Archives For iTunes

Stan Liebowitz (UT-Dallas) offers a characteristically thoughtful and provocative op-ed in the WSJ today commenting on SOPA and the Protect IP Act.  Here’s an excerpt:

You may have noticed last Wednesday’s blackout of Wikipedia or Google’s strange blindfolded-logo screen. These were attempts to kill the Protect IP Act and the Stop Online Piracy Act, proposed legislation intended to hinder piracy and counterfeiting. The laws now before Congress may not be perfect, and they can still be amended. But to do nothing and stay with the status quo is to keep our creative industries at risk by failing to enforce their property rights.

Critics of these proposed laws claim that they are unnecessary and will lead to frivolous claims, reduce innovation and stifle free speech. Those are gross exaggerations. The same critics have been making these claims about every previous attempt to rein in piracy, including the Digital Millennium Copyright Act that was called a draconian antipiracy measure at the time of its passage in 1998. As we all know, the DMCA did not kill the Internet, or even do any noticeable damage to freedom—or to pirates.

Scads of Internet pundits and bloggers have vehemently argued that piracy is really a sales-promoting activity—because it gives people a free sample that might lead to a purchase—or that any piracy problems have been due to a failure of industry to embrace the Internet. Yet these claims are little more than wishful thinking. Some reflect a hostility to commercial activities—think Occupy Wall Street, or self-interest. Others make “freedom” claims on behalf of sites that profit by helping individuals find pirate sites, makers of complementary hardware, or companies that benefit from Internet usage and collect revenues whether the material being accessed was legally obtained or not.

In my examination of peer-reviewed studies, the great majority have results that conform to common sense: Piracy harms copyright owners. I was also somewhat surprised to discover that the typical finding of such academic studies was that the entire enormous decline that has occurred is due to piracy.

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Do check out the whole thing.

 

 

A friend who is very active in startups and angel investing in southern California emailed me about whether I knew of research on the potential multiplier effects of a company on job formation.  Examples that came to her mind were eBay and Mary Kay, which create many small businesses.  I thought of Google as an incubator and exit opportunity for small firms.

She wants to know because she’s thinking about a business school competition for new business ideas that will give a special prize for job creation if this can be measured at an early stage before any jobs actually have been created.

This seems to me to be a great question to be asking in an economy that desperately needs jobs.

I emailed this to several friends, who agreed with me that it was an important issue but were not sure how to answer it.  One referred to established businesses that invest in R & D which leads to ideas that the established business fails to implement.  But he notes that new firms like those in the business competition are unlikely to have large R&D expenditures at the formation stage. Another suggested looking at whether the start-up is a platform technology and asking applicants to articulate the nature and scale of potential spin-offs from their business.

My correspondent followed up with a question whether anyone knew of “research on what parameters correlate directly with job creation.” E.g., cash flow; the need for feeder companies inherent in the start-up’s business model (e.g., Apple’s apps and iTunes; the car industry).

Any ideas out there?

Professor B says:

In the last week I used my iPad to: Watch QI on Youtube. Watch TV shows, movies, and music videos from my iTunes library. Online banking. Online shopping. Web access. WSJ. BBC. Dinner reservations over Open Table. Deer Hunter. Online poker. Document access via Dropbox. Document editing via Quick Office. IMDB. Twitter and Facebook. Online cribbage. Paypal transfer. NY Times crossword. Listed to Sirius radio. Looked stuff up on Wikipedia. Blogged. Played around with a mind map. And, oh yes, read a couple of books. It’s become an essential gadget. A lighter, faster one with better hardware/software integration will be well worth it. Even if I do have to upgrade next year.

All of which, of course, can be done on a laptop.  Which can also do one thing an iPad absolutely cannot do:  real work.  All for 30% less money (for the cheapest laptops).

If you just want the basic functionality of reading a book — the one thing that a laptop (or for that matter a book) is not very good at — you can get a Kindle for almost $400 less, and be able to read it in the sun, for long periods without charging, and without the distraction of the internet.

I will not convince Apple disciples of the drawbacks of the Book of Jobs.  But maybe I can interest them in another gadget they might like.

