In late August, Roberto Campos Neto, the head of Brazil’s central bank, is reported to have said about Pix, the bank’s two-year-old real-time-payments (RTP) system, that it “eliminates the need to have a credit card. I think that credit cards will cease to exist at some point soon.” Wow! Sounds amazing. A new system that does everything a credit card can do, but better.
As the old saying goes, however, something that sounds too good to be true probably isn’t. While Pix has some advantages, it also has many disadvantages. In particular, it lacks many of the features currently offered by credit cards, such as liability caps, fraud prevention, and—perhaps crucially—access to credit. So, it seems unlikely to replace credit cards any time soon.
Pix and the Unbanked
When Brazil’s central bank launched Pix in November 2020, evangelists at the bank hoped it would offer a low-cost alternative to existing payments and would entice some of the country’s tens of millions of unbanked and underbanked adults into the banking system. While Pix has, indeed, attracted many users, it has done little, if anything, to solve the problem of the unbanked.
Proponents of Pix asserted that the RTP system would dramatically reduce the number of unbanked individuals in Brazil. While it is true that many Brazilians who were previously unbanked do now have Pix accounts, it would be incorrect to conclude that Pix was the reason they ceased to be unbanked.
A study by Americas Market Intelligence (commissioned by Mastercard) found that, during the COVID-19 pandemic, “Brazil reduced its unbanked population by an astounding 73%.” But the study was based on research conducted between June and August 2020 and was published in October 2020, the month before Pix launched. It described the implementation of state and federal programs launched in Brazil in response to the pandemic:
The “Coronavoucher” program distributed emergency funds to low-income informal workers exclusively via state-owned bank Caixa Econômica Federal (CEF). Applications for funds could only be made via CEF’s Caixa Tem smartphone app, and funds were distributed via the same app. As of Aug. 5, 2020, 66 million people had received Coronavouchers via the Caix Tem app. Of those, 36 million were previously unbanked.
Merenda em Casa (“snack at home”), a program run by state governments, distributed funds to low-income families with children at public schools to help them pay for food while schools were closed due to COVID-19. The program distributed funds via PicPay and PagBank’s PagSeguro, both private-sector payment apps.
Following the launch of Pix, the central bank-run RTP program was made available to clients of Caixa Tem, PicPay, and PagBank. As a result, previously unbanked individuals who had become banked because of the Coronavoucher and Merenda em Casa programs were able to obtain and use Pix keys to send and receive payments.
It remains unclear, however, what proportion of those previously unbanked individuals actually use Pix. As Figure 1 below shows, the number of Pix keys registered vastly outstrips the number of users. As such, not only is it false to claim that Pix helped reduce the number of unbanked Brazilians, but it isn’t possible to say with certainty how many of those previously unbanked individuals are now active users of Pix.
FIGURE 1: Pix Keys Registered to Natural Persons and Pix Users Who Are Natural Persons
Pix suffered a series of data breaches this past year, with the end result that details of Pix accounts were stolen from more than 500,000 account holders. Meanwhile, hackers have set up fake apps designed to steal money from users’ bank accounts by masquerading as legitimate Pix-compliant wallets. And Pix has been associated with a rise in lightning kidnappings, whereby kidnappers force their victims to make a transfer on Pix in order to be released.
Faced with the problem that they cannot avoid having Pix because their banks have automatically enabled the system, some Brazilians have responded to the threat of kidnappings by purchasing second “Pix phones.” Users load these mid-range Android phones with banking and Pix apps and leave them at home. Meanwhile, they delete all banking apps from their primary phone. While such an approach ostensibly prevents criminals from stealing potentially large amounts of money from individuals who can afford to have a second phone, it is quite a costly and inconvenient solution.
Pix vs Credit Cards
Roberto Campos Neto reportedly conceded that Pix data breaches will occur “with some frequency.” This acknowledgment of Pix’s unresolved security issues is difficult to square with the central bank president’s claim that the service will soon replace credit cards. After all, the major credit-card networks (Visa, Mastercard, American Express, and Discover) have more than half a century of experience managing fraud, and have built massive artificial-intelligence-based systems to identify and prevent potentially fraudulent transactions. Pix has no such system. Credit-card networks have also developed a highly effective system for challenging fraudulent transactions called “chargebacks.”
Card networks’ investment in fraud management has enabled them to offer “zero liability” terms to cardholders, which has made credit cards attractive as a means of paying for goods and services, both at brick-and-mortar locations and online. While Pix now has a system to reverse fraudulent transactions, its reliability has yet to be tested, and Pix as yet does not offer zero liability. Thus, given the choice between a credit card and Pix, users are unlikely to use Pix to pay for goods where there is a risk that the business will fail to deliver goods or services as promised.
Finally, credit cards offer users the ability to defer payment for no fee until their next bill becomes due (usually at least a month). And they offer the ability to defer payment for longer, if necessary, with interest payable on the amount outstanding.
Conclusion: There Ain’t No Such Thing as a Free Lunch
The investments that credit-card networks have made in the identification, prevention, and rectification of fraud have been possible because they are able to charge a (very small) fee to process transactions. Pix also charges merchants a small fee for transactions but, as noted, it is not able to offer the same protections.
Most Pix transactions to date have been person-to-person (P2P), effectively replacing transactions that would have otherwise been made with cash, checks, or online bank-to-bank funds transfers. That makes sense when one thinks about the risks involved. P2P transactions are likely to involve parties that know one another and/or are engaged in repeat business. By contrast, many consumer-to-business and business-to-business transactions involve parties that are relatively less well-known to one another and thus have more incentive to renege on commitments. Consumers are therefore more inclined to use the payment system with protections built in, while merchants—who are happy for the additional business—are willing to pay the price for that business.
The science-fiction writer Robert Heinlein popularized a pithy phrase to describe the idea that it is not possible to get something for nothing: “There Ain’t No Such Thing as a Free Lunch.” If Pix is to challenge credit cards as a real consumer-payments system, it will have to offer similar levels of fraud protection to consumers. That will not be cheap. While the central bank might continue to subsidize Pix transactions, doing so to the degree that would be necessary to offer such fraud protections would be an abuse of its position. Thinking otherwise is science fiction.
Banco Central do Brasil (BCB), Brazil’s central bank, launched a new real-time payment (RTP) system in November 2020 called Pix. Evangelists at the central bank hoped that Pix would offer a low-cost alternative to existing payments systems and would entice some of the country’s tens of millions of unbanked and underbanked adults into the banking system.
A recent review of Pix, published by the Bank for International Settlements, claims that the payment system has achieved these goals and that it is a model for other jurisdictions. However, the BIS review seems to have been written with rose-tinted spectacles. This is perhaps not surprising, given that the lead author runs the division of the central bank that developed Pix. In a critique published this week, I suggest that, when seen in full color, Pix looks a lot less pretty.
