Archives For essential facilities

No surprise here.  The WSJ announced it was coming yesterday, and today Google publicly acknowledged that it has received subpoenas related to the Commission’s investigation.  Amit Singhal of Google acknowledged the FTC subpoenas at the Google Public Policy Blog:

At Google, we’ve always focused on putting the user first. We aim to provide relevant answers as quickly as possible—and our product innovation and engineering talent have delivered results that users seem to like, in a world where the competition is only one click away. Still, we recognize that our success has led to greater scrutiny. Yesterday, we received formal notification from the U.S. Federal Trade Commission that it has begun a review of our business. We respect the FTC’s process and will be working with them (as we have with other agencies) over the coming months to answer questions about Google and our services.

It’s still unclear exactly what the FTC’s concerns are, but we’re clear about where we stand. Since the beginning, we have been guided by the idea that, if we focus on the user, all else will follow. No matter what you’re looking for—buying a movie ticket, finding the best burger nearby, or watching a royal wedding—we want to get you the information you want as quickly as possible. Sometimes the best result is a link to another website. Other times it’s a news article, sports score, stock quote, a video or a map.

It is too early to know the precise details of the FTC’s interest.  However, We’ve been discussing various aspects of the investigation here at TOTM for the last year.  Indeed, we’ve written two articles focused upon framing and evaluating a potential antitrust case against Google as well as the misguided attempts to use the antitrust laws to impose “search neutrality.”  We’ve also written a number of blog posts on Google and antitrust (see here for an archive).

For now, until more details become available, it strikes us that the following points should be emphasized:

  • For several reasons, the Federal Trade Commission’s investigation into Google’s business practices seems misguided from the perspective of competition policy directed toward protecting consumer welfare.  We hope and expect that the agency will conclude its investigation quickly and without any enforcement action against the company.  But it is important to note that this is merely an investigation–and at that, one that is not necessarily new.  More importantly, it is not a full-fledged enforcement action, much less a successful one; and although such investigations are extraordinarily costly for their targets, there is not yet (and there may never be) even any allegation of liability inherent in an investigation.
  • In any such case, the focus of concern must always be on consumer harm–not harm to certain competitors.  This is a well known antitrust maxim, but it is certainly appropriately applied here.  We are skeptical that consumer harm is present in this case, and our writings have explored this issue at length.  In brief, Google of today is not the Microsoft of 1998, and the issues and circumstances that gave rise to liability in the Microsoft case are uniformly absent here.
  • Related, most of the claims we have seen surrounding Google’s conduct here are of the vertical sort–where Google has incorporated (either by merger, business development or technological development) and developed new products or processes to evolve its basic search engine in novel ways by, for instance, offering results in the form of maps or videos, or integrating travel-related search results into its traditional offerings.  As we’ve written, these sorts of vertical activities are almost always pro-competitive, despite claims to the contrary by aggrieved competitors, and we should confront such claims with extreme skepticism.   Vertical claims instigated by rivals are historically viewed with skepticism in antitrust circles.  Failing to subject these claims to scrutiny focused on consumer welfare risks would be a mistake whose costs would be borne largely by consumers.
  • The fact that Google’s rivals–including most importantly Microsoft itself–are complaining about the company is, ironically, some of the very best evidence that Google’s practices are in fact pro-consumer and pro-competitive.  It is always problematic when competitors use the regulatory system to try to hamstring their rivals, and we should be extremely wary of claims arising from such conduct.
  • We are also troubled by statements emanating from FTC Commissioners suggesting that the agency intends to pursue this case as a so-called “Section 5” case rather than the more traditional “Section 2” case.  We will have to wait to see whether any complaint is actually brought and, if so, under what statutory authority, but a Section 5 case against Google raises serious concerns about effective and efficient antitrust enforcement.  Commissioner Rosch has claimed that Section 5 could address conduct that has the effect of “reducing consumer choice”—an effect that some commentators support without requiring any evidence that the conduct actually reduces consumer welfare.  Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by pro-competitive behavior.  This would portend an extremely problematic shift in direction for US antitrust law.

