surprisingly.

• 7:02Scott Galloway?

  One of the things that does help in the venture community and gives people some confidence to invest at these crazy valuations is the following. They get something called a liquidity preference. And that is, say this is the series D and SoftBank is putting in 500 million of a $5 billion round. That means if things don't go well and the company goes public, but at a much lower valuation or it gets sold for, say, 50 billion or 30 billion to Microsoft, things don't pan out, it does okay, it gets sold, let's say just for 10 billion, it declines in value 92% or something, or 90, you know, what would that be, 90 plus percent? The first 5 billion out go to the most recent round.

• 7:43Scott Galloway?

  So where you get in trouble is if you keep raising money and the preference or the cap structure, you have a lot of money ahead of you. So the founders, the common shares employees, they're the back of the bus. They're the last people to get their money. So the investors get their money back based on the preference stack. So what, what? SoftBank looks at it and says, we're pretty confident this company will at least get $5 billion back. Now, say over the next few years, it gets diluted by, they have to raise whatever, another 20, another 30, another 50 billion. That means in order to get our 5 billion back, we would need the company to ultimately get sold for at least 25 or 30 or 50. But that liquidity preference gives these folks

• 8:26Scott Galloway?

  some comfort around investing at these valuations. But just to summarize all of this, I think right now, OpenAI relative to its leadership, its growth, and its valuation is the best investment in AI.

• 8:42Ed Elson?

  Completely agree. Expected to grow to $11.5 billion in revenue by the end of next year. And this is based on financial documents that the New York Times just saw from within the company. So that's what, 200% growth next year at a $150 billion valuation? I totally agree. It seems quite cheap. One interesting detail that the New York Times found, related to this liquidity preference that you mentioned, there is another preference that OpenAI is giving to Thrive Capital, and Thrive Capital is OpenAI's lead investor. And that is that Thrive will have the option to invest another $1 billion at that same

• 9:24Ed Elson?

  $150 billion valuation through till the end of 2025. In other words, they are allowed to get it on the cheap for the next, what, 15 months? And that perk or that preference isn't being offered to any other investor. And apparently, a lot of the other investors are a little bit understandably pissed off by this. My question to you, is this normal? Have you ever seen a preference like this, aside from the liquidity preference, basically just, you know, more allocation at a predetermined cheap valuation?

• 10:01Scott Galloway?

  I'm shocked they're able to do this, because what they're effectively doing is creating a different class of stock within the round itself. So if one class of stock has different rights, then the other investors are investing at the same time and taking the same risk. If I were the other investor, this is evidence of how badly people want into this deal, because what they're saying is certain people are getting Different rights and are, you know, are getting, you know, most favorite nation status. Typically, one of the first things an investor asks is, am I getting most favorite nation status? In other words, am I getting the same deal as everybody else? So, I'll give you an example. I had, I was, when I was raising money for Brand Farm, I asked

• 10:43Scott Galloway?

  a guy named Tully Friedman, who is one of the co-founders of Hellman and Friedman, to invest and go on the board because he's this incredibly bright guy, great at business. And I said, if you invest a million bucks, I'll give you a million and a half in equity. And he said, sure, I'll do it. And then other investors correctly said, am I getting the best deal here? I just want to make sure I'm getting as good or better deal. And I would have to disclose, no, I have one investor who's getting a better deal than the others. And the other investor said, we're kind of not down with that. Will you give us 50% extra and lower the valuation? So I had to go back to Tully and say, Tully, I'm going to have to take away that additional equity, such that you're on the same playing

• 11:24Scott Galloway?

  field as everybody else. And Tully was already like hugely wealthy. I think he was doing it more out of intellectual curiosity and to be supportive of a young entrepreneur. I was in my 30s back then. But this is unusual. This is a sign of just how horny these people are to get into this deal, because typically you don't see different terms across different like investors. This is unusual to have a different class of stock within a class that's investing at the same time with the same prospects.

• 11:53Ed Elson?

  And then the other interesting detail from that New York Times report is that OpenAI is expected to lose $5 billion this year. So costs are extremely high. Doesn't lend itself very well to all this new stock-based comp that they're about to issue, including that $10 billion to Sam Altman. But that's why they need to keep raising. This is an extremely expensive operation. That might shed some light on to that valuation, though I would imagine that basically every single high-performing AI startup has unbelievably high costs at the moment. But do you have any thoughts on that burn rate, $5 billion in 2024?

• 12:32Scott Galloway?

