Archives For international

Earlier this year the UK government announced it was adopting the main recommendations of the Furman Report into competition in digital markets and setting up a “Digital Markets Taskforce” to oversee those recommendations being put into practice. The Competition and Markets Authority’s digital advertising market study largely came to similar conclusions (indeed, in places it reads as if the CMA worked backwards from those conclusions).

The Furman Report recommended that the UK should overhaul its competition regime with some quite significant changes to regulate the conduct of large digital platforms and make it harder for them to acquire other companies. But, while the Report’s panel is accomplished and its tone is sober and even-handed, the evidence on which it is based does not justify the recommendations it makes.

Most of the citations in the Report are of news reports or simple reporting of data with no analysis, and there is very little discussion of the relevant academic literature in each area, even to give a summary of it. In some cases, evidence and logic are misused to justify intuitions that are just not supported by the facts.

Killer acquisitions

One particularly bad example is the report’s discussion of mergers in digital markets. The Report provides a single citation to support its proposals on the question of so-called “killer acquisitions” — acquisitions where incumbent firms acquire innovative startups to kill their rival product and avoid competing on the merits. The concern is that these mergers slip under the radar of current merger control either because the transaction is too small, or because the purchased firm is not yet in competition with the incumbent. But the paper the Report cites, by Colleen Cunningham, Florian Ederer and Song Ma, looks only at the pharmaceutical industry. 

The Furman Report says that “in the absence of any detailed analysis of the digital sector, these results can be roughly informative”. But there are several important differences between the drug markets the paper considers and the digital markets the Furman Report is focused on. 

The scenario described in the Cunningham, et al. paper is of a patent holder buying a direct competitor that has come up with a drug that emulates the patent holder’s drug without infringing on the patent. As the Cunningham, et al. paper demonstrates, decreases in development rates are a feature of acquisitions where the acquiring company holds a patent for a similar product that is far from expiry. The closer a patent is to expiry, the less likely an associated “killer” acquisition is. 

But tech typically doesn’t have the clear and predictable IP protections that would make such strategies reliable. The long and uncertain development and approval process involved in bringing a drug to market may also be a factor.

There are many more differences between tech acquisitions and the “killer acquisitions” in pharma that the Cunningham, et al. paper describes. SO-called “acqui-hires,” where a company is acquired in order to hire its workforce en masse, are common in tech and explicitly ruled out of being “killers” by this paper, for example: it is not harmful to overall innovation or output overall if a team is moved to a more productive project after an acquisition. And network effects, although sometimes troubling from a competition perspective, can also make mergers of platforms beneficial for users by growing the size of that platform (because, of course, one of the points of a network is its size).

The Cunningham, et al. paper estimates that 5.3% of pharma acquisitions are “killers”. While that may seem low, some might say it’s still 5.3% too much. However, it’s not obvious that a merger review authority could bring that number closer to zero without also rejecting more mergers that are good for consumers, making people worse off overall. Given the number of factors that are specific to pharma and that do not apply to tech, it is dubious whether the findings of this paper are useful to the Furman Report’s subject at all. Given how few acquisitions are found to be “killers” in pharma with all of these conditions present, it seems reasonable to assume that, even if this phenomenon does apply in some tech mergers, it is significantly rarer than the ~5.3% of mergers Cunningham, et al. find in pharma. As a result, the likelihood of erroneous condemnation of procompetitive mergers is significantly higher. 

In any case, there’s a fundamental disconnect between the “killer acquisitions” in the Cunningham, et al. paper and the tech acquisitions described as “killers” in the popular media. Neither Facebook’s acquisition of Instagram nor Google’s acquisition of Youtube, which FTC Commissioner Rohit Chopra recently highlighted, would count, because in neither case was the acquired company “killed.” Nor were any of the other commonly derided tech acquisitions — e.g., Facebook/Whatsapp, Google/Waze, Microsoft.LinkedIn, or Amazon/Whole Foods — “killers,” either. 

In all these high-profile cases the acquiring companies expanded the service and invested more in them. One may object that these services would have competed with their acquirers had they remained independent, but this is a totally different argument to the scenarios described in the Cunningham, et al. paper, where development of a new drug is shut down by the acquirer ostensibly to protect their existing product. It is thus extremely difficult to see how the Cunningham, et al. paper is even relevant to the digital platform context, let alone how it could justify a wholesale revision of the merger regime as applied to digital platforms.

A recent paper (published after the Furman Report) does attempt to survey acquisitions by Google, Amazon, Facebook, Microsoft, and Apple. Out of 175 acquisitions in the 2015-17 period the paper surveys, only one satisfies the Cunningham, et al. paper’s criteria for being a potentially “killer” acquisition — Facebook’s acquisition of a photo sharing app called Masquerade, which had raised just $1 million in funding before being acquired.

In lieu of any actual analysis of mergers in digital markets, the Report falls back on a puzzling logic:

To date, there have been no false positives in mergers involving the major digital platforms, for the simple reason that all of them have been permitted. Meanwhile, it is likely that some false negatives will have occurred during this time. This suggests that there has been underenforcement of digital mergers, both in the UK and globally. Remedying this underenforcement is not just a matter of greater focus by the enforcer, as it will also need to be assisted by legislative change.

This is very poor reasoning. It does not logically follow that the (presumed) existence of false negatives implies that there has been underenforcement, because overenforcement carries costs as well. Moreover, there are strong reasons to think that false positives in these markets are more costly than false negatives. A well-run court system might still fail to convict a few criminals because the cost of accidentally convicting an innocent person was so high.

The UK’s competition authority did commission an ex post review of six historical mergers in digital markets, including Facebook/Instagram and Google/Waze, two of the most controversial in the UK. Although it did suggest that the review process could have been done differently, it also highlighted efficiencies that arose from each, and did not conclude that any has led to consumer detriment.

Recommendations

The Report is vague about which mergers it considers to have been uncompetitive, and apart from the aforementioned text it does not really attempt to justify its recommendations around merger control. 

Despite this, the Report recommends a shift to a ‘balance of harms’ approach. Under the current regime, merger review focuses on the likelihood that a merger would reduce competition which, at least, gives clarity about the factors to be considered. A ‘balance of harms’ approach would require the potential scale (size) of the merged company to be considered as well. 

This could give basis for blocking any merger at all on ‘scale’ grounds. After all, if a photo editing app with a sharing timeline can grow into the world’s second largest social network, how could a competition authority say with any confidence that some other acquisition might not prevent the emergence of a new platform on a similar scale, however unlikely? This could provide a basis for blocking almost any acquisition by an incumbent firm, and make merger review an even more opaque and uncertain process than it currently is, potentially deterring efficiency-raising mergers or leading startups that would like to be acquired to set up and operate overseas instead (or not to be started up in the first place).

The treatment of mergers is just one example of the shallowness of the Report. In many other cases — the discussions of concentration and barriers to entry in digital markets, for example — big changes are recommended on the basis of a handful of papers or less. Intuition repeatedly trumps evidence and academic research.

The Report’s subject is incredibly broad, of course, and one might argue that such a limited, casual approach is inevitable. In this sense the Report may function perfectly well as an opening brief introducing the potential range of problems in the digital economy that a rational competition authority might consider addressing. But the complexity and uncertainty of the issues is no reason to eschew rigorous, detailed analysis before determining that a compelling case has been made. Adopting the Report’s assumptions — and in many cases that is the very most one can say of them — of harm and remedial recommendations on the limited bases it offers is sure to lead to erroneous enforcement of competition law in a way that would reduce, rather than enhance, consumer welfare.

[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 Ramaz Samrout, (Principal, REIM Strategies; Lay Member, Competition Tribunal of Canada)]

At a time when nations are engaged in bidding wars in the worldwide market to alleviate the shortages of critical medical necessities for the Covid-19 crisis, it certainly bares the question, have free trade and competition policies resulting in efficient global integrated market networks gone too far? Did economists and policy makers advocating for efficient competitive markets not foresee a failure of the supply chain in meeting a surge in demand during an inevitable global crisis such as this one?

The failures in securing medical supplies have escalated a global health crisis to geopolitical spats fuelled by strong nationalistic public sentiments. In the process of competing to acquire highly treasured medical equipment, governments are confiscating, outbidding, and diverting shipments at the risk of not adhering to the terms of established free trade agreements and international trading rules, all at the cost of the humanitarian needs of other nations.

Since the start of the Covid-19 crisis, all levels of government in Canada have been working on diversifying the supply chain for critical equipment both domestically and internationally. But, most importantly, these governments are bolstering domestic production and an integrated domestic supply network recognizing the increasing likelihood of tightening borders impacting the movement of critical products.

For the past 3 weeks in his daily briefings, Canada’s Prime Minister, Justin Trudeau, has repeatedly confirmed the Government’s support of domestic enterprises that are switching their manufacturing lines to produce critical medical supplies and of other “made in Canada” products.

As conditions worsen in the US and the White House hardens its position towards collaboration and sharing for the greater global humanitarian good—even in the presence of a recent bilateral agreement to keep the movement of essential goods fluid—Canada’s response has become more retaliatory. Now shifting to a message emphasizing that the need for “made in Canada” products is one of extreme urgency.

On April 3rd, President Trump ordered Minnesota-based 3M to stop exporting medical-grade masks to Canada and Latin America; a decision that was enabled by the triggering of the 1950 Defence Production Act. In response, Ontario Premier, Doug Ford, stated in his public address:

Never again in the history of Canada should we ever be beholden to companies around the world for the safety and wellbeing of the people of Canada. There is nothing we can’t build right here in Ontario. As we get these companies round up and we get through this, we can’t be going over to other sources because we’re going to save a nickel.

Premier Ford’s words ring true for many Canadians as they watch this crisis unfold and wonder where would it stop if the crisis worsens? Will our neighbour to the south block shipments of a Covid-19 vaccine when it is developed? Will it extend to other essential goods such as food or medicine? 

There are reports that the decline in the number of foreign workers in farming caused by travel restrictions and quarantine rules in both Canada and the US will cause food production shortages, which makes the actions of the White House very unsettling for Canadians.  Canada’s exports to the US constitute 75% of total Canadian exports, while imports from the US constitute 46%. Canada’s imports of food and beverages from the US were valued at US $24 billion in 2018 including: prepared foods, fresh vegetables, fresh fruits, other snack foods, and non-alcoholic beverages.

The length and depth of the crisis will determine to what extent the US and Canadian markets will experience shortages in products. For Canada, the severity of the pandemic in the US could result in further restrictions on the border. And it is becoming progressively more likely that it will also result in a significant reduction in the volume of necessities crossing the border between the two nations.

Increasingly, the depth and pain experienced from shortages in necessities will shape public sentiment towards free trade and strengthen mainstream demands of more nationalistic and protectionist policies. This will result in more pressure on political and government establishments to take action.

The reliance on free trade and competition policies favouring highly integrated supply chain networks is showing cracks in meeting national interests in this time of crisis. This goes well beyond the usual economic factors of contention between countries of domestic employment, job loss and resource allocation. The need for correction, however, risks moving the pendulum too far to the side of protectionism.

Free trade setbacks and global integration disruptions would become the new economic reality to ensure that domestic self-sufficiency comes first. A new trade trend has been set in motion and there is no going back from some level of disintegrating globalised supply chain productions.

How would domestic self-sufficiency be achieved? 

Would international conglomerates build local plants and forgo their profit maximizing strategies of producing in growing economies that offer cheap wages and resources in order to avoid increased protectionism?

Will the Canada-United States-Mexico Agreement (CUSMA) known as the NEW NAFTA, which until today has not been put into effect, be renegotiated to allow for production measures for securing domestic necessities in the form of higher tariffs, trade quotas, and state subsidies?

Are advanced capitalist economies willing to create State-Owned Industries to produce domestic products for what it deems necessities?

Many other trade policy variations and options focused on protectionism are possible which could lead to the creation of domestic monopolies. Furthermore, any return to protected national production networks will reduce consumer welfare and eventually impede technological advancements that result from competition. 

Divergence between free trade agreements and competition policy in a new era of protectionism.

For the past 30 years, national competition laws and policies have increasingly become an integrated part of free trade agreements, albeit in the form of soft competition law language, making references to the parties’ respective competition laws, and the need for transparency, procedural fairness in enforcement, and cooperation.

Similarly, free trade objectives and frameworks have become part of the design and implementation of competition legislation and, subsequently, case law. Both of which are intended to encourage competitive market systems and efficiency, an implied by-product of open markets.

In that regard, the competition legal framework in Canada, the Competition Act, seeks to maintain and strengthen competitive market forces by encouraging maximum efficiency in the use of economic resources. Provisions to determine the level of competitiveness in the market consider barriers to entry, among them, tariff and non-tariff barriers to international trade. These provisions further direct adjudicators to examine free trade agreements currently in force and their role in facilitating the current or future possibility of an international incumbent entering the market to preserve or increase competition. And it goes further to also assess the extent of an increase in the real value of exports, or substitution of domestic products for imported products.

