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Untangling the 9th Circuit’s Ruling in Epic Games v Apple

Lazar Radic —  4 May 2023

The 9th U.S. Circuit Court of Appeals ruled late last month on Epic Games’ appeal of the decision rendered in 2021 by the U.S. District Court for the Northern District of California in Epic Games v Apple, affirming in part and reversing in part the district court’s judgment.

In the original case, Epic had challenged as a violation of antitrust law Apple’s prohibition of third-party app stores and in-app-payment (IAP) systems from operating on its proprietary iOS platform. The district court ruled against Epic, finding that the company’s real concern was its own business interests in the face of Apple’s business model—in particular, the commission that Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.

We at the International Center for Law & Economics filed an amicus brief in the case last year on behalf of ourselves and 26 distinguished law & economics scholars in which we highlighted two important issues we thought the court got right:

  1. The assessment of competitive harm in two-sided markets (which, in turn, hinges on the correct definition of the relevant market); and
  2. The assessment of less-restrictive alternatives.

While the 9th Circuit reached the right conclusion on the whole, it didn’t always follow the right path. The court’s understanding of anticompetitive harm in two-sided markets and the role of less-restrictive alternatives, in particular, raise more questions than they answer. Whereas the immediate result is a victory for Apple, some of the more contentious aspects of the 9th Circuit’s ruling could complicate future cases for digital platforms.

Relevant and Irrelevant Mistakes in Antitrust Market Definition

The circuit court found that District Judge Yvonne Gonzalez Rogers erred in defining the relevant market, but that the error did not undermine her conclusion. The appellate panel was not unanimous on this issue, which became the subject of a partial dissent by Judge Sidney R. Thomas. After all, didn’t Epic Games v. Apple hinge largely on the correct definition of the relevant market (see, for example, here)? How can such a seemingly crucial mistake not reverberate down to the rule-of-reason analysis and, ultimately, the outcome of the case?

As the 9th Circuit explained, however, not all mistakes in market definition are terminal. The majority wrote:

We agree that the district court erred in certain aspects of its market-definition analysis but conclude that those errors were harmless.

The mistake stemmed from the district court’s imposition of “a categorical rule that an antitrust market can never relate to a product that is licensed or sold.” But this should be read as mere dicta, not as dispositive of the case. Indeed, what the appellate court had an issue with here is the blanket statement of principle; not with how it reflected on the specific case at hand.

While the notion that antitrust markets never relate to products that are licensed or sold can—and does—lead to the rejection of Epic’s proposed relevant market (if Apple does not license or sell its iOS, by the district court’s own reasoning, iOS can’t be the relevant market), the crucial point is that Epic had failed to show that consumers were unaware that purchasing iOS devices “locks” them in, as precedent requires.

Indeed, where the plaintiffs make a single-brand aftermarket claim, it is up to them to rebut the economic presumption that consumers make a knowing choice to restrict their aftermarket options when they enter into a contract on the competitive market (see Kodak and Newcal). For the record, however, it has been argued that even when consumers are totally uninformed about aftermarket conditions when they purchase equipment, they pay a competitive-package price because competition forces manufacturers to offset later aftermarket price increases with initial equipment-price decreases.

 As the 9th Circuit explains:

Moreover, the district court’s finding on Kodak/Newcal’s consumer-unawareness requirement renders harmless its rejection of Epic’s proposed aftermarkets on the legally erroneous basis that Apple does not license or sell iOS as a standalone product. […] To establish its single-brand aftermarkets, Epic bore the burden of “rebut[ting] the economic presumption that . . . consumers make a knowing choice to restrict their aftermarket options when they decide in the initial (competitive) market to enter a . . . contract.” […] Yet the district court found that there was “no evidence in the record” that could support such a showing. As a result, Epic cannot establish its proposed aftermarkets on the record before our court—even after the district court’s erroneous reasoning is corrected.

Because Epic’s proposed aftermarkets fail, and because Apple did not cross-appeal the district court’s rejection of its proposed market (the market for all game transactions, whether on consoles, smartphones, computers, or elsewhere), the district court’s middle-ground market of mobile-games transactions therefore stands on appeal. And it is that market in which the 9th Circuit turns to assessing whether Apple’s conduct is unlawful pursuant to the Sherman Act.

A broader point, and one that is easy to miss at first glance, is that operating systems (OS) could be a valid relevant market before the 9th Circuit. The practical consequences of this are ambiguous. For a platform with a relatively small share of the OS market, like Apple, this might be, on balance, a good thing. But to the extent that defining an OS as a relevant market may be used to undergird a narrow aftermarket (such as Epic attempted to do in this case), it could also be seen as a negative.

Anticompetitive Harm: One-Sided Logic in Two-Sided Markets

The 9th Circuit rightly underscored that a showing of harm in two-sided markets must be marketwide. Regrettably, however, it failed to apply this crucial insight correctly.

As we argued in our amicus brief, Epic didn’t demonstrate that Apple’s app-distribution and IAP practices caused the significant marketwide anticompetitive effects that the U.S. Supreme Court in Amex deemed necessary in cases involving two-sided transaction markets (like Apple’s App Store). Epic instead narrowly focused only on harms to developers.

Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available and product developers’ demand for a platform increases as additional consumers use the platform. Together, the two sides’ demands increase the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.

The 9th Circuit makes essentially the same mistake here. It notes a supracompetitive 30% commission fee for IAPs and, echoing the district court, finds “some evidence” of those costs being passed on to consumers as sufficient to establish anticompetitive harm.

But this is woefully insufficient to show marketwide harm. As we noted in our brief, the full effects on other sides of the market may include reduced prices for devices, a greater range of features, or various other benefits. All such factors need to be considered when assessing whether and to what extent “the market as a whole” is harmed by seemingly restrictive conduct on one side of the market.

Furthermore, just because some developers pay higher IAP fees to Apple doesn’t mean that the total number of mobile-game transactions is lower than the counterfactual. Developers that pay the 30% IAP fee may cross-subsidize those that distribute apps for free, thereby increasing the total number of game transactions.

The 9th Circuit therefore misapplied Amex and perpetuated a mistaken approach to the analysis of anticompetitive harm in two-sided markets. In other words: even if one applies “one-sided logic in two-sided markets” and looks at the two sides of the market separately, Epic failed to demonstrate anticompetitive harm. Of course, the mistake is even more glaring if one applies, as one should, two-sided logic in two-sided markets.

Procompetitive Benefits: Two-Sided Logic in Two-Sided Markets

Highlighting its error, the two-sided logic that the 9th Circuit should have applied in step one of the rule-of-reason analysis—i.e., identifying anticompetitive harm—is then applied in step two. The court asserts:

Contrary to Epic’s contention, Apple’s procompetitive justifications do relate to the app-transactions market. Because use of the App Store requires an iOS device, there are two ways of increasing App Store output: (1) increasing the total number of iOS device users, and (2) increasing the average number of downloads and in-app purchases made by iOS device users. Below, the district court found that a large portion of consumers factored security and privacy into their decision to purchase an iOS device—increasing total iOS device users. It also found that Apple’s security- and privacy-related restrictions “provide a safe and trusted user experience on iOS, which encourages both users and developers to transact freely”—increasing the per-user average number of app transactions.

If that same holistic approach had been taken in step one, the 9th Circuit wouldn’t need to assess procompetitive justifications, because it wouldn’t have found anticompetitive harm to begin with.

This ties into a longstanding debate in antitrust; namely, whether it is proper to put the burden on the defendant to show procompetitive benefits of its conduct, or whether those benefits need to be accounted for by the plaintiff at step one in making out its prima facie case. The Amex “market as a whole” approach goes some way toward suggesting that the benefits need to be incorporated into the prima facie case, at least insofar as they occur elsewhere in the (properly defined) relevant market and may serve to undermine the claim of net harm.

Arguably, however, the conflict can be avoided by focusing on output in the relevant market—i.e., on the number of transactions. To the extent that lower prices elsewhere increase the number of gaming transactions by increasing the number of users or cross-subsidizing transactions, it may not matter exactly where the benefit occurs.

In this case, the fact of a 30% fee should have been deemed insufficient to make out a prima facie case if it was accompanied by an increase in the total number of transactions.    

Steps Three and Four of Rule of Reason: Right Outcome, Wrong Reasoning

As we have written previously, there is a longstanding question about the role and limits of less-restrictive alternatives (LRAs) under the rule of reason.

Epic’s appeal relied on theoretical LRAs to Apple’s business model to satisfy step three of the rule of reason. According to Epic, because the district court had identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor.

There were and are several problems with this reasoning. For starters, LRAs can clearly only be relevant if competitive harm has been established. As discussed above, Epic failed to demonstrate marketwide harm, as required in cases involving two-sided markets. In my view, the 9th Circuit’s findings don’t fundamentally alter this because there is still no convincing evidence of marketwide anticompetitive harm that would justify moving onto step three (or step two, for that matter) of rule-of-reason analysis.

Second, while it is true that, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, contrary to the 9th Circuit’s assertions, there is no holding in either the 9th Circuit or the Supreme Court requiring it in the context of two-sided markets (Amex refers to LRA analysis as constituting step three of the rule of reason, but because that case was resolved at step one, it must be viewed as mere dictum).

And for good reason. In the case of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users (see here).

Moreover, LRAs like the ones proposed by Epic, which are based on maximizing competitor effectiveness by “opening” an incumbent’s platform, would convert the rule of reason into a regulatory tool that may not promote competition at all. This general approach is antithetical to the role of antitrust law. That role is to act as a prophylactic against anticompetitive conduct that harms consumers, not to be a makeshift regulatory tool for redrawing business models (here).

Unfortunately, the 9th Circuit failed to grasp this. It accepted Epic’s base argument and didn’t dispute that an LRA analysis should be conducted. It instead found that, on the facts, Epic failed to propose viable LRAs to Apple’s restrictions. Even further, the 9th Circuit posited (albeit reluctantly) that where the plaintiff fails to show a LRA as part of a “third step” in rule of reason, a fourth step is required to weigh the procompetitive against anticompetitive effects.

But as the 9th Circuit itself notes, the Supreme Court’s most recent rulings—i.e., Alston and Amex—did not require a fourth step. Why would it? Cost-benefit analysis is already baked into the rule of reason. As the 9th Circuit recognizes:

We are skeptical of the wisdom of superimposing a totality-of-the-circumstances balancing step onto a three-part test that is already intended to assess a restraint’s overall effect. 

