The study highlighted some unusual trends.  Philadelphia case dockets are disproportionately larger relative to both its population and other state and federal courts.  Philadelphia plaintiffs are also relatively more likely to prefer jury trials and less likely to settle than other non-Philadelphia Pennsylvania plaintiffs.  The data appear to support the conclusion that Philadelphia courts demonstrate a meaningful preference for plaintiffs, by coaxing “business” from other courts and providing them with a unique combination of advantages; indeed, the PCLC’s own stated goals include a desire to “[take] business away from other courts.”   While these strategies have no doubt successfully increased litigation in Philadelphia, and benefit local Philadelphia attorneys, they also bring a substantial cost to Philadelphia businesses and consumers.

I’ve now conducted a preliminary supplemental analysis (available here) designed to test the proposition that the majority of plaintiffs in the PCLC are out-of-state without an apparent or substantive connection to either Philadelphia or even the State of Pennsylvania.  I considered a sample of about 1,400 of the mass-tort cases in the PCLC to determine if the plaintiff filing the case had a home address or had sustained the complained of injury either in Philadelphia or Pennsylvania. Although the findings are preliminary, the results indicate that a substantial fraction of plaintiffs with cases pending at the PCLC have no discernible or relevant connection to Philadelphia or Pennsylvania. This supplement to the original study provides strong evidence that the PCLC has succeeded in attracting a large number of out-of-state cases that comprise a substantial portion of the civil cases in Philadelphia.

The main conclusions of this supplemental analysis are as follows:

• Of the 1,357 cases in the sample, 913 (67.2%) were brought by plaintiffs who live out-of-state without any apparent connection to Pennsylvania or Philadelphia.
• Only 180 cases (13.3%) reveal plaintiffs who live in or allege injury in Philadelphia.
• The most substantial case types where the plaintiffs were overwhelmingly out-of-state are hormone therapy, denture adhesive cream, and Paxil birth defect cases.
• Although most or all of the companies involved in these cases do business in Philadelphia and a few have some sort of administrative offices there, the vast majority of defendants do not have their principal place of business in Philadelphia or even in Pennsylvania. It is unlikely that venue was moved to the PCLC in most or any of the cases.

A chart summarizing the results is available here at Table 1.

Spirit Airlines says a new federal regulation aimed at protecting consumers is forcing it to charge passengers an additional $2 for a ticket.

The fee, which Spirit calls the “Department of Transportation Unintended Consequences Fee,” has been added to each ticket effective immediately, according to Misty Pinson, a Spirit spokeswoman.

The new DOT regulation allows passengers to change flights within 24 hours of booking without paying a penalty. The airline says the regulation forces them to hold the seat for someone who may or may not want to fly. As a consequence, someone who really does want to fly wouldn’t be able to buy that seat because the airline is holding it for someone who might or might not end up taking it.

In short, DOT is requiring airlines to give consumers a real option to change their flight plans at zero cost within a 24 hour window. Spirit rightly recognizes that options have value. Not only is there a value to consumers in ‘buying’ such an option, there is a cost associated with providing the option; in this case, the opportunity cost of selling seats that may be held for someone that will exercise the option to cancel without a fee.

Obviously, DOT head Ray LaHood is unimpressed.

“This is just another example of the disrespect with which too many airlines treat their passengers,” Department of Transportation Secretary Ray LaHood said in an e-mailed statement. “Rather than coming up with new and unnecessary fees to charge their customers, airlines should focus on providing fair and transparent service — that’s what our common sense rules are designed to ensure.”

Perhaps Mr. LaHood doesn’t understand the concept of options and option value. The right, but not the obligation, to undertake an activity (particularly under pre-specified terms) is clearly an economic good.  The very notion that DOT’s new regulation is touted as “consumer friendly” recognizes that it creates additional value for consumers. That is, it’s giving something away that is of value…a property right to change one’s mind at zero cost. However, it is disingenuous of Mr. LaHood to object to the idea that giving away value imposes a cost on the one providing the value (and I don’t mean the DOT, but the airlines who must honor the consumer’s exercise of the option).

A better solution might be to require airlines to explicitly offer the option of a no-penalty change within a 24-hour window. Then consumers could choose whether to pay the fee and airlines might discover the true market value of that option. Spirits’ $2 may be too high. More likely, it’s too low. Many airlines already do offer the option of a no-fee cancellation and the fare differential is much higher than $2, but that option typically has a much longer maturity…any time after booking up until departure. A shorter maturity window should command a lower option value.

