Interested observers on all sides of the contentious debate over Aereo have focused a great deal on the implications for cloud computing if the Supreme Court rules against Aereo. The Court hears oral argument next week, and the cloud computing issue is sure to make an appearance.

Several parties that filed amicus briefs in the case weighed in on the issue. The Center for Democracy & Technology, for example, filed abrief arguing that a ruling against Aereo would hinder the development of cloud computing. Thirty-six Intellectual Property and Copyright Law Professors also filed a brief arguing this point. On the other hand, the United States—represented by the Solicitor General—devoted a section of its amicus brief in support of copyright owners’ argument that the Court could rule against Aereo without undermining cloud computing.

Our organizations, the International Center for Law and Economics and the Competitive Enterprise Institute, filed an amicus brief in the case in support of the Petitioners (as did many other policy groups, academics, and trade associations). In our brief we applied the consumer welfare framework to the question whether allowing Aereo’s business practice would increase the societal benefits that copyright law seeks to advance. We argued that holding Aereo liable for copyright infringement was well within the letter and spirit of the Copyright Act of 1976. In particular, we argued that Aereo’s model is less a disruptive innovation than a technical work-around taking advantage of the Second Circuit’s overbroad reading of the law in the Cablevision case.

Although our brief didn’t directly address cloud computing writ large, we did articulate a crucial distinction between Aereo and other cloud computing providers. Under our reasoning, the Court could rule against Aereo—as it should—without destroying cloud computing—as it should not.


By way of background, at the center of the legal debate is what it means to “perform [a] copyrighted work publicly.” Aereo argues that because only one individual subscriber is “capable of receiving” each transmission its service delivers, its performances are private, not public. The Copyright Act gives copyright owners the exclusive right to publicly perform their works, but not the right to perform them privately. Therefore, Aereo contends, its service doesn’t infringe upon copyright owners’ exclusive rights.

We disagree. As our brief explains, Aereo’s argument ignores Congress’ decision in the Copyright Act of 1976 to expressly define the transmission of a television broadcast “by means of any device or process” to the public as a public performance, “whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.” Aereo has built an elaborate system for distributing live high-def broadcast television content to subscribers for a monthly fee—without obtaining permission from, or paying royalties to, the copyright owners in the audiovisual works aired by broadcasters.

Although the Copyright Act’s text is less than artful, Congress plainly wrote it so as to encompass businesses that sell consumers access to live television broadcasts, whether using traditional means—such as coaxial cable lines—or some high-tech system that lawmakers couldn’t foresee in 1976.

What does this case mean for cloud computing? To answer this question, it’s worth dividing the discussion into two parts: one addressing cloud providers that don’t sell their users licenses to copyrighted works, and the other addressing cloud providers that do. Dropbox and Mozy fit in the first category; Amazon and iTunes fit in the second.

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

According to the 36 Intellectual Property and Copyright Law Professors, a loss for Aereo would be bad news for cloud storage providers such as Dropbox:

If any service making multiple transmissions of the same underlying copyrighted audiovisual work is publicly performing that work, then the distinction between video-on-demand services and online storage services would vanish, and all such services would henceforth face infringement liability. Thus, if two Dropbox users independently streamed “We, the Juries,” then under Petitioners’ theory, those two transmissions would be aggregated together, making them collectively “to the public.” Under Petitioners’ theory of this case—direct infringement by public performance—that would be game, set, and match against Dropbox.

This sounds like bad news for the cloud. Fortunately, however, Dropbox has little to fear from an Aereo defeat, even if the professors are right to worry about an overbroad public performance right (more on this below). The Digital Millenium Copyright Act (DMCA) grants online service providers—including cloud hosting services such as Dropbox—a safe harbor from copyright infringement liability for unwittingly storing infringing files uploaded by their users. In exchange for this immunity, service providers must comply with the DMCA’snotice and takedown system and adopt a policy to terminate repeat-infringing users, among other duties.

Although 17 U.S.C. § 512(c) refers only to infringement “by reason of … storage” directed by a user, courts have consistently interpreted this language to “encompass[] the access-facilitating processes that automatically occur when a user uploads” a file to a cloud hosting service. Whether YouTube streams an infringing video once or 1,000,000 times, therefore, it retains its DMCA immunity so long as it complies with the safe harbor’s requirements. So even if Aereo loses, and every DropBox user who streams “We, the Juries” is receiving a public performance, DropBox will still be safe from copyright infringement liability in the same way as YouTube, Vimeo, DailyMotion, and countless other services are safe today.

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

As for cloud computing providers that provide copyrighted content, the legal analysis is admittedly trickier. These providers, such as Google and Amazon, contract with copyright holders to sell their users licenses to copyrighted works. Some providers offer a subscription to streaming content, for which the provider has typically secured public performance licenses from the copyright owners. Cloud providers also sell digital copies of copyrighted works—that is, non-transferable lifetime licenses—for which the provider has generally obtained reproduction and distribution licenses, but not public performance rights.

But, as copyright law guru Devlin Hartline argues, determining if a performance is public or private turns on whether the cloud provider’s “volitional conduct [is] sufficient such that it directly causes the transmission.” When a user streams her own licensed content from a cloud service, it remains a private performance because the cloud service took no willful steps to facilitate the playback of copyrighted material. (The same is true for Dropbox-like services, as well.) Aereo, conversely, “crosse[s] the line from being a passive conduit to being an active participant because it supplies the very content that is available using its service.”