Among other things, the BIS review misconstrues the economics of payment networks. By ignoring the two-sided nature of such networks, the authors claim erroneously that payment cards incur a net economic cost. In fact, evidence shows that payment cards generate net benefits. One study put their value add to the Brazilian economy at 0.17% of GDP.
The report also obscures the costs of the Pix system and fails to explain that, whereas private payment systems must recover their full operational cost, Pix appears to benefit from both direct and indirect subsidies. The direct subsidies come from the BCB, which incurred substantial costs in developing and promoting Pix and, unlike other central banks such as the U.S. Federal Reserve, is not required to recover all operational costs. Indirect subsidies come from the banks and other payment-service providers (PSPs), many of which have been forced by the BCB to provide Pix to their clients, even though doing so cannibalizes their other payment systems, including interchange fees earned from payment cards.
Moreover, the BIS review mischaracterizes the role of interchange fees, which are often used to encourage participation in the payment-card network. In the case of debit cards, this often includes covering some or all of the operational costs of bank accounts. The availability of “free” bank accounts with relatively low deposit requirements offers customers incentives to open and maintain accounts.
While the report notes that Pix has “signed up” 67% of adult Brazilians, it fails to mention that most of these were automatically enrolled by their banks, the majority of which were required by the BCB to adopt Pix. It also fails to mention that 33% of adult Brazilians have not “signed up” to Pix, nor that a recent survey found that more than 20% of adult Brazilians remain unbanked or underbanked, nor that the main reason given for not having a bank account was the cost of such accounts. Moreover, by diverting payments away from debit cards, Pix has reduced interchange fees and thereby reduced the ability of banks and other PSPs to subsidize bank accounts, which might otherwise have increased financial inclusion.
The BIS review falsely asserts that “Big Tech” payment networks are able to establish and maintain market power. In reality, tech firms operate in highly competitive markets and have little to no market power in payment networks. Nonetheless, the report uses this claim regarding Big Tech’s alleged market power to justify imposing restrictions on the WhatsApp payment system. The irony, of course, is that by moving to prohibit the WhatsApp payment service shortly before the rollout of Pix, the BCB unfairly inhibited competition, effectively giving Pix a monopoly on RTP with the full support of the government.
In acting as both a supplier of a payment service and the regulator of payment service providers, the BCB has a massive conflict of interest. Indeed, the BIS itself has recommended that, in cases where such conflicts might exist, it is good practice to ensure that the regulator is clearly separated from the supplier. Pix, in contrast, was developed and promoted by the same part of the bank as the payments regulator.
Finally, the BIS report also fails to address significant security issues associated with Pix, including a dramatic rise in the number of “lightning kidnappings” in which hostages were forced to send funds to Pix addresses.
[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.
This post is authored by Julian Morris, (Director of Innovation Policy, ICLE).]
Governments are beginning to lift the lockdowns they imposed to slow the spread of COVID-19. That is a good thing. But simply lifting the restrictions won’t immediately take us back to normality. For that to happen requires a massive investment in mechanisms that will rebuild trust.
Prior to COVID-19, people implicitly trusted that travelling on public transit, working in an office, attending a ball game, or going to a shopping mall would not subject them to the risk of infection by a potentially deadly virus (or any other terrible eventuality). In the wake of the pandemic, this implicit trust is gone. Many people are afraid of COVID-19 and will require reassurance. While governments likely contributed significantly to the loss of trust, they are likely not in the best position to rebuild that trust. The onus is thus on businesses and civic organizations to provide reassurance and rebuild trust. This post outlines two ways businesses can contribute to this effort.
Lockdowns and the Trust Deficit
As the incidence of COVID-19 began to rise dramatically in March, governments across the world imposed “lockdowns.” These curfew-like arrangements have gone well beyond the limits on public gatherings and other “social distancing” strategies deployed during previous major pandemics such as the Spanish ‘flu of 1918-19. Indeed, they are among the most far-reaching restrictions ever imposed on human activity during peacetime. Hundreds of millions of people have been cooped up at home for nearly two months, allowed out only briefly each day for exercise or to buy groceries. Millions of those now at home have also lost their main source of income.
Governments are now finally beginning to remove some of the most severe of these restrictions, allowing more businesses to operate. As they do so, businesses are trying to figure out what the post-lockdown economy is going to look like: Will employees come back to work in offices? Will customers shop in stores, eat at restaurants, visit movie theatres, and use rideshares, taxis, planes, and public transit?
Many people are fearful about the consequences of going back to work. A recent IPSOS-MORI poll for the Washington Post found that 74 percent of American adults want policymakers to, “keep trying to slow the spread of the coronavirus, even if that means keeping many businesses closed,” while just 25 percent prefer to, “open up businesses and get the economy going again, even if that means more people would get the coronavirus.” Meanwhile, in a recent survey in the UK, the TUC union found that 40% of workers were worried about the prospects of returning to crowded workplaces.
The loss of trust is likely in part be due to conditioning: for the past two months we have been told by all and sundry to avoid other people (except over Zoom). Governments likely contributed to this through their promotion of scary predictions that millions could die if people didn’t “stay home, stay safe.” Partly, however, it is a natural reaction to the perceived threat posed by COVID-19.
For the elderly and those with underlying conditions more likely to be adversely affected by COVID-19, such anxiety is understandable. But even many people less likely to become seriously ill or die from COVID-19 are worried. This is also not surprising: They may have heard horror stories of young, otherwise healthy people who ended up on a ventilator and either died or suffered permanent lung damage. Or perhaps they read about the mysterious effects COVID-19 can have on other organs, ranging from the intestines to the brain. Or they may have a more vulnerable person in our household and are worried about the possibility that we might infect them. Or, as I am sure is the case with many, they just don’t know—and this is their reaction to uncertainty (fueled, in part by the now-discreditedpredictions of doom).
Regardless of why a person fears COVID-19, the fact is that many do. And one thing common to all of them is a trust deficit. Given widespread uncertainty regarding who has the virus, how can one trust that the business one works, shops, or dines at provides a safe environment free of COVID-19? This even extends to friends and colleagues: how can one individual trust another individual they might encounter while at work or at play? And it applies also to the use of taxis and rideshares; how can riders and drivers trust one another?
It might be argued that since governments were in no small part responsible for generating the trust deficit, through their well-intentioned but probably misguided efforts to lock down the economy and constant exhortations to avoid all human contact, they should now be trying to do what they can to rebuild trust. Unfortunately, however, they may not be in a very good position to do that. While governments are quite good at scaring people (“I’m from the government and I’m here to help”), they are less good at providing reassurance (“I’m from the government and I’m here to help”), or even data. In other words, governments aren’t much good at engaging in the kinds of “costly signalling” necessary to build trust between individuals and businesses. As a result, much of the responsibility for rebuilding trust will fall on businesses and civic organizations.