Some Links

Josh Wright —  3 July 2010
  • Bainbridge’s latest on insider trading inside the beltway
  • Google and antitrust, everywhere (declared a monopoly in France, the ITA acquisition, and maybe Google not barred from selling targeted ads on iPhone’s and iPad’s afterall)
  • The DOJ ag / antitrust hearings turn their attention to dairy
  • No link for this one, but does anybody have any news on when the new Horizontal Merger Guidelines will be released?
  • The EU looks to broaden the scope of its competition policy reach and water down its “dominance” requirement to force “significant market players to license interoperability information” — the linked story plausibly connects the to a desire to force Apple to allow third-party devices to sync with iTunes.  (More on this later, but it does strike me as a quite significant development for US companies (and obviously, Apple))

News items continue to pile up suggesting that the FTC is likely to challenge Google’s acquisition of mobile application and website advertising provider, AdMob.  See this recent article from the Wall Street Journal.  News reports today contain this quote from an anonymous source:

“The staff (at the U.S. Federal Trade Commission) believes there is a significant competitive problem and they are prepared to make a recommendation to sue,” the person said, speaking on condition of anonymity.

Senator Herb Kohl also opined on the deal this week (having conducted his own thorough economic analysis, of course) and offered his assessment in a letter to the FTC:

Critics of this transaction worry that this deal will allow Google to merge with one of its biggest rival mobile advertising competitors, and leverage its dominance of PC-based search advertising market into the emerging mobile advertising market, particularly with respect to advertising embedded in smart phone applications.  The parties to this transaction argue, on the other hand, that there are ample competitors in the smart phone search and application-based advertising market, and also contend that the market for advertising on mobile devices is too nascent to determine that any transaction will lead to dominance by any one company.

* * *

Without reaching any conclusion as to whether the Google/AdMob transaction would create such dominance or would cause any substantial harm to competition, I believe it is essential that the FTC scrutinize this deal very closely to carefully examine this question.

* * *

The FTC should also pay close attention to the privacy interests implicated by this transaction, as the combined firm will gain access to a treasure trove of data on millions of consumers’ behavior, search and product preferences.    The FTC should assure itself that the deal, if approved, will have sufficient safeguards to protect consumers’ privacy

* * *

Thus the incipiency of the smart phone advertising market is not in itself a reason for the FTC to desist from taking any necessary action to enforce the antitrust laws or protect competition should it determine such action is necessary.

Because the acquisition has already received a second request, and is certainly being carefully assessed by the FTC (and Kohl would never suggest otherwise), I take Kohl’s urging that the FTC “scrutinize this deal very closely” to be the closest he wants to come to publicly telling the FTC to challenge the merger.  Kohl can perhaps be excused for imprecise and antitrust-irrelevant thinking, being a politician and all (even though one in charge of the Senate’s antitrust subcommittee).  But the basic content of Kohl’s letter is perfectly aligned with the claims of the deal’s critics to which he refers.  Unfortunately, there is just no support for the claims being made against the deal, and there is a substantial likelihood that intervention would be in error.

The “Leveraged Dominance” Claim

First of all, neither Kohl’s letter nor the “critics of this transaction” explain what it would mean for Google to “leverage its dominance of [the] PC-based search advertising market into the emerging mobile advertising market, particularly with respect to advertising embedded in smart phone applications,” but it sure sounds scary.  Leveraged dominance. Very bad.  Whatever it means.

If mobile application advertising competes with other forms of advertising offered by Google, then it represents a small fraction of a larger market and this transaction is competitively insignificant.  Moreover, acknowledging that mobile advertising competes with online search advertising does more to expand the size of the relevant market beyond the narrow boundaries it is usually claimed to occupy than it does to increase Google’s share of the combined market (although critics would doubtless argue that the relevant market is still “too concentrated”).  If it is a different market, on the other hand, then critics need to make clear how Google’s “dominance” in the “PC-based search advertising market” actually affects the prospects for competition in this one.  Merely using the words “leverage” and “dominance” to describe the transaction is hardly sufficient.  To the extent that this is just a breathless way of saying Google wants to build its business in a growing market that offers economies of scale and/or scope with its existing business, it’s identifying a feature and not a bug.  If instead it’s meant to refer to some sort of anticompetitive tying or “cross-subsidy” (see below), the claim is speculative and unsupported. Continue Reading…

It looks like Sirius-XM is now contemplating bankruptcy (HT: Danny Sokol). There were quite a few critics of the Bush administration’s decision not to challenge the merger. Various antitrust commentators and critics (as well as rivals like the NAB) lined up on the side of enforcement, arguing that the merger would lead to a monopoly in the satellite radio market and hammering the administration for its failure to challenge. The DOJ defended its decision in a press release with distributors (automakers) also coming to its defense.