Neither Google’s nor Amazon’s business models much resemble Aereo’s, which entails transmitting content for which the company has secured no copyright licenses—either for itself or for its users. And to the extent that these services do supply the content being transmitted (as Spotify or Google Play All Access do, for example), they secure the appropriate public performance right to do so. Indeed, critics who have focused on cloud computing fail to appreciate how the Copyright Act distinguishes between infringing technologies such as Aereo and lawful uses of the cloud to store, share, and transmit copyrighted works.

For instance, as CDT notes:

[S]everal companies (including Google and Amazon) have launched personal music locker services, allowing individuals to upload their personal music collections “to the cloud” and enabling them to transmit that music back to their own computers, phones, and tablets when, where, and how they find most convenient.

And other critics of broadcasters’ legal position have made similar arguments, claiming that the Court cannot reach a holding that simultaneously bars Aereo while allowing cloud storage:

[I]f Aereo is publicly performing when you store a unique copy of the nightly news online and watch it later, then why aren’t cloud services publicly performing if they host your (lawful) unique mp3 of the latest hit single and stream it to you later?… The problem with this rationale is that it applies with equal force to cloud storage like Dropbox, SkyDrive, iCloud, and Google Drive. If multiple people store their own, unique, lawfully acquired copy of the latest hit single in the cloud, and then play it to themselves over the Internet, that too sounds like the broadcasters’ version of a public performance. The anti-Aereo rationale doesn’t distinguish between Aereo and the cloud.

The Ability to Contract is Key

These arguments miss the important concept of privity. A copyright holder who does not wish to license the exclusive rights in her content cannot be forced to do so (unless the content is subject to a compulsory license). If a copyright holder prefers its users not upload their licensed videos to the cloud and later stream them for personal use, the owner can include such a prohibition in its licenses. This may affect users’ willingness to pay for such encumbered content—but this is private ordering in action, with copyright holders and licensees bargaining over control over copyrighted works, a core purpose of the Copyright Act.

When a copyright holder wishes to license content to a cloud provider or user, the parties can bargain over whether users may stream their content from the cloud. These deals can evolve over time in response to new technology and changing consumer demand. This happens all the time—as in therecent deal between Dish and Disney over the Hopper DVR, wherein Dish agreed that Hopper would automatically excise the commercials accompanying ABC content only after three days elapse after each show airs.

But Aereo forecloses the possibility of such negotiation, making all over-the-air content available online to subscribers absent any agreement with the underlying copyright owners of such programs. Aereo is thus distinct from other cloud services that supply content to their users, as the latter have permission to license their content.

Of course, broadcasters make their programming freely available over the airwaves, without any express agreement with viewers. But this doesn’t mean broadcasters lose their legal right to restrict how third parties distribute and monetize their content. While consumers can record and watch such broadcasts at their leisure, they can’t record programs and then sell the rights to the content, for example, simply replicating the broadcast. The fact that copyright holders have entered into licenses to “cloud-ify” content with dedicated over-the-top apps and Hulu clearly suggests that the over-the-air “license” is limited. And because Aereo refuses to deal with the broadcasters, there’s no possibility of a negotiated agreement between Aereo and the content owners, either. The unique combination of broadcast content and an unlicensed distributor differentiates the situation in Aereo from typical cloud computing.

If broadcasters can’t rely on copyright law to protect them from companies like Aereo that simply repackage over-the-air content, they may well shift all of their content to cable subscriptions instead of giving a free option to consumers. That’s bad news for folks who access free television—regardless of the efficiency of traditional broadcasting, or lack thereof.

The Cablevision Decision Doesn’t Require a Holding for Aereo

Commentators argue that overruling the Second Circuit in Aereo necessarily entails overruling the Second Circuit’s Cablevision holding—and with it that ruling’s fair use protections for DVRs and other cloud computing functionality. We disagree, however. Rather, regardless of whether Cablevision was correctly decided, its application to Aereo is improper.

In Cablevision, the individual cable subscribers to whom Cablevision transmitted copies of plaintiff Cartoon Network’s television programming were already paying for lawful access to it. Cartoon Network voluntarily agreed to license its copyrighted works to Cablevision and, in turn, to each Cablevision subscriber whose cable package included the Cartoon Network channel.

The dispute in Cablevision thus involved a copyright holder and a licensee with a preexisting contractual relationship; the parties simply disagreed on the terms by which Cablevision was permitted to transmit Cartoon Network’s content. But even after the decision, Cartoon Network remained (and remains) free to terminate or renegotiate its licensing agreement with Cablevision.

Again, this dynamic of voluntary exchange mitigates Cablevision’s impact on the market for television programming, as copyright holders and cable companies settle on a new equilibrium. But unlike the cable company in Cablevision, Aereo has neither sought nor received permission from any holders of copyrights in broadcast television programming before retransmitting their works to paying subscribers.

Even if it is correct that Aereo itself isn’t engaging in public performance of copyrighted work, it remains the case that its subscribers haven’t obtained the right to use Aereo’s services, either. But one party or the other must obtain this right or else establish that it’s a fair use.

Fair Use Won’t Save Aereo

The only way legitimately to rule in Aereo’s favor would be to decide that Aereo’s retransmission of broadcast content is a fair use. But as Cablevision’s own amicus brief in Aereo (supporting Aereo) argues, fair use rights don’t cover Aereo’s non-transformative retransmission of broadcast content. Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content:

Aereo is functionally identical to a cable system. It captures over-the-air broadcast signals and retransmits them for subscribers to watch. Aereo thus is not meaningfully different from services that have long been required to pay royalties. That fact sharply distinguishes Aereo from cloud technologies like remote-storage services and remote DVRs.

