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Last week the International Center for Law & Economics and I filed an amicus brief in the DC Circuit in support of en banc review of the court’s decision to uphold the FCC’s 2015 Open Internet Order.

In our previous amicus brief before the panel that initially reviewed the OIO, we argued, among other things, that

In order to justify its Order, the Commission makes questionable use of important facts. For instance, the Order’s ban on paid prioritization ignores and mischaracterizes relevant record evidence and relies on irrelevant evidence. The Order also omits any substantial consideration of costs. The apparent necessity of the Commission’s aggressive treatment of the Order’s factual basis demonstrates the lengths to which the Commission must go in its attempt to fit the Order within its statutory authority.

Our brief supporting en banc review builds on these points to argue that

By reflexively affording substantial deference to the FCC in affirming the Open Internet Order (“OIO”), the panel majority’s opinion is in tension with recent Supreme Court precedent….

The panel majority need not have, and arguably should not have, afforded the FCC the level of deference that it did. The Supreme Court’s decisions in State Farm, Fox, and Encino all require a more thorough vetting of the reasons underlying an agency change in policy than is otherwise required under the familiar Chevron framework. Similarly, Brown and Williamson, Utility Air Regulatory Group, and King all indicate circumstances in which an agency construction of an otherwise ambiguous statute is not due deference, including when the agency interpretation is a departure from longstanding agency understandings of a statute or when the agency is not acting in an expert capacity (e.g., its decision is based on changing policy preferences, not changing factual or technical considerations).

In effect, the panel majority based its decision whether to afford the FCC deference upon deference to the agency’s poorly supported assertions that it was due deference. We argue that this is wholly inappropriate in light of recent Supreme Court cases.

Moreover,

The panel majority failed to appreciate the importance of granting Chevron deference to the FCC. That importance is most clearly seen at an aggregate level. In a large-scale study of every Court of Appeals decision between 2003 and 2013, Professors Kent Barnett and Christopher Walker found that a court’s decision to defer to agency action is uniquely determinative in cases where, as here, an agency is changing established policy.

Kent Barnett & Christopher J. Walker, Chevron In the Circuit Courts 61, Figure 14 (2016), available at ssrn.com/abstract=2808848.

Figure 14 from Barnett & Walker, as reproduced in our brief.

As  that study demonstrates,

agency decisions to change established policy tend to present serious, systematic defects — and [thus that] it is incumbent upon this court to review the panel majority’s decision to reflexively grant Chevron deference. Further, the data underscore the importance of the Supreme Court’s command in Fox and Encino that agencies show good reason for a change in policy; its recognition in Brown & Williamson and UARG that departures from existing policy may fall outside of the Chevron regime; and its command in King that policies not made by agencies acting in their capacity as technical experts may fall outside of the Chevron regime. In such cases, the Court essentially holds that reflexive application of Chevron deference may not be appropriate because these circumstances may tend toward agency action that is arbitrary, capricious, in excess of statutory authority, or otherwise not in accordance with law.

As we conclude:

The present case is a clear example where greater scrutiny of an agency’s decision-making process is both warranted and necessary. The panel majority all too readily afforded the FCC great deference, despite the clear and unaddressed evidence of serious flaws in the agency’s decision-making process. As we argued in our brief before the panel, and as Judge Williams recognized in his partial dissent, the OIO was based on factually inaccurate, contradicted, and irrelevant record evidence.

Read our full — and very short — amicus brief here.

Since the European Commission (EC) announced its first inquiry into Google’s business practices in 2010, the company has been the subject of lengthy investigations by courts and competition agencies around the globe. Regulatory authorities in the United States, France, the United Kingdom, Canada, Brazil, and South Korea have all opened and rejected similar antitrust claims.

And yet the EC marches on, bolstered by Google’s myriad competitors, who continue to agitate for further investigations and enforcement actions, even as we — companies and consumers alike — enjoy the benefits of an increasingly dynamic online marketplace.

Indeed, while the EC has spent more than half a decade casting about for some plausible antitrust claim, the online economy has thundered ahead. Since 2010, Facebook has tripled its active users and multiplied its revenue ninefold; the number of apps available in the Amazon app store has grown from less than 4000 to over 400,000 today; and there are almost 1.5 billion more Internet users globally than there were in 2010. And consumers are increasingly using new and different ways to search for information: Amazon’s Alexa, Apple’s Siri, Microsoft’s Cortana, and Facebook’s Messenger are a few of the many new innovations challenging traditional search engines.

Advertisers have adapted to this evolution, moving increasingly online, and from search to display ads as mobile adoption has skyrocketedSocial networks like Twitter and Snapchat have come into their own, competing for the same (and ever-increasing) advertising dollars. For marketers, advertising on social networks is now just as important as advertising in search. No wonder e-commerce sales have more than doubled, to almost $2 trillion worldwide; for the first time, consumers purchased more online than in stores this past year.

To paraphrase Louis C.K.: Everything is amazing — and no one at the European Commission is happy.

The EC’s market definition is fatally flawed

Like its previous claims, the Commission’s most recent charges are rooted in the assertion that Google abuses its alleged dominance in “general search” advertising to unfairly benefit itself and to monopolize other markets. But European regulators continue to miss the critical paradigm shift among online advertisers and consumers that has upended this stale view of competition on the Internet. The reality is that Google’s competition may not, and need not, look exactly like Google itself, but it is competition nonetheless. And it’s happening in spades.

The key to understanding why the European Commission’s case is fundamentally flawed lies in an examination of how it defines the relevant market. Through a series of economically and factually unjustified assumptions, the Commission defines search as a distinct market in which Google faces limited competition and enjoys an 80% market share. In other words, for the EC, “general search” apparently means only nominal search providers like Google and Bing; it doesn’t mean companies like Amazon, Facebook and Twitter — Google’s biggest competitors.  

But the reality is that “general search” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google happens to use to match consumers and advertisers doesn’t reflect the substitutability of other mechanisms that do the same thing — merely because these mechanisms aren’t called “search.”

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive.

Consumers today are increasingly using platforms like Amazon and Facebook as substitutes for the searches they might have run on Google or Bing. “Closed” platforms like the iTunes store and innumerable apps handle copious search traffic but also don’t figure in the EC’s market calculations. And so-called “dark social” interactions like email, text messages, and IMs, drive huge amounts of some of the most valuable traffic on the Internet. This, in turn, has led to a competitive scramble to roll out completely new technologies like chatbots to meet consumers’ informational (and merchants’ advertising) needs.

Properly construed, Google’s market position is precarious

Like Facebook and Twitter (and practically every other Internet platform), advertising is Google’s primary source of revenue. Instead of charging for fancy hardware or offering services to users for a fee, Google offers search, the Android operating system, and a near-endless array of other valuable services for free to users. The company’s very existence relies on attracting Internet users and consumers to its properties in order to effectively connect them with advertisers.

But being an online matchmaker is a difficult and competitive enterprise. Among other things, the ability to generate revenue turns crucially on the quality of the match: All else equal, an advertiser interested in selling widgets will pay more for an ad viewed by a user who can be reliably identified as being interested in buying widgets.

Google’s primary mechanism for attracting users to match with advertisers — general search — is substantially about information, not commerce, and the distinction between product and informational searches is crucially important to understanding Google’s market and the surprisingly limited and tenuous market power it possesses.

General informational queries aren’t nearly as valuable to advertisers: Significantly, only about 30 percent of Google’s searches even trigger any advertising at all. Meanwhile, as of 2012, one-third of product searches started on Amazon while only 13% started on a general search engine.

As economist Hal Singer aptly noted in 2012,

[the data] suggest that Google lacks market power in a critical segment of search — namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”

While Google Search clearly offers substantial value to advertisers, its ability to continue to do so is precarious when confronted with the diverse array of competitors that, like Facebook, offer a level of granularity in audience targeting that general search can’t match, or that, like Amazon, systematically offer up the most valuable searchers.