Further:

Several amici suggest that balancing is needed to pick out restrictions that have significant anticompetitive effects but only minimal procompetitive benefits. But the three-step framework is already designed to identify such an imbalance: A court is likely to find the purported benefits pretextual at step two, or step-three review will likely reveal the existence of viable LRAs.

It is therefore unclear what benefits a fourth step would offer as, in most cases, this would only serve to “briefly [confirm] the result suggested by a step-three failure: that a business practice without a less restrictive alternative is not, on balance, anticompetitive.”

The 9th Circuit’s logic here appears circular. If the necessity of step four is practically precluded by failure at step three, how can it also be that failure to show LRAs in step three requires a fourth step? If step four is triggered after failure at step three, but step four is essentially an abridged version of step three, then what is the point of step four?

This entanglement leads the 9th Circuit to the inevitable conclusion that the failure to conduct a fourth step is immaterial where courts have hitherto diligently assessed anticompetitive harms and procompetitive benefits (under any procedural label):

Even though it did not expressly reference step four, it stated that it “carefully considered the evidence in the record and . . . determined, based on the rule of reason,” that the distribution and IAP restrictions “have procompetitive effects that offset their anticompetitive effects” (emphasis added). This analysis satisfied the court’s obligation pursuant to County of Tuolumne, and the court’s failure to expressly give this analysis a step-four label was harmless.

Conclusion

The 9th Circuit found in favor of Apple on nine out of 10 counts, but it is not entirely clear that the case is a “resounding victory” for Apple. The finding that Judge Rogers’ mistakes in market definition were relevant is, essentially, a red herring (except for the possibility of OS being a relevant market before the 9th Circuit). The important parts of this ruling—and the ones which should give Apple and other digital platforms some pause—are to be found in the rule-of-reason analysis.

First, the 9th Circuit found evidence of anticompetitive harm in a two-sided market without marketwide harm, all the while recognizing, in theory, that marketwide harm is the relevant question in antitrust analysis of two-sided markets. This kind of one-sided logic is bound to result in an overestimation of competitive harm in two-sided markets.

Second, the 9th Circuit’s flawed understanding of LRAs and the need for a fourth step in rule-of-reason analysis could grant plaintiffs not one, but two last-ditch (and unjustified) attempts to make their case, even after having failed previous steps. Ironically, the 9th Circuit found that a fourth step was needed because the rule of reason is not a “rotary list” and that substance, not form, should be dispositive of whether conduct passes muster. But if the rule of reason is not a “rotary list,” why was the district court’s failure to undertake a fourth step seen as a mistake (even if, by the circuit court’s own admission, it was a harmless one)? Shouldn’t it be enough that the district court weighed the procompettive and anticompetitive effects correctly?

The 9th Circuit appears to fall into the same kind of formalistic thinking that it claims to eschew; namely, that LRAs are necessary in all markets (including two-sided ones) and that a fourth step is always necessary where step three fails, even if skipping it is often inconsequential. We will have to see how this affects future antitrust cases involving digital platforms.

In Antitrust & Competition, Apple, Exclusionary Conduct, Monopolization, Platforms, Truth on the Market , , , , ,
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Digital-Market Regulation: One Size Does Not Fit All

Lazar Radic —  17 April 2023

Regulators around the globe are scrambling for a silver bullet to “tame” tech companies. Whether it’s the United States, the United Kingdom, Australia, South Africa, or Canada, the animating rationale behind such efforts is that firms like Google, Apple, Meta, and Amazon (GAMA) engage in undesirable market conduct that falls beyond the narrow purview of antitrust law (here and here).

To tackle these supposed ills, which range from exclusionary practices and disinformation to encroachments on privacy and democratic institutions, it is asserted that sweeping new ex ante rules must be enacted and the playing field tilted in favor of enforcement agencies, which have hitherto faced what advocates characterize as insurmountable procedural hurdles (here and here).

Amid these international calls for regulatory intervention, the EU’s Digital Markets Act (DMA) has been seen as a lodestar by advocates of more aggressive competition policy. Beyond addressing social anxieties about unchecked tech power, the DMA’s primary appeal is that it claims to strive for two goals with almost universal appeal: fairness and market contestability.

Unfortunately, the DMA is not the paragon of regulation that it is sometimes made out to be. Indeed, the law is structured less to forward any purportedly universal set of principles, but instead to align digital platforms’ business models with an idiosyncratic and specifically European industrial policy, rooted in politics and protectionism. As explained below, it is unlikely other countries would benefit from emulating this strategy.

The DMA’s Protectionist Origins

While the DMA is today often lauded as eminently pro-competition (here and here), prior to its adoption, many leading European politicians were touting the text as a protectionist industrial-policy tool that would hinder U.S. firms to the benefit of European rivals: a far cry from the purely consumer-centric tool it is sometimes made out to be. French Minister of the Economy Bruno Le Maire, for example, acknowledged as much in 2021 when he said:

Digital giants are not just nice companies with whom we need to cooperate, they are rivals, rivals of the states that do not respect our economic rules, which must therefore be regulated… There is no political sovereignty without technological sovereignty. You cannot claim sovereignty if your 5G networks are Chinese, if your satellites are American, if your launchers are Russian and if all the products are imported from outside.

This logic dovetails neatly with the EU’s broader push for “technology sovereignty,” a strategy intended to reduce the continent’s dependence on technologies that originate abroad. The strategy already has been institutionalized at different levels of EU digital and industrial policy (see here and here). In fact, the European Parliament’s 2020 Briefing on “Digital Sovereignty for Europe” explicitly anticipates that an ex ante regulatory regime similar to the DMA would be a central piece of that puzzle. French President Emmanuel Macron summarized it well when he said:

If we want technological sovereignty, we’ll have to adapt our competition law, which has perhaps been too much focused solely on the consumer and not enough on defending European champions.

Moreover, it can be argued that the DMA was never intended to promote European companies that could seriously challenge the dominance of U.S. firms (see here at 13:40-14:20). Rather, the goal was always to redistribute rents across the supply chain away from digital platforms and toward third parties and competitors (what is referred to as “business users,” as opposed to “end users”). After all, with the arguable exception of Spotify and Booking.com, the EU has none of the former, and plenty of the latter. Indeed, as Pablo Ibañez Colomo has written:

The driver of many disputes that may superficially be seen as relating to leveraging can be more rationalised, more convincingly, as attempts to re-allocate rents away from vertically-integrated incumbents to rivals.

Alternative Digital Strategies to the DMA

While the DMA strives to use universal language and has a clear ambition to set global standards, under this veneer of objectivity lies a very particular vision of industrial policy and a certain normative understanding of how rents should be allocated across the value chain. That vision is not apt for everyone and, indeed, may not be apt for anyone (see here). Other countries can certainly look to the EU for inspiration and, admittedly, it would be ludicrous to expect them to ignore what goes on in the bloc.

When deciding whether and what sort of legislation to enact, however, other countries should ultimately seek those approaches that are appropriate to their own context. What they ought not do is reflexively copy templates made with certain goals in mind, which they might not share and which may be diametrically opposed to their own interests or values. Below are some suggestions for alternative strategies to the DMA.

Doubling Down on Sound Competition Laws

Mounting evidence suggests that tech companies increasingly consider the costs of regulatory compliance in planning their business strategy. For example, Meta is reportedly considering shutting down political advertising in Europe to avoid the hassle of complying with the EU’s upcoming rules on online campaigning. Just this week, it was revealed that Twitter may be considering pulling out of the EU because it doesn’t have the capacity to comply with the Code of Practice on Disinformation, a “voluntary” agreement that the Digital Services Act (DSA) will nevertheless make binding.

While perhaps the EU—the world’s third largest economy—can afford to impose costly and burdensome regulation on digital companies because it has considerable leverage to ensure (with some, though as we have seen, by no means absolute, certainty) that they will not desert the European market, smaller economies that are unlikely to be seen by GAMA as essential markets are playing a different game.

Not only do they have much smaller carrots to dangle, but they also disproportionately benefit from the enormous infrastructural investments and consumer benefits brought by GAMA (see, for example, here and here). In this context, the wiser strategy for smaller, ostensibly “nonessential” markets might be to court GAMA, rather than to castigate it. Instead of imposing intricate, costly, and untested regulatory obligations on digital platforms, these countries may reasonably wish to emphasize or bolster the transparency, predictability, and procedural safeguards (including credible judicial review) of their competition-law systems. After all, to regulate competition, you must first attract it.

Indeed, while competition is as important in developing markets as developed ones, developing markets are especially dependent upon competition rules that encourage investment in infrastructure to facilitate economic growth and that offer a secure environment for ongoing innovation. Particularly for relatively young, rapidly evolving industries like digital markets, attracting consistent investment and industry know-how ensures that such markets can innovate and transition into maturity (here and here).

Moreover, the case-by-case approach of competition law allows enforcers to tackle harmful behavior while capturing digital platforms’ procompetitive benefits, rather than throwing the baby out with the bathwater by imposing blanket prohibitions. As Giuseppe Colangelo has suggested, the assumption that competition laws are insufficient to tackle anticompetitive conduct in digital markets is a questionable one, given that most of the DMA’s contemplated prohibitions have also been the object of separate antitrust suits in the EU.

Careful Consideration of Costs and Unintended Consequences

DMA-style ex ante regulation is still untested. Its benefits, if any, still remain mostly theoretical. A tradeoff between, say, foreign direct investment (FDI) and ex ante regulation might make sense for some emerging markets if it was clear what was being traded, and at what cost. Alas, such regulations are still in an incipient phase.

The U.S. antitrust bills targeting a handful of companies seem unlikely to be adopted soon; the UK’s Digital Markets Unit proposal has still not been put to Parliament; and Japan and South Korea have imposed codes of conduct only in narrow areas. Even the DMA—the most comprehensive legislative attempt to “rein in” digital companies—entered into force only last October, and it will not start imposing its obligations on gatekeepers until February or March 2024, at the earliest.

