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[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

The U.S. Department of Justice’s (DOJ) antitrust case against Google, which was filed in October 2020, will be a tough slog.[1] It is an alleged monopolization (Sherman Act, Sec. 2) case; and monopolization cases are always a tough slog.

In this brief essay I will lay out some of the issues in the case and raise an intriguing possibility.

What is the case about?

The case is about exclusivity and exclusion in the distribution of search engine services; that Google paid substantial sums to Apple and to the manufacturers of Android-based mobile phones and tablets and also to wireless carriers and web-browser proprietors—in essence, to distributors—to install the Google search engine as the exclusive pre-set (installed), default search program. The suit alleges that Google thereby made it more difficult for other search-engine providers (e.g., Bing; DuckDuckGo) to obtain distribution for their search-engine services and thus to attract search-engine users and to sell the online advertising that is associated with search-engine use and that provides the revenue to support the search “platform” in this “two-sided market” context.[2]

Exclusion can be seen as a form of “raising rivals’ costs.”[3]  Equivalently, exclusion can be seen as a form of non-price predation. Under either interpretation, the exclusionary action impedes competition.

It’s important to note that these allegations are different from those that motivated an investigation by the Federal Trade Commission (which the FTC dropped in 2013) and the cases by the European Union against Google.[4]  Those cases focused on alleged self-preferencing; that Google was unduly favoring its own products and services (e.g., travel services) in its delivery of search results to users of its search engine. In those cases, the impairment of competition (arguably) happens with respect to those competing products and services, not with respect to search itself.

What is the relevant market?

For a monopolization allegation to have any meaning, there needs to be the exercise of market power (which would have adverse consequences for the buyers of the product). And in turn, that exercise of market power needs to occur in a relevant market: one in which market power can be exercised.

Here is one of the important places where the DOJ’s case is likely to turn into a slog: the delineation of a relevant market for alleged monopolization cases remains as a largely unsolved problem for antitrust economics.[5]  This is in sharp contrast to the issue of delineating relevant markets for the antitrust analysis of proposed mergers.  For this latter category, the paradigm of the “hypothetical monopolist” and the possibility that this hypothetical monopolist could prospectively impose a “small but significant non-transitory increase in price” (SSNIP) has carried the day for the purposes of market delineation.

But no such paradigm exists for monopolization cases, in which the usual allegation is that the defendant already possesses market power and has used the exclusionary actions to buttress that market power. To see the difficulties, it is useful to recall the basic monopoly diagram from Microeconomics 101. A monopolist faces a negatively sloped demand curve for its product (at higher prices, less is bought; at lower prices, more is bought) and sets a profit-maximizing price at the level of output where its marginal revenue (MR) equals its marginal costs (MC). Its price is thereby higher than an otherwise similar competitive industry’s price for that product (to the detriment of buyers) and the monopolist earns higher profits than would the competitive industry.

But unless there are reliable benchmarks as to what the competitive price and profits would otherwise be, any information as to the defendant’s price and profits has little value with respect to whether the defendant already has market power. Also, a claim that a firm does not have market power because it faces rivals and thus isn’t able profitably to raise its price from its current level (because it would lose too many sales to those rivals) similarly has no value. Recall the monopolist from Micro 101. It doesn’t set a higher price than the one where MR=MC, because it would thereby lose too many sales to other sellers of other things.

Thus, any firm—regardless of whether it truly has market power (like the Micro 101 monopolist) or is just another competitor in a sea of competitors—should have already set its price at its profit-maximizing level and should find it unprofitable to raise its price from that level.[6]  And thus the claim, “Look at all of the firms that I compete with!  I don’t have market power!” similarly has no informational value.

Let us now bring this problem back to the Google monopolization allegation:  What is the relevant market?  In the first instance, it has to be “the provision of answers to user search queries.” After all, this is the “space” in which the exclusion occurred. But there are categories of search: e.g., search for products/services, versus more general information searches (“What is the current time in Delaware?” “Who was the 21st President of the United States?”). Do those separate categories themselves constitute relevant markets?

Further, what would the exercise of market power in a (delineated relevant) market look like?  Higher-than-competitive prices for advertising that targets search-results recipients is one obvious answer (but see below). In addition, because this is a two-sided market, the competitive “price” (or prices) might involve payments by the search engine to the search users (in return for their exposure to the lucrative attached advertising).[7]  And product quality might exhibit less variety than a competitive market would provide; and/or the monopolistic average level of quality would be lower than in a competitive market: e.g., more abuse of user data, and/or deterioration of the delivered information itself, via more self-preferencing by the search engine and more advertising-driven preferencing of results.[8]

In addition, a natural focus for a relevant market is the advertising that accompanies the search results. But now we are at the heart of the difficulty of delineating a relevant market in a monopolization context. If the relevant market is “advertising on search engine results pages,” it seems highly likely that Google has market power. If the relevant market instead is all online U.S. advertising (of which Google’s revenue share accounted for 32% in 2019[9]), then the case is weaker; and if the relevant market is all advertising in the United States (which is about twice the size of online advertising[10]), the case is weaker still. Unless there is some competitive benchmark, there is no easy way to delineate the relevant market.[11]

What exactly has Google been paying for, and why?

As many critics of the DOJ’s case have pointed out, it is extremely easy for users to switch their default search engine. If internet search were a normal good or service, this ease of switching would leave little room for the exercise of market power. But in that case, why is Google willing to pay $8-$12 billion annually for the exclusive default setting on Apple devices and large sums to the manufacturers of Android-based devices (and to wireless carriers and browser proprietors)? Why doesn’t Google instead run ads in prominent places that remind users how superior Google’s search results are and how easy it is for users (if they haven’t already done so) to switch to the Google search engine and make Google the user’s default choice?

Suppose that user inertia is important. Further suppose that users generally have difficulty in making comparisons with respect to the quality of delivered search results. If this is true, then being the default search engine on Apple and Android-based devices and on other distribution vehicles would be valuable. In this context, the inertia of their customers is a valuable “asset” of the distributors that the distributors may not be able to take advantage of, but that Google can (by providing search services and selling advertising). The question of whether Google’s taking advantage of this user inertia means that Google exercises market power takes us back to the issue of delineating the relevant market.

There is a further wrinkle to all of this. It is a well-understood concept in antitrust economics that an incumbent monopolist will be willing to pay more for the exclusive use of an essential input than a challenger would pay for access to the input.[12] The basic idea is straightforward. By maintaining exclusive use of the input, the incumbent monopolist preserves its (large) monopoly profits. If the challenger enters, the incumbent will then earn only its share of the (much lower, more competitive) duopoly profits. Similarly, the challenger can expect only the lower duopoly profits. Accordingly, the incumbent should be willing to outbid (and thereby exclude) the challenger and preserve the incumbent’s exclusive use of the input, so as to protect those monopoly profits.

To bring this to the Google monopolization context, if Google does possess market power in some aspect of search—say, because online search-linked advertising is a relevant market—then Google will be willing to outbid Microsoft (which owns Bing) for the “asset” of default access to Apple’s (inertial) device owners. That Microsoft is a large and profitable company and could afford to match (or exceed) Google’s payments to Apple is irrelevant. If the duopoly profits for online search-linked advertising would be substantially lower than Google’s current profits, then Microsoft would not find it worthwhile to try to outbid Google for that default access asset.

Alternatively, this scenario could be wholly consistent with an absence of market power. If search users (who can easily switch) consider Bing to be a lower-quality search service, then large payments by Microsoft to outbid Google for those exclusive default rights would be largely wasted, since the “acquired” default search users would quickly switch to Google (unless Microsoft provided additional incentives for the users not to switch).

But this alternative scenario returns us to the original puzzle:  Why is Google making such large payments to the distributors for those exclusive default rights?

An intriguing possibility

Consider the following possibility. Suppose that Google was paying that $8-$12 billion annually to Apple in return for the understanding that Apple would not develop its own search engine for Apple’s device users.[13] This possibility was not raised in the DOJ’s complaint, nor is it raised in the subsequent suits by the state attorneys general.

But let’s explore the implications by going to an extreme. Suppose that Google and Apple had a formal agreement that—in return for the $8-$12 billion per year—Apple would not develop its own search engine. In this event, this agreement not to compete would likely be seen as a violation of Section 1 of the Sherman Act (which does not require a market delineation exercise) and Apple would join Google as a co-conspirator. The case would take on the flavor of the FTC’s prosecution of “pay-for-delay” agreements between the manufacturers of patented pharmaceuticals and the generic drug manufacturers that challenge those patents and then receive payments from the former in return for dropping the patent challenge and delaying the entry of the generic substitute.[14]

As of this writing, there is no evidence of such an agreement and it seems quite unlikely that there would have been a formal agreement. But the DOJ will be able to engage in discovery and take depositions. It will be interesting to find out what the relevant executives at Google—and at Apple—thought was being achieved by those payments.

What would be a suitable remedy/relief?

The DOJ’s complaint is vague with respect to the remedy that it seeks. This is unsurprising. The DOJ may well want to wait to see how the case develops and then amend its complaint.

However, even if Google’s actions have constituted monopolization, it is difficult to conceive of a suitable and effective remedy. One apparently straightforward remedy would be to require simply that Google not be able to purchase exclusivity with respect to the pre-set default settings. In essence, the device manufacturers and others would always be able to sell parallel default rights to other search engines: on the basis, say, that the default rights for some categories of customers—or even a percentage of general customers (randomly selected)—could be sold to other search-engine providers.

But now the Gilbert-Newbery insight comes back into play. Suppose that a device manufacturer knows (or believes) that Google will pay much more if—even in the absence of any exclusivity agreement—Google ends up being the pre-set search engine for all (or nearly all) of the manufacturer’s device sales, as compared with what the manufacturer would receive if those default rights were sold to multiple search-engine providers (including, but not solely, Google). Can that manufacturer (recall that the distributors are not defendants in the case) be prevented from making this sale to Google and thus (de facto) continuing Google’s exclusivity?[15]

Even a requirement that Google not be allowed to make any payment to the distributors for a default position may not improve the competitive environment. Google may be able to find other ways of making indirect payments to distributors in return for attaining default rights, e.g., by offering them lower rates on their online advertising.

Further, if the ultimate goal is an efficient outcome in search, it is unclear how far restrictions on Google’s bidding behavior should go. If Google were forbidden from purchasing any default installation rights for its search engine, would (inert) consumers be better off? Similarly, if a distributor were to decide independently that its customers were better served by installing the Google search engine as the default, would that not be allowed? But if it is allowed, how could one be sure that Google wasn’t indirectly paying for this “independent” decision (e.g., through favorable advertising rates)?

It’s important to remember that this (alleged) monopolization is different from the Standard Oil case of 1911 or even the (landline) AT&T case of 1984. In those cases, there were physical assets that could be separated and spun off to separate companies. For Google, physical assets aren’t important. Although it is conceivable that some of Google’s intellectual property—such as Gmail, YouTube, or Android—could be spun off to separate companies, doing so would do little to cure the (arguably) fundamental problem of the inert device users.

In addition, if there were an agreement between Google and Apple for the latter not to develop a search engine, then large fines for both parties would surely be warranted. But what next? Apple can’t be forced to develop a search engine.[16] This differentiates such an arrangement from the “pay-for-delay” arrangements for pharmaceuticals, where the generic manufacturers can readily produce a near-identical substitute for the patented drug and are otherwise eager to do so.

At the end of the day, forbidding Google from paying for exclusivity may well be worth trying as a remedy. But as the discussion above indicates, it is unlikely to be a panacea and is likely to require considerable monitoring for effective enforcement.

Conclusion

The DOJ’s case against Google will be a slog. There are unresolved issues—such as how to delineate a relevant market in a monopolization case—that will be central to the case. Even if the DOJ is successful in showing that Google violated Section 2 of the Sherman Act in monopolizing search and/or search-linked advertising, an effective remedy seems problematic. But there also remains the intriguing question of why Google was willing to pay such large sums for those exclusive default installation rights?

The developments in the case will surely be interesting.


[1] The DOJ’s suit was joined by 11 states.  More states subsequently filed two separate antitrust lawsuits against Google in December.

[2] There is also a related argument:  That Google thereby gained greater volume, which allowed it to learn more about its search users and their behavior, and which thereby allowed it to provide better answers to users (and thus a higher-quality offering to its users) and better-targeted (higher-value) advertising to its advertisers.  Conversely, Google’s search-engine rivals were deprived of that volume, with the mirror-image negative consequences for the rivals.  This is just another version of the standard “learning-by-doing” and the related “learning curve” (or “experience curve”) concepts that have been well understood in economics for decades.

[3] See, for example, Steven C. Salop and David T. Scheffman, “Raising Rivals’ Costs: Recent Advances in the Theory of Industrial Structure,” American Economic Review, Vol. 73, No. 2 (May 1983), pp.  267-271; and Thomas G. Krattenmaker and Steven C. Salop, “Anticompetitive Exclusion: Raising Rivals’ Costs To Achieve Power Over Price,” Yale Law Journal, Vol. 96, No. 2 (December 1986), pp. 209-293.

[4] For a discussion, see Richard J. Gilbert, “The U.S. Federal Trade Commission Investigation of Google Search,” in John E. Kwoka, Jr., and Lawrence J. White, eds. The Antitrust Revolution: Economics, Competition, and Policy, 7th edn.  Oxford University Press, 2019, pp. 489-513.