One obvious testable implication of the theory that the deal would create a merger to monopoly (in whatever relevant antitrust market you’d like) is that the post-merger firm would earn monopoly profits.  Of course, one of the challenges of retrospectives is that conditions change in the post-merger world.  That’s obviously the case here.  However, that does not mean that one can’t analyze whether the rate of return earned by the post-merger firm is consistent with the anticompetitive theory.  I wonder if the critics of the DOJ decision not to challenge this merger would view a post-merger bankruptcy as inconsistent with their theory?

For those interested in some antitrust analysis of the merger, you might be interested in checking out the conference on Merger Analysis in High-Technology Markets that my colleague Thomas Hazlett and I put on at George Mason University on behalf of the Information Economy Project. While the entire conference was filled with some really nice papers, forthcoming in the Journal of Competition Law & Economics, the third panel features competing analyses of the Sirius-XM merger by Tom Hazlett (link to paper here) and J. Greg Sidak. You can access the papers at the same link or listen to the audio on iTunes here.

Related posts:

That’s a catchy title for a merger conference (HT: Danny Sokol). The program faculty include: David L. Meyer, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice, Ketan P. Jhaveri, Senior Associate, Simpson Thacher & Bartlett LLP, Charles E. Biggio, Partner, Wilson, Sonsini,Goodrich & Rosati, J. Gregory Sidak, Criterion Economics, LLC .

For those interested in some antitrust analysis of the merger, you might be interested in checking out the conference on Merger Analysis in High-Technology Markets that my colleague Tom Hazlett and I put on at George Mason University on behalf of the Information Economy Project. While the entire conference was filled with some really nice papers, forthcoming in the Journal of Competition Law & Economics, the third panel features competing analyses of the Sirius-XM merger by Tom Hazlett and J. Greg Sidak. You can access the papers at the same link or listen to the audio on iTunes here.

We’ve also got quite a bit of commentary on the merger on the blog.  I’ve linked some of the posts below to get them all in one place:

Radiohead results

Geoffrey Manne —  6 November 2007

Radiohead: In RainbowsThe results are in:  Radiohead did . . . ok.  Before I share the specifics, let me remind you of what one seemingly prescient prognosticator said a few weeks ago:

My prediction: They will receive an average price of $2 and a median price of $0.  

So what happened?

Of those who downloaded Radiohead’s digital album, In Rainbows last month, about 62 percent walked away with the music without paying a cent, reported ComScore, an Internet research company.

About 17 percent plunked down between a penny and $4, far below the $12 and $15 retail price of a CD. The next largest group (12 percent) was willing to pay between $8 and $12–the cost of most albums at Apple’s iTunes is $9.99. They were followed by the 6 percent who paid between $4.01 and $8 and 4 percent coughed up between $12 and $20.

* * *

According to ComScore, the average amount spent for all downloads came to $2.26.

So, if my calculations are correct, Radiohead received an average price of $2.26 and a median price of $0. 

Man I’m good.

By the way–read the whole article linked above.  Some interesting comments from Chris Castle on the Radiohead “experiment.”

UPDATE:  To be fair, these kinds of claims to depend a lot on the quality fo the data. See this comment from the band on the reported figures:

“In response to purely speculative figures announced in the press regarding the number of downloads and the price paid for the album, the group’s representatives would like to remind people that, as the album could only be downloaded from the band’s website, it is impossible for outside organisations to have accurate figures on sales,” they explained.

The statement added: “However, they can confirm that the figures quoted by the company comScore Inc are wholly inaccurate and in no way reflect definitive market intelligence or, indeed, the true success of the project.”