At the same time, there are a range of risks and possible unintended consequences associated with the DMA, such as the privacy dangers of sideloading and interoperability mandates; worsening product quality as a result of blanket bans on self-preferencing; decreased innovation; obstruction of the rule of law; and double and even triple jeopardy because of the overlaps between the DMA and EU competition rules. 

Despite the uncertainty inherent in deploying experimental regulation in a fast-moving market, the EU has clearly decided that these risks are not sufficient to offset the DMA’s benefits (see here for a critical appraisal). But other countries should not take their word for it.

In conducting an independent examination, they may place more value on some of the DMA’s expected negative consequences, or may find their likelihood of occurring to be unacceptably high. This could be due to endogenous or highly context-dependent factors. In some cases, the tradeoff could mean too large a sacrifice of FDI, while in others, the rules could impinge on legitimate policy priorities, like national security. In either case, countries should evaluate the risks and benefits of the ex ante regulation of digital platforms themselves, and go their own way.

Conclusion

There are, of course, other good reasons why the DMA shouldn’t be so readily emulated by everyone, everywhere, all at once.

Giving enforcers wide discretionary powers to reshape digital markets and override product-design decisions might not be a good idea in countries with a poor track record of keeping corruption in check, or where enforcers lack the required know-how to do so effectively. Simple norms, backed by the rule of law, may not be sufficient to counteract these background conditions. But they also may be preferable to the broad mandates and tools envisioned by the kinds of ex ante regulatory proposals currently in vogue.

Smaller countries with limited budgets would probably also benefit more from castigating unequivocally harmful (and widespread) conduct, like cartels (the “cancers of the market economy”), bid rigging, distortive state aid, and mergers that create actual monopolies (see, for example, here and here), rather than applying experimental regulation underpinned by tenuous theories of harm and indeterminate benefits .

In the end, the DMA has been mistakenly taken to be a panacea or a blueprint for how to regulate tech, when it is neither of these two things. It is, instead, a particularistic approach that may or may not achieve its stated goals. In any case, it must be understood as an outgrowth of a certain industrial-policy strategy and a sui generis vision of how digital markets should distribute rents (spoiler alert: in the interest of European companies).

In Amazon, Antitrust & Competition, Apple, European Union, Facebook, Google, International, Platforms, Truth on the Market , , ,
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Killer Acquisition or Leveling Up: The Use of Mergers to Enter Adjacent Markets

Dirk Auer —  1 February 2023

In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is called “leveling up.” I find that the phrase also serves as a useful metaphor in the context of corporate mergers. Here, “leveling up” can be thought of as acquiring another firm in order to enter or reinforce one’s presence in an adjacent market where a larger and more successful incumbent is already active.

In video-game terminology, that incumbent would be the “boss.” Acquiring firms choose to level up when they recognize that building internal capacity to compete with the “boss” is too slow, too expensive, or is simply infeasible. An acquisition thus becomes the only way “to beat the boss” (or, at least, to maximize the odds of doing so).

Alas, this behavior is often mischaracterized as a “killer acquisition” or “reverse killer acquisition.” What separates leveling up from killer acquisitions is that the former serve to turn the merged entity into a more powerful competitor, while the latter attempt to weaken competition. In the case of “reverse killer acquisitions,” the assumption is that the acquiring firm would have entered the adjacent market regardless absent the merger, leaving even more firms competing in that market.

In other words, the distinction ultimately boils down to a simple (though hard to answer) question: could both the acquiring and target firms have effectively competed with the “boss” without a merger?

Because they are ubiquitous in the tech sector, these mergers—sometimes also referred to as acquisitions of nascent competitors—have drawn tremendous attention from antitrust authorities and policymakers. All too often, policymakers fail to adequately consider the realistic counterfactual to a merger and mistake leveling up for a killer acquisition. The most recent high-profile example is Meta’s acquisition of the virtual-reality fitness app Within. But in what may be a hopeful sign of a turning of the tide, a federal court appears set to clear that deal over objections from the Federal Trade Commission (FTC).

Some Recent ‘Boss Battles’

The canonical example of leveling up in tech markets is likely Google’s acquisition of Android back in 2005. While Apple had not yet launched the iPhone, it was already clear by 2005 that mobile would become an important way to access the internet (including Google’s search services). Rumors were swirling that Apple, following its tremendously successful iPod, had started developing a phone, and Microsoft had been working on Windows Mobile for a long time.

In short, there was a serious risk that Google would be reliant on a single mobile gatekeeper (i.e., Apple) if it did not move quickly into mobile. Purchasing Android was seen as the best way to do so. (Indeed, averting an analogous sort of threat appears to be driving Meta’s move into virtual reality today.)

The natural next question is whether Google or Android could have succeeded in the mobile market absent the merger. My guess is that the answer is no. In 2005, Google did not produce any consumer hardware. Quickly and successfully making the leap would have been daunting. As for Android:

Google had significant advantages that helped it to make demands from carriers and OEMs that Android would not have been able to make. In other words, Google was uniquely situated to solve the collective action problem stemming from OEMs’ desire to modify Android according to their own idiosyncratic preferences. It used the appeal of its app bundle as leverage to get OEMs and carriers to commit to support Android devices for longer with OS updates. The popularity of its apps meant that OEMs and carriers would have great difficulty in going it alone without them, and so had to engage in some contractual arrangements with Google to sell Android phones that customers wanted. Google was better resourced than Android likely would have been and may have been able to hold out for better terms with a more recognizable and desirable brand name than a hypothetical Google-less Android. In short, though it is of course possible that Android could have succeeded despite the deal having been blocked, it is also plausible that Android became so successful only because of its combination with Google. (citations omitted)

In short, everything suggests that Google’s purchase of Android was a good example of leveling up. Note that much the same could be said about the company’s decision to purchase Fitbit in order to compete against Apple and its Apple Watch (which quickly dominated the market after its launch in 2015).

A more recent example of leveling up is Microsoft’s planned acquisition of Activision Blizzard. In this case, the merger appears to be about improving Microsoft’s competitive position in the platform market for game consoles, rather than in the adjacent market for games.

At the time of writing, Microsoft is staring down the barrel of a gun: Sony is on the cusp of becoming the runaway winner of yet another console generation. Microsoft’s executives appear to have concluded that this is partly due to a lack of exclusive titles on the Xbox platform. Hence, they are seeking to purchase Activision Blizzard, one of the most successful game studios, known among other things for its acclaimed Call of Duty series.

Again, the question is whether Microsoft could challenge Sony by improving its internal game-publishing branch (known as Xbox Game Studios) or whether it needs to acquire a whole new division. This is obviously a hard question to answer, but a cursory glance at the titles shipped by Microsoft’s publishing studio suggest that the issues it faces could not simply be resolved by throwing more money at its existing capacities. Indeed, Microsoft Game Studios seems to be plagued by organizational failings that might only be solved by creating more competition within the Microsoft company. As one gaming journalist summarized:

The current predicament of these titles goes beyond the amount of money invested or the buzzwords used to market them – it’s about Microsoft’s plan to effectively manage its studios. Encouraging independence isn’t an excuse for such a blatantly hands-off approach which allows titles to fester for years in development hell, with some fostering mistreatment to occur. On the surface, it’s just baffling how a company that’s been ranked as one of the top 10 most reputable companies eight times in 11 years (as per RepTrak) could have such problems with its gaming division.

The upshot is that Microsoft appears to have recognized that its own game-development branch is failing, and that acquiring a well-functioning rival is the only way to rapidly compete with Sony. There is thus a strong case to be made that competition authorities and courts should approach the merger with caution, as it has at least the potential to significantly increase competition in the game-console industry.

Finally, leveling up is sometimes a way for smaller firms to try and move faster than incumbents into a burgeoning and promising segment. The best example of this is arguably Meta’s effort to acquire Within, a developer of VR fitness apps. Rather than being an attempt to thwart competition from a competitor in the VR app market, the goal of the merger appears to be to compete with the likes of Google, Apple, and Sony at the platform level. As Mark Zuckerberg wrote back in 2015, when Meta’s VR/AR strategy was still in its infancy:

Our vision is that VR/AR will be the next major computing platform after mobile in about 10 years… The strategic goal is clearest. We are vulnerable on mobile to Google and Apple because they make major mobile platforms. We would like a stronger strategic position in the next wave of computing….

Over the next few years, we’re going to need to make major new investments in apps, platform services, development / graphics and AR. Some of these will be acquisitions and some can be built in house. If we try to build them all in house from scratch, then we risk that several will take too long or fail and put our overall strategy at serious risk. To derisk this, we should acquire some of these pieces from leading companies.

In short, many of the tech mergers that critics portray as killer acquisitions are just as likely to be attempts by firms to compete head-on with incumbents. This “leveling up” is precisely the sort of beneficial outcome that antitrust laws were designed to promote.

Building Products Is Hard

Critics are often quick to apply the “killer acquisition” label to any merger where a large platform is seeking to enter or reinforce its presence in an adjacent market. The preceding paragraphs demonstrate that it’s not that simple, as these mergers often enable firms to improve their competitive position in the adjacent market. For obvious reasons, antitrust authorities and policymakers should be careful not to thwart this competition.

The harder part is how to separate the wheat from the chaff. While I don’t have a definitive answer, an easy first step would be for authorities to more seriously consider the supply side of the equation.

Building a new product is incredibly hard, even for the most successful tech firms. Microsoft famously failed with its Zune music player and Windows Phone. The Google+ social network never gained any traction. Meta’s foray into the cryptocurrency industry was a sobering experience. Amazon’s Fire Phone bombed. Even Apple, which usually epitomizes Silicon Valley firms’ ability to enter new markets, has had its share of dramatic failures: Apple Maps, its Ping social network, and the first Home Pod, to name a few.

To put it differently, policymakers should not assume that internal growth is always a realistic alternative to a merger. Instead, they should carefully examine whether such a strategy is timely, cost-effective, and likely to succeed.

This is obviously a daunting task. Firms will struggle to dispositively show that they need to acquire the target firm in order to effectively compete against an incumbent. The question essentially hinges on the quality of the firm’s existing management, engineers, and capabilities. All of these are difficult—perhaps even impossible—to measure. At the very least, policymakers can improve the odds of reaching a correct decision by approaching these mergers with an open mind.