  I think this looks like a company that's going to be one of the 10 most valuable companies in the world, because if they're going, I mean, okay, they're losing $5 billion, but if they're going from 3.7 to 12. That sounds to me like in 18 months, they're going to be profitable. The algorithm for becoming a trillion dollar company in today's economy has unfortunately been just to outspend everybody. And I would be shocked if they didn't raise another 10 or 15 billion and get serious into compute, soak up the best people, soak up the best biz dev people, pay people a shit ton of money. Because if they're going to 12 billion next year, that kind of says to me, they go to 20, then 30, then 50 in three or four years. And at the margins, even for, even with the cost of compute around query, even with margins

• 13:17Scott Galloway?

  of call it 50 points, what they should be able to get where most of our gets 80 to 90, accounting for additional compute and energy costs, this company's going to have a gross profit potentially in the next three or four years of 15 to 25 billion. So I think this is, if I were on this board, I'd be like, what do you need, Sam? And we'll absolutely go raise the money. You should raise as much as you need to maintain that lead.

• 13:43Ed Elson?

  And by the way, their biggest cost is buying compute from Microsoft. And as we've talked about before, Microsoft also happens to be one of their biggest investors. So if they ever run into trouble with that, with that expense line and on the income statement, I think you can pretty much guarantee that they're going to be getting a very nice discount from one of their biggest investors, which is Microsoft. It's a very, very strange relationship. But with that relationship, barring regulatory intervention, which we talk about with Lina Khan, it feels that it's going to be a little, little too difficult for OpenAI to fail at this point.

• 14:24Scott Galloway?

  Or not. I mean, this is the problem with the related party transactions. I believe that Microsoft's entitled to 49% of the profits for a long time. OpenAI, with their access to incredibly cheap capital, may be buying compute from Microsoft at a ridiculously full retail price. Because they have cheap capital. You know. Sam wants to keep Satya happy, so he may be overpaying. So when I started, when I was starting my e-commerce Incubator brand farm, I raised $15 million. And one of my biggest investors was AMB, which was the predecessor to Prologis. So probably the best managed REIT in America, this guy named Hamid Bogadom, total visionary in real estate. And I said, I need office space.

• 15:09Scott Galloway?

  I'll lease it from AMB. And my board made me correctly jump through a bunch of hoops to make sure I wasn't overpaying for real estate to keep one of my investors happy. So this has this conflict written all over it. When, when your largest shareholder is also your largest expense line. As long as the music keeps playing, it's no problem. It's when the music stops. If, if OpenAI goes down, or, or their customer base, or they don't hit their growth numbers, the ripple effects here of market capitalization declines will be much bigger than OpenAI's 150 billion going to 50 billion. You'll see Microsoft lose a half a trillion dollars in 90 days.

• 15:54Scott Galloway?

  If all of a sudden it looks as if the spending around AI is not living up to projections.

• 16:00Ed Elson?

  Final headline, Gavin Newsom has vetoed the AI bill that was going to mandate a kill switch for a lot of these AI models. It was targeted largely at OpenAI. Do you have any thoughts on Gavin Newsom killing that bill?

• 16:16Scott Galloway?

  So the bill itself essentially said that these companies would be responsible for the harm caused by AI. I thought the language was purposefully vague and dangerous. It was supported by, I forget his name, Hinton, kind of considered the father of AI, and Elon Musk. Now, I believe that Hinton was genuine about his concerns and concerned for the right reasons in slowing down the rapid progress of AI. Musk has his own shitty AI company and just wants to slow OpenAI down. And the thing I didn't like about this legislation, and I think Governor Newsom was smart to veto it because of, was the following.

• 16:54Scott Galloway?

  This felt to me not like legislation to control AI, but legislation to kneecap the market leader. So what do you know? Anthropic supported it, and so did Elon Musk with his shitty AI company. But they said that it only applied to companies who are spending more than $100 million training their LLMs. And as far as I could tell, that was one company. In addition, when Gavin Newsom, when Governor Newsom wakes up in the middle of the night in a cold sweat from a nightmare, the first thing that happens is his wife says, what's wrong, baby? What's wrong? He's dreaming. He's dreaming. She immediately thinks, what can I do to

• 17:34Scott Galloway?

  calm you down, you big fucking tall drink of lemonade? Anyways, then the second thing she asks is, I don't know where I went with that. Why does that make me happy? By the way, that guy should be president. Anyone that tall and good looking with that kind of hair, who isn't a village idiot, should just be president. I just think the world peace and prosperity is just going to happen with a guy that tall and good looking. Anyway.

• 17:56Ed Elson?

  Agreed, but stay on Dolph Lundberg.

