Hanno Kaiser at Antitrust Review discusses the implications of Google’s acquisition of YouTube for the net neutrality debate. Hanno opines that the deal may increase the likelihood of a neutrality result even without legislation. While Google’s public pro-neutrality stance is well known, GMU’s Tom Hazlett (my office neighbor and fellow UCLA Economics alum) has a great column in the Financial Times highlighting the difference between Google’s “public policy” stance on net neutrality and its business model. Here’s Hazlett on Google’s now well-known position on net neutrality legislation:
The company became the leading champion of the hottest topic in technology policy over the past year, asserting that if web innovation such as theirs was to be retained, new laws were warranted. The specific fear was that internet service providers delivering last-mile broadband would shift their pricing strategies, charging not only end users for their connections but application vendors (say, search engines) for access to their customers. Worse, they might move into content and then favour their own web products over those of competitors. “Network neutrality� rules were needed, Google argued, because the architecture of the internet demanded it. That structure relies on traffic flowing freely over a network that is “open, end to end�.
But Hazlett points out that Google’s business model sends a different message — to the benefit of investors and consumers:
The internet lurches forward in spasms of business model discovery, as when Google figured out how to auction off search-targeted advertising slots, leaving banner advertisements behind. Today, Google’s absorption of its little video cousin is part of this jockeying for positions of competitive superiority. The internet really is not open – if, as Google hopes, it is doing it right.
Google has been doing it flawlessly – forging exclusive bargains nonpareil. Mr Vise [ed. — author of “The Google Story“] declares the watershed business event in the company’s history to have occurred on May 1 2002 when its search engine was licensed to AOL. “Web properties that connected more than 34m subscribers . . . had a small search box on every page that said, ‘Search Powered by Google.’â€? To land this deal, Google extended to “AOL a very large financial guaranteeâ€?, including stock options. An ISP getting paid to feature a favoured search engine? What net neutrality would presumably end is what helped launch Google.
Very interesting. The Google story reinforces an important economic lesson that exclusive contracts are frequently part of the normal competitive process. Go read it.
I am becoming increasingly interested in the antitrust-related components of the net neutrality debate, and have heard the argument that antitrust law isn’t sufficient to handle the competitive problems implicated in this space. Specifically, I have read and heard the claim that Trinko renders Section 2 enforcement impotent to deal with the harm caused by these types of contracts. As I understand it, the primary competitive concern is the use of exclusive or exclusionary contracts (or exclusion of rivals via vertical integration) to the detriment of consumers. In other words, this is a conventional “raising rivals’ cost” story. Assuming this is an accurate characterization of the competitive argument for neutrality, there is much to be said for Section 2 enforcement here if it is agreed (and I have no reason to believe otherwise) that consumer welfare is the appropriate standard for evaluating potential restrictions on these types of contracts.
One obvious point is that the antitrust is designed to identify and distinguish pro-competitive from anticompetitive contracting. Agencies and courts have been doing this for a long time. There is hundreds of years of common law and agency expertise involved in tackling this tough problem. Obviously, antitrust enforcement is not perfect. And Section 2 is arguably the source of the most lively existing debate between antitrust scholars. But this is precisely because this task is so difficult. I’m skeptical that would-be neutrality legislation offers a superior alternative.
A second point is that the content of antitrust law imposes sensible boundary conditions on enforcement efforts. For instance, the firm making use of these contracts must have monopoly power in order to establish an antitrust claim. This is a critical boundary on limitations on exclusive contracting since we know that firms without market power frequently engage in these types of contracts, which are part of the normal competitive process. It is important for consumer welfare that we not chill this form of competition.
A related, are more pertinent point in this setting, is that antitrust law also requires that the contracts generate an anticompetitive effect. Because many exclusive contracts are pro-competitive, liability under Section 2 sensibly requires that plaintiffs demonstrate an anticompetitive effect. There are other conditions, but these two suffice to make the point for my purposes. While there are conditions under which exclusive contracts may harm competition, the conditions are narrow and sometimes difficult to distinguish from the normal competitive process. This is why the anticompetitive effect requirement is such an important component of enforcement efforts.
To be clear, I’m not suggesting there are no sensible reasons why neutrality advocates might prefer neutrality legislation to Section 2 jurisprudence (and specifically, Trinko). But my sense of the neutrality debate is that there has been insufficient attention paid to the role of exclusive and exclusionary contracts in the competitive process, as evidenced by Google’s AOL deal among many others in the same space, and harm to consumers sure to follow from a rule that prohibits these contracts. Economists have identified the necessary conditions for competitive harm via exclusionary contracts. The limitations offered by Section 2 enforcement are offered to enhance consumer welfare by ensuring that enforcement does not deter pro-competitive conduct. To my knowledge, and I readily admit that I am relying on descriptions of the legislation I have read, the proposed neutrality legislation is not concerned with these types of limitations and thus appears only to be interested “cheap talk” about enhancing consumer welfare.