Under Chair Lina Khan’s tenure, the FTC has opted for the opposite approach and taken a decidedly hostile view of tech acquisitions. The commission sued to block both Meta’s purchase of Within and Microsoft’s acquisition of Activision Blizzard. Likewise, several economists—notably Tommasso Valletti—have called for policymakers to reverse the burden of proof in merger proceedings, and opined that all mergers should be viewed with suspicion because, absent efficiencies, they always reduce competition.

Unfortunately, this skeptical approach is something of a self-fulfilling prophecy: when authorities view mergers with suspicion, they are likely to be dismissive of the benefits discussed above. Mergers will be blocked and entry into adjacent markets will occur via internal growth. 

Large tech companies’ many failed attempts to enter adjacent markets via internal growth suggest that such an outcome would ultimately harm the digital economy. Too many “boss battles” will needlessly be lost, depriving consumers of precious competition and destroying startup companies’ exit strategies.

In Antitrust & Competition, Apple, Exclusionary Conduct, Facebook, Federal Trade Commission, Google, Mergers & Acquisitions, Platforms, Truth on the Market , , , , , , , ,
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What Do Twitter’s Struggles with CSAM Mean for Section 230 Reform? 

Ben Sperry & Kristian Stout —  15 December 2022

Twitter has seen a lot of ups and downs since Elon Musk closed on his acquisition of the company in late October and almost immediately set about his initiatives to “reform” the platform’s operations.

One of the stories that has gotten somewhat lost in the ensuing chaos is that, in the short time under Musk, Twitter has made significant inroads—on at least some margins—against the visibility of child sexual abuse material (CSAM) by removing major hashtags that were used to share it, creating a direct reporting option, and removing major purveyors. On the other hand, due to the large reductions in Twitter’s workforce—both voluntary and involuntary—there are now very few human reviewers left to deal with the issue.

Section 230 immunity currently protects online intermediaries from most civil suits for CSAM (a narrow carveout is made under Section 1595 of the Trafficking Victims Protection Act). While the federal government could bring criminal charges if it believes online intermediaries are violating federal CSAM laws, and certain narrow state criminal claims could be brought consistent with federal law, private litigants are largely left without the ability to find redress on their own in the courts.

This, among other reasons, is why there has been a push to amend Section 230 immunity. Our proposal (along with co-author Geoffrey Manne) suggests online intermediaries should have a reasonable duty of care to remove illegal content. But this still requires thinking carefully about what a reasonable duty of care entails.

For instance, one of the big splash moves made by Twitter after Musk’s acquisition was to remove major CSAM distribution hashtags. While this did limit visibility of CSAM for a time, some experts say it doesn’t really solve the problem, as new hashtags will arise. So, would a reasonableness standard require the periodic removal of major hashtags? Perhaps it would. It appears to have been a relatively low-cost way to reduce access to such material, and could theoretically be incorporated into a larger program that uses automated discovery to find and remove future hashtags.

Of course it won’t be perfect, and will be subject to something of a Whac-A-Mole dynamic. But the relevant question isn’t whether it’s a perfect solution, but whether it yields significant benefit relative to its cost, such that it should be regarded as a legally reasonable measure that platforms should broadly implement.

On the flip side, Twitter has lost such a large amount of its workforce that it potentially no longer has enough staff to do the important review of CSAM. As long as Twitter allows adult nudity, and algorithms are unable to effectively distinguish between different types of nudity, human reviewers remain essential. A reasonableness standard might also require sufficient staff and funding dedicated to reviewing posts for CSAM. 

But what does it mean for a platform to behave “reasonably”?

Platforms Should Behave ‘Reasonably’

Rethinking platforms’ safe harbor from liability as governed by a “reasonableness” standard offers a way to more effectively navigate the complexities of these tradeoffs without resorting to the binary of immunity or total liability that typically characterizes discussions of Section 230 reform.

It could be the case that, given the reality that machines can’t distinguish between “good” and “bad” nudity, it is patently unreasonable for an open platform to allow any nudity at all if it is run with the level of staffing that Musk seems to prefer for Twitter.

Consider the situation that MindGeek faced a couple of years ago. It was pressured by financial providers, including PayPal and Visa, to clean up the CSAM and nonconsenual pornography that appeared on its websites. In response, they removed more than 80% of suspected illicit content and required greater authentication for posting.

Notwithstanding efforts to clean up the service, a lawsuit was filed against MindGeek and Visa by victims who asserted that the credit-card company was a knowing conspirator for processing payments to MindGeek’s sites when they were purveying child pornography. Notably, Section 230 issues were dismissed early on in the case, but the remaining claims—rooted in the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Trafficking Victims Protection Act (TVPA)—contained elements that support evaluating the conduct of online intermediaries, including payment providers who support online services, through a reasonableness lens.

In our amicus, we stressed the broader policy implications of failing to appropriately demarcate the bounds of liability. In short, we stressed that deterrence is best encouraged by placing responsibility for control on the party most closely able to monitor the situation—i.e., MindGeek, and not Visa. Underlying this, we believe that an appropriately tuned reasonableness standard should be able to foreclose these sorts of inquiries at early stages of litigation if there is good evidence that an intermediary behaved reasonably under the circumstances.

In this case, we believed the court should have taken seriously the fact that a payment processor needs to balance a number of competing demands— legally, economically, and morally—in a way that enables them to serve their necessary prosocial roles. Here, Visa had to balance its role, on the one hand, as a neutral intermediary responsible for handling millions of daily transactions, with its interests to ensure that it did not facilitate illegal behavior. But it also was operating, essentially, under a veil of ignorance: all of the information it had was derived from news reports, as it was not directly involved in, nor did it have special insight into, the operation of MindGeek’s businesses.

As we stressed in our intermediary-liability paper, there is indeed a valid concern that changes to intermediary-liability policy not invite a flood of ruinous litigation. Instead, there needs to be some ability to determine at the early stages of litigation whether a defendant behaved reasonably under the circumstances. In the MindGeek case, we believed that Visa did.

In essence, much of this approach to intermediary liability boils down to finding socially and economically efficient dividing lines that can broadly demarcate when liability should attach. For example, if Visa is liable as a co-conspirator in MindGeek’s allegedly illegal enterprise for providing a payment network that MindGeek uses by virtue of its relationship with yet other intermediaries (i.e., the banks that actually accept and process the credit-card payments), why isn’t the U.S. Post Office also liable for providing package-delivery services that allow MindGeek to operate? Or its maintenance contractor for cleaning and maintaining its offices?

Twitter implicitly engaged in this sort of analysis when it considered becoming an OnlyFans competitor. Despite having considerable resources—both algorithmic and human—Twitter’s internal team determined they could not “accurately detect child sexual exploitation and non-consensual nudity at scale.” As a result, they abandoned the project. Similarly, Tumblr tried to make many changes, including taking down CSAM hashtags, before finally giving up and removing all pornographic material in order to remain in the App Store for iOS. At root, these firms demonstrated the ability to weigh costs and benefits in ways entirely consistent with a reasonableness analysis. 

Thinking about the MindGeek situation again, it could also be the case that MindGeek did not behave reasonably. Some of MindGeek’s sites encouraged the upload of user-generated pornography. If MindGeek experienced the same limitations in detecting “good” and “bad” pornography (which is likely), it could be that the company behaved recklessly for many years, and only tightened its verification procedures once it was caught. If true, that is behavior that should not be protected by the law with a liability shield, as it is patently unreasonable.

Apple is sometimes derided as an unfair gatekeeper of speech through its App Store. But, ironically, Apple itself has made complex tradeoffs between data security and privacy—through use of encryption, on the one hand, and checking devices for CSAM material, on the other. Prioritizing encryption over scanning devices (especially photos and messages) for CSAM is a choice that could allow for more CSAM to proliferate. But the choice is, again, a difficult one: how much moderation is needed and how do you balance such costs against other values important to users, such as privacy for the vast majority of nonoffending users?

As always, these issues are complex and involve tradeoffs. But it is obvious that more can and needs to be done by online intermediaries to remove CSAM.

But What Is ‘Reasonable’? And How Do We Get There?

The million-dollar legal question is what counts as “reasonable?” We are not unaware of the fact that, particularly when dealing with online platforms that deal with millions of users a day, there is a great deal of surface area exposed to litigation by potentially illicit user-generated conduct. Thus, it is not the case, at least for the foreseeable future, that we need to throw open gates of a full-blown common-law process to determine questions of intermediary liability. What is needed, instead, is a phased-in approach that gets courts in the business of parsing these hard questions and building up a body of principles that, on the one hand, encourage platforms to do more to control illicit content on their services, and on the other, discourages unmeritorious lawsuits by the plaintiffs’ bar.

One of our proposals for Section 230 reform is for a multistakeholder body, overseen by an expert agency like the Federal Trade Commission or National Institute of Standards and Technology, to create certified moderation policies. This would involve online intermediaries working together with a convening federal expert agency to develop a set of best practices for removing CSAM, including thinking through the cost-benefit analysis of more moderation—human or algorithmic—or even wholesale removal of nudity and pornographic content.

Compliance with these standards should, in most cases, operate to foreclose litigation against online service providers at an early stage. If such best practices are followed, a defendant could point to its moderation policies as a “certified answer” to any complaint alleging a cause of action arising out of user-generated content. Compliant practices will merit dismissal of the case, effecting a safe harbor similar to the one currently in place in Section 230.

In litigation, after a defendant answers a complaint with its certified moderation policies, the burden would shift to the plaintiff to adduce sufficient evidence to show that the certified standards were not actually adhered to. Such evidence should be more than mere res ipsa loquitur; it must be sufficient to demonstrate that the online service provider should have been aware of a harm or potential harm, that it had the opportunity to cure or prevent it, and that it failed to do so. Such a claim would need to meet a heightened pleading requirement, as for fraud, requiring particularity. And, periodically, the body overseeing the development of this process would incorporate changes to the best practices standards based on the cases being brought in front of courts.

Online service providers don’t need to be perfect in their content-moderation decisions, but they should behave reasonably. A properly designed duty-of-care standard should be flexible and account for a platform’s scale, the nature and size of its user base, and the costs of compliance, among other considerations. What is appropriate for YouTube, Facebook, or Twitter may not be the same as what’s appropriate for a startup social-media site, a web-infrastructure provider, or an e-commerce platform.

