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Breaking Down House Democrats’ Forthcoming Competition Bills

Sam Bowman —  10 June 2021 — Leave a comment

Democratic leadership of the House Judiciary Committee have leaked the approach they plan to take to revise U.S. antitrust law and enforcement, with a particular focus on digital platforms. 

Broadly speaking, the bills would: raise fees for larger mergers and increase appropriations to the FTC and DOJ; require data portability and interoperability; declare that large platforms can’t own businesses that compete with other businesses that use the platform; effectively ban large platforms from making any acquisitions; and generally declare that large platforms cannot preference their own products or services. 

All of these are ideas that have been discussed before. They are very much in line with the EU’s approach to competition, which places more regulation-like burdens on big businesses, and which is introducing a Digital Markets Act that mirrors the Democrats’ proposals. Some Republicans are reportedly supportive of the proposals, which is surprising since they mean giving broad, discretionary powers to antitrust authorities that are controlled by Democrats who take an expansive view of antitrust enforcement as a way to achieve their other social and political goals. The proposals may also be unpopular with consumers if, for example, they would mean that popular features like integrating Maps into relevant Google Search results becomes prohibited.

The multi-bill approach here suggests that the committee is trying to throw as much at the wall as possible to see what sticks. It may reflect a lack of confidence among the proposers in their ability to get their proposals through wholesale, especially given that Amy Klobuchar’s CALERA bill in the Senate creates an alternative that, while still highly interventionist, does not create ex ante regulation of the Internet the same way these proposals do.

In general, the bills are misguided for three main reasons. 

One, they seek to make digital platforms into narrow conduits for other firms to operate on, ignoring the value created by platforms curating their own services by, for example, creating quality controls on entry (as Apple does on its App Store) or by integrating their services with related products (like, say, Google adding events from Gmail to users’ Google Calendars). 

Two, they ignore the procompetitive effects of digital platforms extending into each other’s markets and competing with each other there, in ways that often lead to far more intense competition—and better outcomes for consumers—than if the only firms that could compete with the incumbent platform were small startups.

Three, they ignore the importance of incentives for innovation. Platforms invest in new and better products when they can make money from doing so, and limiting their ability to do that means weakened incentives to innovate. Startups and their founders and investors are driven, in part, by the prospect of being acquired, often by the platforms themselves. Making those acquisitions more difficult, or even impossible, means removing one of the key ways startup founders can exit their firms, and hence one of the key rewards and incentives for starting an innovative new business. 

For more, our “Joint Submission of Antitrust Economists, Legal Scholars, and Practitioners” set out why many of the House Democrats’ assumptions about the state of the economy and antitrust enforcement were mistaken. And my post, “Buck’s “Third Way”: A Different Road to the Same Destination”, argued that House Republicans like Ken Buck were misguided in believing they could support some of the proposals and avoid the massive regulatory oversight that they said they rejected.

Platform Anti-Monopoly Act 

The flagship bill, introduced by Antitrust Subcommittee Chairman David Cicilline (D-R.I.), establishes a definition of “covered platform” used by several of the other bills. The measures would apply to platforms with at least 500,000 U.S.-based users, a market capitalization of more than $600 billion, and that is deemed a “critical trading partner” with the ability to restrict or impede the access that a “dependent business” has to its users or customers.

Cicilline’s bill would bar these covered platforms from being able to promote their own products and services over the products and services of competitors who use the platform. It also defines a number of other practices that would be regarded as discriminatory, including: 

  • Restricting or impeding “dependent businesses” from being able to access the platform or its software on the same terms as the platform’s own lines of business;
  • Conditioning access or status on purchasing other products or services from the platform; 
  • Using user data to support the platform’s own products in ways not extended to competitors; 
  • Restricting the platform’s commercial users from using or accessing data generated on the platform from their own customers;
  • Restricting platform users from uninstalling software pre-installed on the platform;
  • Restricting platform users from providing links to facilitate business off of the platform;
  • Preferencing the platform’s own products or services in search results or rankings;
  • Interfering with how a dependent business prices its products; 
  • Impeding a dependent business’ users from connecting to services or products that compete with those offered by the platform; and
  • Retaliating against users who raise concerns with law enforcement about potential violations of the act.

On a basic level, these would prohibit lots of behavior that is benign and that can improve the quality of digital services for users. Apple pre-installing a Weather app on the iPhone would, for example, run afoul of these rules, and the rules as proposed could prohibit iPhones from coming with pre-installed apps at all. Instead, users would have to manually download each app themselves, if indeed Apple was allowed to include the App Store itself pre-installed on the iPhone, given that this competes with other would-be app stores.

Apart from the obvious reduction in the quality of services and convenience for users that this would involve, this kind of conduct (known as “self-preferencing”) is usually procompetitive. For example, self-preferencing allows platforms to compete with one another by using their strength in one market to enter a different one; Google’s Shopping results in the Search page increase the competition that Amazon faces, because it presents consumers with a convenient alternative when they’re shopping online for products. Similarly, Amazon’s purchase of the video-game streaming service Twitch, and the self-preferencing it does to encourage Amazon customers to use Twitch and support content creators on that platform, strengthens the competition that rivals like YouTube face. 

It also helps innovation, because it gives firms a reason to invest in services that would otherwise be unprofitable for them. Google invests in Android, and gives much of it away for free, because it can bundle Google Search into the OS, and make money from that. If Google could not self-preference Google Search on Android, the open source business model simply wouldn’t work—it wouldn’t be able to make money from Android, and would have to charge for it in other ways that may be less profitable and hence give it less reason to invest in the operating system. 

This behavior can also increase innovation by the competitors of these companies, both by prompting them to improve their products (as, for example, Google Android did with Microsoft’s mobile operating system offerings) and by growing the size of the customer base for products of this kind. For example, video games published by console manufacturers (like Nintendo’s Zelda and Mario games) are often blockbusters that grow the overall size of the user base for the consoles, increasing demand for third-party titles as well.

For more, check out “Against the Vertical Discrimination Presumption” by Geoffrey Manne and Dirk Auer’s piece “On the Origin of Platforms: An Evolutionary Perspective”.

Ending Platform Monopolies Act 

Sponsored by Rep. Pramila Jayapal (D-Wash.), this bill would make it illegal for covered platforms to control lines of business that pose “irreconcilable conflicts of interest,” enforced through civil litigation powers granted to the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ).

Specifically, the bill targets lines of business that create “a substantial incentive” for the platform to advantage its own products or services over those of competitors that use the platform, or to exclude or disadvantage competing businesses from using the platform. The FTC and DOJ could potentially order that platforms divest lines of business that violate the act.

This targets similar conduct as the previous bill, but involves the forced separation of different lines of business. It also appears to go even further, seemingly implying that companies like Google could not even develop services like Google Maps or Chrome because their existence would create such “substantial incentives” to self-preference them over the products of their competitors. 

Apart from the straightforward loss of innovation and product developments this would involve, requiring every tech company to be narrowly focused on a single line of business would substantially entrench Big Tech incumbents, because it would make it impossible for them to extend into adjacent markets to compete with one another. For example, Apple could not develop a search engine to compete with Google under these rules, and Amazon would be forced to sell its video-streaming services that compete with Netflix and Youtube.

For more, check out Geoffrey Manne’s written testimony to the House Antitrust Subcommittee and “Platform Self-Preferencing Can Be Good for Consumers and Even Competitors” by Geoffrey and me. 