It is evident in the design of free trade agreements and competition legislation that efficiency, competition in price, and diversification of products is to be achieved by access to imported goods and by encouraging the creation of global competitive suppliers.

Therefore, the re-emergence of protectionist nationalistic measures in international trade will result in a divergence between competition laws and free trade agreements. Such setbacks would leave competition enforcers, administrators, and adjudicators grappling with the conflict between the economic principles set out in competition law and the policy objectives that could be stipulated in future trade agreements. 

The challenge ahead facing governments and industries is how to correct for the cracks in the current globalized competitive supply networks that have been revealed during this crisis without falling into a trap of nationalism and protectionism.

[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 Ramsi Woodcock, (Assistant Professor of Law, University of Kentucky; Assistant Professor of Management, Gatton College of Business and Economics).]

Specialists know that the antitrust courses taught in law schools and economics departments have an alter ego in business curricula: the course on business strategy. The two courses cover the same material, but from opposite perspectives. Antitrust courses teach how to end monopolies; strategy courses teach how to construct and maintain them.

Strategy students go off and run businesses, and antitrust students go off and make government policy. That is probably the proper arrangement if the policy the antimonopolists make is domestic. We want the domestic economy to run efficiently, and so we want domestic policymakers to think about monopoly—and its allocative inefficiencies—as something to be discouraged.

The coronavirus, and the shortages it has caused, have shown us that putting the antimonopolists in charge of international policy is, by contrast, a very big mistake.

Because we do not yet have a world government. America’s position, in relation to the rest of the world, is therefore more akin to that of a business navigating a free market than it is to a government seeking to promote efficient interactions among the firms that it governs. To flourish, America must engage in international trade with a view to creating and maintaining monopoly positions for itself, rather than eschewing them in the interest of realizing efficiencies in the global economy. Which is to say: we need strategists, not antimonopolists.

For the global economy is not America, and there is no guarantee that competitive efficiencies will redound to America’s benefit, rather than to those of her competitors. Absent a world government, other countries will pursue monopoly regardless what America does, and unless America acts strategically to build and maintain economic power, America will eventually occupy a position of commercial weakness, with all of the consequences for national security that implies.

When Antimonopolists Make Trade Policy

The free traders who have run American economic policy for more than a generation are antimonopolists playing on a bigger stage. Like their counterparts in domestic policy, they are loyal in the first instance only to the efficiency of the market, not to any particular trader. They are content to establish rules of competitive trading—the antitrust laws in the domestic context, the World Trade Organization in the international context—and then to let the chips fall where they may, even if that means allowing present or future adversaries to, through legitimate means, build up competitive advantages that the United States is unable to overcome.

Strategy is consistent with competition when markets are filled with traders of atomic size, for then no amount of strategy can deliver a competitive advantage to any trader. But global markets, more even than domestic markets, are filled with traders of macroscopic size. Strategy then requires that each trader seek to gain and maintain advantages, undermining competition. The only way antimonopolists could induce the trading behemoth that is America to behave competitively, and to let the chips fall where they may, was to convince America voluntarily to give up strategy, to sacrifice self-interest on the altar of efficient markets.

And so they did.

Thus when the question arose whether to permit American corporations to move their manufacturing operations overseas, or to permit foreign companies to leverage their efficiencies to dominate a domestic industry and ensure that 90% of domestic supply would be imported from overseas, the answer the antimonopolists gave was: “yes.” Because it is efficient. Labor abroad is cheaper than labor at home, and transportation costs low, so efficiency requires that production move overseas, and our own resources be reallocated to more competitive uses.

This is the impeccable logic of static efficiency, of general equilibrium models allocating resources optimally. But it is instructive to recall that the men who perfected this model were not trying to describe a free market, much less international trade. They were trying to create a model that a central planner could use to allocate resources to a state’s subjects. What mattered to them in building the model was the good of the whole, not any particular part. And yet it is to a particular part of the global whole that the United States government is dedicated.

The Strategic Trader

Students of strategy would have taken a very different approach to international trade. Strategy teaches that markets are dynamic, and that businesses must make decisions based not only on the market signals that exist today, but on those that can be made to exist in the future. For the successful strategist, unlike the antimonopolist, identifying a product for which consumers are willing to pay the costs of production is not alone enough to justify bringing the product to market. The strategist must be able to secure a source of supply, or a distribution channel, that competitors cannot easily duplicate, before the strategist will enter.

Why? Because without an advantage in supply, or distribution, competitors will duplicate the product, compete away any markups, and leave the strategist no better off than if he had never undertaken the project at all. Indeed, he may be left bankrupt, if he has sunk costs that competition prevents him from recovering. Unlike the economist, the strategist is interested in survival, because he is a partisan of a part of the market—himself—not the market entire. The strategist understands that survival requires power, and all power rests, to a greater or lesser degree, on monopoly.

The strategist is not therefore a free trader in the international arena, at least not as a matter of principle. The strategist understands that trading from a position of strength can enrich, and trading from a position of weakness can impoverish. And to occupy that position of strength, America must, like any monopolist, control supply. Moreover, in the constantly-innovating markets that characterize industrial economies, markets in which innovation emerges from learning by doing, control over physical supply translates into control over the supply of inventions itself.

The strategist does not permit domestic corporations to offshore manufacturing in any market in which the strategist wishes to participate, because that is unsafe: foreign countries could use control over that supply to extract rents from America, to drive domestic firms to bankruptcy, and to gain control over the supply of inventions.

And, as the new trade theorists belatedly discovered, offshoring prevents the development of the dense, geographically-contiguous, supply networks that confer power over whole product categories, such as the electronics hub in Zhengzhou, where iPhone-maker Foxconn is located.

Or the pharmaceutical hub in Hubei.

Coronavirus and the Failure of Free Trade

Today, America is unprepared for the coming wave of coronavirus cases because the antimonopolists running our trade policy do not understand the importance of controlling supply. There is a shortage of masks, because China makes half of the world’s masks, and the Chinese have cut off supply, the state having forbidden even non-Chinese companies that offshored mask production from shipping home masks for which American customers have paid. Not only that, but in January China bought up most of the world’s existing supply of masks, with free-trade-obsessed governments standing idly by as the clock ticked down to their own domestic outbreaks.  

New York State, which lies at the epicenter of the crisis, has agreed to pay five times the market price for foreign supply. That’s not because the cost of making masks has risen, but because sellers are rationing with price. Which is to say: using their control over supply to beggar the state. Moreover, domestic mask makers report that they cannot ramp up production because of a lack of supply of raw materials, some of which are actually made in Wuhan, China. That’s the kind of problem that does not arise when restrictions on offshoring allow manufacturing hubs to develop domestically.

But a shortage of masks is just the beginning. Once a vaccine is developed, the race will be on to manufacture it, and America controls less than 30% of the manufacturing facilities that supply pharmaceuticals to American markets. Indeed, just about the only virus-relevant industries in which we do not have a real capacity shortage today are food and toilet paper, panic buying notwithstanding. Because fortunately for us antimonopolists could not find a way to offshore California and Oregon. If they could have, they surely would have, since both agriculture and timber are labor-intensive industries.

President Trump’s failed attempt to buy a German drug company working on a coronavirus vaccine shows just how damaging free market ideology has been to national security: as Trump should have anticipated given his resistance to the antimonopolists’ approach to trade, the German government nipped the deal in the bud. When an economic agent has market power, the agent can pick its prices, or refuse to sell at all. Only in general equilibrium fantasy is everything for sale, and at a competitive price to boot.

The trouble is: American policymakers, perhaps more than those in any other part of the world, continue to act as though that fantasy were real.

Failures Left and Right

America’s coronavirus predicament is rich with intellectual irony.

Progressives resist free trade ideology, largely out of concern for the effects of trade on American workers. But they seem not to have realized that in doing so they are actually embracing strategy, at least for the benefit of labor.

As a result, progressives simultaneously reject the approach to industrial organization economics that underpins strategic thinking in business: Joseph Schumpeter’s theory of creative destruction, which holds that strategic behavior by firms seeking to achieve and maintain monopolies is ultimately good for society, because it leads to a technological arms race as firms strive to improve supply, distribution, and indeed product quality, in ways that competitors cannot reproduce.

Even if progressives choose to reject Schumpeter’s argument that strategy makes society better off—a proposition that is particularly suspect at the international level, where the availability of tanks ensures that the creative destruction is not always creative—they have much to learn from his focus on the economics of survival.

By the same token, conservatives embrace Schumpeter in arguing for less antitrust enforcement in domestic markets, all the while advocating free trade at the international level and savaging governments for using dumping and tariffs—which is to say, the tools of monopoly—to strengthen their trading positions. It is deeply peculiar to watch the coronavirus expose conservative economists as pie-in-the-sky internationalists. And yet as the global market for coronavirus necessities seizes up, the ideology that urged us to dispense with producing these goods ourselves, out of faith that we might always somehow rely on the support of the rest of the world, provided through the medium of markets, looks pathetically naive.

The cynic might say that inconsistency has snuck up on both progressives and conservatives because each remains too sympathetic to a different domestic constituency.

Dodging a Bullet

America is lucky that a mere virus exposed the bankruptcy of free trade ideology. Because war could have done that instead. It is difficult to imagine how a country that cannot make medical masks—much less a Macbook—would be able to respond effectively to a sustained military attack from one of the many nations that are closing the technological gap long enjoyed by the United States.

The lesson of the coronavirus is: strategy, not antitrust.

This is the fourth, and last, in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision (the first post can be found here, and the second here, and the third here). It draws on research from a soon-to-be published ICLE white paper.

The previous parts of this series have mostly focused on the Commission’s factual and legal conclusions. However, as this blog post points out, the case’s economic underpinnings also suffer from important weaknesses.

Two problems are particularly salient: First, the economic models cited by the Commission (discussed in an official paper, but not directly in the decision) poorly match the underlying facts. Second, the Commission’s conclusions on innovation harms are out of touch with the abundant economic literature regarding the potential link between market structure and innovation.

The wrong economic models

The Commission’s Chief Economist team outlined its economic reasoning in an article published shortly after the Android decision was published. The article reveals that the Commission relied upon three economic papers to support its conclusion that Google’s tying harmed consumer welfare.

Each of these three papers attempts to address the same basic problem. Ever since the rise of the Chicago-School, it is widely accepted that a monopolist cannot automatically raise its profits by entering an adjacent market (i.e. leveraging its monopoly position), for instance through tying. This has sometimes been called the single-monopoly-profit theory. In more recent years, various scholars have refined this Chicago-School intuition, and identified instances where the theory fails.

While the single monopoly profit theory has been criticized in academic circles, it is important to note that the three papers cited by the Commission accept its basic premise. They thus attempt to show why the theory fails in the context of the Google Android case. 

Unfortunately, the assumptions upon which they rely to reach this conclusion markedly differ from the case’s fact pattern. These papers thus offer little support to the Commission’s economic conclusions.

For a start, the authors of the first paper cited by the Commission concede that their own model does not apply to the Google case:

Actual antitrust cases are fact-intensive and our model does not perfectly fit with the current Google case in one important aspect.

The authors thus rely on important modifications, lifted from a paper by Frederico Etro and Cristina Caffara (the second paper cited by the Commission), to support their conclusion that Google’s tying was anticompetitive. 

The second paper cited by the Commission, however, is equally problematic

The authors’ underlying intuition is relatively straightforward: because Google bundles its suite of Google Apps (including Search) with the Play Store, a rival search engine would have to pay a premium in order to be pre-installed and placed on the home screen, because OEMs would have to entirely forgo Google’s suite of applications. The key assumption here is that OEMs cannot obtain the Google Play app and pre-install and place favorably a rival search app

But this is simply not true of Google’s contractual terms. The best evidence is that rivals search apps have indeed concluded deals with OEMs to pre-install their search apps, without these OEMs losing access to Google’s suite of proprietary apps. Google’s contractual terms simply do not force OEMs to choose between the Google Play app and the pre-installation of a rival search app. Etro and Caffara’s model thus falls flat.

More fundamentally, even if Google’s contractual terms did prevent OEMs from pre-loading rival apps, the paper’s conclusions would still be deeply flawed. The authors essentially assume that the only way for consumers to obtain a rival app is through pre-installation. But this is a severe misreading of the prevailing market conditions. 

Users remain free to independently download rival search apps. If Google did indeed purchase exclusive pre-installation, users would not have to choose between a “full Android” device and one with a rival search app but none of Google’s apps. Instead, they could download the rival app and place it alongside Google’s applications. 

A more efficient rival could even provide side payments, of some sort, to encourage consumers to download its app. Exclusive pre-installation thus generates a much smaller advantage than Etro and Caffara assume, and their model fails to reflect this.

Finally, the third paper by Alexandre de Cornière and Greg Taylor, suffers from the exact same problem. The authors clearly acknowledge that their findings only hold if OEMs (and consumers) are effectively prevented from (pre-)installing applications that compete with Google’s apps. In their own words:

Upstream firms offer contracts to the downstream firm, who chooses which component(s) to use and then sells to consumers. For our theory to apply, the following three conditions need to hold: (i) substitutability between the two versions of B leads the downstream firm to install at most one version.