[5] For a more complete version of the argument that follows, see Lawrence J. White, “Market Power and Market Definition in Monopolization Cases: A Paradigm Is Missing,” in Wayne D. Collins, ed., Issues in Competition Law and Policy. American Bar Association, 2008, pp. 913-924.

[6] The forgetting of this important point is often termed “the cellophane fallacy”, since this is what the U.S. Supreme Court did in a 1956 antitrust case in which the DOJ alleged that du Pont had monopolized the cellophane market (and du Pont, in its defense claimed that the relevant market was much wider: all flexible wrapping materials); see U.S. v. du Pont, 351 U.S. 377 (1956).  For an argument that profit data and other indicia argued for cellophane as the relevant market, see George W. Stocking and Willard F. Mueller, “The Cellophane Case and the New Competition,” American Economic Review, Vol. 45, No. 1 (March 1955), pp. 29-63.

[7] In the context of differentiated services, one would expect prices (positive or negative) to vary according to the quality of the service that is offered.  It is worth noting that Bing offers “rewards” to frequent searchers; see https://www.microsoft.com/en-us/bing/defaults-rewards.  It is unclear whether this pricing structure of payment to Bing’s customers represents what a more competitive framework in search might yield, or whether the payment just indicates that search users consider Bing to be a lower-quality service.

[8] As an additional consequence of the impairment of competition in this type of search market, there might be less technological improvement in the search process itself – to the detriment of users.

[9] As estimated by eMarketer: https://www.emarketer.com/newsroom/index.php/google-ad-revenues-to-drop-for-the-first-time/.

[10] See https://www.visualcapitalist.com/us-advertisers-spend-20-years/.

[11] And, again, if we return to the du Pont cellophane case:  Was the relevant market cellophane?  Or all flexible wrapping materials?

[12] This insight is formalized in Richard J. Gilbert and David M.G. Newbery, “Preemptive Patenting and the Persistence of Monopoly,” American Economic Review, Vol. 72, No. 3 (June 1982), pp. 514-526.

[13] To my knowledge, Randal C. Picker was the first to suggest this possibility; see https://www.competitionpolicyinternational.com/a-first-look-at-u-s-v-google/.  Whether Apple would be interested in trying to develop its own search engine – given the fiasco a decade ago when Apple tried to develop its own maps app to replace the Google maps app – is an open question.  In addition, the Gilbert-Newbery insight applies here as well:  Apple would be less inclined to invest the substantial resources that would be needed to develop a search engine when it is thereby in a duopoly market.  But Google might be willing to pay “insurance” to reinforce any doubts that Apple might have.

[14] The U.S. Supreme Court, in FTC v. Actavis, 570 U.S. 136 (2013), decided that such agreements could be anti-competitive and should be judged under the “rule of reason”.  For a discussion of the case and its implications, see, for example, Joseph Farrell and Mark Chicu, “Pharmaceutical Patents and Pay-for-Delay: Actavis (2013),” in John E. Kwoka, Jr., and Lawrence J. White, eds. The Antitrust Revolution: Economics, Competition, and Policy, 7th edn.  Oxford University Press, 2019, pp. 331-353.

[15] This is an example of the insight that vertical arrangements – in this case combined with the Gilbert-Newbery effect – can be a way for dominant firms to raise rivals’ costs.  See, for example, John Asker and Heski Bar-Isaac. 2014. “Raising Retailers’ Profits: On Vertical Practices and the Exclusion of Rivals.” American Economic Review, Vol. 104, No. 2 (February 2014), pp. 672-686.

[16] And, again, for the reasons discussed above, Apple might not be eager to make the effort.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

As one of the few economic theorists in this symposium, I believe my comparative advantage is in that: economic theory. In this post, I want to remind people of the basic economic theories that we have at our disposal, “off the shelf,” to make sense of the U.S. Department of Justice’s lawsuit against Google. I do not mean this to be a proclamation of “what economics has to say about X,” but merely just to help us frame the issue.

In particular, I’m going to focus on the economic concerns of Google paying phone manufacturers (Apple, in particular) to be the default search engine installed on phones. While there is not a large literature on the economic effects of default contracts, there is a large literature on something that I will argue is similar: trade promotions, such as slotting contracts, where a manufacturer pays a retailer for shelf space. Despite all the bells and whistles of the Google case, I will argue that, from an economic point of view, the contracts that Google signed are just trade promotions. No more, no less. And trade promotions are well-established as part of a competitive process that ultimately helps consumers. 

However, it is theoretically possible that such trade promotions hurt customers, so it is theoretically possible that Google’s contracts hurt consumers. Ultimately, the theoretical possibility of anticompetitive behavior that harms consumers does not seem plausible to me in this case.

Default Status

There are two reasons that Google paying Apple to be its default search engine is similar to a trade promotion. First, the deal brings awareness to the product, which nudges certain consumers/users to choose the product when they would not otherwise do so. Second, the deal does not prevent consumers from choosing the other product.

In the case of retail trade promotions, a promotional space given to Coca-Cola makes it marginally easier for consumers to pick Coke, and therefore some consumers will switch from Pepsi to Coke. But it does not reduce any consumer’s choice. The store will still have both items.

This is the same for a default search engine. The marginal searchers, who do not have a strong preference for either search engine, will stick with the default. But anyone can still install a new search engine, install a new browser, etc. It takes a few clicks, just as it takes a few steps to walk down the aisle to get the Pepsi; it is still an available choice.

If we were to stop the analysis there, we could conclude that consumers are worse off (if just a tiny bit). Some customers will have to change the default app. We also need to remember that this contract is part of a more general competitive process. The retail stores are also competing with one another, as are smartphone manufacturers.

Despite popular claims to the contrary, Apple cannot charge anything it wants for its phone. It is competing with Samsung, etc. Therefore, Apple has to pass through some of Google’s payments to customers in order to compete with Samsung. Prices are lower because of this payment. As I phrased it elsewhere, Google is effectively subsidizing the iPhone. This cross-subsidization is a part of the competitive process that ultimately benefits consumers through lower prices.

These contracts lower consumer prices, even if we assume that Apple has market power. Those who recall your Econ 101 know that a monopolist chooses a quantity where the marginal revenue equals marginal cost. With a payment from Google, the marginal cost of producing a phone is lower, therefore Apple will increase the quantity and lower price. This is shown below:

One of the surprising things about markets is that buyers’ and sellers’ incentives can be aligned, even though it seems like they must be adversarial. Companies can indirectly bargain for their consumers. Commenting on Standard Fashion Co. v. Magrane-Houston Co., where a retail store contracted to only carry Standard’s products, Robert Bork (1978, pp. 306–7) summarized this idea as follows:

The store’s decision, made entirely in its own interest, necessarily reflects the balance of competing considerations that determine consumer welfare. Put the matter another way. If no manufacturer used exclusive dealing contracts, and if a local retail monopolist decided unilaterally to carry only Standard’s patterns because the loss in product variety was more than made up in the cost saving, we would recognize that decision was in the consumer interest. We do not want a variety that costs more than it is worth … If Standard finds it worthwhile to purchase exclusivity … the reason is not the barring of entry, but some more sensible goal, such as obtaining the special selling effort of the outlet.

How trade promotions could harm customers

Since Bork’s writing, many theoretical papers have shown exceptions to Bork’s logic. There are times that the retailers’ incentives are not aligned with the customers. And we need to take those possibilities seriously.

The most common way to show the harm of these deals (or more commonly exclusivity deals) is to assume:

  1. There are large, fixed costs so that a firm must acquire a sufficient number of customers in order to enter the market; and
  2. An incumbent can lock in enough customers to prevent the entrant from reaching an efficient size.

Consumers can be locked-in because there is some fixed cost of changing suppliers or because of some coordination problems. If that’s true, customers can be made worse off, on net, because the Google contracts reduce consumer choice.

To understand the logic, let’s simplify the model to just search engines and searchers. Suppose there are two search engines (Google and Bing) and 10 searchers. However, to operate profitably, each search engine needs at least three searchers. If Google can entice eight searchers to use its product, Bing cannot operate profitably, even if Bing provides a better product. This holds even if everyone knows Bing would be a better product. The consumers are stuck in a coordination failure.

We should be skeptical of coordination failure models of inefficient outcomes. The problem with any story of coordination failures is that it is highly sensitive to the exact timing of the model. If Bing can preempt Google and offer customers an even better deal (the new entrant is better by assumption), then the coordination failure does not occur.

To argue that Bing could not execute a similar contract, the most common appeal is that the new entrant does not have the capital to pay upfront for these contracts, since it will only make money from its higher-quality search engine down the road. That makes sense until you remember that we are talking about Microsoft. I’m skeptical that capital is the real constraint. It seems much more likely that Google just has a more popular search engine.

The other problem with coordination failure arguments is that they are almost non-falsifiable. There is no way to tell, in the model, whether Google is used because of a coordination failure or whether it is used because it is a better product. If Google is a better product, then the outcome is efficient. The two outcomes are “observationally equivalent.” Compare this to the standard theory of monopoly, where we can (in principle) establish an inefficiency if the price is greater than marginal cost. While it is difficult to measure marginal cost, it can be done.

There is a general economic idea in these models that we need to pay attention to. If Google takes an action that prevents Bing from reaching efficient size, that may be an externality, sometimes called a network effect, and so that action may hurt consumer welfare.

I’m not sure how seriously to take these network effects. If more searchers allow Bing to make a better product, then literally any action (competitive or not) by Google is an externality. Making a better product that takes away consumers from Bing lowers Bing’s quality. That is, strictly speaking, an externality. Surely, that is not worthy of antitrust scrutiny simply because we find an externality.

And Bing also “takes away” searchers from Google, thus lowering Google’s possible quality. With network effects, bigger is better and it may be efficient to have only one firm. Surely, that’s not an argument we want to put forward as a serious antitrust analysis.

Put more generally, it is not enough to scream “NETWORK EFFECT!” and then have the antitrust authority come in, lawsuits-a-blazing. Well, it shouldn’t be enough.

For me to take the network effect argument seriously from an economic point of view, compared to a legal perspective, I would need to see a real restriction on consumer choice, not just an externality. One needs to argue that:

  1. No competitor can cover their fixed costs to make a reasonable search engine; and
  2. These contracts are what prevent the competing search engines from reaching size.

That’s the challenge I would like to put forward to supporters of the lawsuit. I’m skeptical.

In the hands of a wise philosopher-king, the Sherman Act’s hard-to-define prohibitions of “restraints of trade” and “monopolization” are tools that will operate inevitably to advance the public interest in competitive markets. In the hands of real-world litigators, regulators and judges, those same words can operate to advance competitors’ private interests in securing commercial advantages through litigation that could not be secured through competition in the marketplace. If successful, this strategy may yield outcomes that run counter to antitrust law’s very purpose.

The antitrust lawsuit filed by Epic Games against Apple in August 2020, and Apple’s antitrust lawsuit against Qualcomm (settled in April 2019), suggest that antitrust law is heading in this unfortunate direction.

From rent-minimization to rent-maximization

The first step in converting antitrust law from an instrument to minimize rents to an instrument to maximize rents lies in expanding the statute’s field of application on the apparently uncontroversial grounds of advancing the public interest in “vigorous” enforcement. In surprisingly short order, this largely unbounded vision of antitrust’s proper scope has become the dominant fashion in policy discussions, at least as expressed by some legislators, regulators, and commentators.

Following the new conventional wisdom, antitrust law has pursued over the past decades an overly narrow path, consequently overlooking and exacerbating a panoply of social ills that extend well beyond the mission to “merely” protect the operation of the market pricing mechanism. This line of argument is typically coupled with the assertion that courts, regulators and scholars have been led down this path by incumbents that welcome the relaxed scrutiny of a purportedly deferential antitrust policy.

This argument, and related theory of regulatory capture, has things roughly backwards.

Placing antitrust law at the service of a largely undefined range of social purposes set by judicial and regulatory fiat threatens to render antitrust a tool that can be easily deployed to favor the private interests of competitors rather than the public interest in competition. Without the intellectual discipline imposed by the consumer welfare standard (and, outside of per se illegal restraints, operationalized through the evidentiary requirement of competitive harm), the rhetoric of antitrust provides excellent cover for efforts to re-engineer the rules of the game in lieu of seeking to win the game as it has been played.

Epic Games v. Apple

A nascent symptom of this expansive form of antitrust is provided by the much-publicized lawsuit brought by Epic Games, the maker of the wildly popular video game, Fortnite, against Apple, the operator of the even more wildly popular App Store. On August 13, 2020, Epic added a “direct” payment processing services option to its Fortnite game, which violated the developer terms of use that govern the App Store. In response, Apple exercised its contractual right to remove Fortnite from the App Store, triggering Fortnite’s antitrust suit. The same sequence has ensued between Epic Games and Google in connection with the Google Play Store. Both litigations are best understood as a breach of contract dispute cloaked in the guise of an antitrust cause of action.

In suggesting that a jury trial would be appropriate in Epic Games’ suit against Apple, the district court judge reportedly stated that the case is “on the frontier of antitrust law” and [i]t is important enough to understand what real people think.” That statement seems to suggest that this is a close case under antitrust law. I respectfully disagree. Based on currently available information and applicable law, Epic’s argument suffers from two serious vulnerabilities that would seem to be difficult for the plaintiff to overcome.