In order to compete in this market — one properly defined to include actual competitors — Google has had to constantly innovate to maintain its position. Unlike a complacent monopolist, it has evolved to meet changing consumer demand, shifting technology and inventive competitors. Thus, Google’s search algorithm has changed substantially over the years to make more effective use of the information available to ensure relevance; search results have evolved to give consumers answers to queries rather than just links, and to provide more-direct access to products and services; and, as users have shifted more and more of their time and attention to mobile devices, search has incorporated more-localized results.

Competitors want a free lunch

Critics complain, nevertheless, that these developments have made it harder, in one way or another, for rivals to compete. And the EC has provided a willing ear. According to Commissioner Vestager last week:

Google has come up with many innovative products that have made a difference to our lives. But that doesn’t give Google the right to deny other companies the chance to compete and innovate. Today, we have further strengthened our case that Google has unduly favoured its own comparison shopping service in its general search result pages…. (Emphasis added).

Implicit in this statement is the remarkable assertion that by favoring its own comparison shopping services, Google “den[ies] other companies the chance to compete and innovate.” Even assuming Google does “favor” its own results, this is an astounding claim.

First, it is not a violation of competition law simply to treat competitors’ offerings differently than one’s own, even for a dominant firm. Instead, conduct must actually exclude competitors from the market, without offering countervailing advantages to consumers. But Google’s conduct is not exclusionary, and there are many benefits to consumers.

As it has from the start of its investigations of Google, the EC begins with a flawed assumption: that Google’s competitors both require, and may be entitled to, unfettered access to Google’s property in order to compete. But this is patently absurd. Google is not an essential facility: Billions of users reach millions of companies everyday through direct browser navigation, apps, email links, review sites and blogs, and countless other means — all without once touching Google.com.

Google Search results do not exclude competitors, whether comparison shopping sites or others. For example, 72% of TripAdvisor’s U.S. traffic comes from search, and almost all of that from organic results; other specialized search sites see similar traffic volumes.

More important, however, in addition to continuing to reach rival sites through Google Search, billions of consumers access rival services directly through their mobile apps. In fact, for Yelp,

Approximately 21 million unique devices accessed Yelp via the mobile app on a monthly average basis in the first quarter of 2016, an increase of 32% compared to the same period in 2015. App users viewed approximately 70% of page views in the first quarter and were more than 10 times as engaged as website users, as measured by number of pages viewed. (Emphasis added).

And a staggering 40 percent of mobile browsing is now happening inside the Facebook app, competing with the browsers and search engines pre-loaded on smartphones.

Millions of consumers also directly navigate to Google’s rivals via their browser by simply typing, for example, “Yelp.com” in their address bar. And as noted above, consumers are increasingly using Google rivals’ new disruptive information engines like Alexa and Siri for their search needs. Even the traditional search engine space is competitive — in fact, according to Wired, as of July 2016:

Microsoft has now captured more than one-third of Internet searches. Microsoft’s transformation from a company that sells boxed software to one that sells services in the cloud is well underway. (Emphasis added).

With such numbers, it’s difficult to see how rivals are being foreclosed from reaching consumers in any meaningful way.

Meanwhile, the benefits to consumers are obvious: Google is directly answering questions for consumers rather than giving them a set of possible links to click through and further search. In some cases its results present entirely new and valuable forms of information (e.g., search trends and structured data); in others they serve to hone searches by suggesting further queries, or to help users determine which organic results (including those of its competitors) may be most useful. And, of course, consumers aren’t forced to endure these innovations if they don’t find them useful, as they can quickly switch to other providers.  

Nostalgia makes for bad regulatory policy

Google is not the unstoppable monopolist of the EU competition regulators’ imagining. Rather, it is a continual innovator, forced to adapt to shifting consumer demand, changing technology, and competitive industry dynamics. And, instead of trying to hamstring Google, if they are to survive, Google’s competitors (and complainants) must innovate as well.

Dominance in technology markets — especially online — has always been ephemeral. Once upon a time, MySpace, AOL, and Yahoo were the dominant Internet platforms. Kodak, once practically synonymous with “instant camera” let the digital revolution pass it by. The invincible Sony Walkman was upended by mp3s and the iPod. Staid, keyboard-operated Blackberries and Nokias simply couldn’t compete with app-driven, graphical platforms from Apple and Samsung. Even today, startups like Snapchat, Slack, and Spotify gain massive scale and upend entire industries with innovative new technology that can leave less-nimble incumbents in the dustbin of tech history.

Put differently, companies that innovate are able to thrive, while those that remain dependent on yesterday’s technology and outdated business models usually fail — and deservedly so. It should never be up to regulators to pick winners and losers in a highly dynamic and competitive market, particularly if doing so constrains the market’s very dynamism. As Alfonso Lamadrid has pointed out:

It is companies and not competition enforcers which will strive or fail in the adoption of their business models, and it is therefore companies and not competition enforcers who are to decide on what business models to use. Some will prove successful and others will not; some companies will thrive and some will disappear, but with experimentation with business models, success and failure are and have always been part of the game.

In other words, we should not forget that competition law is, or should be, business-model agnostic, and that regulators are – like anyone else – far from omniscient.

Like every other technology company before them, Google and its competitors must be willing and able to adapt in order to keep up with evolving markets — just as for Lewis Carroll’s Red Queen, “it takes all the running you can do, to keep in the same place.” Google confronts a near-constantly evolving marketplace and fierce competition from unanticipated quarters; companies that build their businesses around Google face a near-constantly evolving Google. In the face of such relentless market dynamism, neither consumers nor firms are well served by regulatory policy rooted in nostalgia.  

Yesterday, the International Center for Law & Economics filed reply comments in the docket of the FCC’s Broadband Privacy NPRM. ICLE was joined in its comments by the following scholars of law & economics:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Adam Candeub, Professor of Law, Michigan State University College of Law
  • Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
  • Daniel Lyons, Associate Professor, Boston College Law School
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University Department of Economics

As in our initial comments, we drew on the economic scholarship of multi-sided platforms to argue that the FCC failed to consider the ways in which asymmetric regulation will ultimately have negative competitive effects and harm consumers. The FCC and some critics claimed that ISPs are gatekeepers deserving of special regulation — a case that both the FCC and the critics failed to make.

The NPRM fails adequately to address these issues, to make out an adequate case for the proposed regulation, or to justify treating ISPs differently than other companies that collect and use data.

Perhaps most important, the NPRM also fails to acknowledge or adequately assess the actual market in which the use of consumer data arises: the advertising market. Whether intentionally or not, this NPRM is not primarily about regulating consumer privacy; it is about keeping ISPs out of the advertising business. But in this market, ISPs are upstarts challenging the dominant position of firms like Google and Facebook.

Placing onerous restrictions upon ISPs alone results in either under-regulation of edge providers or over-regulation of ISPs within the advertising market, without any clear justification as to why consumer privacy takes on different qualities for each type of advertising platform. But the proper method of regulating privacy is, in fact, the course that both the FTC and the FCC have historically taken, and which has yielded a stable, evenly administered regime: case-by-case examination of actual privacy harms and a minimalist approach to ex ante, proscriptive regulations.

We also responded to particular claims made by New America’s Open Technology Institute about the expectations of consumers regarding data collection online, the level of competitiveness in the marketplace, and the technical realities that differentiate ISPs from edge providers.

OTI attempts to substitute its own judgment of what consumers (should) believe about their data for that of consumers themselves. And in the process it posits a “context” that can and will never shift as new technology and new opportunities emerge. Such a view of consumer expectations is flatly anti-innovation and decidedly anti-consumer, consigning broadband users to yesterday’s technology and business models. The rule OTI supports could effectively forbid broadband providers from offering consumers the option to trade data for lower prices.

Our reply comments went on to point out that much of the basis upon which the NPRM relies — and alleged lack of adequate competition among ISPs — was actually a “manufactured scarcity” based upon the Commission’s failure to properly analyze the relevant markets.