The upshot is that all three of the economic models cited by the Commission cease to be relevant in the specific context of the Google Android decision. The Commission is thus left with little to no economic evidence to support its finding of anticompetitive effects.

Critics might argue that direct downloads by consumers are but a theoretical possibility. Yet nothing could be further from the truth. Take the web browser market: The Samsung Internet Browser has more than 1 Billion downloads on Google’s Play Store. The Opera, Opera Mini and Firefox browsers each have over a 100 million downloads. The Brave browser has more than 10 million downloads, but is growing rapidly.

In short the economic papers on which the Commission relies are based on a world that does not exist. They thus fail to support the Commission’s economic findings.

An incorrect view of innovation

In its decision, the Commission repeatedly claimed that Google’s behavior stifled innovation because it prevented rivals from entering the market. However, the Commission offered no evidence to support its assumption that reduced market entry on would lead to a decrease in innovation:

(858) For the reasons set out in this Section, the Commission concludes that the tying of the Play Store and the Google Search app helps Google to maintain and strengthen its dominant position in each national market for general search services, increases barriers to entry, deters innovation and tends to harm, directly or indirectly, consumers.

(859) First, Google’s conduct makes it harder for competing general search services to gain search queries and the respective revenues and data needed to improve their services.

(861) Second, Google’s conduct increases barriers to entry by shielding Google from competition from general search services that could challenge its dominant position in the national markets for general search services:

(862) Third, by making it harder for competing general search services to gain search queries including the respective revenues and data needed to improve their services, Google’s conduct reduces the incentives of competing general search services to invest in developing innovative features, such as innovation in algorithm and user experience design.

In a nutshell, the Commission’s findings rest on the assumption that barriers to entry and more concentrated market structures necessarily reduce innovation. But this assertion is not supported by the empirical economic literature on the topic.

For example, a 2006 paper published by Richard Gilbert surveys 24 empirical studies on the topic. These studies examine the link between market structure (or firm size) and innovation. Though earlier studies tended to identify a positive relationship between concentration, as well as firm size, and innovation, more recent empirical techniques found no significant relationship. Gilbert thus suggests that:

These econometric studies suggest that whatever relationship exists at a general economy-wide level between industry structure and R&D is masked by differences across industries in technological opportunities, demand, and the appropriability of inventions.

This intuition is confirmed by another high-profile empirical paper by Aghion, Bloom, Blundell, Griffith, and Howitt. The authors identify an inverted-U relationship between competition and innovation. Perhaps more importantly, they point out that this relationship is affected by a number of sector-specific factors.

Finally, reviewing fifty years of research on innovation and market structure, Wesley Cohen concludes that:

Even before one controls for industry effects, the variance in R&D intensity explained by market concentration is small. Moreover, whatever relationship that exists in cross sections becomes imperceptible with the inclusion of controls for industry characteristics, whether expressed as industry fixed effects or in the form of survey-based and other measures of industry characteristics such as technological opportunity, appropriability conditions, and demand. In parallel to a decades-long accumulation of mixed results, theorists have also spawned an almost equally voluminous and equivocal literature on the link between market structure and innovation.[16]

The Commission’s stance is further weakened by the fact that investments in the Android operating system are likely affected by a weak appropriability regime. In other words, because of its open source nature, it is hard for Google to earn a return on investments in the Android OS (anyone can copy, modify and offer their own version of the OS). 

Loosely tying Google’s proprietary applications to the OS is arguably one way to solve this appropriability problem. Unfortunately, the Commission brushed these considerations aside. It argued that Google could earn some revenue from the Google Play app, as well as other potential venues. However, the Commission did not question whether these sources of income were even comparable to the sums invested by Google in the Android OS. It is thus possible that the Commission’s decision will prevent Google from earning a positive return on some future investments in the Android OS, ultimately causing it to cut back its investments and slowing innovation.

The upshot is that the Commission was simply wrong to assume that barriers to entry and more concentrated market structures would necessarily reduce innovation. This is especially true, given that Google may struggle to earn a return on its investments, absent the contractual provisions challenged by the Commission.

Conclusion

In short, the Commission’s economic analysis was severely lacking. It relied on economic models that had little to say about the market it which Google and its rivals operated. Its decisions thus reveals the inherent risk of basing antitrust decisions upon overfitted economic models. 

As if that were not enough, the Android decision also misrepresents the economic literature concerning the link (or absence thereof) between market structure and innovation. As a result, there is no reason to believe that Google’s behavior reduced innovation.

This is the third in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision (the first post can be found here, and the second here). It draws on research from a soon-to-be published ICLE white paper.

(Comparison of Google and Apple’s smartphone business models. Red $ symbols represent money invested; Green $ symbols represent sources of revenue; Black lines show the extent of Google and Apple’s control over their respective platforms)

For the third in my series of posts about the Google Android decision, I will delve into the theories of harm identified by the Commission. 

The big picture is that the Commission’s analysis was particularly one-sided. The Commission failed to adequately account for the complex business challenges that Google faced – such as monetizing the Android platform and shielding it from fragmentation. To make matters worse, its decision rests on dubious factual conclusions and extrapolations. The result is a highly unbalanced assessment that could ultimately hamstring Google and prevent it from effectively competing with its smartphone rivals, Apple in particular.

1. Tying without foreclosure

The first theory of harm identified by the Commission concerned the tying of Google’s Search app with the Google Play app, and of Google’s Chrome app with both the Google Play and Google Search apps.

Oversimplifying, Google required its OEMs to choose between either pre-installing a bundle of Google applications, or forgoing some of the most important ones (notably Google Play). The Commission argued that this gave Google a competitive advantage that rivals could not emulate (even though Google’s terms did not preclude OEMs from simultaneously pre-installing rival web browsers and search apps). 

To support this conclusion, the Commission notably asserted that no alternative distribution channel would enable rivals to offset the competitive advantage that Google obtained from tying. This finding is, at best, dubious. 

For a start, the Commission claimed that user downloads were not a viable alternative distribution channel, even though roughly 250 million apps are downloaded on Google’s Play store every day.

The Commission sought to overcome this inconvenient statistic by arguing that Android users were unlikely to download apps that duplicated the functionalities of a pre-installed app – why download a new browser if there is already one on the user’s phone?

But this reasoning is far from watertight. For instance, the 17th most-downloaded Android app, the “Super-Bright Led Flashlight” (with more than 587million downloads), mostly replicates a feature that is pre-installed on all Android devices. Moreover, the five most downloaded Android apps (Facebook, Facebook Messenger, Whatsapp, Instagram and Skype) provide functionalities that are, to some extent at least, offered by apps that have, at some point or another, been preinstalled on many Android devices (notably Google Hangouts, Google Photos and Google+).

The Commission countered that communications apps were not appropriate counterexamples, because they benefit from network effects. But this overlooks the fact that the most successful communications and social media apps benefited from very limited network effects when they were launched, and that they succeeded despite the presence of competing pre-installed apps. Direct user downloads are thus a far more powerful vector of competition than the Commission cared to admit.

Similarly concerning is the Commission’s contention that paying OEMs or Mobile Network Operators (“MNOs”) to pre-install their search apps was not a viable alternative for Google’s rivals. Some of the reasons cited by the Commission to support this finding are particularly troubling.

For instance, the Commission claimed that high transaction costs prevented parties from concluding these pre installation deals. 

But pre-installation agreements are common in the smartphone industry. In recent years, Microsoft struck a deal with Samsung to pre-install some of its office apps on the Galaxy Note 10. It also paid Verizon to pre-install the Bing search app on a number of Samsung phones, in 2010. Likewise, a number of Russian internet companies have been in talks with Huawei to pre-install their apps on its devices. And Yahoo reached an agreement with Mozilla to make it the default search engine for its web browser. Transaction costs do not appear to  have been an obstacle in any of these cases.

The Commission also claimed that duplicating too many apps would cause storage space issues on devices. 

And yet, a back-of-the-envelope calculation suggests that storage space is unlikely to be a major issue. For instance, the Bing Search app has a download size of 24MB, whereas typical entry-level smartphones generally have an internal memory of at least 64GB (that can often be extended to more than 1TB with the addition of an SD card). The Bing Search app thus takes up less than one-thousandth of these devices’ internal storage. Granted, the Yahoo search app is slightly larger than Microsoft’s, weighing almost 100MB. But this is still insignificant compared to a modern device’s storage space.

Finally, the Commission claimed that rivals were contractually prevented from concluding exclusive pre-installation deals because Google’s own apps would also be pre-installed on devices.

However, while it is true that Google’s apps would still be present on a device, rivals could still pay for their applications to be set as default. Even Yandex – a plaintiff – recognized that this would be a valuable solution. In its own words (taken from the Commission’s decision):

Pre-installation alongside Google would be of some benefit to an alternative general search provider such as Yandex […] given the importance of default status and pre-installation on home screen, a level playing field will not be established unless there is a meaningful competition for default status instead of Google.

In short, the Commission failed to convincingly establish that Google’s contractual terms prevented as-efficient rivals from effectively distributing their applications on Android smartphones. The evidence it adduced was simply too thin to support anything close to that conclusion.

2. The threat of fragmentation

The Commission’s second theory of harm concerned the so-called “antifragmentation” agreements concluded between Google and OEMs. In a nutshell, Google only agreed to license the Google Search and Google Play apps to OEMs that sold “Android Compatible” devices (i.e. devices sold with a version of Android did not stray too far from Google’s most recent version).

According to Google, this requirement was necessary to limit the number of Android forks that were present on the market (as well as older versions of the standard Android). This, in turn, reduced development costs and prevented the Android platform from unraveling.

The Commission disagreed, arguing that Google’s anti-fragmentation provisions thwarted competition from potential Android forks (i.e. modified versions of the Android OS).

This conclusion raises at least two critical questions: The first is whether these agreements were necessary to ensure the survival and competitiveness of the Android platform, and the second is why “open” platforms should be precluded from partly replicating a feature that is essential to rival “closed” platforms, such as Apple’s iOS.

Let us start with the necessity, or not, of Google’s contractual terms. If fragmentation did indeed pose an existential threat to the Android ecosystem, and anti-fragmentation agreements averted this threat, then it is hard to make a case that they thwarted competition. The Android platform would simply not have been as viable without them.

The Commission dismissed this possibility, relying largely on statements made by Google’s rivals (many of whom likely stood to benefit from the suppression of these agreements). For instance, the Commission cited comments that it received from Yandex – one of the plaintiffs in the case:

(1166) The fact that fragmentation can bring significant benefits is also confirmed by third-party respondents to requests for information:

[…]

(2) Yandex, which stated: “Whilst the development of Android forks certainly has an impact on the fragmentation of the Android ecosystem in terms of additional development being required to adapt applications for various versions of the OS, the benefits of fragmentation outweigh the downsides…”

Ironically, the Commission relied on Yandex’s statements while, at the same time, it dismissed arguments made by Android app developers, on account that they were conflicted. In its own words:

Google attached to its Response to the Statement of Objections 36 letters from OEMs and app developers supporting Google’s views about the dangers of fragmentation […] It appears likely that the authors of the 36 letters were influenced by Google when drafting or signing those letters.

More fundamentally, the Commission’s claim that fragmentation was not a significant threat is at odds with an almost unanimous agreement among industry insiders.

For example, while it is not dispositive, a rapid search for the terms “Google Android fragmentation”, using the DuckDuckGo search engine, leads to results that cut strongly against the Commission’s conclusions. Of the ten first results, only one could remotely be construed as claiming that fragmentation was not an issue. The others paint a very different picture (below are some of the most salient excerpts):

“There’s a fairly universal perception that Android fragmentation is a barrier to a consistent user experience, a security risk, and a challenge for app developers.” (here)

“Android fragmentation, a problem with the operating system from its inception, has only become more acute an issue over time, as more users clamor for the latest and greatest software to arrive on their phones.” (here)

“Android Fragmentation a Huge Problem: Study.” (here)

“Google’s Android fragmentation fix still isn’t working at all.” (here)

“Does Google care about Android fragmentation? Not now—but it should.” (here).

“This is very frustrating to users and a major headache for Google… and a challenge for corporate IT,” Gold said, explaining that there are a large number of older, not fully compatible devices running various versions of Android.” (here)

Perhaps more importantly, one might question why Google should be treated differently than rivals that operate closed platforms, such as Apple, Microsoft and Blackberry (before the last two mostly exited the Mobile OS market). By definition, these platforms limit all potential forks (because they are based on proprietary software).

The Commission argued that Apple, Microsoft and Blackberry had opted to run “closed” platforms, which gave them the right to prevent rivals from copying their software.

While this answer has some superficial appeal, it is incomplete. Android may be an open source project, but this is not true of Google’s proprietary apps. Why should it be forced to offer them to rivals who would use them to undermine its platform? The Commission did not meaningfully consider this question.

