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A few weeks ago I posted a preliminary assessment of the relative antitrust risk of a Comcast vs Disney purchase of 21st Century Fox assets. (Also available in pdf as an ICLE Issue brief, here). On the eve of Judge Leon’s decision in the AT&T/Time Warner merger case, it seems worthwhile to supplement that assessment by calling attention to Assistant Attorney General Makan Delrahim’s remarks at The Deal’s Corporate Governance Conference last week. Somehow these remarks seem to have passed with little notice, but, given their timing, they deserve quite a bit more attention.

In brief, Delrahim spent virtually the entirety of his short remarks making and remaking the fundamental point at the center of my own assessment of the antitrust risk of a possible Comcast/Fox deal: The DOJ’s challenge of the AT&T/Time Warner merger tells you nothing about the likelihood that the agency would challenge a Comcast/Fox merger.

To begin, in my earlier assessment I pointed out that most vertical mergers are approved by antitrust enforcers, and I quoted Bruce Hoffman, Director of the FTC’s Bureau of Competition, who noted that:

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

* * *

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

I may not have made it very clear in that post, but, of course, most horizontal mergers are approved by enforcers, as well.

Well, now we have the head of the DOJ Antitrust Division making the same point:

I’d say 95 or 96 percent of mergers — horizontal or vertical — are cleared — routinely…. Most mergers — horizontal or vertical — are procompetitive, or have no adverse effect.

Delrahim reinforced the point in an interview with The Street in advance of his remarks. Asked by a reporter, “what are your concerns with vertical mergers?,” Delrahim quickly corrected the questioner: “Well, I don’t have any concerns with most vertical mergers….”

But Delrahim went even further, noting that nothing about the Division’s approach to vertical mergers has changed since the AT&T/Time Warner case was brought — despite the efforts of some reporters to push a different narrative:

I understand that some journalists and observers have recently expressed concern that the Antitrust Division no longer believes that vertical mergers can be efficient and beneficial to competition and consumers. Some point to our recent decision to challenge some aspects of the AT&T/Time Warner merger as a supposed bellwether for a new vertical approach. Rest assured: These concerns are misplaced…. We have long recognized that vertical integration can and does generate efficiencies that benefit consumers. Indeed, most vertical mergers are procompetitive or competitively neutral. The same is of course true in horizontal transactions. To the extent that any recent action points to a closer review of vertical mergers, it’s not new…. [But,] to reiterate, our approach to vertical mergers has not changed, and our recent enforcement efforts are consistent with the Division’s long-standing, bipartisan approach to analyzing such mergers. We’ll continue to recognize that vertical mergers, in general, can yield significant economic efficiencies and benefit to competition.

Delrahim concluded his remarks by criticizing those who assume that the agency’s future enforcement decisions can be inferred from past cases with different facts, stressing that the agency employs an evidence-based, case-by-case approach to merger review:

Lumping all vertical transactions under the same umbrella, by comparison, obscures the reality that we conduct a vigorous investigation, aided by over 50 PhD economists in these markets, to make sure that we as lawyers don’t steer too far without the benefits of their views in each of these instances.

Arguably this was a rebuke directed at those, like Disney and Fox’s board, who are quick to ascribe increased regulatory risk to a Comcast/Fox tie-up because the DOJ challenged the AT&T/Time Warner merger. Recall that, in its proxy statement, the Fox board explained that it rejected Comcast’s earlier bid in favor of Disney’s in part because of “the regulatory risks presented by the DOJ’s unanticipated opposition to the proposed vertical integration of the AT&T / Time Warner transaction.”

I’ll likely have more to add once the AT&T/Time Warner decision is out. But in the meantime (and with apologies to Mark Twain), the takeaway is clear: Reports of the death of vertical mergers have been greatly exaggerated.

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

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

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

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

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

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

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

Summary of the Proposed Deal

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

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

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

Analysis of the Antitrust Risk of a Comcast/Fox Merger

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

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

Vertical Mergers Generally Present Less Antitrust Risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

There are some who view a host of claimed negative social ills allegedly related to the large size of firms like Amazon as an occasion to call for the company’s break up. And, unfortunately, these critics find an unlikely ally in President Trump, whose tweet storms claim that tech platforms are too big and extract unfair rents at the expense of small businesses. But these critics are wrong: Amazon is not a dangerous monopoly, and it certainly should not be broken up.  

Of course, no one really spells out what it means for these companies to be “too big.” Even Barry Lynn, a champion of the neo-Brandeisian antitrust movement, has shied away from specifics. The best that emerges when probing his writings is that he favors something like a return to Joe Bain’s “Structure-Conduct-Performance” paradigm (but even here, the details are fuzzy).

The reality of Amazon’s impact on the market is quite different than that asserted by its critics. Amazon has had decades to fulfill a nefarious scheme to suddenly raise prices and reap the benefits of anticompetive behavior. Yet it keeps putting downward pressure on prices in a way that seems to be commoditizing goods instead of building anticompetitive moats.

Amazon Does Not Anticompetitively Exercise Market Power

Twitter rants aside, more serious attempts to attack Amazon on antitrust grounds argue that it is engaging in pricing that is “predatory.” But “predatory pricing” requires a specific demonstration of factors — which, to date, have not been demonstrated — in order to justify legal action. Absent a showing of these factors, it has long been understood that seemingly “predatory” conduct is unlikely to harm consumers and often actually benefits consumers.