• 17:58Scott Galloway?

  Okay, sorry about that. Sorry about that. I'm playing with my nipples. Anyways. Okay. The second thing she asks is, what were you dreaming about? What was your nightmare? And he says, I had a nightmare that Jensen Huang called me and told me, I'm going to go be roommates with Elon Musk in Texas. If AI or Nvidia leave California, it could literally blow a hole in the state's budget. It reminds me of in New Jersey, when David Tepper, the founder and CEO of Appaloosa, said he was moving to Miami, they didn't know it. They read it in the paper. And the treasurer of the state of New Jersey called an emergency meeting and said, you realize, we have to either cut costs or raise taxes

• 18:42Scott Galloway?

  because this is about to put a hundred or $150 million hole in our budget. Because that's how much Appaloosa was paying in state taxes to New Jersey. And probably a big part of the reason why he decided to piece out to Miami. So you can bet Governor Newsom, when he gets a call from Jensen Huang, takes the call. And when Jensen says, or Sam Altman says, this is unfair legislation, you can bet he listens.

• 19:07Ed Elson?

  The other thing I found quite ridiculous about the bill is that it requires a safety assessment for every time a developer trains a new model. And to me, this is the giant tell that they don't really know what they're talking about, because it neglects the fact that these are dynamic models now that are being trained and retrained multiple times a day. So what, you're going to send in a letter to the government, to the California state government, 50 times a day when you're trying to train your AI model? It just doesn't really make sense. So he recognized that. His best quote, I believe, was the following. He said, "The bill applies stringent standards to even the most basic functions, so long as a large system deploys it. I do not believe this is the best approach to protecting the public from real threats posed by the technology."

• 19:52Ed Elson?

  This is all a long-winded way of me saying, I think Newsom is really smart. I think he understands the issues really well. I think he's been caricatured pretty effectively, I will say, by the Republican Party in the media to seem like this sort of pseudo-communist lizard criminal. But the reality, if you listen to what he says, is he's actually completely informed on these issues, and I think he's got this one exactly right.

• 20:18Scott Galloway?

  So I don't know if you remember this, but Governor Newsom, there was actually a recall after the tech bros decided they just couldn't stand that communist Governor Newsom, and they figured out a way to get enough signatures with a little bit of money. And it cost the state $200 million for them to find out, these tech bros who sponsored this bullshit recall, that no, voters get to decide in two years if they want to reelect him, which they did. I mean, it was just such, it was such an abuse, I think, of democracy. It cost the state $200 million to have this bullshit recall election. In addition, speaking of this terrible place, California, Governor Newsom pointed out that

• 21:03Scott Galloway?

  32 of the world's top 50 AI companies are located in this terrible place. By the way, have you heard, is Keith Rambach still renovating his house in San Francisco? I know he hates to be there, but word is he's spending a lot of time again in San Francisco. It must be so hard for him trying to figure out the wainscoting and what type of, you know, what type of lighting. But I've heard he's still in San Francisco despite what a terrible place it is. Anyways.

• 21:33Scott Galloway?

  This state continues to bring together this alchemy of In-N-Out Burger, Zuma Beach, the greatest university system in history, the University of California, the greatest junior college system, the greatest Cal State system. Stanford continues to push out some of the most dramatic thought leadership. And here's the thing, you know, it's like my dad, when my mom and dad got divorced, he told me he got a promotion, quote unquote, he was working for O.M. Scotts and moved back to Columbus, Ohio. And he's told me over and over that he said, he could tell when the, when the plane took off and it banked over Zuma or the Pacific Ocean and started heading east, he thought

• 22:17Scott Galloway?

  to himself, you should never leave California. He thought, he thought to himself, I'll never get back to the beach. I'll never get back to California. And he was right. He could never really afford to move back because California is very expensive. But also the reality is the reason why it's expensive is because it's worth it. I would bet a third of my kids at NYU get on a plane and just head west, young woman, although I could still, I still don't go back to San Francisco. Too politically extreme for me, but In-N-Out Burger. Daddy, daddy's going to LA to celebrate my two friends in the room of the eighties, my sophomore year in the fraternity. That's what we call the room of the eighties. Eddie Blau and David Frayer are having their 50th birthday parties on Saturday. So I am flying to LA and I stay at the Beverly Hills Hotel. I go to In-N-Out Burger.

• 23:01Scott Galloway?

  I just love California. Anyways, I'm a big fan of this. I think I'm a big fan of the governor. I think he was absolutely right to kill this selective legislation.

• 23:12Ed Elson?

