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It’s fitting that FCC Chairman Ajit Pai recently compared his predecessor’s jettisoning of the FCC’s light touch framework for Internet access regulation without hard evidence to the Oklahoma City Thunder’s James Harden trade. That infamous deal broke up a young nucleus of three of the best players in the NBA in 2012 because keeping all three might someday create salary cap concerns. What few saw coming was a new TV deal in 2015 that sent the salary cap soaring.

If it’s hard to predict how the market will evolve in the closed world of professional basketball, predictions about the path of Internet innovation are an order of magnitude harder — especially for those making crucial decisions with a lot of money at stake.

The FCC’s answer for what it considered to be the dangerous unpredictability of Internet innovation was to write itself a blank check of authority to regulate ISPs in the 2015 Open Internet Order (OIO), embodied in what is referred to as the “Internet conduct standard.” This standard expanded the scope of Internet access regulation well beyond the core principle of preserving openness (i.e., ensuring that any legal content can be accessed by all users) by granting the FCC the unbounded, discretionary authority to define and address “new and novel threats to the Internet.”

When asked about what the standard meant (not long after writing it), former Chairman Tom Wheeler replied,

We don’t really know. We don’t know where things will go next. We have created a playing field where there are known rules, and the FCC will sit there as a referee and will throw the flag.

Somehow, former Chairman Wheeler would have us believe that an amorphous standard that means whatever the agency (or its Enforcement Bureau) says it means created a playing field with “known rules.” But claiming such broad authority is hardly the light-touch approach marketed to the public. Instead, this ill-conceived standard allows the FCC to wade as deeply as it chooses into how an ISP organizes its business and how it manages its network traffic.

Such an approach is destined to undermine, rather than further, the objectives of Internet openness, as embodied in Chairman Powell’s 2005 Internet Policy Statement:

To foster creation, adoption and use of Internet broadband content, applications, services and attachments, and to ensure consumers benefit from the innovation that comes from competition.

Instead, the Internet conduct standard is emblematic of how an off-the-rails quest to heavily regulate one specific component of the complex Internet ecosystem results in arbitrary regulatory imbalances — e.g., between ISPs and over-the-top (OTT) or edge providers that offer similar services such as video streaming or voice calling.

As Boston College Law Professor, Dan Lyons, puts it:

While many might assume that, in theory, what’s good for Netflix is good for consumers, the reality is more complex. To protect innovation at the edge of the Internet ecosystem, the Commission’s sweeping rules reduce the opportunity for consumer-friendly innovation elsewhere, namely by facilities-based broadband providers.

This is no recipe for innovation, nor does it coherently distinguish between practices that might impede competition and innovation on the Internet and those that are merely politically disfavored, for any reason or no reason at all.

Free data madness

The Internet conduct standard’s unholy combination of unfettered discretion and the impulse to micromanage can (and will) be deployed without credible justification to the detriment of consumers and innovation. Nowhere has this been more evident than in the confusion surrounding the regulation of “free data.”

Free data, like T-Mobile’s Binge On program, is data consumed by a user that has been subsidized by a mobile operator or a content provider. The vertical arrangements between operators and content providers creating the free data offerings provide many benefits to consumers, including enabling subscribers to consume more data (or, for low-income users, to consume data in the first place), facilitating product differentiation by mobile operators that offer a variety of free data plans (including allowing smaller operators the chance to get a leg up on competitors by assembling a market-share-winning plan), increasing the overall consumption of content, and reducing users’ cost of obtaining information. It’s also fundamentally about experimentation. As the International Center for Law & Economics (ICLE) recently explained:

Offering some services at subsidized or zero prices frees up resources (and, where applicable, data under a user’s data cap) enabling users to experiment with new, less-familiar alternatives. Where a user might not find it worthwhile to spend his marginal dollar on an unfamiliar or less-preferred service, differentiated pricing loosens the user’s budget constraint, and may make him more, not less, likely to use alternative services.

In December 2015 then-Chairman Tom Wheeler used his newfound discretion to launch a 13-month “inquiry” into free data practices before preliminarily finding some to be in violation of the standard. Without identifying any actual harm, Wheeler concluded that free data plans “may raise” economic and public policy issues that “may harm consumers and competition.”