Businesses can do several things that would likely reduce this trust deficit and allay the fears of employees and customers. First, they can establish, communicate, and implement clear standards for employees and customers regarding the practices to be adopted to reduce infection risk. Second, and relatedly, where employees are likely to be working in close quarters with one another or with customers or suppliers, they can adopt mechanisms to establish the COVID-19 status of those employees, suppliers and customers (somewhat along the lines of the system implemented by Taiwan in February and subsequently elaborated by Hal Singer in his post in this series here).
The following sections briefly consider how such systems might work.
CV19 Standards
Companies that have not been locked down are already implementing processes to limit the exposure of employees to potentially infected customers, suppliers, and other employees. For example, many supermarkets require staff to use masks and/or protective screens and gloves. Some stores also require customers to wear masks, limit how many people can be in the store, and impose distancing rules. Some have even built seemingly permanent screens in front of check-out clerks and imposed seemingly permanent rules for in-store movement. Other stores and restaurants are currently limiting service to take-out and delivery.
At present, the approaches taken by businesses vary considerably. There is nothing inherently wrong with this; indeed, it is a healthy part of a market process in which companies develop different solutions to the same problem and allow consumers to pick and choose the ones that work best for them. Consumers can be aided in this process by reading reviews and ratings provided by other consumers; that model has worked well for goods and services purchased online. As Paul Seabright has noted, these systems are designed to enable users to build trusting relationships with suppliers. Survey data suggest that consumers find such systems more trustworthy than government regulations.
But when consumers are not well placed to evaluate the most effective solution, for example because it is difficult to observe the effectiveness of the solution directly, it can be helpful for third parties to evaluate the various solutions and either rank them or set out voluntary pass-fail standards. COVID-19 is just such a case: individual consumers and employees are unlikely to be in a good position to evaluate the relative effectiveness of different processes and technologies designed to limit the transmission of SARS-CoV-2. As such, pass-fail standards developed and/or validated by credible, independent third parties are likely to be the most effective way to help rebuild trust.
Standards will vary depending on the type of establishment and activity. For some businesses, such as theatres, gyms, and mass transit systems, the standards will likely be more onerous than others. Plausibly, such establishments could reduce transmission through such things as: mandatory masks, mandatory use of antiviral hand sanitizer on entry, regular cleaning, the use of HEPA filters (which remove the droplets on which the virus is spread), and other technologies. But given the very close proximity of people in such systems, often for extended periods (half an hour or more), the risk of significant viral load being transferred from one person to another, even if wearing basic masks, remains.
For standards to be effective as a means of regaining the trust of employees, suppliers, and consumers, it is important that they are communicated effectively through marketing campaigns, likely including advertising and signage. Standards will also likely change over time as understanding of the way the virus is transmitted, technologies that can prevent transmission, and hence best practices improve. The need for such standards will also likely change over time and once the virus is no longer a major threat there should be no need for such standards. For these reasons, standards should be both voluntary and developed privately. However, governments can play a role in encouraging the adoption of such standards by legislating that organizations that are compliant with a recognized standard will not be liable if an infection occurs on their property or through the actions of their employees.
In addition to other practices designed to reduce transmission of the SARS-CoV-2 virus, some businesses have begun testing employees for the virus, to determine who is and who is not currently infected, so that infected individuals can be isolated until they are no longer infectious (employees who are required to isolate continue to receive their salary). Some businesses are also considering testing for antibodies to the virus, to determine who has had the virus and likely has some immunity. By doing such testing, businesses are probably reducing transmission both among employees and between employees and customers to a greater extent than by merely implementing technologies, hygiene and distancing rules. But the tests are not perfect and given the potential for infection outside work, it is possible that an employee who tests negative on one day could then become infected and be infective a few days later. While daily testing might be an option for some firms, it is unrealistic for most—and will not solve the trust problem for most individuals.
CV19 Status Verification
This brings us to the second major thing that business can do to reduce the trust gap: status verification. The idea here is to enable parties to ascertain one another’s current COVID-19 status without the need to resort to constant testing. One possible approach is to use a smartphone-based app that combines various pieces of information (time stamped virus tests and antibody tests, anonymized information about contacts with people who subsequently tested positive, and self-reported health-relevant data) to offer the most accurate and up-to-date status of an individual.
In principle, such a status app could be used by employers to minimize the likelihood that their staff have COVID (and to require those that may be infected to self-isolate and obtain a test). But their potential application is far wider:
· Universities, churches, theatres, restaurants, bars, and events might utilize the status app not only for employees but also to determine who may participate and/or what forms of PPE they should utilize and/or where participants may congregate.
· Airlines might utilize status apps to determine who might fly and where passengers should be seated.
· Jurisdictions might utilize status apps as a means of facilitating more rapid immigration – and to enable those who most likely do not have COVID-19 to avoid most quarantine requirements.
· Public transit systems might utilize status apps to determine who can use the system.
· Taxis and ridesharing services, such as Uber and Lyft, might utilize data from the status app to help match riders and drivers.
· Personal services facilitators such as Thumbtack might utilize the app to help match service providers and customers.
· Hotels, AirBnB and vacation rental facilitators such as vrbo might use status apps for both hosts (and their employees and contractors) and guests in order to minimize infection risk during a visit.
· Online dating and matchmaking services such as Match and Tinder might utilize status apps to help facilitate virus-compatible matches. (While SARS-CoV-2/COVID-19 is not really comparable to HIV/AIDS, it is noteworthy that sites already exist that seek to match people who are HIV positive.)
How a CV19 Status App might Work
A basic schema for a CV19 status app would be:
· Red = Has COVID-19 (e.g. recently tested positive for virus)
· Red-Amber = May have COVID-19 (e.g. recently tested negative for virus but either has COVID-19 related symptoms or has been in contact with someone who tested positive).
· Amber = Is susceptible: Has not had COVID-19 and likely does not have COVID-19 (e.g. recently tested negative for COVID-19, has no COVID-19 symptoms, and has had no recent known contact with someone who tested positive).
· Green = Has had COVID-19 and is now presumed to be immune (either tested positive for CV19 and then tested negative for CV19, or tested negative for CV19 and also tested positive for Antibodies) (See below regarding immunity concerns.)
This schema is shown in the decision tree below
There are numerous technical issues relating to the operation of an app designed to establish a person’s CV19 status that must be addressed for it to function effectively. First, it will be necessary to ensure that the person using the app is the person whose status is being asserted. It should be possible to address this by storing the information from tests, contacts with infected people, and self-reported symptoms on an immutable digital ledger and use biometric identification both to record and to share status information. (Storing the status information on a person’s phone in this way also avoids the risk of hacking that plagues centralized databases.)