Spirit Airlines may be the epitome of nickle-and-diming air travel consumers, something many consumers (myself included in some cases) don’t appreciate. However, there is no denying that Spirit understands the nature of options and their value. And there’s also no denying that, based on its stock price over the past year, Spirit is doing at least as well as industry leaders in providing consumers value for the options they choose. Perhaps instead of casting aspersions, Mr LaHood and his staff should invite Spirit to teach them about this fairly fundamental concept of options and option value rather than imposing regulations with so little regard for their true costs.

The upcoming IPO of Facebook, the flak surrounding Twitter’s decision to censor some tweets, and Google’s weaker-than-expected 4th-quarter earnings all point to one of the big events of our times: The crazy, chaotic, idealistic days of the Internet are ending. Once, the Prairies were open and shared by everyone. Then the farmers arrived and fenced them in. The same is happening to the Internet: Apple, Amazon and Facebook are putting up fences — and Google is increasingly being left outside.

The old Internet on which Google has thrived is still there, of course, but like the wilderness it is shrinking. Often these days, we sign up for Facebook or Amazon’s private version of the Internet. At other times, we use a smartphone and download an App instead of using Google search.

…

The danger to Google, in other words, is that as social networking, smartphones and tablets increasingly come to dominate the Internet, Google’s chance to earn advertising revenues from searching will shrink along with its influence.

Yes, Google has the Android and Google+, but these may not be enough to fight the shift to the closed Internet. Google+, of course, has just a tiny fraction of Facebook’s scale and there’s currently little reason to think it can catch up. The Android operating system, also an attempt by Google to build its own internet eco-system, is a more conspicuous success. Most commentators focus on the rapid growth of Android and the fact that it has greater market share than the iPhone.

But this analysis misses the point: The Android may have market share, but more than half of mobile searches come from iPhone users. Google may have developed Android but, unlike Apple’s iPhone, it does not really control it. Licensees like Samsung and HTC are able to adapt Android software to their own ends. And smart companies like Amazon are getting a free ride on Android while sharing little of the spoils with Google.

Don’t get me wrong: Google is still a force, just as Microsoft, Intel and IBM are. But they are no longer at the epicentre of the zeitgeist. Like Microsoft before it, Google can fight the good fight on many different fronts. Whether it can ever find an engine of growth capable of supplanting its core business is another question.

Check out the whole thing.

You may have noticed last Wednesday’s blackout of Wikipedia or Google’s strange blindfolded-logo screen. These were attempts to kill the Protect IP Act and the Stop Online Piracy Act, proposed legislation intended to hinder piracy and counterfeiting. The laws now before Congress may not be perfect, and they can still be amended. But to do nothing and stay with the status quo is to keep our creative industries at risk by failing to enforce their property rights.

Critics of these proposed laws claim that they are unnecessary and will lead to frivolous claims, reduce innovation and stifle free speech. Those are gross exaggerations. The same critics have been making these claims about every previous attempt to rein in piracy, including the Digital Millennium Copyright Act that was called a draconian antipiracy measure at the time of its passage in 1998. As we all know, the DMCA did not kill the Internet, or even do any noticeable damage to freedom—or to pirates.

…

Scads of Internet pundits and bloggers have vehemently argued that piracy is really a sales-promoting activity—because it gives people a free sample that might lead to a purchase—or that any piracy problems have been due to a failure of industry to embrace the Internet. Yet these claims are little more than wishful thinking. Some reflect a hostility to commercial activities—think Occupy Wall Street, or self-interest. Others make “freedom” claims on behalf of sites that profit by helping individuals find pirate sites, makers of complementary hardware, or companies that benefit from Internet usage and collect revenues whether the material being accessed was legally obtained or not.

In my examination of peer-reviewed studies, the great majority have results that conform to common sense: Piracy harms copyright owners. I was also somewhat surprised to discover that the typical finding of such academic studies was that the entire enormous decline that has occurred is due to piracy.

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Do check out the whole thing.

Here.

Introduction

• The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship.

• This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2012 through June 2013 or June 2014).  The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching.  No degree will be offered as part of the Fellowship program.

Eligibility

• Fellowship candidates must hold a JD degree from an ABA accredited law school and be committed to a career of law teaching and scholarship in the field of  business law and policy.  Applicants should have demonstrated an outstanding aptitude for independent legal research, preferably through research and/or writing as a law student or through exceptional legal experience after law school. Law Teaching Fellowship candidates must have strong academic records that will make them highly competitive for law teaching jobs.