And yet, industry insiders routinely compare the fragmentation of Apple’s iOS and Google’s Android OS, in order to gage the state of competition between both firms. For instance, one commentator noted:

[T]he gap between iOS and Android users running the latest major versions of their operating systems has never looked worse for Google.

Likewise, an article published in Forbes concluded that Google’s OEMs were slow at providing users with updates, and that this might drive users and developers away from the Android platform:

For many users the Android experience isn’t as up-to-date as Apple’s iOS. Users could buy the latest Android phone now and they may see one major OS update and nothing else. […] Apple users can be pretty sure that they’ll get at least two years of updates, although the company never states how long it intends to support devices.

However this problem, in general, makes it harder for developers and will almost certainly have some inherent security problems. Developers, for example, will need to keep pushing updates – particularly for security issues – to many different versions. This is likely a time-consuming and expensive process.

To recap, the Commission’s decision paints a world that is either black or white: either firms operate closed platforms, and they are then free to limit fragmentation as they see fit, or they create open platforms, in which case they are deemed to have accepted much higher levels of fragmentation.

This stands in stark contrast to industry coverage, which suggests that users and developers of both closed and open platforms care a great deal about fragmentation, and demand that measures be put in place to address it. If this is true, then the relative fragmentation of open and closed platforms has an important impact on their competitive performance, and the Commission was wrong to reject comparisons between Google and its closed ecosystem rivals. 

3. Google’s revenue sharing agreements

The last part of the Commission’s case centered on revenue sharing agreements between Google and its OEMs/MNOs. Google paid these parties to exclusively place its search app on the homescreen of their devices. According to the Commission, these payments reduced OEMs and MNOs’ incentives to pre-install competing general search apps.

However, to reach this conclusion, the Commission had to make the critical (and highly dubious) assumption that rivals could not match Google’s payments.

To get to that point, it notably assumed that rival search engines would be unable to increase their share of mobile search results beyond their share of desktop search results. The underlying intuition appears to be that users who freely chose Google Search on desktop (Google Search & Chrome are not set as default on desktop PCs) could not be convinced to opt for a rival search engine on mobile.

But this ignores the possibility that rivals might offer an innovative app that swayed users away from their preferred desktop search engine. 

More importantly, this reasoning cuts against the Commission’s own claim that pre-installation and default placement were critical. If most users, dismiss their device’s default search app and search engine in favor of their preferred ones, then pre-installation and default placement are largely immaterial, and Google’s revenue sharing agreements could not possibly have thwarted competition (because they did not prevent users from independently installing their preferred search app). On the other hand, if users are easily swayed by default placement, then there is no reason to believe that rivals could not exceed their desktop market share on mobile phones.

The Commission was also wrong when it claimed that rival search engines were at a disadvantage because of the structure of Google’s revenue sharing payments. OEMs and MNOs allegedly lost all of their payments from Google if they exclusively placed a rival’s search app on the home screen of a single line of handsets.

The key question is the following: could Google automatically tilt the scales to its advantage by structuring the revenue sharing payments in this way? The answer appears to be no. 

For instance, it has been argued that exclusivity may intensify competition for distribution. Conversely, other scholars have claimed that exclusivity may deter entry in network industries. Unfortunately, the Commission did not examine whether Google’s revenue sharing agreements fell within this category. 

It thus provided insufficient evidence to support its conclusion that the revenue sharing agreements reduced OEMs’ (and MNOs’) incentives to pre-install competing general search apps, rather than merely increasing competition “for the market”.

4. Conclusion

To summarize, the Commission overestimated the effect that Google’s behavior might have on its rivals. It almost entirely ignored the justifications that Google put forward and relied heavily on statements made by its rivals. The result is a one-sided decision that puts undue strain on the Android Business model, while providing few, if any, benefits in return.

This is the second in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision (the first post can be found here). It draws on research from a soon-to-be published ICLE white paper.

(Left, Android 10 Website; Right, iOS 13 Website)

In a previous post, I argued that the Commission failed to adequately define the relevant market in its recently published Google Android decision

This improper market definition might not be so problematic if the Commission had then proceeded to undertake a detailed (and balanced) assessment of the competitive conditions that existed in the markets where Google operates (including the competitive constraints imposed by Apple). 

Unfortunately, this was not the case. The following paragraphs respond to some of the Commission’s most problematic arguments regarding the existence of barriers to entry, and the absence of competitive constraints on Google’s behavior.

The overarching theme is that the Commission failed to quantify its findings and repeatedly drew conclusions that did not follow from the facts cited. As a result, it was wrong to conclude that Google faced little competitive pressure from Apple and other rivals.

1. Significant investments and network effects ≠ barriers to entry

In its decision, the Commission notably argued that significant investments (millions of euros) are required to set up a mobile OS and App store. It also argued that market for licensable mobile operating systems gave rise to network effects. 

But contrary to the Commission’s claims, neither of these two factors is, in and of itself, sufficient to establish the existence of barriers to entry (even under EU competition law’s loose definition of the term, rather than Stigler’s more technical definition)

Take the argument that significant investments are required to enter the mobile OS market.

The main problem is that virtually every market requires significant investments on the part of firms that seek to enter. Not all of these costs can be seen as barriers to entry, or the concept would lose all practical relevance. 

For example, purchasing a Boeing 737 Max airplane reportedly costs at least $74 million. Does this mean that incumbents in the airline industry are necessarily shielded from competition? Of course not. 

Instead, the relevant question is whether an entrant with a superior business model could access the capital required to purchase an airplane and challenge the industry’s incumbents.

Returning to the market for mobile OSs, the Commission should thus have questioned whether as-efficient rivals could find the funds required to produce a mobile OS. If the answer was yes, then the investments highlighted by the Commission were largely immaterial. As it happens, several firms have indeed produced competing OSs, including CyanogenMod, LineageOS and Tizen.

The same is true of Commission’s conclusion that network effects shielded Google from competitors. While network effects almost certainly play some role in the mobile OS and app store markets, it does not follow that they act as barriers to entry in competition law terms. 

As Paul Belleflamme recently argued, it is a myth that network effects can never be overcome. And as I have written elsewhere, the most important question is whether users could effectively coordinate their behavior and switch towards a superior platform, if one arose (See also Dan Spulber’s excellent article on this point).

The Commission completely ignored this critical interrogation during its discussion of network effects.

2. The failure of competitors is not proof of barriers to entry

Just as problematically, the Commission wrongly concluded that the failure of previous attempts to enter the market was proof of barriers to entry. 

This is the epitome of the Black Swan fallacy (i.e. inferring that all swans are white because you have never seen a relatively rare, but not irrelevant, black swan).

The failure of rivals is equally consistent with any number of propositions: 

  • There were indeed barriers to entry; 
  • Google’s products were extremely good (in ways that rivals and the Commission failed to grasp); 
  • Google responded to intense competitive pressure by continuously improving its product (and rivals thus chose to stay out of the market); 
  • Previous rivals were persistently inept (to take the words of Oliver Williamson); etc. 

The Commission did not demonstrate that its own inference was the right one, nor did it even demonstrate any awareness that other explanations were at least equally plausible.

3. First mover advantage?

Much of the same can be said about the Commission’s observation that Google enjoyed a first mover advantage

The elephant in the room is that Google was not the first mover in the smartphone market (and even less so in the mobile phone industry). The Commission attempted to sidestep this uncomfortable truth by arguing that Google was the first mover in the Android app store market. It then concluded that Google had an advantage because users were familiar with Android’s app store.

To call this reasoning “naive” would be too kind. Maybe consumers are familiar with Google’s products today, but they certainly weren’t when Google entered the market. 

Why would something that did not hinder Google (i.e. users’ lack of familiarity with its products, as opposed to those of incumbents such as Nokia or Blackberry) have the opposite effect on its future rivals? 

Moreover, even if rivals had to replicate Android’s user experience (and that of its app store) to prove successful, the Commission did not show that there was anything that prevented them from doing so — a particularly glaring omission given the open-source nature of the Android OS.

The result is that, at best, the Commission identified a correlation but not causality. Google may arguably have been the first, and users might have been more familiar with its offerings, but this still does not prove that Android flourished (and rivals failed) because of this.

4. It does not matter that users “do not take the OS into account” when they purchase a device

The Commission also concluded that alternatives to Android (notably Apple’s iOS and App Store) exercised insufficient competitive constraints on Google. Among other things, it argued that this was because users do not take the OS into account when they purchase a smartphone (so Google could allegedly degrade Android without fear of losing users to Apple)..

In doing so, the Commission failed to grasp that buyers might base their purchases on a devices’ OS without knowing it.

Some consumers will simply follow the advice of a friend, family member or buyer’s guide. Acutely aware of their own shortcomings, they thus rely on someone else who does take the phone’s OS into account. 

But even when they are acting independently, unsavvy consumers may still be driven by technical considerations. They might rely on a brand’s reputation for providing cutting edge devices (which, per the Commission, is the most important driver of purchase decisions), or on a device’s “feel” when they try it in a showroom. In both cases, consumers’ choices could indirectly be influenced by a phone’s OS.

In more technical terms, a phone’s hardware and software are complementary goods. In these settings, it is extremely difficult to attribute overall improvements to just one of the two complements. For instance, a powerful OS and chipset are both equally necessary to deliver a responsive phone. The fact that consumers may misattribute a device’s performance to one of these two complements says nothing about their underlying contribution to a strong end-product (which, in turn, drives purchase decisions). Likewise, battery life is reportedly one of the most important features for users, yet few realize that a phone’s OS has a large impact on it.

Finally, if consumers were really indifferent to the phone’s operating system, then the Commission should have dropped at least part of its case against Google. The Commission’s claim that Google’s anti-fragmentation agreements harmed consumers (by reducing OS competition) has no purchase if Android is provided free of charge and consumers are indifferent to non-price parameters, such as the quality of a phone’s OS. 

5. Google’s users were not “captured”

Finally, the Commission claimed that consumers are loyal to their smartphone brand and that competition for first time buyers was insufficient to constrain Google’s behavior against its “captured” installed base.

It notably found that 82% of Android users stick with Android when they change phones (compared to 78% for Apple), and that 75% of new smartphones are sold to existing users. 

The Commission asserted, without further evidence, that these numbers proved there was little competition between Android and iOS.

But is this really so? In almost all markets consumers likely exhibit at least some loyalty to their preferred brand. At what point does this become an obstacle to interbrand competition? The Commission offered no benchmark mark against which to assess its claims.

And although inter-industry comparisons of churn rates should be taken with a pinch of salt, it is worth noting that the Commission’s implied 18% churn rate for Android is nothing out of the ordinary (see, e.g., here, here, and here), including for industries that could not remotely be called anticompetitive.

To make matters worse, the Commission’s own claimed figures suggest that a large share of sales remained contestable (roughly 39%).

Imagine that, every year, 100 devices are sold in Europe (75 to existing users and 25 to new users, according to the Commission’s figures). Imagine further that the installed base of users is split 76–24 in favor of Android. Under the figures cited by the Commission, it follows that at least 39% of these sales are contestable.

According to the Commission’s figures, there would be 57 existing Android users (76% of 75) and 18 Apple users (24% of 75), of which roughly 10 (18%) and 4 (22%), respectively, switch brands in any given year. There would also be 25 new users who, even according to the Commission, do not display brand loyalty. The result is that out of 100 purchasers, 25 show no brand loyalty and 14 switch brands. And even this completely ignores the number of consumers who consider switching but choose not to after assessing the competitive options.

Conclusion

In short, the preceding paragraphs argue that the Commission did not meet the requisite burden of proof to establish Google’s dominance. Of course, it is one thing to show that the Commission’s reasoning was unsound (it is) and another to establish that its overall conclusion was wrong.

At the very least, I hope these paragraphs will convey a sense that the Commission loaded the dice, so to speak. Throughout the first half of its lengthy decision, it interpreted every piece of evidence against Google, drew significant inferences from benign pieces of information, and often resorted to circular reasoning.

The following post in this blog series argues that these errors also permeate the Commission’s analysis of Google’s allegedly anticompetitive behavior.

A screenshot of a cell phone

Description automatically generated

This is the first in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision. It draws on research from a soon-to-be published ICLE white paper.

The European Commission’s recent Google Android decision will surely go down as one of the most important competition proceedings of the past decade. And yet, an in-depth reading of the 328 page decision should leave attentive readers with a bitter taste.

One of the Commission’s most significant findings is that the Android operating system and Apple’s iOS are not in the same relevant market, along with the related conclusion that Apple’s App Store and Google Play are also in separate markets.

This blog post points to a series of flaws that undermine the Commission’s reasoning on this point. As a result, the Commission’s claim that Google and Apple operate in separate markets is mostly unsupported.

1. Everyone but the European Commission thinks that iOS competes with Android

Surely the assertion that the two predominant smartphone ecosystems in Europe don’t compete with each other will come as a surprise to… anyone paying attention: 

A screenshot of a cell phone

Description automatically generated

Apple 10-K:

The Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers.

Google 10-K:

We face competition from: Companies that design, manufacture, and market consumer electronics products, including businesses that have developed proprietary platforms.