Next there is the question of authenticating test data recorded by the app. Ideally, this would be done by having a trusted third party—such as a doctor, nurse, or pharmacist—verify the data. If that is not feasible—for example because the test was carried out at home—then some other mechanism will be required to ensure the data is input correctly, such as rewards for accurate self-reports and/or penalties for inaccurate self-reports. (Self-reported data could also be treated within the system as less reliable, or simply as tentative—requiring verified test data to be added within a specified period.)
Beyond these verification issues, there remain problems with the specificity and sensitivity of tests—implying a likelihood of both false positive and false negatives. Although there are now both PCR and antibody tests that achieve very high levels of accuracy, even small numbers of false negative PCR tests and false positive antibody tests would clearly create problems for the effective functioning of the status app system. To address these problems, it may be necessary to undertake secondary testing for some portion of the tests.
The more challenging problem is that of infection after tests are conducted. As noted above, this can in principle be mitigated—but not eliminated—by incorporating contact tracing and/or self-reporting of symptoms. Related to this is the possibility that having COVID-19 confers only limited immunity (as has been suggested in relation to some people who have seemingly become reinfected). This obviously poses problems for the notion of a “Green” status; if reinfection is possible, then Green clearly would not be a permanent designation and would require regular testing. The evidence remains ambiguous, with news of five US sailors who had COVID then tested negative twice subsequently having new symptoms and testing positive again; on the other hand, a recent study suggests that people who test positive after recovery do not have a live (infectious) version of the virus.
Contact tracing apps have been used successfully in several locations as part of a strategy for containing COVID-19. However, the only really successful implementations so far have been those in China, South Korea and Hong Kong, which had a mandatory component and were highly centralized. By contrast, apps that required voluntary uptake have generally been less successful.
One reason for the lack of success of voluntary contact tracing apps is heightened concern regarding privacy (for example, the app used in Hong Kong enables anyone to find the gender, age, and precise locations of every person in the city who currently has COVID-19). Of course it is worth repeating Jane Bambauer’s observation in an earlier post that “Objections to surveillance lose their moral and logical bearings when the alternatives are out-of-control disease or mass lockdowns. Compared to those, mass surveillance is the most liberty-preserving option.” But assuming imprisonment is not the only alternative, concerns over privacy are not necessarily unmoored from logic or ethics (pace Christine Wilson’s earlier post). And to address these concerns, several groups have developed privacy-protecting systems. For example, the TCN coalition developed a system that shares anonymized tokens with other nearby phones over Bluetooth Low Energy. That system has now been adopted by Google and Apple in an API that is being made available to government health authorities (but not to other private app developers).
Another reason voluntary contact tracing apps have not been successful is the lack of incentives to adopt them. The main benefit of a contact tracing app is that it notifies the user when they have been in close contact with someone who subsequently tested positive. Logically, the people most likely voluntarily to adopt a contact tracing app are those who are most risk averse. But those people would also presumably be taking strong measures to avoid contracting COVID-19, so they would be less likely to become infected. By contrast, the people most likely to become infected are those who are least risk averse. But those people are least likely to be motivated to use the contact tracing app. In other words, even if there is relatively wide uptake of the app (say, 40% of the population, as in Iceland), it is likely to miss many of the people most likely to be spreading COVID-19 and so would not actually be very useful as a means of identifying and containing clusters.
Tying the contact tracing app to a CV19 Status App potentially overcomes this incentive compatibility problem, since anyone who wants to engage in an activity that requires use of the app would automatically participate in the contact tracing system. It could thus be quite effective at identifying instances of transmission that occur during activities that require the app to be used, which would also presumably be activities that put users at higher risk.
Nonetheless, for the app to be useful as a means of identifying clusters of COVID-19, either a significant proportion of common activities would have to require use of the app (e.g. public transit, rideshares, gyms, and shopping malls) or it would have to be used by at least some proportion of those not required to use it for access to activities.
Adding a symptom monitoring component can help in two ways. First, by offering users a way to self-assess for early symptoms of COVID-19, it encourages more people to download and use the app. More important, symptom monitoring can help identify additional potential COVID-19 infections, both among the individuals reporting symptoms and among their contacts. Thus, the combination of test data, symptom data and contact tracing become the information determining a person’s current status in a manner that is more reliable than relying on any one datum.
It should be noted that even combining these data will not make the status app 100% accurate. Some people with COVID-19 will likely slip through as Green or Orange and others will likely inadvertently be infected as a result. But the number of such instances is likely to be small and certainly much lower than would be the case without the use of the app. Moreover, widespread use of the app should dramatically reduce the infection rate throughout the population, with benefits to all.
Conclusions
Both CV19 standards and CV19 status verification offer potential means by which to address the trust deficit that has emerged in the context of the continuing COVID-19 pandemic. A company that adopts both solutions would likely dramatically reduce the chances of their employees, suppliers and customers contracting the virus on their premises. That would also likely reduce the company’s liability, which could be rewarded by insurance providers offering discounts. Indeed, one could envisage a greater role for insurance companies in designing or certifying the standards and the status app.
However, the real benefits of these systems come not from one or a few companies adopting them but from widespread adoption, which has the potential dramatically to reduce the transmission of the virus both now and in the future (should there be a second wave). This leads to something of a paradox: Governments could mandate adoption, but such an approach may be counterproductive for two reasons. First, much knowledge is dispersed and tacit, so it is generally better to allow private actors to determine which standards to adopt (lest an inferior standard be the subject of a mandate). Second, if companies are genuinely concerned to address the trust deficit, then they will be willing to invest in standards and to limit access though status apps — both of which entail costs. By contrast, if governments mandate the use of standards and apps, they would effectively prevent firms from engaging in such costly signalling, so would undermine at least part of the effectiveness of such tools as trust-generative.
[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.
This post is authored by Julian Morris, (Director of Innovation Policy, ICLE).]
SARS-CoV2, the virus that causes COVID-19, is now widespread in the population in many countries, including the US, UK, Australia, Iran, and many European countries. Its prevalence in other regions, such as South Asia, much of South America, and Africa, is relatively unknown. The failure to contain the virus early on has meant that more aggressive measures are now necessary in order to avoid overwhelming healthcare systems, which would cause unacceptable levels of mortality. (Sadly, Italy’s health system has already been overwhelmed, forcing medical practitioners to engage in the most awful triage decisions.) Many jurisdictions, ranging from cities to entire countries, have chosen to implement mandatory lockdowns. These will likely have the desired effect of slowing transmission in the short term, but they cannot be maintained indefinitely. The challenge going forward is how to contain the spread of the virus without destroying the economy.
