Archives For mergers & acquisitions

Credit where it’s due — the FTC has closed its investigation of the Men’s Warehouse/Jos. A. Bank merger. I previously wrote about the investigation here, where I said:

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.

The FTC’s blog post on closing the investigation notes that:

Despite limited competition from the Internet, the transaction is not likely to harm consumers because of significant competition from other sources. As in all transactions, FTC staff examined which product markets were likely to be affected and what the competitive landscape looks like in those markets. There were two such markets in this matter: (1) the retail sale of men’s suits and (2) tuxedo rentals. With respect to men’s suits, there are numerous competitors that sell suits across the range of prices of the suits the merging parties offer, including Macy’s, Kohl’s, JC Penney’s, Nordstrom, and Brooks Brothers, among others. The two firms also have different product assortments that reflect their different customer bases. Men’s Wearhouse, which sells branded and private-label suits, has a younger, trendier customer set, while Jos. A. Bank, which sells private-label suits only, has an older, more traditional customer base.

Sounds right — and good to see.

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.

Commissioner Wright makes a powerful and important case in dissenting from the FTC’s 2-1 (Commissioner Ohlhausen was recused from the matter) decision imposing conditions on Nielsen’s acquisition of Arbitron.

Essential to Josh’s dissent is the absence of any actual existing market supporting the Commission’s challenge:

Nielsen and Arbitron do not currently compete in the sale of national syndicated cross-platform audience measurement services. In fact, there is no commercially available national syndicated cross-platform audience measurement service today. The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

* * *

[W]e…do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

* * *

To be clear, I do not base my disagreement with the Commission today on the possibility that the potential efficiencies arising from the transaction would offset any anticompetitive effect. As discussed above, I find no reason to believe the transaction is likely to substantially lessen competition because the evidence does not support the conclusion that it is likely to generate anticompetitive effects in the alleged relevant market.

This is the kind of theory that seriously threatens innovation. Regulators in Washington are singularly ill-positioned to predict the course of technological evolution — that’s why they’re regulators and not billionaire innovators. To impose antitrust-based constraints on economic activity that hasn’t even yet occurred is the height of folly. As Virginia Postrel discusses in The Future and Its Enemies, this is the technocratic mindset, in all its stasist glory:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation.

* * *

By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

* * *

For technocrats, a kaleidoscope of trial-and-error innovation is not enough; decentralized experiments lack coherence. “Today, we have an opportunity to shape technology,” wrote [Newt] Gingrich in classic technocratic style. His message was that computer technology is too important to be left to hackers, hobbyists, entrepreneurs, venture capitalists, and computer buyers. “We” must shape it into a “coherent picture.” That is the technocratic notion of progress: Decide on the one best way, make a plan, and stick to it.

It should go without saying that this is the antithesis of the environment most conducive to economic advance. Whatever antitrust’s role in regulating technology markets, it must be evidence-based, grounded in economics and aware of its own limitations.

As Josh notes:

A future market case, such as the one alleged by the Commission today, presents a number of unique challenges not confronted in a typical merger review or even in “actual potential competition” cases. For instance, it is inherently more difficult in future market cases to define properly the relevant product market, to identify likely buyers and sellers, to estimate cross-elasticities of demand or understand on a more qualitative level potential product substitutability, and to ascertain the set of potential entrants and their likely incentives. Although all merger review necessarily is forward looking, it is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer these basic questions upon which proper merger analysis is based.

* * *

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Josh’s dissent also contains an important, related criticism of the FTC’s problematic reliance on consent agreements. It’s so good, in fact, I will quote it almost in its entirety:

Whether parties to a transaction are willing to enter into a consent agreement will often have little to do with whether the agreed upon remedy actually promotes consumer welfare. The Commission’s ability to obtain concessions instead reflects the weighing by the parties of the private costs and private benefits of delaying the transaction and potentially litigating the merger against the private costs and private benefits of acquiescing to the proposed terms. Indeed, one can imagine that where, as here, the alleged relevant product market is small relative to the overall deal size, the parties would be happy to agree to concessions that cost very little and finally permit the deal to close. Put simply, where there is no reason to believe a transaction violates the antitrust laws, a sincerely held view that a consent decree will improve upon the post-merger competitive outcome or have other beneficial effects does not justify imposing those conditions. Instead, entering into such agreements subtly, and in my view harmfully, shifts the Commission’s mission from that of antitrust enforcer to a much broader mandate of “fixing” a variety of perceived economic welfare-reducing arrangements.