Fellowship Requirements

The Fellowship program is year-round, over one or two academic years, during which time the Fellow will:

• complete at least one substantial scholarly publication and present the publication as a work-in-progress to the UCLA School of Law faculty;
• teach at least one class per academic year of the appointment;
• work closely with a faculty mentor in order to observe and participate in teaching, as well as to complete a publishable scholarly piece;
• assist the Institute’s Executive Director with other projects relating to the Institute’s work, including organizing conferences and other events,  research, publications, public education and outreach efforts;
• permit the Institute to publish any article(s) resulting from the Fellowship—as long as such publication will not interfere with the Fellow’s ability to publish such articles in a law journal; and
• acknowledge the Institute’s assistance in any published work that is facilitated by the Fellowship.

Fellowship Benefits

The unique features of this Fellowship include opportunities to:

• develop expertise in business law and public policy;
• work with a faculty mentor;
• develop expertise in business law teaching;
• complete a published piece of research before entering the law teaching market;
• obtain faculty recommendations and support for law teaching jobs;
• participate in the rich mixture of scholarly symposia, invited lectures, and conferences of the Lowell Milken Institute for Business Law and Policy; and
• participate in UCLA School of Law’s rich interdisciplinary scholarly symposia, lectures, and conferences.

Application Material and Deadlines

To apply for the 2012-2013 Lowell Milken Institute Law Teaching Fellowship, please submit the following materials by March 1, 2012:

• A cover letter summarizing your qualifications for the fellowship;
• A current resume, including a list of published works;
• An official law school transcript;
• Contact information for three references, including at least one from a law school professor familiar with your scholarly potential;
• A detailed research proposal, no longer than five single-spaced pages in length; and
• A description of teaching interests (course abstract and plan for class or seminar preferred)

Interested candidates should submit materials as a single PDF or Word.doc file to estrada@law.ucla.edu.

Equal Opportunity Employer

The University of California is an affirmative action/equal opportunity employer, and seeks candidates committed to the highest standards of scholarship and professional activities and to a campus climate that supports equality and diversity.

In Sherman Act Section 1 and Section 2 civil cases, judges tend to gravitate towards the ABA Model Instructions as the gold standard for impartial instructions. … The AAI believes the ABA model instructions are, in some situations, confusing, out of date, or do not adequately effectuate the goals of the antitrust laws. To provide an alternative, the AAI will develop a set of jury instructions that can be widely disseminated to lawyers and judges.

Foer is certainly right about existing jury instructions.  They’re often confusing and frequently provide so little guidance that jurors are effectively invited simply to “pick a winner.”  Crafting clearer, more concrete jury instructions would benefit the antitrust enterprise and further AAI’s stated mission “to increase the role of competition [and] assure that competition works in the interests of consumers.”

But clarity alone is not enough.  Any new jury instructions should set forth (in clear terms) liability standards whose substance enhances the effectiveness of the antitrust.  Here’s where I worry about the AAI project.

Throughout its history, AAI has shown little regard for the inherent limits of antitrust.  Those limits arise because the antitrust laws (1) embody somewhat vague standards that factfinders must flesh out ex post (e.g., they forbid ”unreasonable” restraints of trade and “unreasonably” exclusionary conduct by monopolists) and (2) are privately enforceable in lawsuits giving rise to treble damages.  The former feature ensures that courts, regulators, and business planners face difficulty in evaluating the legality of business practices.  The latter guarantees that they’re regularly called upon to do so.  It also discourages borderline practices that might wrongly be deemed, after the fact, to be anticompetitive.  Antitrust therefore creates significant “decision costs” (in both adjudication and counseling) and “error costs” (in the form of either market power resulting from improper acquittals or foregone efficiencies resulting from improper convictions and the chilling of procompetitive conduct).  Those decision and error costs constitute the limits of antitrust and are inexorable:

• you can’t decrease decision costs (by simplifying a liability rule) without increasing error costs (incorrect judgments and enhanced chilling effect);
• you can’t decrease error costs (by making the rule more nuanced in order to better separate pro- from anticompetitive conduct) without increasing decision costs; 
• you can’t reduce false acquittals (by easing the plaintiff’s proof burden or cutting back on affirmative defenses) without increasing false convictions, and vice-versa.