The Commission’s claim that ISPs, uniquely among companies in the modern data economy, face insufficient competition in the broadband market is… insufficiently supported. The flawed manner in which the Commission has defined the purported relevant market for broadband distorts the analysis upon which the proposed rules are based, and manufactures a false scarcity in order to justify unduly burdensome privacy regulations for ISPs. Even the Commission’s own data suggest that consumer choice is alive and well in broadband… The reality is that there is in fact enough competition in the broadband market to offer privacy-sensitive consumers options if they are ever faced with what they view as overly invasive broadband business practices. According to the Commission, as of December 2014, 74% of American homes had a choice of two or more wired ISPs delivering download speeds of at least 10 Mbps, and 88% had a choice of at least two providers of 3 Mbps service. Meanwhile, 93% of consumers have access to at least three mobile broadband providers. Looking forward, consumer choice at all download speeds is increasing at rapid rates due to extensive network upgrades and new entry in a highly dynamic market.

Finally, we rebutted the contention that predictive analytics was a magical tool that would enable ISPs to dominate information gathering and would, consequently, lead to consumer harms — even where ISPs had access only to seemingly trivial data about users.

Some comments in support of the proposed rules attempt to cast ISPs as all powerful by virtue of their access to apparently trivial data — IP addresses, access timing, computer ports, etc. — because of the power of predictive analytics. These commenters assert that the possibility of predictive analytics coupled with a large data set undermines research that demonstrates that ISPs, thanks to increasing encryption, do not have access to any better quality data, and probably less quality data, than edge providers themselves have.

But this is a curious bit of reasoning. It essentially amounts to the idea that, not only should consumers be permitted to control with whom their data is shared, but that all other parties online should be proscribed from making their own independent observations about consumers. Such a rule would be akin to telling supermarkets that they are not entitled to observe traffic patterns in their stores in order to place particular products in relatively more advantageous places, for example. But the reality is that most data is noise; simply having more of it is not necessarily a boon, and predictive analytics is far from a panacea. In fact, the insights gained from extensive data collection are frequently useless when examining very large data sets, and are better employed by single firms answering particular questions about their users and products.

Our full reply comments are available here.

Last week the International Center for Law & Economics filed comments on the FCC’s Broadband Privacy NPRM. ICLE was joined in its comments by the following scholars of law & economics:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Adam Candeub, Professor of Law, Michigan State University College of Law
  • Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
  • Daniel Lyons, Associate Professor, Boston College Law School
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University Department of Economics

As we note in our comments:

The Commission’s NPRM would shoehorn the business models of a subset of new economy firms into a regime modeled on thirty-year-old CPNI rules designed to address fundamentally different concerns about a fundamentally different market. The Commission’s hurried and poorly supported NPRM demonstrates little understanding of the data markets it proposes to regulate and the position of ISPs within that market. And, what’s more, the resulting proposed rules diverge from analogous rules the Commission purports to emulate. Without mounting a convincing case for treating ISPs differently than the other data firms with which they do or could compete, the rules contemplate disparate regulatory treatment that would likely harm competition and innovation without evident corresponding benefit to consumers.

In particular, we focus on the FCC’s failure to justify treating ISPs differently than other competitors, and its failure to justify more stringent treatment for ISPs in general:

In short, the Commission has not made a convincing case that discrimination between ISPs and edge providers makes sense for the industry or for consumer welfare. The overwhelming body of evidence upon which other regulators have relied in addressing privacy concerns urges against a hard opt-in approach. That same evidence and analysis supports a consistent regulatory approach for all competitors, and nowhere advocates for a differential approach for ISPs when they are participating in the broader informatics and advertising markets.

With respect to the proposed opt-in regime, the NPRM ignores the weight of economic evidence on opt-in rules and fails to justify the specific rules it prescribes. Of most significance is the imposition of this opt-in requirement for the sharing of non-sensitive data.

On net opt-in regimes may tend to favor the status quo, and to maintain or grow the position of a few dominant firms. Opt-in imposes additional costs on consumers and hurts competition — and it may not offer any additional protections over opt-out. In the absence of any meaningful evidence or rigorous economic analysis to the contrary, the Commission should eschew imposing such a potentially harmful regime on broadband and data markets.

Finally, we explain that, although the NPRM purports to embrace a regulatory regime consistent with the current “federal privacy regime,” and particularly the FTC’s approach to privacy regulation, it actually does no such thing — a sentiment echoed by a host of current and former FTC staff and commissioners, including the Bureau of Consumer Protection staff, Commissioner Maureen Ohlhausen, former Chairman Jon Leibowitz, former Commissioner Josh Wright, and former BCP Director Howard Beales.

Our full comments are available here.

The lifecycle of a law is a curious one; born to fanfare, a great solution to a great problem, but ultimately doomed to age badly as lawyers seek to shoehorn wholly inappropriate technologies and circumstances into its ambit. The latest chapter in the book of badly aging laws comes to us courtesy of yet another dysfunctional feature of our political system: the Supreme Court nomination and confirmation process.

In 1988, President Reagan nominated Judge Bork for a spot on the US Supreme Court. During the confirmation process following his nomination, a reporter was able to obtain a list of videos he and his family had rented from local video rental stores (You remember those, right?). In response to this invasion of privacy — by a reporter whose intention was to publicize and thereby (in some fashion) embarrass or “expose” Judge Bork — Congress enacted the Video Privacy Protection Act (“VPPA”).

In short, the VPPA makes it illegal for a “video tape service provider” to knowingly disclose to third parties any “personally identifiable information” in connection with the viewing habits of a “consumer” who uses its services. Left as written and confined to the scope originally intended for it, the Act seems more or less fine. However, over the last few years, plaintiffs have begun to use the Act as a weapon with which to attack common Internet business models in a manner wholly out of keeping with drafters’ intent.

And with a decision that promises to be a windfall for hungry plaintiff’s attorneys everywhere, the First Circuit recently allowed a plaintiff, Alexander Yershov, to make it past a 12(b)(6) motion on a claim that Gannett violated the VPPA with its  USA Today Android mobile app.

What’s in a name (or Android ID) ?

The app in question allowed Mr. Yershov to view videos without creating an account, providing his personal details, or otherwise subscribing (in the generally accepted sense of the term) to USA Today’s content. What Gannett did do, however, was to provide to Adobe Systems the Android ID and GPS location data associated with Mr. Yershov’s use of the app’s video content.

In interpreting the VPPA in a post-Blockbuster world, the First Circuit panel (which, apropos of nothing, included retired Justice Souter) had to wrestle with whether Mr. Yershov counts as a “subscriber,” and to what extent an Android ID and location information count as “personally identifying information” under the Act. Relying on the possibility that Adobe might be able to infer the identity of the plaintiff given its access to data from other web properties, and given the court’s rather gut-level instinct that an app user is a “subscriber,” the court allowed the plaintiff to survive the 12(b)(6) motion.

The PII point is the more arguable of the two, as the statutory language is somewhat vague. Under the Act, PIII “includes information which identifies a person as having requested or obtained specific video materials or services from a video tape service provider.” On this score the court decided that GPS data plus an Android ID (or each alone — it wasn’t completely clear) could constitute information protected under the Act (at least for purposes of a 12(b)(6) motion):

The statutory term “personally identifiable information” is awkward and unclear. The definition of that term… adds little clarity beyond training our focus on the question whether the information identifies the person who obtained the video…. Nevertheless, the language reasonably conveys the point that PII is not limited to information that explicitly names a person.

OK (maybe). But where the court goes off the rails is in its determination that an Android ID, GPS data, or a list of videos is, in itself, enough to identify anyone.

It might be reasonable to conclude that Adobe could use that information in combination with other information it collects from yet other third parties (fourth parties?) in order to build up a reliable, personally identifiable profile. But the statute’s language doesn’t hang on such a combination. Instead, the court’s reasoning finds potential liability by reading this exact sort of prohibition into the statute:

Adobe takes this and other information culled from a variety of sources to create user profiles comprised of a given user’s personal information, online behavioral data, and device identifiers… These digital dossiers provide Adobe and its clients with “an intimate look at the different types of materials consumed by the individual” … While there is certainly a point at which the linkage of information to identity becomes too uncertain, or too dependent on too much yet-to-be-done, or unforeseeable detective work, here the linkage, as plausibly alleged, is both firm and readily foreseeable to Gannett.