Consents can and do play an important and productive role in the Commission’s competition enforcement mission. Consents can efficiently address competitive concerns arising from a merger by allowing the Commission to reach a resolution more quickly and at less expense than would be possible through litigation. However, consents potentially also can have a detrimental impact upon consumers. The Commission’s consents serve as important guidance and inform practitioners and the business community about how the agency is likely to view and remedy certain mergers. Where the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare. Because there is no judicial approval of Commission settlements, it is especially important that the Commission take care to ensure its consents are in the public interest.

This issue of the significance of the FTC’s tendency to, effectively, legislate by consent decree is of great importance, particularly in its Section 5 practice (as we discuss in our amicus brief in the Wyndham case).

As the FTC begins its 100th year next week, we need more voices like those of Commissioners Wright and Ohlhausen challenging the FTC’s harmful, technocratic mindset.

Last Thursday, the FTC settled a challenge to a company’s acquisitions of two key rivals. The two acquisitions, each of which failed to meet the threshold for required reporting under Hart Scott Rodino, occurred in 2005 and 2008. Because the acquired companies have been fully integrated into the acquirer and all distinct operations have been shut down, it was impossible for the Commission to “unscramble the eggs” by imposing a structural remedy that separates the companies or parts thereof. The Commission therefore opted for a behavioral remedy — i.e., a list of restrictions on how the combined company may operate its business in the future. The purported goal of the behavioral remedy is to enhance consumer welfare by restoring competition that was destroyed by the anticompetitive acquisitions.

Commissioner Josh Wright took exception to a couple of the restrictions in the consent order. In a separate statement, he set forth a principle reflecting his concerns that antitrust implementation be both evidence-based and sensitive to error costs. One hopes that the principle he articulated — a version of the Hippocratic maxim, “First, do no harm” — will influence future FTC decisions on behavioral remedies.

The defendant here was Graco, the leading manufacturer of “fast set equipment” (FSE) used by contractors to apply polyurethane foams and coatings. The two companies it purchased, Gusmer in 2005 and GlasCraft in 2008, were its two closest competitors in the North American market for FSE. Graco’s acquisitions of those companies eliminated almost all market competition. In addition, Graco allegedly coerced and threatened FSE distributors so that they would not carry competitors’ products, and it filed a questionable lawsuit against a rival, Gama/PMC, causing FSE distributors to grow leery of that supplier and drop its products.  These post-acquisition actions have helped cement Graco’s market power by denying its actual and potential rivals access to the distribution networks they need to effectively market their products.

In light of Graco’s post-acquisition conduct, the consent order agreed to Thursday prohibits Graco from threatening, coercing, or retaliating against distributors who carry its rivals’ products.  It also requires settlement of the lawsuit that was impairing Gama/PMC’s access to distributors, and it forbids Graco from bringing a similar suit in the future.

But the order then goes further.  It prohibits Graco from entering into exclusive dealing contracts with distributors, and it places limits on Graco’s freedom to give loyalty discounts to distributors.  (Specifically, it limits the purchase and inventory levels upon which Graco may condition distributor discounts.)

The problem, in Commissioner Wright’s view, was that there was no evidence that these forbidden activities – exclusive dealing arrangements and loyalty discounts – contributed to the absence of competition in the FSE market.  Because exclusive dealing arrangements and loyalty discounts are usually procompetitive, prohibiting their use by Graco in the absence of evidence that they are responsible for the lack of competition in the market or are likely to be used to effect anticompetitive harm rather than to achieve a procompetitive benefit is more likely to hurt than help consumers.