A contestably narrow market definition

Epic states three related claims: (1) Apple has a monopoly in the relevant market, defined as the App Store, (2) Apple maintains its monopoly by contractually precluding developers from distributing iOS-compatible versions of their apps outside the App Store, and (3) Apple maintains a related monopoly in the payment processing services market for the App Store by contractually requiring developers to use Apple’s processing service.

This market definition, and the associated chain of reasoning, is subject to significant doubt, both as a legal and factual matter.

Epic’s narrow definition of the relevant market as the App Store (rather than app distribution platforms generally) conveniently results in a 100% market share for Apple. Inconveniently, federal case law is generally reluctant to adopt single-brand market definitions. While the Supreme Court recognized in 1992 a single-brand market in Eastman Kodak Co. v. Image Technical Services, the case is widely considered to be an outlier in light of subsequent case law. As a federal district court observed in Spahr v. Leegin Creative Leather Products (E.D. Tenn. 2008): “Courts have consistently refused to consider one brand to be a relevant market of its own when the brand competes with other potential substitutes.”

The App Store would seem to fall into this typical category. The customer base of existing and new Fortnite users can still accessthe gamethrough multiple platforms and on multiple devices other than the iPhone, including a PC, laptop, game console, and non-Apple mobile devices. (While Google has also removed Fortnite from the Google Play store due to the added direct payment feature, users can, at some inconvenience, access the game manually on Android phones.)

Given these alternative distribution channels, it is at a minimum unclear whether Epic is foreclosed from reaching a substantial portion of its consumer base, which may already access the game on alternative platforms or could potentially do so at moderate incremental transaction costs. In the language of platform economics, it appears to be technologically and economically feasible for the target consumer base to “multi-home.” If multi-homing and related switching costs are low, even a 100% share of the App Store submarket would not translate into market power in the broader and potentially more economically relevant market for app distribution generally.

An implausible theory of platform lock-in

Even if it were conceded that the App Store is the relevant market, Epic’s claim is not especially persuasive, both as an economic and a legal matter. That is because there is no evidence that Apple is exploiting any such hypothetically attributed market power to increase the rents extracted from developers and indirectly impose deadweight losses on consumers.

In the classic scenario of platform lock-in, a three-step sequence is observed: (1) a new firm acquires a high market share in a race for platform dominance, (2) the platform winner is protected by network effects and switching costs, and (3) the entrenched platform “exploits” consumers by inflating prices (or imposing other adverse terms) to capture monopoly rents. This economic model is reflected in the case law on lock-in claims, which typically requires that the plaintiff identify an adverse change by the defendant in pricing or other terms after users were allegedly locked-in.

The history of the App Store does not conform to this model. Apple has always assessed a 30% fee and the same is true of every other leading distributor of games for the mobile and PC market, including Google Play Store, App Store’s rival in the mobile market, and Steam, the dominant distributor of video games in the PC market. This long-standing market practice suggests that the 30% fee is most likely motivated by an efficiency-driven business motivation, rather than seeking to entrench a monopoly position that Apple did not enjoy when the practice was first adopted. That is: even if Apple is deemed to be a “monopolist” for Section 2 purposes, it is not taking any “illegitimate” actions that could constitute monopolization or attempted monopolization.

The logic of the 70/30 split

Uncovering the business logic behind the 70/30 split in the app distribution market is not too difficult.

The 30% fee appears to be a low transaction-cost practice that enables the distributor to fund a variety of services, including app development tools, marketing support, and security and privacy protections, all of which are supplied at no separately priced fee and therefore do not require service-by-service negotiation and renegotiation. The same rationale credibly applies to the integrated payment processing services that Apple supplies for purposes of in-app purchases.

These services deliver significant value and would otherwise be difficult to replicate cost-effectively, protect the App Store’s valuable stock of brand capital (which yields positive spillovers for app developers on the site), and lower the costs of joining and participating in the App Store. Additionally, the 30% fee cross-subsidizes the delivery of these services to the approximately 80% of apps on the App Store that are ad-based and for which no fee is assessed, which in turn lowers entry costs and expands the number and variety of product options for platform users. These would all seem to be attractive outcomes from a competition policy perspective.

Epic’s objection

Epic would object to this line of argument by observing that it only charges a 12% fee to distribute other developers’ games on its own Epic Games Store.

Yet Epic’s lower fee is reportedly conditioned, at least in some cases, on the developer offering the game exclusively on the Epic Games Store for a certain period of time. Moreover, the services provided on the Epic Games Store may not be comparable to the extensive suite of services provided on the App Store and other leading distributors that follow the 30% standard. Additionally, the user base a developer can expect to access through the Epic Games Store is in all likelihood substantially smaller than the audience that can be reached through the App Store and other leading app and game distributors, which is then reflected in the higher fees charged by those platforms.

Hence, even the large fee differential may simply reflect the higher services and larger audiences available on the App Store, Google Play Store and other leading platforms, as compared to the Epic Games Store, rather than the unilateral extraction of market rents at developers’ and consumers’ expense.

Antitrust is about efficiency, not distribution

Epic says the standard 70/30 split between game publishers and app distributors is “excessive” while others argue that it is historically outdated.

Neither of these are credible antitrust arguments. Renegotiating the division of economic surplus between game suppliers and distributors is not the concern of antitrust law, which (as properly defined) should only take an interest if either (i) Apple is colluding on the 30% fee with other app distributors, or (ii) Apple is taking steps that preclude entry into the apps distribution market and lack any legitimate business justification. No one claims evidence for the former possibility and, without further evidence, the latter possibility is not especially compelling given the uniform use of the 70/30 split across the industry (which, as noted, can be derived from a related set of credible efficiency justifications). It is even less compelling in the face of evidence that output is rapidly accelerating, not declining, in the gaming app market: in the first half of 2020, approximately 24,500 new games were added to the App Store.

If this conclusion is right, then Epic’s lawsuit against Apple does not seem to have much to do with the public interest in preserving market competition.

But it clearly has much to do with the business interest of an input supplier in minimizing its distribution costs and maximizing its profit margin. That category includes not only Epic Games but Tencent, the world’s largest video game publisher and the holder of a 40% equity stake in Epic. Tencent also owns Riot Games (the publisher of “League of Legends”), an 84% stake in Supercell (the publisher of “Clash of Clans”), and a 5% stake in Activision Blizzard (the publisher of “Call of Duty”). It is unclear how an antitrust claim that, if successful, would simply redistribute economic value from leading game distributors to leading game developers has any necessary relevance to antitrust’s objective to promote consumer welfare.

The prequel: Apple v. Qualcomm

Ironically (and, as Dirk Auer has similarly observed), there is a symmetry between Epic’s claims against Apple and the claims previously pursued by Apple (and, concurrently, the Federal Trade Commission) against Qualcomm.

In that litigation, Apple contested the terms of the licensing arrangements under which Qualcomm made available its wireless communications patents to Apple (more precisely, Foxconn, Apple’s contract manufacturer), arguing that the terms were incompatible with Qualcomm’s commitment to “fair, reasonable and nondiscriminatory” (“FRAND”) licensing of its “standard-essential” patents (“SEPs”). Like Epic v. Apple, Apple v. Qualcomm was fundamentally a contract dispute, with the difference that Apple was in the position of a third-party beneficiary of the commitment that Qualcomm had made to the governing standard-setting organization. Like Epic, Apple sought to recharacterize this contractual dispute as an antitrust question, arguing that Qualcomm’s licensing practices constituted anticompetitive actions to “monopolize” the market for smartphone modem chipsets.

Theory meets evidence

The rhetoric used by Epic in its complaint echoes the rhetoric used by Apple in its briefs and other filings in the Qualcomm litigation. Apple (like the FTC) had argued that Qualcomm imposed a “tax” on competitors by requiring that any purchaser of Qualcomm’s chipsets concurrently enter into a license for Qualcomm’s SEP portfolio relating to 3G and 4G/LTE-enabled mobile communications devices.

Yet the history and performance of the mobile communications market simply did not track Apple’s (and the FTC’s continuing) characterization of Qualcomm’s licensing fee as a socially costly drag on market growth and, by implication, consumer welfare.

If this assertion had merit, then the decades-old wireless market should have exhibited a dismal history of increasing prices, slow user adoption and lagging innovation. In actuality, the wireless market since its inception has grown relentlessly, characterized by declining quality-adjusted prices, expanding output, relentless innovation, and rapid adoption across a broad range of income segments.

Given this compelling real-world evidence, the only remaining line of argument (still being pursued by the FTC) that could justify antitrust intervention is a theoretical conjecture that the wireless market might have grown even faster under some alternative IP licensing arrangement. This assertion rests precariously on the speculative assumption that any such arrangement would have induced the same or higher level of aggregate investment in innovation and commercialization activities. That fragile chain of “what if” arguments hardly seems a sound basis on which to rewrite the legal infrastructure behind the billions of dollars of licensing transactions that support the economically thriving smartphone market and the even larger ecosystem that has grown around it.

Antitrust litigation as business strategy

Given the absence of compelling evidence of competitive harm from Qualcomm’s allegedly anticompetitive licensing practices, Apple’s litigation would seem to be best interpreted as an economically rational attempt by a downstream producer to renegotiate a downward adjustment in the fees paid to an upstream supplier of critical technology inputs. (In fact, those are precisely the terms on which Qualcomm in 2015 settled the antitrust action brought against it by China’s competition regulator, to the obvious benefit of local device producers.) The Epic Games litigation is a mirror image fact pattern in which an upstream supplier of content inputs seeks to deploy antitrust law strategically for the purposes of minimizing the fees it pays to a leading downstream distributor.

Both litigations suffer from the same flaw. Private interests concerning the division of an existing economic value stream—a business question that is matter of indifference from an efficiency perspective—are erroneously (or, at least, reflexively) conflated with the public interest in preserving the free play of competitive forces that maximizes the size of the economic value stream.

Conclusion: Remaking the case for “narrow” antitrust

The Epic v. Apple and Apple v. Qualcomm disputes illustrate the unproductive rent-seeking outcomes to which antitrust law will inevitably be led if, as is being widely advocated, it is decoupled from its well-established foundation in promoting consumer welfare—and not competitor welfare.

Some proponents of a more expansive approach to antitrust enforcement are convinced that expanding the law’s scope of application will improve market efficiency by providing greater latitude for expert regulators and courts to reengineer market structures to the public benefit. Yet any substitution of top-down expert wisdom for the bottom-up trial-and-error process of market competition can easily yield “false positives” in which courts and regulators take actions that counterproductively intervene in markets that are already operating under reasonably competitive conditions. Additionally, an overly expansive approach toward the scope of antitrust law will induce private firms to shift resources toward securing advantages over competitors through lobbying and litigation, rather than seeking to win the race to deliver lower-cost and higher-quality products and services. Neither outcome promotes the public’s interest in a competitive marketplace.

Apple’s legal team will be relieved that “you reap what you sow” is just a proverb. After a long-running antitrust battle against Qualcomm unsurprisingly ended in failure, Apple now faces antitrust accusations of its own (most notably from Epic Games). Somewhat paradoxically, this turn of events might cause Apple to see its previous defeat in a new light. Indeed, the well-established antitrust principles that scuppered Apple’s challenge against Qualcomm will now be the rock upon which it builds its legal defense.

But while Apple’s reversal of fortunes might seem anecdotal, it neatly illustrates a fundamental – and often overlooked – principle of antitrust policy: Antitrust law is about maximizing consumer welfare. Accordingly, the allocation of surplus between two companies is only incidentally relevant to antitrust proceedings, and it certainly is not a goal in and of itself. In other words, antitrust law is not about protecting David from Goliath.

Jockeying over the distribution of surplus

Or at least that is the theory. In practice, however, most antitrust cases are but small parts of much wider battles where corporations use courts and regulators in order to jockey for market position and/or tilt the distribution of surplus in their favor. The Microsoft competition suits brought by the DOJ and the European commission (in the EU and US) partly originated from complaints, and lobbying, by Sun Microsystems, Novell, and Netscape. Likewise, the European Commission’s case against Google was prompted by accusations from Microsoft and Oracle, among others. The European Intel case was initiated following a complaint by AMD. The list goes on.

The last couple of years have witnessed a proliferation of antitrust suits that are emblematic of this type of power tussle. For instance, Apple has been notoriously industrious in using the court system to lower the royalties that it pays to Qualcomm for LTE chips. One of the focal points of Apple’s discontent was Qualcomm’s policy of basing royalties on the end-price of devices (Qualcomm charged iPhone manufacturers a 5% royalty rate on their handset sales – and Apple received further rebates):

“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” [Apple COO Jeff Williams] said. “It struck at our very core of fairness. At the time we were making something really really different.”

This pricing dispute not only gave rise to high-profile court cases, it also led Apple to lobby Standard Developing Organizations (“SDOs”) in a partly successful attempt to make them amend their patent policies, so as to prevent this type of pricing. 

However, in a highly ironic turn of events, Apple now finds itself on the receiving end of strikingly similar allegations. At issue is the 30% commission that Apple charges for in app purchases on the iPhone and iPad. These “high” commissions led several companies to lodge complaints with competition authorities (Spotify and Facebook, in the EU) and file antitrust suits against Apple (Epic Games, in the US).

