Enterprise Software Policy
If the US had an enterprise software policy it would look at what promotes innovation and the development of good software, and would seek to promote these practices through the incentives and rules that it created. Our research shows a clear conclusion that mergers and acquisitions are negatively correlated with software innovation as can be seen in the graphic below.
The US Government could create a specific entity, which regulates software, however, this would not be entirely necessary. All that would be necessary is for the Federal Trade Commission (FTC) to disallow mergers and acquisitions in software. The FTC already has the power to deny any M&A request that it receives on the basis of the Sherman and Clayton Antitrust Acts (SAA and CAA). In fact due to the CAA, all M&A activity must be approved by the FTC. Therefore it’s not a question of passing any new legislation, as they are already law however, it is a question of enforcement of the law. One could make the argument that M&A activity could be subject to exceptions, but then every software vendor would claim the exception rule. Actually having the FTC do this would be a challenge as they tend to approved most M&A activity, and the agency has diverged so far from the SAA and CAA that as with most regulatory bodies since the 1970s, there is a very serious question as to how much the FTC is interested in stopping the formation of trusts versus being used as leverage to receive corporate contributions, and for ex-FTC senior members to angle for future positions in monopolistic software vendors whose M&A activity they approve. The FTC relies on an overly complex calculation referred to as the Herfindahl–Hirschman Index, or HHI, which is a measure of the size of the firms in relation to the industry. However, the problem with the HHI is that it depends upon the definition of the industry. If we look at the software vendor AspenTech, its difficult to see how its acquisitions could have been approved as it now has a monopoly in many areas of manufacturing software, although it may seem to have only a smaller percentage of the overall supply chain software market. The HHI is complex and unnecessary as any M&A activity reduces the competitiveness, innovation and customer options in the enterprise software market. Therefore under this more practical measurement, the process of approving or disapproving M&A could be greatly simplified – as any M&A activity reduces competition it should be disapproved.
The Clayton AntiTrust Act
Less known, the Clayton Antitrust Act was passed after the SAA caused a “wave” of mergers as the SAA lead to companies that had previously been acting as cartels – merge. Dissatisfied with the commensurate leverage provided by the formation of trade/labor unions, many companies formed informal cartels to reduce their power. The third principle of the CAA was that M&A activity would be disallowed under the case where the M&A would result in substantially less competition. This act “seeks(ed) to capture anticompetitive practices in their incipiency by prohibiting particular types of conduct, not deemed in the best interest of a competitive market.”
Conclusion
Most Americans would say they would like an innovative and competitive enterprise software market. Certainly the US has the world’s largest enterprise software market, however it is far less innovative and competitive than it could be, and a major reason for this is that the US rarely enforces its own anti trust laws. Many companies actually receive a very poor value from their software – and large consulting companies are to a great degree diverting the benefits of enterprise software away from the end clients. There are other things that the US could do to improve the software that companies select, including making it illegal to allow software implementation firms to provide software selection services, or requiring that the consulting companies become legal fiduciaries, meaning they would have a legal liability if they continued to place their interests before the interests of their clients. However, none of these changes are likely to happen because the US in effect has nothing but a hands off policy regarding enterprise software.
References
https://en.wikipedia.org/wiki/Clayton_Antitrust_Act