Despite its hedging about uncertain linkages, the court’s reasoning remains contingent on an awful lot of other moving parts — something not found in either the text of the law, nor the legislative history of the Act.

The information sharing identified by the court is in no way the sort of simple disclosure of PII that easily identifies a particular person in the way that, say, Blockbuster Video would have been able to do in 1988 with disclosure of its viewing lists.  Yet the court purports to find a basis for its holding in the abstract nature of the language in the VPPA:

Had Congress intended such a narrow and simple construction [as specifying a precise definition for PII], it would have had no reason to fashion the more abstract formulation contained in the statute.

Again… maybe. Maybe Congress meant to future-proof the provision, and didn’t want the statute construed as being confined to the simple disclosure of name, address, phone number, and so forth. I doubt, though, that it really meant to encompass the sharing of any information that might, at some point, by some unknown third parties be assembled into a profile that, just maybe if you squint at it hard enough, will identify a particular person and their viewing habits.

Passive Subscriptions?

What seems pretty clear, however, is that the court got it wrong when it declared that Mr. Yershov was a “subscriber” to USA Today by virtue of simply downloading an app from the Play Store.

The VPPA prohibits disclosure of a “consumer’s” PII — with “consumer” meaning “any renter, purchaser, or subscriber of goods or services from a video tape service provider.” In this case (as presumably will happen in most future VPPA cases involving free apps and websites), the plaintiff claims that he is a “subscriber” to a “video tape” service.

The court built its view of “subscriber” predominantly on two bases: (1) you don’t need to actually pay anything to count as a subscriber (with which I agree), and (2) that something about installing an app that can send you push notifications is different enough than frequenting a website, that a user, no matter how casual, becomes a “subscriber”:

When opened for the first time, the App presents a screen that seeks the user’s permission for it to “push” or display notifications on the device. After choosing “Yes” or “No,” the user is directed to the App’s main user interface.

The court characterized this connection between USA Today and Yershov as “seamless” — ostensibly because the app facilitates push notifications to the end user.

Thus, simply because it offers an app that can send push notifications to users, and because this app sometimes shows videos, a website or Internet service — in this case, an app portal for a newspaper company — becomes a “video tape service,” offering content to “subscribers.” And by sharing information in a manner that is nowhere mentioned in the statute and that on its own is not capable of actually identifying anyone, the company suddenly becomes subject to what will undoubtedly be an avalanche of lawsuits (at least in the first circuit).

Preposterous as this may seem on its face, it gets worse. Nothing in the court’s opinion is limited to “apps,” and the “logic” would seem to apply to the general web as well (whether the “seamless” experience is provided by push notifications or some other technology that facilitates tighter interaction with users). But, rest assured, the court believes that

[B]y installing the App on his phone, thereby establishing seamless access to an electronic version of USA Today, Yershov established a relationship with Gannett that is materially different from what would have been the case had USA Today simply remained one of millions of sites on the web that Yershov might have accessed through a web browser.

Thank goodness it’s “materially” different… although just going by the reasoning in this opinion, I don’t see how that can possibly be true.

What happens when web browsers can enable push notifications between users and servers? Well, I guess we’ll find out soon because major browsers now support this feature. Further, other technologies — like websockets — allow for continuous two-way communication between users and corporate sites. Does this change the calculus? Does it meet the court’s “test”? If so, the court’s exceedingly vague reasoning provides little guidance (and a whole lot of red meat for lawsuits).

To bolster its view that apps are qualitatively different than web sites with regard to their delivery to consumers, the court asks “[w]hy, after all, did Gannett develop and seek to induce downloading of the App?” I don’t know, because… cell phones?

And this bit of “reasoning” does nothing for the court’s opinion, in fact. Gannett undertook development of a web site in the first place because some cross-section of the public was interested in reading news online (and that was certainly the case for any electronic distribution pre-2007). No less, consumers have increasingly been moving toward using mobile devices for their online activities. Though it’s a debatable point, apps can often provide a better user experience than that provided by a mobile browser. Regardless, the line between “app” and “web site” is increasingly a blurry one, especially on mobile devices, and with the proliferation of HTML5 and frameworks like Google’s Progressive Web Apps, the line will only grow more indistinct. That Gannett was seeking to provide the public with an app has nothing to do with whether it intended to develop a more “intimate” relationship with mobile app users than it has with web users.

The 11th Circuit, at least, understands this. In Ellis v. Cartoon Network, it held that a mere user of an app — without more — could not count as a “subscriber” under the VPPA:

The dictionary definitions of the term “subscriber” we have quoted above have a common thread. And that common thread is that “subscription” involves some type of commitment, relationship, or association (financial or otherwise) between a person and an entity. As one district court succinctly put it: “Subscriptions involve some or [most] of the following [factors]: payment, registration, commitment, delivery, [expressed association,] and/or access to restricted content.”

The Eleventh Circuit’s point is crystal clear, and I’m not sure how the First Circuit failed to appreciate it (particularly since it was the district court below in the Yershov case that the Eleventh Circuit was citing). Instead, the court got tied up in asking whether or not a payment was required to constitute a “subscription.” But that’s wrong. What’s needed is some affirmative step – something more than just downloading an app, and certainly something more than merely accessing a web site.

Without that step — a “commitment, relationship, or association (financial or otherwise) between a person and an entity” — the development of technology that simply offers a different mode of interaction between users and content promises to transform the VPPA into a tremendously powerful weapon in the hands of eager attorneys, and a massive threat to the advertising-based business models that have enabled the growth of the web.

How could this possibly not apply to websites?

In fact, there is no way this opinion won’t be picked up by plaintiff’s attorneys in suits against web sites that allow ad networks to collect any information on their users. Web sites may not have access to exact GPS data (for now), but they do have access to fairly accurate location data, cookies, and a host of other data about their users. And with browser-based push notifications and other technologies being developed to create what the court calls a “seamless” experience for users, any user of a web site will count as a “subscriber” under the VPPA. The potential damage to the business models that have funded the growth of the Internet is hard to overstate.

There is hope, however.

Hulu faced a similar challenge over the last few years arising out of its collection of viewer data on its platform and the sharing of that data with third-party ad services in order to provide better targeted and, importantly, more user-relevant marketing. Last year it actually won a summary judgment motion on the basis that it had no way of knowing that Facebook (the third-party with which it was sharing data) would reassemble the data in order to identify particular users and their viewing habits. Nevertheless, Huu has previously lost motions on the subscriber and PII issues.

Hulu has, however, previously raised one issue in its filings on which the district court punted, but that could hold the key to putting these abusive litigations to bed.

The VPPA provides a very narrowly written exception to the prohibition on information sharing when such sharing is “incident to the ordinary course of business” of the “video tape service provider.” “Ordinary course of business” in this context means  “debt collection activities, order fulfillment, request processing, and the transfer of ownership.” In one of its motions, Hulu argued that

the section shows that Congress took into account that providers use third parties in their business operations and “‘allows disclosure to permit video tape service providers to use mailing houses, warehouses, computer services, and similar companies for marketing to their customers. These practices are called ‘order fulfillment’ and ‘request processing.’

The district court didn’t grant Hulu summary judgment on the issue, essentially passing on the question. But in 2014 the Seventh Circuit reviewed a very similar set of circumstances in Sterk v. Redbox and found that the exception applied. In that case Redbox had a business relationship with Stream, a third party that provided Redbox with automated customer service functions. The Seventh Circuit found that information sharing in such a relationship fell within Redbox’s “ordinary course of business”, and so Redbox was entitled to summary judgment on the VPPA claims against it.

This is essentially the same argument that Hulu was making. Third-party ad networks most certainly provide a service to corporations that serve content over the web. Hulu, Gannett and every other publisher on the web surely could provide their own ad platforms on their own properties. But by doing so they would lose the economic benefits that come from specialization and economies of scale. Thus, working with a third-party ad network pretty clearly replaces the “order fulfillment” and “request processing” functions of a content platform.