This leads to a critical question: Why did the Commission choose to depart from the instinctive conclusion that Google and Apple compete vigorously against each other in the smartphone and mobile operating system market? 

As explained below, its justifications for doing so were deeply flawed.

2. It does not matter that OEMs cannot license iOS (or the App Store)

One of the main reasons why the Commission chose to exclude Apple from the relevant market is that OEMs cannot license Apple’s iOS or its App Store.

But is it really possible to infer that Google and Apple do not compete against each other because their products are not substitutes from OEMs’ point of view? 

The answer to this question is likely no.

Relevant markets, and market shares, are merely a proxy for market power (which is the appropriate baseline upon which build a competition investigation). As Louis Kaplow puts it:

[T]he entire rationale for the market definition process is to enable an inference about market power.

If there is a competitive market for Android and Apple smartphones, then it is somewhat immaterial that Google is the only firm to successfully offer a licensable mobile operating system (as opposed to Apple and Blackberry’s “closed” alternatives).

By exercising its “power” against OEMs by, for instance, degrading the quality of Android, Google would, by the same token, weaken its competitive position against Apple. Google’s competition with Apple in the smartphone market thus constrains Google’s behavior and limits its market power in Android-specific aftermarkets (on this topic, see Borenstein et al., and Klein).

This is not to say that Apple’s iOS (and App Store) is, or is not, in the same relevant market as Google Android (and Google Play). But the fact that OEMs cannot license iOS or the App Store is mostly immaterial for market  definition purposes.

 3. Google would find itself in a more “competitive” market if it decided to stop licensing the Android OS

The Commission’s reasoning also leads to illogical outcomes from a policy standpoint. 

Google could suddenly find itself in a more “competitive” market if it decided to stop licensing the Android OS and operated a closed platform (like Apple does). The direct purchasers of its products – consumers – would then be free to switch between Apple and Google’s products.

As a result, an act that has no obvious effect on actual market power — and that could have a distinctly negative effect on consumers — could nevertheless significantly alter the outcome of competition proceedings on the Commission’s theory. 

One potential consequence is that firms might decide to close their platforms (or refuse to open them in the first place) in order to avoid competition scrutiny (because maintaining a closed platform might effectively lead competition authorities to place them within a wider relevant market). This might ultimately reduce product differentiation among mobile platforms (due to the disappearance of open ecosystems) – the exact opposite of what the Commission sought to achieve with its decision.

This is, among other things, what Antonin Scalia objected to in his Eastman Kodak dissent: 

It is quite simply anomalous that a manufacturer functioning in a competitive equipment market should be exempt from the per se rule when it bundles equipment with parts and service, but not when it bundles parts with service [when the manufacturer has a high share of the “market” for its machines’ spare parts]. This vast difference in the treatment of what will ordinarily be economically similar phenomena is alone enough to call today’s decision into question.

4. Market shares are a poor proxy for market power, especially in narrowly defined markets

Finally, the problem with the Commission’s decision is not so much that it chose to exclude Apple from the relevant markets, but that it then cited the resulting market shares as evidence of Google’s alleged dominance:

(440) Google holds a dominant position in the worldwide market (excluding China) for the licensing of smart mobile OSs since 2011. This conclusion is based on: 

(1) the market shares of Google and competing developers of licensable smart mobile OSs […]

In doing so, the Commission ignored one of the critical findings of the law & economics literature on market definition and market power: Although defining a narrow relevant market may not itself be problematic, the market shares thus adduced provide little information about a firm’s actual market power. 

For instance, Richard Posner and William Landes have argued that:

If instead the market were defined narrowly, the firm’s market share would be larger but the effect on market power would be offset by the higher market elasticity of demand; when fewer substitutes are included in the market, substitution of products outside of the market is easier. […]

If all the submarket approach signifies is willingness in appropriate cases to call a narrowly defined market a relevant market for antitrust purposes, it is unobjectionable – so long as appropriately less weight is given to market shares computed in such a market.

Likewise, Louis Kaplow observes that:

In choosing between a narrower and a broader market (where, as mentioned, we are supposing that the truth lies somewhere in between), one would ask whether the inference from the larger market share in the narrower market overstates market power by more than the inference from the smaller market share in the broader market understates market power. If the lesser error lies with the former choice, then the narrower market is the relevant market; if the latter minimizes error, then the broader market is best.

The Commission failed to heed these important findings.

5. Conclusion

The upshot is that Apple should not have been automatically excluded from the relevant market. 

To be clear, the Commission did discuss this competition from Apple later in the decision. And it also asserted that its findings would hold even if Apple were included in the OS and App Store markets, because Android’s share of devices sold would have ranged from 45% to 79%, depending on the year (although this ignores other potential metrics such as the value of devices sold or Google’s share of advertising revenue

However, by gerrymandering the market definition (which European case law likely permitted it to do), the Commission ensured that Google would face an uphill battle, starting from a very high market share and thus a strong presumption of dominance. 

Moreover, that it might reach the same result by adopting a more accurate market definition is no excuse for adopting a faulty one and resting its case (and undertaking its entire analysis) on it. In fact, the Commission’s choice of a faulty market definition underpins its entire analysis, and is far from a “harmless error.” 

I shall discuss the consequences of this error in an upcoming blog post. Stay tuned.

Today, Reuters reports that Germany-based ThyssenKrupp has received bids from three bidding groups for a majority stake in the firm’s elevator business. Finland’s Kone teamed with private equity firm CVC to bid on the company. Private equity firms Blackstone and Carlyle joined with the Canada Pension Plan Investment Board to submit a bid. A third bid came from Advent, Cinven, and the Abu Dhabi Investment Authority.

Also today — in anticipation of the long-rumored and much-discussed sale of ThyssenKrupp’s elevator business — the International Center for Law & Economics released The Antitrust Risks of Four To Three Mergers: Heightened Scrutiny of a Potential ThyssenKrupp/Kone Merger, by Eric Fruits and Geoffrey A. Manne. This study examines the heightened scrutiny of four to three mergers by competition authorities in the current regulatory environment, using a potential ThyssenKrupp/Kone merger as a case study. 

In recent years, regulators have become more aggressive in merger enforcement in response to populist criticisms that lax merger enforcement has led to the rise of anticompetitive “big business.” In this environment, it is easy to imagine regulators intensely scrutinizing and challenging or conditioning nearly any merger that substantially increases concentration. 

This potential deal provides an opportunity to highlight the likely challenges, complexity, and cost that regulatory scrutiny of such mergers actually entails — and it is likely to be a far cry from the lax review and permissive decisionmaking of antitrust critics’ imagining.

In the case of a potential ThyssenKrupp/Kone merger, the combined entity would face lengthy, costly, and duplicative review in multiple jurisdictions, any one of which could effectively block the merger or impose onerous conditions. It would face the automatic assumption of excessive concentration in several of these, including the US, EU, and Canada. In the US, the deal would also face heightened scrutiny based on political considerations, including the perception that the deal would strengthen a foreign firm at the expense of a domestic supplier. It would also face the risk of politicized litigation from state attorneys general, and potentially the threat of extractive litigation by competitors and customers.

Whether the merger would actually entail anticompetitive risk may, unfortunately, be of only secondary importance in determining the likelihood and extent of a merger challenge or the imposition of onerous conditions.

A “highly concentrated” market

In many jurisdictions, the four to three merger would likely trigger a “highly concentrated” market designation. With the merging firms having a dominant share of the market for elevators, the deal would be viewed as problematic in several areas:

  • The US (share > 35%, HHI > 3,000, HHI increase > 700), 
  • Canada (share of approximately 50%, HHI > 2,900, HHI increase of 1,000), 
  • Australia (share > 40%, HHI > 3,100, HHI increase > 500), 
  • Europe (shares of 33–65%, HHIs in excess of 2,700, and HHI increases of 270 or higher in Sweden, Finland, Netherlands, Austria, France, and Luxembourg).

As with most mergers, a potential ThyssenKrupp/Kone merger would likely generate “hot docs” that would be used to support the assumption of anticompetitive harm from the increase in concentration, especially in light of past allegations of price fixing in the industry and a decision by the European Commission in 2007 to fine certain companies in the industry for alleged anticompetitive conduct.

Political risks

The merger would also surely face substantial political risks in the US and elsewhere from the perception the deal would strengthen a foreign firm at the expense of a domestic supplier. President Trump’s administration has demonstrated a keen interest in protecting what it sees as US interests vis-à-vis foreign competition. As a high-rise and hotel developer who has shown a willingness to intervene in antitrust enforcement to protect his interests, President Trump may have a heightened personal interest in a ThyssenKrupp/Kone merger. 

To the extent that US federal, state, and local governments purchase products from the merging parties, the deal would likely be subjected to increased attention from federal antitrust regulators as well as states’ attorneys general. Indeed, the US Department of Justice (DOJ) has created a “Procurement Collusion Strike Force” focused on “deterring, detecting, investigating and prosecuting antitrust crimes . . . which undermine competition in government procurement. . . .”

The deal may also face scrutiny from EC, UK, Canadian, and Australian competition authorities, each of which has exhibited increased willingness to thwart such mergers. For example, the EU recently blocked a proposed merger between the transport (rail) services of EU firms, Siemens and Alstom. The UK recently blocked a series of major deals that had only limited competitive effects on the UK. In one of these, Thermo Fisher Scientific’s proposed acquisition of Roper Technologies’ Gatan subsidiary was not challenged in the US, but the deal was abandoned after the UK CMA decided to block the deal despite its limited connections to the UK.

Economic risks

In addition to the structural and political factors that may lead to blocking a four to three merger, several economic factors may further exacerbate the problem. While these, too, may be wrongly deemed problematic in particular cases by reviewing authorities, they are — relatively at least — better-supported by economic theory in the abstract. Moreover, even where wrongly applied, they are often impossible to refute successfully given the relevant standards. And such alleged economic concerns can act as an effective smokescreen for blocking a merger based on the sorts of political and structural considerations discussed above. Some of these economic factors include:

  • Barriers to entry. IBISWorld identifies barriers to entry to include economies of scale, long-standing relationships with existing buyers, as well as long records of safety and reliability. Strictly speaking, these are not costs borne only by a new entrant, and thus should not be deemed competitively-relevant entry barriers. Yet merger review authorities the world over fail to recognize this distinction, and routinely scuttle mergers based simply on the costs faced by additional competitors entering the market.
  • Potential unilateral effects. The extent of direct competition between the products and services sold by the merging parties is a key part of the evaluation of unilateral price effects. Competition authorities would likely consider a significant range of information to evaluate the extent of direct competition between the products and services sold by ThyssenKrupp and its merger partner. In addition to “hot docs,” this information could include won/lost bid reports as well as evidence from discount approval processes and customer switching patterns. Because the purchase of elevator and escalator products and services involves negotiation by sophisticated and experienced buyers, it is likely that this type of bid information would be readily available for review.
  • A history of coordinated conduct involving ThyssenKrupp and Kone. Competition authorities will also consider the risk that a four to three merger will increase the ability and likelihood for the remaining, smaller number of firms to collude. In 2007 the European Commission imposed a €992 million cartel fine on five elevator firms: ThyssenKrupp, Kone, Schindler, United Technologies, and Mitsubishi. At the time, it was the largest-ever cartel fine. Several companies, including Kone and UTC, admitted wrongdoing.

Conclusion

As “populist” antitrust gains more traction among enforcers aiming to stave off criticisms of lax enforcement, superficial and non-economic concerns have increased salience. The simple benefit of a resounding headline — “The US DOJ challenges increased concentration that would stifle the global construction boom” — signaling enforcers’ efforts to thwart further increases in concentration and save blue collar jobs is likely to be viewed by regulators as substantial. 

Coupled with the arguably more robust, potential economic arguments involving unilateral and coordinated effects arising from such a merger, a four to three merger like a potential ThyssenKrupp/Kone transaction would be sure to attract significant scrutiny and delay. Any arguments that such a deal might actually decrease prices and increase efficiency are — even if valid — less likely to gain as much traction in today’s regulatory environment.

Ursula von der Leyen has just announced the composition of the next European Commission. For tech firms, the headline is that Margrethe Vestager will not only retain her job as the head of DG Competition, she will also oversee the EU’s entire digital markets policy in her new role as Vice-President in charge of digital policy. Her promotion within the Commission as well as her track record at DG Competition both suggest that the digital economy will continue to be the fulcrum of European competition and regulatory intervention for the next five years.

The regulation (or not) of digital markets is an extremely important topic. Not only do we spend vast swaths of both our professional and personal lives online, but firms operating in digital markets will likely employ an ever-increasing share of the labor force in the near future

Likely recognizing the growing importance of the digital economy, the previous EU Commission intervened heavily in the digital sphere over the past five years. This resulted in a series of high-profile regulations (including the GDPR, the platform-to-business regulation, and the reform of EU copyright) and competition law decisions (most notably the Google cases). 