One important requirement that has gone unsatisfied is that a firm engaging in predatory pricing must have market power. Contrary to common characterizations of Amazon as a retail monopolist, its market power is less than it seems. By no means does it control retail in general. Rather, less than half of all online commerce (44%) takes place on its platform (and that number represents only 4% of total US retail commerce). Of that 44 percent, a significant portion is attributable to the merchants who use Amazon as a platform for their own online retail sales. Rather than abusing a monopoly market position to predatorily harm its retail competitors, at worst Amazon has created a retail business model that puts pressure on other firms to offer more convenience and lower prices to their customers. This is what we want and expect of competitive markets.

The claims leveled at Amazon are the intellectual kin of the ones made against Walmart during its ascendancy that it was destroying main street throughout the nation. In 1993, it was feared that Walmart’s quest to vertically integrate its offerings through Sam’s Club warehouse operations meant that “[r]etailers could simply bypass their distributors in favor of Sam’s — and Sam’s could take revenues from local merchants on two levels: as a supplier at the wholesale level, and as a competitor at retail.” This is a strikingly similar accusation to those leveled against Amazon’s use of its Seller Marketplace to aggregate smaller retailers on its platform.

But, just as in 1993 with Walmart, and now with Amazon, the basic fact remains that consumer preferences shift. Firms need to alter their behavior to satisfy their customers, not pretend they can change consumer preferences to suit their own needs. Preferring small, local retailers to Amazon or Walmart is a decision for individual consumers interacting in their communities, not for federal officials figuring out how best to pattern the economy.

All of this is not to say that Amazon is not large, or important, or that, as a consequence of its success it does not exert influence over the markets it operates in. But having influence through success is not the same as anticompetitively asserting market power.

Other criticisms of Amazon focus on its conduct in specific vertical markets in which it does have more significant market share. For instance, a UK Liberal Democratic leader recently claimed that “[j]ust as Standard Oil once cornered 85% of the refined oil market, today… Amazon accounts for 75% of ebook sales … .”

The problem with this concern is that Amazon’s conduct in the ebook market has had, on net, pro-competitive, not anti-competitive, effects. Amazon’s behavior in the ebook market has actually increased demand for books overall (and expanded output), increased the amount that consumers read, and decreased the price of theses books. Amazon is now even opening physical bookstores. Lina Khan made much hay in her widely cited article last year that this was all part of a grand strategy to predatorily push competitors out of the market:

The fact that Amazon has been willing to forego profits for growth undercuts a central premise of contemporary predatory pricing doctrine, which assumes that predation is irrational precisely because firms prioritize profits over growth. In this way, Amazon’s strategy has enabled it to use predatory pricing tactics without triggering the scrutiny of predatory pricing laws.

But it’s hard to allege predation in a market when over the past twenty years Amazon has consistently expanded output and lowered overall prices in the book market. Courts and lawmakers have sought to craft laws that encourage firms to provide consumers with more choices at lower prices — a feat that Amazon repeatedly accomplishes. To describe this conduct as anticompetitive is asking for a legal requirement that is at odds with the goal of benefiting consumers. It is to claim that Amazon has a contradictory duty to both benefit consumers and its shareholders, while also making sure that all of its less successful competitors also stay in business.

But far from creating a monopoly, the empirical reality appears to be that Amazon is driving categories of goods, like books, closer to the textbook model of commodities in a perfectly competitive market. Hardly an antitrust violation.

Amazon Should Not Be Broken Up

“Big is bad” may roll off the tongue, but, as a guiding ethic, it makes for terrible public policy. Amazon’s size and success are a direct result of its ability to enter relevant markets and to innovate. To break up Amazon, or any other large firm, is to punish it for serving the needs of its consumers.

None of this is to say that large firms are incapable of causing harm or acting anticompetitively. But we should accept calls for dramatic regulatory intervention  — especially from those in a position to influence regulatory or market reactions to such calls — to be supported by substantial factual evidence and legal and economic theory.

This tendency to go after large players is nothing new. As noted above, Walmart triggered many similar concerns thirty years ago. Thinking about Walmart then, pundits feared that direct competition with Walmart was fruitless:

In the spring of 1992 Ken Stone came to Maine to address merchant groups from towns in the path of the Wal-Mart advance. His advice was simple and direct: don’t compete directly with Wal-Mart; specialize and carry harder-to-get and better-quality products; emphasize customer service; extend your hours; advertise more — not just your products but your business — and perhaps most pertinent of all to this group of Yankee individualists, work together.

And today, some think it would be similarly pointless to compete with Amazon:

Concentration means it is much harder for someone to start a new business that might, for example, try to take advantage of the cheap housing in Minneapolis. Why bother when you know that if you challenge Amazon, they will simply dump your product below cost and drive you out of business?

The interesting thing to note, of course, is that Walmart is now desperately trying to compete with Amazon. But despite being very successful in its own right, and having strong revenues, Walmart doesn’t seem able to keep up.

Some small businesses will close as new business models emerge and consumer preferences shift. This is to be expected in a market driven by creative destruction. Once upon a time Walmart changed retail and improved the lives of many Americans. If our lawmakers can resist the urge to intervene without real evidence of harm, Amazon just might do the same.

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)

 

The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

The world discovered something this past weekend that the world had already known: that what you say on the Internet stays on the Internet, spread intractably and untraceably through the tendrils of social media. I refer, of course, to the Cambridge Analytica/Facebook SNAFU (or just Situation Normal): the disclosure that Cambridge Analytica, a company used for election analytics by the Trump campaign, breached a contract with Facebook in order to unauthorizedly collect information on 50 million Facebook users. Since the news broke, Facebook’s stock is off by about 10 percent, Cambridge Analytica is almost certainly a doomed company, the FTC has started investigating both, private suits against Facebook are already being filed, the Europeans are investigating as well, and Cambridge Analytica is now being blamed for Brexit.