* * *

Aereo is not in the business of transmitting recorded content from individual hard-drive copies to subscribers. Rather, it is in the business of retransmitting broadcast television to subscribers.

* * *

Aereo…is not relying on its separate hard-drive copies merely to justify the lawfulness of its pause, rewind, and record functions. It is relying on those copies to justify the entire television retransmission service. It is doing so even in the many cases where subscribers are not even using the pause, rewind, or record functions but are merely watching television live.

It may be that the DVR-like functions that Aereo provides are protected, but that doesn’t mean that it can retransmit copyrighted content without a license. If, like cable companies, it obtained such a license, it might be able to justify its other functionality (and negotiate license terms with broadcasters to reflect the value to each of such functionality). But that is a fundamentally different case. Similarly, if users were able to purchase licenses to broadcast content, Aereo’s additional functionality might also be protected (with the license terms between users and broadcasters reflecting the value to each). But, again, that is a fundamentally different case. Cloud computing services don’t create these problems, and thus need not be implicated by a proper reading of the Copyright Act and a ruling against Aereo.


One of the main purposes of copyright law is to secure for content creators the right to market their work. To allow services like Aereo undermines that ability and the incentives to create content in the first place. But, as we have shown, there is no reason to think a ruling against Aereo will destroy cloud computing.

FTC Commissioner Josh Wright is on a roll. A couple of days before his excellent Ardagh/Saint Gobain dissent addressing merger efficiencies, Wright delivered a terrific speech on minimum resale price maintenance (RPM). The speech, delivered in London to the British Institute of International and Comparative Law, signaled that Wright will seek to correct the FTC’s early post-Leegin mistakes on RPM and will push for the sort of structured rule of reason that is most likely to benefit consumers.

Wright began by acknowledging that minimum RPM is, from a competitive standpoint, a mixed bag. Under certain (rarely existent) circumstances, RPM may occasion anticompetitive harm by facilitating dealer or manufacturer collusion or by acting as an exclusionary device for a dominant manufacturer or retailer. Under more commonly existing sets of circumstances, however, RPM may enhance interbrand competition by reducing dealer free-riding, facilitating the entry of new brands, or encouraging optimal production of output-enhancing dealer services that are not susceptible to free-riding.

Because instances of minimum RPM may be good or bad, liability rules may err in two directions. Overly lenient rules may fail to condemn output-reducing instances of RPM, but overly strict rules will prevent uses of RPM that would benefit consumers by enhancing distributional efficiency. Efforts to tailor a liability rule so that it makes fewer errors (i.e., produces fewer false acquittals or false convictions) will create complexity that makes the rule more difficult for business planners and courts to apply. An optimal liability rule, then, should minimize the sum of “error costs” (social losses from expected false acquittals and false convictions) and “decision costs” (costs of applying the rule).

Crafting such a rule requires judgments about (1) whether RPM is more likely to occasion harmful or beneficial effects, and (2) the magnitude of expected harms or benefits. If most instances of RPM are likely to be harmful, the harm resulting from an instance of RPM is likely to be great, and the foregone efficiencies from false convictions are likely to be minor, then the liability rule should tend toward condemnation – i.e., should be “plaintiff-friendly.” On the other hand, if most instances of RPM are likely to be beneficial, the magnitude of expected benefit is significant, and the social losses from false acquittals are likely small, then a “defendant-friendly” rule is more likely to minimize error costs.

As Commissioner Wright observed, economic theory and empirical evidence about minimum RPM’s competitive effects, as well as intuitions about the magnitude of those various effects, suggest that minimum RPM ought to be subject to a defendant-friendly liability rule that puts the burden on plaintiffs to establish actual or likely competitive harm. With respect to economic theory, procompetitive benefit from RPM is more likely because the necessary conditions for RPM’s anticompetitive effects are rarely satisfied, while the prerequisites to procompetitive benefit often exist. Not surprisingly, then, most studies of minimum RPM have concluded that it is more frequently used to enhance rather than reduce market output. (As I have elsewhere observed and Commissioner Wright acknowledged, the one recent outlier study is methodologically flawed.) In terms of the magnitude of harms from wrongly condemning or wrongly approving instances of RPM, there are good reasons to believe greater harm will result from the former sort of error. The social harm from a false acquittal – enhanced market power – is self-correcting; market power invites entry. A false condemnation, by contrast, can be corrected only by a subsequent judicial, regulatory, or legislative overruling.  Moreover, an improper conviction thwarts not just the challenged instance of RPM but also instances contemplated by business planners who would seek to avoid antitrust liability. Taken together, these considerations about the probability and magnitude of various competitive effects argue in favor of a fairly lenient liability rule for minimum RPM – certainly not per se illegality or a “quick look” approach that deems RPM to be inherently suspect and places the burden on the defendant to rebut a presumption of anticompetitive harm.

Commissioner Wright’s call for a more probing rule of reason for minimum RPM represents a substantial improvement on the approach the FTC took in the wake of the U.S. Supreme Court’s 2007 Leegin decision. Shortly after Leegin abrogated the rule of per se illegality for minimum RPM, women’s shoe manufacturer Nine West petitioned the Commission to modify a pre-Leegin consent decree constraining Nine West’s use of RPM arrangements. In agreeing to modify (but not eliminate) the restrictions, the Commission endorsed a liability rule that would deem RPM to be inherently suspect (and thus presumptively illegal) unless the defendant could establish an absence of the so-called “Leegin factors” – i.e., that there was no dealer or manufacturer market power, that RPM was not widely used in the relevant market, and that the RPM at issue was not dealer-initiated.