Lauded by supporters of the administrative state, these interventions have drawn flak from numerous corners. This includes foreign politicians (especially  Americans) who see in these measures an attempt to protect the EU’s tech industry from its foreign rivals, as well as free market enthusiasts who argue that the old continent has moved further in the direction of digital paternalism. 

Vestager’s increased role within the new Commission, the EU’s heavy regulation of digital markets over the past five years, and early pronouncements from Ursula von der Leyen all suggest that the EU is in for five more years of significant government intervention in the digital sphere.

Vestager the slayer of Big Tech

During her five years as Commissioner for competition, Margrethe Vestager has repeatedly been called the most powerful woman in Brussels (see here and here), and it is easy to see why. Yielding the heavy hammer of European competition and state aid enforcement, she has relentlessly attacked the world’s largest firms, especially American’s so-called “Tech Giants”. 

The record-breaking fines imposed on Google were probably her most high-profile victory. When Vestager entered office, in 2014, the EU’s case against Google had all but stalled. The Commission and Google had spent the best part of four years haggling over a potential remedy that was ultimately thrown out. Grabbing the bull by the horns, Margrethe Vestager made the case her own. 

Five years, three infringement decisions, and 8.25 billion euros later, Google probably wishes it had managed to keep the 2014 settlement alive. While Vestager’s supporters claim that justice was served, Barack Obama and Donald Trump, among others, branded her a protectionist (although, as Geoffrey Manne and I have noted, the evidence for this is decidedly mixed). Critics also argued that her decisions would harm innovation and penalize consumers (see here and here). Regardless, the case propelled Vestager into the public eye. It turned her into one of the most important political forces in Brussels. Cynics might even suggest that this was her plan all along.

But Google is not the only tech firm to have squared off with Vestager. Under her watch, Qualcomm was slapped with a total of €1.239 Billion in fines. The Commission also opened an investigation into Amazon’s operation of its online marketplace. If previous cases are anything to go by, the probe will most probably end with a headline-grabbing fine. The Commission even launched a probe into Facebook’s planned Libra cryptocurrency, even though it has yet to be launched, and recent talk suggests it may never be. Finally, in the area of state aid enforcement, the Commission ordered Ireland to recover €13 Billion in allegedly undue tax benefits from Apple.   

Margrethe Vestager also initiated a large-scale consultation on competition in the digital economy. The ensuing report concluded that the answer was more competition enforcement. Its findings will likely be cited by the Commission as further justification to ramp up its already significant competition investigations in the digital sphere.

Outside of the tech sector, Vestager has shown that she is not afraid to adopt controversial decisions. Blocking the proposed merger between Siemens and Alstom notably drew the ire of Angela Merkel and Emmanuel Macron, as the deal would have created a European champion in the rail industry (a key political demand in Germany and France). 

These numerous interventions all but guarantee that Vestager will not be pushing for light touch regulation in her new role as Vice-President in charge of digital policy. Vestager is also unlikely to put a halt to some of the “Big Tech” investigations that she herself launched during her previous spell at DG Competition. Finally, given her evident political capital in Brussels, it’s a safe bet that she will be given significant leeway to push forward landmark initiatives of her choosing. 

Vestager the prophet

Beneath these attempts to rein-in “Big Tech” lies a deeper agenda that is symptomatic of the EU’s current zeitgeist. Over the past couple of years, the EU has been steadily blazing a trail in digital market regulation (although much less so in digital market entrepreneurship and innovation). Underlying this push is a worldview that sees consumers and small startups as the uninformed victims of gigantic tech firms. True to form, the EU’s solution to this problem is more regulation and government intervention. This is unlikely to change given the Commission’s new (old) leadership.

If digital paternalism is the dogma, then Margrethe Vestager is its prophet. As Thibault Schrepel has shown, her speeches routinely call for digital firms to act “fairly”, and for policymakers to curb their “power”. According to her, it is our democracy that is at stake. In her own words, “you can’t sensibly talk about democracy today, without appreciating the enormous power of digital technology”. And yet, if history tells us one thing, it is that heavy-handed government intervention is anathema to liberal democracy. 

The Commission’s Google decisions neatly illustrate this worldview. For instance, in Google Shopping, the Commission concluded that Google was coercing consumers into using its own services, to the detriment of competition. But the Google Shopping decision focused entirely on competitors, and offered no evidence showing actual harm to consumers (see here). Could it be that users choose Google’s products because they actually prefer them? Rightly or wrongly, the Commission went to great lengths to dismiss evidence that arguably pointed in this direction (see here, §506-538).

Other European forays into the digital space are similarly paternalistic. The General Data Protection Regulation (GDPR) assumes that consumers are ill-equipped to decide what personal information they share with online platforms. Queue a deluge of time-consuming consent forms and cookie-related pop-ups. The jury is still out on whether the GDPR has improved users’ privacy. But it has been extremely costly for businesses — American S&P 500 companies and UK FTSE 350 companies alone spent an estimated total of $9 billion to comply with the GDPR — and has at least temporarily slowed venture capital investment in Europe. 

Likewise, the recently adopted Regulation on platform-to-business relations operates under the assumption that small firms routinely fall prey to powerful digital platforms: 

Given that increasing dependence, the providers of those services [i.e. digital platforms] often have superior bargaining power, which enables them to, in effect, behave unilaterally in a way that can be unfair and that can be harmful to the legitimate interests of their businesses users and, indirectly, also of consumers in the Union. For instance, they might unilaterally impose on business users practices which grossly deviate from good commercial conduct, or are contrary to good faith and fair dealing. 

But the platform-to-business Regulation conveniently overlooks the fact that economic opportunism is a two-way street. Small startups are equally capable of behaving in ways that greatly harm the reputation and profitability of much larger platforms. The Cambridge Analytica leak springs to mind. And what’s “unfair” to one small business may offer massive benefits to other businesses and consumers

Make what you will about the underlying merits of these individual policies, we should at least recognize that they are part of a greater whole, where Brussels is regulating ever greater aspects of our online lives — and not clearly for the benefit of consumers. 

With Margrethe Vestager now overseeing even more of these regulatory initiatives, readers should expect more of the same. The Mission Letter she received from Ursula von der Leyen is particularly enlightening in that respect: 

I want you to coordinate the work on upgrading our liability and safety rules for digital platforms, services and products as part of a new Digital Services Act…. 

I want you to focus on strengthening competition enforcement in all sectors. 

A hard rain’s a gonna fall… on Big Tech

Today’s announcements all but confirm that the EU will stay its current course in digital markets. This is unfortunate.

Digital firms currently provide consumers with tremendous benefits at no direct charge. A recent study shows that median users would need to be paid €15,875 to give up search engines for a year. They would also require €536 in order to forgo WhatsApp for a month, €97 for Facebook, and €59 to drop digital maps for the same duration. 

By continuing to heap ever more regulations on successful firms, the EU risks killing the goose that laid the golden egg. This is not just a theoretical possibility. The EU’s policies have already put technology firms under huge stress, and it is not clear that this has always been outweighed by benefits to consumers. The GDPR has notably caused numerous foreign firms to stop offering their services in Europe. And the EU’s Google decisions have forced it to start charging manufacturers for some of its apps. Are these really victories for European consumers?

It is also worth asking why there are so few European leaders in the digital economy. Not so long ago, European firms such as Nokia and Ericsson were at the forefront of the digital revolution. Today, with the possible exception of Spotify, the EU has fallen further down the global pecking order in the digital economy. 

The EU knows this, and plans to invest €100 Billion in order to boost European tech startups. But these sums will be all but wasted if excessive regulation threatens the long-term competitiveness of European startups. 

So if more of the same government intervention isn’t the answer, then what is? Recognizing that consumers have agency and are responsible for their own decisions might be a start. If you don’t like Facebook, close your account. Want a search engine that protects your privacy? Try DuckDuckGo. If YouTube and Spotify’s suggestions don’t appeal to you, create your own playlists and turn off the autoplay functions. The digital world has given us more choice than we could ever have dreamt of; but this comes with responsibility. Both Margrethe Vestager and the European institutions have often seemed oblivious to this reality. 

If the EU wants to turn itself into a digital economy powerhouse, it will have to switch towards light-touch regulation that allows firms to experiment with disruptive services, flexible employment options, and novel monetization strategies. But getting there requires a fundamental rethink — one that the EU’s previous leadership refused to contemplate. Margrethe Vestager’s dual role within the next Commission suggests that change isn’t coming any time soon.

The German Bundeskartellamt’s Facebook decision is unsound from either a competition or privacy policy perspective, and will only make the fraught privacy/antitrust relationship worse.

Continue Reading...

As has been rumored in the press for a few weeks, today Comcast announced it is considering making a renewed bid for a large chunk of Twenty-First Century Fox’s (Fox) assets. Fox is in the process of a significant reorganization, entailing primarily the sale of its international and non-television assets. Fox itself will continue, but with a focus on its US television business.

In December of last year, Fox agreed to sell these assets to Disney, in the process rejecting a bid from Comcast. Comcast’s initial bid was some 16% higher than Disney’s, although there were other differences in the proposed deals, as well.

In April of this year, Disney and Fox filed a proxy statement with the SEC explaining the basis for the board’s decision, including predominantly the assertion that the Comcast bid (NB: Comcast is identified as “Party B” in that document) presented greater regulatory (antitrust) risk.

As noted, today Comcast announced it is in “advanced stages” of preparing another unsolicited bid. This time,

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney. The structure and terms of any offer by Comcast, including with respect to both the spin-off of “New Fox” and the regulatory risk provisions and the related termination fee, would be at least as favorable to Fox shareholders as the Disney offer.

Because, as we now know (since the April proxy filing), Fox’s board rejected Comcast’s earlier offer largely on the basis of the board’s assessment of the antitrust risk it presented, and because that risk assessment (and the difference between an all-cash and all-share offer) would now be the primary distinguishing feature between Comcast’s and Disney’s bids, it is worth evaluating that conclusion as Fox and its shareholders consider Comcast’s new bid.

In short: There is no basis for ascribing a greater antitrust risk to Comcast’s purchase of Fox’s assets than to Disney’s.

Summary of the Proposed Deal

Post-merger, Fox will continue to own Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network.

The deal would transfer to Comcast (or Disney) the following:

  • Primarily, international assets, including Fox International (cable channels in Latin America, the EU, and Asia), Star India (the largest cable and broadcast network in India), and Fox’s 39% interest in Sky (Europe’s largest pay TV service).
  • Fox’s film properties, including 20th Century Fox, Fox Searchlight, and Fox Animation. These would bring along with them studios in Sydney and Los Angeles, but would not include the Fox Los Angeles backlot. Like the rest of the US film industry, the majority of Fox’s film revenue is earned overseas.
  • FX cable channels, National Geographic cable channels (of which Fox currently owns 75%), and twenty-two regional sports networks (RSNs). In terms of relative demand for the two cable networks, FX is a popular basic cable channel, but fairly far down the list of most-watched channels, while National Geographic doesn’t even crack the top 50. Among the RSNs, only one geographic overlap exists with Comcast’s current RSNs, and most of the Fox RSNs (at least 14 of the 22) are not in areas where Comcast has a substantial service presence.
  • The deal would also entail a shift in the companies’ ownership interests in Hulu. Hulu is currently owned in equal 30% shares by Disney, Comcast, and Fox, with the remaining, non-voting 10% owned by Time Warner. Either Comcast or Disney would hold a controlling 60% share of Hulu following the deal with Fox.

Analysis of the Antitrust Risk of a Comcast/Fox Merger

According to the joint proxy statement, Fox’s board discounted Comcast’s original $34.36/share offer — but not the $28.00/share offer from Disney — because of “the level of regulatory issues posed and the proposed risk allocation arrangements.” Significantly on this basis, the Fox board determined Disney’s offer to be superior.

The claim that a merger with Comcast poses sufficiently greater antitrust risk than a purchase by Disney to warrant its rejection out of hand is unsupportable, however. From an antitrust perspective, it is even plausible that a Comcast acquisition of the Fox assets would be on more-solid ground than would be a Disney acquisition.

Vertical Mergers Generally Present Less Antitrust Risk

A merger between Comcast and Fox would be predominantly vertical, while a merger between Disney and Fox, in contrast, would be primarily horizontal. Generally speaking, it is easier to get antitrust approval for vertical mergers than it is for horizontal mergers. As Bruce Hoffman, Director of the FTC’s Bureau of Competition, noted earlier this year:

[V]ertical merger enforcement is still a small part of our merger workload….

There is a strong theoretical basis for horizontal enforcement because economic models predict at least nominal potential for anticompetitive effects due to elimination of horizontal competition between substitutes.

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

On its face, and consistent with the last quarter century of merger enforcement by the DOJ and FTC, the Comcast acquisition would be less likely to trigger antitrust scrutiny, and the Disney acquisition raises more straightforward antitrust issues.

This is true even in light of the fact that the DOJ decided to challenge the AT&T-Time Warner (AT&T/TWX) merger.

The AT&T/TWX merger is a single data point in a long history of successful vertical mergers that attracted little scrutiny, and no litigation, by antitrust enforcers (although several have been approved subject to consent orders).