Frank Pasquale has taken the time to respond to my earlier post on the use of antitrust to tax consumers on the grounds of fairness or other vague criteria. I take the basic point of Frank’s post to be that I have engaged in unfair burden shifting by demanding a showing of consumer harm prior to condemning the conduct as has been done in the Norwegian/ French investigations, though he goes on to make the some complaints about consumer rationality, a claim that I “refuse to inquire” as to whether the big four in the music industry are engaged in tacit collusion, and an accusation that I am just another “free marketeer” who glibly ignores how other countries handle these problems.
Frank seems to be ignoring the fact that I was responding to his post, not writing a treatise on DRM or a full economic analysis of DRM markets. Specifically, as I note in my post in response to endorsement of the Norwegian antitrust approach:

I’m not sure what about the Norwegian / European approach is worth celebrating here from an antitrust perspective.

These new claims about consumer rationality as well as my lack of curiousity about antitrust abroad and tacit collusion are certainly outside the scope of his post and so I’m not sure how my failure to address them in my response to his post can demonstrate much of anything. Further, a search of the TOTM archives will reveal that I have several posts about empirical evidence regarding consumer rationality as well as international antitrust issues. Overall, I thought Frank’s post was a “pretty disingenuous reading of my post” and said as much in a comment over at CoOp with a promise to respond later here at TOTM. Upon further reflection, I don’t think much more detail is required to illustrate this than what I supplied in my comment and so I will simply reproduce it here in full:

Frank, I think this is a pretty disingenuous reading of my post and I will respond over at TOTM later. But for now, please note the following: (1) my post clearly states that its purpose is to evaluate the Norwegian attack from an antitrust perspective; (2) antitrust in the United States has adopted a consumer welfare-based approach of analysis which requires a demonstration of likely or actual competitive harm; (3) your post framed the issue in antitrust terms and thus asks for the consumer harm analysis, not mine.

What you take as “burden shifting” (“If I can’t show concrete, immediate consumer harm arising out of iTunes incompatibility, I can’t criticize it”) is a statement about the shortcomings of your approach under the antitrust law.

The rest of your post strikes me as inapposite. I am happy to concede, contrary to the allegations in your post, that it is quite possible that Apple’s conduct harms consumers and thus should be condemned after an appropriate antitrust analysis. My prior is that this is unlikely; but that is a separate issue from claiming that I know the answer to be true and would like to eschew real analysis. If consumers are harmed, lets conduct an analysis appropriately and *THEN* condemn the conduct. That seems to be the right sequence, no?

As to the argument that consumer welfare is not the appropriate metric for antitrust analysis, I believe that ship has sailed. The point of the post, which appears in the title, is that substitution for non-consumer welfare elements appears to be nothing more than hand waving and imposing one’s own personal policy preference at the cost of consumers. I stand by that proposition.

P.S. The three tenors case did not find dominance, the case was about an agreement between firms not to compete on price for a 10 week period. This has very little to do w. dominance.

The Market for DRM

Geoffrey Manne —  9 February 2007

Everyone is talking about Steve Jobs’ open letter on DRM,”Thoughts on Music,” including, best among all of them, my colleague, Josh.  Among many others, see excellent entries from Jim DeLong, Randy Picker and Mike Madison.  Frank Pasquale weighs in with a predictable post about how wonderful the world would be if we just regulated his (perfect) vision of the world, but Josh pretty handily skewers his musings.

The topic is an interesting one, but I think there’s an important element missing from most of the analyses I’ve seen.  Practically at random, I’ll take off from Mike Madison’s post (itself taking off from Randy Picker’s).  Mike says:

Second, and more pragmatically for the moment, Apple’s interest lies in strengthening the market position for the iPod itself, regardless of where the content comes from. As Randy notes, with Apple’s DRM the iPod is a platform, and strong measures to prevent reverse engineering are in Apple’s interest to maintain its platform status. Or, in other words, in recent years Apple has taken a number of steps to position itself as a content company (cf. the purchase of Apple Corps trademarks, for example), but it turns out to be a hardware company after all.  At least until the next generation of media player comes along and dislodges the iPod.

Mike seems off the mark with this comment about Apple as a content company.  In what way is Apple a content company?  It’s a content company like Wal-Mart is a content company; like Kroger is a content company.  Which is to say, at least when it comes to the digital music/mp3 player world, not much at all.  What Apple is, in the music content space, is a middleman.  It provides content manufactured by someone else. 

Which brings us to the really important thing that Apple does make, and it does sell.  And that is . . . . 