The FTC’s fairly pro-plaintiff approach was deficient in that it simply lifted a few words from Leegin without paying close attention to the economics of RPM. As Commissioner Wright explained,

[C]ritical to any decision to structure the rule of reason for minimum RPM is that the relevant analytical factors correctly match the economic evidence. For instance, some of the factors identified by the Leegin Court as relevant for identifying whether a particular minimum RPM agreement might be anticompetitive actually shed little light on competitive effects. For example, the Leegin Court noted that “the source of the constraint might also be an important consideration” and observed that retailer-initiated restraints are more likely to be anticompetitive than manufacturer-initiated restraints. But economic evidence recognizes that because retailers in effect sell promotional services to manufacturers and benefit from such contracts, it is equally as possible that retailers will initiate minimum RPM agreements as manufacturers. Imposing a structured rule of reason standard that treats retailer-initiated minimum RPM more restrictively would thus undermine the benefits of the rule of reason.

Commissioner Wright’s remarks give me hope that the FTC will eventually embrace an economically sensible liability rule for RPM. Now, if we could only get those pesky state policy makers to modernize their outdated RPM thinking.  As Commissioner Wright recently observed, policy advocacy “is a weapon the FTC has wielded effectively and consistently over time.” Perhaps the Commission, spurred by Wright, will exercise its policy advocacy prowess on the backward states that continue to demonize minimum RPM arrangements.

FTC Commissioner Josh Wright pens an incredibly important dissent in the FTC’s recent Ardagh/Saint-Gobain merger review.

At issue is how pro-competitive efficiencies should be considered by the agency under the Merger Guidelines.

As Josh notes, the core problem is the burden of proof:

Merger analysis is by its nature a predictive enterprise. Thinking rigorously about probabilistic assessment of competitive harms is an appropriate approach from an economic perspective. However, there is some reason for concern that the approach applied to efficiencies is deterministic in practice. In other words, there is a potentially dangerous asymmetry from a consumer welfare perspective of an approach that embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.

In the summer of 1995, I spent a few weeks at the FTC. It was the end of the summer and nearly the entire office was on vacation, so I was left dealing with the most arduous tasks. In addition to fielding calls from Joe Sims prodding the agency to finish the Turner/Time Warner merger consent, I also worked on early drafting of the efficiencies defense, which was eventually incorporated into the 1997 Merger Guidelines revision.

The efficiencies defense was added to the Guidelines specifically to correct a defect of the pre-1997 Guidelines era in which

It is unlikely that efficiencies were recognized as an antitrust defense…. Even if efficiencies were thought to have a significant impact on the outcome of the case, the 1984 Guidelines stated that the defense should be based on “clear and convincing” evidence. Appeals Court Judge and former Assistant Attorney General for Antitrust Ginsburg has recently called reaching this standard “well-nigh impossible.” Further, even if defendants can meet this level of proof, only efficiencies in the relevant anticompetitive market may count.

The clear intention was to ensure better outcomes by ensuring that net pro-competitive mergers wouldn’t be thwarted. But even under the 1997 (and still under the 2010) Guidelines,

the merging firms must substantiate efficiency claims so that the Agency can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific. Efficiency claims will not be considered if they are vague or speculative or otherwise cannot be verified by reasonable means.

The 2006 Guidelines Commentary further supports the notion that the parties bear a substantial burden of demonstrating efficiencies.

As Josh notes, however:

Efficiencies, like anticompetitive effects, cannot and should not be presumed into existence. However, symmetrical treatment in both theory and practice of evidence proffered to discharge the respective burdens of proof facing the agencies and merging parties is necessary for consumer‐welfare based merger policy

There is no economic basis for demanding more proof of claimed efficiencies than of claimed anticompetitive harms. And the Guidelines since 1997 were (ostensibly) drafted in part precisely to ensure that efficiencies were appropriately considered by the agencies (and the courts) in their enforcement decisions.

But as Josh notes, this has not really been the case, much to the detriment of consumer-welfare-enhancing merger review:

To the extent the Merger Guidelines are interpreted or applied to impose asymmetric burdens upon the agencies and parties to establish anticompetitive effects and efficiencies, respectively, such interpretations do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare. Application of a more symmetric standard is unlikely to allow, as the Commission alludes to, the efficiencies defense to “swallow the whole of Section 7 of the Clayton Act.” A cursory read of the cases is sufficient to put to rest any concerns that the efficiencies defense is a mortal threat to agency activity under the Clayton Act. The much more pressing concern at present is whether application of asymmetric burdens of proof in merger review will swallow the efficiencies defense.

It benefits consumers to permit mergers that offer efficiencies that offset presumed anticompetitive effects. To the extent that the agencies, as in the Ardagh/Saint-Gobain merger, discount efficiencies evidence relative to their treatment of anticompetitive effects evidence, consumers will be harmed and the agencies will fail to fulfill their mandate.

This is an enormously significant issue, and Josh should be widely commended for raising it in this case. With luck it will spur a broader discussion and, someday, a more appropriate treatment in the Guidelines and by the agencies of merger efficiencies.


I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

The article explains why the merger doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis. Instead, arguments against the merger amount to little more than the usual “big-is-bad” naysaying.

In summary, I make the following points:

Horizontal Concerns

The absence of any reduction in competition should end the inquiry into any potentially anticompetitive effects in consumer markets resulting from the horizontal aspects of the transaction.

  • It’s well understood at this point that Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.
  • Even if Comcast were a true monopolist provider of broadband service in certain geographic markets, the DOJ would have to show that the merger would be substantially likely to lessen competition—a difficult showing to make where Comcast and TWC are neither actual nor potential competitors in any of these markets.
  • Whatever market power Comcast may currently possess, the proposed merger simply does nothing to increase it, nor to facilitate its exercise.