In this post I will outline the elements of a proposal that I hope might do that. (I’ve been working on this for about a week and in the meantime some of the ideas have been advanced by others. E.g. this and this. Great minds clearly think alike.)
1. Identify those who have had COVID-19 and have recovered — and allow them to go back to work
While there are some reports of people who have had COVID-19 becoming reinfected, this seems to be very rare (a recent primate study implies reinfection is impossible) and the alleged cases may have been a result of false negative tests followed by relapse by patients. The general presumption is that having the disease is likely to confer immunity for several months at least. Moreover, people with immunity who no longer show symptoms of the disease are very unlikely to transmit the disease. Allowing those people to go back to work will lessen the burden of the lockdown without appreciably increasing the risk of infection
One group of such people is readily identifiable, though small: Those who tested positive for COVID-19 and subsequently recovered. Those people should be permitted to go back to work immediately.
2. Where possible, test, trace, treat, isolate
The town of Vo in Northern Italy, the site of the first death in the country from COVID-19, appears to have stopped the disease from spreading in about three weeks. It did so through a combination of universal testing, two weeks of strict lockdown, and quarantine of cases. Could this be replicated elsewhere?
Vo has a population of 3,300, so universal testing was not the gargantuan exercise it would be in, say, the continental US. Some larger jurisdictions have had similar success without resorting to universal testing and lockdown. South Korea managed to contain the spread of SARS-CoV2 relatively quickly through a combination of: social distancing (including closing schools and restricting large gatherings), testing anyone who had COVID-19 symptoms (and increasingly those without symptoms), tracing and testing of those who had contact with those symptomatic individuals, treating those with severe symptoms, quarantining those who tested positive but had no or only mild symptoms (the quarantine was monitored using a phone app and strictly enforced), and publicly sharing detailed information about the known incidence of the virus.
A study of 181 cases in China published in the Annals of Internal Medicine found that the mean incubation period for COVID-19 is just over 5 days and only about 1 in 100 cases take longer than 14 days. By implication, if people have been strictly following the guidelines on avoiding contact with others, washing/sanitizing hands, sanitizing other objects, and avoiding hand-to-face contact, it should be possible, after two weeks of lockdown, to identify the vast majority of people who are not infected by testing everyone for the presence of SARS-CoV2 itself.
But that’s a series of big ifs. Since it takes a few days for the virus to replicate in the body to the point at which it is detectable, people who have recently been infected might test negative. Also, it is unlikely to be feasible logistically to test a significant proportion of the population for SARS-CoV2 in a short period of time. Existing tests require the use of RT-PCR, which is expensive and time consuming, not least because it can only be done at a lab, and while the capacity for such tests is increasing, it is likely around 50,000 per day in the entire US.
Test, trace, treat, and isolate may be a feasible option for towns and even cities that currently have relatively low incidence of SARS-CoV2. However, given the lethargic progress of testing in places such as the US, UK and India, and hence poor existing knowledge of the extent of infection, it will not be a universal panacea.
3. Test as many people as possible for the presence of antibodies to SARS-CoV2
Outside those few places that have dramatically ramped up testing, it is likely that many more people have had COVID-19 than have been tested, either because they were asymptomatic or because they did not require clinical attention. Many, perhaps most of those people will no longer have the virus in their system but they should still have antibodies (indicating immunity). In order to identify those people, there should be widespread testing for antibodies to SARS-CoV2.
Antibody tests are inexpensive, quick, and some can be done at home with minimal assistance. Numerous such tests have already been produced or are in development (see the list here). For example, Chinese manufacturer Innovita has produced a test that appears to be effective; in a clinical trial of 447 patients, it identified the presence of antibodies to SARS-CoV2 in 87.3 % of clinically confirmed cases of COVID-19 (i.e. there were approximately 13% false negatives) but zero false positives. Innovita’s test was approved by China’s equivalent of the FDA and has been used widely there.
Scanwell Health, a San Francisco-based startup, has an exclusive license to produce Innovita’s test in the U.S. and has already begun the process for obtaining approval from the US FDA under its Emergency Use Authorization. Scanwell estimates that the total cost of the test, including overnight shipping of the kit and support from a doctor or nurse practitioner from Lemonaid Health, will be around $70. One downside to Scanwell Health’s offering, however, is that it expects it to take 6-8 weeks to begin shipping testing kits once it receives authorization from the FDA.
So far, the FDA has approved at least one SARS-CoV2 antibody test, produced by Aytu Bioscience in Colorado. But Aytu’s test is designed for use by physicians, not at home. In Europe, at least one antibody test, produced by German company PharmactACT, is already available. (That test has similar characteristics to Innovita’s.) Another has been approved by the MHRA in the UK for physician use and is awaiting approval for home use; the UK government has ordered 3.5 million of these tests, with the aim of distributing 250,000 per day by the end of April.
Unfortunately, some people who have antibodies to SARS-CoV2 will also still be infectious. However, because different antibodies develop at different times during the course of infection, it may be possible to distinguish those who are still infectious from those who are no longer infectious. Specifically, immunoglobulin (Ig) M is present in larger amounts while the viral load is still present, while IgG is present in larger amounts later on (see e.g. this and the figure below). So, by testing for the presence of both IgM and IgG it should be possible to identify a large proportion of those who have had COVID-19 but are no longer infectious. (The currently available antibody tests result in about 13 percent false negatives, making them inappropriate as a means of screening out those who do not have COVID-19. But they produce zero false positives, making them ideal for identifying those who definitely have or have had COVID-19). In essence, people whose IgG test is positive but IgM test is negative can then go back to work. In addition, people who have had COVID-19 symptoms, are now symptom-free, and test positive for antibodies, should be allowed to go back to work.
4. Test for SARS-Cov2 among those who test negative for antibodies — and ensure that everyone who tests positive remains in isolation
Those people who test negative for SARS-CoV2 using the quick antibody immunoassay, as well as those who are positive for both IgG and IgM (indicating that they may still be infectious) should then be tested for SARS-CoV2 using the RT-PCR test described above. And those who test negative for SARS-CoV2 should then be permitted to go back to work. But those who test positive should be required to remain in isolation— and seek treatment if necessary.
5. Repeat steps 3 and 4 until nobody tests positive for COVID-19
By repeating steps 3 and 4, it should be possible gradually to enable the vast majority of the population to return to work, and thence to a life of greater normalcy, within a matter of weeks.