Indeed, this sort of flexibility is a benefit of adopting a “reasonableness” standard, such as is found in common-law negligence. Allowing courts to apply the flexible common-law duty of reasonable care would also enable jurisprudence to evolve with the changing nature of online intermediaries, the problems they pose, and the moderating technologies that become available.

Conclusion

Twitter and other online intermediaries continue to struggle with the best approach to removing CSAM, nonconsensual pornography, and a whole host of other illicit content. There are no easy answers, but there are strong ethical reasons, as well as legal and market pressures, to do more. Section 230 reform is just one part of a complete regulatory framework, but it is an important part of getting intermediary liability incentives right. A reasonableness approach that would hold online platforms accountable in a cost-beneficial way is likely to be a key part of a positive reform agenda for Section 230.

In Apple, Credit Cards, Platforms, Truth on the Market, Twitter , , , , ,
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7 Big Questions About the Open App Markets Act

Lazar Radic —  1 November 2022

With just a week to go until the U.S. midterm elections, which potentially herald a change in control of one or both houses of Congress, speculation is mounting that congressional Democrats may seek to use the lame-duck session following the election to move one or more pieces of legislation targeting the so-called “Big Tech” companies.

Gaining particular notice—on grounds that it is the least controversial of the measures—is S. 2710, the Open App Markets Act (OAMA). Introduced by Sen. Richard Blumenthal (D-Conn.), the Senate bill has garnered 14 cosponsors: exactly seven Republicans and seven Democrats. It would, among other things, force certain mobile app stores and operating systems to allow “sideloading” and open their platforms to rival in-app payment systems.

Unfortunately, even this relatively restrained legislation—at least, when compared to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act or the European Union’s Digital Markets Act (DMA)—is highly problematic in its own right. Here, I will offer seven major questions the legislation leaves unresolved.

1.     Are Quantitative Thresholds a Good Indicator of ‘Gatekeeper Power’?

It is no secret that OAMA has been tailor-made to regulate two specific app stores: Android’s Google Play Store and Apple’s Apple App Store (see here, here, and, yes, even Wikipedia knows it).The text makes this clear by limiting the bill’s scope to app stores with more than 50 million users, a threshold that only Google Play and the Apple App Store currently satisfy.

However, purely quantitative thresholds are a poor indicator of a company’s potential “gatekeeper power.” An app store might have much fewer than 50 million users but cater to a relevant niche market. By the bill’s own logic, why shouldn’t that app store likewise be compelled to be open to competing app distributors? Conversely, it may be easy for users of very large app stores to multi-home or switch seamlessly to competing stores. In either case, raw user data paints a distorted picture of the market’s realities.

As it stands, the bill’s thresholds appear arbitrary and pre-committed to “disciplining” just two companies: Google and Apple. In principle, good laws should be abstract and general and not intentionally crafted to apply only to a few select actors. In OAMA’s case, the law’s specific thresholds are also factually misguided, as purely quantitative criteria are not a good proxy for the sort of market power the bill purportedly seeks to curtail.

2.     Why Does the Bill not Apply to all App Stores?

Rather than applying to app stores across the board, OAMA targets only those associated with mobile devices and “general purpose computing devices.” It’s not clear why.

For example, why doesn’t it cover app stores on gaming platforms, such as Microsoft’s Xbox or Sony’s PlayStation?

Source: Visual Capitalist

Currently, a PlayStation user can only buy digital games through the PlayStation Store, where Sony reportedly takes a 30% cut of all sales—although its pricing schedule is less transparent than that of mobile rivals such as Apple or Google.

Clearly, this bothers some developers. Much like Epic Games CEO Tim Sweeney’s ongoing crusade against the Apple App Store, indie-game publisher Iain Garner of Neon Doctrine recently took to Twitter to complain about Sony’s restrictive practices. According to Garner, “Platform X” (clearly PlayStation) charges developers up to $25,000 and 30% of subsequent earnings to give games a modicum of visibility on the platform, in addition to requiring them to jump through such hoops as making a PlayStation-specific trailer and writing a blog post. Garner further alleges that Sony severely circumscribes developers’ ability to offer discounts, “meaning that Platform X owners will always get the worst deal!” (see also here).

Microsoft’s Xbox Game Store similarly takes a 30% cut of sales. Presumably, Microsoft and Sony both have the same type of gatekeeper power in the gaming-console market that Apple and Google are said to have on their respective platforms, leading to precisely those issues that OAMA ostensibly purports to combat. Namely, that consumers are not allowed to choose alternative app stores through which to buy games on their respective consoles, and developers must acquiesce to Sony’s and Microsoft’s terms if they want their games to reach those players.

More broadly, dozens of online platforms also charge commissions on the sales made by their creators. To cite but a few: OnlyFans takes a 20% cut of sales; Facebook gets 30% of the revenue that creators earn from their followers; YouTube takes 45% of ad revenue generated by users; and Twitch reportedly rakes in 50% of subscription fees.

This is not to say that all these services are monopolies that should be regulated. To the contrary, it seems like fees in the 20-30% range are common even in highly competitive environments. Rather, it is merely to observe that there are dozens of online platforms that demand a percentage of the revenue that creators generate and that prevent those creators from bypassing the platform. As well they should, after all, because creating and improving a platform is not free.

It is nonetheless difficult to see why legislation regulating online marketplaces should focus solely on two mobile app stores. Ultimately, the inability of OAMA’s sponsors to properly account for this carveout diminishes the law’s credibility.

3.     Should Picking Among Legitimate Business Models Be up to Lawmakers or Consumers?

“Open” and “closed” platforms posit two different business models, each with its own advantages and disadvantages. Some consumers may prefer more open platforms because they grant them more flexibility to customize their mobile devices and operating systems. But there are also compelling reasons to prefer closed systems. As Sam Bowman observed, narrowing choice through a more curated system frees users from having to research every possible option every time they buy or use some product. Instead, they can defer to the platform’s expertise in determining whether an app or app store is trustworthy or whether it contains, say, objectionable content.

Currently, users can choose to opt for Apple’s semi-closed “walled garden” iOS or Google’s relatively more open Android OS (which OAMA wants to pry open even further). Ironically, under the pretext of giving users more “choice,” OAMA would take away the possibility of choice where it matters the most—i.e., at the platform level. As Mikolaj Barczentewicz has written:

A sideloading mandate aims to give users more choice. It can only achieve this, however, by taking away the option of choosing a device with a “walled garden” approach to privacy and security (such as is taken by Apple with iOS).

This obviates the nuances between the two and pushes Android and iOS to converge around a single model. But if consumers unequivocally preferred open platforms, Apple would have no customers, because everyone would already be on Android.

Contrary to regulators’ simplistic assumptions, “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play between these two perfectly valid business models that belie simplistic characterizations of one being inherently superior to the other.

It is debatable whether courts, regulators, or legislators are well-situated to resolve these complex tradeoffs by substituting businesses’ product-design decisions and consumers’ revealed preferences with their own. After all, if regulators had such perfect information, we wouldn’t need markets or competition in the first place.

4.     Does OAMA Account for the Security Risks of Sideloading?

Platforms retaining some control over the apps or app stores allowed on their operating systems bolsters security, as it allows companies to weed out bad players.

Both Apple and Google do this, albeit to varying degrees. For instance, Android already allows sideloading and third-party in-app payment systems to some extent, while Apple runs a tighter ship. However, studies have shown that it is precisely the iOS “walled garden” model which gives it an edge over Android in terms of privacy and security. Even vocal Apple critic Tim Sweeney recently acknowledged that increased safety and privacy were competitive advantages for Apple.

The problem is that far-reaching sideloading mandates—such as the ones contemplated under OAMA—are fundamentally at odds with current privacy and security capabilities (see here and here).

OAMA’s defenders might argue that the law does allow covered platforms to raise safety and security defenses, thus making the tradeoffs between openness and security unnecessary. But the bill places such stringent conditions on those defenses that platform operators will almost certainly be deterred from risking running afoul of the law’s terms. To invoke the safety and security defenses, covered companies must demonstrate that provisions are applied on a “demonstrably consistent basis”; are “narrowly tailored and could not be achieved through less discriminatory means”; and are not used as a “pretext to exclude or impose unnecessary or discriminatory terms.”

Implementing these stringent requirements will drag enforcers into a micromanagement quagmire. There are thousands of potential spyware, malware, rootkit, backdoor, and phishing (to name just a few) software-security issues—all of which pose distinct threats to an operating system. The Federal Trade Commission (FTC) and the federal courts will almost certainly struggle to control the “consistency” requirement across such varied types.

Likewise, OAMA’s reference to “least discriminatory means” suggests there is only one valid answer to any given security-access tradeoff. Further, depending on one’s preferred balance between security and “openness,” a claimed security risk may or may not be “pretextual,” and thus may or may not be legal.

Finally, the bill text appears to preclude the possibility of denying access to a third-party app or app store for reasons other than safety and privacy. This would undermine Apple’s and Google’s two-tiered quality-control systems, which also control for “objectionable” content such as (child) pornography and social engineering. 

5.     How Will OAMA Safeguard the Rights of Covered Platforms?

OAMA is also deeply flawed from a procedural standpoint. Most importantly, there is no meaningful way to contest the law’s designation as “covered company,” or the harms associated with it.

Once a company is “covered,” it is presumed to hold gatekeeper power, with all the associated risks for competition, innovation, and consumer choice. Remarkably, this presumption does not admit any qualitative or quantitative evidence to the contrary. The only thing a covered company can do to rebut the designation is to demonstrate that it, in fact, has fewer than 50 million users.

By preventing companies from showing that they do not hold the kind of gatekeeper power that harms competition, decreases innovation, raises prices, and reduces choice (the bill’s stated objectives), OAMA severely tilts the playing field in the FTC’s favor. Even the EU’s enforcer-friendly DMA incorporated a last-minute amendment allowing firms to dispute their status as “gatekeepers.” While this defense is not perfect (companies cannot rely on the same qualitative evidence that the European Commission can use against them), at least gatekeeper status can be contested under the DMA.

6.     Should Legislation Protect Competitors at the Expense of Consumers?

Like most of the new wave of regulatory initiatives against Big Tech (but unlike antitrust law), OAMA is explicitly designed to help competitors, with consumers footing the bill.