  We'll be right back after the break for our conversation with Lina Khan. If you're enjoying the show so far, hit follow and leave us a review on Prof G Markets.

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• 25:03Ed Elson?

  Welcome back. Here's our conversation with Lina Khan, Chair of the Federal Trade Commission. Chair Khan, thank you so much for joining us. It really is an honor.

• 25:10Speaker 06

  Great to be with you.

• 25:14Ed Elson?

  So as you look at the state of antitrust today, which sectors in your view are most in need of regulation right now?

• 25:22Speaker 06

  Well, we're really on the other end of a 40-year natural experiment, where, starting in the late 70s and early 80s, there was a decision to become more hands-off. When it comes to enforcing the antitrust laws and making sure that we're promoting vigorous competition. And so you've really seen for several decades now, waves of M and A resulting in much more consolidated markets, be it in food and agriculture, be it in telecom, be it in mattresses, be it in parts of the cement industry, cat food, you know, eyeglasses. I mean, it's really not an isolated feature, but actually a systemic feature of our economy increasingly.

• 26:05Speaker 06

  I think there are, you know, a few ways to look at where you might want to prioritize addressing these issues. One is, what are the essentials for Americans as we're thinking about food, as we're thinking about housing, as we're thinking about healthcare and medicine? And so each of those sectors is very important for us. But if we're thinking about America's competitiveness globally and wanting to make sure we stay ahead, making sure we're also focusing on technology markets to make sure that it's vigorous competition that's allowing the best ideas to win and allowing Americas to stay ahead, that's really critical, too.

• 26:40Ed Elson?

  You mentioned that this is sort of a 40-year-long story. Why do you think America got so loose on regulation, particularly on regulating monopolies and I should say not regulating monopolies and not regulating M and A? What is the story there? Why did we do that?

• 26:59Speaker 06

  Well, it was a philosophical and policy decision that was premised in part on the idea that instead of the traditional skepticism of concentrated economic power in our country, we should actually view monopolies more favorably. We should assume oftentimes that they can deliver efficiencies that are going to be passed on to people. And so this was a shift that was executed under the Reagan administration. Antitrust was ground zero, but we really saw a trend across different parts of the government. And a whole paradigm shift in how we think about economic policy and how we think about the relationship between government and markets. And there was an assumption that markets will generally self-correct.

• 27:43Speaker 06

  And so the best thing when in doubt is for the government to get out of the way. I think we've seen in all parts of the economy, areas where those assumptions have really either failed or led to pretty catastrophic outcomes. And so that's why you're seeing a reorientation, not just in antitrust, but also in how our administration has been doing industrial policy and how we've been doing trade policy. We've been really closing the gap between reality and theory to make sure that the decisions we're making are not premised on outdated assumptions, but are instead responding to modern day commercial realities and the state of the world in 2024.

• 28:22Scott Galloway?

  Chair Khan, one of the biggest, if not the biggest issue in the upcoming election is inflation. And I'm not sure people are able to make the connection between inflation and the concentration of industries. Can you help us make that connection?

• 28:34Speaker 06

  So, look, the inflation that we saw peak a few years ago was initially instigated by the pandemic and major supply chain shortages that occurred in the wake of that. You had ports backed up, and then you had Russia's invasion of Ukraine. And each of those events directly contributed to a surge in prices. What's been really interesting to see and widely discussed these last few years is even as some of those supply chain disruptions have eased and things have gone back to normal, prices have not concurrently dropped, especially in areas like groceries. A few things that we've seen is that concentrated markets can lend themselves more, not just

• 29:19Speaker 06

  to collusion, but coordination when it comes to whether you're actually reducing prices even as costs go down. Or whether you're keeping them up. And so you can imagine a world in which inflation is giving cover to come for companies to exercise their pricing power to the full extent in ways they were not doing so previously. It can also provide cover, you know, in ways that are ultimately allowing them to grow their margins and not see those margins shrink as the underlying cost disruptions ease. So, you know, there's, there's a lot of evidence out there. There's earnings calls where we're seeing executives directly acknowledge this fact.

• 30:03Speaker 06

  And so it comes up as part of the FTC's work. The other connection I'll note is concentration of production also concentrates risk. And what that means is that a single outage or a single disruption can have cascading effects in ways that lead to supply shortages and lead to price increases as well. We saw this in infant formula a couple of years ago where there was a single contamination in a single factory in the United States, and that resulted in shortages across the country. And so concentration can also contribute to inflation because it makes your markets more fragile and more susceptible to cascading effects when you have a single outbreak.

• 30:44Scott Galloway?