Together Geoffrey Manne and Joshua Wright are the authors of two articles on the antitrust law and economics of Google and search engines more broadly, Google and the Limits of Antitrust: The Case Against the Case Against Google, and If Search Neutrality Is the Answer, What’s the Question?

Manne is also the author of “The Problem of Search Engines as Essential Facilities: An Economic & Legal Assessment,” an essay debunking arguments for regulation of search engines to preserve so-called “search neutrality” in TechFreedom’s 2011 book, The Next Digital Decade: Essays on the Future of the Internet.

Among our recent blog posts on the topic are the following:

What’s Really Motivating the Pursuit of Google

Barnett v. Barnett on Antitrust

Sacrificing Consumer Welfare in the Search Bias Debate

Type I Errors in Action, Google Edition

Google, Antitrust, and First Principles

Microsoft Comes Full Circle

Search Bias and Antitrust

The EU Tightens the Noose Around Google

When Google’s Competitors Attack

Antitrust Karma, The Microsoft-Google Wars, and a Question for Rick Rule

DOJ Gears Up to Challenge the Proposed Google ITA Merger

Today at 12:30 at the Capitol Visitor Center, TechFreedom is hosting a discussion on the regulation of search engines:  “Search Engine Regulation: A Solution in Search of a Problem?”

The basics:

Allegations of “search bias” have led to increased scrutiny of Google, including active investigations in the European Union and Texas, a possible FTC investigation, and sharply-worded inquiries from members of Congress. But what does “search bias” really mean? Does it demand preemptive “search neutrality” regulation, requiring government oversight of how search results are ranked? Is antitrust intervention required to protect competition? Or can market forces deal with these concerns?

A panel of leading thinkers on Internet law will explore these questions at a luncheon hosted by TechFreedom, a new digital policy think tank. The event will take place at the Capitol Visitor Center room SVC-210/212 onTuesday, June 14 from 12:30 to 2:30pm, and include a complimentary lunch. CNET’s Declan McCullagh, a veteran tech policy journalist, will moderate a panel of four legal experts:

More details are here, and the event will be streaming live from that link as well.  If all goes well, it will also be accessible right here:

http://www.ustream.tv/flash/viewer.swf

Live Broadcasting by Ustream

Tom Barnett (Covington & Burling) represents Expedia in, among other things, its efforts to persuade a US antitrust agency to bring a case against Google involving the alleged use of its search engine results to harm competition.  In that role, in a recent piece in Bloomberg, Barnett wrote the following things:

  • “The U.S. Justice Department stood up for consumers last month by requiring Google Inc. to submit to significant conditions on its takeover of ITA Software Inc., a company that specializes in organizing airline data.”
  • “According to the department, without the judicially monitored restrictions, Google’s control over this key asset “would have substantially lessened competition among providers of comparative flight search websites in the United States, resulting in reduced choice and less innovation for consumers.”
  • “Now Google also offers services that compete with other sites to provide specialized “vertical” search services in particular segments (such as books, videos, maps and, soon, travel) and information sought by users (such as hotel and restaurant reviews in Google Places).  So Google now has an incentive to use its control over search traffic to steer users to its own services and to foreclose the visibility of competing websites.”
  • “Search Display: Google has led users to expect that the top results it displays are those that its search algorithm indicates are most likely to be relevant to their query. This is why the vast majority of user clicks are on the top three or four results.  Google now steers users to its own pages by inserting links to its services at the top of the search results page, often without disclosing what it has done. If you search for hotels in a particular city, for example, Google frequently inserts links to its Places pages.”
  • “All of these activities by Google warrant serious antitrust scrutiny. … It’s important for consumers that antitrust enforcers thoroughly investigate Google’s activities to ensure that competition and innovation on the Internet remain vibrant. The ITA decision is a great win for consumers; even bigger issues and threats remain.”