Wright notes (and the Commission acknowledges), for example, that the market for FSE is precisely the sort market in which exclusive dealing arrangements achieve the procompetitive benefit of avoiding “inter-brand free-riding.”  Manufacturers of FSE will enhance total sales if they train distributors on the proper use and various complicated features of FSE.  Consumers benefit from (and sales are increased by) such training, because the distributors pass along their learning to end-user purchasers.  But if one FSE manufacturer trains a distributor on how to use the equipment, other manufacturers whose product is carried by that distributor won’t need to do so themselves.  The possibility that they will “take a free-ride” on the manufacturer providing the training tends to dissuade all manufacturers from providing such training, to the detriment of consumers.  Exclusive dealing helps out by preventing free-riding and thereby assuring a manufacturer that it will receive the full benefit of its training efforts.  By banning exclusive dealing, then, the Commission’s consent order may cause a consumer injury, and there’s no reason to take that risk absent evidence that exclusive dealing has been used – or is likely to be used in the future – to create anticompetitive harm.  First, do no harm!

It is important to note that not including exclusive dealing and loyalty discounts on the list of behaviors prohibited by the consent order would not give Graco free rein to use those practices in a manner that causes anticompetitive foreclosure.  The Commission or a competitor could always challenge a future exclusive dealing arrangement or loyalty discount if there were evidence that the practice had caused anticompetitive harm.  The remainder of the Commission’s behavioral remedy assures that there will be a viable competitor – Gama/PMC – that is in a position to challenge any such conduct, and, in light of the consent order, the Commission and any reviewing court would take any future complaints quite seriously.  Doesn’t it make more sense, then, to limit the behavioral remedy to actions that have contributed to the anticompetitive situation at hand and not ban behaviors that may well inure to the benefit of consumers?  As Commissioner Wright put it:

A minimum safeguard to ensure [that] remedial provisions … restore competition rather than inadvertently reduce it is to require evidence that the type of conduct being restricted has been, or is likely to be, used anticompetitively to harm consumers.

I think Wright’s right on this one.

Although it probably flew under almost everyone’s radar, last week Josh issued his first Concurring Statement as an FTC Commissioner.  The statement came in response to a seemingly arcane Notice of Proposed Rulemaking relating to Hart-Scott-Rodino Premerger Notification Rules:

The proposed rules also establish a procedure for the automatic withdrawal of an HSR filing when filings are made with the U.S. Securities and Exchange Commission (SEC) announcing that a transaction has been terminated.

The proposed rulemaking itself isn’t enormously significant, but Josh’s statement lays down a marker that indicates (as anyone could have predicted) that he intends to do everything he can to improve the agency and its process.

The rule, as suggested above, would automatically withdraw an HSR filing whenever transacting parties filed certain notices with the SEC announcing the termination of a deal.  You may recall that the Hertz/Dollar Thrifty deal had been in the works for at least five years when it finally closed.  When Hertz withdrew its tender offer in October 2011, it did not withdraw its HSR filing.  As reported at the time, Hertz withdrew its bid over difficulty securing FTC approval, which had plagued other offers for Thrifty:

In a sign of frustration, Mr. Thompson said that the company had spent some $30 million over the last few years dealing with the barrage of takeover offers.

Obviously, given the difficulty of securing FTC approval and the costs imposed by the uncertainty it created, there was real benefit to Hertz (and perhaps Thrifty, for that matter) from receiving a decision from the FTC without meanwhile tying up the company’s resources, restraining its decision- and deal-making abilities, complicating negotiations and weakening its credit by maintaining a stalled-but-pending merger.  So the deal was withdrawn, but the HSR filing was not.

In August 2012 the parties re-initiated the merger following ongoing consultations by Hertz with the FTC, and, in November 2012 — a full year after the deal was withdrawn (and a year and a half after the HSR filing) — the FTC approved the deal.

But, understandably, FTC staff don’t want to be wasting resources reviewing hypothetical transactions, and so, following on the heels of the Hertz/Dollar Thrifty deal, wrote the proposed rule to ensure that it never happens again.

Except it didn’t happen in Hertz because, after all, the deal was eventually made. According to Josh, in fact, the situation intended to be avoided by the rule has never arisen:

The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from “expend[ing] scarce resources on hypothetical transactions.” Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction. Indeed, it would be surprising to see firms incurring the costs and devoting the time and effort associated with antitrust review in the absence of a good faith intent to proceed with their transaction.