In light of this unhappy situation, antitrust liability standards should be crafted so as to minimize the sum of decision and error costs.  As I have recently explained, the Roberts Court has taken this tack in its eight major antitrust decisions.

AAI, by contrast, has shown little concern for false positives and seems to equate an effective antitrust regime with one that produces more liability.  Time and again, the Institute has advocated “pro-plaintiff” liability rules that threaten high error costs in the form of false convictions (and the chilling effect that follows).  In all but one of the Roberts Court’s antitrust decisions (which, as noted, are consistent with a “decision-theoretic” framework that would help minimize the sum of decision and error costs), AAI has advocated a pro-plaintiff position that the Supreme Court ultimately rejected.  (See AAI’s positions in Twombly, Leegin, Credit Suisse, Dagher, Weyerhaeuser, LinkLine, and Independent Ink.)  This is a stunningly bad record. 

Moreover, AAI remains out of antitrust’s mainstream (which now acknowledges antitrust’s inherent limits and the need to constrain error costs) on practices involving somewhat unsettled liability rules.  Consider, for example, AAI’s views on: 

• Resale Price Maintenance (RPM).  Even after Leegin abrogated the per se rule against minimum RPM, AAI urged courts to adopt a rule of reason that would burden a defendant with “justifying” any instance of RPM that results in an increase in consumer prices.  Such an approach is likely to generate excessive liability because all instances of RPM — even those aimed at such procompetitive effects as the elimination of free-riding, the facilitation of new entry, or encouraging “non-free-rideable” demand-enhancing services — involve an increase in consumer prices.  AAI’s preferred rule essentially amounts to a presumption of illegality for RPM.  As I explained in this article, such an approach would involve huge error costs (and certainly wouldn’t minimize the sum of decision and error costs).
   
• Loyalty Rebates.  Efficiency-minded antitrust scholars have generally concluded that there should be a safe harbor for single-product loyalty rebates resulting in an above-cost discounted price for the product at issue.  The leading case on loyalty rebates, the Eight Circuit’s Concord Boat decision, agrees.  The thinking behind such a safe harbor is that any equally efficient rival could match a defendant’s loyalty rebate that resulted in an above-cost discounted price; permitting liability on the basis of such a rebate would chill discounting and create a price umbrella for relatively inefficient rivals.  AAI, however, has urged courts to reject the safe harbor approved in Concord Boat.
   
• Bundled Discounts.   Efficiency-minded antitrust scholars have also approved a safe harbor for some sorts of multi-product or “bundled”
   discounts: such a discount should be legal if each product in the bundle is priced above cost when the entire amount of the bundled discount is attributed to that single product.  The Ninth Circuit approved this safe harbor in its PeaceHealth decision.  Again, the rationale behind the safe harbor is that an equally efficient, single-product rival could meet any bundled discount resulting an above-cost pricing under this so-called “discount attribution” test.  And again, AAI has opposed this safe harbor.

These are but a few examples of AAI’s wildly pro-plaintiff view of antitrust—a view that ultimately injures consumers by ignoring the error costs (e.g., thwarted procompetitive business practices) associated with false convictions.  So in the end, I’m a bit worried about AAI’s jury instruction project.  If the Institute can simply provide clarity without pushing substantive liability standards in its preferred, pro-plaintiff (error cost-insensitive) direction, antitrust will be better off because of its efforts.  But I’m not optimistic.

As I’ve repeatedly emphasized, while I refer to differences among search engines’ rankings of their own or affiliated content as “bias,” without more these differences do not imply anticompetitive conduct.  It is wholly unsurprising and indeed consistent with vigorous competition among engines that differentiation emerges with respect to algorithms.  However, it is especially important to note that the theories of anticompetitive foreclosure raised by Google’s rivals involve very specific claims about these differences.  Properly articulated vertical foreclosure theories proffer both that bias is (1) sufficient in magnitude to exclude Google’s rivals from achieving efficient scale, and (2) actually directed at Google’s rivals.  Unfortunately for search engine critics, their theories fail on both counts.  The observed own-content bias appears neither to be extensive enough to prevent rivals from gaining access to distribution nor does it appear to target Google’s rivals; rather, it seems to be a natural result of intense competition between search engines and of significant benefit to consumers.