That is all fine and well, and we will be discussing this situation and its fallout for years to come. I want to write about a couple of other aspects of the story: the culpability of 270,000 Facebook users in disclosing the data of 50 million of their peers, and what this situation tells us about evergreen proposals to “open up the social graph” by making users’ social media content portable.

I Have Seen the Enemy and the Enemy is Us

Most discussion of Cambridge Analytica’s use of Facebook data has focused on the large number of user records Cambridge Analytica obtained access to – 50 million – and the fact that it obtained these records through some problematic means (and Cambridge Analytica pretty clearly breached contracts and acted deceptively to obtain these records). But one needs to dig a deeper to understand the mechanics of what actually happened. Once one does this, the story becomes both less remarkable and more interesting.

(For purposes of this discussion, I refer to Cambridge Analytica as the actor that obtained the records. It’s actually a little more complicated: Cambridge Analytica worked with an academic researcher to obtain these records. That researcher was given permission by Facebook to work with and obtain data on users for purposes relating to his research. But he exceeded that scope of authority, sharing the data that he collected with CA.)

The 50 million users’ records that Cambridge Analytica obtained access to were given to Cambridge Analytica by about 200,000 individual Facebook users. Those 270,000 users become involved with Cambridge Analytica by participating in an online quiz – one of those fun little throwaway quizzes that periodically get some attention on Facebook and other platforms. As part of taking that quiz, those 270,000 users agreed to grant Cambridge Analytica access to their profile information, including information available through their profile about their friends.

This general practice is reasonably well known. Any time a quiz or game like this has its moment on Facebook it is also accompanied by discussion of how the quiz or game is likely being used to harvest data about users. The terms of use of these quizzes and games almost always disclose that such information is being collected. More telling, any time a user posts a link to one of these quizzes or games, some friend will will invariably leave a comment warning about these terms of service and of these data harvesting practices.

There are two remarkable things about this. The first remarkable thing is that there is almost nothing remarkable about the fact that Cambridge Analytica obtained this information. A hundred such data harvesting efforts have preceded Cambridge Analytica; and a hundred more will follow it. The only remarkable things about the present story is that Cambridge Analytica was an election analytics firm working for Donald Trump – never mind that by all accounts the data collected proved to be of limited use generally in elections or that when Cambridge Analytica started working for the Trump campaign they were tasked with more mundane work that didn’t make use of this data.

More remarkable is that Cambridge Analytica didn’t really obtain data about 50 million individuals from Facebook, or from a Facebook quiz. Cambridge Analytica obtained this data from those 50 million individuals’ friends.

There are unquestionably important questions to be asked about the role of Facebook in giving users better control over, or ability to track uses of, their information. And there are questions about the use of contracts such as that between Facebook and Cambridge Analytica to control how data like this is handled. But this discussion will not be complete unless and until we also understand the roles and responsibilities of individual users in managing and respecting the privacy of their friends.

Fundamentally, we lack a clear and easy way to delineate privacy rights. If I share with my friends that I participated in a political rally, that I attended a concert, that I like certain activities, that I engage in certain illegal activities, what rights do I have to control how they subsequently share that information? The answer in the physical world, in the American tradition, is none – at least, unless I take affirmative steps to establish such a right prior to disclosing that information.

The answer is the same in the online world, as well – though platforms have substantial ability to alter this if they so desire. For instance, Facebook could change the design of its system to prohibit users from sharing information about their friends with third parties. (Indeed, this is something that most privacy advocates think social media platforms should do.) But such a “solution” to the delineation problem has its own problems. It assumes that the platform is the appropriate arbiter of privacy rights – a perhaps questionable assumption given platforms’ history of getting things wrong when it comes to privacy. More trenchant, it raises questions about users’ ability to delineate or allocate their privacy differently than allowed by the platforms, particularly where a given platform may not allow the delineation or allocation of rights that users prefer.

The Badness of the Open Graph Idea

One of the standard responses to concerns about how platforms may delineate and allow users to allocate their privacy interests is, on the one hand, that competition among platforms would promote desirable outcomes and that, on the other hand, the relatively limited and monopolistic competition that we see among firms like Facebook is one of the reasons that consumers today have relatively poor control over their information.

The nature of competition in markets such as these, including whether and how to promote more of it, is a perennial and difficult topic. The network effects inherent in markets like these suggest that promoting competition may in fact not improve consumer outcomes, for instance. Competition could push firms to less consumer-friendly privacy positions if that allows better monetization and competitive advantages. And the simple fact that Facebook has lost 10% of its value following the Cambridge Analytica news suggests that there are real market constraints on how Facebook operates.

But placing those issues to the side for now, the situation with Cambridge Analytica offers an important cautionary tale about one of the perennial proposals for how to promote competition between social media platforms: “opening up the social graph.” The basic idea of these proposals is to make it easier for users of these platforms to migrate between platforms or to use the features of different platforms through data portability and interoperability. Specific proposals have taken various forms over the years, but generally they would require firms like Facebook to either make users’ data exportable in a standardized form so that users could easily migrate it to other platforms or to adopt a standardized API that would allow other platforms to interoperate with data stored on the Facebook platform.

In other words, proposals to “open the social graph” are proposals to make it easier to export massive volumes of Facebook user data to third parties at efficient scale.

If there is one lesson from the past decade that is more trenchant than that delineation privacy rights is difficult it is that data security is even harder.

