Unlock Editor’s Digest for free
FT editor Roula Khalaf picks her favorite stories in this week’s newsletter.
Vertical integration is all the rage as companies try to compete in AI and decarbonisation. They believe that greater influence over suppliers and sales channels will help them accelerate innovation and cope with geopolitical disruption. But is it better to buy the supplies and smarts you need, develop them in-house, or find a way to partner?
Last year, General Motors bought a lithium mine to secure key minerals for its electric vehicles. Chinese rival BYD already controls much of its supply chain, right down to the ships that transport its cars, and is said to be looking for acquisitions as it seeks to expand.
Apple this week announced a partnership with OpenAI to integrate ChatGPT into its devices. It is trying to catch up with rival Microsoft, which got off the ground with an AI startup and has now invested $13 billion and incorporated its technology into several products. Meanwhile, Google owner Alphabet, an early leader in artificial intelligence with its 2014 purchase of DeepMind, is building its own large language models and has recently accelerated development of proprietary chips to power its offerings.
Many companies have very good reasons for vertical combinations that go beyond trying to control and profit from cutting-edge technology. Strong connections often increase efficiency and the ability to recover from supply chain disruptions. Direct ownership also makes it easier to monitor labor abuses, overseas bribery and other violations, while simplifying the calculation of carbon emissions.
However, competition watchers are increasingly concerned that vertical integration may also promote less laudable goals. In areas where technology is still developing, powerful companies may try to steal the attack on rivals—and independent entrepreneurs—by using their power over key inputs or sales channels to exclude competition.
For years, US enforcement agencies have focused primarily on horizontal agreements, where harm to competition is easier to demonstrate because they involve combinations of direct competitors. To the extent that concerns have been raised when major companies have moved up or down the value chain, they have largely been tempered by promises not to abuse market power, as was the case when concert promoter Live Nation bought Ticketmaster in 2010 .
But that started to change. Under chairman Lina Khan, the Federal Trade Commission tried to stop Microsoft, which makes game consoles, from buying gaming group Activision and blocked Meta from acquiring Within, a virtual reality company. Those challenges failed, but the FTC had more success trying to block the biotech group Illumina from buying Grail, which makes cancer screening tests.
A federal appeals court agreed that the FTC was legitimately concerned that Illumina’s dominance of DNA sequencing tests gave it too much power over potential Grail competitors in the nascent screening market. EU enforcers were even tougher, fining Illumina €432 million for completing the merger without Brussels’ approval. Illumina’s CEO has lost his job, and the company plans to bring Grail back in an initial public offering this month.
More cases are being worked on, including some that reconsider earlier leniency. The Justice Department sued Live Nation last month, saying it now stifles competition because it manages music acts and controls arenas while controlling concert ticket sales.
Business executives should be wary of seeing this as a brief blip in the Biden administration that will disappear if Donald Trump retakes the presidency in November. His Justice Department started the trend when it brought the first vertical merger lawsuit in more than 40 years, trying to block AT&T’s purchase of Time Warner.
Although that suit failed, Republican-appointed judges have shown sympathy for some of the other claims. George HW Bush was named as the author of the Illumina decision. “Courts are much more receptive. . . than people think they are. It’s not just a right-wing question,” says Rebecca Allensworth, a Vanderbilt law professor. “I can’t see this all going away.
CEOs hoping to stay out of the eyes of regulators should remember a simple rule: not all vertical integration is created equal. Companies that innovate generally avoid criticism unless they abuse existing power by illegally bundling two products together. And buying an already successful business to deny access to competitors is quite different from licensing a technology.
Full control has its advantages. Freedom under antitrust control is not one of them.
brooke.masters@ft.com
Watch Brooke Masters with myFT and further X