The themes are fairly straightforward: (1) Google is a dominant search engine, and its size and share of the search market warrants concern, (2) Google is becoming vertically integrated, which also warrants concern, (3) Google uses its search engine results in manner that harms rivals through actions that “warrant serious antitrust scrutiny,” and (4) Barnett appears to applaud judicial monitoring of Google’s contracts involving one of its “key assets.”   Sigh.

The notion of firms “coming full circle” in antitrust, a la Microsoft’s journey from antitrust defendant to complainant, is nothing new.   Neither is it too surprising or noteworthy when an antitrust lawyer, including very good ones like Barnett, say things when representing a client that are at tension with prior statements made when representing other clients.  By itself, that is not really worth a post.  What I think is interesting here is that the prior statements from Barnett about the appropriate scope of antitrust enforcement generally, and monopolization in the specific, were made as Assistant Attorney General for the Antitrust Division — and thus, I think are more likely to reflect Barnett’s actual views on the law, economics, and competition policy than the statements that appear in Bloomberg.  The comments also expose some shortcomings in the current debate over competition policy and the search market.

But lets get to it.  Here is a list of statements that Barnett made in a variety of contexts while at the Antitrust Division.

  • “Mere size does not demonstrate competitive harm.”  (Section 2 of the Sherman Act Presentation, June 20, 2006)
  • “…if the government is too willing to step in as a regulator, rivals will devote their resources to legal challenges rather than business innovation. This is entirely rational from an individual rival’s perspective: seeking government help to grab a share of your competitor’s profit is likely to be low cost and low risk, whereas innovating on your own is a risky, expensive proposition. But it is entirely irrational as a matter of antitrust policy to encourage such efforts.
    (Interoperability Between Antitrust and Intellectual Property, George Mason University School of Law Symposium, September 13, 2006)
  • “Rather, rivals should be encouraged to innovate on their own – to engage in leapfrog or Schumpeterian competition. New innovation expands the pie for rivals and consumers alike. We would do well to heed Justice Scalia’s observation in Trinko, that creating a legal avenue for such challenges can ‘distort investment’ of both the dominant and the rival firms.” (emphasis added)
    (Interoperability Between Antitrust and Intellectual Property, George Mason University School of Law Symposium, September 13, 2006)
  • “Because a Section 2 violation hurts competitors, they are often the focus of section 2 remedial efforts.  But competitor well-being, in itself, is not the purpose of our antitrust laws.  The Darwinian process of natural selection described by Judge Easterbrook and Professor Schumpeter cannot drive growth and innovation unless tigers and other denizens of the jungle are forced to survive the crucible of competition.”  (Cite).
  • “Implementing a remedy that is too broad runs the risk of distorting markets, impairing competition, and prohibiting perfectly legal and efficient conduct.” (same)
  • “Access remedies also raise efficiency and innovation concerns.  By forcing a firm to share the benefits of its investments and relieving its rivals of the incentive to develop comparable assets of their own, access remedies can reduce the competitive vitality of an industry.” (same)
  • “The extensively discussed problems with behavioral remedies need not be repeated in detail here.  Suffice it to say that agencies and courts lack the resources and expertise to run businesses in an efficient manner. … [R]emedies that require government entities to make business decisions or that require extensive monitoring or other government activity should be avoided wherever possible.”  (Cite).
  • “We need to recognize the incentive created by imposing a duty on a defendant to provide competitors access to its assets.  Such a remedy can undermine the incentive of those other competitors to develop their own assets as well as undermine the incentive for the defendant competitor to develop the assets in the first instance.  If, for example, you compel access to the single bridge across the Missouri River, you might improve competitive options in the short term but harm competition in the longer term by ending up with only one bridge as opposed to two or three.” (same)
  • “There seems to be consensus that we should prohibit unilateral conduct only where it is demonstrated through rigorous economic analysis to harm competition and thereby harm consumer welfare.” (same)

I’ll take Barnett (2006-08) over Barnett (2011) in a technical knockout.  Concerns about administrable antitrust remedies, unintended consequences of those remedies, error costs, helping consumers and restoring competition rather than merely giving a handout to rivals, and maintaining the incentive to compete and innovate are all serious issues in the Section 2 context.  Antitrust scholars from Epstein and Posner to Areeda and Hovenkamp and others have all recognized these issues — as did Barnett when he was at the DOJ (and no doubt still).  I do not fault him for the inconsistency.  But on the merits, the current claims about the role of Section 2 in altering competition in the search engine space, and the applause for judicially monitored business activities, runs afoul of the well grounded views on Section 2 and remedies that Barnett espoused while at the DOJ.