  I think sometimes the populace conflates antitrust or aggressive antitrust with being anti corporation or anti business. Can you cite specific examples of corporations that have been busted up and the ensuing benefit to the end consumer?

• 31:01Speaker 06

  Truly antitrust is a gift to innovators and entrepreneurs. And what promoting open, fair competition really means is that you have a system where the best idea can win, right? If somebody has a good idea, they're able to get funding for it. They have the talent and dedication and hard work to really commit that they actually have an opportunity to scale and fairly compete in the market rather than just get locked out because the big guys feel threatened by you and don't want you to have a fair shot. And so that's what antitrust is really about, is about wanting to make sure that the big guys are still having to look over their shoulder. And say, hey, there's somebody clipping right behind me and I need to soar to go faster.

• 31:44Speaker 06

  That's the system we want. That's the system that has allowed America to stay ahead globally. In terms of specific examples, I mean, you can go back to the antitrust lawsuit against IBM, the antitrust lawsuit against AT&T, the antitrust lawsuit against Microsoft. Each of these ended up being a critical point in which innovation was unlocked, be it in the personal computer, be it telecom, be it in, you know, the web 2.0 revolution that we saw. Each of those was primarily a result of the fact that you had the government saying the existing incumbent couldn't block out this next generation of innovators.

• 32:25Ed Elson?

  I'd love to get your view on AI check on and how you think it will affect or perhaps not affect the antitrust landscape in the next few years. What are you focused on when it comes to the AI industry right now?

• 32:39Speaker 06

  Well, look, AI is really interesting because, you know, it's still at a pretty early stage in terms of understanding what its precise trajectory will be. From the perspective of antitrust, we want to make sure that companies that already have a leg up because they're dominant in one layer of the stack are not using that dominance to squash out competition somewhere else. And so we've been scrutinizing some of these investments and partnerships that you see between the incumbents and between some of the, you know, newer model developers to understand, you know, is this going to be distorting independent decision making when it comes to strategic calls and competition?

• 33:21Speaker 06

  Is there going to be undue special privileges or exclusive access in ways that risk locking out some other competitors? These are the types of questions that we're asking. We're looking layer by layer across the stack. So looking at the chips, looking at the cloud, looking at the models to understand, you know, what are the key economic properties of each of these? And if we are seeing bottlenecks or choke points, how do we make sure that A, those are not the results of illegal monopolization? And B, they're not being abused or exploited in ways that's going to hurt competition? You know, I think it's an exciting moment and we want to make sure that the innovators get a fair shot rather than be locked out.

• 34:03Ed Elson?

  Yeah, so this is something that we've been discussing a lot on this podcast. Those investments that you mentioned, the term we've been using is corporate incest, where it feels like you have big tech who are all buying stakes in each other's AI companies. And when I look at it, it feels as if this is sort of the way that you sequester monopoly power and monopoly influence without being regulated. And that is, instead of acquiring a company, you sort of stick your teeth in and establish dominance by investing in them. And we sort of saw this with Microsoft investing in Inflection, and then suddenly all the employees at Inflection went to Microsoft.

• 34:44Ed Elson?

  I don't know if you can speak to this specifically, but I'm just wondering what your take is on that view, this idea of influence not through acquisition but through investment.

• 34:55Speaker 06

  It's a really good point. And to be effective as antitrust enforcers, you've got to keep up. And if there are particular business tactics or particular ways that control is being acquired, and even though the mechanism looks different, it's not a straight up acquisition, but it's through some of these investments. You know, we need to focus on the market reality rather than kind of formalities around, is it an acquisition formally, yes or no? And so we've been really skilling up internally. We've brought on a whole set of technologists to make sure that as we look under the hood, we have the capacity to understand what's going on.

• 35:36Speaker 06

  And just to step back, I mean, the whole premise of wanting competitive markets is that a market where you have lots of different independent nodes of competitive decision making is going to lead to better outcomes than when you have just a single node of that competitive decision making. And so that's really, as you think about wanting to preserve competitive markets, what you want to do is make sure that you have markets that are allowing, you know, a lot of different ideas to compete and see who gets out ahead.

• 36:08Scott Galloway?

  It felt like a watershed moment when Alphabet was found guilty of monopoly maintenance.

• 36:16Scott Galloway?

  And obviously, we're now moving to the remedy part of the trial. And my sense is amongst the remedies, there's fines. And I would argue that we can't come up, or we don't seem to be able to come up with fines that aren't whittled down to something that's fairly meaningless for the company. There's the idea of some sort of oversight where you put a regulator in there. And I don't know if you would argue that has had much effect. And then there's breakups as a remedy. And it strikes me that the only potential remedy for these companies in big tech that would have real teeth in terms of breaking their monopoly power is in fact breakups. Do you think we're going to see more breakups as a mix of the remedies offered if in fact we do see more of these companies found guilty of monopoly abuse?