Of course, these complaints are couched in more sophisticated, and antitrust-relevant, reasoning. But that doesn’t alter the fact that these disputes are ultimately driven by firms trying to tilt the allocation of surplus in their favor (for a more detailed explanation, see Apple and Qualcomm).

Pushback from courts: The Qualcomm case

Against this backdrop, a string of recent cases sends a clear message to would-be plaintiffs: antitrust courts will not be drawn into rent allocation disputes that have no bearing on consumer welfare. 

The best example of this judicial trend is Qualcomm’s victory before the United States Court of Appeal for the 9th Circuit. The case centered on the royalties that Qualcomm charged to OEMs for its Standard Essential Patents (SEPs). Both the district court and the FTC found that Qualcomm had deployed a series of tactics (rebates, refusals to deal, etc) that enabled it to circumvent its FRAND pledges. 

However, the Court of Appeal was not convinced. It failed to find any consumer harm, or recognizable antitrust infringement. Instead, it held that the dispute at hand was essentially a matter of contract law:

To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. 

This is not surprising. From the outset, numerous critics pointed that the case lied well beyond the narrow confines of antitrust law. The scathing dissenting statement written by Commissioner Maureen Olhaussen is revealing:

[I]n the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections. 

In reaching its conclusion, the Court notably rejected the notion that SEP royalties should be systematically based upon the “Smallest Saleable Patent Practicing Unit” (or SSPPU):

Even if we accept that the modem chip in a cellphone is the cellphone’s SSPPU, the district court’s analysis is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.

Similarly, it saw no objection to Qualcomm licensing its technology at the OEM level (rather than the component level):

Qualcomm’s rationale for “switching” to OEM-level licensing was not “to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition,” the second element of the Aspen Skiing exception. Aerotec Int’l, 836 F.3d at 1184 (internal quotation marks and citation omitted). Instead, Qualcomm responded to the change in patent-exhaustion law by choosing the path that was “far more lucrative,” both in the short term and the long term, regardless of any impacts on competition. 

Finally, the Court concluded that a firm breaching its FRAND pledges did not automatically amount to anticompetitive conduct: 

We decline to adopt a theory of antitrust liability that would presume anticompetitive conduct any time a company could not prove that the “fair value” of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.

Taken together, these findings paint a very clear picture. The Qualcomm Court repeatedly rejected the radical idea that US antitrust law should concern itself with the prices charged by monopolists — as opposed to practices that allow firms to illegally acquire or maintain a monopoly position. The words of Learned Hand and those of Antonin Scalia (respectively, below) loom large:

The successful competitor, having been urged to compete, must not be turned upon when he wins. 

And,

To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Other courts (both in the US and abroad) have reached similar conclusions

For instance, a district court in Texas dismissed a suit brought by Continental Automotive Systems (which supplies electronic systems to the automotive industry) against a group of SEP holders. 

Continental challenged the patent holders’ decision to license their technology at the vehicle rather than component level (the allegation is very similar to the FTC’s complaint that Qualcomm licensed its SEPs at the OEM, rather than chipset level). However, following a forceful intervention by the DOJ, the Court ultimately held that the facts alleged by Continental were not indicative of antitrust injury. It thus dismissed the case.

Likewise, within weeks of the Qualcomm and Continental decisions, the UK Supreme court also ruled in favor of SEP holders. In its Unwired Planet ruling, the Court concluded that discriminatory licenses did not automatically infringe competition law (even though they might breach a firm’s contractual obligations):

[I]t cannot be said that there is any general presumption that differential pricing for licensees is problematic in terms of the public or private interests at stake.

In reaching this conclusion, the UK Supreme Court emphasized that the determination of whether licenses were FRAND, or not, was first and foremost a matter of contract law. In the case at hand, the most important guide to making this determination were the internal rules of the relevant SDO (as opposed to competition case law):

Since price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare), it would have required far clearer language in the ETSI FRAND undertaking to indicate an intention to impose the more strict, “hard-edged” non-discrimination obligation for which Huawei contends. Further, in view of the prevalence of competition laws in the major economies around the world, it is to be expected that any anti-competitive effects from differential pricing would be most appropriately addressed by those laws

All of this ultimately led the Court to rule in favor of Unwired Planet, thus dismissing Huawei’s claims that it had infringed competition law by breaching its FRAND pledges. 

In short, courts and antitrust authorities on both sides of the Atlantic have repeatedly, and unambiguously, concluded that pricing disputes (albeit in the specific context of technological standards) are generally a matter of contract law. Antitrust/competition law intercedes only when unfair/excessive/discriminatory prices are both caused by anticompetitive behavior and result in anticompetitive injury.

Apple’s Loss is… Apple’s gain.

Readers might wonder how the above cases relate to Apple’s app store. But, on closer inspection the parallels are numerous. As explained above, courts have repeatedly stressed that antitrust enforcement should not concern itself with the allocation of surplus between commercial partners. Yet that is precisely what Epic Game’s suit against Apple is all about.

Indeed, Epic’s central claim is not that it is somehow foreclosed from Apple’s App Store (for example, because Apple might have agreed to exclusively distribute the games of one of Epic’s rivals). Instead, all of its objections are down to the fact that it would like to access Apple’s store under more favorable terms:

Apple’s conduct denies developers the choice of how best to distribute their apps. Developers are barred from reaching over one billion iOS users unless they go through Apple’s App Store, and on Apple’s terms. […]

Thus, developers are dependent on Apple’s noblesse oblige, as Apple may deny access to the App Store, change the terms of access, or alter the tax it imposes on developers, all in its sole discretion and on the commercially devastating threat of the developer losing access to the entire iOS userbase. […]

By imposing its 30% tax, Apple necessarily forces developers to suffer lower profits, reduce the quantity or quality of their apps, raise prices to consumers, or some combination of the three.

And the parallels with the Qualcomm litigation do not stop there. Epic is effectively asking courts to make Apple monetize its platform at a different level than the one that it chose to maximize its profits (no more monetization at the app store level). Similarly, Epic Games omits any suggestion of profit sacrifice on the part of Apple — even though it is a critical element of most unilateral conduct theories of harm. Finally, Epic is challenging conduct that is both the industry norm and emerged in a highly competitive setting.

In short, all of Epic’s allegations are about monopoly prices, not monopoly maintenance or monopolization. Accordingly, just as the SEP cases discussed above were plainly beyond the outer bounds of antitrust enforcement (something that the DOJ repeatedly stressed with regard to the Qualcomm case), so too is the current wave of antitrust litigation against Apple. When all is said and done, Apple might thus be relieved that Qualcomm was victorious in their antitrust confrontation. Indeed, the legal principles that caused its demise against Qualcomm are precisely the ones that will, likely, enable it to prevail against Epic Games.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Privacy absolutism is the misguided belief that protecting citizens’ privacy supersedes all other policy goals, especially economic ones. This is a mistake. Privacy is one value among many, not an end in itself. Unfortunately, the absolutist worldview has filtered into policymaking and is beginning to have very real consequences. Readers need look no further than contact tracing applications and the fight against Covid-19.

Covid-19 has presented the world with a privacy conundrum worthy of the big screen. In fact, it’s a plotline we’ve seen before. Moviegoers will recall that, in the wildly popular film “The Dark Knight”, Batman has to decide between preserving the privacy of Gotham’s citizens or resorting to mass surveillance in order to defeat the Joker. Ultimately, the caped crusader begrudgingly chooses the latter. Before the Covid-19 outbreak, this might have seemed like an unrealistic plot twist. Fast forward a couple of months, and it neatly illustrates the difficult decision that most western societies urgently need to make as they consider the use of contract tracing apps to fight Covid-19.

Contact tracing is often cited as one of the most promising tools to safely reopen Covid-19-hit economies. Unfortunately, its adoption has been severely undermined by a barrage of overblown privacy fears.

Take the contact tracing API and App co-developed by Apple and Google. While these firms’ efforts to rapidly introduce contact tracing tools are laudable, it is hard to shake the feeling that they have been holding back slightly. 

In an overt attempt to protect users’ privacy, Apple and Google’s joint offering does not collect any location data (a move that has irked some states). Similarly, both firms have repeatedly stressed that users will have to opt-in to their contact tracing solution (as opposed to the API functioning by default). And, of course, all the data will be anonymous – even for healthcare authorities. 

This is a missed opportunity. Google and Apple’s networks include billions of devices. That puts them in a unique position to rapidly achieve the scale required to successfully enable the tracing of Covid-19 infections. Contact tracing applications need to reach a critical mass of users to be effective. For instance, some experts have argued that an adoption rate of at least 60% is necessary. Unfortunately, existing apps – notably in Singapore, Australia, Norway and Iceland – have struggled to get anywhere near this number. Forcing users to opt-out of Google and Apple’s services could go a long way towards inverting this trend. Businesses could also boost these numbers by making them mandatory for their employees and consumers.

However, it is hard to blame Google or Apple for not pushing the envelope a little bit further. For the best part of a decade, they and other firms have repeatedly faced specious accusations of “surveillance capitalism”. This has notably resulted in heavy-handed regulation (including the GDPR, in the EU, and the CCPA, in California), as well as significant fines and settlements

Those chickens have now come home to roost. The firms that are probably best-placed to implement an effective contact tracing solution simply cannot afford the privacy-related risks. This includes the risk associated with violating existing privacy law, but also potential reputational consequences. 

Matters have also been exacerbated by the overly cautious stance of many western governments, as well as their citizens: 

  • The European Data Protection Board cautioned governments and private sector actors to anonymize location data collected via contact tracing apps. The European Parliament made similar pronouncements.
  • A group of Democratic Senators pushed back against Apple and Google’s contact tracing solution, notably due to privacy considerations.
  • And public support for contact tracing is also critically low. Surveys in the US show that contact tracing is significantly less popular than more restrictive policies, such as business and school closures. Similarly, polls in the UK suggest that between 52% and 62% of Britons would consider using contact tracing applications.
  • Belgium’s initial plans for a contact tracing application were struck down by its data protection authority on account that they did not comply with the GDPR.
  • Finally, across the globe, there has been pushback against so-called “centralized” tracing apps, notably due to privacy fears.

In short, the West’s insistence on maximizing privacy protection is holding back its efforts to combat the joint threats posed by Covid-19 and the unfolding economic recession. 

But contrary to the mass surveillance portrayed in the Dark Knight, the privacy risks entailed by contact tracing are for the most part negligible. State surveillance is hardly a prospect in western democracies. And the risk of data breaches is no greater here than with many other apps and services that we all use daily. To wit, password, email, and identity theft are still, by far, the most common targets for cyber attackers. Put differently, cyber criminals appear to be more interested in stealing assets that can be readily monetized, rather than location data that is almost worthless. This suggests that contact tracing applications, whether centralized or not, are unlikely to be an important target for cyberattackers.

The meagre risks entailed by contact tracing – regardless of how it is ultimately implemented – are thus a tiny price to pay if they enable some return to normalcy. At the time of writing, at least 5,8 million human beings have been infected with Covid-19, causing an estimated 358,000 deaths worldwide. Both Covid-19 and the measures destined to combat it have resulted in a collapse of the global economy – what the IMF has called “the worst economic downturn since the great depression”. Freedoms that the west had taken for granted have suddenly evaporated: the freedom to work, to travel, to see loved ones, etc. Can anyone honestly claim that is not worth temporarily sacrificing some privacy to partially regain these liberties?

More generally, it is not just contact tracing applications and the fight against Covid-19 that have suffered because of excessive privacy fears. The European GDPR offers another salient example. Whatever one thinks about the merits of privacy regulation, it is becoming increasingly clear that the EU overstepped the mark. For instance, an early empirical study found that the entry into force of the GDPR markedly decreased venture capital investments in Europe. Michal Gal aptly summarizes the implications of this emerging body of literature:

The price of data protection through the GDPR is much higher than previously recognized. The GDPR creates two main harmful effects on competition and innovation: it limits competition in data markets, creating more concentrated market structures and entrenching the market power of those who are already strong; and it limits data sharing between different data collectors, thereby preventing the realization of some data synergies which may lead to better data-based knowledge. […] The effects on competition and innovation identified may justify a reevaluation of the balance reached to ensure that overall welfare is increased. 

In short, just like the Dark Knight, policymakers, firms and citizens around the world need to think carefully about the tradeoff that exists between protecting privacy and other objectives, such as saving lives, promoting competition, and increasing innovation. As things stand, however, it seems that many have veered too far on the privacy end of the scale.

The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law. 

A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them. 

Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.

Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust. 

Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.

The letter argues that:

  1. The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate. 
  2. Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
  3. Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
  4. Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
  5. History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
  6. Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.

The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.

Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies. 

The full letter is here.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]

The public policy community’s infatuation with digital privacy has grown by leaps and bounds since the enactment of GDPR and the CCPA, but COVID-19 may leave the most enduring mark on the actual direction that privacy policy takes. As the pandemic and associated lockdowns first began, there were interesting discussions cropping up about the inevitable conflict between strong privacy fundamentalism and the pragmatic steps necessary to adequately trace the spread of infection. 

Axiomatic of this controversy is the Apple/Google contact tracing system, software developed for smartphones to assist with the identification of individuals and populations that have likely been in contact with the virus. The debate sparked by the Apple/Google proposal highlights what we miss when we treat “privacy” (however defined) as an end in itself, an end that must necessarily  trump other concerns. 