6. Some (possibly rather large) caveats
All of this relies on: (a) the ability rapidly to expand testing and (b) widespread compliance with isolation requirements. Neither of these conditions is by any means guaranteed, not least because the rules effectively discriminate in favor of people who have had COVID-19, which may create a perverse incentive to violate not only the isolation requirements but all the recommended hygiene practices — and thereby intentionally become infected with SARS-CoV2 on the presumption that they will then be able to go back to work sooner than otherwise. So, before this is rolled out, it is important to ensure that there will be widespread testing for COVID-19 in a timeframe shorter than the likely total time for contracting and recovering from COVID-19.
In addition, if test results are to be used as a means of establishing a person’s ability to travel and work while others are still under lockdown, it is important that there be a means of verifying the status of individuals. That might be possible through the use of an app, for example; such an app might also provide policymakers to make better resources allocation decisions too.
Also, at-risk individuals should be strongly advised to remain in isolation until there is no further evidence of community transmission.
7. The Mechanics of Testing
Given that there are not currently sufficient tests available for everyone to be tested in most locations, one obvious question is: who should be tested? As noted above, it makes sense initially to target those who have had COVID-19 symptoms and have recovered. Since only those people who have had such symptoms—and possibly their physician if they presented with their symptoms—will know who they are, this will rely largely on trust. (It’s possible that self-reporting apps could help.)
But it may make sense initially to target tests more narrowly. The UK is initially targeting the antibody detection kits to healthcare and other key workers—people who are essential to the continued functioning of the country. That makes sense and could easily be applied in other places.
Assuming that key workers can be supplied with antibody detection kits quickly, distribution should then be opened up more widely. No doubt insurance companies will be making decisions about the purchase of testing kits. Ideally, however, individuals should be able to buy kits such as Scanwell’s without going through a bureaucratic process, whether that be their insurance company or the NHS. And vendors should be free to price kits as they see fit, without worrying about the prospect of being subject to price caps such as those imposed by Medicaid or the VA, which have the perverse effect of incentivising vendors to increase the list price. Finally, in order to increase the supply of tests as rapidly as possible, regulatory agencies should be encouraged to issue emergency approvals as quickly as possible. Having more manufacturers with a diverse array of tests available will increase access to testing more quickly and likely lead to more accurate testing too. Agencies such as the FDA should see this as their absolute priority right now. If the Mayo clinic can compress 6 months’ product development into a month, the FDA can surely do its review far more quickly too. Lives—and the economy—depend upon it.
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony…
Section 2:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…
Its short length and broad implications (“Every contract… in restraint of trade… is declared to be illegal”) didn’t give the courts much to go on in terms of textualism. As for originalism, the legislative history of the Sherman Act is mixed, and no consensus currently exists among experts. In practice, that means enforcement of the antitrust laws in the US has been a product of the evolutionarycommon law process (and has changed over time due to economic learning).
Over the last fifty years, academics, judges, and practitioners have generally converged on the consumer welfare standard as the best approach for protecting market competition. Although some early supporters of aggressive enforcement (e.g., Brandeis and, more recently, Pitofsky) advocated for a more political conception of antitrust, that conception of the law has been decisively rejected by the courts as the contours of the law have evolved through judicial decisionmaking.
In the last few years, however, a movement has reemerged to expand antitrust beyond consumer welfare to include political and social issues, ranging from broadly macroeconomic matters like rising income inequality and declining wages, to sociopolitical concerns like increasing political concentration, environmental degradation, a struggling traditional news industry, and declining localism.
Although we at ICLE are decidedly in the consumer welfare camp, the contested “original intent” of the antitrust laws and the simple progress of evolving interpretation could conceivably support a broader, more-political interpretation. It is, at the very least, a timely and significant question whether and how political and social issues might be incorporated into antitrust law. Yet much of the discussion of politics and antitrust has been heavy on rhetoric and light on substance; it is dominated by non-expert, ideologically driven opinion.
In this blog symposium we seek to offer a more substantive and balanced discussion of the issue. To that end, we invited a number of respected economists, legal scholars, and practitioners to offer their perspectives.
Both Steve Cernak and Zingales and Lancieri offer big picture perspectives. Cernak sees the current debate as, “an opportunity to explain the benefits and limits of antitrust enforcement and the competitive process it is meant to protect.” He then urges “regulatory humility” and outlines what this means in the context of antitrust.
Zingales and Lancieri note that “simply “politicizing” the current antitrust regime would be very dangerous for the economic well-being of nations.” More specifically, they observe that “If used without clear and objective standards, antitrust remedies could easily add an extra layer of uncertainty or could even outright prohibit perfectly legitimate conduct, which would depress competition, investment, and growth.” Nonetheless, they argue that nuanced changes to the application of antitrust law may be justified because, “as markets become more concentrated, incumbent firms become better at distorting the political process in their favor.”
Manne and Stapp question the existence of a causal relationship between market concentration and political power, noting that there is little empirical support for such a claim. Moreover, they warn that politicizing antitrust will inevitably result in more politicized antitrust enforcement actions to the detriment of consumers and democracy.
Mircea argues that antitrust enforcement in the EU is already too political and that enforcement has been too focused on “Big Tech” companies. The result has been to chill investment in technology firms in the EU while failing to address legitimate antitrust violations in other sectors.
Woodcock argues that the excessive focus on “Big Tech” companies as antitrust villains has come in no small part from a concerted effort by “Big Ink” (i.e. media companies), who resent the loss of advertising revenue that has resulted from the emergence of online advertising platforms. Woodcock suggests that the solution to this problem is to ban advertising. (We suspect that this cure would be worse than the disease but will leave substantive criticism to another blog post.)
Stout argues that while consumers may have legitimate grievances with Big Tech companies, these grievances do not justify widening the scope of antitrust, noting that “Concerns about privacy, hate speech, and, more broadly, the integrity of the democratic process are critical issues to wrestle with. But these aren’t antitrust problems.”
Finally, Veljanovski highlights potential problems with per se rules against cartels, noting that in some cases (most notably regulation of common pool resources such as fisheries), long-run consumer welfare may be improved by permitting certain kinds of cartel. However, he notes that in the case of polluting firms, a cartel that raises prices and lowers output is not likely to be the most efficient way to reduce the harms associated with pollution. This is of relevance given the DOJ’s case against certain automobile manufacturers, which are accused of colluding with California to set emission standards that are stricter than required under federal law.
It is tempting to conclude that U.S. antitrust law is not fundamentally broken, so does not require a major fix. Indeed, if any fix is needed, it is that the CWS should be more widely applied both in the U.S. and internationally.
What to make of Wednesday’s decision by the European Commission alleging that Google has engaged in anticompetitive behavior? In this post, I contrast the European Commission’s (EC) approach to competition policy with US antitrust, briefly explore the history of smartphones and then discuss the ruling.