Platform Competition and Opportunity Act

Introduced by Rep. Hakeem Jeffries (D-N.Y.), this bill would bar covered platforms from making essentially any acquisitions at all. To be excluded from the ban on acquisitions, the platform would have to present “clear and convincing evidence” that the acquired business does not compete with the platform for any product or service, does not pose a potential competitive threat to the platform, and would not in any way enhance or help maintain the acquiring platform’s market position. 

The two main ways that founders and investors can make a return on a successful startup are to float the company at IPO or to be acquired by another business. The latter of these, acquisitions, is extremely important. Between 2008 and 2019, 90 percent of U.S. start-up exits happened through acquisition. In a recent survey, half of current startup executives said they aimed to be acquired. One study found that countries that made it easier for firms to be taken over saw a 40-50 percent increase in VC activity, and that U.S. states that made acquisitions harder saw a 27 percent decrease in VC investment deals. 

So this proposal would probably reduce investment in U.S. startups, since it makes it more difficult for them to be acquired. It would therefore reduce innovation as a result. It would also reduce inter-platform competition by banning deals that allow firms to move into new markets, like the acquisition of Beats that helped Apple to build a Spotify competitor, or the deals that helped Google, Microsoft, and Amazon build cloud-computing services that all compete with each other. It could also reduce competition faced by old industries, by preventing tech companies from buying firms that enable it to move into new markets—like Amazon’s acquisitions of health-care companies that it has used to build a health-care offering. Even Walmart’s acquisition of Jet.com, which it has used to build an Amazon competitor, could have been banned under this law if Walmart had had a higher market cap at the time.

For more, check out Dirk Auer’s piece “Facebook and the Pros and Cons of Ex Post Merger Reviews” and my piece “Cracking down on mergers would leave us all worse off”. 

ACCESS Act

The Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act, sponsored by Rep. Mary Gay Scanlon (D-Pa.), would establish data portability and interoperability requirements for platforms. 

Under terms of the legislation, covered platforms would be required to allow third parties to transfer data to their users or, with the user’s consent, to a competing business. It also would require platforms to facilitate compatible and interoperable communications with competing businesses. The law directs the FTC to establish technical committees to promulgate the standards for portability and interoperability. 

Data portability and interoperability involve trade-offs in terms of security and usability, and overseeing them can be extremely costly and difficult. In security terms, interoperability requirements prevent companies from using closed systems to protect users from hostile third parties. Mandatory openness means increasing—sometimes, substantially so—the risk of data breaches and leaks. In practice, that could mean users’ private messages or photos being leaked more frequently, or activity on a social media page that a user considers to be “their” private data, but that “belongs” to another user under the terms of use, can be exported and publicized as such. 

It can also make digital services more buggy and unreliable, by requiring that they are built in a more “open” way that may be more prone to unanticipated software mismatches. A good example is that of Windows vs iOS; Windows is far more interoperable with third-party software than iOS is, but tends to be less stable as a result, and users often prefer the closed, stable system. 

Interoperability requirements also entail ongoing regulatory oversight, to make sure data is being provided to third parties reliably. It’s difficult to build an app around another company’s data without assurance that the data will be available when users want it. For a requirement as broad as this bill’s, that could mean setting up quite a large new de facto regulator. 

In the UK, Open Banking (an interoperability requirement imposed on British retail banks) has suffered from significant service outages, and targets a level of uptime that many developers complain is too low for them to build products around. Nor has Open Banking yet led to any obvious competition benefits.

For more, check out Gus Hurwitz’s piece “Portable Social Media Aren’t Like Portable Phone Numbers” and my piece “Why Data Interoperability Is Harder Than It Looks: The Open Banking Experience”.

Merger Filing Fee Modernization Act

A bill that mirrors language in the Endless Frontier Act recently passed by the U.S. Senate, would significantly raise filing fees for the largest mergers. Rather than the current cap of $280,000 for mergers valued at more than $500 million, the bill—sponsored by Rep. Joe Neguse (D-Colo.)–the new schedule would assess fees of $2.25 million for mergers valued at more than $5 billion; $800,000 for those valued at between $2 billion and $5 billion; and $400,000 for those between $1 billion and $2 billion.

Smaller mergers would actually see their filing fees cut: from $280,000 to $250,000 for those between $500 million and $1 billion; from $125,000 to $100,000 for those between $161.5 million and $500 million; and from $45,000 to $30,000 for those less than $161.5 million. 

In addition, the bill would appropriate $418 million to the FTC and $252 million to the DOJ’s Antitrust Division for Fiscal Year 2022. Most people in the antitrust world are generally supportive of more funding for the FTC and DOJ, although whether this is actually good or not depends both on how it’s spent at those places. 

It’s hard to object if it goes towards deepening the agencies’ capacities and knowledge, by hiring and retaining higher quality staff with salaries that are more competitive with those offered by the private sector, and on greater efforts to study the effects of the antitrust laws and past cases on the economy. If it goes toward broadening the activities of the agencies, by doing more and enabling them to pursue a more aggressive enforcement agenda, and supporting whatever of the above proposals make it into law, then it could be very harmful. 

For more, check out my post “Buck’s “Third Way”: A Different Road to the Same Destination” and Thom Lambert’s post “Bad Blood at the FTC”.

In administrative law, advertising, anticompetitive market distortions, anticompetitive petitioning, antitrust, antitrust division, antitrust penalties, barriers to entry, bundled discounts, common ownerhsip, consumer protection, contracts, cost-benefit analysis, data security, doj, entrepreneurship, essential facilities, european commission, exclusionary conduct, exclusive dealing, federal trade commission, international, international competition, internet, Justice Department, law and economics, markets, merger guidelines, mergers & acquisitions, monopolization, privacy, regulation, technology, truth on the market, tying and bundling, vertical restraints , , , , , , , , , , , , ,
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European Commission Objection to App Store Rules Lack Empirical Support

Paula Pernas Castrillo —  27 May 2021 — 1 Comment

The European Commission recently issued a formal Statement of Objections (SO) in which it charges Apple with antitrust breach. In a nutshell, the commission argues that Apple prevents app developers—in this case, Spotify—from using alternative in-app purchase systems (IAPs) other than Apple’s own, or steering them towards other, cheaper payment methods on another site. This, the commission says, results in higher prices for consumers in the audio streaming and ebook/audiobook markets.

More broadly, the commission claims that Apple’s App Store rules may distort competition in markets where Apple competes with rival developers (such as how Apple Music competes with Spotify). This explains why the anticompetitive concerns raised by Spotify regarding the Apple App Store rules have now expanded to Apple’s e-books, audiobooks and mobile payments platforms.

However, underlying market realities cast doubt on the commission’s assessment. Indeed, competition from Google Play and other distribution mediums makes it difficult to state unequivocally that the relevant market should be limited to Apple products. Likewise, the conduct under investigation arguably solves several problems relating to platform dynamics, and consumers’ privacy and security.

Should the relevant market be narrowed to iOS?

An important first question is whether there is a distinct, antitrust-relevant market for “music streaming apps distributed through the Apple App Store,” as the EC posits.

This market definition is surprising, given that it is considerably narrower than the one suggested by even the most enforcement-minded scholars. For instance, Damien Geradin and Dimitrias Katsifis—lawyers for app developers opposed to Apple—define the market as “that of app distribution on iOS devices, a two-sided transaction market on which Apple has a de facto monopoly.” Similarly, a report by the Dutch competition authority declared that the relevant market was limited to the iOS App Store, due to the lack of interoperability with other systems.