Comcast doesn’t currently have substantial bargaining power in its dealings with content providers, and the merger won’t change that. The claim that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers, fails for similar reasons.

  • After the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers in the United States. This share is insufficient to give Comcast market power over sellers of video programming.
  • The FCC has tried to impose a 30 percent cable ownership cap, and twice it has been rejected by the courts. The D.C. Circuit concluded more than a decade ago—in far less competitive conditions than exist today—that the evidence didn’t justify a horizontal ownership limit lower than 60% on the basis of buyer power.
  • The recent exponential growth in OVDs like Google, Netflix, Amazon and Apple gives content providers even more ways to distribute their programming.
  • In fact, greater concentration among cable operators has coincided with an enormous increase in output and quality of video programming
  • Moreover, because the merger doesn’t alter the competitive make-up of any relevant consumer market, Comcast will have no greater ability to threaten to withhold carriage of content in order to extract better terms.
  • Finally, programmers with valuable content have significant bargaining power and have been able to extract the prices to prove it. None of that will change post-merger.

Vertical Concerns

The merger won’t give Comcast the ability (or the incentive) to foreclose competition from other content providers for its NBCUniversal content.

  • Because the merger would represent only 30 percent of the national market (for MVPD services), 70 percent of the market is still available for content distribution.
  • But even this significantly overstates the extent of possible foreclosure. OVD providers increasingly vie for the same content as cable (and satellite).
  • In the past when regulators have considered foreclosure effects for localized content (regional sports networks, primarily)—for example, in the 2005 Adelphia/Comcast/TWC deal, under far less competitive conditions—the FTC found no substantial threat of anticompetitive harm. And while the FCC did identify a potential risk of harm in its review of the Adelphia deal, its solution was to impose arbitration requirements for access to this programming—which are already part of the NBCUniversal deal conditions and which will be extended to the new territory and new programming from TWC.

The argument that the merger will increase Comcast’s incentive and ability to impair access to its users by online video competitors or other edge providers is similarly without merit.

  • Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers.
  • Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
  • This leaves at least 60 percent—and quite possibly far more—of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it, giving it the ability to degrade or simply block content from companies like Netflix. But these arguments misunderstand the market.

  • The transit market through which edge providers bring their content into the Comcast network is highly competitive. Edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.
  • The transit market is also almost entirely populated by big players engaged in repeat interactions and, despite a large number of transactions over the years, marked by a trivial number of disputes.
  • The recent Comcast/Netflix agreement demonstrates that the sophisticated commercial entities in this market are capable of resolving conflicts—conflicts that appear to affect only the distribution of profits among contracting parties but not raise anticompetitive concerns.
  • If Netflix does end up paying more to access Comcast’s network over time, it won’t be because of market power or this merger. Rather, it’s an indication of the evolving market and the increasing popularity of OTT providers.
  • The Comcast/Netflix deal has procompetitive justifications, as well. Charging Netflix allows Comcast to better distinguish between the high-usage Netflix customers (two percent of Netflix users account for 20 percent of all broadband traffic) and everyone else. This should lower cable bills on average, improve incentives for users, and lead to more efficient infrastructure investments by both Comcast and Netflix.

Critics have also alleged that the vertically integrated Comcast may withhold its own content from competing MVPDs or OVDs, or deny carriage to unaffiliated programming. In theory, by denying competitors or potential competitors access to popular programming, a vertically integrated MVPD might gain a competitive advantage over its rivals. Similarly, an MVPD that owns cable channels may refuse to carry at least some unaffiliated content to benefit its own channels. But these claims also fall flat.

  • Once again, these issue are not transaction specific.
  • But, regardless, Comcast will not be able to engage in successful foreclosure strategies following the transaction.
  • The merger has no effect on Comcast’s share of national programming. And while it will have a larger share of national distribution post-merger, a 30 percent market share is nonetheless insufficient to confer buyer power in today’s highly competitive MVPD market.
  • Moreover, the programming market is highly dynamic and competitive, and Comcast’s affiliated programming networks face significant competition.
  • Comcast already has no ownership interest in the overwhelming majority of content it distributes. This won’t measurably change post-transaction.

Procompetitive Justifications

While the proposed transaction doesn’t give rise to plausible anticompetitive harms, it should bring well-understood pro-competitive benefits. Most notably:

  • The deal will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology.
  • And bringing a more vertical structure to TWC will likely be beneficial, as well. Vertical integration can increase efficiency, and the elimination of double marginalization often leads to lower prices for consumers.

Let’s be clear about the baseline here. Remember all those years ago when Netflix was a mail-order DVD company? Before either Netflix or Comcast even considered using the internet to distribute Netflix’s video content, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent broadband we’d still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

The ability to realize returns—including returns from scale—is essential to incentivizing continued network and other quality investments. The cable industry today operates with a small positive annual return on invested capital (“ROIC”) but it has had cumulative negative ROIC over the entirety of the last decade. In fact, on invested capital of $127 billion between 2000 and 2009, cable has seen economic profits of negative $62 billion and a weighted average ROIC of negative 5 percent. Meanwhile Comcast’s stock has significantly underperformed the S&P 500 over the same period and only outperformed the S&P over the last two years.

Comcast is far from being a rapacious and endlessly profitable monopolist. This merger should help it (and TWC) improve its cable and broadband services, not harm consumers.