Well, before we get there, let me just note one more thing:  Apple is, as Mike notes, a hardware company.  It makes hardware.  It sells hardware.  It happens to sell a lot of it because it is also a brand company.  But it capitalizes on its brand investment primarily via hardware sales.

Ok, so, what’s the punchline?  The punchline is that Apple manufactures and sells something else along with its shiny iPods, and it’s what facilitates the whole enterprise.  Apple is also a DRM COMPANY.  Apple manufactures DRM.  It operates a two-sided market where it sells DRM to content providers and DRM-ed content to end users.  It sells hardware to end users, too, to enable the use of the DRM.  And it sells enough of this hardware to convince the content providers that it’s worth paying for the DRM because the DRM enables access to that healthy customer base.

Now as with any two-sided market, the pricing decision here is a complex one.  Do you charge the content providers for the DRM and practically give away the hardware?  Do you make your money on the hardware and practically give away the DRM?  Whatever the decision, of course, the goal is to bring in as many end users as possible–either because the large market makes the DRM more valuable to the content providers or because the more end users, the more hardware sales.  The key in either case is DRM:  On the one hand if the DRM is no good, the content providers aren’t likely to pay much for it, because bad DRM (and here I mean either DRM that is too hard for end users to use and/or DRM that doesn’t effectively protect content from unauthorized copying) leads to a smaller end user market for the platform.  On the other hand, if your DRM is no good (because it can be played on anyone else’s hardware and/or because it is too hard for end users to use), end users are less likely to buy your hardware.  (Mike starts to get to this when he talks about the iPod as a platform).

It is easy to forget in all of these debates that there is a competitive market for DRM.  It’s easy to forget because no one listens to DRM or holds it in their hot little hands.  But there is competition in this market, and there is innovation.  Microsoft’s Zune incorporates its own DRM, and you’ll see Microsoft claiming that its DRM is better than Apple’s.  Much (most?) DRM comes bundled with content, but not all of it does.  A quick search takes us to this site that seems to sell Microsoft’s Windows Media DRM, for example.  In keeping with its overall business model, Apple does not license or sell its DRM separately.

What does all this mean?  A few things.  First, competition in the DRM market will, as all competition does, lead to better DRM–along all the relevant margins.  Apple has an advantage now, and, of course, it sells image, not just content.  But if Apple’s DRM loses its competitive edge, the content providers may buy their DRM elsewhere.  Also, the DRM choice is not binary.  On the one hand, this is an important point for all those people who push the Darknet-inspired idea that all DRM is doomed to immediate failure.  In fact, while it may be that all DRM is imperfect, all DRM also impedes copying to some degree.  The higher the obstacle, the better the DRM.  Perfection is not required, only comparative advantage.  Likewise, while the likes of Frank Pasquale may crow about the moral failure of DRM per se, the reality is that some DRM will be better than others at facilitating the sorts of consumption (unhindered playback; unhindered transferability; free (is that as in beer or freedom?–I never can remember) content; etc.) that Frank believes are inherent rights, and the rest of us believe may or may not be worth paying something for. 

DRM is not really a commodity.  It is manufactured by vigorous and innovative competitors in response to changing demand, technology, regulatory environments, etc.–just like hardware and content are.  As Jobs says in his missive,

Apple, Microsoft and Sony all compete with proprietary systems. Music purchased from Microsoft’s Zune store will only play on Zune players; music purchased from Sony’s Connect store will only play on Sony’s players; and music purchased from Apple’s iTunes store will only play on iPods. This is the current state of affairs in the industry, and customers are being well served with a continuing stream of innovative products and a wide variety of choices.

These choices are enabled by–not in spite of–DRM, and some of the appreciable differences between these systems are attributable directly to differences in their DRM.  It may be in the end that the system that wins this competition is no sytem at all–stand alone media players, playing unencumbered content purchased directly from the labels or sites like emusic.  But for now, I think the debate tends to miss an important market and an important piece of this system.  It would be a little like talking about the personal computer and word processor markets, while pretending like the operating system market didn’t exist.

There is some antitrust buzz in the air after Steve Job’s “Thoughts on Music,” which discussed the possibility of eliminating DRM entirely. The real antitrust story, I suspect, is whether the rather transparent attempt to shift the gaze of regulators fixated on the iPod/iTunes combo to the big four’s “refusal” to go DRM-free will have any success. Antitrust Review has covered these issues at length, and Randy Picker chimes in as well. So does Frank Pasquale , who applauds the Norwegian antitrust attack on Apple and suggests that Apple adopt a “true interoperability” approach which “would likely lead to a boom in the sale of both digital music players and music.”