The commission’s decisional practice has been anything but constant in this space. In the Apple/Shazam and Apple/Beats cases, it did not place competing mobile operating systems and app stores in separate relevant markets. Conversely, in the Google Android decision, the commission found that the Android OS and Apple’s iOS, including Google Play and Apple’s App Store, did not compete in the same relevant market. The Spotify SO seems to advocate for this definition, narrowing it even further to music streaming services.

However, this narrow definition raises several questions. Market definition is ultimately about identifying the competitive constraints that the firm under investigation faces. As Gregory Werden puts it: “the relevant market in an antitrust case […] identifies the competitive process alleged to be harmed.”

In that regard, there is clearly some competition between Apple’s App Store, Google Play and other app stores (whether this is sufficient to place them in the same relevant market is an empirical question).

This view is supported by the vast number of online posts comparing Android and Apple and advising consumers on their purchasing options. Moreover, the growth of high-end Android devices that compete more directly with the iPhone has reinforced competition between the two firms. Likewise, Apple has moved down the value chain; the iPhone SE, priced at $399, competes with other medium-range Android devices.

App developers have also suggested they view Apple and Android as alternatives. They take into account technical differences to decide between the two, meaning that these two platforms compete with each other for developers.

All of this suggests that the App Store may be part of a wider market for the distribution of apps and services, where Google Play and other app stores are included—though this is ultimately an empirical question (i.e., it depends on the degree of competition between both platforms)

If the market were defined this way, Apple would not even be close to holding a dominant position—a prerequisite for European competition intervention. Indeed, Apple only sold 27.43% of smartphones in March 2021. Similarly, only 30.41% of smartphones in use run iOS, as of March 2021. This is well below the lowest market share in a European abuse of dominance—39.7% in the British Airways decision.

The sense that Apple and Android compete for users and developers is reinforced by recent price movements. Apple dropped its App Store commission fees from 30% to 15% in November 2020 and Google followed suit in March 2021. This conduct is consistent with at least some degree of competition between the platforms. It is worth noting that other firms, notably Microsoft, have so far declined to follow suit (except for gaming apps).

Barring further evidence, neither Apple’s market share nor its behavior appear consistent with the commission’s narrow market definition.

Are Apple’s IAP system rules and anti-steering provisions abusive?

The commission’s case rests on the idea that Apple leverages its IAP system to raise the costs of rival app developers:

 “Apple’s rules distort competition in the market for music streaming services by raising the costs of competing music streaming app developers. This in turn leads to higher prices for consumers for their in-app music subscriptions on iOS devices. In addition, Apple becomes the intermediary for all IAP transactions and takes over the billing relationship, as well as related communications for competitors.”

However, expropriating rents from these developers is not nearly as attractive as it might seem. The report of the Dutch competition notes that “attracting and maintaining third-party developers that increase the value of the ecosystem” is essential for Apple. Indeed, users join a specific platform because it provides them with a wide number of applications they can use on their devices. And the opposite applies to developers. Hence, the loss of users on either or both sides reduces the value provided by the Apple App Store. Following this logic, it would make no sense for Apple to systematically expropriate developers. This might partly explain why Apple’s fees are only 30%-15%, since in principle they could be much higher.

It is also worth noting that Apple’s curated App Store and IAP have several redeeming virtues. Apple offers “a highly curated App Store where every app is reviewed by experts and an editorial team helps users discover new apps every day.”  While this has arguably turned the App Store into a relatively closed platform, it provides users with the assurance that the apps they find there will meet a standard of security and trustworthiness.

As noted by the Dutch competition authority, “one of the reasons why the App Store is highly valued is because of the strict review process. Complaints about malware spread via an app downloaded in the App Store are rare.” Apple provides users with a special degree of privacy and security. Indeed, Apple stopped more than $1.5 billion in potentially fraudulent transactions in 2020, proving that the security protocols are not only necessary, but also effective. In this sense, the App Store Review Guidelines are considered the first line of defense against fraud and privacy breaches.

It is also worth noting that Apple only charges a nominal fee for iOS developer kits and no fees for in-app advertising. The IAP is thus essential for Apple to monetize the platform and to cover the costs associated with running the platform (note that Apple does make money on device sales, but that revenue is likely constrained by competition between itself and Android). When someone downloads Spotify from the App Store, Apple does not get paid, but Spotify does get a new client. Thus, while independent developers bear the costs of the app fees, Apple bears the costs and risks of running the platform itself.

For instance, Apple’s App Store Team is divided into smaller teams: the Editorial Design team, the Business Operations team, and the Engineering R&D team. These teams each have employees, budgets, and resources for which Apple needs to pay. If the revenues stopped, one can assume that Apple would have less incentive to sustain all these teams that preserve the App Store’s quality, security, and privacy parameters.

Indeed, the IAP system itself provides value to the Apple App Store. Instead of charging all of the apps it provides, it takes a share of the income from some of them. As a result, large developers that own in-app sales contribute to the maintenance of the platform, while smaller ones are still offered to consumers without having to contribute economically. This boosts Apple’s App Store diversity and supply of digital goods and services.

If Apple was forced to adopt another system, it could start charging higher prices for access to its interface and tools, leading to potential discrimination against the smaller developers. Or, Apple could increase the prices of handset devices, thus incurring higher costs for consumers who do not purchase digital goods. Therefore, there are no apparent alternatives to the current IAP that satisfy the App Store’s goals in the same way.

As the Apple Review Guidelines emphasize, “for everything else there is always the open Internet.” Netflix and Spotify have ditched the subscription options from their app, and they are still among the top downloaded apps in iOS. The IAP system is therefore not compulsory to be successful in Apple’s ecosystem, and developers are free to drop Apple Review Guidelines.

Conclusion

The commission’s case against Apple is based on shaky foundations. Not only is the market definition extremely narrow—ignoring competition from Android, among others—but the behavior challenged by the commission has a clear efficiency-enhancing rationale. Of course, both of these critiques ultimately boil down to empirical questions that the commission will have overcome before it reaches a final decision. In the meantime, the jury is out.

In antitrust, e-books, economics, european commission, exclusionary conduct, market definition, monopolization, technology, truth on the market , , , , , , , , , , , , ,
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The Digital Markets Act Shouldn’t Mandate Radical Interoperability

Mikolaj Barczentewicz —  19 May 2021

Despite calls from some NGOs to mandate radical interoperability, the EU’s draft Digital Markets Act (DMA) adopted a more measured approach, requiring full interoperability only in “ancillary” services like identification or payment systems. There remains the possibility, however, that the DMA proposal will be amended to include stronger interoperability mandates, or that such amendments will be introduced in the Digital Services Act. Without the right checks and balances, this could pose grave threats to Europeans’ privacy and security.

At the most basic level, interoperability means a capacity to exchange information between computer systems. Email is an example of an interoperable standard that most of us use today. Expanded interoperability could offer promising solutions to some of today’s difficult problems. For example, it might allow third-party developers to offer different “flavors” of social media news feed, with varying approaches to content ranking and moderation (see Daphne Keller, Mike Masnick, and Stephen Wolfram for more on that idea). After all, in a pluralistic society, someone will always be unhappy with what some others consider appropriate content. Why not let smaller groups decide what they want to see? 

But to achieve that goal using currently available technology, third-party developers would have to be able to access all of a platform’s content that is potentially available to a user. This would include not just content produced by users who explicitly agrees for their data to be shared with third parties, but also content—e.g., posts, comments, likes—created by others who may have strong objections to such sharing. It doesn’t require much imagination to see how, without adequate safeguards, mandating this kind of information exchange would inevitably result in something akin to the 2018 Cambridge Analytica data scandal.

