Unlocking Innovation Through Antitrust Enforcement — ft. Lina Khan
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Welcome to Prop G Markets. Today, we're speaking with Lina Khan, chair of the Federal Trade Commission. That wasn't an easy segue. We're not joking. That part is not a joke. We are actually speaking with Chairman Khan. Did you enjoy this conversation, Ed? Incredible. First U.S. government representative on the podcast, so I think that means we're officially...

A legit podcast now. We're big time. I was so excited when she said yes to this. 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. Now is the time to fly. I hope you have plenty of the wherewithal. 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. I believe markets are cyclical, and you're going to see at some point the stock market or the S&P PE average, which I think is at a kind of a historically or a 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 of, I think it's the MSCI World Index, sans America, so every market except America, and the ratio of that valuation relative to the S&P indices is

It's at a historically low ratio, meaning the value of all markets other than the U.S. relative to the U.S. 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 in

where you're going to see flows out of the U.S. market potentially into Brazilian stocks, some European markets, and most specifically the Hang Seng in China. Yeah, 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 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 trends

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. But there is nothing in China's real economy that

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. 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. 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. 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 make a note of that and return to it at the end of the year. OpenAI, thoughts on SoftBank getting involved, hard to say.

half a billion dollars into their round. They're sort of attracting pretty much every big name investor at this point, perhaps not surprisingly. One of the things that does help in the venture community and gives people some confidence to invest with 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 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. 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...

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 $10.

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 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. 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 $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. 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 than the other investors who 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 to end this deal because what they're saying is certain people are getting

different rights and are getting 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. When I was raising money for Brandfarm,

I asked a guy named Tully Friedman, who is one of the co-founders of Hellman & 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 investors 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 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. 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. Yeah.

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 onto that valuation, though I would imagine that basically every single company

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? 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 for, 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 with the cost of compute around query,

even with margins of, call it, 50 points, what they should be able to get, where most software 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

to maintain that lead. 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 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 too difficult for OpenAI to fail at this point. 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, probably the best managed REIT in America, this guy named Hamid Moghadam, total visionary in real estate.

And I said, I need office space. I'll lease it from A&B. 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 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 OpenAI goes down 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.

If all of a sudden it looks as if the spending around AI is not living up to projections. 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 open AI. Do you have any thoughts on that?

Gavin Newsom killing that bill. 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 and slowing down the rapid progress of AI.

Musk has his own shitty AI company and just wants to slow open AI 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. 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 dreamy. He's dreamy. She immediately thinks, what can I do to 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. Agree, but stay on Dalbeck. 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 because this is about to put $100 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 peace 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. 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 saying,

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. 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.

Right.

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 32 of the world's top 50 AI companies are located in this terrible place. By the way, have you heard, is Keith Rabois 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 Wayne's coating and what type of lighting. But I've heard he's still in San Francisco, despite what a terrible place it is. Anyways, 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. Scott's and moved back to Columbus, Ohio. And he's told me over and over,

That he said he could tell when the plane took off and it banked over Zuma or the Pacific Ocean and started heading east, he thought to himself, you should never leave California. 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 still don't go back to San Francisco. Too politically extreme for me. But In-N-Out Burger? Daddy's going to L.A. to celebrate my two friends in the room of the 80s, my sophomore year in the fraternity. That's what we call the room of the 80s. Eddie Blau and David Frey are having their 50th birthday parties on Saturday, so I am flying there.

to LA and I stay at the Beverly Hills Hotel. I go to In-N-Out Burger. I just love California. Anyways, I'm a big fan of this. I think I'm a big fan of the governor. I think it was absolutely right to kill this selective legislation. 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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Ryan Reynolds here for, I guess, my 100th Mint commercial. No, no, no, no, no, no, no, no, no. I mean, honestly, when I started this, I thought I'd only have to do like four of these. I mean, it's unlimited premium wireless for $15 a month. How are there still people paying two or three times that much? I'm sorry.

I'm sorry, I shouldn't be victim blaming here. Give it a try at midmobile.com slash save whenever you're ready. $45 upfront payment equivalent to $15 per month. New customers on first three-month plan only. Taxes and fees extra. Speeds lower above 40 gigabytes. See details. 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. Great to be with you. So as you look at the state of antitrust today,

Which sectors, in your view, are most in need of regulation right now? 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&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...

Thank you.

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 America's to stay ahead. That's really critical, too.

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&A? What is the story there? Why did we do that?

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.

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.

Cherkan, 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? 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 companies

concentrated markets can lend themselves more, not just 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 for companies to exercise their pricing power to the full extent in ways they were not doing so previously. It can also provide cover for

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 a lot of evidence out there. There's earnings calls where we're seeing executives directly acknowledge this fact. 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 yesterday.

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. 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? 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 store to go faster. 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, and

each of these ended up being a critical point in

in which innovation was unlocked, be it in the personal computer, be it telecom, be it in 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. I'd love to get your view on AI, Chaykan, and how you think it will evolve

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? 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 newer model developers to understand, you know, is this going to be distorting independent decision making when it comes to strategic calls and competition? 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 there,

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.

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 of Inflection went to Microsoft. 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. 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, right?

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're

We have the capacity to understand what's going on. And just to step back, I mean, the whole premise of wanting competitive markets is

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.

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

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 worked.

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 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,

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 restore competition, not just for the markets of yesterday, but with an eye to the markets of today and tomorrow. Stay with us.

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We're back with Profit Markets.

I'd love to know how things sort of work inside the FTC, you know. 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? 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 in to 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.

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 health care. 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 scrutinized 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. 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 as a general matter is a big area of focus. We've seen how blocking some of the big pharma activities

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 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

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 mentioned, 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 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 health care, be it in food and agriculture and that sort of thing.

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? 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, etc.

In labor markets, we sometimes see firms are watching what the other firm does 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 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. But it's really a very fact-specific analysis.

So it absolutely makes sense theoretically to prevent a 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 chat GPT 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 to 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 preventive medicine, if you will? 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 in

entirely new regulations or, you know, create new market structures. It's really 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. 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 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. It feels like the responsibility of preventative 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? 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 inquiry into the AI investments and partnerships that we're seeing to try to understand what are the contractual terms here for

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.

And Chair Kahn, 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 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 chair in history at the FTC. What advice would you have? I mean, how did you personally feel when things were not going well? And what was your personal practice like?

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? 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 health care.

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 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. Yeah.

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 U.S. 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 was great. Great to be with you. Thanks for having me. Thanks, Chair. Good to see you. Good to see you.

Ed, what'd you think? The most talented young person in government today, probably. I mean, just pretty incredible. Well, that means one of three people. I mean, they're all 80 fucking years old. I mean, it's 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, Cher Khan. That sounds like a Star Trek movie. I mean, that just sounds like the badass in a Star Trek movie. Did you see or you're to like ask your father the revenge of Khan, I think it was called.

William Shatner, Captain Kirk's nemesis, was Fernando Llamas. 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. 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. 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. 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 positive way. And I think it's just sort of, she makes working in government look cool. Yeah. And I think that's something we need more of. I love that.

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 Profiting Markets from the Vox Media Podcast Network. If you like what you heard, give us a follow and join us for a fresh take on markets on Monday.

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