Vertical foreclosure arguments are premised upon the notion that rivals are excluded with sufficient frequency and intensity as to render their efforts to compete for distribution uneconomical.  Yet the empirical results simply do not indicate that market conditions are in fact conducive to the types of harmful exclusion contemplated by application of the antitrust laws.  Rather, the evidence indicates that (1) the absolute level of search engine “bias” is extremely low, and (2) “bias” is not a function of market power, but an effective strategy that has arisen as a result of serious competition and innovation between and by search engines.  The first finding undermines competitive foreclosure arguments on their own terms, that is, even if there were no pro-consumer justifications for the integration of Google content with Google search results.  The second finding, even more importantly, reveals that the evolution of consumer preferences for more sophisticated and useful search results has driven rival search engines to satisfy that demand.  Both Bing and Google have shifted toward these results, rendering the complained-of conduct equivalent to satisfying the standard of care in the industry–not restraining competition.

A significant lack of search bias emerges in the representative sample of queries.  This result is entirely unsurprising, given that bias is relatively infrequent even in E&L’s sample of queries specifically designed to identify maximum bias.  In the representative sample, the total percentage of queries for which Google references its own content when rivals do not is even lower—only about 8%—meaning that Google favors its own content far less often than critics have suggested.  This fact is crucial and highly problematic for search engine critics, as their burden in articulating a cognizable antitrust harm includes not only demonstrating that bias exists, but further that it is actually competitively harmful.  As I’ve discussed, bias alone is simply not sufficient to demonstrate any prima facie anticompetitive harm as it is far more often procompetitive or competitively neutral than actively harmful.  Moreover, given that bias occurs in less than 10% of queries run on Google, anticompetitive exclusion arguments appear unsustainable.

Indeed, theories of vertical foreclosure find virtually zero empirical support in the data.  Moreover, it appears that, rather than being a function of monopolistic abuse of power, search bias has emerged as an efficient competitive strategy, allowing search engines to differentiate their products in ways that benefit consumers.  I find that when search engines do reference their own content on their search results pages, it is generally unlikely that another engine will reference this same content.  However, the fact that both this percentage and the absolute level of own content inclusion is similar across engines indicates that this practice is not a function of market power (or its abuse), but is rather an industry standard.  In fact, despite conducting a much smaller percentage of total consumer searches, Bing is consistently more biased than Google, illustrating that the benefits search engines enjoy from integrating their own content into results is not necessarily a function of search engine size or volume of queries.  These results are consistent with a business practice that is efficient and at significant tension with arguments that such integration is designed to facilitate competitive foreclosure.

Inclusion of own content accordingly appears to be just one dimension upon which search engines have endeavored to satisfy and anticipate heterogeneous and dynamic consumer preferences.  Consumers today likely make strategic decisions as to which engine to run their searches on, and certainly expect engines to return far more complex results than were available just a few years ago. For example, over the last few years, search engines have begun “personalizing” search results, tailoring results pages to individual searchers, and allowing users’ preferences to be reflected over time.  While the traditional “10 blue links” results page is simply not an effective competitive strategy today, it appears that own-content inclusion is.  By developing and offering their own products in search results, engines are better able to directly satisfy consumer desires.

Moreover, the purported bias does not involve attempts to prominently display Google’s own general or vertical search content over that of rivals.  Consider the few queries in Edelman & Lockwood’s small sample of terms for which Google returned Google content within the top three results but neither Bing nor Blekko referenced the same content anywhere on their first page of results.  For the query “voicemail,” for example, Google refers to both Google Voice and Google Talk; both instances appear unrelated to the grievances of general and vertical search rivals.  The query “movie” results in a OneBox with the next 3 organic results including movie.com, fandango.com, and yahoo.movies.com.  The single instance in Edelman & Lockwood’s sample for which Google ranks its own content in the Top 3 positions but this content is not referred to at all on Bing’s first page of results is a link to blogger.com in response to the query “blog.”  It is difficult to construct a story whereby this result impedes Bing’s competitive position.  In fact, none of these examples suggests that efforts to anticompetitively foreclose rivals are in play.  To the contrary, each seems to be a result of simple and expected procompetitive product differentiation.

Overall, the evidence reveals very little search engine bias, and no overwhelming or systematic biasing by Google against  search competitors.  Indeed, the data simply do not support claims that own-content bias is of the nature, quality, or magnitude to generate plausible antitrust concerns.  To the contrary, the results strongly suggest that own-content bias fosters natural and procompetitive product differentiation.  Accordingly, search bias is likely beneficial to consumers—and is clearly not indicative of harm to consumer welfare.