The Apple/Google contact tracing efforts

Apple/Google are doing yeoman’s work attempting to produce a useful contact tracing API given the headwinds of privacy advocacy they face. Apple’s webpage describing its new contact tracing system is a testament to the extent to which strong privacy protections are central to its efforts. Indeed, those privacy protections are in the very name of the service: “Privacy-Preserving Contact Tracing” program. But, vitally, the utility of the Apple/Google API is ultimately a function of its efficacy as a tracing tool, not in how well it protects privacy.

Apple/Google — despite the complaints of some states — are rolling out their Covid-19-tracking services with notable limitations. Most prominently, the APIs will not allow collection of location data, and will only function when users explicitly opt-in. This last point is important because there is evidence that opt-in requirements, by their nature, tend to reduce the flow of information in a system, and when we are considering tracing solutions to an ongoing pandemic surely less information is not optimal. Further, all of the data collected through the API will be anonymized, preventing even healthcare authorities from identifying particular infected individuals.

These restrictions prevent the tool from being as effective as it could be, but it’s not clear how Apple/Google could do any better given the political climate. For years, the Big Tech firms have been villainized by privacy advocates that accuse them of spying on kids and cavalierly disregarding consumer privacy as they treat individuals’ data as just another business input. The problem with this approach is that, in the midst of a generational crisis, our best tools are being excluded from the fight. Which begs the question: perhaps we have privacy all wrong? 

Privacy is one value among many

The U.S. constitutional order explicitly protects our privacy as against state intrusion in order to guarantee, among other things, fair process and equal access to justice. But this strong presumption against state intrusion—far from establishing a fundamental or absolute right to privacy—only accounts for part of the privacy story. 

The Constitution’s limit is a recognition of the fact that we humans are highly social creatures and that privacy is one value among many. Properly conceived, privacy protections are themselves valuable only insofar as they protect other things we value. Jane Bambauer explored some of this in an earlier post where she characterized privacy as, at best, an “instrumental right” — that is a tool used to promote other desirable social goals such as “fairness, safety, and autonomy.”

Following from Jane’s insight, privacy — as an instrumental good — is something that can have both positive and negative externalities, and needs to be enlarged or attenuated as its ability to serve instrumental ends changes in different contexts. 

According to Jane:

There is a moral imperative to ignore even express lack of consent when withholding important information that puts others in danger. Just as many states affirmatively require doctors, therapists, teachers, and other fiduciaries to report certain risks even at the expense of their client’s and ward’s privacy …  this same logic applies at scale to the collection and analysis of data during a pandemic.

Indeed, dealing with externalities is one of the most common and powerful justifications for regulation, and an extreme form of “privacy libertarianism” —in the context of a pandemic — is likely to be, on net, harmful to society.

Which brings us back to efforts of Apple/Google. Even if those firms wanted to risk the ire of  privacy absolutists, it’s not clear that they could do so without incurring tremendous regulatory risk, uncertainty and a popular backlash. As statutory matters, the CCPA and the GDPR chill experimentation in the face of potentially crippling fines. While the FTC Act’s Section 5 prohibition on “unfair or deceptive” practices is open to interpretation in manners which could result in existentially damaging outcomes. Further, some polling suggests that the public appetite for contact tracing is not particularly high – though, as is often the case, such pro-privacy poll outcomes rarely give appropriate shrift to the tradeoff required.

As a general matter, it’s important to think about the value of individual privacy, and how best to optimally protect it. But privacy does not stand above all other values in all contexts. It is entirely reasonable to conclude that, in a time of emergency, if private firms can devise more effective solutions for mitigating the crisis, they should have more latitude to experiment. Knee-jerk preferences for an amorphous “right of privacy” should not be used to block those experiments.

Much as with the Cosmic Turtle, its tradeoffs all the way down. Most of the U.S. is in lockdown, and while we vigorously protect our privacy, we risk frustrating the creation of tools that could put a light at the end of the tunnel. We are, in effect, trading liberty and economic self-determination for privacy.

Once the worst of the Covid-19 crisis has passed — hastened possibly by the use of contact tracing programs — we can debate the proper use of private data in exigent circumstances. For the immediate future, we should instead be encouraging firms like Apple/Google to experiment with better ways to control the pandemic. 

A spate of recent newspaper investigations and commentary have focused on Apple allegedly discriminating against rivals in the App Store. The underlying assumption is that Apple, as a vertically integrated entity that operates both a platform for third-party apps and also makes it own apps, is acting nefariously whenever it “discriminates” against rival apps through prioritization, enters into popular app markets, or charges a “tax” or “surcharge” on rival apps. 

For most people, the word discrimination has a pejorative connotation of animus based upon prejudice: racism, sexism, homophobia. One of the definitions you will find in the dictionary reflects this. But another definition is a lot less charged: the act of making or perceiving a difference. (This is what people mean when they say that a person has a discriminating palate, or a discriminating taste in music, for example.)

In economics, discrimination can be a positive attribute. For instance, effective price discrimination can result in wealthier consumers paying a higher price than less well off consumers for the same product or service, and it can ensure that products and services are in fact available for less-wealthy consumers in the first place. That would seem to be a socially desirable outcome (although under some circumstances, perfect price discrimination can be socially undesirable). 

Antitrust law rightly condemns conduct only when it harms competition and not simply when it harms a competitor. This is because it is competition that enhances consumer welfare, not the presence or absence of a competitor — or, indeed, the profitability of competitors. The difficult task for antitrust enforcers is to determine when a vertically integrated firm with “market power” in an upstream market is able to effectively discriminate against rivals in a downstream market in a way that harms consumers

Even assuming the claims of critics are true, alleged discrimination by Apple against competitor apps in the App Store may harm those competitors, but it doesn’t necessarily harm either competition or consumer welfare.

The three potential antitrust issues facing Apple can be summarized as:

There is nothing new here economically. All three issues are analogous to claims against other tech companies. But, as I detail below, the evidence to establish any of these claims at best represents harm to competitors, and fails to establish any harm to the competitive process or to consumer welfare.

Prioritization

Antitrust enforcers have rejected similar prioritization claims against Google. For instance, rivals like Microsoft and Yelp have funded attacks against Google, arguing the search engine is harming competition by prioritizing its own services in its product search results over competitors. As ICLE and affiliated scholars have pointed out, though, there is nothing inherently harmful to consumers about such prioritization. There are also numerous benefits in platforms directly answering queries, even if it ends up directing users to platform-owned products or services.

As Geoffrey Manne has observed:

there is good reason to believe that Google’s decision to favor its own content over that of other sites is procompetitive. Beyond determining and ensuring relevance, Google surely has the prerogative to vigorously compete and to decide how to design its products to keep up with a changing market. In this case, that means designing, developing, and offering its own content to partially displace the original “ten blue links” design of its search results page and offer its own answers to users’ queries in its stead. 

Here, the antitrust case against Apple for prioritization is similarly flawed. For example, as noted in a recent article in the WSJ, users often use the App Store search in order to find apps they already have installed:

“Apple customers have a very strong connection to our products and many of them use search as a way to find and open their apps,” Apple said in a statement. “This customer usage is the reason Apple has strong rankings in search, and it’s the same reason Uber, Microsoft and so many others often have high rankings as well.” 

If a substantial portion of searches within the App Store are for apps already on the iPhone, then showing the Apple app near the top of the search results could easily be consumer welfare-enhancing. 

Apple is also theoretically leaving money on the table by prioritizing its (already pre-loaded) apps over third party apps. If its algorithm promotes its own apps over those that may earn it a 30% fee — additional revenue — the prioritization couldn’t plausibly be characterized as a “benefit” to Apple. Apple is ultimately in the business of selling hardware. Losing customers of the iPhone or iPad by prioritizing apps consumers want less would not be a winning business strategy.

Further, it stands to reason that those who use an iPhone may have a preference for Apple apps. Such consumers would be naturally better served by seeing Apple’s apps prioritized over third-party developer apps. And if consumers do not prefer Apple’s apps, rival apps are merely seconds of scrolling away.

Moreover, all of the above assumes that Apple is engaging in sufficiently pervasive discrimination through prioritzation to have a major impact on the app ecosystem. But substantial evidence exists that the universe of searches for which Apple’s algorithm prioritizes Apple apps is small. For instance, most searches are for branded apps already known by the searcher:

Keywords: how many are brands?

  • Top 500: 58.4%
  • Top 400: 60.75%
  • Top 300: 68.33%
  • Top 200: 80.5%
  • Top 100: 86%
  • Top 50: 90%
  • Top 25: 92%
  • Top 10: 100%

This is corroborated by data from the NYT’s own study, which suggests Apple prioritized its own apps first in only roughly 1% of the overall keywords queried: 

Whatever the precise extent of increase in prioritization, it seems like any claims of harm are undermined by the reality that almost 99% of App Store results don’t list Apple apps first. 

The fact is, very few keyword searches are even allegedly affected by prioritization. And the algorithm is often adjusting to searches for apps already pre-loaded on the device. Under these circumstances, it is very difficult to conclude consumers are being harmed by prioritization in search results of the App Store.

Entry

The issue of Apple building apps to compete with popular apps in its marketplace is similar to complaints about Amazon creating its own brands to compete with what is sold by third parties on its platform. For instance, as reported multiple times in the Washington Post:

Clue, a popular app that women use to track their periods, recently rocketed to the top of the App Store charts. But the app’s future is now in jeopardy as Apple incorporates period and fertility tracking features into its own free Health app, which comes preinstalled on every device. Clue makes money by selling subscriptions and services in its free app. 

However, there is nothing inherently anticompetitive about retailers selling their own brands. If anything, entry into the market is normally procompetitive. As Randy Picker recently noted with respect to similar claims against Amazon: 

The heart of this dynamic isn’t new. Sears started its catalogue business in 1888 and then started using the Craftsman and Kenmore brands as in-house brands in 1927. Sears was acquiring inventory from third parties and obviously knew exactly which ones were selling well and presumably made decisions about which markets to enter and which to stay out of based on that information. Walmart, the nation’s largest retailer, has a number of well-known private brands and firms negotiating with Walmart know full well that Walmart can enter their markets, subject of course to otherwise applicable restraints on entry such as intellectual property laws… I think that is possible to tease out advantages that a platform has regarding inventory experimentation. It can outsource some of those costs to third parties, though sophisticated third parties should understand where they can and cannot have a sustainable advantage given Amazon’s ability to move to build-or-bought first-party inventory. We have entire bodies of law— copyright, patent, trademark and more—that limit the ability of competitors to appropriate works, inventions and symbols. Those legal systems draw very carefully considered lines regarding permitted and forbidden uses. And antitrust law generally favors entry into markets and doesn’t look to create barriers that block firms, large or small, from entering new markets.

If anything, Apple is in an even better position than Amazon. Apple invests revenue in app development, not because the apps themselves generate revenue, but because it wants people to use the hardware, i.e. the iPhones, iPads, and Apple Watches. The reason Apple created an App Store in the first place is because this allows Apple to make more money from selling devices. In order to promote security on those devices, Apple institutes rules for the App Store, but it ultimately decides whether to create its own apps and provide access to other apps based upon its desire to maximize the value of the device. If Apple chooses to create free apps in order to improve iOS for users and sell more hardware, it is not a harm to competition.

Apple’s ability to enter into popular app markets should not be constrained unless it can be shown that by giving consumers another choice, consumers are harmed. As noted above, most searches in the App Store are for branded apps to begin with. If consumers already know what they want in an app, it hardly seems harmful for Apple to offer — and promote — its own, additional version as well. 

In the case of Clue, if Apple creates a free health app, it may hurt sales for Clue. But it doesn’t hurt consumers who want the functionality and would prefer to get it from Apple for free. This sort of product evolution is not harming competition, but enhancing it. And, it must be noted, Apple doesn’t exclude Clue from its devices. If, indeed, Clue offers a better product, or one that some users prefer, they remain able to find it and use it.

The so-called App Store “Tax”

The argument that Apple has an unfair competitive advantage over rival apps which have to pay commissions to Apple to be on the App Store (a “tax” or “surcharge”) has similarly produced no evidence of harm to consumers. 

Apple invested a lot into building the iPhone and the App Store. This infrastructure has created an incredibly lucrative marketplace for app developers to exploit. And, lest we forget a point fundamental to our legal system, Apple’s App Store is its property

The WSJ and NYT stories give the impression that Apple uses its commissions on third party apps to reduce competition for its own apps. However, this is inconsistent with how Apple charges its commission

For instance, Apple doesn’t charge commissions on free apps, which make up 84% of the App Store. Apple also doesn’t charge commissions for apps that are free to download but are supported by advertising — including hugely popular apps like Yelp, Buzzfeed, Instagram, Pinterest, Twitter, and Facebook. Even apps which are “readers” where users purchase or subscribe to content outside the app but use the app to access that content are not subject to commissions, like Spotify, Netflix, Amazon Kindle, and Audible. Apps for “physical goods and services” — like Amazon, Airbnb, Lyft, Target, and Uber — are also free to download and are not subject to commissions. The class of apps which are subject to a 30% commission include:

  • paid apps (like many games),
  • free apps that then have in-app purchases (other games and services like Skype and TikTok), 
  • and free apps with digital subscriptions (Pandora, Hulu, which have 30% commission first year and then 15% in subsequent years), and
  • cross-platform apps (Dropbox, Hulu, and Minecraft) which allow for digital goods and services to be purchased in-app and Apple collects commission on in-app sales, but not sales from other platforms. 