Just because the DOJ challenged that one merger does not mean that antitrust enforcers generally, nor even the DOJ in particular, have suddenly become more hostile to vertical mergers.

Of particular importance to the conclusion that the AT&T/TWX merger challenge is of minimal relevance to predicting the DOJ’s reception in this case, the theory of harm argued by the DOJ in that case is far from well-accepted, while the potential theory that could underpin a challenge to a Disney/Fox merger is. As Bruce Hoffman further remarks:

I am skeptical of arguments that vertical mergers cause harm due to an increased bargaining skill; this is likely not an anticompetitive effect because it does not flow from a reduction in competition. I would contrast that to the elimination of competition in a horizontal merger that leads to an increase in bargaining leverage that could raise price or reduce output.

The Relatively Lower Risk of a Vertical Merger Challenge Hasn’t Changed Following the DOJ’s AT&T/Time Warner Challenge

Judge Leon is expected to rule on the AT&T/TWX merger in a matter of weeks. The theory underpinning the DOJ’s challenge is problematic (to say the least), and the case it presented was decidedly weak. But no litigated legal outcome is ever certain, and the court could, of course, rule against the merger nevertheless.

Yet even if the court does rule against the AT&T/TWX merger, this hardly suggests that a Comcast/Fox deal would create a greater antitrust risk than would a Disney/Fox merger.

A single successful challenge to a vertical merger — what would be, in fact, the first successful vertical merger challenge in four decades — doesn’t mean that the courts are becoming hostile to vertical mergers any more than the DOJ’s challenge means that vertical mergers suddenly entail heightened enforcement risk. Rather, it would simply mean that that, given the specific facts of the case, the DOJ was able to make out its prima facie case, and that the defendants were unable to rebut it.  

A ruling for the DOJ in the AT&T/TWX merger challenge would be rooted in a highly fact-specific analysis that could have no direct bearing on future cases.

In the AT&T/TWX case, the court’s decision will turn on its assessment of the DOJ’s argument that the merged firm could raise subscriber prices by a few pennies per subscriber. But as AT&T’s attorney aptly pointed out at trial (echoing the testimony of AT&T’s economist, Dennis Carlton):

The government’s modeled price increase is so negligible that, given the inherent uncertainty in that predictive exercise, it is not meaningfully distinguishable from zero.

Even minor deviations from the facts or the assumptions used in the AT&T/TWX case could completely upend the analysis — and there are important differences between the AT&T/TWX merger and a Comcast/Fox merger. True, both would be largely vertical mergers that would bring together programming and distribution assets in the home video market. But the foreclosure effects touted by the DOJ in the AT&T/TWX merger are seemingly either substantially smaller or entirely non-existent in the proposed Comcast/Fox merger.

Most importantly, the content at issue in AT&T/TWX is at least arguably (and, in fact, argued by the DOJ) “must have” programming — Time Warner’s premium HBO channels and its CNN news programming, in particular, were central to the DOJ’s foreclosure argument. By contrast, the programming that Comcast would pick up as a result of the proposed merger with Fox — FX (a popular, but non-essential, basic cable channel) and National Geographic channels (which attract a tiny fraction of cable viewing) — would be extremely unlikely to merit that designation.

Moreover, the DOJ made much of the fact that AT&T, through DirectTV, has a national distribution footprint. As a result, its analysis was dependent upon the company’s potential ability to attract new subscribers decamping from competing providers from whom it withholds access to Time Warner content in every market in the country. Comcast, on the other hand, provides cable service in only about 35% of the country. This significantly limits its ability to credibly threaten competitors because its ability to recoup lost licensing fees by picking up new subscribers is so much more limited.

And while some RSNs may offer some highly prized live sports programming, the mismatch between Comcast’s footprint and the FOX RSNs (only about 8 of the 22 Fox RSNs are in Comcast service areas) severely limits any ability or incentive the company would have to leverage that content for higher fees. Again, to the extent that RSN programming is not “must-have,” and to the extent there is not overlap between the RSN’s geographic area and Comcast’s service area, the situation is manifestly not the same as the one at issue in the AT&T/TWX merger.

In sum, a ruling in favor of the DOJ in the AT&T/TWX case would be far from decisive in predicting how the agency and the courts would assess any potential concerns arising from Comcast’s ownership of Fox’s assets.

A Comcast/Fox Deal May Entail Lower Antitrust Risk than a Disney/Fox Merger

As discussed below, concerns about antitrust enforcement risk from a Comcast/Fox merger are likely overstated. Perhaps more importantly, however, to the extent these concerns are legitimate, they apply at least as much to a Disney/Fox merger. There is, at minimum, no basis for assuming a Comcast deal would present any greater regulatory risk.

The Antitrust Risk of a Comcast/Fox Merger Is Likely Overstated

The primary theory upon which antitrust enforcers could conceivably base a Comcast/Fox merger challenge would be a vertical foreclosure theory. Importantly, such a challenge would have to be based on the incremental effect of adding the Fox assets to Comcast, and not on the basis of its existing assets. Thus, for example, antitrust enforcers would not be able to base a merger challenge on the possibility that Comcast could leverage NBC content it currently owns to extract higher fees from competitors. Rather, only if the combination of NBC programming with additional content from Fox could create a new antitrust risk would a case be tenable.

Enforcers would be unlikely to view the addition of FX and National Geographic to the portfolio of programming content Comcast currently owns as sufficient to raise concerns that the merger would give Comcast anticompetitive bargaining power or the ability to foreclose access to its content.

Although even less likely, enforcers could be concerned with the (horizontal) addition of 20th Century Fox filmed entertainment to Universal’s existing film production and distribution. But the theatrical film market is undeniably competitive, with the largest studio by revenue (Disney) last year holding only 22% of the market. The combination of 20th Century Fox with Universal would still result in a market share only around 25% based on 2017 revenues (and, depending on the year, not even result in the industry’s largest share).

There is also little reason to think that a Comcast controlling interest in Hulu would attract problematic antitrust attention. Comcast has already demonstrated an interest in diversifying its revenue across cable subscriptions and licensing, broadband subscriptions, and licensing to OVDs, as evidenced by its recent deal to offer Netflix as part of its Xfinity packages. Hulu likely presents just one more avenue for pursuing this same diversification strategy. And Universal has a history (see, e.g., this, this, and this) of very broad licensing across cable providers, cable networks, OVDs, and the like.

In the case of Hulu, moreover, the fact that Comcast is vertically integrated in broadband as well as cable service likely reduces the anticompetitive risk because more-attractive OVD content has the potential to increase demand for Comcast’s broadband service. Broadband offers larger margins (and is growing more rapidly) than cable, and it’s quite possible that any loss in Comcast’s cable subscriber revenue from Hulu’s success would be more than offset by gains in its content licensing and broadband subscription revenue. The same, of course, goes for Comcast’s incentives to license content to OVD competitors like Netflix: Comcast plausibly gains broadband subscription revenue from heightened consumer demand for Netflix, and this at least partially offsets any possible harm to Hulu from Netflix’s success.

At the same time, especially relative to Netflix’s vast library of original programming (an expected $8 billion worth in 2018 alone) and content licensed from other sources, the additional content Comcast would gain from a merger with Fox is not likely to appreciably increase its bargaining leverage or its ability to foreclose Netflix’s access to its content.     

Finally, Comcast’s ownership of Fox’s RSNs could, as noted, raise antitrust enforcers’ eyebrows. Enforcers could be concerned that Comcast would condition competitors’ access to RSN programming on higher licensing fees or prioritization of its NBC Sports channels.

While this is indeed a potential risk, it is hardly a foregone conclusion that it would draw an enforcement action. Among other things, NBC is far from the market leader, and improving its competitive position relative to ESPN could be viewed as a benefit of the deal. In any case, potential problems arising from ownership of the RSNs could easily be dealt with through divestiture or behavioral conditions; they are extremely unlikely to lead to an outright merger challenge.

The Antitrust Risk of a Disney Deal May Be Greater than Expected

While a Comcast/Fox deal doesn’t entail no antitrust enforcement risk, it certainly doesn’t entail sufficient risk to deem the deal dead on arrival. Moreover, it may entail less antitrust enforcement risk than would a Disney/Fox tie-up.

Yet, curiously, the joint proxy statement doesn’t mention any antitrust risk from the Disney deal at all and seems to suggest that the Fox board applied no risk discount in evaluating Disney’s bid.

Disney — already the market leader in the filmed entertainment industry — would acquire an even larger share of box office proceeds (and associated licensing revenues) through acquisition of Fox’s film properties. Perhaps even more important, the deal would bring the movie rights to almost all of the Marvel Universe within Disney’s ambit.

While, as suggested above, even that combination probably wouldn’t trigger any sort of market power presumption, it would certainly create an entity with a larger share of the market and stronger control of the industry’s most valuable franchises than would a Comcast/Fox deal.

Another relatively larger complication for a Disney/Fox merger arises from the prospect of combining Fox’s RSNs with ESPN. Whatever ability or incentive either company would have to engage in anticompetitive conduct surrounding sports programming, that risk would seem to be more significant for undisputed market leader, Disney. At the same time, although still powerful, demand for ESPN on cable has been flagging. Disney could well see the ability to bundle ESPN with regional sports content as a way to prop up subscription revenues for ESPN — a practice, in fact, that it has employed successfully in the past.   

Finally, it must be noted that licensing of consumer products is an even bigger driver of revenue from filmed entertainment than is theatrical release. No other company comes close to Disney in this space.

Disney is the world’s largest licensor, earning almost $57 billion in 2016 from licensing properties like Star Wars and Marvel Comics. Universal is in a distant 7th place, with 2016 licensing revenue of about $6 billion. Adding Fox’s (admittedly relatively small) licensing business would enhance Disney’s substantial lead (even the number two global licensor, Meredith, earned less than half of Disney’s licensing revenue in 2016). Again, this is unlikely to be a significant concern for antitrust enforcers, but it is notable that, to the extent it might be an issue, it is one that applies to Disney and not Comcast.

Conclusion

Although I hope to address these issues in greater detail in the future, for now the preliminary assessment is clear: There is no legitimate basis for ascribing a greater antitrust risk to a Comcast/Fox deal than to a Disney/Fox deal.

Although not always front page news, International Trade Commission (“ITC”) decisions can have major impacts on trade policy and antitrust law. Scott Kieff, a former ITC Commissioner, recently published a thoughtful analysis of Certain Carbon and Alloy Steel Products — a potentially important ITC investigation that implicates the intersection of these two policy areas. Scott was on the ITC when the investigation was initiated in 2016, but left in 2017 before the decision was finally issued in March of this year.

Perhaps most important, the case highlights an uncomfortable truth:

Sometimes (often?) Congress writes really bad laws and promotes really bad policies, but administrative agencies can do more harm to the integrity of our legal system by abusing their authority in an effort to override those bad policies.

In this case, that “uncomfortable truth” plays out in the context of the ITC majority’s effort to override Section 337 of the Tariff Act of 1930 by limiting the ability of the ITC to investigate alleged violations of the Act rooted in antitrust.

While we’re all for limiting the ability of competitors to use antitrust claims in order to impede competition (as one of us has noted: “Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions”), it is inappropriate to make an end-run around valid and unambiguous legislation in order to do so — no matter how desirable the end result. (As the other of us has noted: “Attempts to [effect preferred policies] through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.”)

Brief background

Under Section 337, the ITC is empowered to, among other things, remedy

Unfair methods of competition and unfair acts in the importation of articles… into the United States… the threat or effect of which is to destroy or substantially injure an industry in the United States… or to restrain or monopolize trade and commerce in the United States.

In Certain Carbon and Alloy Steel Products, the ITC undertook an investigation — at the behest of U.S. Steel Corporation — into alleged violations of Section 337 by the Chinese steel industry. The complaint was based upon a number of claims, including allegations of price fixing.

As ALJ Lord succinctly summarizes in her Initial Determination:

For many years, the United States steel industry has complained of unfair trade practices by manufacturers of Chinese steel. While such practices have resulted in the imposition of high tariffs on certain Chinese steel products, U.S. Steel seeks additional remedies. The complaint by U.S. Steel in this case attempts to use section 337 of the Tariff Act of 1930 to block all Chinese carbon and alloy steel from coming into the United States. One of the grounds that U.S. Steel relies on is the allegation that the Chinese steel industry violates U.S. antitrust laws.

The ALJ dismissed the antitrust claims (alleging violations of the Sherman Act), however, concluding that they failed to allege antitrust injury as required by US courts deciding Sherman Act cases brought by private parties under the Clayton Act’s remedial provisions:

Under federal antitrust law, it is firmly established that a private complainant must show antitrust standing [by demonstrating antitrust injury]. U.S. Steel has not alleged that it has antitrust standing or the facts necessary to establish antitrust standing and erroneously contends it need not have antitrust standing to allege the unfair trade practice of restraining trade….

In its decision earlier this year, a majority of ITC commissioners agreed, and upheld the ALJ’s Initial Determination.