• 36:58Speaker 06

  It's a great question. You're right, it was a landmark moment. It was a landmark opinion. It was the first time in modern history that we've had Section 2 of the Sherman Act, the core statute around monopolization, applied in a digital market in this way. And it was a really great opinion for a whole bunch of reasons, but it really showed the judge grasped the realities of how online search work and the properties of it in terms of just the incredible importance of scale, the incredible importance of certain types of user data to be able to, you know, gather that momentum and enjoy the accelerated growth that digital markets can provide. In terms of remedies, you know, this is a live question, and I defer to our colleagues

• 37:43Speaker 06

  at the Justice Department to lay out for the judge what type of remedy they think is best. But historically, the remedies that have worked, that have been successful, have been ones that have opened up the market to competition in a market-based way, rather than a regulator overseeing and the company basically having to ask permission to do things or not do things. You really want the kind of market incentives to be such that competition is organically entering and organically able to thrive. I think it's especially interesting when you face this question at technological inflection points like we do right now.

• 38:25Speaker 06

  And so it's, you know, we saw a discussion during the trial about not just search, but what search could mean for AI. And so I imagine that'll be, you know, a part of the conversation as well. You want to, you want to restore competition, not just for the markets of yesterday, but with an eye to the markets of today and tomorrow.

• 38:42Ed Elson?

  Stay with us.

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• 40:26Ed Elson?

  We're back with Prof G Markets. I'd love to know how things sort of work inside the FTC, Nina. How do you figure out which sectors you need to be taking a harder look at? And what are some of the criteria that you use when discerning which companies are monopolies and which aren't?

• 40:45Speaker 06

  So on the antitrust front, there are kind of two components of our work. One is merger enforcement, where we're primarily having to be in a reactive posture because we don't know what deals are going to come into the door and we do a case-by-case analysis. The other part of the work that we do is really focused on monopolistic practices. And sometimes these things interact, right? You see how mergers can be also allowing monopolies to persist. You can see oftentimes that it was a merger that ultimately allowed a dominant firm to really deepen that moat. So it's not like these are entirely siloed, but in the merger context, we do have to be much more in a reactive posture, depending on what firms are proposing.

• 41:29Speaker 06

  But for me, the biggest thing is where are we seeing some of the major pain points for Americans? And that's why we've been focused so on healthcare. So we review big pharma deals. We review mergers between hospitals. We've been scrutinizing these pharmacy benefit managers, these middlemen in the pharmaceutical supply chain. There was a lawsuit filed just last week. And we've had some pretty big wins. So when we scrutinize some of the patenting practices of big pharma, we found that they were listing with the FDA patents for certain parts of devices rather than patents for the core chemical ingredients or drug formulations in ways that was improper.

• 42:12Speaker 06

  And so we challenged those firms, including in areas relating to asthma inhalers, EpiPens. And several of those firms have already proactively agreed that they're going to be dropping the prices for things like asthma inhalers, down from hundreds of dollars to just $35. And so healthcare is a general matter, is a big area of focus. We've seen how blocking some of the big pharma acquisitions has actually resulted in partnerships that have resulted in more innovation and resulted in more patients being served by some of these great discoveries. And so I would say healthcare is a big area of focus. Thinking about some of these next generation markets is key because we've learned that

• 42:54Speaker 06

  trying to fix things on the back end in tech is just extraordinarily difficult, right? I mean, these are markets where you have such significant network externalities, such significant self-reinforcing advantages of data, that the accelerated growth and momentum that happens once you achieve a certain degree of scale. Is so significant that it's really much better to prevent monopolization early rather than try to fix it a decade or more after the fact. Because as Prof G mentions, you know, what the remedy looks like on the back end can be really challenging. And historically, the remedies that have worked most effectively have been breakups

• 43:36Speaker 06

  because that's been what's needed to allow the market to be oxygenated. And so, you know, next generation digital markets will continue to be a focus as well. But we keep thinking about where are we seeing the biggest pain points for people, be it in healthcare, be it in food and agriculture and that sort of thing.

• 43:51Ed Elson?