Despite protestations to the contrary, these costs are hardly unreasonable: third party apps receive the benefit not only of being in Apple’s App Store (without which they wouldn’t have any opportunity to earn revenue from sales on Apple’s platform), but also of the features and other investments Apple continues to pour into its platform — investments that make the ecosystem better for consumers and app developers alike. There is enormous value to the platform Apple has invested in, and a great deal of it is willingly shared with developers and consumers.  It does not make it anticompetitive to ask those who use the platform to pay for it. 

In fact, these benefits are probably even more important for smaller developers rather than bigger ones who can invest in the necessary back end to reach consumers without the App Store, like Netflix, Spotify, and Amazon Kindle. For apps without brand reputation (and giant marketing budgets), the ability for consumers to trust that downloading the app will not lead to the installation of malware (as often occurs when downloading from the web) is surely essential to small developers’ ability to compete. The App Store offers this.

Despite the claims made in Spotify’s complaint against Apple, Apple doesn’t have a duty to deal with app developers. Indeed, Apple could theoretically fill the App Store with only apps that it developed itself, like Apple Music. Instead, Apple has opted for a platform business model, which entails the creation of a new outlet for others’ innovation and offerings. This is pro-consumer in that it created an entire marketplace that consumers probably didn’t even know they wanted — and certainly had no means to obtain — until it existed. Spotify, which out-competed iTunes to the point that Apple had to go back to the drawing board and create Apple Music, cannot realistically complain that Apple’s entry into music streaming is harmful to competition. Rather, it is precisely what vigorous competition looks like: the creation of more product innovation, lower prices, and arguably (at least for some) higher quality.

Interestingly, Spotify is not even subject to the App Store commission. Instead, Spotify offers a work-around to iPhone users to obtain its premium version without ads on iOS. What Spotify actually desires is the ability to sell premium subscriptions to Apple device users without paying anything above the de minimis up-front cost to Apple for the creation and maintenance of the App Store. It is unclear how many potential Spotify users are affected by the inability to directly buy the ad-free version since Spotify discontinued offering it within the App Store. But, whatever the potential harm to Spotify itself, there’s little reason to think consumers or competition bear any of it. 

Conclusion

There is no evidence that Apple’s alleged “discrimination” against rival apps harms consumers. Indeed, the opposite would seem to be the case. The regulatory discrimination against successful tech platforms like Apple and the App Store is far more harmful to consumers.

[This post is the seventh in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]

[This post is authored by Alec Stapp, Research Fellow at the International Center for Law & Economics]

Should we break up Microsoft? 

In all the talk of breaking up “Big Tech,” no one seems to mention the biggest tech company of them all. Microsoft’s market cap is currently higher than those of Apple, Google, Amazon, and Facebook. If big is bad, then, at the moment, Microsoft is the worst.

Apart from size, antitrust activists also claim that the structure and behavior of the Big Four — Facebook, Google, Apple, and Amazon — is why they deserve to be broken up. But they never include Microsoft, which is curious given that most of their critiques also apply to the largest tech giant:

  1. Microsoft is big (current market cap exceeds $1 trillion)
  2. Microsoft is dominant in narrowly-defined markets (e.g., desktop operating systems)
  3. Microsoft is simultaneously operating and competing on a platform (i.e., the Microsoft Store)
  4. Microsoft is a conglomerate capable of leveraging dominance from one market into another (e.g., Windows, Office 365, Azure)
  5. Microsoft has its own “kill zone” for startups (196 acquisitions since 1994)
  6. Microsoft operates a search engine that preferences its own content over third-party content (i.e., Bing)
  7. Microsoft operates a platform that moderates user-generated content (i.e., LinkedIn)

To be clear, this is not to say that an antitrust case against Microsoft is as strong as the case against the others. Rather, it is to say that the cases against the Big Four on these dimensions are as weak as the case against Microsoft, as I will show below.

Big is bad

Tim Wu published a book last year arguing for more vigorous antitrust enforcement — including against Big Tech — called “The Curse of Bigness.” As you can tell by the title, he argues, in essence, for a return to the bygone era of “big is bad” presumptions. In his book, Wu mentions “Microsoft” 29 times, but only in the context of its 1990s antitrust case. On the other hand, Wu has explicitly called for antitrust investigations of Amazon, Facebook, and Google. It’s unclear why big should be considered bad when it comes to the latter group but not when it comes to Microsoft. Maybe bigness isn’t actually a curse, after all.

As the saying goes in antitrust, “Big is not bad; big behaving badly is bad.” This aphorism arose to counter erroneous reasoning during the era of structure-conduct-performance when big was presumed to mean bad. Thanks to an improved theoretical and empirical understanding of the nature of the competitive process, there is now a consensus that firms can grow large either via superior efficiency or by engaging in anticompetitive behavior. Size alone does not tell us how a firm grew big — so it is not a relevant metric.

Dominance in narrowly-defined markets

Critics of Google say it has a monopoly on search and critics of Facebook say it has a monopoly on social networking. Microsoft is similarly dominant in at least a few narrowly-defined markets, including desktop operating systems (Windows has a 78% market share globally): 

Source: StatCounter

Microsoft is also dominant in the “professional networking platform” market after its acquisition of LinkedIn in 2016. And the legacy tech giant is still the clear leader in the “paid productivity software” market. (Microsoft’s Office 365 revenue is roughly 10x Google’s G Suite revenue).

The problem here is obvious. These are overly-narrow market definitions for conducting an antitrust analysis. Is it true that Facebook’s platforms are the only service that can connect you with your friends? Should we really restrict the productivity market to “paid”-only options (as the EU similarly did in its Android decision) when there are so many free options available? These questions are laughable. Proper market definition requires considering whether a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price (SSNIP). If not (which is likely the case in the narrow markets above), then we should employ a broader market definition in each case.

Simultaneously operating and competing on a platform

Elizabeth Warren likes to say that if you own a platform, then you shouldn’t both be an umpire and have a team in the game. Let’s put aside the problems with that flawed analogy for now. What she means is that you shouldn’t both run the platform and sell products, services, or apps on that platform (because it’s inherently unfair to the other sellers). 

Warren’s solution to this “problem” would be to create a regulated class of businesses called “platform utilities” which are “companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties.” Microsoft’s revenue last quarter was $32.5 billion, so it easily meets the first threshold. And Windows obviously qualifies as “a platform for connecting third parties.”

Just as in mobile operating systems, desktop operating systems are compatible with third-party applications. These third-party apps can be free (e.g., iTunes) or paid (e.g., Adobe Photoshop). Of course, Microsoft also makes apps for Windows (e.g., Word, PowerPoint, Excel, etc.). But the more you think about the technical details, the blurrier the line between the operating system and applications becomes. Is the browser an add-on to the OS or a part of it (as Microsoft Edge appears to be)? The most deeply-embedded applications in an OS are simply called “features.”

Even though Warren hasn’t explicitly mentioned that her plan would cover Microsoft, it almost certainly would. Previously, she left Apple out of the Medium post announcing her policy, only to later tell a journalist that the iPhone maker would also be prohibited from producing its own apps. But what Warren fails to include in her announcement that she would break up Apple is that trying to police the line between a first-party platform and third-party applications would be a nightmare for companies and regulators, likely leading to less innovation and higher prices for consumers (as they attempt to rebuild their previous bundles).

Leveraging dominance from one market into another

The core critique in Lina Khan’s “Amazon’s Antitrust Paradox” is that the very structure of Amazon itself is what leads to its anticompetitive behavior. Khan argues (in spite of the data) that Amazon uses profits in some lines of business to subsidize predatory pricing in other lines of businesses. Furthermore, she claims that Amazon uses data from its Amazon Web Services unit to spy on competitors and snuff them out before they become a threat.

Of course, this is similar to the theory of harm in Microsoft’s 1990s antitrust case, that the desktop giant was leveraging its monopoly from the operating system market into the browser market. Why don’t we hear the same concern today about Microsoft? Like both Amazon and Google, you could uncharitably describe Microsoft as extending its tentacles into as many sectors of the economy as possible. Here are some of the markets in which Microsoft competes (and note how the Big Four also compete in many of these same markets):

What these potential antitrust harms leave out are the clear consumer benefits from bundling and vertical integration. Microsoft’s relationships with customers in one market might make it the most efficient vendor in related — but separate — markets. It is unsurprising, for example, that Windows customers would also frequently be Office customers. Furthermore, the zero marginal cost nature of software makes it an ideal product for bundling, which redounds to the benefit of consumers.

The “kill zone” for startups

In a recent article for The New York Times, Tim Wu and Stuart A. Thompson criticize Facebook and Google for the number of acquisitions they have made. They point out that “Google has acquired at least 270 companies over nearly two decades” and “Facebook has acquired at least 92 companies since 2007”, arguing that allowing such a large number of acquisitions to occur is conclusive evidence of regulatory failure.

Microsoft has made 196 acquisitions since 1994, but they receive no mention in the NYT article (or in most of the discussion around supposed “kill zones”). But the acquisitions by Microsoft or Facebook or Google are, in general, not problematic. They provide a crucial channel for liquidity in the venture capital and startup communities (the other channel being IPOs). According to the latest data from Orrick and Crunchbase, between 2010 and 2018, there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion

By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. Making it harder for a startup to be acquired would not result in more venture capital investment (and therefore not in more IPOs), according to recent research by Gordon M. Phillips and Alexei Zhdanov. The researchers show that “the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment.”

As investor and serial entrepreneur Leonard Speiser said recently, “If the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” 

Search engine bias

Google is often accused of biasing its search results to favor its own products and services. The argument goes that if we broke them up, a thousand search engines would bloom and competition among them would lead to less-biased search results. While it is a very difficult — if not impossible — empirical question to determine what a “neutral” search engine would return, one attempt by Josh Wright found that “own-content bias is actually an infrequent phenomenon, and Google references its own content more favorably than other search engines far less frequently than does Bing.” 

The report goes on to note that “Google references own content in its first results position when no other engine does in just 6.7% of queries; Bing does so over twice as often (14.3%).” Arguably, users of a particular search engine might be more interested in seeing content from that company because they have a preexisting relationship. But regardless of how we interpret these results, it’s clear this not a frequent phenomenon.

So why is Microsoft being left out of the antitrust debate now?

One potential reason why Google, Facebook, and Amazon have been singled out for criticism of practices that seem common in the tech industry (and are often pro-consumer) may be due to the prevailing business model in the journalism industry. Google and Facebook are by far the largest competitors in the digital advertising market, and Amazon is expected to be the third-largest player by next year, according to eMarketer. As Ramsi Woodcock pointed out, news publications are also competing for advertising dollars, the type of conflict of interest that usually would warrant disclosure if, say, a journalist held stock in a company they were covering.

Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”

Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.


[This post is the sixth in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]

[This post is authored by Thibault Schrepel, Faculty Associate at the Berkman Center at Harvard University and Assistant Professor in European Economic Law at Utrecht University School of Law.]

The pretense of ignorance

Over the last few years, I have published a series of antitrust conversations with Nobel laureates in economics. I have discussed big tech dominance with most of them, and although they have different perspectives, all of them agreed on one thing: they do not know what the effect of breaking up big tech would be. In fact, I have never spoken with any economist who was able to show me convincing empirical evidence that breaking up big tech would on net be good for consumers. The same goes for political scientists; I have never read any article that, taking everything into consideration, proves empirically that breaking up tech companies would be good for protecting democracies, if that is the objective (please note that I am not even discussing the fact that using antitrust law to do that would violate the rule of law, for more on the subject, click here).

This reminds me of Friedrich Hayek’s Nobel memorial lecture, in which he discussed the “pretense of knowledge.” He argued that some issues will always remain too complex for humans (even helped by quantum computers and the most advanced AI; that’s right!). Breaking up big tech is one such issue; it is simply impossible simultaneously to consider the micro and macro-economic impacts of such an enormous undertaking, which would affect, literally, billions of people. Not to mention the political, sociological and legal issues, all of which combined are beyond human understanding.

Ignorance + fear = fame

In the absence of clear-cut conclusions, here is why (I think), some officials are arguing for breaking up big tech. First, it may be possible that some of them actually believe that it would be great. But I am sure we agree that beliefs should not be a valid basis for such actions. More realistically, the answer can be found in the work of another Nobel laureate, James Buchanan, and in particular his 1978 lecture in Vienna entitled “Politics Without Romance.”

In his lecture and the paper that emerged from it, Buchanan argued that while markets fail, so do governments. The latter is especially relevant insofar as top officials entrusted with public power may, occasionally at least, use that power to benefit their personal interests rather than the public interest. Thus, the presumption that government-imposed corrections for market failures always accomplish the desired objectives must be rejected. Taking that into consideration, it follows that the expected effectiveness of public action should always be established as precisely and scientifically as possible before taking action. Integrating these insights from Hayek and Buchanan, we must conclude that it is not possible to know whether the effects of breaking up big tech would on net be positive.

The question then is why, in the absence of positive empirical evidence, are some officials arguing for breaking up tech giants then? Well, because defending such actions may help them achieve their personal goals. Often, it is more important for public officials to show their muscle and take action, rather showing great care about reaching a positive net result for society. This is especially true when it is practically impossible to evaluate the outcome due to the scale and complexity of the changes that ensue. That enables these officials to take credit for being bold while avoiding blame for the harms.