Asked about the EC’s decision the day it was announced, FTC Chairman Joseph Simons noted that, while the market is concentrated, Apple and Google “compete pretty heavily against each other” with their mobile operating systems, in stark contrast to the way the EC defined the market. Simons also stressed that for the FTC what matters is not the structure of the market per se but whether or not there is harm to the consumer. This again contrasts with the European Commission’s approach, which does not require harm to consumers. As Simons put it:
Once they [the European Commission] find that a company is dominant… that imposes upon the company kind of like a fairness obligation irrespective of what the effect is on the consumer. Our regulatory… our antitrust regime requires that there be a harm to consumer welfare — so the consumer has to be injured — so the two tests are a little bit different.
Indeed, and as the history below shows, the popularity of Apple’s iOS and Google’s Android operating systems arose because they were superior products — not because of anticompetitive conduct on the part of either Apple or Google. On the face of it, the conduct of both Apple and Google has led to consumer benefits, not harms. So, from the perspective of U.S. antitrust authorities, there is no reason to take action.
Moreover, there is a danger that by taking action as the EU has done, competition and innovation will be undermined — which would be a perverse outcome indeed. These concerns were reflected in astatement by Senator Mike Lee (R-UT):
Today’s decision by the European Commission to fine Google over $5 billion and require significant changes to its business model to satisfy EC bureaucrats has the potential to undermine competition and innovation in the United States,” Sen. Lee said. “Moreover, the decision further demonstrates the different approaches to competition policy between U.S. and EC antitrust enforcers. As discussed at the hearing held last December before the Senate’s Subcommittee on Antitrust, Competition Policy & Consumer Rights, U.S. antitrust agencies analyze business practices based on the consumer welfare standard. This analytical framework seeks to protect consumers rather than competitors. A competitive marketplace requires strong antitrust enforcement. However, appropriate competition policy should serve the interests of consumers and not be used as a vehicle by competitors to punish their successful rivals.
Ironically, the fundamental basis for the Commission’s decision is an analytical framework developed by economists at Harvard in the 1950s, which presumes that the structure of a market determines the conduct of the participants, which in turn presumptively affects outcomes for consumers. This “structure-conduct-performance” paradigm has been challenged both theoretically and empirically (and by “challenged,” I mean “demolished”).
Maintaining, as EC Commissioner Vestager has, that “What would serve competition is to have more players,” is to adopt a presumption regarding competition rooted in the structure of the market, without sufficient attention to the facts on the ground. As French economist Jean Tirole noted in his Nobel Prize lecture:
Economists accordingly have advocated a case-by-case or “rule of reason” approach to antitrust, away from rigid “per se” rules (which mechanically either allow or prohibit certain behaviors, ranging from price-fixing agreements to resale price maintenance). The economists’ pragmatic message however comes with a double social responsibility. First, economists must offer a rigorous analysis of how markets work, taking into account both the specificities of particular industries and what regulators do and do not know….
Second, economists must participate in the policy debate…. But of course, the responsibility here goes both ways. Policymakers and the media must also be willing to listen to economists.
In good Tirolean fashion, we begin with an analysis of how the market for smartphones developed. What quickly emerges is that the structure of the market is a function of intense competition, not its absence. And, by extension, mandating a different structure will likely impede competition, or, at the very least, will not likely contribute to it.
A brief history of smartphone competition
In 2006, Nokia’s N70 became the first smartphone to sell more than a million units. It was a beautiful device, with a simple touch screen interface and real push buttons for numbers. The following year, Apple released its first iPhone. It sold 7 million units — about the same as Nokia’s N95 and slightly less than LG’s Shine. Not bad, but paltry compared to the sales of Nokia’s 1200 series phones, which had combined sales of over 250 million that year — about twice the total of all smartphone sales in 2007.
By 2017, smartphones had come to dominate the market, with total sales of over1.5 billion. At the same time, the structure of the market has changed dramatically. In the first quarter of 2018, Apple’s iPhone X and iPhone 8 were thetwo best-selling smartphones in the world. In total, Apple shipped just over52 million phones, accounting for 14.5% of the global market. Samsung, which has a wider range of devices, sold even more: 78 million phones, or 21.7% of the market. At third and fourth place were Huawei (11%) and Xiaomi (7.5%). Nokia and LG didn’t even make it into the top 10, with market shares of only 3% and1% respectively.
Several factors have driven this highly dynamic market. Dramatic improvements in cellular data networks have played a role. But arguably of greater importance has been the development of software that offers consumers an intuitive and rewarding experience.
Apple’s iOS and Google’s Android operating systems have proven to be enormously popular among both users and app developers. This has generated synergies — or what economists call network externalities — as more apps have been developed, so more people are attracted to the ecosystem and vice versa, leading to a virtuous circle that benefits both users and app developers.
By contrast, Nokia’s early smartphones, including the N70 and N95, ran Symbian, the operating system developed for Psion’s handheld devices, which had a clunkier user interface and wasmore difficult to code — so it was less attractive to both users and developers. In addition, Symbian lacked an effective means of solving the problem of fragmentation of the operating system across different devices, which made it difficult for developers to create apps that ran across the ecosystem — something both Apple (through its closed system) and Google (through agreements with carriers) were able to address. Meanwhile, Java’s MIDP used in LG’s Shine, and its successor J2ME imposed restrictions on developers (such as prohibiting access to files, hardware, and network connections) that seem to have made it less attractive than Android.
The relative superiority of their operating systems enabled Apple and the manufacturers of Android-based phones to steal a march on the early leaders in the smartphone revolution.
The fact that Google allows smartphone manufacturers to install Android for free, distributes Google Play and other apps in a free bundle, and pays such manufacturers for preferential treatment for Google Search, has also kept the cost of Android-based smartphones down. As a result, Android phones are the cheapest on the market, providing a powerful experience for as little as $50. It is reasonable to conclude from this that innovation, driven by fierce competition, has led to devices, operating systems, and apps that provide enormous benefits to consumers.
The Commission decision would harm device manufacturers, app developers and consumers
The EC’s decision seems to disregard the history of smartphone innovation and competition and their ongoing consequences. As Dirk Auer explains, the Open Handset Alliance (OHA) was created specifically to offer an effective alternative to Apple’s iPhone — and it worked. Indeed, it worked so spectacularly that Android is installed on about 80% of all new phones. This success was the result of several factors that the Commission now seeks to undermine:
First, in order to maintain order within the Android universe, and thereby ensure that apps developed for Android would function on the vast majority of Android devices, Google and the OHA sought to limit the extent to which Android “forks” could be created. (Apple didn’t face this problem because its source code is proprietary, so cannot be modified by third-party developers.) One way Google does this is by imposing restrictions on the licensing of its proprietary apps, such as the Google Play store (a repository of apps, similar to Apple’s App Store).