No matter how many times Al Franken and Susan Crawford say it, neither the broadband market nor the MVPD market is imperiled by vertical or horizontal integration. The proposed merger won’t create cognizable antitrust harms. Comcast may get bigger, but that simply isn’t enough to thwart the merger.

Last month the Wall Street Journal raised the specter of an antitrust challenge to the proposed Jos. A. Bank/Men’s Warehouse merger.

Whether a challenge is forthcoming appears to turn, of course, on market definition:

An important question in the FTC’s review will be whether it believes the two companies compete in a market that is more specialized than the broad men’s apparel market. If the commission concludes the companies do compete in a different space than retailers like Macy’s, Kohl’s and J.C. Penney, then the merger partners could face a more-difficult government review.

You’ll be excused for recalling that the last time you bought a suit you shopped at Jos. A. Bank and Macy’s before making your purchase at Nordstrom Rack, and for thinking that the idea of a relevant market comprising Jos. A. Bank and Men’s Warehouse to the exclusion of the others is absurd.  Because, you see, as the article notes (quoting Darren Tucker),

“The FTC sometimes segments markets in ways that can appear counterintuitive to the public.”

“Ah,” you say to yourself. “In other words, if the FTC’s rigorous econometric analysis shows that prices at Macy’s don’t actually affect pricing decisions at Men’s Warehouse, then I’d be surprised, but so be it.”

But that’s not what he means by “counterintuitive.” Rather,

The commission’s analysis, he said, will largely turn on how the companies have viewed the market in their own ordinary-course business documents.

According to this logic, even if Macy’s does exert pricing pressure on Jos. A Bank, if Jos. A. Bank’s business documents talk about Men’s Warehouse as its only real competition, or suggest that the two companies “dominate” the “mid-range men’s apparel market,” then FTC may decide to challenge the deal.

I don’t mean to single out Darren here; he just happens to be who the article quotes, and this kind of thinking is de rigeur.

But it’s just wrong. Or, I should say, it may be descriptively accurate — it may be that the FTC will make its enforcement decision (and the court would make its ruling) on the basis of business documents — but it’s just wrong as a matter of economics, common sense, logic and the protection of consumer welfare.

One can’t help but think of the Whole Foods/Wild Oats merger and the FTC’s ridiculous “premium, natural and organic supermarkets” market. As I said of that market definition:

In other words, there is a serious risk of conflating a “market” for business purposes with an actual antitrust-relevant market. Whole Foods and Wild Oats may view themselves as operating in a different world than Wal-Mart. But their self-characterization is largely irrelevant. What matters is whether customers who shop at Whole Foods would shop elsewhere for substitute products if Whole Food’s prices rose too much. The implicit notion that the availability of organic foods at Wal-Mart (to say nothing of pretty much every other grocery store in the US today!) exerts little or no competitive pressure on prices at Whole Foods seems facially silly.

I don’t know for certain what an econometric analysis would show, but I would indeed be shocked if a legitimate economic analysis suggested that Jos. A. Banks and Men’s Warehouse occupied all or most of any relevant market. For the most part — and certainly for the marginal consumer — there is no meaningful difference between a basic, grey worsted wool suit bought at a big department store in the mall and a similar suit bought at a small retailer in the same mall or a “warehouse” store across the street. And the barriers to entry in such a market, if it existed, would be insignificant. Again, what I said of Whole Foods/Wild Oats is surely true here, too:

But because economically-relevant market definition turns on demand elasticity among consumers who are often free to purchase products from multiple distribution channels, a myopic focus on a single channel of distribution to the exclusion of others is dangerous.

Let’s hope the FTC gets it right this time.

As Geoff posted yesterday, a group of 72 distinguished economists and law professors from across the political spectrum released a letter to Chris Christie pointing out the absurdities of New Jersey’s direct distribution ban. I’m heartened that both Governor Christie and his potential rival for the 2016 Republican nomination, Texas Governor Rick Perry, have made statements, here and here, in recent days suggesting that they would support legislation to allow direct distribution. Another potential 2016 Republican contender, has also joined the anti-protectionist fray. This should not be a partisan political issue. Hopefully, thinking people from both parties will realize that these laws help no one but the car dealers.

In the midst of these encouraging developments, I came across a March 5, 2014 letter from General Motors to Ohio Governor John Kasich complaining about proposed legislation that would carve out a special direct-dealing exemption for Tesla in Ohio. I’ve gotta say that I’m sympathetic to GM’s plight. It isn’t fair that Tesla would get a special exemption from regulations applicable to other car dealers. I’m not blaming Tesla, since I assume and hope that Tesla’s legislative strategy is to ask that these laws be repealed or that Tesla be exempted, not that the laws should continue to apply to other manufacturers. But the point of our letter is that no manufacturer should be subject to these restrictions. Tesla may have special reasons to prefer direct distribution, but the laws should be general—and generally permissive of direct distribution. The last thing we need is for a continuation of the dealers’ crony capitalism through a system of selective exemptions from protectionist statutes.

What was most telling about GM’s letter was its straightforward admission that allowing Tesla to engage in direct distribution would give Tesla a “distinct competitive advantage” and would create a “significant disparate impact” on competition in the auto industry. That’s just another way of saying that direct distribution is more efficient. If Tesla will gain a competitive advantage by bypassing dealers, shouldn’t we want all car companies to have that same advantage?

To be clear, there are circumstances were exempting just select companies from a regulatory scheme would give them a competitive advantage not based on superior efficiency in a social-welfare enhancing sense. For example, if the general pollution control regulations are optimally set, then exempting some firms will allow them to externalize costs and thereby obtain a competitive advantage, reducing net social welfare. But that would only be the case if the regulated activity is socially harmful, which direct distribution is not, as our open letter explained. The take-away from GM’s letter should be even more impetus for repealing the direct distribution bans across the board so that consumers can enjoy the benefit of competition among rival manufacturers who all have the right to choose the most efficient means of distribution for them.