  We had a pretty interesting conversation with Professor Rebecca Allensworth of Vanderbilt, particularly around this idea of the consumer welfare standard and how we're supposed to sort of quantify it. Because I think traditionally, the measure has been prices. I mean, if a company is operating a monopoly and they're raising prices, then that is considered consumer harm. But it sounds like under this new administration, it's a bit more expansive than that. I'd love to just get your view on what constitutes consumer harm? How do we actually measure how consumers are being harmed by monopoly powers?

• 44:35Speaker 06

  So the antitrust laws are written in a way that focuses on competition. They talk about preventing mergers that may substantially lessen competition. They talk about monopolization. What it looks like to protect competition is going to vary depending on the market, right? And the key question is, what are the dimensions on which firms are actually competing in a particular market? There are going to be markets where the main dimension of competition is price, but there are going to be other markets where the main dimension of competing is going to be certain types of innovation, certain types of quality metrics. In labor markets, we sometimes see, you know, firms are watching what the other firm does

• 45:17Speaker 06

  in terms of are they offering better wages to their workers? Are they offering better benefits? And so the First issue is you need to understand what's happening in this market. How are firms competing? What are the dimensions on which these firms are competing? What is the trajectory of the market look like? And then make an assessment based on that. I mean, in digital markets, we've of course seen a, you know, whole set of services that charge zero dollars to their users. But their users' data is what's being monetized. And so you can imagine that privacy and how privacy protective certain services are could be a really important dimension of competition. Something users care about, something companies are competing on.

• 46:01Speaker 06

  But it's really a very fact specific analysis.

• 46:04Scott Galloway?

  So it absolutely makes sense theoretically to preventative medicine here and move in and apply some form of antitrust before these companies get too big and too strong. And it strikes me that that just begs the question or focus on AI. Where ChatGPT is being used by 92% of corporate America, where Nvidia has soaked up the majority of the market capitalization and it's just dominant in terms of GPUs. But what would sort of preemptive or prophylactic approach antitrust look like when you have a single brand in an emerging market? Do you need to wait and see? Or are there things you could do preemptively in terms of a remedy to do preventative medicine? If you will.

• 46:43Speaker 06

  So antitrust is a law enforcement regime. And so we can only act if and when there is a violation of the law. We can't really go in prophylactically and, you know, set just entirely new regulations or, you know, create new market structures. It's really pegged to, pegged to our firms violating the law. Right? And it's not unlawful for a firm to be big. It's really about are they competing fairly or unfairly? And are they using their dominant position in ways that is undermining competition? That is preventing other companies from being able to compete fairly? And so those are the types of things we are focused on.

• 47:27Speaker 06

  You're right that we are already seeing some major players, you know, have a pretty significant leg up. And the Focus needs to be on making sure those firms are not acting in ways that are keeping out other rivals, right, in terms of how they're designing their contracts, in terms of how they're designing their products. And so, you know, it's been publicly reported that both the FTC and the DOJ are looking at some of these markets. But just the bigger point here is, we went through, you know, a 20-year period where the big five technology companies, Apple, Facebook, Google, Microsoft, and Amazon collectively made over 800 acquisitions,

• 48:12Speaker 06

  and not a single one of which was challenged at the time. And now there are lawsuits kind of retroactively identifying that some of those were missed opportunities and failing to stop those deals had a really negative impact on the market.

• 48:25Ed Elson?

  It feels like the responsibility of preventive treatment sort of lands on Congress. I'm just wondering, to what extent does the FTC and do you personally communicate with Congress? Is there any sort of exchange of information there? Or are you just totally separate?

• 48:43Speaker 06

  We constantly communicate with members of Congress. I mean, we do so, you know, officially when we're up there testifying. We do so when they're asking for feedback or suggestions on legislation. Sometimes they ask for ideas on legislation. And so we have, you know, an agency of 1,200 people, some deep expertise in understanding how these markets work. And so we want to make sure we're sharing that expertise with Congress. On digital markets and AI in particular, I mean, you know, we have our law enforcement tools, which, as you noted, we can only be reactive with. But we do have other tools where we can proactively do market studies. And so earlier this year, we launched an

• 49:24Speaker 06

  inquiry into the AI investments and partnerships that we're seeing to try to understand, what are the contractual terms here? Are these contractual terms allowing the dominant firm to be in the driver's seat when it comes to competitive decision making at some of these model companies? Or are there other ways that these partnerships could be undermining competition? And so using that market study tool proactively is one way that, at the very least, we can be vigilant.

• 49:55Scott Galloway?