Device manufacturers that don’t conform to these restrictions may still build devices with their forked version of Android — but without those Google apps. Indeed, Amazon chooses to develop a non-conforming version of Android and built its own app repository for its Fire devices (though it is still possible to add the Google Play Store). That strategy seems to be working for Amazon in the tablet market; in 2017 it rose past Samsung to become the second biggest manufacturer of tablets worldwide, after Apple.
Second, in order to be able to offer Android for free to smartphone manufacturers, Google sought to develop unique revenue streams (because, although the software is offered for free, it turns out that software developers generally don’t work for free). The main way Google did this was by requiring manufacturers that choose to install Google Play also to install its browser (Chrome) and search tools, which generate revenue from advertising. At the same time, Google kept its platform open by permitting preloads of rivals’ apps and creating a marketplace where rivals can also reach scale. Mozilla’s Firefox browser, for example, has been downloaded over 100 million times on Android.
The importance of these factors to the success of Android is acknowledged by the EC. But instead of treating them as legitimate business practices that enabled the development of high-quality, low-cost smartphones and a universe of apps that benefits billions of people, the Commission simply asserts that they are harmful, anticompetitive practices.
For example, the Commission asserts that
In order to be able to pre-install on their devices Google’s proprietary apps, including the Play Store and Google Search, manufacturers had to commit not to develop or sell even a single device running on an Android fork. The Commission found that this conduct was abusive as of 2011, which is the date Google became dominant in the market for app stores for the Android mobile operating system.
This is simply absurd, to say nothing of ahistorical. As noted, the restrictions on Android forks plays an important role in maintaining the coherency of the Android ecosystem. If device manufacturers were able to freely install Google apps (and other apps via the Play Store) on devices running problematic Android forks that were unable to run the apps properly, consumers — and app developers — would be frustrated, Google’s brand would suffer, and the value of the ecosystem would be diminished. Extending this restriction to all devices produced by a specific manufacturer, regardless of whether they come with Google apps preinstalled, reinforces the importance of the prohibition to maintaining the coherency of the ecosystem.
It is ridiculous to say that something (efforts to rein in Android forking) that made perfect sense until 2011 and that was central to the eventual success of Android suddenly becomes “abusive” precisely because of that success — particularly when the pre-2011 efforts were often viewed as insufficient and unsuccessful (a January 2012 Guardian Technology Blog post, “How Google has lost control of Android,” sums it up nicely).
Meanwhile, if Google is unable to tie pre-installation of its search and browser apps to the installation of its app store, then it will have less financial incentive to continue to maintain the Android ecosystem. Or, more likely, it will have to find other ways to generate revenue from the sale of devices in the EU — such as charging device manufacturers for Android or Google Play. The result is that consumers will be harmed, either because the ecosystem will be degraded, or because smartphones will become more expensive.
The troubling absence of Apple from the Commission’s decision
In addition, the EC’s decision is troublesome in other ways. First, for its definition of the market. The ruling asserts that “Through its control over Android, Google is dominant in the worldwide market (excluding China) for licensable smart mobile operating systems, with a market share of more than 95%.” But “licensable smart mobile operating systems” is a very narrow definition, as it necessarily precludes operating systems that are not licensable — such as Apple’s iOS and RIM’s Blackberry OS. Since Apple has nearly 25% of the market share of smartphones in Europe, the European Commission has — through its definition of the market — presumed away the primary source of effective competition. As Pinar Akmanhas noted:
How can Apple compete with Google in the market as defined by the Commission when Apple allows only itself to use its operating system only on devices that Apple itself manufactures?
The EU then invents a series of claims regarding the lack of competition with Apple:
end user purchasing decisions are influenced by a variety of factors (such as hardware features or device brand), which are independent from the mobile operating system;
It is not obvious that this is evidence of a lack of competition. A better explanation is that the EU’s narrow definition of the market is defective. In fact, one could easily draw the opposite conclusion of that drawn by the Commission: the fact that purchasing decisions are driven by various factors suggests that there is substantial competition, with phone manufacturers seeking to design phones that offer a range of features, on a number of dimensions, to best capture diverse consumer preferences. They are able to do this in large part precisely because consumers are able to rely upon a generally similar operating system and continued access to the apps that they have downloaded. As Tim Cook likes to remind his investors, Apple is quite successful at targeting “Android switchers” to switch to iOS.
Apple devices are typically priced higher than Android devices and may therefore not be accessible to a large part of the Android device user base;
And yet, in the first quarter of 2018, Apple phones accounted for five of the top ten selling smartphones worldwide. Meanwhile, several competing phones, including thefifth and sixth best-sellers, Samsung’s Galaxy S9 and S9+, sell forsimilar prices to themostexpensive iPhones. And a refurbished iPhone 6 can be had for less than $150.
Android device users face switching costs when switching to Apple devices, such as losing their apps, data and contacts, and having to learn how to use a new operating system;
This is, of course, true for any system switch. And yet the growing market share of Apple phones suggests that some users are willing to part with those sunk costs. Moreover, the increasing predominance of cloud-based and cross-platform apps, as well as Apple’s own “Move to iOS” Android app (which facilitates the transfer of users’ data from Android to iOS), means that the costs of switching border on trivial. As mentioned above, Tim Cook certainly believes in “Android switchers.”
even if end users were to switch from Android to Apple devices, this would have limited impact on Google’s core business. That’s because Google Search is set as the default search engine on Apple devices and Apple users are therefore likely to continue using Google Search for their queries.
This is perhaps the most bizarre objection of them all. The fact that Apple chooses to install Google search as the default demonstrates that consumers prefer that system over others. Indeed, this highlights a fundamental problem with the Commission’s own rationale, As Akman notes:
It is interesting that the case appears to concern a dominant undertaking leveraging its dominance from a market in which it is dominant (Google Play Store) into another market in which it is also dominant (internet search). As far as this author is aware, most (if not all?) cases of tying in the EU to date concerned tying where the dominant undertaking leveraged its dominance in one market to distort or eliminate competition in an otherwise competitive market.
Conclusion
As the foregoing demonstrates, the EC’s decision is based on a fundamental misunderstanding of the nature and evolution of the market for smartphones and associated applications. The statement by Commissioner Vestager quoted above — that “What would serve competition is to have more players” — belies this misunderstanding and highlights the erroneous assumptions underpinning the Commission’s analysis, which is wedded to a theory of market competition that was long ago thrown out by economists.
And, thankfully, it appears that the FTC Chairman is aware of at least some of the flaws in the EC’s conclusions.
Google will undoubtedly appeal the Commission’s decision. For the sakes of the millions of European consumers who rely on Android-based phones and the millions of software developers who provide Android apps, let’s hope that they succeed.
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