Let me end with one illustration that I think drives the point home.   When one compares Barnett’s column in Bloomberg to his speeches at DOJ, there is one difference that jumps off the page and I think is illustrative of a real problem in the search engine antitrust debate.  Barnett’s focus in the Bloomberg piece, as counsel for Expedia, is largely harm to rivals.  Google is big.  Google has engaged in practices that might harm various Internet businesses.  The focus is not consumers, i.e. the users.  They are mentioned here and there — but in the context of Google’s practices that might “steer” users toward their own sites.  As Barnett (2006-08) well knew, and no doubt continues to know, is that vertical integration and vertical contracts with preferential placement of this sort can well be (and often are) pro-competitive.  This is precisely why Barnett (2006-08) counseled requiring hard proof of harm to consumers before he would recommend much less applaud an antitrust remedy tinkering with the way search business is conducted and running the risk of violating the “do no harm” principle.  By way of contrast, Barnett’s speeches at the DOJ frequently made clear that the notion that the antitrust laws “protection competition, not competitors,” was not just a mantra, but a serious core of sensible Section 2 enforcement.

The focus can and should remain upon consumers rather than rivals.  The economic question is whether, when and if Google uses search results to favor its own content, that conduct is efficient and pro-consumer or can plausibly cause antitrust injury.  Those leaping from “harm to rivals” to harm to consumers should proceed with caution.  Neither economic theory nor empirical evidence indicate that the leap is an easy one.  Quite the contrary, the evidence suggests these arrangements are generally pro-consumer and efficient.  On a case-by-case analysis, the facts might suggest a competitive problem in any given case.

Barnett (2006-08) has got Expedia’s antitrust lawyer dead to rights on this one.  Consumers would be better off if the antitrust agencies took the advice of the former and ignored the latter.

Josh and I have just completed a white paper on search neutrality/search bias and the regulation of search engines.  The paper is this year’s first in the ICLE Antitrust & Consumer Protection White Paper Series:

If Search Neutrality Is the Answer, What’s the Question?


Geoffrey A. Manne

(Lewis & Clark Law School and ICLE)

and

Joshua D. Wright

(George Mason Law School & Department of Economics and ICLE)

In this paper we evaluate both the economic and non-economic costs and benefits of search bias. In Part I we define search bias and search neutrality, terms that have taken on any number of meanings in the literature, and survey recent regulatory concerns surrounding search bias. In Part II we discuss the economics and technology of search. In Part III we evaluate the economic costs and benefits of search bias. We demonstrate that search bias is the product of the competitive process and link the search bias debate to the economic and empirical literature on vertical integration and the generally-efficient and pro-competitive incentives for a vertically integrated firm to discriminate in favor of its own content. Building upon this literature and its application to the search engine market, we conclude that neither an ex ante regulatory restriction on search engine bias nor the imposition of an antitrust duty to deal upon Google would benefit consumers. In Part V we evaluate the frequent claim that search engine bias causes other serious, though less tangible, social and cultural harms. As with the economic case for search neutrality, we find these non-economic justifications for restricting search engine bias unconvincing, and particularly susceptible to the well-known Nirvana Fallacy of comparing imperfect real world institutions with romanticized and unrealistic alternatives