These last two points do not sum together well. The easier that Facebook makes it for its users’ data to be exported at scale, the easier Facebook makes it for its users’ data to be exfiltrated at scale. Despite its myriad problems, Cambridge Analytica at least was operating within a contractual framework with Facebook – it was a known party. Creating external API for exporting Facebook data makes it easier for unknown third-parties to anonymously obtain user information. Indeed, even if the API only works to allow trusted third parties to to obtain such information, the problem of keeping that data secured against subsequent exfiltration multiplies with each third party that is allowed access to that data.

In January a Food and Drug Administration advisory panel, the Tobacco Products Scientific Advisory Committee (TPSAC), voted 8-1 that the weight of scientific evidence shows that switching from cigarettes to an innovative, non-combustible tobacco product such as Philip Morris International’s (PMI’s) IQOS system significantly reduces a user’s exposure to harmful or potentially harmful chemicals.

This finding should encourage the FDA to allow manufacturers to market smoke-free products as safer alternatives to cigarettes. But, perhaps predictably, the panel’s vote has incited a regulatory furor among certain politicians.

Last month, several United States senators, including Richard Blumenthal, Dick Durbin, and Elizabeth Warren, sent a letter to FDA Commissioner Scott Gottlieb urging the agency to

avoid rushing through new products, such as IQOS, … without requiring strong evidence that any such product will reduce the risk of disease, result in a large number of smokers quitting, and not increase youth tobacco use.

At the TPSAC meeting, nine members answered five multi-part questions about proposed marketing claims for the device. Taken as a whole, the panel’s votes indicate considerable agreement that non-combustible tobacco products like IQOS should, in fact, allay the senators’ concerns. And a closer look at the results reveals a much more nuanced outcome than either the letter or much of the media coverage has suggested.

“Reduce the risk of disease”: Despite the finding that IQOS reduces exposure to harmful chemicals, the panel nominally rejected a claim that it would reduce the risk of tobacco-related diseases. The panel’s objection, however, centered on the claim’s wording that IQOS “can reduce” risk, rather than “may reduce” risk. And, in the panel’s closest poll, it rejected by just a single vote the claim that “switching completely to IQOS presents less risk of harm than continuing to smoke cigarettes.”

“Result in large number of smokers quitting”: The panel unanimously concluded that PMI demonstrated a “low” likelihood that former smokers would re-initiate tobacco use with the IQOS system. The only options were “low,” “medium,” and “high.” This doesn’t mean it will necessarily help non-users quit in the first place, of course, but for smokers who do switch, it means the device helps them stay away from cigarettes.

“Not increase youth tobacco use”: A majority of the voting panel members agreed that PMI demonstrated a “low” likelihood that youth “never smokers” would become established IQOS users.

By definition, the long-term health benefits of innovative new products like IQOS are uncertain. But the cost of waiting for perfect information may be substantial.

It’s worth noting that the American Cancer Society recently shifted its position on electronic cigarettes, recommending that individuals who do not quit smoking

should be encouraged to switch to the least harmful form of tobacco product possible; switching to the exclusive use of e-cigarettes is preferable to continuing to smoke combustible products.

Dr. Nancy Rigotti agrees. A professor of medicine at Harvard and Director of the Tobacco Research and Treatment Center at Massachusetts General Hospital, Dr. Rigotti is a prominent tobacco-cessation researcher and the author of a February 2018 National Academies of Science, Engineering, and Medicine Report that examined over 800 peer-reviewed scientific studies on the health effects of e-cigarettes. As she has said:

The field of tobacco control recognizes cessation is the goal, but if the patient can’t quit then I think we should look at harm reduction.

About her recent research, Dr. Rigotti noted:

I think the major takeaway is that although there’s a lot we don’t know, and although they have some health risks, [e-cigarettes] are clearly better than cigarettes….

Unlike the senators pushing the FDA to prohibit sales of non-combustible tobacco products, experts recognize that there is enormous value in these products: the reduction of imminent harm relative to the alternative.

Such harm-reduction strategies are commonplace, even when the benefits aren’t perfectly quantifiable. Bike helmet use is encouraged (or mandated) to reduce the risk and harm associated with bicycling. Schools distribute condoms to reduce teen pregnancy and sexually transmitted diseases. Local jurisdictions offer needle exchange programs to reduce the spread of AIDS and other infectious diseases; some offer supervised injection facilities to reduce the risk of overdose. Methadone and Suboxone are less-addictive opioids used to treat opioid use disorder.

In each of these instances, it is understood that the underlying, harmful behaviors will continue. But it is also understood that the welfare benefits from reducing the harmful effects of such behavior outweigh any gain that might be had from futile prohibition efforts.

By the same token — and seemingly missed by the senators urging an FDA ban on non-combustible tobacco technologies — constraints placed on healthier alternatives induce people, on the margin, to stick with the less-healthy option. Thus, many countries that have adopted age restrictions on their needle exchange programs and supervised injection facilities have seen predictably higher rates of infection and overdose among substance-using youth.

Under the Food, Drug & Cosmetic Act, in order to market “safer” tobacco products manufacturers must demonstrate that they would (1) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users, and (2) benefit the health of the population as a whole. In addition, the Act limits the labeling and advertising claims that manufacturers can make on their products’ behalf.

These may be well-intentioned restraints, but overly strict interpretation of the rules can do far more harm than good.

In 2015, for example, the TPSAC expressed concerns about consumer confusion in an application to market “snus” (a smokeless tobacco product placed between the lip and gum) as a safer alternative to cigarettes. The manufacturer sought to replace the statement on snus packaging, “WARNING: This product is not a safe alternative to cigarettes,” with one reading, “WARNING: No tobacco product is safe, but this product presents substantially lower risks to health than cigarettes.”

