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Tuesday, January 7, 2020

The FTC vs Axon? Axon vs the FCT? Wow!

Whilst we were all minding our own business, it seems that the US Federal Trade Commission was busy investigating Axon for anti-competitive behavior. Last Friday, Axon CEO, Rick Smith, penned a piece on LinkedIn to make his case to the public. According to Smith, the FTC believes that Axon's acquisition of VieVu in 2018 was anti-competitive.

I'm not a fly on the wall. I only know what I've read in Smith's post and the subsequent reporting and interviews. To be fair, the press has let Smith tell Axon's side of the story. For the government's side, we have only a press release on the FTC's web site.

In terms of disclosure, it should be noted that within the scope of my prior employment with Amped Software, Inc. (an Axon partner), I worked closely with several internal business units within Axon.

But, I want to break down the FTC's press release to attempt to determine what's really the problem here.

Paragraph 1: "The Federal Trade Commission has issued an administrative complaint (a public version of which will be available and linked to this news release as soon as possible) challenging Axon Enterprise, Inc.’s consummated acquisition of its body-worn camera systems competitor VieVu, LLC. Before the acquisition, the two companies competed to provide body-worn camera systems to large, metropolitan police departments across the United States."

Analysis: Yes, they were in the same market. But, given the many quality issues with VieVu's product line, they weren't really competing - in the same way that the best Texas high school football team is really no competition for the worst of the NFL in any given year. My opinion on how VieVu got "competitive" on deals was to compete on price, not on quality. It was their low price that got them in the door at police departments, but it was their lack of quality that ruined the company.

Paragraph 2: "According to the complaint, Axon’s May 2018 acquisition reduced competition in an already concentrated market. Before their merger, Axon and VieVu competed to sell body-worn camera systems that were particularly well suited for large metropolitan police departments. Competition between Axon and VieVu resulted in substantially lower prices for large metropolitan police departments, the complaint states. Axon and VieVu also competed vigorously on non-price aspects of body-worn camera systems. By eliminating direct and substantial competition in price and innovation between dominant supplier Axon and its closest competitor, VieVu, to serve large metropolitan police departments, the merger removed VieVu as a bidder for new contracts and allowed Axon to impose substantial price increases, according to the complaint."

Analysis: Given the analysis of the first paragraph, VieVu was certainly not "particularly well suited" to deliver on any department's needs. Additionally, it wasn't the "competition" that drove prices down, it was VieVu's essentially offering their goods below cost to get in the door that drove prices down. Selling below cost isn't sustainable, and police agencies must look at all factors of a vendor - like the fact that unsustainable business practices will likely mean that the company won't be around throughout the lifecycle of the product.

Paragraph 3: “Competition not only keeps prices down, but it drives innovation that makes products better,” said Ian Conner, Director of the FTC’s Bureau of Competition. “Here, the stakes could not be higher. The Commission is taking action to ensure that police officers have access to the cutting-edge products they need to do their job, and police departments benefit from the lower prices and innovative products that competition had provided before the acquisition.”

Analysis: the market is still chocked full of offerings. There's Motorola/Watchguard, Panasonic, Getac, Utility, Coban, Visual Labs/Samsung, L3/Mobile Vision, and Digital Ally, plus over 10k results from China on alibaba.com. You can get a body camera from China's LS Vision for under $100/unit. That's a lot of competition.

Paragraph 4: "The complaint also states that as part of the merger agreement, Axon entered into several long-term ancillary agreements with VieVu’s former parent company, Safariland, that also substantially lessened actual and potential competition. These agreements barred Safariland from competing with Axon now and in the future on all of Axon’s products, limited solicitation of customers and employees by either company, and stifled potential innovation or expansion by Safariland. These restraints, some of which were intended to last more than a decade, are not reasonably limited to protect a legitimate business interest, according to the complaint."

Analysis: This part is just silly. Axon says to Safariland, known for their holsters and gear, stay with what you're good at (holsters and gear) and we'll stay with what we're good at. Stay out of our lane, and we'll stay out of yours. This is a good business decision, not anti-competitive behavior. You also have to be myopic to not consider that Safariland only bought VieVu in 2015. According to the WSJ, "Vievu LLC, a maker of police body cameras, has been acquired by Safariland LLC, which is bulking up its portfolio of security products ahead of a planned initial public offering next year." Safariland's entry into other vertical markets followed a similar pattern. But, at their heart, they're a holster and gear company, so their exit from the technology sector is no great loss.

Paragraph 5: "The Commission vote to issue the administrative complaint was 5-0. The administrative trial is scheduled to begin on May 19, 2020."

Analysis: What is missing is a specific citation as to which federal laws were violated. Likely, there was no specific violation of US law, but rather a violation of an FTC Rule. The FTC has the authority to pass and enforce it's own rules outside of the normal US law making process. Smith outlines the administrative hearing process in his op-ed. Smith is correct, this won't see a "court room," as the vast majority of FTC processes are kept in-house.

An examination of the FTC's "Competition Enforcement Database" found only 25 competition enforcement actions for 2018, which was down from 2017's 32 actions. Given the totality of commercial activity in the US, this is an incredibly small number. The assumption is that they only go after the most egregious of behaviors. If that's the case, what's really behind this action against Axon. VieVue was delivery faulty products. It was losing deals on it's own. Axon did a mutually beneficial deal with Safariland to take VieVu off their hands. What's actually wrong with this? Does this rise to a Standard Oil or AT&T level? Hardly. So why this case? That's the problem with administrative processes, we'll never know. There's a complete lack of transparency into their decision making or procedures.

I do tend to agree with Smith that this issue rises above brands and technology. It's a peek into the workings of the Administrative State in the US. What remains to be seen is if the US government grants Axon permission to sue the FTC. Stay tuned.

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