But for such a call to be profitable for the public officials, they first must legitimize the potential action in the eyes of the majority of the public. Until now, most consumers evidently like the services of tech giants, which is why it is crucial for the top officials engaged in such a strategy to demonize those companies and further explain to consumers why they are wrong to enjoy them. Only then does defending the breakup of tech giants becomes politically valuable.

Some data, one trend

In a recent paper entitled “Antitrust Without Romance,” I have analyzed the speeches of the five current FTC commissioners, as well as the speeches of the current and three previous EU Competition Commissioners. What I found is an increasing trend to demonize big tech companies. In other words, public officials increasingly seek to prepare the general public for the idea that breaking up tech giants would be great.

In Europe, current Competition Commissioner Margrethe Vestager has sought to establish an opposition between the people (referred under the pronoun “us”) and tech companies (referred under the pronoun “them”) in more than 80% of her speeches. She further describes these companies as engaging in manipulation of the public and unleashing violence. She says they, “distort or fabricate information, manipulate people’s views and degrade public debate” and help “harmful, untrue information spread faster than ever, unleashing violence and undermining democracy.” Furthermore, she says they cause, “danger of death.” On this basis, she mentions the possibility of breaking them up (for more data about her speeches, see this link).

In the US, we did not observe a similar trend. Assistant Attorney General Makan Delrahim, who has responsibility for antitrust enforcement at the Department of Justice, describes the relationship between people and companies as being in opposition in fewer than 10% of his speeches. The same goes for most of the FTC commissioners (to see all the data about their speeches, see this link). The exceptions are FTC Chairman Joseph J. Simons, who describes companies’ behavior as “bad” from time to time (and underlines that consumers “deserve” better) and Commissioner Rohit Chopra, who describes the relationship between companies and the people as being in opposition to one another in 30% of his speeches. Chopra also frequently labels companies as “bad.” These are minor signs of big tech demonization compared to what is currently done by European officials. But, unfortunately, part of the US doctrine (which does not hide political objectives) pushes for demonizing big tech companies. One may have reason to fear that such a trend will grow in the US as it has in Europe, especially considering the upcoming presidential campaign in which far-right and far-left politicians seem to agree about the need to break up big tech.

And yet, let’s remember that no-one has any documented, tangible, and reproducible evidence that breaking up tech giants would be good for consumers, or societies at large, or, in fact, for anyone (even dolphins, okay). It might be a good idea; it might be a bad idea. Who knows? But the lack of evidence either way militates against taking such action. Meanwhile, there is strong evidence that these discussions are fueled by a handful of individuals wishing to benefit from such a call for action. They do so, first, by depicting tech giants as representing the new elite in opposition to the people and they then portray themselves as the only saviors capable of taking action.

Epilogue: who knows, life is not a Tarantino movie

For the last 30 years, antitrust law has been largely immune to strategic takeover by political interests. It may now be returning to a previous era in which it was the instrument of a few. This transformation is already happening in Europe (it is expected to hit case law there quite soon) and is getting real in the US, where groups display political goals and make antitrust law a Trojan horse for their personal interests.The only semblance of evidence they bring is a few allegedly harmful micro-practices (see Amazon’s Antitrust Paradox), which they use as a basis for defending the urgent need of macro, structural measures, such as breaking up tech companies. This is disproportionate, but most of all and in the absence of better knowledge, purely opportunistic and potentially foolish. Who knows at this point whether antitrust law will come out intact of this populist and moralist episode? And who knows what the next idea of those who want to use antitrust law for purely political purposes will be. Life is not a Tarantino movie; it may end up badly.

It might surprise some readers to learn that we think the Court’s decision today in Apple v. Pepper reaches — superficially — the correct result. But, we hasten to add, the Court’s reasoning (and, for that matter, the dissent’s) is completely wrongheaded. It would be an understatement to say that the Court reached the right result for the wrong reason; in fact, the Court’s analysis wasn’t even in the same universe as the correct reasoning.

Below we lay out our assessment, in a post drawn from an article forthcoming in the Nebraska Law Review.

Did the Court forget that, just last year, it decided Amex, the most significant U.S. antitrust case in ages?

What is most remarkable about the decision (and the dissent) is that neither mentions Ohio v. Amex, nor even the two-sided market context in which the transactions at issue take place.

If the decision in Apple v. Pepper hewed to the precedent established by Ohio v. Amex it would start with the observation that the relevant market analysis for the provision of app services is an integrated one, in which the overall effect of Apple’s conduct on both app users and app developers must be evaluated. A crucial implication of the Amex decision is that participants on both sides of a transactional platform are part of the same relevant market, and the terms of their relationship to the platform are inextricably intertwined.

Under this conception of the market, it’s difficult to maintain that either side does not have standing to sue the platform for the terms of its overall pricing structure, whether the specific terms at issue apply directly to that side or not. Both end users and app developers are “direct” purchasers from Apple — of different products, but in a single, inextricably interrelated market. Both groups should have standing.

More controversially, the logic of Amex also dictates that both groups should be able to establish antitrust injury — harm to competition — by showing harm to either group, as long as it establishes the requisite interrelatedness of the two sides of the market.

We believe that the Court was correct to decide in Amex that effects falling on the “other” side of a tightly integrated, two-sided market from challenged conduct must be addressed by the plaintiff in making its prima facie case. But that outcome entails a market definition that places both sides of such a market in the same relevant market for antitrust analysis.

As a result, the Court’s holding in Amex should also have required a finding in Apple v. Pepper that an app user on one side of the platform who transacts with an app developer on the other side of the market, in a transaction made possible and directly intermediated by Apple’s App Store, should similarly be deemed in the same market for standing purposes.

Relative to a strict construction of the traditional baseline, the former entails imposing an additional burden on two-sided market plaintiffs, while the latter entails a lessening of that burden. Whether the net effect is more or fewer successful cases in two-sided markets is unclear, of course. But from the perspective of aligning evidentiary and substantive doctrine with economic reality such an approach would be a clear improvement.

Critics accuse the Court of making antitrust cases unwinnable against two-sided market platforms thanks to Amex’s requirement that a prima facie showing of anticompetitive effect requires assessment of the effects on both sides of a two-sided market and proof of a net anticompetitive outcome. The critics should have been chastened by a proper decision in Apple v. Pepper. As it is, the holding (although not the reasoning) still may serve to undermine their fears.

But critics should have recognized that a necessary corollary of Amex’s “expanded” market definition is that, relative to previous standing doctrine, a greater number of prospective parties should have standing to sue.

More important, the Court in Apple v. Pepper should have recognized this. Although nominally limited to the indirect purchaser doctrine, the case presented the Court with an opportunity to grapple with this logical implication of its Amex decision. It failed to do so.

On the merits, it looks like Apple should win. But, for much the same reason, the Respondents in Apple v. Pepper should have standing

This does not, of course, mean that either party should win on the merits. Indeed, on the merits of the case, the Petitioner in Apple v. Pepper appears to have the stronger argument, particularly in light of Amex which (assuming the App Store is construed as some species of a two-sided “transaction” market) directs that Respondent has the burden of considering harms and efficiencies across both sides of the market.

At least on the basis of the limited facts as presented in the case thus far, Respondents have not remotely met their burden of proving anticompetitive effects in the relevant market.

The actual question presented in Apple v. Pepper concerns standing, not whether the plaintiffs have made out a viable case on the merits. Thus it may seem premature to consider aspects of the latter in addressing the former. But the structure of the market considered by the court should be consistent throughout its analysis.

Adjustments to standing in the context of two-sided markets must be made in concert with the nature of the substantive rule of reason analysis that will be performed in a case. The two doctrines are connected not only by the just demands for consistency, but by the error-cost framework of the overall analysis, which runs throughout the stages of an antitrust case.

Here, the two-sided markets approach in Amex properly understands that conduct by a platform has relevant effects on both sides of its interrelated two-sided market. But that stems from the actual economics of the platform; it is not merely a function of a judicial construct. It thus holds true at all stages of the analysis.

The implication for standing is that users on both sides of a two-sided platform may suffer similarly direct (or indirect) injury as a result of the platform’s conduct, regardless of the side to which that conduct is nominally addressed.

The consequence, then, of Amex’s understanding of the market is that more potential plaintiffs — specifically, plaintiffs on both sides of a two-sided market — may claim to suffer antitrust injury.

Why the myopic focus of the holding (and dissent) on Illinois Brick is improper: It’s about the market definition, stupid!

Moreover, because of the Amex understanding, the problem of analyzing the pass-through of damages at issue in Illinois Brick (with which the Court entirely occupies itself in Apple v. Pepper) is either mitigated or inevitable.

In other words, either the users on the different sides of a two-sided market suffer direct injury without pass-through under a proper definition of the relevant market, or else their interrelatedness is so strong that, complicated as it may be, the needs of substantive accuracy trump the administrative costs in sorting out the incidence of the costs, and courts cannot avoid them.

Illinois Brick’s indirect purchaser doctrine was designed for an environment in which the relationship between producers and consumers is mediated by a distributor in a direct, linear supply chain; it was not designed for platforms. Although the question presented in Apple v. Pepper is explicitly about whether the Illinois Brick “indirect purchaser” doctrine applies to the Apple App Store, that determination is contingent on the underlying product market definition (whether the product market is in fact well-specified by the parties and the court or not).

Particularly where intermediaries exist precisely to address transaction costs between “producers” and “consumers,” the platform services they provide may be central to the underlying claim in a way that the traditional direct/indirect filters — and their implied relevant markets — miss.

Further, the Illinois Brick doctrine was itself based not on the substantive necessity of cutting off liability evaluations at a particular level of distribution, but on administrability concerns. In particular, the Court was concerned with preventing duplicative recovery when there were many potential groups of plaintiffs, as well as preventing injustices that would occur if unknown groups of plaintiffs inadvertently failed to have their rights adequately adjudicated in absentia. It was also concerned with avoiding needlessly complicated damages calculations.

But, almost by definition, the tightly coupled nature of the two sides of a two-sided platform should mitigate the concerns about duplicative recovery and unknown parties. Moreover, much of the presumed complexity in damages calculations in a platform setting arise from the nature of the platform itself. Assessing and apportioning damages may be complicated, but such is the nature of complex commercial relationships — the same would be true, for example, of damages calculations between vertically integrated companies that transact simultaneously at multiple levels, or between cross-licensing patent holders/implementers. In fact, if anything, the judicial efficiency concerns in Illinois Brick point toward the increased importance of properly assessing the nature of the product or service of the platform in order to ensure that it accurately encompasses the entire relevant transaction.

Put differently, under a proper, more-accurate market definition, the “direct” and “indirect” labels don’t necessarily reflect either business or antitrust realities.

Where the Court in Apple v. Pepper really misses the boat is in its overly formalistic claim that the business model (and thus the product) underlying the complained-of conduct doesn’t matter:

[W]e fail to see why the form of the upstream arrangement between the manufacturer or supplier and the retailer should determine whether a monopolistic retailer can be sued by a downstream consumer who has purchased a good or service directly from the retailer and has paid a higher-than-competitive price because of the retailer’s unlawful monopolistic conduct.

But Amex held virtually the opposite:

Because “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law,” courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.

* * *

Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services. Thus, courts must include both sides of the platform—merchants and cardholders—when defining the credit-card market.

In the face of novel business conduct, novel business models, and novel economic circumstances, the degree of substantive certainty may be eroded, as may the reasonableness of the expectation that typical evidentiary burdens accurately reflect competitive harm. Modern technology — and particularly the platform business model endemic to many modern technology firms — presents a need for courts to adjust their doctrines in the face of such novel issues, even if doing so adds additional complexity to the analysis.

The unlearned market-definition lesson of the Eighth Circuit’s Campos v. Ticketmaster dissent

The Eight Circuit’s Campos v. Ticketmaster case demonstrates the way market definition shapes the application of the indirect purchaser doctrine. Indeed, the dissent in that case looms large in the Ninth Circuit’s decision in Apple v. Pepper. [Full disclosure: One of us (Geoff) worked on the dissent in Campos v. Ticketmaster as a clerk to Eighth Circuit judge Morris S. Arnold]

In Ticketmaster, the plaintiffs alleged that Ticketmaster abused its monopoly in ticket distribution services to force supracompetitve charges on concert venues — a practice that led to anticompetitive prices for concert tickets. Although not prosecuted as a two-sided market, the business model is strikingly similar to the App Store model, with Ticketmaster charging fees to venues and then facilitating ticket purchases between venues and concert goers.

As the dissent noted, however:

The monopoly product at issue in this case is ticket distribution services, not tickets.

Ticketmaster supplies the product directly to concert-goers; it does not supply it first to venue operators who in turn supply it to concert-goers. It is immaterial that Ticketmaster would not be supplying the service but for its antecedent agreement with the venues.

But it is quite relevant that the antecedent agreement was not one in which the venues bought some product from Ticketmaster in order to resell it to concert-goers.

More important, and more telling, is the fact that the entirety of the monopoly overcharge, if any, is borne by concert-goers.

In contrast to the situations described in Illinois Brick and the literature that the court cites, the venues do not pay the alleged monopoly overcharge — in fact, they receive a portion of that overcharge from Ticketmaster. (Emphasis added).