After assuming the reins at the FCC, Chairman Pai swiftly put an end to that nonsense, saying that the Commission had better things to do (like removing barriers to broadband deployment) than denying free data plans that expand Internet access and are immensely popular, especially among low-income Americans.

The global morass of free data regulation

But as long as the Internet conduct standard remains on the books, it implicitly grants the US’s imprimatur to harmful policies and regulatory capriciousness in other countries that look to the US for persuasive authority. While Chairman Pai’s decisive intervention resolved the free data debate in the US (at least for now), other countries are still grappling with whether to prohibit the practice, allow it, or allow it with various restrictions.

In Europe, the 2016 EC guidelines left the decision of whether to allow the practice in the hands of national regulators. Consequently, some regulators — in Hungary, Sweden, and the Netherlands (although there the ban was recently overturned in court) — have banned free data practices  while others — in Denmark, Germany, Spain, Poland, the United Kingdom, and Ukraine — have not. And whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs, a state of affairs that is compounded by a lack of data on the consequences of various approaches to their regulation.

In Canada this year, the CRTC issued a decision adopting restrictive criteria under which to evaluate free data plans. The criteria include assessing the degree to which the treatment of data is agnostic, whether the free data offer is exclusive to certain customers or certain content providers, the impact on Internet openness and innovation, and whether there is financial compensation involved. The standard is open-ended, and free data plans as they are offered in the US would “likely raise concerns.”

Other regulators are contributing to the confusion through ambiguously framed rules, such as that of the Chilean regulator, Subtel. In a 2014 decision, it found that a free data offer of specific social network apps was in breach of Chile’s Internet rules. In contrast to what is commonly reported, however, Subtel did not ban free data. Instead, it required mobile operators to change how they promote such services, requiring them to state that access to Facebook, Twitter and WhatsApp were offered “without discounting the user’s balance” instead of “at no cost.” It also required them to disclose the amount of time the offer would be available, but imposed no mandatory limit.

In addition to this confusing regulatory make-work governing how operators market free data plans, the Chilean measures also require that mobile operators offer free data to subscribers who pay for a data plan, in order to ensure free data isn’t the only option users have to access the Internet.

The result is that in Chile today free data plans are widely offered by Movistar, Claro, and Entel and include access to apps such as Facebook, WhatsApp, Twitter, Instagram, Pokemon Go, Waze, Snapchat, Apple Music, Spotify, Netflix or YouTube — even though Subtel has nominally declared such plans to be in violation of Chile’s net neutrality rules.

Other regulators are searching for palatable alternatives to both flex their regulatory muscle to govern Internet access, while simultaneously making free data work. The Indian regulator, TRAI, famously banned free data in February 2016. But the story doesn’t end there. After seeing the potential value of free data in unserved and underserved, low-income areas, TRAI proposed implementing government-sanctioned free data. The proposed scheme would provide rural subscribers with 100 MB of free data per month, funded through the country’s universal service fund. To ensure that there would be no vertical agreements between content providers and mobile operators, TRAI recommended introducing third parties, referred to as “aggregators,” that would facilitate mobile-operator-agnostic arrangements.

The result is a nonsensical, if vaguely well-intentioned, threading of the needle between the perceived need to (over-)regulate access providers and the determination to expand access. Notwithstanding the Indian government’s awareness that free data will help to close the digital divide and enhance Internet access, in other words, it nonetheless banned private markets from employing private capital to achieve that very result, preferring instead non-market processes which are unlikely to be nearly as nimble or as effective — and yet still ultimately offer “non-neutral” options for consumers.

Thinking globally, acting locally (by ditching the Internet conduct standard)

Where it is permitted, free data is undergoing explosive adoption among mobile operators. Currently in the US, for example, all major mobile operators offer some form of free data or unlimited plan to subscribers. And, as a result, free data is proving itself as a business model for users’ early stage experimentation and adoption of augmented reality, virtual reality and other cutting-edge technologies that represent the Internet’s next wave — but that also use vast amounts of data. Were the US to cut off free data at the legs under the OIO absent hard evidence of harm, it would substantially undermine this innovation.