The FDA denied the request, stating that the amended warning label “asserts a substantial reduction in risks, which may not accurately convey the risks of [snus] to consumers” — even though it agreed that snus “substantially reduce the risks of some, but not all, tobacco-related diseases.”

But under this line of reasoning, virtually no amount of net health benefits would merit approval of marketing language designed to encourage the use of less-harmful products as long as any risk remains. And yet consumers who refrain from using snus after reading the stronger warning might instead — and wrongly — view cigarettes as equally healthy (or healthier), precisely because of the warning. That can’t be sound policy if the aim is actually to reduce harm overall.

To be sure, there is a place for government to try to ensure accuracy in marketing based on health claims. But it is impossible for regulators to fine-tune marketing materials to convey the full range of truly relevant information for all consumers. And pressuring the FDA to limit the sale and marketing of smoke-free products as safer alternatives to cigarettes — in the face of scientific evidence that they would likely achieve significant harm-reduction goals — could do far more harm than good.

The cause of basing regulation on evidence-based empirical science (rather than mere negative publicity) – and of preventing regulatory interference with First Amendment commercial speech rights – got a judicial boost on February 26.

Specifically, in National Association of Wheat Growers et al. v. Zeise (Monsanto Case), a California federal district court judge preliminarily enjoined application against Monsanto of a labeling requirement imposed by a California regulatory law, Proposition 65.  Proposition 65 mandates that the Governor of California publish a list of chemicals known to the State to cause cancer, and also prohibits any person in the course of doing business from knowingly and intentionally exposing anyone to the listed chemicals without a prior “clear and reasonable” warning.  In this case, California sought to make Monsanto place warning labels on its popular Roundup weed killer products, stating that glyphosate, a widely-used herbicide and key Roundup ingredient, was known to cause cancer.  Monsanto, joined by various agribusiness entities, sued to enjoin California from taking that action.  Judge William Shubb concluded that there was insufficient evidence that the active ingredient in Roundup causes cancer, and that requiring Roundup to publish warning labels would violate Monsanto’s First Amendment rights by compelling it to engage in false and misleading speech.  Salient excerpts from Judge Shubb’s opinion are set forth below:

[When, as here, it compels commercial speech, in order to satisfy the First Amendment,] [t]he State has the burden of demonstrating that a disclosure requirement is purely factual and uncontroversial, not unduly burdensome, and reasonably related to a substantial government interest. . . .  The dispute in the present case is over whether the compelled disclosure is of purely factual and uncontroversial information. In this context, “uncontroversial” “refers to the factual accuracy of the compelled disclosure, not to its subjective impact on the audience.” [citation omitted]

 On the evidence before the court, the required warning for glyphosate does not appear to be factually accurate and uncontroversial because it conveys the message that glyphosate’s carcinogenicity is an undisputed fact, when almost all other regulators have concluded that there is insufficient evidence that glyphosate causes cancer. . . .

It is inherently misleading for a warning to state that a chemical is known to the state of California to cause cancer based on the finding of one organization [, the International Agency for Research on Cancer] (which as noted above, only found that substance is probably carcinogenic), when apparently all other regulatory and governmental bodies have found the opposite, including the EPA, which is one of the bodies California law expressly relies on in determining whether a chemical causes cancer. . . .  [H]ere, given the heavy weight of evidence in the record that glyphosate is not in fact known to cause cancer, the required warning is factually inaccurate and controversial. . . .

The court’s First Amendment inquiry here boils down to what the state of California can compel businesses to say. Whether Proposition 65’s statutory and regulatory scheme is good policy is not at issue. However, where California seeks to compel businesses to provide cancer warnings, the warnings must be factually accurate and not misleading. As applied to glyphosate, the required warnings are false and misleading. . . .

As plaintiffs have shown that they are likely to succeed on the merits of their First Amendment claim, are likely to suffer irreparable harm absent an injunction, and that the balance of equities and public interest favor an injunction, the court will grant plaintiffs’ request to enjoin Proposition 65’s warning requirement for glyphosate.

The Monsanto Case commendably highlights a little-appreciated threat of government overregulatory zeal.  Not only may excessive regulation fail a cost-benefit test, and undermine private property rights, it may violates the First Amendment speech rights of private actors when it compels inaccurate speech.  The negative economic consequences may be substantial  when the government-mandated speech involves a claim about a technical topic that not only lacks empirical support (and thus may be characterized as “junk science”), but is deceptive and misleading (if not demonstrably false).  Deceptive and misleading speech in the commercial market place reduces marketplace efficiency and reduces social welfare (both consumer’s surplus and producer’s surplus).  In particular, it does this by deterring mutually beneficial transactions (for example, purchases of Roundup that would occur absent misleading labeling about cancer risks), generating suboptimal transactions (for example, purchases of inferior substitutes to Roundup due to misleading Roundup labeling), and distorting competition within the marketplace (the reallocation of market shares among Roundup and substitutes not subject to labeling).  The short-term static effects of such market distortions may be dwarfed by the  dynamic effects, such as firms’ disincentives to invest in innovation (or even participate) in markets subject to inaccurate information concerning the firms’ products or services.

In short, the Monsanto Case highlights the fact that government regulation not only imposes an implicit tax on business – it affirmatively distorts the workings of individual markets if it causes the introduction misleading or deceptive information that is material to marketplace decision-making.  The threat of such distortive regulation may be substantial, especially in areas where regulators interact with “public interest clients” that have an incentive to demonize disfavored activities by private commercial actors – one example being the health and safety regulation of agricultural chemicals.  In those areas, there may be a case for federal preemption of state regulation, and for particularly close supervision of federal agencies to avoid economically inappropriate commercial speech mandates.  Stay tuned for future discussion of such potential legal reforms.