Earlier this month New Jersey became the most recent (but likely not the last) state to ban direct sales of automobiles. Although the rule nominally applies more broadly, it is directly aimed at keeping Tesla Motors (or at least its business model) out of New Jersey. Automobile dealers have offered several arguments why the rule is in the public interest, but a little basic economics reveals that these arguments are meritless.

Today the International Center for Law & Economics sent an open letter to New Jersey Governor Chris Christie, urging reconsideration of the regulation and explaining why the rule is unjustified — except as rent-seeking protectionism by independent auto dealers.

The letter, which was principally written by University of Michigan law professor, Dan Crane, and based in large part on his blog posts here at Truth on the Market (see here and here), was signed by more than 70 economists and law professors.

As the letter notes:

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation.

The letter concludes:

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Among the letter’s signatories are some of the country’s most prominent legal scholars and economists from across the political spectrum.

Read the letter here:

Open Letter to New Jersey Governor Chris Christie on the Direct Automobile Distribution Ban

The world of economics and public policy has lost yet another giant.  Joining Ronald Coase, James Buchanan, Armen Alchian, and Robert Bork is a man whose name may be less familiar to TOTM readers but whose ideas have been hugely influential, particularly on me.

As the first chairman of President Reagan’s Council of Economic Advisers, Murray Weidenbaum lay much of the blame for the anemic economy President Reagan “inherited” (my, how I’ve come to hate that word!) on the then-existing regulatory state.  Command and control dominated in those days, and there was virtually no consideration of such mundane matters as the costs and benefits of regulatory interventions and the degree to which regulations were tailored to fit the market failures they purported to correct.  Murray understood that such an unmoored regulatory state strangled innovation and would inevitably become co-opted by regulatees, who would use the machinery of the state to squelch competition and gain other advantages.  He counseled the President to do something about it.

The result was Executive Order 12291, which subjected major federal regulations to cost-benefit analysis and stated that “[r]egulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society.”  Such basic cost-benefit balancing seems like nothing more than common sense these days, but when Murray was pushing the idea at Washington University back in the late 1970s, it was considered pretty radical.  Many of the Nixon era environmental statutes, for example, proudly eschewed consideration of costs.  Murray helped us see how silly that was.

I distinctly remember a conversation we had in 1993.  I had just been hired as a research fellow at Wash U’s Center for the Study of American Business, and Murray, the Center director, was taking me and the other research fellow to lunch.  The faculty dining club at Wash U is across a busy-ish street from the main campus.  There’s a tunnel a block or so west of the dining club, but hardly anybody would use it when walking to lunch.  As we waited for an opening in traffic and crossed the street, Murray remarked, “See fellows, this is what I’m talking about.  Crossing this busy street is risky.  All these lunch-goers could eliminate the risk of an accident by walking two blocks out of their way.  But nobody ever does that.  The risk reduction just isn’t worth the cost.”

That was classic Murray.  He was a plain-talking purveyor of common sense.  He was firm in his beliefs but always kind and never doctrinaire.  By presenting his ideas calmly and rationally, he earned the respect of differently minded folks, like Democratic Senator Thomas Eagleton, with whom he co-taught a popular course at Wash U.  Our country is a better place because of Murray’s service, and I am where I am because he took me under his wing.

Rest in peace, Murray.

An occasional reader brought to our attention a bill that is fast making its way through the U.S. House Committee on Financial Services. The Small Company Disclosure Simplification Act (H.R. 4167) would exempt emerging growth companies and companies with annual gross revenue less than $250 million from using the eXtensible Business Reporting Language (XBRL) structure data format currently required for SEC filings. This would effect roughly 60% of publicly listed companies in the U.S.

XBRL makes it possible to easily extract financial data from electronic SEC filings using automated computer programs. Opponents of the bill (most of whom seem to make their living using XBRL to sell information to investors or assisting filing companies comply with the XBRL requirement) argue the bill will create a caste system of filers, harm the small companies the bill is intended to help, and harm investors (for example, see here and here). On pretty much every count, the critics are wrong. Here’s a point-by-point explanation of why:

1) Small firms will be hurt because they will have reduced access to capital markets because their data will be less accessible. — FALSE
The bill doesn’t prohibit small firms from using XBRL, it merely gives them the option to use it or not. If in fact small companies believe they are (or would be) disadvantaged in the market, they can continue filing just as they have been for at least the last two years. For critics to turn around and argue that small companies may choose to not use XBRL simply points out the fallacy of their claim that companies would be disadvantaged. The bill would basically give business owners and management the freedom to decide whether it is in fact in the company’s best interest to use the XBRL format. Therefore, there’s no reason to believe small firms will be hurt as claimed.

Moreover, the information disclosed by firms is no different under the bill–only the format in which it exists. There is no less information available to investors, it just makes it little less convenient to extract–particularly for the information service companies whose computer systems rely on XBRL to gather they data they sell to investors. More on this momentarily.

2) The costs of the current requirement are not as large as the bill’s sponsors claims.–IRRELEVANT AT BEST
According to XBRL US, an XBRL industry trade group, the cost of compliance ranges from $2,000 for small firms up to $25,000–per filing (or $8K to $100K per year). XBRL US goes on to claim those costs are coming down. Regardless whether the actual costs are the “tens of thousands of dollars a year” that bill sponsor Rep. Robert Hurt (VA-5) claims, the point is there are costs that are not clearly justified by any benefits of the disclosure format.