Everybody seems to have some advice for how Apple’s business model, which is fine, and there are certainly a ton of interesting economic issues about interoperability, standards, and competition to discuss here. But I’m not sure what about the Norwegian / European approach is worth celebrating here from an antitrust perspective. As I’ve written here before, the discussion of antitrust issues surrounding the Apple have been heavy on buzzwords and light on deference to the competitive process that has generated obvious and tangible consumer benefits thus far:

What I find puzzling is that the regulatory-speak has focused so much on these buzzwords and speculative theoretical effects and so little on consumer welfare. Let’s keep in mind that Apple’s success, and the benefits that have accrued to consumers because of it, derives precisely from their business model of integrating iPod and iTunes.

Is there concrete evidence that Apple’s conduct has harmed competition? Not that I am aware of. Most of the anticompetitive claims involve some speculative harm down the line from a future decrease in innovation or some such. Notice that I am not claiming that these effects will certainly not occur, just that an honest assessment of the competitive effects must account for both the pro-competitive bird in the hand and the speculative harms in the future discounted by the probability of their occurrence. By the way, the antitrust laws also are not equivocal about the presumption that the “bird in the hand” wins in close cases. Are there also substantial costs to using the antitrust laws to condemn what basically everyone agrees is conduct that produces at least some consumer benefits? You bet. DOJ AG Tom Barnett discussed exactly this threat in his speech on interoperability, DRM and antitrust at the GMU Antitrust Symposium last year:

“There are real costs to using the antitrust law to protect competitors rather than competition. There is the problem of deterring innovation by the target of the ‘dominance’ attack: if a firm knows it will have to share its IP or to be managed by a committee of government regulators, it may not innovate in the first instance. Or, just as likely, it will reduce its further innovation once the product has arrived on the market — either because its returns are diminishing, or because its personnel are forced to spend their time playing defense against the regulators, rather than playing innovation offense in the marketplace.”

I think that is right. So, again, what exactly are those behind this action in favor of? Whatever it is, I don’t think it is conventional (or appropriate) antitrust analysis focused on consumer welfare. This does not stop Professor Pasquale from getting off a passing shot against U.S. antitrust regulators:

Even if antitrust in the U.S. slowly fades into a subfield of legal history, international pressure can lead to fairer business practices. Consider Norway’s recent pressure on Apple to open up its iTunes/iPod music platform to rival players: “Norway’s consumer regulator declared the lack of interoperability illegal, and gave Apple until Oct. 1 to change it or face legal action and possible fines.

One is invited to accept the inference that the U.S. antitrust regulators are standing idly by knowing that their inaction is harming consumers. Don’t take the bait. If there is some real evidence that Apple’s conduct here is reducing consumer welfare that Pasquale has in mind, I would like to see it. Of course, Professor Pasquale leaves himself some “outs” by using the term “fairer business practices” rather than “consumer welfare,” the latter of which is the currency of the U.S. antitrust laws. But this is an attempt to skirt the issue and substitute one’s policy preferences (dressed up in vague notions of “fairness”) for evidence of consumer harm. How do we rank business practices by “fairness”? Do we mean fairness between producers and consumers? Between groups of consumers? Fairness over time? Are lower prices more fair than higher prices? Or perhaps we just know an unfair practice when we see it in action?

Professor Pasquale’s position, it should be clear, has very little to do with antitrust principles and that is a good thing for consumers. One would hope that antitrusters would resist this temptation to condemn conduct without evidence of anticompetitive effects in order to avoid the possibility of interfering with a competitive process that has produced real and tangible benefits for consumers. The antitrust laws are not designed to serve as a “fairness” tax imposed on consumers and there is no cause to celebrate when they are used to protect competitors rather than competition. Didn’t we learn this with the Robinson-Patman Act, Von’s Grocery, Brown Shoe, Utah Pie

Yesterday I had the pleasure of participating in a panel discussion on standards for single firm conduct in the United States and the EU at the George Mason Antitrust Symposium, which focused on antitrust issues in the global marketplace (and I might add, was put together quite nicely by the GMU Law Review folks). The materials from many of the presentations are available at the GMU website. Thomas Barnett’s speech has managed to get some attention in the press (HT: Antitrust Review), in particular, because of his use of the antitrust attacks on Apple’s iPod and iTunes as an example of how “an attack on intellectual property rights can threaten dynamic innovation.”