The application of the nebulous Internet conduct standard to free data is a microcosm of the current incoherence: It is a rule rife with a parade of uncertainties and only theoretical problems, needlessly saddling companies with enforcement risk, all in the name of preserving and promoting innovation and openness. As even some of the staunchest proponents of net neutrality have recognized, only companies that can afford years of litigation can be expected to thrive in such an environment.

In the face of confusion and uncertainty globally, the US is now poised to provide leadership grounded in sound policy that promotes innovation. As ICLE noted last month, Chairman Pai took a crucial step toward re-imposing economic rigor and the rule of law at the FCC by questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the OIO in general and the Internet conduct standard in particular. Today the agency will take the next step by voting on Chairman Pai’s proposed rulemaking. Wherever the new proceeding leads, it’s a welcome opportunity to analyze the issues with a degree of rigor that has thus far been appallingly absent.

And we should not forget that there’s a direct solution to these ambiguities that would avoid the undulations of subsequent FCC policy fights: Congress could (and should) pass legislation implementing a regulatory framework grounded in sound economics and empirical evidence that allows for consumers to benefit from the vast number of procompetitive vertical agreements (such as free data plans), while still facilitating a means for policing conduct that may actually harm consumers.

The Golden State Warriors are the heavy odds-on favorite to win another NBA Championship this summer, led by former OKC player Kevin Durant. And James Harden is a contender for league MVP. We can’t always turn back the clock on a terrible decision, hastily made before enough evidence has been gathered, but Chairman Pai’s efforts present a rare opportunity to do so.

Allen Gibby is a Senior Fellow at the International Center for Law & Economics

Modern agriculture companies like Monsanto, DuPont, and Syngenta, develop cutting-edge seeds containing genetic traits that make them resistant to insecticides and herbicides. They also  develop crop protection chemicals to use throughout the life of the crop to further safeguard from pests, weeds and grasses, and disease. No single company has a monopoly on all the high-demand seeds and traits or crop protection products. Thus, in order for Company A to produce a variety of corn that is resistant to Company B’s herbicide, it may have to license a trait patented by Company B in order to even begin researching its product, and it may need further licenses (and other inputs) from Company B as its research progresses in unpredictable directions.

While the agriculture industry has a long history of successful cross-licensing arrangements between agricultural input providers, licensing talks can break down (and do so for any number of reasons), potentially thwarting a nascent product before research has even begun — or, possibly worse, well into its development. The cost of such a breakdown isn’t merely the loss of the intended product; it’s also the loss of the other products Company A could have been developing, as well as the costs of negotiation.

To eschew this outcome, as well as avoid other challenges such as waiting years for Company B to fully develop and make available a chemical before it engages in in arm’s length negotiations with Company A, one solution is for Company A and Company B to merge and combine their expertise to design novel seeds and traits and complementary crop protection products.

The potential for this type of integration seems evident in the proposed Dow-DuPont and Bayer-Monsanto deals where, of the companies merging, one earns most of its revenue from seeds and traits (DuPont and Monsanto) and the other from crop protection (Dow and Bayer).

Do the complementary aspects inherent in these deals increase the likelihood that the merged entities will gain the ability and the incentive to prevent entry, foreclose competitors, and thereby harm consumers?  

Diana Moss, who will surely have more to say on this in her post, believes the answer is yes. She recently voiced concerns during a Senate hearing that the Dow-DuPont and Bayer-Monsanto mergers would have negative conglomerate effects. According to Moss’s testimony, the mergers would create:

substantial vertical integration between traits, seeds, and chemicals. The resulting “platforms” will likely be engineered for the purpose of creating exclusive packages of traits, seeds and chemicals for farmers that do not “interoperate” with rival products. This will likely raise barriers for smaller innovators and increase the risk that they are foreclosed from access to technology and other resources to compete effectively.

Decades of antitrust policy and practice present a different perspective, however. While it’s true that the combined entities certainly might offer combined stacks of products to farmers, doing so would enable Dow-DuPont and Bayer-Monsanto to vigorously innovate and compete with each other, a combined ChemChina-Syngenta, and an increasing number of agriculture and biotechnology startups (per AgFunder, investments in such startups totaled $719 million in 2016, representing a 150% increase from 2015’s figure).

More importantly, the complaint assumes that the only, or predominant, effect of such integration would be to erect barriers to entry, rather than to improve product quality, offer expanded choices to consumers, and enhance competition.

