Navigating Antitrust Risks in the Generative AI Landscape
Transformative technological shifts often pave the way for new competitors to challenge established market leaders. These rare paradigm changes redefine how businesses vie for customers and resources. The rise of generative artificial intelligence (AI) serves as a prime example of innovation's potential to disrupt or reinforce existing power dynamics, depending on market and regulatory responses.
Generative AI employs large-scale models, trained on extensive and diverse datasets, to create original content. This groundbreaking technology is revolutionizing how companies engage with customers, competitors, and partners, presenting both significant opportunities and substantial risks.
The Federal Trade Commission (FTC) is advocating for robust antitrust enforcement. A recent post from the Bureau of Competition and Office of Technology outlines practices that could prompt governmental scrutiny. To navigate antitrust risks in the generative AI market, businesses must understand various antitrust theories and their implications.
Exclusive Dealing
Companies frequently pursue exclusive agreements to strengthen relations with suppliers or customers. While exclusive dealing can stimulate competition, it poses risks when it allows one firm to control crucial inputs, distribution channels, or customer segments. In the case of McWane v. FTC, a federal court struck down an exclusive-dealing agreement that barred rivals from achieving efficient scale, ultimately raising costs and hindering market entry.
In the generative AI context, the FTC may view arrangements by major players that provide both computing services and generative AI products with scrutiny if they favor incumbents over new entrants. The agency is particularly interested in exclusive deals involving essential compute resources like graphical processing units, which are critical for competing in this space.
While each agreement must be evaluated individually, some general principles to consider include:
1. Exclusionary Intent: Exclusive-dealing agreements should never be designed to hinder rivals' ability to compete. Such arrangements that restrict competition pose significant risk.
2. Documentation of Benefits: Businesses should carefully document the pro-competitive advantages of exclusivity, such as reduced costs, enhanced quality, and improved access to products. Be prepared to articulate how these benefits emerge specifically from exclusive arrangements.
3. Market Share Considerations: Exclusive contracts with companies holding over 30% market share present heightened antitrust risks.
Tying
The FTC is also monitoring tying arrangements, where the sale of a dominant product is contingent on purchasing a secondary product. The agency warns that firms may link generative AI applications with existing core products, potentially undermining competitors’ standalone offerings.
According to the U.S. Supreme Court's definition in Jefferson Parish, an illegal tying arrangement exists when a seller coerces a buyer into purchasing an unwanted tied product. Such arrangements are scrutinized more closely when the seller holds significant market share or offers unique products unavailable from competitors. It is vital to recognize that tying typically raises antitrust concerns only if the products are perceived as distinct by consumers.
To mitigate antitrust liability with tying:
1. Customer Interest: Keep track of instances where a customer expresses a desire to purchase products together.
2. Competitive Benefits: Clearly demonstrate how tying arrangements enhance competition by lowering costs, increasing efficiencies, boosting the combined product value, and fostering technological advancements.
Bundling
Like tying, bundling uses a sought-after product to drive sales of additional offerings. In the precedent-setting case of Cascade Health v. Peacehealth, bundling refers to offering multiple goods or services at a single, lower price compared to selling each separately. While bundling can result in significant consumer savings, it may limit competition for those who cannot match such diverse product offerings. Courts are generally wary of bundles offered by sellers with market shares exceeding 30%.
The FTC notes that companies might bundle generative AI with productivity software, web browsers, or cloud services, potentially inhibiting less-established firms. To evaluate antitrust risk in bundling:
- Analyze if the range of bundled products restricts tighter competition from rivals offering fewer options.
Acquisitions
Antitrust enforcers are closely monitoring acquisitions that involve key inputs crucial for generative AI, including vast datasets, specialized talent, and advanced computational resources. The FTC's commitment to rigorous enforcement suggests that any strategies aimed at excluding or harming competition could trigger significant regulatory backlash.
To effectively navigate antitrust risks, businesses should emphasize that exclusive agreements, tying, bundling, and strategic acquisitions are vital for promoting competition through enhanced, cost-effective AI solutions.
This proactive approach will not only enhance market positioning but also mitigate potential legal challenges in this rapidly evolving landscape.
Ranking