It is telling that supporters of this kind of interoperability use services like email as their model examples. Email (more precisely, the SMTP protocol) originally was designed in a notoriously insecure way. It is a perfect example of the opposite of privacy by design. A good analogy for the levels of privacy and security provided by email, as originally conceived, is that of a postcard message sent without an envelope that passes through many hands before reaching the addressee. Even today, email continues to be a source of security concerns due to its prioritization of interoperability.

It also is telling that supporters of interoperability tend to point to what are small-scale platforms (e.g., Mastodon) or protocols with unacceptably poor usability for most of today’s Internet users (e.g., Usenet). When proposing solutions to potential privacy problems—e.g., that users will adequately monitor how various platforms use their data—they often assume unrealistic levels of user interest or technical acumen.

Interoperability in the DMA

The current draft of the DMA contains several provisions that broadly construe interoperability as applying only to “gatekeepers”—i.e., the largest online platforms:

  1. Mandated interoperability of “ancillary services” (Art 6(1)(f)); 
  2. Real-time data portability (Art 6(1)(h)); and
  3. Business-user access to their own and end-user data (Art 6(1)(i)). 

The first provision, (Art 6(1)(f)), is meant to force gatekeepers to allow e.g., third-party payment or identification services—for example, to allow people to create social media accounts without providing an email address, which is possible using services like “Sign in with Apple.” This kind of interoperability doesn’t pose as big of a privacy risk as mandated interoperability of “core” services (e.g., messaging on a platform like WhatsApp or Signal), partially due to a more limited scope of data that needs to be exchanged.

However, even here, there may be some risks. For example, users may choose poorly secured identification services and thus become victims of attacks. Therefore, it is important that gatekeepers not be prevented from protecting their users adequately. Of course,there are likely trade-offs between those protections and the interoperability that some want. Proponents of stronger interoperability want this provision amended to cover all “core” services, not just “ancillary” ones, which would constitute precisely the kind of radical interoperability that cannot be safely mandated today.

The other two provisions do not mandate full two-way interoperability, where a third party could both read data from a service like Facebook and modify content on that service. Instead, they provide for one-way “continuous and real-time” access to data—read-only.

The second provision (Art 6(1)(h)) mandates that gatekeepers give users effective “continuous and real-time” access to data “generated through” their activity. It’s not entirely clear whether this provision would be satisfied by, e.g., Facebook’s Graph API, but it likely would not be satisfied simply by being able to download one’s Facebook data, as that is not “continuous and real-time.”

Importantly, the proposed provision explicitly references the General Data Protection Regulation (GDPR), which suggests that—at least as regards personal data—the scope of this portability mandate is not meant to be broader than that from Article 20 GDPR. Given the GDPR reference and the qualification that it applies to data “generated through” the user’s activity, this mandate would not include data generated by other users—which is welcome, but likely will not satisfy the proponents of stronger interoperability.

The third provision from Art 6(1)(i) mandates only “continuous and real-time” data access and only as regards data “provided for or generated in the context of the use of the relevant core platform services” by business users and by “the end users engaging with the products or services provided by those business users.” This provision is also explicitly qualified with respect to personal data, which are to be shared after GDPR-like user consent and “only where directly connected with the use effectuated by the end user in respect of” the business user’s service. The provision should thus not be a tool for a new Cambridge Analytica to siphon data on users who interact with some Facebook page or app and their unwitting contacts. However, for the same reasons, it will also not be sufficient for the kinds of uses that proponents of stronger interoperability envisage.

Why can’t stronger interoperability be safely mandated today?

Let’s imagine that Art 6(1)(f) is amended to cover all “core” services, so gatekeepers like Facebook end up with a legal duty to allow third parties to read data from and write data to Facebook via APIs. This would go beyond what is currently possible using Facebook’s Graph API, and would lack the current safety valve of Facebook cutting off access because of the legal duty to deal created by the interoperability mandate. As Cory Doctorow and Bennett Cyphers note, there are at least three categories of privacy and security risks in this situation:

1. Data sharing and mining via new APIs;

2. New opportunities for phishing and sock puppetry in a federated ecosystem; and

3. More friction for platforms trying to maintain a secure system.

Unlike some other proponents of strong interoperability, Doctorow and Cyphers are open about the scale of the risk: “[w]ithout new legal safeguards to protect the privacy of user data, this kind of interoperable ecosystem could make Cambridge Analytica-style attacks more common.”

There are bound to be attempts to misuse interoperability through clearly criminal activity. But there also are likely to be more legally ambiguous attempts that are harder to proscribe ex ante. Proposals for strong interoperability mandates need to address this kind of problem.

So, what could be done to make strong interoperability reasonably safe? Doctorow and Cyphers argue that there is a “need for better privacy law,” but don’t say whether they think the GDPR’s rules fit the bill. This may be a matter of reasonable disagreement.

What isn’t up for serious debate is that the current framework and practice of privacy enforcement offers little confidence that misuses of strong interoperability would be detected and prosecuted, much less that they would be prevented (see here and here on GDPR enforcement). This is especially true for smaller and “judgment-proof” rule-breakers, including those from outside the European Union. Addressing the problems of privacy law enforcement is a herculean task, in and of itself.

The day may come when radical interoperability will, thanks to advances in technology and/or privacy enforcement, become acceptably safe. But it would be utterly irresponsible to mandate radical interoperability in the DMA and/or DSA, and simply hope the obvious privacy and security problems will somehow be solved before the law takes force. Instituting such a mandate would likely discredit the very idea of interoperability.

In antitrust, consumer protection, data security, essential facilities, european commission, international, internet, privacy, regulation, technology, truth on the market , , , , , , ,
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An L&E Defense of the First Amendment’s Protection of Private Ordering

Ben Sperry —  23 April 2021

In his recent concurrence in Biden v. Knight, Justice Clarence Thomas sketched a roadmap for how to regulate social-media platforms. The animating factor for Thomas, much like for other conservatives, appears to be a sense that Big Tech has exhibited anti-conservative bias in its moderation decisions, most prominently by excluding former President Donald Trump from Twitter and Facebook. The opinion has predictably been greeted warmly by conservative champions of social-media regulation, who believe it shows how states and the federal government can proceed on this front.

While much of the commentary to date has been on whether Thomas got the legal analysis right, or on the uncomfortable fit of common-carriage law to social media, the deeper question of the First Amendment’s protection of private ordering has received relatively short shrift.

Conservatives’ main argument has been that Big Tech needs to be reined in because it is restricting the speech of private individuals. While conservatives traditionally have defended the state-action doctrine and the right to editorial discretion, they now readily find exceptions to both in order to justify regulating social-media companies. But those two First Amendment doctrines have long enshrined an important general principle: private actors can set the rules for speech on their own property. I intend to analyze this principle from a law & economics perspective and show how it benefits society.

Who Balances the Benefits and Costs of Speech?

Like virtually any other human activity, there are benefits and costs to speech and it is ultimately subjective individual preference that determines the value that speech has. The First Amendment protects speech from governmental regulation, with only limited exceptions, but that does not mean all speech is acceptable or must be tolerated. Under the state-action doctrine, the First Amendment only prevents the government from restricting speech.

Some purported defenders of the principle of free speech no longer appear to see a distinction between restraints on speech imposed by the government and those imposed by private actors. But this is surely mistaken, as no one truly believes all speech protected by the First Amendment should be without consequence. In truth, most regulation of speech has always come by informal means—social mores enforced by dirty looks or responsive speech from others.