The Big Picture

And, stepping back for a moment, it’s important to take in the big picture. The point of the VPPA was to prevent public disclosures that would chill speech or embarrass individuals; the reporter in 1987 set out to expose or embarrass Judge Bork.  This is the situation the VPPA’s drafters had in mind when they wrote the Act. But the VPPA was most emphatically not designed to punish Internet business models — especially of a sort that was largely unknown in 1988 — that serve the interests of consumers.

The 1988 Senate report on the bill, for instance, notes that “[t]he bill permits the disclosure of personally identifiable information under appropriate and clearly defined circumstances. For example… companies may sell mailing lists that do not disclose the actual selections of their customers.”  Moreover, the “[Act] also allows disclosure to permit video tape service providers to use mailing houses, warehouses, computer services, and similar companies for marketing to their customers. These practices are called ‘order fulfillment’ and ‘request processing.’”

Congress plainly contemplated companies being able to monetize their data. And this just as plainly includes the common practice in automated tracking systems on the web today that use customers’ viewing habits to serve them with highly personalized web experiences.

Sites that serve targeted advertising aren’t in the business of embarrassing consumers or abusing their information by revealing it publicly. And, most important, nothing in the VPPA declares that information sharing is prohibited if third party partners could theoretically construct a profile of users. The technology to construct these profiles simply didn’t exist in 1988, and there is nothing in the Act or its legislative history to support the idea that the VPPA should be employed against the content platforms that outsource marketing to ad networks.

What would make sense is to actually try to fit modern practice in with the design and intent of the VPPA. If, for instance, third-party ad networks were using the profiles they created to extort, blackmail, embarrass, or otherwise coerce individuals, the practice certainly falls outside of course of business, and should be actionable.

But as it stands, much like the TCPA, the VPPA threatens to become a costly technological anachronism. Future courts should take the lead of the Eleventh and Seventh circuits, and make the law operate in the way it was actually intended. Gannett still has the opportunity to appeal for an en banc hearing, and after that for cert before the Supreme Court. But the circuit split this presents is the least of our worries. If this issue is not resolved in a way that permits platforms to continue to outsource their marketing efforts as they do today, the effects on innovation could be drastic.

Web platforms — which includes much more than just online newspapers — depend upon targeted ads to support their efforts. This applies to mobile apps as well. The “freemium” model has eclipsed the premium model for apps — a fact that expresses the preferences of both consumers at large as well as producers. Using the VPPA as a hammer to smash these business models will hurt everyone except, of course, for plaintiff’s attorneys.

Yesterday a federal district court in Washington state granted the FTC’s motion for summary judgment against Amazon in FTC v. Amazon — the case alleging unfair trade practices in Amazon’s design of the in-app purchases interface for apps available in its mobile app store. The headlines score the decision as a loss for Amazon, and the FTC, of course, claims victory. But the court also granted Amazon’s motion for partial summary judgment on a significant aspect of the case, and the Commission’s win may be decidedly pyrrhic.

While the district court (very wrongly, in my view) essentially followed the FTC in deciding that a well-designed user experience doesn’t count as a consumer benefit for assessing substantial harm under the FTC Act, it rejected the Commission’s request for a permanent injunction against Amazon. It also called into question the FTC’s calculation of monetary damages. These last two may be huge. 

The FTC may have “won” the case, but it’s becoming increasingly apparent why it doesn’t want to take these cases to trial. First in Wyndham, and now in Amazon, courts have begun to chip away at the FTC’s expansive Section 5 discretion, even while handing the agency nominal victories.

The Good News

The FTC largely escapes judicial oversight in cases like these because its targets almost always settle (Amazon is a rare exception). These settlements — consent orders — typically impose detailed 20-year injunctions and give the FTC ongoing oversight of the companies’ conduct for the same period. The agency has wielded the threat of these consent orders as a powerful tool to micromanage tech companies, and it currently has at least one consent order in place with Twitter, Google, Apple, Facebook and several others.

As I wrote in a WSJ op-ed on these troubling consent orders:

The FTC prefers consent orders because they extend the commission’s authority with little judicial oversight, but they are too blunt an instrument for regulating a technology company. For the next 20 years, if the FTC decides that Google’s product design or billing practices don’t provide “express, informed consent,” the FTC could declare Google in violation of the new consent decree. The FTC could then impose huge penalties—tens or even hundreds of millions of dollars—without establishing that any consumer had actually been harmed.

Yesterday’s decision makes that outcome less likely. Companies will be much less willing to succumb to the FTC’s 20-year oversight demands if they know that courts may refuse the FTC’s injunction request and accept companies’ own, independent and market-driven efforts to address consumer concerns — without any special regulatory micromanagement.

In the same vein, while the court did find that Amazon was liable for repayment of unauthorized charges made without “express, informed authorization,” it also found the FTC’s monetary damages calculation questionable and asked for further briefing on the appropriate amount. If, as seems likely, it ultimately refuses to simply accept the FTC’s damages claims, that, too, will take some of the wind out of the FTC’s sails. Other companies have settled with the FTC and agreed to 20-year consent decrees in part, presumably, because of the threat of excessive damages if they litigate. That, too, is now less likely to happen.

Collectively, these holdings should help to force the FTC to better target its complaints to cases of still-ongoing and truly-harmful practices — the things the FTC Act was really meant to address, like actual fraud. Tech companies trying to navigate ever-changing competitive waters by carefully constructing their user interfaces and payment mechanisms (among other things) shouldn’t be treated the same way as fraudulent phishing scams.

The Bad News

The court’s other key holding is problematic, however. In essence, the court, like the FTC, seems to believe that regulators are better than companies’ product managers, designers and engineers at designing app-store user interfaces:

[A] clear and conspicuous disclaimer regarding in-app purchases and request for authorization on the front-end of a customer’s process could actually prove to… be more seamless than the somewhat unpredictable password prompt formulas rolled out by Amazon.

Never mind that Amazon has undoubtedly spent tremendous resources researching and designing the user experience in its app store. And never mind that — as Amazon is certainly aware — a consumer’s experience of a product is make-or-break in the cut-throat world of online commerce, advertising and search (just ask Jet).

Instead, for the court (and the FTC), the imagined mechanism of “affirmatively seeking a customer’s authorized consent to a charge” is all benefit and no cost. Whatever design decisions may have informed the way Amazon decided to seek consent are either irrelevant, or else the user-experience benefits they confer are negligible.

As I’ve written previously:

Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order.

Amazon is not abdicating its obligation to act fairly under the FTC Act and to ensure that users are protected from unauthorized charges. It’s just doing so in ways that also take account of the costs such protections may impose — particularly, in this case, on the majority of Amazon customers who didn’t and wouldn’t suffer such unauthorized charges.

Amazon began offering Kindle Free Time in 2012 as an innovative solution to a problem — children’s access to apps and in-app purchases — that affects only a small subset of Amazon’s customers. To dismiss that effort without considering that Amazon might have made a perfectly reasonable judgment that balanced consumer protection and product design disregards the cost-benefit balancing required by Section 5 of the FTC Act.

Moreover, the FTC Act imposes liability for harm only when they are not “reasonably avoidable.” Kindle Free Time is an outstanding example of an innovative mechanism that allows consumers at risk of unauthorized purchases by children to “reasonably avoid” harm. The court’s and the FTC’s disregard for it is inconsistent with the statute.

Conclusion

The court’s willingness to reinforce the FTC’s blackboard design “expertise” (such as it is) to second guess user-interface and other design decisions made by firms competing in real markets is unfortunate. But there’s a significant silver lining. By reining in the FTC’s discretion to go after these companies as if they were common fraudsters, the court has given consumers an important victory. After all, it is consumers who otherwise bear the costs (both directly and as a result of reduced risk-taking and innovation) of the FTC’s largely unchecked ability to extract excessive concessions from its enforcement targets.

On Friday the the International Center for Law & Economics filed comments with the FCC in response to Chairman Wheeler’s NPRM (proposed rules) to “unlock” the MVPD (i.e., cable and satellite subscription video, essentially) set-top box market. Plenty has been written on the proposed rulemaking—for a few quick hits (among many others) see, e.g., Richard Bennett, Glenn Manishin, Larry Downes, Stuart Brotman, Scott Wallsten, and me—so I’ll dispense with the background and focus on the key points we make in our comments.

