Barnett on Antitrust, IP, and Apple at the GMU Antitrust Symposium

Josh Wright —  14 September 2006

Yesterday I had the pleasure of participating in a panel discussion on standards for single firm conduct in the United States and the EU at the George Mason Antitrust Symposium, which focused on antitrust issues in the global marketplace (and I might add, was put together quite nicely by the GMU Law Review folks). The materials from many of the presentations are available at the GMU website. Thomas Barnett’s speech has managed to get some attention in the press (HT: Antitrust Review), in particular, because of his use of the antitrust attacks on Apple’s iPod and iTunes as an example of how “an attack on intellectual property rights can threaten dynamic innovation.”

A few excerpts:

There was a history of an intractable problem, characterized by rampant piracy and declining legal sales. After some missteps, Apple’s iTunes solved these problems: legal sales boomed; competition against the largest players — the recording industry and Microsoft — increased; the recording industry dropped many restrictive licensing terms; and consumers can now choose from a number of music services and music playing devices; not just the iPod (devices from Dell, iRiver, SanDisk, Sony, and others already exist, and Microsoft recently announced another push for a rival to the iPod, the “Zune”).

Barnett moves from the historical rise of the iPod to the more recent antitrust attacks we have discussed here at TOTM, e.g. here, and here. Barnett discusses a number of theories raised against Apple. For instance, in response to the most frequently raised theory that consumers are “locked in” to buying songs only from iTunes and pay too high a price for those songs, Barnett writes:

“There are two problems with this theory. First, consumers can upload other formats (CD-ROMs and MP3 files) to Apples’s devices, so they do not have to buy from iTunes. And while it is true that Apple’s DRM software ensures that the first recording of a song downloaded from iTunes can only play on an Apple device, consumers can re-record an iTunes song in an MP3 format and play it on other devices; in sum, it is hardly clear that they are locked in. Second, it appears that Apple has been depressing per-song prices, not raising them.”

As to the claim that underpricing songs and overpricing machines, but offering a competitive package price, hurts consumers by locking in consumers to the same device, Barnett notes that this business model does not create antitrust problems in the reverse: cheap upfront item (razor, printer) and expensive aftermarket item (blades, ink) in an aftermarket metering attempt to price discriminate, and implies that it also should not here.

The motivating message in Barnett’s speech is rather clear:

“There are real costs to using the antitrust law to protect competitors rather than competition. There is the problem of deterring innovation by the target of the ‘dominance’ attack: if a firm knows it will have to share its IP or to be managed by a committee of government regulators, it may not innovate in the first instance. Or, just as likely, it will reduce its further innovation once the product has arrived on the market — either because its returns are diminishing, or because its personnel are forced to spend their time playing defense against the regulators, rather than playing innovation offense in the marketplace.”

I have expressed similar sentiments with respect to the potential for abuses in the application of antitrust law to Apple’s business practices:

There are a few important things to get straight here, at least about the relevant competition laws in the United States. The first is that the presence of network effects is not a sufficient condition for antitrust liability. Neither is lock-in. Nor is DRM. The US antitrust laws do not generally require a monopolist to assist its rivals. Nor do they prohibit a firm merely because it is a monopolist. US antitrust laws condemn the abuse of such power, not its existence per se, under the Sherman Act. And for good reason. A policy that penalized a firm for earning a dominant market share by producing a superior mousetrap would be anti-thetical to the purposes of competition law. We can expect firms with large shares to emerge in markets with demand side economies. It is important that we do not restrain competition in these markets by forcing the firm best able to satisfy consumer preferences to roll over.

Barnett also takes a preemptive shot against the predictable response that failure to intervene means less “access”:

“Letting competition in the market drive technological development does not necessarily mean less “access.” The market has already disciplined Apple: remember, the iPod and iTunes originally only worked with Apple machines and FireWire ports, but Apple responded to consumer demand and opened up its technology to work on PC’s and USB 2.0 … . Market discipline can be a powerful force.”

Obviously, I am in agreement with the thrust of Barnett’s message to foreign antitrust regulators and his recognition that Apple’s business strategies have been a boon for consumers. As I wrote previously:

The French antitrust rule takes exactly the wrong stance here, forbidding Apple to engage in consumer welfare enhancing conduct while allowing would be competitors to do so. The reward for a competitor like Apple who has earned its market share by delivering a bundle that consumers demand should not be forcing it to play the rest of the game with one hand behind its back. Instead, regulators should allow obviously vigorous competition “for the field� to continue and smile as consumers benefit.

UPDATE: Tim Lee offers a critique of Barnett’s history of the iPod.