In comments filed with the ITC following the ALJ’s Initial Determination, we argued that the ALJ erred in her analysis:

Because antitrust injury is not an express requirement imposed by Congress, because ITC processes differ substantially from those of Article III courts, and because Section 337 is designed to serve different aims than private antitrust litigation, the Commission should reinstate the price fixing claims and allow the case to proceed.

Unfortunately, in upholding the Initial Determination, the Commission compounded this error, and also failed to properly understand the goals of the Tariff Act, and, by extension, its own role as arbiter of “unfair” trade practices.

A tale of two statutes

The case appears to turn on an arcane issue of adjudicative process in antitrust claims brought under the antitrust laws in federal court, on the one hand, versus antitrust claims brought under the Section 337 of the Tariff Act at the ITC, on the other. But it is actually about much more: the very purposes and structures of those laws.

The ALJ notes that

[The Chinese steel manufacturers contend that] under antitrust law as currently applied in federal courts, it has become very difficult for a private party like U.S. Steel to bring an antitrust suit against its competitors. Steel accepts this but says the law under section 337 should be different than in federal courts.

And as the ALJ further notes, this highlights the differences between the two regimes:

The dispute between U.S. Steel and the Chinese steel industry shows the conflict between section 337, which is intended to protect American industry from unfair competition, and U.S. antitrust laws, which are intended to promote competition for the benefit of consumers, even if such competition harms competitors.

Nevertheless, the ALJ (and the Commission) holds that antitrust laws must be applied in the same way in federal court as under Section 337 at the ITC.

It is this conclusion that is in error.

Judging from his article, it’s clear that Kieff agrees and would have dissented from the Commission’s decision. As he writes:

Unlike the focus in Section 16 of the Clayton Act on harm to the plaintiff, the provisions in the ITC’s statute — Section 337 — explicitly require the ITC to deal directly with harms to the industry or the market (rather than to the particular plaintiff)…. Where the statute protects the market rather than the individual complainant, the antitrust injury doctrine’s own internal logic does not compel the imposition of a burden to show harm to the particular private actor bringing the complaint. (Emphasis added)

Somewhat similar to the antitrust laws, the overall purpose of Section 337 focuses on broader, competitive harm — injury to “an industry in the United States” — not specific competitors. But unlike the Clayton Act, the Tariff Act does not accomplish this by providing a remedy for private parties alleging injury to themselves as a proxy for this broader, competitive harm.

As Kieff writes:

One stark difference between the two statutory regimes relates to the explicit goals that the statutes state for themselves…. [T]he Clayton Act explicitly states it is to remedy harm to only the plaintiff itself. This difference has particular significance for [the Commission’s decision in Certain Carbon and Alloy Steel Products] because the Supreme Court’s source of the private antitrust injury doctrine, its decision in Brunswick, explicitly tied the doctrine to this particular goal.

More particularly, much of the Court’s discussion in Brunswick focuses on the role the [antitrust injury] doctrine plays in mitigating the risk of unjustly enriching the plaintiff with damages awards beyond the amount of the particular antitrust harm that plaintiff actually suffered. The doctrine makes sense in the context of the Clayton Act proceedings in federal court because it keeps the cause of action focused on that statute’s stated goal of protecting a particular litigant only in so far as that party itself is a proxy for the harm to the market.

By contrast, since the goal of the ITC’s statute is to remedy for harm to the industry or to trade and commerce… there is no need to closely tie such broader harms to the market to the precise amounts of harms suffered by the particular complainant. (Emphasis and paragraph breaks added)

The mechanism by which the Clayton Act works is decidedly to remedy injury to competitors (including with treble damages). But because its larger goal is the promotion of competition, it cabins that remedy in order to ensure that it functions as an appropriate proxy for broader harms, and not simply a tool by which competitors may bludgeon each other. As Kieff writes:

The remedy provisions of the Clayton Act benefit much more than just the private plaintiff. They are designed to benefit the public, echoing the view that the private plaintiff is serving, indirectly, as a proxy for the market as a whole.

The larger purpose of Section 337 is somewhat different, and its remedial mechanism is decidedly different:

By contrast, the provisions in Section 337[] are much more direct in that they protect against injury to the industry or to trade and commerce more broadly. Harm to the particular complainant is essentially only relevant in so far as it shows harm to the industry or to trade and commerce more broadly. In turn, the remedies the ITC’s statute provides are more modest and direct in stopping any such broader harm that is determined to exist through a complete investigation.

The distinction between antitrust laws and trade laws is firmly established in the case law. And, in particular, trade laws not only focus on effects on industry rather than consumers or competition, per se, but they also contemplate a different kind of economic injury:

The “injury to industry” causation standard… focuses explicitly upon conditions in the U.S. industry…. In effect, Congress has made a judgment that causally related injury to the domestic industry may be severe enough to justify relief from less than fair value imports even if from another viewpoint the economy could be said to be better served by providing no relief. (Emphasis added)

Importantly, under Section 337 such harms to industry would ultimately have to be shown before a remedy would be imposed. In other words, demonstration of injury to competition is a constituent part of a case under Section 337. By contrast, such a demonstration is brought into an action under the antitrust laws by the antitrust injury doctrine as a function of establishing that the plaintiff has standing to sue as a proxy for broader harm to the market.

Finally, it should be noted, as ITC Commissioner Broadbent points out in her dissent from the Commission’s majority opinion, that U.S. Steel alleged in its complaint a violation of the Sherman Act, not the Clayton Act. Although its ability to enforce the Sherman Act arises from the remedial provisions of the Clayton Act, the substantive analysis of its claims is a Sherman Act matter. And the Sherman Act does not contain any explicit antitrust injury requirement. This is a crucial distinction because, as Commissioner Broadbent notes (quoting the Federal Circuit’s Tianrui case):

The “antitrust injury” standing requirement stems, not from the substantive antitrust statutes like the Sherman Act, but rather from the Supreme Court’s interpretation of the injury elements that must be proven under sections 4 and 16 of the Clayton Act.

* * *

Absent [] express Congressional limitation, restricting the Commission’s consideration of unfair methods of competition and unfair acts in international trade “would be inconsistent with the congressional purpose of protecting domestic commerce from unfair competition in importation….”

* * *

Where, as here, no such express limitation in the Sherman Act has been shown, I find no legal justification for imposing the insurmountable hurdle of demonstrating antitrust injury upon a typical U.S. company that is grappling with imports that benefit from the international unfair methods of competition that have been alleged in this case.

Section 337 is not a stand-in for other federal laws, even where it protects against similar conduct, and its aims diverge in important ways from those of other federal laws. It is, in other words, a trade protection provision, first and foremost, not an antitrust law, patent law, or even precisely a consumer protection statute.

The ITC hamstrings Itself

Kieff lays out a number of compelling points in his paper, including an argument that the ITC was statutorily designed as a convenient forum with broad powers in order to enable trade harms to be remedied without resort to expensive and protracted litigation in federal district court.

But, perhaps even more important, he points to a contradiction in the ITC’s decision that is directly related to its statutory design.

Under the Tariff Act, the Commission is entitled to self-initiate a Section 337 investigation identical to the one in Certain Alloy and Carbon Steel Products. And, as in this case, private parties are also entitled to file complaints with the Commission that can serve as the trigger for an investigation. In both instances, the ITC itself decides whether there is sufficient basis for proceeding, and, although an investigation unfolds much like litigation in federal court, it is, in fact, an investigation (and decision) undertaken by the ITC itself.

Although the Commission is statutorily mandated to initiate an investigation once a complaint is properly filed, this is subject to a provision requiring the Commission to “examine the complaint for sufficiency and compliance with the applicable sections of this Chapter.” Thus, the Commission conducts a preliminary investigation to determine if the complaint provides a sound basis for institution of an investigation, not unlike an assessment of standing and evaluation of the sufficiency of a complaint in federal court — all of which happens before an official investigation is initiated.

Yet despite the fact that, before an investigation begins, the ITC either 1) decides for itself that there is sufficient basis to initiate its own action, or else 2) evaluates the sufficiency of a private complaint to determine if the Commission should initiate an action, the logic of the decision in Certain Alloy and Carbon Steel Products would apply different standards in each case. Writes Kieff:

There appears to be broad consensus that the ITC can self-initiate an antitrust case under Section 337 and in such a proceeding would not be required to apply the antitrust injury doctrine to itself or to anyone else…. [I]t seems odd to make [this] legal distinction… After all, if it turned out there really were harm to a domestic industry or trade and commerce in this case, it would be strange for the ITC to have to dismiss this action and deprive itself of the benefit of the advance work and ongoing work of the private party [just because it was brought to the ITC’s attention by a private party complaint], only to either sit idle or expend the resources to — flying solo that time — reinitiate and proceed to completion.

Odd indeed, because, in the end, what is instituted is an investigation undertaken by the ITC — whether it originates from a private party or from its own initiative. The role of a complaining party before the ITC is quite distinct from that of a plaintiff in an Article III court.

In trade these days, it always comes down to China

We are hesitant to offer justifications for Congress’ decision to grant the ITC a sweeping administrative authority to prohibit the “unfair” importation of articles into the US, but there could be good reasons that Congress enacted the Tariff Act as a protectionist statute.

In a recent Law360 article, Kieff noted that analyzing anticompetitive behavior in the trade context is more complicated than in the domestic context. To take the current example: By limiting the complainant’s ability to initiate an ITC action based on a claim that foreign competitors are conspiring to keep prices artificially low, the ITC majority decision may be short-sighted insofar as keeping prices low might actually be part of a larger industrial and military policy for the Chinese government:

The overlooked problem is that, as the ITC petitioners claim, the Chinese government is using its control over many Chinese steel producers to accomplish full-spectrum coordination on both price and quantity. Mere allegations of course would have to be proven; but it’s not hard to imagine that such coordination could afford the Chinese government effective surveillance and control over  almost the entire worldwide supply chain for steel products.

This access would help the Chinese government run significant intelligence operations…. China is allegedly gaining immense access to practically every bid and ask up and down the supply chain across the global steel market in general, and our domestic market in particular. That much real-time visibility across steel markets can in turn give visibility into defense, critical infrastructure and finance.

Thus, by taking it upon itself to artificially narrow its scope of authority, the ITC could be undermining a valid congressional concern: that trade distortions not be used as a way to allow a foreign government to gain a more pervasive advantage over diplomatic and military operations.

No one seriously doubts that China is, at the very least, a supportive partner to much of its industry in a way that gives that industry some potential advantage over competitors operating in countries that receive relatively less assistance from national governments.

In certain industries — notably semiconductors and patent-intensive industries more broadly — the Chinese government regularly imposes onerous conditions (including mandatory IP licensing and joint ventures with Chinese firms, invasive audits, and obligatory software and hardware “backdoors”) on foreign tech companies doing business in China. It has long been an open secret that these efforts, ostensibly undertaken for the sake of national security, are actually aimed at protecting or bolstering China’s domestic industry.

And China could certainly leverage these partnerships to obtain information on a significant share of important industries and their participants throughout the world. After all, we are well familiar with this business model: cheap or highly subsidized access to a desired good or service in exchange for user data is the basic description of modern tech platform companies.

Only Congress can fix Congress

Stepping back from the ITC context, a key inquiry when examining antitrust through a trade lens is the extent to which countries will use antitrust as a non-tariff barrier to restrain trade. It is certainly the case that a sort of “mutually assured destruction” can arise where every country chooses to enforce its own ambiguously worded competition statute in a way that can favor its domestic producers to the detriment of importers. In the face of that concern, the impetus to try to apply procedural constraints on open-ended competition laws operating in the trade context is understandable.

And as a general matter, it also makes sense to be concerned when producers like U.S. Steel try to use our domestic antitrust laws to disadvantage Chinese competitors or keep them out of the market entirely.

But in this instance the analysis is more complicated. Like it or not, what amounts to injury in the international trade context, even with respect to anticompetitive conduct, is different than what’s contemplated under the antitrust laws. When the Tariff Act of 1922 was passed (which later became Section 337) the Senate Finance Committee Report that accompanied it described the scope of its unfair methods of competition authority as “broad enough to prevent every type and form of unfair practice” involving international trade. At the same time, Congress pretty clearly gave the ITC the discretion to proceed on a much less-constrained basis than that on which Article III courts operate.

If these are problems, Congress needs to fix them, not the ITC acting sua sponte.

Moreover, as Kieff’s paper (and our own comments in the Certain Alloy and Carbon Steel Products investigation) make clear, there are also a number of relevant, practical distinctions between enforcement of the antitrust laws in a federal court in a case brought by a private plaintiff and an investigation of alleged anticompetitive conduct by the ITC under Section 337. Every one of these cuts against importing an antitrust injury requirement from federal court into ITC adjudication.

Instead, understandable as its motivation may be, the ITC majority’s approach in Certain Alloy and Carbon Steel Products requires disregarding Congressional intent, and that’s simply not a tenable interpretive approach for administrative agencies to take.

Protectionism is a terrible idea, but if that’s how Congress wrote the Tariff Act, the ITC is legally obligated to enforce the protectionist law it is given.