Our comments explain that the proposal’s assertion that the MVPD set-top box market isn’t competitive is a product of its failure to appreciate the dynamics of the market (and its disregard for economics). Similarly, the proposal fails to acknowledge the complexity of the markets it intends to regulate, and, in particular, it ignores the harmful effects on content production and distribution the rules would likely bring about.

“Competition, competition, competition!” — Tom Wheeler

“Well, uh… just because I don’t know what it is, it doesn’t mean I’m lying.” — Claude Elsinore

At root, the proposal is aimed at improving competition in a market that is already hyper-competitive. As even Chairman Wheeler has admitted,

American consumers enjoy unprecedented choice in how they view entertainment, news and sports programming. You can pretty much watch what you want, where you want, when you want.

Of course, much of this competition comes from outside the MVPD market, strictly speaking—most notably from OVDs like Netflix. It’s indisputable that the statute directs the FCC to address the MVPD market and the MVPD set-top box market. But addressing competition in those markets doesn’t mean you simply disregard the world outside those markets.

The competitiveness of a market isn’t solely a function of the number of competitors in the market. Even relatively constrained markets like these can be “fully competitive” with only a few competing firms—as is the case in every market in which MVPDs operate (all of which are presumed by the Commission to be subject to “effective competition”).

The truly troubling thing, however, is that the FCC knows that MVPDs compete with OVDs, and thus that the competitiveness of the “MVPD market” (and the “MVPD set-top box market”) isn’t solely a matter of direct, head-to-head MVPD competition.

How do we know that? As I’ve recounted before, in a recent speech FCC General Counsel Jonathan Sallet approvingly explained that Commission staff recommended rejecting the Comcast/Time Warner Cable merger precisely because of the alleged threat it posed to OVD competitors. In essence, Sallet argued that Comcast sought to undertake a $45 billion merger primarily—if not solely—in order to ameliorate the competitive threat to its subscription video services from OVDs:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively.…

Thus, at least when it suits it, the Chairman’s office appears not only to believe that this competitive threat is real, but also that Comcast, once the largest MVPD in the country, believes so strongly that the OVD competitive threat is real that it was willing to pay $45 billion for a mere “increased ability” to limit it.

UPDATE 4/26/2016

And now the FCC has approved the Charter/Time Warner Cable, imposing conditions that, according to Wheeler,

focus on removing unfair barriers to video competition. First, New Charter will not be permitted to charge usage-based prices or impose data caps. Second, New Charter will be prohibited from charging interconnection fees, including to online video providers, which deliver large volumes of internet traffic to broadband customers. Additionally, the Department of Justice’s settlement with Charter both outlaws video programming terms that could harm OVDs and protects OVDs from retaliation—an outcome fully supported by the order I have circulated today.

If MVPDs and OVDs don’t compete, why would such terms be necessary? And even if the threat is merely potential competition, as we note in our comments (citing to this, among other things),

particularly in markets characterized by the sorts of technological change present in video markets, potential competition can operate as effectively as—or even more effectively than—actual competition to generate competitive market conditions.

/UPDATE

Moreover, the proposal asserts that the “market” for MVPD set-top boxes isn’t competitive because “consumers have few alternatives to leasing set-top boxes from their MVPDs, and the vast majority of MVPD subscribers lease boxes from their MVPD.”

But the MVPD set-top box market is an aftermarket—a secondary market; no one buys set-top boxes without first buying MVPD service—and always or almost always the two are purchased at the same time. As Ben Klein and many others have shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive.

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

The competitiveness of the MVPD market in which the antecedent choice of provider is made incorporates consumers’ preferences regarding set-top boxes, and makes the secondary market competitive.

The proposal’s superficial and erroneous claim that the set-top box market isn’t competitive thus reflects bad economics, not competitive reality.

But it gets worse. The NPRM doesn’t actually deny the importance of OVDs and app-based competitors wholesale — it only does so when convenient. As we note in our Comments:

The irony is that the NPRM seeks to give a leg up to non-MVPD distribution services in order to promote competition with MVPDs, while simultaneously denying that such competition exists… In order to avoid triggering [Section 629’s sunset provision,] the Commission is forced to pretend that we still live in the world of Blockbuster rentals and analog cable. It must ignore the Netflix behind the curtain—ignore the utter wealth of video choices available to consumers—and focus on the fact that a consumer might have a remote for an Apple TV sitting next to her Xfinity remote.

“Yes, but you’re aware that there’s an invention called television, and on that invention they show shows?” — Jules Winnfield

The NPRM proposes to create a world in which all of the content that MVPDs license from programmers, and all of their own additional services, must be provided to third-party device manufacturers under a zero-rate compulsory license. Apart from the complete absence of statutory authority to mandate such a thing (or, I should say, apart from statutory language specifically prohibiting such a thing), the proposed rules run roughshod over the copyrights and negotiated contract rights of content providers:

The current rulemaking represents an overt assault on the web of contracts that makes content generation and distribution possible… The rules would create a new class of intermediaries lacking contractual privity with content providers (or MVPDs), and would therefore force MVPDs to bear the unpredictable consequences of providing licensed content to third-parties without actual contracts to govern those licenses…

Because such nullification of license terms interferes with content owners’ right “to do and to authorize” their distribution and performance rights, the rules may facially violate copyright law… [Moreover,] the web of contracts that support the creation and distribution of content are complicated, extensively negotiated, and subject to destabilization. Abrogating the parties’ use of the various control points that support the financing, creation, and distribution of content would very likely reduce the incentive to invest in new and better content, thereby rolling back the golden age of television that consumers currently enjoy.

You’ll be hard-pressed to find any serious acknowledgement in the NPRM that its rules could have any effect on content providers, apart from this gem:

We do not currently have evidence that regulations are needed to address concerns raised by MVPDs and content providers that competitive navigation solutions will disrupt elements of service presentation (such as agreed-upon channel lineups and neighborhoods), replace or alter advertising, or improperly manipulate content…. We also seek comment on the extent to which copyright law may protect against these concerns, and note that nothing in our proposal will change or affect content creators’ rights or remedies under copyright law.

The Commission can’t rely on copyright to protect against these concerns, at least not without admitting that the rules require MVPDs to violate copyright law and to breach their contracts. And in fact, although it doesn’t acknowledge it, the NPRM does require the abrogation of content owners’ rights embedded in licenses negotiated with MVPD distributors to the extent that they conflict with the terms of the rule (which many of them must).   

“You keep using that word. I do not think it means what you think it means.” — Inigo Montoya

Finally, the NPRM derives its claimed authority for these rules from an interpretation of the relevant statute (Section 629 of the Communications Act) that is absurdly unreasonable. That provision requires the FCC to enact rules to assure the “commercial availability” of set-top boxes from MVPD-unaffiliated vendors. According to the NPRM,

we cannot assure a commercial market for devices… unless companies unaffiliated with an MVPD are able to offer innovative user interfaces and functionality to consumers wishing to access that multichannel video programming.

This baldly misconstrues a term plainly meant to refer to the manner in which consumers obtain their navigation devices, not how those devices should function. It also contradicts the Commission’s own, prior readings of the statute:

As structured, the rules will place a regulatory thumb on the scale in favor of third-parties and to the detriment of MVPDs and programmers…. [But] Congress explicitly rejected language that would have required unbundling of MVPDs’ content and services in order to promote other distribution services…. Where Congress rejected language that would have favored non-MVPD services, the Commission selectively interprets the language Congress did employ in order to accomplish exactly what Congress rejected.

And despite the above noted problems (and more), the Commission has failed to do even a cursory economic evaluation of the relative costs of the NPRM, instead focusing narrowly on one single benefit it believes might occur (wider distribution of set-top boxes from third-parties) despite the consistent failure of similar FCC efforts in the past.