Antitrust regulators should proceed with caution when evaluating such claims given the overwhelmingly consistent economic learning concerning the competitive benefits generally of vertical integration for consumers.  Serious care must be taken in order not to deter vigorous competition between search engines and the natural competitive process between rivals constantly vying to best one another to serve consumers.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15^th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

1. Local markets, where there are five, six, or more carriers to choose from;
2. Non-contract/pre-paid providers, whose strength is rapidly growing;
3. Technology that is making more bands of available spectrum useful for competitive offerings;
4. The reality that LTE will make inter-modal competition a reality; and
5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post.

Jobs

First, although it’s not really in my bailiwick to comment on the job claims that have been such an important aspect of the public conversations surrounding this merger, some things are simple logic, and the staff’s contrary claims here are inscrutable.  As Cicconi suggests, it is hard to understand how the $8 billion investment and build-out required to capitalize on AT&T’s T-Mobile purchase will fail to produce a host of jobs, how the creation of a more-robust, faster broadband network will fail to ignite even further growth in this growing sector of the economy, and, finally, how all this can fail to happen while the FCC’s own (relatively) paltry $4.5 billion broadband fund will somehow nevertheless create approximately 500,000 (!!!) jobs.  Even Paul Krugman knows that private investment is better than government investment in generating stimulus – the claim is that there’s not enough of it, not that it doesn’t work as well.  Here, however, the fiscal experts on the FCC’s staff have determined that massive private funding won’t create even 96,000 jobs, although the same agency claims that government funding only one half as large will create five times that many jobs.  Um, really?

Meanwhile the agency simply dismisses AT&T’s job preservation commitments.  Now, I would also normally disregard such unenforceable pronouncements as cheap talk – except given the frequency and the volume with which AT&T has made them, they would suffer pretty mightily for failing to follow through on them now.  Even more important perhaps, I have to believe (again, given the vehemence with which they have made the statements and the reality of de facto, reputational enforcement) they are willing to agree to whatever is in their control in a consent decree, thus making them, in fact, legally enforceable.  For the staff to so blithely disregard AT&T’s claims on jobs is unintelligible except as farce—or venality.

Spectrum

Although the report rarely misses an opportunity to fail to mention the spectrum crisis that has been at the center of the Administration’s telecom agenda and the focus of the National Broadband Plan, coincidentally authored by the FCC’s staff, the crux of the report seems to come down to a stark denial that such a spectrum crunch even exists.  As I noted, much of the staff report amounts to an extended meditation on why the parties can and should run their businesses as the staff say they can and should.  The report’s section assessing the parties’ claims regarding the transition to LTE (para 210, ff.) is remarkable.  It begins thus:

One of the Applicants’ primary justifications for the necessity of this transaction is that, as standalone firms, AT&T and T-Mobile are, and will continue to be, spectrum and capacity constrained. Due to these constraints, we find it more plausible that a spectrum constrained firm would maximize deployment of more spectrally efficient LTE, rather than limit it. Transitioning to LTE is primarily a function of only two factors: (1) the extent of LTE capable equipment deployed on the network and (2) the penetration of LTE compatible devices in the subscriber base. Although it may make it more economical, the transition does not require “spectrum headroom” as the Applicants claim. Increased deployment could be achieved by both of the Applicants on a standalone basis by adding the more spectrally efficient LTE-capable radios and equipment to the network and then providing customers with dual mode HSPAILTE devices. . . .

Forget the spectrum crunch!  It is the very absence of spectrum that will give firms the incentive and the ability to transition to more-efficient technology.  And all they have to do is run duplicate equipment on their networks and give all their customers new devices overnight.  And, well, the whole business model fits in a few paragraphs, entails no new spectrum, actually creates spectrum, and meets all foreseeable demand (as long as demand never increases which, of course, the report conveniently fails to assess).

Moreover, claims the report, AT&T’s transition to LTE flows inevitably from its competition with Verizon.  But, as Cicconi points out, the staff is unprincipled in its disparate treatment of the industry’s competitive conditions.  Somehow, without T-Mobile in the mix, prices will skyrocket and quality will be degraded—let’s say, just for example, by not upgrading to LTE (my interpretation, not the staff’s).  But 100 pages later, it turns out that AT&T doesn’t need to merge with T-Mobile to expand its LTE network because it will have to do so in response to competition from Verizon anyway.  It would appear, however, that Verizon’s power over AT&T operates only if T-Mobile exists separately and AT&T has a harder time competing.  Remove T-Mobile and expand AT&T’s ability to compete and, apparently, the market collapses.  Such is the logic of the report.