A few excerpts:

There was a history of an intractable problem, characterized by rampant piracy and declining legal sales. After some missteps, Apple’s iTunes solved these problems: legal sales boomed; competition against the largest players — the recording industry and Microsoft — increased; the recording industry dropped many restrictive licensing terms; and consumers can now choose from a number of music services and music playing devices; not just the iPod (devices from Dell, iRiver, SanDisk, Sony, and others already exist, and Microsoft recently announced another push for a rival to the iPod, the “Zune”).

Barnett moves from the historical rise of the iPod to the more recent antitrust attacks we have discussed here at TOTM, e.g. here, and here. Barnett discusses a number of theories raised against Apple. For instance, in response to the most frequently raised theory that consumers are “locked in” to buying songs only from iTunes and pay too high a price for those songs, Barnett writes:

“There are two problems with this theory. First, consumers can upload other formats (CD-ROMs and MP3 files) to Apples’s devices, so they do not have to buy from iTunes. And while it is true that Apple’s DRM software ensures that the first recording of a song downloaded from iTunes can only play on an Apple device, consumers can re-record an iTunes song in an MP3 format and play it on other devices; in sum, it is hardly clear that they are locked in. Second, it appears that Apple has been depressing per-song prices, not raising them.”

As to the claim that underpricing songs and overpricing machines, but offering a competitive package price, hurts consumers by locking in consumers to the same device, Barnett notes that this business model does not create antitrust problems in the reverse: cheap upfront item (razor, printer) and expensive aftermarket item (blades, ink) in an aftermarket metering attempt to price discriminate, and implies that it also should not here.

The motivating message in Barnett’s speech is rather clear:

“There are real costs to using the antitrust law to protect competitors rather than competition. There is the problem of deterring innovation by the target of the ‘dominance’ attack: if a firm knows it will have to share its IP or to be managed by a committee of government regulators, it may not innovate in the first instance. Or, just as likely, it will reduce its further innovation once the product has arrived on the market — either because its returns are diminishing, or because its personnel are forced to spend their time playing defense against the regulators, rather than playing innovation offense in the marketplace.”

I have expressed similar sentiments with respect to the potential for abuses in the application of antitrust law to Apple’s business practices:

There are a few important things to get straight here, at least about the relevant competition laws in the United States. The first is that the presence of network effects is not a sufficient condition for antitrust liability. Neither is lock-in. Nor is DRM. The US antitrust laws do not generally require a monopolist to assist its rivals. Nor do they prohibit a firm merely because it is a monopolist. US antitrust laws condemn the abuse of such power, not its existence per se, under the Sherman Act. And for good reason. A policy that penalized a firm for earning a dominant market share by producing a superior mousetrap would be anti-thetical to the purposes of competition law. We can expect firms with large shares to emerge in markets with demand side economies. It is important that we do not restrain competition in these markets by forcing the firm best able to satisfy consumer preferences to roll over.

Barnett also takes a preemptive shot against the predictable response that failure to intervene means less “access”:

“Letting competition in the market drive technological development does not necessarily mean less “access.” The market has already disciplined Apple: remember, the iPod and iTunes originally only worked with Apple machines and FireWire ports, but Apple responded to consumer demand and opened up its technology to work on PC’s and USB 2.0 … . Market discipline can be a powerful force.”

Obviously, I am in agreement with the thrust of Barnett’s message to foreign antitrust regulators and his recognition that Apple’s business strategies have been a boon for consumers. As I wrote previously:

The French antitrust rule takes exactly the wrong stance here, forbidding Apple to engage in consumer welfare enhancing conduct while allowing would be competitors to do so. The reward for a competitor like Apple who has earned its market share by delivering a bundle that consumers demand should not be forcing it to play the rest of the game with one hand behind its back. Instead, regulators should allow obviously vigorous competition “for the field� to continue and smile as consumers benefit.

UPDATE: Tim Lee offers a critique of Barnett’s history of the iPod.