All of the foregoing leads to a final question: At what point do the costs of these rules finally outweigh the perceived benefits? On the one hand are legal questions of infringement, inducements to violate agreements, and disruptions of complex contractual ecosystems supporting content creation. On the other hand are the presence of more boxes and apps that allow users to choose who gets to draw the UI for their video content…. At some point the Commission needs to take seriously the costs of its actions, and determine whether the public interest is really served by the proposed rules.

Our full comments are available here.

Today’s Canadian Competition Bureau (CCB) Google decision marks yet another regulator joining the chorus of competition agencies around the world that have already dismissed similar complaints relating to Google’s Search or Android businesses (including the US FTC, the Korea FTC, the Taiwan FTC, and AG offices in Texas and Ohio).

A number of courts around the world have also rejected competition complaints against the company, including courts in the US, France, the UK, Germany, and Brazil.

After an extensive, three-year investigation into Google’s business practices in Canada, the CCB

did not find sufficient evidence that Google engaged in [search manipulation, preferential treatment of Google services, syndication agreements, distribution agreements, exclusion of competitors from its YouTube mobile app, or tying of mobile ads with those on PCs and tablets] for an anti-competitive purpose, and/or that the practices resulted in a substantial lessening or prevention of competition in any relevant market.

Like the US FTC, the CCB did find fault with Google’s use of restriction on its AdWords API — but Google had already revised those terms worldwide following the FTC investigation, and has committed to the CCB to maintain the revised terms for at least another 5 years.

Other than a negative ruling from Russia’s competition agency last year in favor of Yandex — essentially “the Russian Google,” and one of only a handful of Russian tech companies of significance (surely a coincidence…) — no regulator has found against Google on the core claims brought against it.

True, investigations in a few jurisdictions, including the EU and India, are ongoing. And a Statement of Objections in the EU’s Android competition investigation appears imminent. But at some point, regulators are going to have to take a serious look at the motivations of the entities that bring complaints before wasting more investigatory resources on their behalf.

Competitor after competitor has filed complaints against Google that amount to, essentially, a claim that Google’s superior services make it too hard to compete. But competition law doesn’t require that Google or any other large firm make life easier for competitors. Without a finding of exclusionary harm/abuse of dominance (and, often, injury to consumers), this just isn’t anticompetitive conduct — it’s competition. And the overwhelming majority of competition authorities that have examined the company have agreed.

Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?

Canada joins the chorus

The Canadian decision mirrors the reasoning that regulators around the world have employed in reaching the decision that Google hasn’t engaged in anticompetitive conduct.

Two of the more important results in the CCB’s decision relate to preferential treatment of Google’s services (e.g., promotion of its own Map or Shopping results, instead of links to third-party aggregators of the same services) — the tired “search bias” claim that started all of this — and the distribution agreements that Google enters into with device manufacturers requiring inclusion of Google search as a default installation on Google Android phones.

On these key issues the CCB was unequivocal in its conclusions.

On search bias:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

And on search distribution agreements:

Google competes with other search engines for the business of hardware manufacturers and software developers. Other search engines can and do compete for these agreements so they appear as the default search engine…. Consumers can and do change the default search engine on their desktop and mobile devices if they prefer a different one to the pre-loaded default…. Google’s distribution agreements have not resulted in a substantial lessening or prevention of competition in Canada.

And here is the crucial point of the CCB’s insight (which, so far, everyone but Russia seems to appreciate): Despite breathless claims from rivals alleging they can’t compete in the face of their placement in Google’s search results, data barriers to entry, or default Google search on mobile devices, Google does actually face significant competition. Both the search bias and Android distribution claims were dismissed essentially because, whatever competitors may prefer Google do, its conduct doesn’t actually preclude access to competing services.

The True North strong and free [of meritless competitor complaints]

Exclusionary conduct must, well, exclude. But surfacing Google’s own “subjective” search results, even if they aren’t as high quality, doesn’t exclude competitors, according to the CCB and the other regulatory agencies that have also dismissed such claims. Similarly, consumers’ ability to switch search engines (“competition is just a click away,” remember), as well as OEMs’ ability to ship devices with different search engine defaults, ensure that search competitors can access consumers.

Former FTC Commissioner Josh Wright’s analysis of “search bias” in Google’s results applies with equal force to these complaints:

It is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather [than] individual competitors and websites… [but these results] are not useful from an antitrust policy perspective because they erroneously—and contrary to economic theory and evidence—presume natural and procompetitive product differentiation in search rankings to be inherently harmful.

The competitors that bring complaints to antitrust authorities seek to make a demand of Google that is rarely made of any company: that it must provide access to its competitors on equal terms. But one can hardly imagine a valid antitrust complaint arising because McDonald’s refuses to sell a Whopper. The law on duties to deal is heavily circumscribed for good reason, as Josh Wright and I have pointed out:

The [US Supreme] Court [in Trinko] warned that the imposition of a duty to deal would threaten to “lessen the incentive for the monopolist, the rival, or both to invest in… economically beneficial facilities.”… Because imposition of a duty to deal with rivals threatens to decrease the incentive to innovate by creating new ways of producing goods at lower costs, satisfying consumer demand, or creating new markets altogether, courts and antitrust agencies have been reluctant to expand the duty.

Requiring Google to link to other powerful and sophisticated online search companies, or to provide them with placement on Google Android mobile devices, on the precise terms it does its own products would reduce the incentives of everyone to invest in their underlying businesses to begin with.

This is the real threat to competition. And kudos to the CCB for recognizing it.

The CCB’s investigation was certainly thorough, and its decision appears to be well-reasoned. Other regulators should take note before moving forward with yet more costly investigations.

Netflix’s latest net neutrality hypocrisy (yes, there have been others. See here and here, for example) involves its long-term, undisclosed throttling of its video traffic on AT&T’s and Verizon’s wireless networks, while it lobbied heavily for net neutrality rules from the FCC that would prevent just such throttling by ISPs.

It was Netflix that coined the term “strong net neutrality,” in an effort to import interconnection (the connections between ISPs and edge provider networks) into the net neutrality fold. That alone was a bastardization of what net neutrality purportedly stood for, as I previously noted:

There is a reason every iteration of the FCC’s net neutrality rules, including the latest, have explicitly not applied to backbone interconnection agreements: Interconnection over the backbone has always been open and competitive, and it simply doesn’t give rise to the kind of discrimination concerns net neutrality is meant to address.

That Netflix would prefer not to pay for delivery of its content isn’t surprising. But net neutrality regulations don’t — and shouldn’t — have anything to do with it.

But Netflix did something else with “strong net neutrality.” It tied it to consumer choice:

This weak net neutrality isn’t enough to protect an open, competitive Internet; a stronger form of net neutrality is required. Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube, or Skype, or intermediaries such as Cogent, Akamai or Level 3, to deliver the services and data requested by ISP residential subscribers. Instead, they must provide sufficient access to their network without charge. (Emphasis added).

A focus on consumers is laudable, of course, but when the focus is on consumers there’s no reason to differentiate between ISPs (to whom net neutrality rules apply) and content providers entering into contracts with ISPs to deliver their content (to whom net neutrality rules don’t apply).

And Netflix has just showed us exactly why that’s the case.

Netflix can and does engage in management of its streams in order (presumably) to optimize consumer experience as users move between networks, devices and viewers (e.g., native apps vs Internet browser windows) with very different characteristics and limitations. That’s all well and good. But as we noted in our Policy Comments in the FCC’s Open Internet Order proceeding,

In this circumstance, particularly when the content in question is Netflix, with 30% of network traffic, both the network’s and the content provider’s transmission decisions may be determinative of network quality, as may the users’ device and application choices.

As a 2011 paper by a group of network engineers studying the network characteristics of video streaming data from Netflix and YouTube noted:

This is a concern as it means that a sudden change of application or container in a large population might have a significant impact on the network traffic. Considering the very fast changes in trends this is a real possibility, the most likely being a change from Flash to HTML5 along with an increase in the use of mobile devices…. [S]treaming videos at high resolutions can result in smoother aggregate traffic while at the same time linearly increase the aggregate data rate due to video streaming.