Moreover, property rights have long played a crucial role in determining speech rules within any given space. If a man were to come into my house and start calling my wife racial epithets, I would not only ask that person to leave but would exercise my right as a property owner to eject the trespasser—if necessary, calling the police to assist me. I similarly could not expect to go to a restaurant and yell at the top of my lungs about political issues and expect them—even as “common carriers” or places of public accommodation—to allow me to continue.

As Thomas Sowell wrote in Knowledge and Decisions:

The fact that different costs and benefits must be balanced does not in itself imply who must balance them―or even that there must be a single balance for all, or a unitary viewpoint (one “we”) from which the issue is categorically resolved.

Knowledge and Decisions, p. 240

When it comes to speech, the balance that must be struck is between one individual’s desire for an audience and that prospective audience’s willingness to play the role. Asking government to use regulation to make categorical decisions for all of society is substituting centralized evaluation of the costs and benefits of access to communications for the individual decisions of many actors. Rather than incremental decisions regarding how and under what terms individuals may relate to one another—which can evolve over time in response to changes in what individuals find acceptable—government by its nature can only hand down categorical guidelines: “you must allow x, y, and z speech.”

This is particularly relevant in the sphere of social media. Social-media companies are multi-sided platforms. They are profit-seeking, to be sure, but the way they generate profits is by acting as intermediaries between users and advertisers. If they fail to serve their users well, those users could abandon the platform. Without users, advertisers would have no interest in buying ads. And without advertisers, there is no profit to be made. Social-media companies thus need to maximize the value of their platform by setting rules that keep users engaged.

In the cases of Facebook, Twitter, and YouTube, the platforms have set content-moderation standards that restrict many kinds of speech that are generally viewed negatively by users, even if the First Amendment would foreclose the government from regulating those same types of content. This is a good thing. Social-media companies balance the speech interests of different kinds of users to maximize the value of the platform and, in turn, to maximize benefits to all.

Herein lies the fundamental difference between private action and state action: one is voluntary, and the other based on coercion. If Facebook or Twitter suspends a user for violating community rules, it represents termination of a previously voluntary association. If the government kicks someone out of a public forum for expressing legal speech, that is coercion. The state-action doctrine recognizes this fundamental difference and creates a bright-line rule that courts may police when it comes to speech claims. As Sowell put it:

The courts’ role as watchdogs patrolling the boundaries of governmental power is essential in order that others may be secure and free on the other side of those boundaries. But what makes watchdogs valuable is precisely their ability to distinguish those people who are to be kept at bay and those who are to be left alone. A watchdog who could not make that distinction would not be a watchdog at all, but simply a general menace.

Knowledge and Decisions, p. 244

Markets Produce the Best Moderation Policies

The First Amendment also protects the right of editorial discretion, which means publishers, platforms, and other speakers are free from carrying or transmitting government-compelled speech. Even a newspaper with near-monopoly power cannot be compelled by a right-of-reply statute to carry responses by political candidates to editorials it has published. In other words, not only is private regulation of speech not state action, but in many cases, private regulation is protected by the First Amendment.

There is no reason to think that social-media companies today are in a different position than was the newspaper in Miami Herald v. Tornillo. These companies must determine what, how, and where content is presented within their platform. While this right of editorial discretion protects the moderation decisions of social-media companies, its benefits accrue to society at-large.

Social-media companies’ abilities to differentiate themselves based on functionality and moderation policies are important aspects of competition among them. How each platform is used may differ depending on those factors. In fact, many consumers use multiple social-media platforms throughout the day for different purposes. Market competition, not government power, has enabled internet users (including conservatives!) to have more avenues than ever to get their message out.

Many conservatives remain unpersuaded by the power of markets in this case. They see multiple platforms all engaging in very similar content-moderation policies when it comes to certain touchpoint issues, and thus allege widespread anti-conservative bias and collusion. Neither of those claims have much factual support, but more importantly, the similarity of content-moderation standards may simply be common responses to similar demand structures—not some nefarious and conspiratorial plot.

In other words, if social-media users demand less of the kinds of content commonly considered to be hate speech, or less misinformation on certain important issues, platforms will do their best to weed those things out. Platforms won’t always get these determinations right, but it is by no means clear that forcing them to carry all “legal” speech—which would include not just misinformation and hate speech, but pornographic material, as well—would better serve social-media users. There are always alternative means to debate contestable issues of the day, even if it may be more costly to access them.

Indeed, that content-moderation policies make it more difficult to communicate some messages is precisely the point of having them. There is a subset of protected speech to which many users do not wish to be subject. Moreover, there is no inherent right to have an audience on a social-media platform.

Conclusion

Much of the First Amendment’s economic value lies in how it defines roles in the market for speech. As a general matter, it is not the government’s place to determine what speech should be allowed in private spaces. Instead, the private ordering of speech emerges through the application of social mores and property rights. This benefits society, as it allows individuals to create voluntary relationships built on marginal decisions about what speech is acceptable when and where, rather than centralized decisions made by a governing few and that are difficult to change over time.

In constitutional law, constitutional political economy, First amendment, google, internet, journalism, Knowledge Problem, law and economics, political economy, Supreme Court, truth on the market , , , , , , , , , , , , ,
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Committee Prepares to Grill Tech CEOS, but It Is the First Amendment That Could Get Torched

Ben Sperry —  24 March 2021

In what has become regularly scheduled programming on Capitol Hill, Facebook CEO Mark Zuckerberg, Twitter CEO Jack Dorsey, and Google CEO Sundar Pichai will be subject to yet another round of congressional grilling—this time, about the platforms’ content-moderation policies—during a March 25 joint hearing of two subcommittees of the House Energy and Commerce Committee.

The stated purpose of this latest bit of political theatre is to explore, as made explicit in the hearing’s title, “social media’s role in promoting extremism and misinformation.” Specific topics are expected to include proposed changes to Section 230 of the Communications Decency Act, heightened scrutiny by the Federal Trade Commission, and misinformation about COVID-19—the subject of new legislation introduced by Rep. Jennifer Wexton (D-Va.) and Sen. Mazie Hirono (D-Hawaii).

But while many in the Democratic majority argue that social media companies have not done enough to moderate misinformation or hate speech, it is a problem with no realistic legal fix. Any attempt to mandate removal of speech on grounds that it is misinformation or hate speech, either directly or indirectly, would run afoul of the First Amendment.

Much of the recent focus has been on misinformation spread on social media about the 2020 election and the COVID-19 pandemic. The memorandum for the March 25 hearing sums it up:

Facebook, Google, and Twitter have long come under fire for their role in the dissemination and amplification of misinformation and extremist content. For instance, since the beginning of the coronavirus disease of 2019 (COVID-19) pandemic, all three platforms have spread substantial amounts of misinformation about COVID-19. At the outset of the COVID-19 pandemic, disinformation regarding the severity of the virus and the effectiveness of alleged cures for COVID-19 was widespread. More recently, COVID-19 disinformation has misrepresented the safety and efficacy of COVID-19 vaccines.

Facebook, Google, and Twitter have also been distributors for years of election disinformation that appeared to be intended either to improperly influence or undermine the outcomes of free and fair elections. During the November 2016 election, social media platforms were used by foreign governments to disseminate information to manipulate public opinion. This trend continued during and after the November 2020 election, often fomented by domestic actors, with rampant disinformation about voter fraud, defective voting machines, and premature declarations of victory.

It is true that, despite social media companies’ efforts to label and remove false content and bar some of the biggest purveyors, there remains a considerable volume of false information on social media. But U.S. Supreme Court precedent consistently has limited government regulation of false speech to distinct categories like defamation, perjury, and fraud.