There is much more to criticize in the report, and I hope to have a chance to do so in the next few days.

To do this, the NYT picks one transaction, medical company Dade International, from the 150 handled by Bain during Romney’s 15-year tenure (financing Staples as a startup is mentioned in passing).  The Times says the “deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.”  The Times summarizes the transaction as follows:

At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States, including Brian and Christine Shoemaker, who lost their jobs at a plant in Westwood, Mass. Staggered, Mr. Shoemaker wondered, “How can the bean counters just come in here and say, Hey, it’s over?”

Apart from the question of whether the Dade transaction was typical, what does the Times show about the Dade transaction?  Let’s review the facts in the NYT story.

In 1994, Bain led a buyout group in purchasing the Dade, which the Times describes as “ailing” and “rife with problems,” from Baxter International. 

Romney himself was “quite knowledgeable about the business” according to Dade’s then CEO. The article describes how Bain imposed the discipline on Dade that was a key innovation of the private equity industry. I summarize the incentive mechanisms that private equity employed here and in Chapter 8 of Rise of the Uncorporation. The Times article suggests this is how Bain operated in running Dade:

Dade employees could always tell when Bain Capital executives were in town: their bosses worked longer hours. “The thing Bain brought was urgency,” Mr. Brightfelt [a former Dade president] said. “It was 24 hours a day. It never stopped.” At Dade’s headquarters, the men from Bain — young, nattily dressed Bostonians — exerted themselves in ways big and small as the new owners. They took a majority of seats on the board of directors. They interviewed candidates for high-level jobs. They negotiated crucial contracts with suppliers. And they requested reams of data.

This clearly wasn’t a slash-and-run takeover.  Bain expanded Dade rather than just firing the workers and selling out for a profit, based on Romney’s desire to “double down on Dade.” As a result, the company

became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers. The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.

So what’s the problem?  While the article wants to make a lot of the overleveraging of Dade, during Romney’s tenure debt apparently increased in line with assets. The firm also cut some salaries.  But the article doesn’t discuss aggregate salary data, just the reduction of one particular employee’s salary, and the replacement of his “generous pension plan” by a 401(k) — a common practice in industry at this time. 

The biggest horror story in the article was layoffs in a plant owned by one of Dade’s acquisitions.  Although the story focuses on one worker’s personal tragedy, a former Dade SVP is quoted as saying, “It’s not done because they love cutting jobs. It ultimately made those companies stronger.” If layoffs and salary cuts make the business stronger, workers as a whole can benefit even as some suffer.  The owners hurt themselves if they make the business weaker by depreciating the labor force. 

The article concludes with a discussion of a transaction that occurred in April, 1999, two months after Romney retired from Bain, in which “it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company — and half of those of its investment partners.” Romney evidently benefited from this transaction via an increase in the value of his 16.5% interest in Bain.  We are not told whether he had any role in approving in the increased debt.

We learn that Dade cut more jobs in 1999, evidently after Romney had left.    Three years after Romney’s departure, when Romney no longer had a financial interest in Bain, and after other events weakened Dade (increased interest rates, declining euro, delays in constructing a new distribution center), Dade filed for bankruptcy.  But Dade left bankruptcy two months later and went public. In 2007 it was sold to Siemens for $7 billion — 15.5 times the price paid in 1994 for an “ailing” orphaned division of a big corporation.  The article concludes with the suggestion that the “painful” layoffs “ultimately worked.”

In short, the story’s details don’t support its slant.  Romney’s “brand of capitalism” seems to have worked in this instance, even if its success was colored by events that occurred after he left Bain.  Although I’m not suggesting that Romney should or would run the country the way he ran Bain and Dade, I’m also not troubled by his history as a deeply invested owner and manager of Bain.  True, he and the other “elites” at his firm made a lot of money. But if every deal was like Dade, it’s not clear society as a whole, including the working class, came out worse. 

I understand what the OWS crowd will make of this story.  But they need to persuade me why this story should make Romney look worse than the typical presidential candidate who has spent his life in politics and whose job history has consisted mainly of engineering wealth transfers from weak interest groups (e.g., taxpayers) to more powerful ones (e.g., big banks).