The Internet is a modern miracle: from providing all varieties of entertainment, to facilitating life-saving technologies, to keeping us connected with distant loved ones, the scope of the Internet’s contribution to our daily lives is hard to overstate. Moving forward there is undoubtedly much more that we can and will do with the Internet, and part of that innovation will, naturally, require a reconsideration of existing laws and how new Internet-enabled modalities fit into them.

But when undertaking such a reconsideration, the goal should not be simply to promote Internet-enabled goods above all else; rather, it should be to examine the law’s effect on the promotion of new technology within the context of other, competing social goods. In short, there are always trade-offs entailed in changing the legal order. As such, efforts to reform, clarify, or otherwise change the law that affects Internet platforms must be balanced against other desirable social goods, not automatically prioritized above them.

Unfortunately — and frequently with the best of intentions — efforts to promote one good thing (for instance, more online services) inadequately take account of the balance of the larger legal realities at stake. And one of the most important legal realities that is too often readily thrown aside in the rush to protect the Internet is that policy be established through public, (relatively) democratically accountable channels.

Trade deals and domestic policy

Recently a letter was sent by a coalition of civil society groups and law professors asking the NAFTA delegation to incorporate U.S.-style intermediary liability immunity into the trade deal. Such a request is notable for its timing in light of the ongoing policy struggles over SESTA —a bill currently working its way through Congress that seeks to curb human trafficking through online platforms — and the risk that domestic platform companies face of losing (at least in part) the immunity provided by Section 230 of the Communications Decency Act. But this NAFTA push is not merely about a tradeoff between less trafficking and more online services, but between promoting policies in a way that protects the rule of law and doing so in a way that undermines the rule of law.

Indeed, the NAFTA effort appears to be aimed at least as much at sidestepping the ongoing congressional fight over platform regulation as it is aimed at exporting U.S. law to our trading partners. Thus, according to EFF, for example, “[NAFTA renegotiation] comes at a time when Section 230 stands under threat in the United States, currently from the SESTA and FOSTA proposals… baking Section 230 into NAFTA may be the best opportunity we have to protect it domestically.”

It may well be that incorporating Section 230 into NAFTA is the “best opportunity” to protect the law as it currently stands from efforts to reform it to address conflicting priorities. But that doesn’t mean it’s a good idea. In fact, whatever one thinks of the merits of SESTA, it is not obviously a good idea to use a trade agreement as a vehicle to override domestic reforms to Section 230 that Congress might implement. Trade agreements can override domestic law, but that is not the reason we engage in trade negotiations.

In fact, other parts of NAFTA remain controversial precisely for their ability to undermine domestic legal norms, in this case in favor of guaranteeing the expectations of foreign investors. EFF itself is deeply skeptical of this “investor-state” dispute process (“ISDS”), noting that “[t]he latest provisions would enable multinational corporations to undermine public interest rules.” The irony here is that ISDS provides a mechanism for overriding domestic policy that is a close analogy for what EFF advocates for in the Section 230/SESTA context.

ISDS allows foreign investors to sue NAFTA signatories in a tribunal when domestic laws of that signatory have harmed investment expectations. The end result is that the signatory could be responsible for paying large sums to litigants, which in turn would serve as a deterrent for the signatory to continue to administer its laws in a similar fashion.

Stated differently, NAFTA currently contains a mechanism that favors one party (foreign investors) in a way that prevents signatory nations from enacting and enforcing laws approved of by democratically elected representatives. EFF and others disapprove of this.

Yet, at the same time, EFF also promotes the idea that NAFTA should contain a provision that favors one party (Internet platforms) in a way that would prevent signatory nations from enacting and enforcing laws like SESTA that (might be) approved of by democratically elected representatives.

A more principled stance would be skeptical of the domestic law override in both contexts.

Restating Copyright or creating copyright policy?

Take another example: Some have suggested that the American Law Institute (“ALI”) is being used to subvert Congressional will. Since 2013, ALI has taken upon itself the project to “restate” the law of copyright. ALI is well known and respected for its common law restatements, but it may be that something more than mere restatement is going on here. As the NY Bar Association recently observed:

The Restatement as currently drafted appears inconsistent with the ALI’s long-standing goal of promoting clarity in the law: indeed, rather than simply clarifying or restating that law, the draft offers commentary and interpretations beyond the current state of the law that appear intended to shape current and future copyright policy.  

It is certainly odd that ALI (or any other group) would seek to restate a body of law that is already stated in the form of an overarching federal statute. The point of a restatement is to gather together the decisions of disparate common law courts interpreting different laws and precedent in order to synthesize a single, coherent framework approximating an overall consensus. If done correctly, a restatement of a federal statute would, theoretically, end up with the exact statute itself along with some commentary about how judicial decisions have filled in the blanks differently — a state of affairs that already exists with the copious academic literature commenting on federal copyright law.

But it seems that merely restating judicial interpretations was not the only objective behind the copyright restatement effort. In a letter to ALI, one of the scholars responsible for the restatement project noted that:

While congressional efforts to improve the Copyright Act… may be a welcome and beneficial development, it will almost certainly be a long and contentious process… Register Pallante… [has] not[ed] generally that “Congress has moved slowly in the copyright space.”