The Case of Stolen Valor

The court’s 2011 decision in United States v. Alvarez struck down as unconstitutional the Stolen Valor Act of 2005, which made it a federal crime to falsely claim to have earned a military medal. A four-justice plurality opinion written by Justice Anthony Kennedy, along with a two-justice concurrence, both agreed that a statement being false did not, by itself, exclude it from First Amendment protection. 

Kennedy’s opinion noted that while the government may impose penalties for false speech connected with the legal process (perjury or impersonating a government official); with receiving a benefit (fraud); or with harming someone’s reputation (defamation); the First Amendment does not sanction penalties for false speech, in and of itself. The plurality exhibited particular skepticism toward the notion that government actors could be entrusted as a “Ministry of Truth,” empowered to determine what categories of false speech should be made illegal:

Permitting the government to decree this speech to be a criminal offense, whether shouted from the rooftops or made in a barely audible whisper, would endorse government authority to compile a list of subjects about which false statements are punishable. That governmental power has no clear limiting principle. Our constitutional tradition stands against the idea that we need Oceania’s Ministry of Truth… Were this law to be sustained, there could be an endless list of subjects the National Government or the States could single out… Were the Court to hold that the interest in truthful discourse alone is sufficient to sustain a ban on speech, absent any evidence that the speech was used to gain a material advantage, it would give government a broad censorial power unprecedented in this Court’s cases or in our constitutional tradition. The mere potential for the exercise of that power casts a chill, a chill the First Amendment cannot permit if free speech, thought, and discourse are to remain a foundation of our freedom. [EMPHASIS ADDED]

As noted in the opinion, declaring false speech illegal constitutes a content-based restriction subject to “exacting scrutiny.” Applying that standard, the court found “the link between the Government’s interest in protecting the integrity of the military honors system and the Act’s restriction on the false claims of liars like respondent has not been shown.” 

While finding that the government “has not shown, and cannot show, why counterspeech would not suffice to achieve its interest,” the plurality suggested a more narrowly tailored solution could be simply to publish Medal of Honor recipients in an online database. In other words, the government could overcome the problem of false speech by promoting true speech. 

In 2012, President Barack Obama signed an updated version of the Stolen Valor Act that limited its penalties to situations where a misrepresentation is shown to result in receipt of some kind of benefit. That places the false speech in the category of fraud, consistent with the Alvarez opinion.

A Social Media Ministry of Truth

Applying the Alvarez standard to social media, the government could (and already does) promote its interest in public health or election integrity by publishing true speech through official channels. But there is little reason to believe the government at any level could regulate access to misinformation. Anything approaching an outright ban on accessing speech deemed false by the government not only would not be the most narrowly tailored way to deal with such speech, but it is bound to have chilling effects even on true speech.

The analysis doesn’t change if the government instead places Big Tech itself in the position of Ministry of Truth. Some propose making changes to Section 230, which currently immunizes social media companies from liability for user speech (with limited exceptions), regardless what moderation policies the platform adopts. A hypothetical change might condition Section 230’s liability shield on platforms agreeing to moderate certain categories of misinformation. But that would still place the government in the position of coercing platforms to take down speech. 

Even the “fix” of making social media companies liable for user speech they amplify through promotions on the platform, as proposed by Sen. Mark Warner’s (D-Va.) SAFE TECH Act, runs into First Amendment concerns. The aim of the bill is to regard sponsored content as constituting speech made by the platform, thus opening the platform to liability for the underlying misinformation. But any such liability also would be limited to categories of speech that fall outside First Amendment protection, like fraud or defamation. This would not appear to include most of the types of misinformation on COVID-19 or election security that animate the current legislative push.

There is no way for the government to regulate misinformation, in and of itself, consistent with the First Amendment. Big Tech companies are free to develop their own policies against misinformation, but the government may not force them to do so. 

Extremely Limited Room to Regulate Extremism

The Big Tech CEOs are also almost certain to be grilled about the use of social media to spread “hate speech” or “extremist content.” The memorandum for the March 25 hearing sums it up like this:

Facebook executives were repeatedly warned that extremist content was thriving on their platform, and that Facebook’s own algorithms and recommendation tools were responsible for the appeal of extremist groups and divisive content. Similarly, since 2015, videos from extremists have proliferated on YouTube; and YouTube’s algorithm often guides users from more innocuous or alternative content to more fringe channels and videos. Twitter has been criticized for being slow to stop white nationalists from organizing, fundraising, recruiting and spreading propaganda on Twitter.

Social media has often played host to racist, sexist, and other types of vile speech. While social media companies have community standards and other policies that restrict “hate speech” in some circumstances, there is demand from some public officials that they do more. But under a First Amendment analysis, regulating hate speech on social media would fare no better than the regulation of misinformation.

The First Amendment doesn’t allow for the regulation of “hate speech” as its own distinct category. Hate speech is, in fact, as protected as any other type of speech. There are some limited exceptions, as the First Amendment does not protect incitement, true threats of violence, or “fighting words.” Some of these flatly do not apply in the online context. “Fighting words,” for instance, applies only in face-to-face situations to “those personally abusive epithets which, when addressed to the ordinary citizen, are, as a matter of common knowledge, inherently likely to provoke violent reaction.”

One relevant precedent is the court’s 1992 decision in R.A.V. v. St. Paul, which considered a local ordinance in St. Paul, Minnesota, prohibiting public expressions that served to cause “outrage, alarm, or anger with respect to racial, gender or religious intolerance.” A juvenile was charged with violating the ordinance when he created a makeshift cross and lit it on fire in front of a black family’s home. The court unanimously struck down the ordinance as a violation of the First Amendment, finding it an impermissible content-based restraint that was not limited to incitement or true threats.

By contrast, in 2003’s Virginia v. Black, the Supreme Court upheld a Virginia law outlawing cross burnings done with the intent to intimidate. The court’s opinion distinguished R.A.V. on grounds that the Virginia statute didn’t single out speech regarding disfavored topics. Instead, it was aimed at speech that had the intent to intimidate regardless of the victim’s race, gender, religion, or other characteristic. But the court was careful to limit government regulation of hate speech to instances that involve true threats or incitement.

When it comes to incitement, the legal standard was set by the court’s landmark Brandenberg v. Ohio decision in 1969, which laid out that:

the constitutional guarantees of free speech and free press do not permit a State to forbid or proscribe advocacy of the use of force or of law violation except where such advocacy is directed to inciting or producing imminent lawless action and is likely to incite or produce such action. [EMPHASIS ADDED]

In other words, while “hate speech” is protected by the First Amendment, specific types of speech that convey true threats or fit under the related doctrine of incitement are not. The government may regulate those types of speech. And they do. In fact, social media users can be, and often are, charged with crimes for threats made online. But the government can’t issue a per se ban on hate speech or “extremist content.”

Just as with misinformation, the government also can’t condition Section 230 immunity on platforms removing hate speech. Insofar as speech is protected under the First Amendment, the government can’t specifically condition a government benefit on its removal. Even the SAFE TECH Act’s model for holding platforms accountable for amplifying hate speech or extremist content would have to be limited to speech that amounts to true threats or incitement. This is a far narrower category of hateful speech than the examples that concern legislators. 

Social media companies do remain free under the law to moderate hateful content as they see fit under their terms of service. Section 230 immunity is not dependent on whether companies do or don’t moderate such content, or on how they define hate speech. But government efforts to step in and define hate speech would likely run into First Amendment problems unless they stay focused on unprotected threats and incitement.

What Can the Government Do?