Moreover, if costs are coming down as claimed, then small businesses will be more likely to voluntarily use XBRL. In fact, the ability of small companies to choose NOT to file using XBRL will put competitive pressure on filing compliance companies to reduce costs even further in order to attract business, rather than enjoying a captive market of companies that have no choice.

3) Investors will be harmed because they will lose access to small company data.–FALSE
As noted above,investors will have no less information under the bill–they simply won’t be able to use automated programs to extract the information from the filings. Moreover, even if there was less information available, information asymmetry has long been a part of financial markets and markets are quite capable of dealing with such information asymmetry effectively in how prices are determined by investors and market-makers.  Paul Healy and Krishna Palepu (2001) provide an overview of the literature that shows markets are not only capable, but have an established history, of dealing with differences in information disclosure among firms. If any investors stand to lose, it would be current investors in small companies whose stocks could conceivably decrease in value if the companies choose not to use XBRL. Could. Conceivably. But with no evidence to suggest they would, much less that the effects would be large. To the extent large block holders and institutional investors perceive a potential negative effect, those investors also have the ability to influence management’s decision on whether to take advantage of the proposed exemption or to keep filing with the XBRL format.

The other potential investor harm critics point to with alarm is the prospect that small companies would be more likely and better able to engage in fraudulent reporting because regulators will not be able to as easily monitor the reports. Just one problem: the bill specifically requires the SEC to assess “the benefits to the Commission in terms of improved ability to monitor securities markets” of having the XBRL requirement. That will require the SEC to actively engage in monitoring both XBRL and non-XBRL filings in order to make that determination. So the threat of rampant fraud seems a tad bit overblown…certainly not what one critic described as “a massive regulatory loophole that a fraudulent company could drive an Enron-sized truck through.”

In the end, the bill before Congress would do nothing to change the kind of information that is made available to investors. It would create a more competitive market for companies who do choose to file using the XBRL structured data format, likely reducing the costs of that information format not only for small companies, but also for the larger companies that would still be required to use XBRL. By allowing smaller companies the freedom to choose what technical format to use in disclosing their data, the cost of compliance for all companies can be reduced. And that’s good for investors, capital formation, and the global competitiveness of US-based stock exchanges.

Last summer I blogged here at TOTM about the protectionist statutes designed to preempt direct distribution of Tesla cars that are proliferating around the country. This week, New Jersey’s Motor Vehicle Commission voted to add New Jersey to the list of states bowing to the politically powerful car dealers’ lobby.

Yesterday, I was on Bloomberg’s Market Makers show with Jim Appleton, the president of the New Jersey Coalition of Automotive Retailers. (The clip is here). Mr. Appleton advanced several “very interesting” arguments against direct distribution of cars, including that we already regulate everything else from securities sales to dogs and cats, so why not regulate car sales as well. The more we regulate, the more we should regulate. Good point. I’m stumped. But moving on, Mr. Appleton also argued that this particular regulation is necessary for actual reasons, and he gave two.

First, he argued that Tesla has a monopoly and that the direct distribution prohibition would create price competition. But, of course, Tesla does not have anything like a monopoly. A point that Mr. Appleton repeated three times over the course of our five minutes yesterday was that Tesla’s market share in New Jersey is 0.1%. Sorry, not a monopoly.

Mr. Appleton then insisted that the relevant “monopoly” is over the Tesla brand. This argument misunderstands basic economics. Every seller has a “monopoly” in its own brand to the same extent as Mr. Appleton has a “monopoly” in the tie he wore yesterday. No one but Tesla controls the Tesla brand, and no one but Mr. Appleton controls his tie. But, as economists have understood for a very long time, it would be absurd to equate monopoly power in an economic sense with the exclusive legal right to control something. Otherwise, every man, woman, child, dog, and cat is a monopolist over a whole bunch of things. The word monopoly can only make sense as capturing the absence of rivalry between sellers of different brands. A seller can have monopoly power in its brand, but only if there are not other brands that are reasonable substitutes. And, of course, there are many reasonable substitutes for Teslas.

Nor will forcing Tesla to sell through dealers create “price competition” for Teslas to the benefit of consumers. As I explained in my post last summer, Tesla maximizes its profits by minimizing its cost of distribution. If dealers can perform that function more efficiently than Tesla, Tesla has every incentive to distribute through dealers. The one thing Tesla cannot do is increase its profits by charging more for the retail distribution function than dealers would charge. Whatever the explanation for Tesla’s decision to distribute directly may be, it has nothing to do with charging consumers a monopoly price for the distribution of Teslas.

Mr. Appleton’s second argument was that the dealer protection laws are necessary for consumer safety. He then pointed to the news that GM might have prevented accidents taking 12 lives if it had recalled some of its vehicles earlier than it eventually did. But of course all of this occurred while GM was distributing through franchised dealers. To take Mr. Appleton’s logic, I should have been arguing that distribution through franchised dealers kills people.

Mr. Appleton then offered a concrete argument on car safety. He said that, to manufacturers, product recalls are a cost whereas, to dealers, they are an opportunity to earn income. But that argument is also facially absurd. Dealers don’t make the decision to issue safety recalls. Those decisions come from the manufacturer and the National Highway Traffic Safety Administration. Dealers benefit only incidentally.

The direct distribution laws have nothing to do with enhancing price competition or car safety. They are protectionism for dealers, pure and simple. At a time when Chris Christie is trying to regain credibility with New Jersey voters in general, and New Jersey motorists in particular, this development is a real shame.