Again, a concern with consumers is admirable, but Netflix isn’t concerned with consumers. It’s concerned at most with consumers of Netflix, while they are consuming Netflix. But the reality is that Netflix’s content management decisions can adversely affect consumers overall, including its own subscribers when they aren’t watching Netflix.

And here’s the huge irony. The FCC’s net neutrality rules are tailor-made to guarantee that Netflix will never have any incentive to take these externalities into account in its own decisions. What’s more, they ensure that ISPs are severely hamstrung in managing their networks for the benefit of all consumers, not least because their interconnection deals with large content providers like Netflix are now being closely scrutinized.

It’s great that Netflix thinks it should manage its video delivery to optimize viewing under different network conditions. But net neutrality rules ensure that Netflix bears no cost for overwhelming the network in the process. Essentially, short of building new capacity — at great expense to all ISP subscribers, of course — ISPs can’t do much about it, either, under the rules. And, of course, the rules also make it impossible for ISPs to negotiate for financial help from Netflix (or its heaviest users) in paying for those upgrades.

On top of this, net neutrality advocates have taken aim at usage-based billing and other pricing practices that would help with the problem by enabling ISPs to charge their heaviest users more in order to alleviate the inherent subsidy by normal users that flat-rate billing entails. (Netflix itself, as one of the articles linked above discusses at length, is hypocritically inconsistent on this score).

As we also noted in our OIO Policy Comments:

The idea that consumers and competition generally are better off when content providers face no incentive to take account of congestion externalities in their pricing (or when users have no incentive to take account of their own usage) runs counter to basic economic logic and is unsupported by the evidence. In fact, contrary to such claims, usage-based pricing, congestion pricing and sponsored content, among other nonlinear pricing models, would, in many circumstances, further incentivize networks to expand capacity (not create artificial scarcity).

Some concern for consumers. Under Netflix’s approach consumers get it coming and going: Either their non-Netflix traffic is compromised for the sake of Netflix’s traffic, or they have to pay higher subscription fees to ISPs for the privilege of accommodating Netflix’s ever-expanding traffic loads (4K videos, anyone?) — whether they ever use Netflix or not.

Sometimes, apparently, Netflix throttles its own traffic in order to “help” a few consumers. (That it does so without disclosing the practice is pretty galling, especially given the enhanced transparency rules in the Open Internet Order — something Netflix also advocated for, and which also apply only to ISPs and not to content providers). But its self-aggrandizing advocacy for the FCC’s latest net neutrality rules reveals that its first priority is to screw over consumers, so long as it can shift the blame and the cost to others.

On February 18, the Federal Communications Commission (FCC) voted three-to-two in favor of a notice of proposed rulemaking (NPRM) fancifully entitled “Expanding Consumers’ Video Navigation Choices, MB Docket No. 16-42; Commercial Availability of Navigation Devices, CS Docket No. 97-80”.  The NPRM, in the words of the FCC’s press release, will “create a framework for providing innovators, device manufacturers, and app developers the information they need to develop new technologies, reflecting the many ways consumers access their subscription video programming today.”  In reality, far from “creating a framework” to spawn new technologies, this NPRM promotes uncalled-for regulatory intrusion into an increasingly dynamic and efficient market, and (as Free State Foundation President Randy May aptly put it) represents FCC “regulatory policy run amok.”  (A November 2015 article by Heritage Foundation scholar James Gattuso provides a broader and more detailed critical assessment of FCC regulation of the video programming market.)

In particular, as one legal analyst summarizes, the NPRM would require “multichannel video programming distributors (MVPDs) providers to make ‘three core information streams’ available to companies developing devices or applications that might compete with MVPDs’ set-top boxes.”  (MVPDs are providers of pay television services, such as cable television, direct broadcast satellite, fiberoptic cable (e.g., Verizon FIOS), and competitive local exchange companies.)  Specifically:

The NPRM would require the MVPDs to supply the following to potential competitors: 1) information about what programming is available to the consumer, such as the channel listing and video-on-demand lineup; 2) information about what a device is allowed to do with content, such as recording; and 3) the content itself.

This new regulatory requirement makes no sense and threatens to undermine competition and innovation.  As telecommunications scholar Randy May recently emphasized, the FCC itself adopted a rule in June 2015 establishing a presumption that local video markets, on a nationwide basis, are subject to “effective competition.”  Indeed, May noted that the FCC conceded in a February 2 appellate brief that there has been a “transformation” of the multichannel video marketplace, that “consumers have alternatives to cable,” and that “cable’s market share has sharply declined.”  (May embellished the point in stating that today “consumers  may choose among a multitude of services and devices, such as Netflix, Hulu, Amazon Fire TV, Google Chromecast, Apple TV, and Roku.  And they are doing so in exponentially increasing numbers.”)  This means that regulation in this area is inappropriate, since it is well accepted that economic regulation of competitive markets is unjustifiable.  (Indeed, even imperfectly competitive markets and monopolies should not be regulated unless regulation is likely to yield welfare outcomes that are superior to reliance on market forces, a test that is not easily met – a point made by such renowned economists as James Buchanan and A.E. Kahn.)  What’s more, FCC regulation, which tends to slow innovation, is likely to prove especially harmful in the MVPD sector, given that market’s record of rapid and continuous welfare-enhancing introduction of new and improved services.

The February 18 dissenting statements by Commissioner Ajit Pai and Commissioner Michael O’Rielly further explored the NPRM’s serious deficiencies.

After summarizing the harm caused by prior FCC regulation of video set-top boxes, Commissioner Pai stated:

[W]e are en route to eliminating the need for a set-top box. An app can turn your iPad or Android phone into a navigation device. MVPDs have deployed these apps and are in the process of developing more advanced ones.  The Commission should be encouraging these efforts.  

But this proposal would do precisely the opposite.  It would divert the industry’s energies away from app development and toward the long-term slog of complying with the Commission’s new regulatory scheme for unwanted hardware.  And the Notice goes further; it actually proposes imposing a number of regulations that would discourage the development and deployment of MVPD apps.  That’s not what the American people want. I’m confident that most consumers would rather eliminate the set-top box altogether than embrace a complex regulatory scheme that will require them to have another box in their home and won’t take effect for at least three years.

Commissioner O’Rielly focused on the economic and technical harm imposed by the NPRM, as well as its legal deficiencies:

[The proposal] could open multichannel video programming distributor (“MVPD”) networks to serious security vulnerabilities, exposing them to potential network damage and content theft.  It could strip content producers of their rights to control the distribution and presentation of their content.  It could ultimately subject over-the-top (“OTT”) providers to the same regime. . . .  Worst of all, it would certainly devalue the content produced by programmers large and small, by enabling anyone capable of writing a compliant app to turn on a free stream of video content painstakingly cobbled together by an MVPD at great expense – the ultimate free-rider problem.  MVPDs, broadcasters, and independent programmers alike would all lose some incentives to keep doing what they do, and some would opt for the sidelines, leaving consumers with fewer video options. . . .

The statutory authority on which this fantasy rests is equally as far-fetched. The section that discusses authority will long live as a testament to the level of absurdity that can be achieved in four short paragraphs when two defenseless statutes fall down a rabbit hole into a land where words have no meaning.  While billed as an attempt to enhance competition in the set top box market, the item shoots miles beyond that narrow frame on the very first page, redefining statutory terms plainly referring to hardware, such as “navigation device,” “interactive communications equipment,” and “other equipment” to mean either hardware or software (including apps). I don’t know how much clearer the terms “device” or “equipment” could be in their intent to reference tangible, physical hardware. If those words don’t work to restrict the Commission, are there any that ever could? And I don’t think that anyone here believes for a second that [the statutory language discussed] could ever have made it out of a single Congressional committee in 2014 if the members had known it would be interpreted to allow the FCC to force MVPDs to stream all of their content for free to any app developer willing to jump through a few hoops.

In sum, the FCC’s February 18 NPRM flies in the face of sound economics, video programming distribution history, and reasonable statutory construction.  If finalized, it will further reduce innovation, economic efficiency, and consumer welfare.  The three commissioners who voted for this misbegotten proposal should rethink their position and act to end this unwarranted proposed regulatory intrusion into a competitive and innovative marketplace.