It’s widely reported that Apple intends to acquire Beats Electronics LLC. In fact, Dr. Dre himself apparently posted a YouTube video saying as much. This acquisition, like a stream of others in Silicon Valley, raises competition policy issues to which the US, so far, has turned a deaf ear. Unless the US begins to address these issues, the US will either be accused of discrimination or will have to stand by mute as foreign investors acquire control of Silicon Valley.

Why the Bid?

Apple doesn’t explain its business strategy. However, it stands to reason that Apple is very interested in Beats Music, the new streaming music service launched by Beats Electronics. Apple’s iTunes music purchasing service saw a decline in online music sales for the first time since Apple shook up the music industry with its innovative service. Like many young people looking at the US housing market, the question has become, why buy when you can rent? Spotify allows users to download and store on their mobile devices as many songs as they wish for a flat monthly fee. This disrupts Apple’s business model of selling songs, and Beats Music claims to offer an even better service with playlists curated by musicians and DJs. With one humongous check, Apple can “take out” one competitor (Beats Music) and try to fend off Spotify.

What Is the Competitive Impact?

I’m sure that Apple would argue that the acquisition promotes competition between Apple and Spotify (and let’s not forget Pandora). But Apple probably won’t have to make any such argument. The US, so far, has turned a deaf ear to the rampant Silicon Valley business strategy whereby large companies like Apple, Facebook and Google buy up nascent competitors before they can become a threat. Facebook has made a string of acquisitions to absorb competing social media platforms that offered consumers an alternative, such as Instagram and Whatsapp. This pattern of activity has raised no concerns so far, because it benefits venture funds that invest in the start-ups, the start-ups themselves that are often launched for the purpose of exiting through a sale rather than an IPO, and the large tech companies who are protecting their turf, and indirectly, the huge positions in those companies held by numerous investment funds.

Why Should the US Government Care?

So what’s changed? Why should the US look at this deal? In a word, Alibaba (and maybe to add another word, Softbank). Alibaba and Softbank have made no secret of their interest in acquiring Silicon Valley start-ups. In fact, those and other foreign companies already are actively engaged in acquiring Silicon Valley companies. And foreign acquisitions in Silicon Valley will expand exponentially if the SEC approves the Alibaba S-1 filing and allows Alibaba to sell novel indirect, non-controlling ownership units to US investors. How Silicon Valley will react to this remains to be seen. The flood of foreign investment will be as disruptive to the Silicon Valley business model as Spotify is to iTunes.

What we do know is that the apparent absence of US scrutiny of acquisitions of start-ups by established companies in Silicon Valley has set a precedent of hands-off, non-regulation. If at some point Silicon Valley decides that foreign investments should be subject to greater scrutiny, the US may be open to a charge of discriminatory treatment. We think such claims ring hollow when GE faces opposition to its acquisition of Alstom, Pfizer faces opposition to its acquisition of AstraZeneca (and Kraft had to jump through far too many hoops to acquire Cadbury), and AT&T was blocked from acquiring Vodafone, all because the acquirers are US companies. Nevertheless, the absence of US review of Silicon Valley’s practice of stifling nascent competition by aggressive acquisitions ultimately may clash with foreign ownership concerns.