Search bias is not a function of Google’s large share of overall searches. Rather, it is a feature of competition in the search engine market, as evidenced by the fact that its rivals also exercise editorial and algorithmic control over what information is provided to consumers and in what manner. Consumers rightly value competition between search engine providers on this margin; this fact alone suggests caution in regulating search bias at all, much less with an ex ante regulatory schema which defines the margins upon which search providers can compete. The strength of economic theory and evidence demonstrating that regulatory restrictions on vertical integration are costly to consumers, impede innovation, and discourage experimentation in a dynamic marketplace support the conclusion that neither regulation of search bias nor antitrust intervention can be justified on economic terms. Search neutrality advocates touting the non-economic virtues of their proposed regime should bear the burden of demonstrating that they exist beyond the Nirvana Fallacy of comparing an imperfect private actor to a perfect government decision-maker, and further, that any such benefits outweigh the economic costs.

CLICK HERE TO DOWNLOAD THE PAPER


Commentators who see Trinko as an impediment to the claim that antitrust law can take care of harmful platform access problems (and thus that prospective rate regulation (i.e., net neutrality) is not necessary), commit an important error in making their claim–and it is a similar error committed by those who advocate for search neutrality regulation, as well.  In both cases, proponents are advocating for a particular remedy to an undemonstrated problem, rather than attempting to assess whether there is really a problem in the first place.  In the net neutrality context, it may be true that Trinko would prevent the application of antitrust laws to mandate neutral access as envisioned by Free Press, et al.  But that is not the same as saying Trinko precludes the application of antitrust laws.  In fact, there is nothing in Trinko that would prevent regulators and courts from assessing the anticompetitive consequences of particular network management decisions undertaken by a dominant network provider.  This is where the concerns do and should lie–not with an aesthetic preference for a particular form of regulation putatively justified as a response to this concern.  Indeed, “net neutrality” as an antitrust remedy, to the extent that it emanates from essential facilities arguments, is and should be precluded by Trinko.

But the Court seems to me to be pretty clear in Trinko that an antitrust case can be made, even against a firm regulated under the Telecommunications Act:

Section 601(b)(1) of the 1996 Act is an antitrust-specific saving clause providing that “nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws.”  This bars a finding of implied immunity. As the FCC has put the point, the saving clause preserves those “claims that satisfy established antitrust standards.”

But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally inconsistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws.

There is no problem assessing run of the mill anticompetitive conduct using “established antitrust standards.”  But that doesn’t mean that a net neutrality remedy can be constructed from such a case, nor does it mean that precisely the same issues that proponents of net neutrality seek to resolve with net neutrality are necessarily cognizable anticompetitive concerns.

For example, as Josh noted the other day, quoting Tom Hazlett, proponents of net neutrality seem to think that it should apply indiscriminately against even firms with no monopoly power (and thus no ability to inflict consumer harm in the traditional antitrust sense).  Trinko (along with a vast quantity of other antitrust precedent) would prevent the application of antitrust laws to reach this conduct–and thus, indeed, antitrust and net neutrality as imagined by its proponents are not coextensive.  I think this is very much to the good.  But, again, nothing in Trinko or elsewhere in the antitrust laws would prohibit an antitrust case against a dominant firm engaged in anticompetitive conduct just because it was also regulated by the FCC.

Critics point to language like this in Trinko to support their contrary claim:

One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anticompetitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny.

But I don’t think that helps them at all.  What the Court is saying is not that one regulatory scheme precludes the other, but rather that if a regulatory scheme mandates conduct that makes the actuality of anticompetitive harm less likely, then the application of necessarily-imperfect antitrust law is likely to do more harm than good.  Thus the Court notes that

The regulatory framework that exists in this case demonstrates how, in certain circumstances, “regulation significantly diminishes the likelihood of major antitrust harm.”

But this does not say that regulation precludes the application of antitrust law.  Nor does it preclude the possibility that antitrust harm can still exist; nor does it suggest that any given regulatory regime reduces the likelihood of any given anticompetitive harm–and if net neutrality proponents could show that the regulatory regime did not in fact diminish the likelihood of antitrust harm, nothing in Trinko would suggest that antitrust should not apply.

So let’s get out there and repeal that FCC net neutrality order and let antitrust deal with any problems that might arise.