In tech, acquisitions are an important path to business growth, but sometimes their combined powers are so strong that it limits competition, stamping out innovation and raising antitrust concerns.
A new Columbia Business School study examines hundreds of acquisitions in the Apple App Store to assess the effects on competition for future developers in the market. The findings suggest more regulation is needed on the platform.
As a handful of big tech companies continue to wield enormous influence over not just the technology sector but the economy as a whole, their acquisitions are known to make a big splash. In 2015, when Activision Blizzard, maker of the popular video game Call of Duty, bought Candy Crush creator King Digital Entertainment for $5.9 billion, Activision CEO Bobby Kotick said the move “[solidified its] position as the largest, most profitable standalone company in interactive entertainment.” Microsoft subsequently bought Activision for a whopping $69 billion.
With major deals like that, a debate frequently arises regarding antitrust concerns and whether tech firms’ acquisitions should face tighter regulatory standards. For instance, Facebook’s $22 billion acquisition of Whatsapp in 2014 has been the subject of scrutiny by the U.S. Federal Trade Commission for several years.
In a new study, Lori Yue, associate professor of business in the Management Division at Columbia Business School, and her co-authors examined competition among app developers, a category Yue says has been overlooked in this conversation. “A lot of research focuses attention on platform owners like Apple or Google, but there are very few of those companies,” she says. “There are a lot of smaller companies that create value on the platforms.” A lack of competition in this ecosystem of companies could also reduce innovation and variety on digital platforms.
Identifying Synergies
For this study, the researchers looked at how acquisitions of complementors — meaning complementary companies whose goods or services enhance the acquirers’ existing offerings — impact new competitors’ willingness to enter the Apple iOS App Store.
To define the benefits, or synergies, gleaned through acquisitions, researchers examined the 872 acquisitions of complementors that occurred between 2008 and 2015. They then outlined four sources of acquisition synergies: user-side economies of scale, user-side economies of scope, and technology-side economies of scale and scope.
Economies of scale refer to savings in per-unit fixed costs brought about by increasing production volume or usership. Economies of scope arise when a company offers a wider range of complementary products or services using its existing equipment and distribution channels. Technology-side synergies involve the tools that developers use to build and enhance their apps, like software development kits (SDKs), while user-side synergies have to do with features and services that benefit the consumer.
To measure these acquisition synergies, researchers took into account more than 279,000 app developers’ decisions, more than 71 million customer reviews, and more than 12,000 unique SDKs. The reviews provided information on how app users benefitted from the acquisition, while the SDKs revealed information on the developers’ side. The researchers then analyzed how these different types of synergies influenced the likelihood of new developers entering the platform.
Stamping Out Competition
The researchers found that acquisitions among complementors indeed deter new companies from entering the platform, which limits competition over time. The synergies that emerge from the purchase make the acquirer more competitive, seemingly making it harder for new developers to establish a foothold. “Maybe it feels like there’s no opportunity for them in this market anymore,” Yue says.
The deterring effect was strongest on the technology side and with economies of scope. This may be because these economies enable the acquirer to broaden their product through shared tech. The study cites the 2013 example of European internet company Yandex acquiring movie database company KinoPoisk. Yandex combined its search technologies, machine learning, and personalization algorithms with the movie company’s extensive database to develop personalized movie recommendations for users. By integrating complementary technologies, the acquirer enhanced the user experience in a way that was difficult to replicate, especially for new developers just entering the market.
Yue says regulators need to expand their focus to not only the major tech companies’ acquisitions but also to the smaller complementor companies, which she says are not currently scrutinized at all. “A lot of app developers have this kind of antitrust effect, but we don't really pay attention to them,” she says. “So when some of the biggest game developers, for example, acquire a lot of smaller apps and games, they can really dominate that domain and deter other game developers from entering these categories.”
Yue says business executives need to pay attention to these patterns as well, because the approach to measuring anticompetitiveness in the digital market differs from the traditional market. “Industry is not clearly defined in the digital market. There are all kinds of industries competing on this platform,” she says. “You don’t really have a clear index here [for detecting anticompetitive behavior], but you may be able to calculate the kind of synergy for each particular case of acquisition.”
By assessing the synergies of an acquisition, executives can better guard against triggering anticompetitive concerns as they grow their businesses.
Adapted from “The entry-deterring effects of synergies in complementor acquisitions: Evidence from Apple's digital platform market, the iOS app store” by Yongzhi Wang of the Fisher College of Business at Ohio State University; Lori Qingyuan Yue of Columbia Business School; Nandini Rajagopalan of the Marshall School of Business at the University of Southern California; and Brian Wu of the Ross School of Business at the University of Michigan.