Reform of copyright law, in other words, and not merely restatement of it, was an important impetus for the project. As an attorney for the Copyright Office observed, “[a]lthough presented as a “Restatement” of copyright law, the project would appear to be more accurately characterized as a rewriting of the law.” But “rewriting” is a job for the legislature. And even if Congress moves slowly, or the process is frustrating, the democratic processes that produce the law should still be respected.

Pyrrhic Policy Victories

Attempts to change copyright or entrench liability immunity through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.

It’s no surprise why some may be frustrated and concerned about intermediary liability and copyright issues: On the margin, it’s definitely harder to operate an Internet platform if it faces sweeping liability for the actions of third parties (whether for human trafficking or infringing copyrights). Maybe copyright law needs to be reformed and perhaps intermediary liability must be maintained exactly as it is (or expanded). But the right way to arrive at these policy outcomes is not through backdoors — and it is not to begin with the assertion that such outcomes are required.

Congress and the courts can be frustrating vehicles through which to enact public policy, but they have the virtue of being relatively open to public deliberation, and of having procedural constraints that can circumscribe excesses and idiosyncratic follies. We might get bad policy from Congress. We might get bad cases from the courts. But the theory of our system is that, on net, having a frustratingly long, circumscribed, and public process will tend to weed out most of the bad ideas and impulses that would otherwise result from unconstrained decision making, even if well-intentioned.

We should meet efforts like these to end-run Congress and the courts with significant skepticism. Short term policy “victories” are likely not worth the long-run consequences. These are important, complicated issues. If we surreptitiously adopt idiosyncratic solutions to them, we risk undermining the rule of law itself.

What happened

Today, following a six year investigation into Google’s business practices in India, the Competition Commission of India (CCI) issued its ruling.

Two things, in particular, are remarkable about the decision. First, while the CCI’s staff recommended a finding of liability on a litany of claims (the exact number is difficult to infer from the Commission’s decision, but it appears to be somewhere in the double digits), the Commission accepted its staff’s recommendation on only three — and two of those involve conduct no longer employed by Google.

Second, nothing in the Commission’s finding of liability or in the remedy it imposes suggests it approaches the issue as the EU does. To be sure, the CCI employs rhetoric suggesting that “search bias” can be anticompetitive. But its focus remains unwaveringly on the welfare of the consumer, not on the hyperbolic claims of Google’s competitors.

What didn’t happen

In finding liability on only a single claim involving ongoing practices — the claim arising from Google’s “unfair” placement of its specialized flight search (Google Flights) results — the Commission also roundly rejected a host of other claims (more than once with strong words directed at its staff for proposing such woefully unsupported arguments). Among these are several that have been raised (and unanimously rejected) by competition regulators elsewhere in the world. These claims related to a host of Google’s practices, including:

  • Search bias involving the treatment of specialized Google content (like Google Maps, YouTube, Google Reviews, etc.) other than Google Flights
  • Search bias involving the display of Universal Search results (including local search, news search, image search, etc.), except where these results are fixed to a specific position on every results page (as was the case in India before 2010), instead of being inserted wherever most appropriate in context
  • Search bias involving OneBox results (instant answers to certain queries that are placed at the top of search results pages), even where answers are drawn from Google’s own content and specific, licensed sources (rather than from crawling the web)
  • Search bias involving sponsored, vertical search results (e.g., Google Shopping results) other than Google Flights. These results are not determined by the same algorithm that returns organic results, but are instead more like typical paid search advertising results that sometimes appear at the top of search results pages. The Commission did find that Google’s treatment of its Google Flight results (another form of sponsored result) violated India’s competition laws
  • The operation of Google’s advertising platform (AdWords), including the use of a “Quality Score” in its determination of an ad’s relevance (something Josh Wright and I discuss at length here)
  • Google’s practice of allowing advertisers to bid on trademarked keywords
  • Restrictions placed by Google upon the portability of advertising campaign data to other advertising platforms through its AdWords API
  • Distribution agreements that set Google as the default (but not exclusive) search engine on certain browsers
  • Certain restrictions in syndication agreements with publishers (websites) through which Google provides search and/or advertising (Google’s AdSense offering). The Commission found that negotiated search agreements that require Google to be the exclusive search provider on certain sites did violate India’s competition laws. It should be noted, however, that Google has very few of these agreements, and no longer enters into them, so the finding is largely historical. All of the other assertions regarding these agreements (and there were numerous claims involving a number of clauses in a range of different agreements) were rejected by the Commission.

Just like competition authorities in the US, Canada, and Taiwan that have properly focused on consumer welfare in their Google investigations, the CCI found important consumer benefits from these practices that outweigh any inconveniences they may impose on competitors. And, just as in those jurisdictions, all of them were rejected by the Commission.

Still improperly assessing Google’s dominance

The biggest problem with the CCI’s decision is its acceptance — albeit moderated in important ways — of the notion that Google owes a special duty to competitors given its position as an alleged “gateway” to the Internet:

In the present case, since Google is the gateway to the internet for a vast majority of internet users, due to its dominance in the online web search market, it is under an obligation to discharge its special responsibility. As Google has the ability and the incentive to abuse its dominant position, its “special responsibility” is critical in ensuring not only the fairness of the online web search and search advertising markets, but also the fairness of all online markets given that these are primarily accessed through search engines. (para 202)

As I’ve discussed before, a proper analysis of the relevant markets in which Google operates would make clear that Google is beset by actual and potential competitors at every turn. Access to consumers by advertisers, competing search services, other competing services, mobile app developers, and the like is readily available. The lines between markets drawn by the CCI are based on superficial distinctions that are of little importance to the actual relevant market.