Concerns about conglomerate effects making life harder for small businesses are not new. From 1965 to 1975, the United States experienced numerous conglomerate mergers. Among the theories of competitive harm advanced by the courts and antitrust authorities to address their envisioned negative effects was entrenchment. Under this theory, mergers could be blocked if they strengthened an incumbent firm through increased efficiencies not available to other firms, access to a broader line of products, or increased financial muscle to discourage entry.

While a nice theory, for over a decade the DoJ could not identify any conditions under which conglomerate effects would give the merged firm the ability and incentive to raise price and restrict output. The DoJ determined that the harms of foreclosure and barriers to smaller businesses were remote and easily outweighed by the potential benefits, which include

providing infusions of capital, improving management efficiency either through replacement of mediocre executives or reinforcement of good ones with superior financial control and management information systems, transfer of technical and marketing know-how and best practices across traditional industry lines; meshing of research and distribution; increasing ability to ride out economic fluctuations through diversification; and providing owners-managers a market for selling the enterprises they created, thus encouraging entrepreneurship and risk-taking.

Consequently, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects in the 1982 Merger Guidelines.

In the Dow-DuPont and Bayer-Monsanto deals, there are no overwhelming factors that would contradict the presumption that the conglomerate effects of improved product quality and expanded choices for farmers outweigh the potential harms.

To find such harms, the DoJ reasoned, would require satisfying a highly attenuated chain of causation that “invites competition authorities to speculate about what the future is likely to bring.” Such speculation — which includes but is not limited to: weighing whether rivals can match the merged firm’s costs, whether rivals will exit, whether firms will not re-enter the market in response to price increases above pre-merger levels, and whether what buyers gain through prices set below pre-merger levels is less than what they later lose through paying higher than pre-merger prices — does not inspire confidence that even the most clairvoyant regulator would properly make trade-offs that would ultimately benefit consumers.

Moss’s argument also presumes that the merger would compel farmers to purchase the potentially “exclusive packages of traits, seeds and chemicals… that do not ‘interoperate’ with rival products.” But while there aren’t a large number of “platform” competitors in agribusiness, there are still enough to provide viable alternatives to any “exclusive packages” and cross-licensed combinations of seeds, traits, and chemicals that Dow-DuPont and Bayer-Monsanto may attempt to sell.

First, even if a rival fails to offer an equally “good deal” or suffers a loss of sales or market share, it would be illogical, the DoJ concluded, to condemn mergers that promote benefits such as resource savings, more efficient production modes, and efficient bundling (i.e., bundling that benefits customers by offering them improved products, lower prices or lower transactions costs due to the purchase of a combined stack through a “one-stop shop”). As Robert Bork put it, far from “frightening smaller companies into semi-paralysis,” conglomerate mergers that generate greater efficiencies will force smaller competitors to compete more effectively, making consumers better off.

Second, it is highly unlikely these deals will adversely affect the long-standing prevalence of cross-licensing arrangements between agricultural input providers. Agriculture companies have a long history of supplying competitors with products while simultaneously competing with them. For decades, antitrust scholars have been skeptical of claims that firms have incentives to deal unreasonably with providers of complementary products, and the ag-biotech industry seems to bear this out. This is because discriminating anticompetitively against complements often devalues the firm’s own platform. For example, Apple’s App Store is more valuable to iPhone users because it includes messaging apps like WeChat, WhatsApp, and Facebook Messenger, even though they compete directly with iMessage and FaceTime. By excluding these apps, Apple would devalue the iPhone to hundreds of millions of its users who also use these apps.

In the case of the pending mergers, not only would a combined Dow-DuPont and Bayer-Monsanto offer their own combined stacks, their platforms increase in value by providing a broad suite of alternative cross-licensed product combinations. And, of course, the combined stack (independent of whether it’s entirely produced by a Dow-DuPont or Bayer-Monsanto) that offers sufficiently increased value to farmers over other packages or non-packaged alternatives, will — and should — win in the end.

The Dow-DuPont and Bayer-Monsanto mergers are an opportunity to remember why, decades ago, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects and an occasion to highlight the incentives that providers of complementary products have to deal reasonably with one another.