Thus, if there was a monopoly overcharge it was really borne entirely by concert-goers. As a result, apportionment — the complexity of which gives rise to the standard in Illinois Brick — was not a significant issue. And the antecedent transaction that allegedly put concertgoers in an indirect relationship with Ticketmaster is one in which Ticketmaster and concert venues divvied up the alleged monopoly spoils, not one in which the venues absorb their share of the monopoly overcharge.

The analogy to Apple v. Pepper is nearly perfect. Apple sits between developers on one side and consumers on the other, charges a fee to developers for app distribution services, and facilitates app sales between developers and users. It is possible to try to twist the market definition exercise to construe the separate contracts between developers and Apple on one hand, and the developers and consumers on the other, as some sort of complicated version of the classical manufacturing and distribution chains. But, more likely, it is advisable to actually inquire into the relevant factual differences that underpin Apple’s business model and adapt how courts consider market definition for two-sided platforms.

Indeed, Hanover Shoe and Illinois Brick were born out of a particular business reality in which businesses structured themselves in what are now classical production and distribution chains. The Supreme Court adopted the indirect purchaser rule as a prudential limitation on antitrust law in order to optimize the judicial oversight of such cases. It seems strangely nostalgic to reflexively try to fit new business methods into old legal analyses, when prudence and reality dictate otherwise.

The dissent in Ticketmaster was ahead of its time insofar as it recognized that the majority’s formal description of the ticket market was an artifact of viewing what was actually something much more like a ticket-services platform operated by Ticketmaster through the poor lens of the categories established decades earlier.

The Ticketmaster dissent’s observations demonstrate that market definition and antitrust standing are interrelated. It makes no sense to adhere to a restrictive reading of the latter if it connotes an economically improper understanding of the former. Ticketmaster provided an intermediary service — perhaps not quite a two-sided market, but something close — that stands outside a traditional manufacturing supply chain. Had it been offered by the venues themselves and bundled into the price of concert tickets there would be no question of injury and of standing (nor would market definition matter much, as both tickets and distribution services would be offered as a joint product by the same parties, in fixed proportions).

What antitrust standing doctrine should look like after Amex

There are some clear implications for antitrust doctrine that (should) follow from the preceding discussion.

A plaintiff has a choice to allege that a defendant operates either as a two-sided market or in a more traditional, linear chain during the pleading stage. If the plaintiff alleges a two-sided market, then, to demonstrate standing, it need only be shown that injury occurred to some subset of platform users with which the plaintiff is inextricably interrelated. The plaintiff would not need to demonstrate injury to him or herself, nor allege net harm, nor show directness.

In response, a defendant can contest standing by challenging the interrelatedness of the plaintiff and the group of platform users with whom the plaintiff claims interrelatedness. If the defendant does not challenge the allegation that it operates a two-sided market, it could not challenge standing by showing indirectness, that plaintiff had not alleged personal injury, or that plaintiff hasn’t alleged a net harm.

Once past a determination of standing, however, a plaintiff who pleads a two-sided market would not be able to later withdraw this allegation in order to lessen the attendant legal burdens.

If the court accepts that the defendant is operating a two-sided market, both parties would be required to frame their allegations and defenses in accordance with the nature of the two-sided market and thus the holding in Amex. This is critical because, whereas alleging a two-sided market may make it easier for plaintiffs to demonstrate standing, Amex’s requirement that net harm be demonstrated across interrelated sets of users makes it more difficult for plaintiffs to present a viable prima facie case. Further, defendants would not be barred from presenting efficiencies defenses based on benefits that interrelated users enjoy.

Conclusion: The Court in Apple v. Pepper should have acknowledged the implications of its holding in Amex

After Amex, claims against two-sided platforms might require more evidence to establish anticompetitive harm, but that business model also means that firms should open themselves up to a larger pool of potential plaintiffs. The legal principles still apply, but the relative importance of those principles to judicial outcomes shifts (or should shift) in line with the unique economic position of potential plaintiffs and defendants in a platform environment.

Whether a priori the net result is more or fewer cases and more or fewer victories for plaintiffs is not the issue; what matters is matching the legal and economic theory to the relevant facts in play. Moreover, decrying Amex as the end of antitrust was premature: the actual affect on injured parties can’t be known until other changes (like standing for a greater number of plaintiffs) are factored into the analysis. The Court’s holding in Apple v. Pepper sidesteps this issue entirely, and thus fails to properly move antitrust doctrine forward in line with its holding in Amex.

Of course, it’s entirely possible that platforms and courts might be inundated with expensive and difficult to manage lawsuits. There may be reasons of administrability for limiting standing (as Illinois Brick perhaps prematurely did for fear of the costs of courts’ managing suits). But then that should have been the focus of the Court’s decision.

Allowing standing in Apple v. Pepper permits exactly the kind of legal experimentation needed to enable the evolution of antitrust doctrine along with new business realities. But in some ways the Court reached the worst possible outcome. It announced a rule that permits more plaintiffs to establish standing, but it did not direct lower courts to assess standing within the proper analytical frame. Instead, it just expands standing in a manner unmoored from the economic — and, indeed, judicial — context. That’s not a recipe for the successful evolution of antitrust doctrine.

Source: Benedict Evans

[N]ew combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; … in general it is not the owner of stagecoaches who builds railways. – Joseph Schumpeter, January 1934

Elizabeth Warren wants to break up the tech giants — Facebook, Google, Amazon, and Apple — claiming they have too much power and represent a danger to our democracy. As part of our response to her proposal, we shared a couple of headlines from 2007 claiming that MySpace had an unassailable monopoly in the social media market.

Tommaso Valletti, the chief economist of the Directorate-General for Competition (DG COMP) of the European Commission, said, in what we assume was a reference to our posts, “they go on and on with that single example to claim that [Facebook] and [Google] are not a problem 15 years later … That’s not what I would call an empirical regularity.”

We appreciate the invitation to show that prematurely dubbing companies “unassailable monopolies” is indeed an empirical regularity.

It’s Tough to Make Predictions, Especially About the Future of Competition in Tech

No one is immune to this phenomenon. Antitrust regulators often take a static view of competition, failing to anticipate dynamic technological forces that will upend market structure and competition.

Scientists and academics make a different kind of error. They are driven by the need to satisfy their curiosity rather than shareholders. Upon inventing a new technology or discovering a new scientific truth, academics often fail to see the commercial implications of their findings.

Maybe the titans of industry don’t make these kinds of mistakes because they have skin in the game? The profit and loss statement is certainly a merciless master. But it does not give CEOs the power of premonition. Corporate executives hailed as visionaries in one era often become blinded by their success, failing to see impending threats to their company’s core value propositions.

Furthermore, it’s often hard as outside observers to tell after the fact whether business leaders just didn’t see a tidal wave of disruption coming or, worse, they did see it coming and were unable to steer their bureaucratic, slow-moving ships to safety. Either way, the outcome is the same.

Here’s the pattern we observe over and over: extreme success in one context makes it difficult to predict how and when the next paradigm shift will occur in the market. Incumbents become less innovative as they get lulled into stagnation by high profit margins in established lines of business. (This is essentially the thesis of Clay Christensen’s The Innovator’s Dilemma).

Even if the anti-tech populists are powerless to make predictions, history does offer us some guidance about the future. We have seen time and again that apparently unassailable monopolists are quite effectively assailed by technological forces beyond their control.

PCs

Source: Horace Dediu

Jan 1977: Commodore PET released

Jun 1977: Apple II released

Aug 1977: TRS-80 released

Feb 1978: “I.B.M. Says F.T.C. Has Ended Its Typewriter Monopoly Study” (NYT)

Mobile

Source: Comscore

Mar 2000: Palm Pilot IPO’s at $53 billion

Sep 2006: “Everyone’s always asking me when Apple will come out with a cellphone. My answer is, ‘Probably never.’” – David Pogue (NYT)

Apr 2007: “There’s no chance that the iPhone is going to get any significant market share.” Ballmer (USA TODAY)

Jun 2007: iPhone released

Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)

Sep 2013: “Microsoft CEO Ballmer Bids Emotional Farewell to Wall Street” (Reuters)

If there’s one thing I regret, there was a period in the early 2000s when we were so focused on what we had to do around Windows that we weren’t able to redeploy talent to the new device form factor called the phone.

Search

Source: Distilled

Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)

Once upon a time, Yahoo! was an Internet search site with mediocre technology. Now it has a market cap of $2.8 billion. Some people say it’s the next America Online.

Sep 1998: Google founded

Instant Messaging

Sep 2000: “AOL Quietly Linking AIM, ICQ” (ZDNet)

AOL’s dominance of instant messaging technology, the kind of real-time e-mail that also lets users know when others are online, has emerged as a major concern of regulators scrutinizing the company’s planned merger with Time Warner Inc. (twx). Competitors to Instant Messenger, such as Microsoft Corp. (msft) and Yahoo! Inc. (yhoo), have been pressing the Federal Communications Commission to force AOL to make its services compatible with competitors’.

Dec 2000: “AOL’s Instant Messaging Monopoly?” (Wired)

Dec 2015: Report for the European Parliament

There have been isolated examples, as in the case of obligations of the merged AOL / Time Warner to make AOL Instant Messenger interoperable with competing messaging services. These obligations on AOL are widely viewed as having been a dismal failure.

Oct 2017: AOL shuts down AIM

Jan 2019: “Zuckerberg Plans to Integrate WhatsApp, Instagram and Facebook Messenger” (NYT)

Retail

Source: Seeking Alpha

May 1997: Amazon IPO

Mar 1998: American Booksellers Association files antitrust suit against Borders, B&N

Feb 2005: Amazon Prime launches

Jul 2006: “Breaking the Chain: The Antitrust Case Against Wal-Mart” (Harper’s)

Feb 2011: “Borders Files for Bankruptcy” (NYT)

Social

Feb 2004: Facebook founded

Jan 2007: “MySpace Is a Natural Monopoly” (TechNewsWorld)

Seventy percent of Yahoo 360 users, for example, also use other social networking sites — MySpace in particular. Ditto for Facebook, Windows Live Spaces and Friendster … This presents an obvious, long-term business challenge to the competitors. If they cannot build up a large base of unique users, they will always be on MySpace’s periphery.

Feb 2007: “Will Myspace Ever Lose Its Monopoly?” (Guardian)

Jun 2011: “Myspace Sold for $35m in Spectacular Fall from $12bn Heyday” (Guardian)

Music

Source: RIAA

Dec 2003: “The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model, and it might not be successful.” – Steve Jobs (Rolling Stone)

Apr 2006: Spotify founded

Jul 2009: “Apple’s iPhone and iPod Monopolies Must Go” (PC World)

Jun 2015: Apple Music announced

Video

Source: OnlineMBAPrograms

Apr 2003: Netflix reaches one million subscribers for its DVD-by-mail service

Mar 2005: FTC blocks Blockbuster/Hollywood Video merger

Sep 2006: Amazon launches Prime Video

Jan 2007: Netflix streaming launches

Oct 2007: Hulu launches

May 2010: Hollywood Video’s parent company files for bankruptcy

Sep 2010: Blockbuster files for bankruptcy

The Only Winning Move Is Not to Play

Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions. The authors just cannot help themselves. A March 2012 BBC article “The Future of Technology… Who Knows?” derided the naysayers who predicted doom for Apple’s retail store strategy. Its kicker?

And that is why when you read that the Blackberry is doomed, or that Microsoft will never make an impression on mobile phones, or that Apple will soon dominate the connected TV market, you need to take it all with a pinch of salt.

But Blackberry was doomed and Microsoft never made an impression on mobile phones. (Half credit for Apple TV, which currently has a 15% market share).

Nobel Prize-winning economist Paul Krugman wrote a piece for Red Herring magazine (seriously) in June 1998 with the title “Why most economists’ predictions are wrong.” Headline-be-damned, near the end of the article he made the following prediction:

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

Robert Metcalfe himself predicted in a 1995 column that the Internet would “go spectacularly supernova and in 1996 catastrophically collapse.” After pledging to “eat his words” if the prediction did not come true, “in front of an audience, he put that particular column into a blender, poured in some water, and proceeded to eat the resulting frappe with a spoon.”

A Change Is Gonna Come

Benedict Evans, a venture capitalist at Andreessen Horowitz, has the best summary of why competition in tech is especially difficult to predict:

IBM, Microsoft and Nokia were not beaten by companies doing what they did, but better. They were beaten by companies that moved the playing field and made their core competitive assets irrelevant. The same will apply to Facebook (and Google, Amazon and Apple).

Elsewhere, Evans tried to reassure his audience that we will not be stuck with the current crop of tech giants forever:

With each cycle in tech, companies find ways to build a moat and make a monopoly. Then people look at the moat and think it’s invulnerable. They’re generally right. IBM still dominates mainframes and Microsoft still dominates PC operating systems and productivity software. But… It’s not that someone works out how to cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose mainframes and Microsoft didn’t lose PC operating systems. Instead, those stopped being ways to dominate tech. PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well. Unless you think tech progress is over and there’ll be no more cycles … It is deeply counter-intuitive to say ‘something we cannot predict is certain to happen’. But this is nonetheless what’s happened to overturn pretty much every tech monopoly so far.

If this time is different — or if there are more false negatives than false positives in the monopoly prediction game — then the advocates for breaking up Big Tech should try to make that argument instead of falling back on “big is bad” rhetoric. As for us, we’ll bet that we have not yet reached the end of history — tech progress is far from over.