This isn’t to say (and Josh doesn’t say) that the proposed rule is a bad idea, just that, given the apparently negligible benefits of the rule, the costs could easily outweigh the benefits.

Which is why Josh’s Statement is important. What Josh is asking for is not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits. And as Josh points out, there could indeed be some costs:

The proposed rules, if adopted, could increase the costs of corporate takeovers and thus distort the market for corporate control. Some companies that had complied with or were attempting to comply with a Second Request, for example, could be forced to restart their antitrust review, leading to significant delays and added expenses. The proposed rules could also create incentives for firms to structure their transactions less efficiently and discourage the use of tender offers. Finally, the proposed new rules will disproportionately burden U.S. public companies; the Federal Register notice acknowledges that the new rules will not apply to tender offers for many non-public and foreign companies.

Given these concerns, I hope that interested parties will avail themselves of the opportunity to submit public comments so that the Commission can make an informed decision at the conclusion of this process.

What is surprising is not that Josh suggested that there might be unanticipated costs to such a rule, nor that cost-benefit analysis be applied. Rather, what’s surprising is that the rest of the Commission didn’t sign on. Why is that surprising? Well, because cost-benefit analysis is not only sensible, it’s consistent with the Obama Administration’s stated regulatory approach. Executive Order 13563 requires that:

Each agency must, among other things:  (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify) . . . In applying these principles, each agency is directed to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible.

Unfortunately, as Berin Szoka has pointed out,

The FCC, FTC and many other regulatory agencies aren’t required to do cost-benefit analysis at all.  Because these are “independent agencies”—creatures of Congress rather than part of the Executive Branch (like the Department of Justice)—only Congress can impose cost-benefit analysis on agencies.  A bipartisan bill, the Independent Agency Regulatory Analysis Act (S. 3486), would have allowed the President to impose the same kind of cost-benefit analysis on independent regulatory agencies as on Executive Branch agencies, including review by the Office of Information and Regulatory Affairs (OIRA) for “significant” rulemakings (those with $100 million or more in economic impact, that adversely affect sectors of the economy in a material way, or that create “serious inconsistency” with other agencies’ actions). . . . yet the bill has apparently died . . . .

Legislation or not, it is the Commission’s responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh’s point is simply that it isn’t clear the rule should be adopted because it isn’t clear that the benefits of doing so would outweigh the costs.

It may have happened before, but I can’t recall an FTC Commissioner laying down the cost-benefit-analysis gauntlet and publicly calling for consistent cost-benefit review at the Commission, even of seemingly innocuous (but often not actually innocuous), technical rules.

This is exactly the sort of thing that those of us who extolled Josh’s appointment hoped for, and I’m delighted to see him pushing this kind of approach right out of the gate.  No doubt he rocked some boats and took some heat for it. Good. That means he’s on the right track.

by Larry Downes and Geoffrey A. Manne

Now that the election is over, the Federal Communications Commission is returning to the important but painfully slow business of updating its spectrum management policies for the 21st century. That includes a process the agency started in September to formalize its dangerously unstructured role in reviewing mergers and other large transactions in the communications industry.

This followed growing concern about “mission creep” at the FCC, which, in deals such as those between Comcast and NBCUniversal, AT&T and T-Mobile USA, and Verizon Wireless and SpectrumCo, has repeatedly been caught with its thumb on the scales of what is supposed to be a balance between private markets and what the Communications Act refers to as the “public interest.” Continue Reading…

There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.

The primary claim of critics such as the American Antitrust Institute and Public Knowledge is that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.
Continue Reading…

By Geoffrey Manne and Berin Szoka

Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?

Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.

To see why this is so, consider what digital distributors—whether of the pay-as-you-go, iTunes type, or the all-you-can-eat, Spotify type—most want: Access to as much music as possible on terms on par with those of other distribution channels. For the all-you-can-eat distributors this is a sine qua non: their business models depend on being able to distribute as close as possible to all the music every potential customer could want. But given UMG’s current catalogue, it already has the ability, if it wanted to exercise it, to extract monopoly profits from these distributors, as they simply can’t offer a viable product without UMG’s catalogue. Continue Reading…