One may fairly ask what it is that governments can do to combat misinformation and hate speech online. The answer may be a law that requires takedowns by court order of speech after it is declared illegal, as proposed by the PACT Act, sponsored in the last session by Sens. Brian Schatz (D-Hawaii) and John Thune (R-S.D.). Such speech may, in some circumstances, include misinformation or hate speech.

But as outlined above, the misinformation that the government can regulate is limited to situations like fraud or defamation, while the hate speech it can regulate is limited to true threats and incitement. A narrowly tailored law that looked to address those specific categories may or may not be a good idea, but it would likely survive First Amendment scrutiny, and may even prove a productive line of discussion with the tech CEOs.

In constitutional law, federal trade commission, First amendment, internet, politics, technology, torts, truth on the market , , , , , , , , , , , ,
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Congress Should Not Legalize a News Media Cartel

Alden Abbott —  16 March 2021

Amazingly enough, at a time when legislative proposals for new antitrust restrictions are rapidly multiplying—see the Competition and Antitrust Law Enforcement Reform Act (CALERA), for example—Congress simultaneously is seriously considering granting antitrust immunity to a price-fixing cartel among members of the newsmedia. This would thereby authorize what the late Justice Antonin Scalia termed “the supreme evil of antitrust: collusion.” What accounts for this bizarre development?

Discussion

The antitrust exemption in question, embodied in the Journalism Competition and Preservation Act of 2021, was introduced March 10 simultaneously in the U.S. House and Senate. The press release announcing the bill’s introduction portrayed it as a “good government” effort to help struggling newspapers in their negotiations with large digital platforms, and thereby strengthen American democracy:

We must enable news organizations to negotiate on a level playing field with the big tech companies if we want to preserve a strong and independent press[.] …

A strong, diverse, free press is critical for any successful democracy. …

Nearly 90 percent of Americans now get news while on a smartphone, computer, or tablet, according to a Pew Research Center survey conducted last year, dwarfing the number of Americans who get news via television, radio, or print media. Facebook and Google now account for the vast majority of online referrals to news sources, with the two companies also enjoying control of a majority of the online advertising market. This digital ad duopoly has directly contributed to layoffs and consolidation in the news industry, particularly for local news.

This legislation would address this imbalance by providing a safe harbor from antitrust laws so publishers can band together to negotiate with large platforms. It provides a 48-month window for companies to negotiate fair terms that would flow subscription and advertising dollars back to publishers, while protecting and preserving Americans’ right to access quality news. These negotiations would strictly benefit Americans and news publishers at-large; not just one or a few publishers.

The Journalism Competition and Preservation Act only allows coordination by news publishers if it (1) directly relates to the quality, accuracy, attribution or branding, and interoperability of news; (2) benefits the entire industry, rather than just a few publishers, and are non-discriminatory to other news publishers; and (3) is directly related to and reasonably necessary for these negotiations.

Lurking behind this public-spirited rhetoric, however, is the specter of special interest rent seeking by powerful media groups, as discussed in an insightful article by Thom Lambert. The newspaper industry is indeed struggling, but that is true overseas as well as in the United States. Competition from internet websites has greatly reduced revenues from classified and non-classified advertising. As Lambert notes, in “light of the challenges the internet has created for their advertising-focused funding model, newspapers have sought to employ the government’s coercive power to increase their revenues.”

In particular, media groups have successfully lobbied various foreign governments to impose rules requiring that Google and Facebook pay newspapers licensing fees to display content. The Australian government went even further by mandating that digital platforms share their advertising revenue with news publishers and give the publishers advance notice of any algorithm changes that could affect page rankings and displays. Media rent-seeking efforts took a different form in the United States, as Lambert explains (citations omitted):

In the United States, news publishers have sought to extract rents from digital platforms by lobbying for an exemption from the antitrust laws. Their efforts culminated in the introduction of the Journalism Competition and Preservation Act of 2018. According to a press release announcing the bill, it would allow “small publishers to band together to negotiate with dominant online platforms to improve the access to and the quality of news online.” In reality, the bill would create a four-year safe harbor for “any print or digital news organization” to jointly negotiate terms of trade with Google and Facebook. It would not apply merely to “small publishers” but would instead immunize collusive conduct by such major conglomerates as Murdoch’s News Corporation, the Walt Disney Corporation, the New York Times, Gannet Company, Bloomberg, Viacom, AT&T, and the Fox Corporation. The bill would permit news organizations to fix prices charged to digital platforms as long as negotiations with the platforms were not limited to price, were not discriminatory toward similarly situated news organizations, and somehow related to “the quality, accuracy, attribution or branding, and interoperability of news.” Given the ease of meeting that test—since news organizations could always claim that higher payments were necessary to ensure journalistic quality—the bill would enable news publishers in the United States to extract rents via collusion rather than via direct government coercion, as in Australia.

The 2021 version of the JCPA is nearly identical to the 2018 version discussed by Thom. The only substantive change is that the 2021 version strengthens the pro-cartel coalition by adding broadcasters (it applies to “any print, broadcast, or news organization”). While the JCPA plainly targets Facebook and Google (“online content distributors” with “not fewer than 1,000,000,000 monthly active users, in the aggregate, on its website”), Microsoft President Brad Smith noted in a March 12 House Antitrust Subcommittee Hearing on the bill that his company would also come under its collective-bargaining terms. Other online distributors could eventually become subject to the proposed law as well.

Purported justifications for the proposal were skillfully skewered by John Yun in a 2019 article on the substantively identical 2018 JCPA. Yun makes several salient points. First, the bill clearly shields price fixing. Second, the claim that all news organizations (in particular, small newspapers) would receive the same benefit from the bill rings hollow. The bill’s requirement that negotiations be “nondiscriminatory as to similarly situated news content creators” (emphasis added) would allow the cartel to negotiate different terms of trade for different “tiers” of organizations. Thus The New York Times and The Washington Post, say, might be part of a top tier getting the most favorable terms of trade. Third, the evidence does not support the assertion that Facebook and Google are monopolistic gateways for news outlets.

Yun concludes by summarizing the case against this legislation (citations omitted):

Put simply, the impact of the bill is to legalize a media cartel. The bill expressly allows the cartel to fix the price and set the terms of trade for all market participants. The clear goal is to transfer surplus from online platforms to news organizations, which will likely result in higher content costs for these platforms, as well as provisions that will stifle the ability to innovate. In turn, this could negatively impact quality for the users of these platforms.

Furthermore, a stated goal of the bill is to promote “quality” news and to “highlight trusted brands.” These are usually antitrust code words for favoring one group, e.g., those that are part of the News Media Alliance, while foreclosing others who are not “similarly situated.” What about the non-discrimination clause? Will it protect non-members from foreclosure? Again, a careful reading of the bill raises serious questions as to whether it will actually offer protection. The bill only ensures that the terms of the negotiations are available to all “similarly situated” news organizations. It is very easy to carve out provisions that would favor top tier members of the media cartel.

Additionally, an unintended consequence of antitrust exemptions can be that it makes the beneficiaries lax by insulating them from market competition and, ultimately, can harm the industry by delaying inevitable and difficult, but necessary, choices. There is evidence that this is what occurred with the Newspaper Preservation Act of 1970, which provided antitrust exemption to geographically proximate newspapers for joint operations.

There are very good reasons why antitrust jurisprudence reserves per se condemnation to the most egregious anticompetitive acts including the formation of cartels. Legislative attempts to circumvent the federal antitrust laws should be reserved solely for the most compelling justifications. There is little evidence that this level of justification has been met in this present circumstance.