For example, OAMA prohibits covered companies from using or combining nonpublic data obtained from third-party apps or app stores operating on their platforms in competition with those third parties. While this may have the short-term effect of redistributing rents away from these platforms and toward competitors, it risks harming consumers and third-party developers in the long run.

Platforms’ ability to integrate such data is part of what allows them to bring better and improved products and services to consumers in the first place. OAMA tacitly admits this by recognizing that the use of nonpublic data grants covered companies a competitive advantage. In other words, it allows them to deliver a product that is better than competitors’.

Prohibiting self-preferencing raises similar concerns. Why wouldn’t a company that has invested billions in developing a successful platform and ecosystem not give preference to its own products to recoup some of that investment? After all, the possibility of exercising some control over downstream and adjacent products is what might have driven the platform’s development in the first place. In other words, self-preferencing may be a symptom of competition, and not the absence thereof. Third-party companies also would have weaker incentives to develop their own platforms if they can free-ride on the investments of others. And platforms that favor their own downstream products might simply be better positioned to guarantee their quality and reliability (see here and here).

In all of these cases, OAMA’s myopic focus on improving the lot of competitors for easy political points will upend the mobile ecosystems from which both users and developers derive significant benefit.

7.     Shouldn’t the EU Bear the Risks of Bad Tech Regulation?

Finally, U.S. lawmakers should ask themselves whether the European Union, which has no tech leaders of its own, is really a model to emulate. Today, after all, marks the day the long-awaited Digital Markets Act— the EU’s response to perceived contestability and fairness problems in the digital economy—officially takes effect. In anticipation of the law entering into force, I summarized some of the outstanding issues that will define implementation moving forward in this recent tweet thread.

We have been critical of the DMA here at Truth on the Market on several factual, legal, economic, and procedural grounds. The law’s problems range from it essentially being a tool to redistribute rents away from platforms and to third-parties, despite it being unclear why the latter group is inherently more deserving (Pablo Ibañez Colomo has raised a similar point); to its opacity and lack of clarity, a process that appears tilted in the Commission’s favor; to the awkward way it interacts with EU competition law, ignoring the welfare tradeoffs between the models it seeks to impose and perfectly valid alternatives (see here and here); to its flawed assumptions (see, e.g., here on contestability under the DMA); to the dubious legal and economic value of the theory of harm known as  “self-preferencing”; to the very real possibility of unintended consequences (e.g., in relation to security and interoperability mandates).

In other words, that the United States lags the EU in seeking to regulate this area might not be a bad thing, after all. Despite the EU’s insistence on being a trailblazing agenda-setter at all costs, the wiser thing in tech regulation might be to remain at a safe distance. This is particularly true when one considers the potentially large costs of legislative missteps and the difficulty of recalibrating once a course has been set.

U.S. lawmakers should take advantage of this dynamic and learn from some of the Old Continent’s mistakes. If they play their cards right and take the time to read the writing on the wall, they might just succeed in averting antitrust’s uncertain future.

In Antitrust & Competition, Apple, Data Privacy & Security, European Union, Federal Trade Commission, Google, Monopolization, Platforms, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , , , , , , ,
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Waking up to Platform Regulation

Friso Bostoen —  29 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Brrring! “Gee, this iPhone alarm is the worst—I should really change that sometime. Let’s see what’s in my calendar for today…”

In accordance with new regulatory requirements, Apple is providing you with a choice of app stores. Please select an option from the menu below. Going forward, iOS applications will download via the selected store by default. To read additional information about an app store, tap “learn more”; to confirm your selection, tap “install.” Beware: outside of the App Store, Apple is not responsible for the privacy and security of applications and transactions.

“Wait, didn’t I have to make this choice last year already—or did that concern browsers? What do ‘new regulatory requirements’ even mean? And how is there no ‘remind me later’ button like there is for iOS updates? They really shouldn’t push this upon people before their morning coffee. Guess I’ll just stick with the devil I know and select the App Store like last time?

“Then again, if I’m to believe those targeted ads, that’s costing me serious money. And didn’t Steve say he saves like $3 on his Tinder subscription every month with whatever store he’s using? That could add up, especially if it also applies for Spotify and Netflix. But I don’t want some dodgy app from some obscure store to brick my phone either. Well, I suppose it can’t hurt to look at the options.”

Appdroid – A wide choice of apps without Apple’s puritan content restrictions. Install now and discover *everything* the developer community has to offer.

“Why am I getting the feeling that this store’s focus might be … NSFW?”

Amazon AppStore – Your trusted partner in distribution. Lower fees guaranteed and Prime members get an additional 5% discount on every in-app purchase. Install now and receive a $25 welcome credit.

“Well, at least I know those guys. But they already handle my e-commerce, video streaming, game streaming, and have even started delivering my prescription medicine… I’m not sure I also want them taking over my phone—these ads are targeted enough as they are.”

Epic Store – The premium app-store experience without the premium price point. On average, users of the Epic Store save $20/year on app purchases. And all apps are subject to human review—just like in the App Store.

“Epic, that sounds familiar… Oh right, that’s the maker of Fortnite, isn’t it? Gosh, it’s been a while since I played that game. If they can create a virtual world like that, I guess they can run an app store.

“But do these alternatives even have all the apps I want? If not, where do I get them? And don’t tell me ‘the web’ because the last time I downloaded an app from a random website was… not great. I don’t want to have to make another trip to the Genius Bar. Although I suppose I have learned my lesson now: trust those pop-ups with security warnings and only download apps with a ‘notarized by Apple’ badge.

“And I guess there’s the opposite problem too: it’s not like the App Store has everything. Despite all sorts of announcements, I still can’t find xCloud in the App Store. Accessing that cloud-gaming service via the web has been a pain, although it’s gotten a bit better since I ditched Safari in that browser choice screen. Does selecting another app store mean I can finally download a cloud-gaming app?”

App Store – The most popular app store, designed especially for iOS. After more than a decade, the App Store continues to lead the industry in terms of privacy, security and user-friendliness—and now boasts an attractive new fee structure.

“A new fee structure… God, save me from having to tap ‘learn more’ to find out what that means. I’ve had to learn more about the app ecosystem than is good for me already.

“Oh wait, what’s that? There is actually a ‘remind me later’ button—its clever shading escaping my bleary eyes… Guess I’ll offload this app-store selection on future me!”

In Antitrust & Competition, Antitrust’s Uncertain Future, Apple, Platforms, Symposia, Truth on the Market , , ,
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The Four Ways of Spending Data

Stephen Dnes —  28 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

In Free to Choose, Milton Friedman famously noted that there are four ways to spend money[1]:

  1. Spending your own money on yourself. For example, buying groceries or lunch. There is a strong incentive to economize and to get full value.
  2. Spending your own money on someone else. For example, buying a gift for another. There is a strong incentive to economize, but perhaps less to achieve full value from the other person’s point of view. Altruism is admirable, but it differs from value maximization, since—strictly speaking—giving cash would maximize the other’s value. Perhaps the point of a gift is that it does not amount to cash and the maximization of the other person’s welfare from their point of view.
  3. Spending someone else’s money on yourself. For example, an expensed business lunch. “Pass me the filet mignon and Chateau Lafite! Do you have one of those menus without any prices?” There is a strong incentive to get maximum utility, but there is little incentive to economize.
  4. Spending someone else’s money on someone else. For example, applying the proceeds of taxes or donations. There may be an indirect desire to see utility, but incentives for quality and cost management are often diminished.

This framework can be criticized. Altruism has a role. Not all motives are selfish. There is an important role for action to help those less fortunate, which might mean, for instance, that a charity gains more utility from category (4) (assisting the needy) than from category (3) (the charity’s holiday party). It always depends on the facts and the context. However, there is certainly a grain of truth in the observation that charity begins at home and that, in the final analysis, people are best at managing their own affairs.

How would this insight apply to data interoperability? The difficult cases of assisting the needy do not arise here: there is no serious sense in which data interoperability does, or does not, result in destitution. Thus, Friedman’s observations seem to ring true: when spending data, those whose data it is seem most likely to maximize its value. This is especially so where collection of data responds to incentives—that is, the amount of data collected and processed responds to how much control over the data is possible.

The obvious exception to this would be a case of market power. If there is a monopoly with persistent barriers to entry, then the incentive may not be to maximize total utility, and therefore to limit data handling to the extent that a higher price can be charged for the lesser amount of data that does remain available. This has arguably been seen with some data-handling rules: the “Jedi Blue” agreement on advertising bidding, Apple’s Intelligent Tracking Prevention and App Tracking Transparency, and Google’s proposed Privacy Sandbox, all restrict the ability of others to handle data. Indeed, they may fail Friedman’s framework, since they amount to the platform deciding how to spend others’ data—in this case, by not allowing them to collect and process it at all.

It should be emphasized, though, that this is a special case. It depends on market power, and existing antitrust and competition laws speak to it. The courts will decide whether cases like Daily Mail v Google and Texas et al. v Google show illegal monopolization of data flows, so as to fall within this special case of market power. Outside the United States, cases like the U.K. Competition and Markets Authority’s Google Privacy Sandbox commitments and the European Union’s proposed commitments with Amazon seek to allow others to continue to handle their data and to prevent exclusivity from arising from platform dynamics, which could happen if a large platform prevents others from deciding how to account for data they are collecting. It will be recalled that even Robert Bork thought that there was risk of market power harms from the large Microsoft Windows platform a generation ago.[2] Where market power risks are proven, there is a strong case that data exclusivity raises concerns because of an artificial barrier to entry. It would only be if the benefits of centralized data control were to outweigh the deadweight loss from data restrictions that this would be untrue (though query how well the legal processes verify this).

Yet the latest proposals go well beyond this. A broad interoperability right amounts to “open season” for spending others’ data. This makes perfect sense in the European Union, where there is no large domestic technology platform, meaning that the data is essentially owned via foreign entities (mostly, the shareholders of successful U.S. and Chinese companies). It must be very tempting to run an industrial policy on the basis that “we’ll never be Google” and thus to embrace “sharing is caring” as to others’ data.