  And Chair Khan, just as we wrap up here, a more personal question. Right out of the gates, there were some pretty high-profile cases that the DOJ and the FTC didn't get very far on. And I remember there was some publicity about morale at the FTC being really low. And I remember thinking, I didn't think you were going to last. And then, over the course of the last couple of years, you've had some wins. And there's been a lot of reports that you're one of the few senior officials that has, it seems to have allies and supporters on both sides of the aisle. It seems like, quite frankly, you're just doing very well. Just for, for the benefit of some of the younger people out there, you're extraordinarily young for someone in your position. I got to imagine you're the youngest, youngest Chair in history at the FTC. What advice would you have?

• 50:37Scott Galloway?

  I mean, how did you personally feel when things were not going well? And what was your personal practice for trying to get through that? And what advice would you have for people when they face kind of, I just can't imagine the level of stress you felt during that period? And how did you deal with it? And what were your learnings and advice you'd have for other young people?

• 50:56Speaker 06

  Yeah, I appreciate the question. I mean, it's such an honor to be in this role. And, you know, for me, my North Star in all of this is like, what is the point of the tools and authorities we have, right? And how do we make sure we're using these authorities to make a real difference and solve concrete problems that Americans are facing? Be it, you know, not being able to afford groceries, not being able to access quality healthcare, wanting to make sure that our markets are still allowing America to stay ahead globally. Like, these are real tangible, concrete things that the FTC works on. And so, really staying rooted in the issues and the substance is what motivates me. You know, I think the most important thing in these types of roles is making sure that

• 51:41Speaker 06

  you have the best team you can. And I've been really fortunate to have a really good team. It's really important to understand what are your own areas of comparative advantage and strength? And how do you build a team around yourself that is accounting for the areas where you don't have those comparative advantages? And so, as we've been able to build out and make sure people are in the right lanes and we have a team that's really able to fire on all cylinders, we are seeing a historic level of activity from the FTC. And it's just been such an honor to be at the helm and be colleagues with such dedicated, talented civil servants.

• 52:18Ed Elson?

  Lina Khan is Chair of the Federal Trade Commission, which enforces the nation's antitrust and consumer protection laws. Khan got her start in antitrust as a business reporter and researcher, examining consolidation across markets from airlines to chicken farming. Prior to joining the FTC, Khan served as a counsel to the US House Judiciary Committee's Subcommittee on Antitrust, Commercial and Administrative Law. She was also an associate professor at Columbia Law School. Chair Khan, thank you so much for joining us. This is great.

• 52:43Speaker 06

  Great to be with you. Thanks for having me.

• 52:44Scott Galloway?

  Thanks, Chair.

• 52:45Speaker 06

  Good to see you.

• 52:46Scott Galloway?

  Good to see you.

• 52:55Scott Galloway?

  Ed, what'd you think?

• 52:57Ed Elson?

  The most talented young person in government today, probably. I mean, she's pretty incredible.

• 53:03Scott Galloway?

  Well, that means one of three people. I mean, they're all 80 fucking years old. I mean, it's a pretty low bar. I mean, come on. It's like, whatever. I was the most talented Jew on my basketball team. Ask me how many Jews are on the high school basketball team. Anyways, oh, that's wrong. Is that wrong? Is that wrong? And even more importantly, Chair Khan, that sounds like a Star Trek movie. I mean, that just sounds like the badass in a Star Trek movie. Did you, did you see, or you're to, like, you ask your father, The Revenge of Khan, I think it was called, and William Shatner, Captain Kirk's nemesis, was Fernando Lamas. And he was actually quite good as Khan. He was very good. And he was Chair Khan. I think that's badass. Yeah, I agree with you.

• 53:48Scott Galloway?

  She's a, she's a total gangster. My attitude used to be, eventually every firm falls. And that's true. If you look at the most valuable firms from 40 years ago, I don't think any of them are on the list. Maybe Walmart. That organically, there's churn. And what I came to realize is that, yeah, but along the way, these companies really suppress innovation along the way. Anyways, I agree with that. I think she's outstanding.

• 54:12Ed Elson?

  Yeah, I hope she also is sort of an inspiration for young people to get involved in government. Because, I don't know, I think you look at government today and it does look so stale and old. And it does look like a retirement home and sort of the least sexy place that you could work. And then you see people like Lina Khan, who have just crushed it in all aspects of life. And, you know, she's having a real impact on our society and our economy in a, in a positive way. And I think it's just sort of, she makes working in government look cool.

• 54:42Scott Galloway?

  Yeah.

• 54:43Ed Elson?

  And I think that's something we need more of.

• 54:44Scott Galloway?

  I love that.

• 54:48Ed Elson?

  This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss, our executive producer is Catherine Dillon, Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Profitec Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

• 55:49Speaker 10

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