Consider, for example: Users seeking product information can get it via search, but also via Amazon and Facebook; advertisers can place ad copy and links in front of millions of people on search results pages, and they can also place them in front of millions of people on Facebook and Twitter. Meanwhile, many specialized search competitors like Yelp receive most of their traffic from direct navigation and from their mobile apps. In short, the assumption of market dominance made by the CCI (and so many others these days) is based on a stilted conception of the relevant market, as Google is far from the only channel through which competitors can reach consumers.

The importance of innovation in the CCI’s decision

Of course, it’s undeniable that Google is an important mechanism by which competitors reach consumers. And, crucially, nowhere did the CCI adopt Google’s critics’ and competitors’ frequently asserted position that Google is, in effect, an “essential facility” requiring extremely demanding limitations on its ability to control its product when doing so might impede its rivals.

So, while the CCI defines the relevant markets and adopts legal conclusions that confer special importance on Google’s operation of its general search results pages, it stops short of demanding that Google treat competitors on equal terms to its own offerings, as would typically be required of essential facilities (or their close cousin, public utilities).

Significantly, the Commission weighs the imposition of even these “special responsibilities” against the effects of such duties on innovation, particularly with respect to product design.

The CCI should be commended for recognizing that any obligation imposed by antitrust law on a dominant company to refrain from impeding its competitors’ access to markets must stop short of requiring the company to stop innovating, even when its product innovations might make life difficult for its competitors.

Of course, some product design choices can be, on net, anticompetitive. But innovation generally benefits consumers, and it should be impeded only where doing so clearly results in net consumer harm. Thus:

[T]he Commission is cognizant of the fact that any intervention in technology markets has to be carefully crafted lest it stifles innovation and denies consumers the benefits that such innovation can offer. This can have a detrimental effect on economic welfare and economic growth, particularly in countries relying on high growth such as India…. [P]roduct design is an important and integral dimension of competition and any undue intervention in designs of SERP [Search Engine Results Pages] may affect legitimate product improvements resulting in consumer harm. (paras 203-04).

As a consequence of this cautious approach, the CCI refused to accede to its staff’s findings of liability based on Google’s treatment of its vertical search results without considering how Google’s incorporation of these specialized results improved its product for consumers. Thus, for example:

The Commission is of opinion that requiring Google to show third-party maps may cause a delay in response time (“latency”) because these maps reside on third-party servers…. Further, requiring Google to show third-party maps may break the connection between Google’s local results and the map…. That being so, the Commission is of the view that no case of contravention of the provisions of the Act is made out in Google showing its own maps along with local search results. The Commission also holds that the same consideration would apply for not showing any other specialised result designs from third parties. (para 224 (emphasis added))

The CCI’s laudable and refreshing focus on consumer welfare

Even where the CCI determined that Google’s current practices violate India’s antitrust laws (essentially only with respect to Google Flights), it imposed a remedy that does not demand alteration of the overall structure of Google’s search results, nor its algorithmic placement of those results. In fact, the most telling indication that India’s treatment of product design innovation embodies a consumer-centric approach markedly different from that pushed by Google’s competitors (and adopted by the EU) is its remedy.

Following its finding that

[p]rominent display and placement of Commercial Flight Unit with link to Google’s specialised search options/ services (Flight) amounts to an unfair imposition upon users of search services as it deprives them of additional choices (para 420),

the CCI determined that the appropriate remedy for this defect was:

So far as the contravention noted by the Commission in respect of Flight Commercial Unit is concerned, the Commission directs Google to display a disclaimer in the commercial flight unit box indicating clearly that the “search flights” link placed at the bottom leads to Google’s Flights page, and not the results aggregated by any other third party service provider, so that users are not misled. (para 422 (emphasis added))

Indeed, what is most notable — and laudable — about the CCI’s decision is that both the alleged problem, as well as the proposed remedy, are laser-focused on the effect on consumers — not the welfare of competitors.

Where the EU’s recent Google Shopping decision considers that this sort of non-neutral presentation of Google search results harms competitors and demands equal treatment by Google of rivals seeking access to Google’s search results page, the CCI sees instead that non-neutral presentation of results could be confusing to consumers. It does not demand that Google open its doors to competitors, but rather that it more clearly identify when its product design prioritizes Google’s own content rather than determine priority based on its familiar organic search results algorithm.

This distinction is significant. For all the language in the decision asserting Google’s dominance and suggesting possible impediments to competition, the CCI does not, in fact, view Google’s design of its search results pages as a contrivance intended to exclude competitors from accessing markets.

The CCI’s remedy suggests that it has no problem with Google maintaining control over its search results pages and determining what results, and in what order, to serve to consumers. Its sole concern, rather, is that Google not get a leg up at the expense of consumers by misleading them into thinking that its product design is something that it is not.

Rather than dictate how Google should innovate or force it to perpetuate an outdated design in the name of preserving access by competitors bent on maintaining the status quo, the Commission embraces the consumer benefits of Google’s evolving products, and seeks to impose only a narrowly targeted tweak aimed directly at the quality of consumers’ interactions with Google’s products.

Conclusion

As some press accounts of the CCI’s decision trumpet, the Commission did impose liability on Google for abuse of a dominant position. But its similarity with the EU’s abuse of dominance finding ends there. The CCI rejected many more claims than it adopted, and it carefully tailored its remedy to the welfare of consumers, not the lamentations of competitors. Unlike the EU, the CCI’s finding of a violation is tempered by its concern for avoiding harmful constraints on innovation and product design, and its remedy makes this clear. Whatever the defects of India’s decision, it offers a welcome return to consumer-centric antitrust.

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.