But this would transgress the warning from Friedman: would people optimize data collection if it is open to mandatory sharing even without proof of market power? It is deeply concerning that the EU’s DATA Act is accompanied by an infographic that suggests that coffee-machine data might be subject to mandatory sharing, to allow competition in services related to the data (e.g., sales of pods; spare-parts automation). There being no monopoly in coffee machines, this simply forces vertical disintegration of data collection and handling. Why put a data-collection system into a coffee maker at all, if it is to be a common resource? Friedman’s category (4) would apply: the data is taken and spent by another. There is no guarantee that there would be sensible decision making surrounding the resource.

It will be interesting to see how common-law jurisdictions approach this issue. At the risk of stating the obvious, the polity in continental Europe differs from that in the English-speaking democracies when it comes to whether the collective, or the individual, should be in the driving seat. A close read of the UK CMA’s Google commitments is interesting, in that paragraph 30 requires no self-preferencing in data collection and requires future data-handling systems to be designed with impacts on competition in mind. No doubt the CMA is seeking to prevent data-handling exclusivity on the basis that this prevents companies from using their data collection to compete. This is far from the EU DATA Act’s position in that it is certainly not a right to handle Google’s data: it is simply a right to continue to process one’s own data.

U.S. proposals are at an earlier stage. It would seem important, as a matter of principle, not to make arbitrary decisions about vertical integration in data systems, and to identify specific market-power concerns instead, in line with common-law approaches to antitrust.

It might be very attractive to the EU to spend others’ data on their behalf, but that does not make it right. Those working on the U.S. proposals would do well to ensure that there is a meaningful market-power gate to avoid unintended consequences.

Disclaimer: The author was engaged for expert advice relating to the UK CMA’s Privacy Sandbox case on behalf of the complainant Marketers for an Open Web.

[1] Milton Friedman, Free to Choose, 1980, pp.115-119

[2] Comments at the Yale Law School conference, Robert H. Bork’s influence on Antitrust Law, Sep. 27-28, 2013.

In Amazon, Antitrust & Competition, Apple, Barriers to Entry, European Union, Google, International, Platforms, Symposia, Truth on the Market, United Kingdom , , , , , , , , , , , ,
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The Woman in the High Office

Dirk Auer —  27 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

May 2007, Palo Alto

The California sun shone warmly on Eric Schmidt’s face as he stepped out of his car and made his way to have dinner at Madera, a chic Palo Alto restaurant.

Dining out was a welcome distraction from the endless succession of strategy meetings with the nitpickers of the law department, which had been Schmidt’s bread and butter for the last few months. The lawyers seemed to take issue with any new project that Google’s engineers came up with. “How would rivals compete with our maps?”; “Our placement should be no less favorable than rivals’’; etc. The objections were endless. 

This is not how things were supposed to be. When Schmidt became Google’s chief executive officer in 2001, his mission was to take the company public and grow the firm into markets other than search. But then something unexpected happened. After campaigning on an anti-monopoly platform, a freshman senator from Minnesota managed to get her anti-discrimination bill through Congress in just her first few months in office. All companies with a market cap of more than $150 billion were now prohibited from favoring their own products. Google had recently crossed that Rubicon, putting a stop to years of carefree expansion into new markets.

But today was different. The waiter led Schmidt to his table overlooking Silicon Valley. His acquaintance was already seated. 

With his tall and slender figure, Andy Rubin had garnered quite a reputation among Silicon Valley’s elite. After engineering stints at Apple and Motorola, developing various handheld devices, Rubin had set up his own shop. The idea was bold: develop the first open mobile platform—based on Linux, nonetheless. Rubin had pitched the project to Google in 2005 but given the regulatory uncertainty over the future of antitrust—the same wave of populist sentiment that would carry Klobuchar to office one year later—Schmidt and his team had passed.

“There’s no money in open source,” the company’s CFO ruled. Schmidt had initially objected, but with more pressing matters to deal with, he ultimately followed his CFO’s advice.

Schmidt and Rubin were exchanging pleasantries about Microsoft and Java when the meals arrived–sublime Wagyu short ribs and charred spring onions paired with a 1986 Chateau Margaux.

Rubin finally cut to the chase. “Our mobile operating system will rely on state-of-the-art touchscreen technology. Just like the device being developed by Apple. Buying Android today might be your only way to avoid paying monopoly prices to access Apple’s mobile users tomorrow.”

Schmidt knew this all too well: The future was mobile, and few companies were taking Apple’s upcoming iPhone seriously enough. Even better, as a firm, Android was treading water. Like many other startups, it had excellent software but no business model. And with the Klobuchar bill putting the brakes on startup investment—monetizing an ecosystem had become a delicate legal proposition, deterring established firms from acquiring startups–Schmidt was in the middle of a buyer’s market. “Android we could make us a force to reckon with” Schmidt thought to himself.

But he quickly shook that thought, remembering the words of his CFO: “There is no money in open source.” In an ideal world, Google would have used Android to promote its search engine—placing a search bar on Android users to draw users to its search engine—or maybe it could have tied a proprietary app store to the operating system, thus earning money from in-app purchases. But with the Klobuchar bill, these were no longer options. Not without endless haggling with Google’s planning committee of lawyers.

And they would have a point, of course. Google risked heavy fines and court-issued injunctions that would stop the project in its tracks. Such risks were not to be taken lightly. Schmidt needed a plan to make the Android platform profitable while accommodating Google’s rivals, but he had none.

The desserts were served, Schmidt steered the conversation to other topics, and the sun slowly set over Sand Hill Road.

Present Day, Cupertino

Apple continues to dominate the smartphone industry with little signs of significant competition on the horizon. While there are continuing rumors that Google, Facebook, or even TikTok might enter the market, these have so far failed to transpire.

Google’s failed partnership with Samsung, back in 2012, still looms large over the industry. After lengthy talks to create an open mobile platform failed to materialize, Google ultimately entered into an agreement with the longstanding mobile manufacturer. Unfortunately, the deal was mired by antitrust issues and clashing visions—Samsung was believed to favor a closed ecosystem, rather than the open platform envisioned by Google.

The sense that Apple is running away with the market is only reinforced by recent developments. Last week, Tim Cook unveiled the company’s new iPhone 11—the first ever mobile device to come with three cameras. With an eye-watering price tag of $1,199 for the top-of-the-line Pro model, it certainly is not cheap. In his presentation, Cook assured consumers Apple had solved the security issues that have been an important bugbear for the iPhone and its ecosystem of competing app stores.

Analysts expect the new range of devices will help Apple cement the iPhone’s 50% market share. This is especially likely given the important challenges that Apple’s main rivals continue to face.

The Windows Phone’s reputation for buggy software continues to undermine its competitive position, despite its comparatively low price point. Andy Rubin, the head of the Windows Phone, was reassuring in a press interview, but there is little tangible evidence he will manage to successfully rescue the flailing ship. Meanwhile, Huawei has come under increased scrutiny for the threats it may pose to U.S. national security. The Chinese manufacturer may face a U.S. sales ban, unless the company’s smartphone branch is sold to a U.S. buyer. Oracle is said to be a likely candidate.

The sorry state of mobile competition has become an increasingly prominent policy issue. President Klobuchar took to Twitter and called on mobile-device companies to refrain from acting as monopolists, intimating elsewhere that failure to do so might warrant tougher regulation than her anti-discrimination bill:

In Antitrust & Competition, Antitrust’s Uncertain Future, Apple, Barriers to Entry, Exclusionary Conduct, Exclusive Dealing, Google, Platforms, Symposia, Truth on the Market, Tying , , , , , , , ,
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Verses on Self-Preferencing

Ramsi Woodcock —  26 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

About earth’s creatures great and small,
Devices clever as can be,
I see foremost a ruthless power;
You, their ingenuity.

You see the beak upon the finch;
I, the beaked skeleton.
You see the wonders that they are;
I, the things that might have been.

You see th’included batteries
I, the poor excluded ones.
You, the phone that simply works;
I, restrain’d competition.

’Twould be a better world, I say,
Were all the options to abide—
All beaks and brands of battery—
From which the public to decide.

You say that man the greatest is
Because he dominates today,
But meteor, not caveman, drove
The ancient dinosaurs away.

If they were here when we were new,
We might the age not have survived;
They say some species could outwit
The sharpest chimps today alive.

Just so, I say, ’twould better be
Replacement batteries t’allow
For sales alone can prove what brands
Deserve el’vation to the Dow.

Designing batt’ries switchable
Makes their selection fully public;
It substitutes democracy
For an engineering logic.

For only buyers should decide
Which components to inter;
Their taste alone determines worth,
Though engineers be cleverer.

You: The meaning of component,
We can always redefine.
From batteries to molecules,
We can draw most any line.

Of cogs, thus, an infinitude;
Of time a finitude to lose.
You cannot interchange all parts,
Or each one carefully to choose.

Product choices corporate
We cannot all democratize,
At least so long as consumers
Wish to get on with their lives.

Exclusion therefore cannot we
Universally condemn;
Oft must we let the firm decide
Which components to put in.

Power, then, is everywhere—
What is is built on what is not—
And th’elimination of it
Is no cornerstone of thought.

Of components infinite
We must choose which few to free;
Th’criterion for doing that,
Abuse-of-power cannot be.

Power and oppression are,
In life and goods ubiquitous.
But value differentiates—
Build we antitrust on this.

Alone when letting buyers say
Which part into a product goes
Would make those buyers happier,
Must we interchange impose.

Batt’ry brand must matter much,
Else, we seriously delude,
To think consumers want to hear:
“We the batt’ries not include.”

The same is true for Amazon.
If it knows which seller’s best,
Let it cast the others out for us—
Give our scrolling bars a rest.

If Apple knows which app’s a dud,
Let Apple cast it out as well.
Which app’s a fraud and which a scam,
Smartphone users cannot tell.

If Google wants to show me how
To get from A to B to C,
I’d rather that she use her maps
Than search for others separately.

A rule against self-preferencing
No legal principle provides;
For what opposes power’s role
Can’t be neutrally applied.

What goes for all third-party sales
Goes for Amazon’s front-end.
Self-preferencing alone prevents
My designing a new skin.

We cannot hire its warehouse staff;
We cannot choose its motor fleet;
We cannot source its cargo planes;
Or its trucks route through our streets.

But this is all self-preferencing;
And it cannot all be banned;
Unless we choice’s value weigh,
We strike with arbitrary hand.

So say you and differ I:
’Twixt dinosaur and man must choose.
If one alone fits on this earth—
Wilt for man our power use?

These verses are based in part on arguments summarized in this blog post and this paper.

In Amazon, Antitrust & Competition, Antitrust’s Uncertain Future, Apple, Google, Platforms, Symposia, Truth on the Market ,
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AICOA Is Neither Urgently Needed Nor Good: A Response to Professors Scott Morton, Salop, and Dinielli

Thom Lambert —  25 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.

“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”

The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”

Is Change ‘Urgently Needed’?

With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.

But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the old Terminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.

With respect to economic activity, Amazon may be a huge player, but it still accounts for only 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.

For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.

Nor are the firms singled out by AICOA essential gatekeepers of “political activity on the internet.” The proposed law touches neither Twitter, the primary hub of political activity on the internet, nor TikTok, which is increasingly used for political messaging.

The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.

The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:

  1. increasing industrial concentration;
  2. higher markups on goods and services since 1980;
  3. a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
  4. a reduction in startup activity, suggesting diminished innovation. 

Examined closely, however, those studies fail to establish a domestic market power crisis.

Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:

Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.

What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.

With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs, reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)

As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)

Finally, the claim of reduced startup activity is unfounded. In its report on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:

  1. “[t]he number of new technology firms in the digital economy has declined”;
  2. “the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
  3. “[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)

Those claims, however, are based on cherry-picked evidence.

In support of the first two, the Judiciary Committee report cited a study based on data ending in 2011. As Benedict Evans has observed, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”

In support of the third claim, the report cited statistics from an article noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding has continued to increase since 2018.

Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:

AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.

Is the Vagueness of AICOA’s Primary Legal Standard a Feature?

AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”

Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”

That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:

To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.

Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.

The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:

[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.

It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”

But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?

A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:

The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.

This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”

AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.

For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.

Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as it creates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.

A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”

Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.

Will AICOA Break Popular Products and Services?

Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans. Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—something Amazon could not do under AICOA.

The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:

provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’

But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.

First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionaries define as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.

Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.

Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.

Should the US Follow Europe?

Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:

[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.

Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:

the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.

Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhere explained, the rules set forth in the DMA hardly seem calibrated to do so.

As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home to zero of the top 20 global tech companies. (The United States hosts 12; China, eight.)

It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and are scrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparently contemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.

At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.

In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.

It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach. 

Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?

The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.

The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.

Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It is hardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.

And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senator touted the bill as a means of policing content moderation and observed during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”

At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.

Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, as several Republican legislators are supporting the act because it restricts content moderation.

The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.

The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.

Conclusion

So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.

For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.

In Amazon, Antitrust & Competition, Antitrust’s Uncertain Future, Apple, Error Costs, European Union, Facebook, Federal Trade Commission, Google, Monopolization, Platforms, Price Discrimination, Symposia, Truth on the Market, Twitter, Tying, Vertical Restraints , , , , , ,
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How Tech Startups Could Be a Casualty of the War on Self-Preferencing

Geoffrey Manne —  3 June 2022

We will learn more in the coming weeks about the fate of the proposed American Innovation and Choice Online Act (AICOA), legislation sponsored by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa) that would, among other things, prohibit “self-preferencing” by large digital platforms like Google, Amazon, Facebook, Apple, and Microsoft. But while the bill has already been subject to significant scrutiny, a crucially important topic has been absent from that debate: the measure’s likely effect on startup acquisitions. 

Of course, AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

This would be a significant loss. As Dirk Auer, Sam Bowman, and I discuss in a recent article in the Missouri Law Review, acquisitions are arguably the most important component in providing vitality to the overall venture ecosystem:  

Startups generally have two methods for achieving liquidity for their shareholders: IPOs or acquisitions. According to the latest data from Orrick and Crunchbase, between 2010 and 2018 there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. As venture capitalist Scott Kupor said in his testimony during the FTC’s hearings on “Competition and Consumer Protection in the 21st Century,” “these large players play a significant role as acquirers of venture-backed startup companies, which is an important part of the overall health of the venture ecosystem.”

Moreover, acquisitions by large incumbents are known to provide a crucial channel for liquidity in the venture capital and startup communities: While at one time the source of the “liquidity events” required to yield sufficient returns to fuel venture capital was evenly divided between IPOs and mergers, “[t]oday that math is closer to about 80 percent M&A and about 20 percent IPOs—[with important implications for any] potential actions that [antitrust enforcers] might be considering with respect to the large platform players in this industry.” As investor and serial entrepreneur Leonard Speiser said recently, “if the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” (emphasis added)

Going after self-preferencing may have exactly the same harmful effect on venture investors and competition. 

It’s unclear exactly how the legislation would be applied in any given context (indeed, this uncertainty is one of the most significant problems with the bill, as the ABA Antitrust Section has argued at length). But AICOA is designed, at least in part, to keep large online platforms in their own lanes—to keep them from “leveraging their dominance” to compete against more politically favored competitors in ancillary markets. Indeed, while covered platforms potentially could defend against application of the law by demonstrating that self-preferencing is necessary to “maintain or substantially enhance the core functionality” of the service, no such defense exists for non-core (whatever that means…) functionality, the enhancement of which through self-preferencing is strictly off limits under AICOA.

As I have written (and so have many, many, many, many others), this is terrible policy on its face. But it is also likely to have significant, adverse, indirect consequences for startup acquisitions, given the enormous number of such acquisitions that are outside the covered platforms’ “core functionality.” 

Just take a quick look at a sample of the largest acquisitions made by Apple, Microsoft, Amazon, and Alphabet, for example. (These are screenshots of the first several acquisitions by size drawn from imperfect lists collected by Wikipedia, but for purposes of casual empiricism they are well-suited to give an idea of the diversity of acquisitions at issue):

Apple:

Microsoft:

Amazon:

Alphabet (Google):

Vanishingly few of these acquisitions go to the “core functionalities” of these platforms. Alphabet’s acquisitions, for example, involve (among many other things) cybersecurity; home automation; cloud computing; wearables, smart glasses, and AR hardware; GPS navigation software; communications security; satellite technology; and social gaming. Microsoft’s acquisitions include companies specializing in video games; social networking; software versioning; drawing software; cable television; cybersecurity; employee engagement; and e-commerce. The technologies and applications involved in acquisitions by Apple and Amazon are similarly varied.

Drilling down a bit, consider the companies Alphabet acquired and put to use in the service of Google Maps:

Which, if any, of these companies would Google have purchased if it knew it would be unable to prioritize Maps in its search results? Would Google have invested more than $1 billion in these companies—and likely significantly more in internal R&D to develop Maps—if it had to speculate whether it would be required (or even be able) to prove someday in the future that prioritizing Google Maps results would enhance its core functionality?

What about Xbox? As noted, AICOA’s terms aren’t perfectly clear, so I’m not certain it would apply to Xbox (is Xbox a “website, online or mobile application, operating system, digital assistant, or online service”?). Here are Microsoft’s video-gaming-related purchases:

The vast majority of these (and all of the acquisitions for which Wikipedia has purchase-price information, totaling some $80 billion of investment) involve video games, not the development of hardware or the functionality of the Xbox platform. Would Microsoft have made these investments if it knew it would be prohibited from prioritizing its own games or exclusively using data gleaned through these games to improve its platform? No one can say for certain, but, at the margin, it is absolutely certain that these self-preferencing bills would make such acquisitions less likely.

Perhaps the most obvious—and concerning—example of the problem arises in the context of Google’s Android platform. Google famously gives Android away for free, of course, and makes its operating system significantly open for bespoke use by all comers. In exchange, Google requires that implementers of the Android OS provide some modicum of favoritism to Google’s revenue-generating products, like Search. For all its uncertainty, there is no question that AICOA’s terms would prohibit this self-preferencing. Intentionally or not, it would thus prohibit the way in which Google monetizes Android and thus hopes to recoup some of the—literally—billions of dollars it has invested in the development and maintenance of Android. 

Here are Google’s Android-related acquisitions:

Would Google have bought Android in the first place (to say nothing of subsequent acquisitions and its massive ongoing investment in Android) if it had been foreclosed from adopting its preferred business model to monetize its investment? In the absence of Google bidding for these companies, would they have earned as much from other potential bidders? Would they even have come into existence at all?

Of course, AICOA wouldn’t preclude Google charging device makers for Android and thus raising the price of mobile devices. But that mechanism may not have been sufficient to support Google’s investment in Android, and it would certainly constrain its ability to compete. Even if rules like those proposed by AICOA didn’t undermine Google’s initial purchase of and investment in Android, it is manifestly unclear how forcing Google to adopt a business model that increases consumer prices and constrains its ability to compete head-to-head with Apple’s iOS ecosystem would benefit consumers. (This excellent series of posts—1, 2, 3, 4—by Dirk Auer on the European Commission’s misguided Android decision discusses in detail the significant costs of prohibiting self-preferencing on Android.)

There are innumerable further examples, as well. In all of these cases, it seems clear not only that an AICOA-like regime would diminish competition and reduce consumer welfare across important dimensions, but also that it would impoverish the startup ecosystem more broadly. 

And that may be an even bigger problem. Even if you think, in the abstract, that it would be better for “Big Tech” not to own these startups, there is a real danger that putting that presumption into force would drive down acquisition prices, kill at least some tech-startup exits, and ultimately imperil the initial financing of tech startups. It should go without saying that this would be a troubling outcome. Yet there is no evidence to suggest that AICOA’s proponents have even considered whether the presumed benefits of the bill would be worth this immense cost.

In Amazon, Antitrust & Competition, Apple, Exclusionary Conduct, Exclusive Dealing, Facebook, Google, Mergers & Acquisitions, Platforms, Truth on the Market, Tying, Vertical Restraints , , , , , , ,
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The ABA’s Antitrust Law Section Sounds the Alarm on Klobuchar-Grassley

Lazar Radic and Geoffrey Manne —  12 May 2022

Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”

In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.

That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.

The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.

Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.

Departing from established antitrust-law principles

Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”

Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.

The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.

Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.

It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:

Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Opaque language for opaque ideas

Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.

Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.

Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.

In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:

The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors

Conclusion

The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.

In Amazon, Antitrust & Competition, Antitrust Division, Apple, Barriers to Entry, Exclusionary Conduct, Exclusive Dealing, Facebook, Federal Trade Commission, Google, Justice Department, Monopolization, Platforms, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , , ,
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