Conclusion

Statutory exemptions to the antitrust laws have long been disfavored, and with good reason. As I explained in my 2005 testimony before the Antitrust Modernization Commission, such exemptions tend to foster welfare-reducing output restrictions. Also, empirical research suggests that industries sheltered from competition perform less well than those subject to competitive forces. In short, both economic theory and real-world data support a standard that requires proponents of an exemption to bear the burden of demonstrating that the exemption will benefit consumers.

This conclusion applies most strongly when an exemption would specifically authorize hard-core price fixing, as in the case with the JCPA. What’s more, the bill’s proponents have not borne the burden of justifying their pro-cartel proposal in economic welfare terms—quite the opposite. Lambert’s analysis exposes this legislation as the product of special interest rent seeking that has nothing to do with consumer welfare. And Yun’s evaluation of the bill clarifies that, not only would the JCPA foster harmful collusive pricing, but it would also harm its beneficiaries by allowing them to avoid taking steps to modernize and render themselves more efficient competitors.

In sum, though the JCPA claims to fly a “public interest” flag, it is just another private interest bill promoted by well-organized rent seekers would harm consumer welfare and undermine innovation.

In advertising, anticompetitive market distortions, antitrust, cartels, google, international, internet, journalism, markets, truth on the market , , , , , , , ,
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Platform Self-Preferencing Can Be Good for Consumers and Even Competitors

Sam Bowman & Geoffrey Manne —  4 March 2021

Critics of big tech companies like Google and Amazon are increasingly focused on the supposed evils of “self-preferencing.” This refers to when digital platforms like Amazon Marketplace or Google Search, which connect competing services with potential customers or users, also offer (and sometimes prioritize) their own in-house products and services. 

The objection, raised by several members and witnesses during a Feb. 25 hearing of the House Judiciary Committee’s antitrust subcommittee, is that it is unfair to third parties that use those sites to allow the site’s owner special competitive advantages. Is it fair, for example, for Amazon to use the data it gathers from its service to design new products if third-party merchants can’t access the same data? This seemingly intuitive complaint was the basis for the European Commission’s landmark case against Google. 

But we cannot assume that something is bad for competition just because it is bad for certain competitors. A lot of unambiguously procompetitive behavior, like cutting prices, also tends to make life difficult for competitors. The same is true when a digital platform provides a service that is better than alternatives provided by the site’s third-party sellers. 

It’s probably true that Amazon’s access to customer search and purchase data can help it spot products it can undercut with its own versions, driving down prices. But that’s not unusual; most retailers do this, many to a much greater extent than Amazon. For example, you can buy AmazonBasics batteries for less than half the price of branded alternatives, and they’re pretty good.

There’s no doubt this is unpleasant for merchants that have to compete with these offerings. But it is also no different from having to compete with more efficient rivals who have lower costs or better insight into consumer demand. Copying products and seeking ways to offer them with better features or at a lower price, which critics of self-preferencing highlight as a particular concern, has always been a fundamental part of market competition—indeed, it is the primary way competition occurs in most markets. 

Store-branded versions of iPhone cables and Nespresso pods are certainly inconvenient for those companies, but they offer consumers cheaper alternatives. Where such copying may be problematic (say, by deterring investments in product innovations), the law awards and enforces patents and copyrights to reward novel discoveries and creative works, and trademarks to protect brand identity. But in the absence of those cases where a company has intellectual property, this is simply how competition works. 

The fundamental question is “what benefits consumers?” Services like Yelp object that they cannot compete with Google when Google embeds its Google Maps box in Google Search results, while Yelp cannot do the same. But for users, the Maps box adds valuable information to the results page, making it easier to get what they want. Google is not making Yelp worse by making its own product better. Should it have to refrain from offering services that benefit its users because doing so might make competing products comparatively less attractive?

Self-preferencing also enables platforms to promote their offerings in other markets, which is often how large tech companies compete with each other. Amazon has a photo-hosting app that competes with Google Photos and Apple’s iCloud. It recently emailed its customers to promote it. That is undoubtedly self-preferencing, since other services cannot market themselves to Amazon’s customers like this, but if it makes customers aware of an alternative they might not have otherwise considered, that is good for competition. 

This kind of behavior also allows companies to invest in offering services inexpensively, or for free, that they intend to monetize by preferencing their other, more profitable products. For example, Google invests in Android’s operating system and gives much of it away for free precisely because it can encourage Android customers to use the profitable Google Search service. Despite claims to the contrary, it is difficult to see this sort of cross-subsidy as harmful to consumers.

Self-preferencing can even be good for competing services, including third-party merchants. In many cases, it expands the size of their potential customer base. For example, blockbuster video games released by Sony and Microsoft increase demand for games by other publishers because they increase the total number of people who buy Playstations and Xboxes. This effect is clear on Amazon’s Marketplace, which has grown enormously for third-party merchants even as Amazon has increased the number of its own store-brand products on the site. By making the Amazon Marketplace more attractive, third-party sellers also benefit.

All platforms are open or closed to varying degrees. Retail “platforms,” for example, exist on a spectrum on which Craigslist is more open and neutral than eBay, which is more so than Amazon, which is itself relatively more so than, say, Walmart.com. Each position on this spectrum offers its own benefits and trade-offs for consumers. Indeed, some customers’ biggest complaint against Amazon is that it is too open, filled with third parties who leave fake reviews, offer counterfeit products, or have shoddy returns policies. Part of the role of the site is to try to correct those problems by making better rules, excluding certain sellers, or just by offering similar options directly. 

Regulators and legislators often act as if the more open and neutral, the better, but customers have repeatedly shown that they often prefer less open, less neutral options. And critics of self-preferencing frequently find themselves arguing against behavior that improves consumer outcomes, because it hurts competitors. But that is the nature of competition: what’s good for consumers is frequently bad for competitors. If we have to choose, it’s consumers who should always come first.

In advertising, antitrust, google, intellectual property, internet, Internet search, technology, truth on the market, tying and bundling , , , , , , , , , , , , ,
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Investors and Regulators Can Both Fall for Platform Bubbles

Jonathan M. Barnett —  2 March 2021

In current discussions of technology markets, few words are heard more often than “platform.” Initial public offering (IPO) prospectuses use “platform” to describe a service that is bound to dominate a digital market. Antitrust regulators use “platform” to describe a service that dominates a digital market or threatens to do so. In either case, “platform” denotes power over price. For investors, that implies exceptional profits; for regulators, that implies competitive harm.

Conventional wisdom holds that platforms enjoy high market shares, protected by high barriers to entry, which yield high returns. This simple logic drives the market’s attribution of dramatically high valuations to dramatically unprofitable businesses and regulators’ eagerness to intervene in digital platform markets characterized by declining prices, increased convenience, and expanded variety, often at zero out-of-pocket cost. In both cases, “burning cash” today is understood as the path to market dominance and the ability to extract a premium from consumers in the future.

This logic is usually wrong. 

The Overlooked Basics of Platform Economics

To appreciate this perhaps surprising point, it is necessary to go back to the increasingly overlooked basics of platform economics. A platform can refer to any service that matches two complementary populations. A search engine matches advertisers with consumers, an online music service matches performers and labels with listeners, and a food-delivery service matches restaurants with home diners. A platform benefits everyone by facilitating transactions that otherwise might never have occurred.

A platform’s economic value derives from its ability to lower transaction costs by funneling a multitude of individual transactions into a single convenient hub.  In pursuit of minimum costs and maximum gains, users on one side of the platform will tend to favor the most popular platforms that offer the largest number of users on the other side of the platform. (There are partial exceptions to this rule when users value being matched with certain typesof other users, rather than just with more users.) These “network effects” mean that any successful platform market will always converge toward a handful of winners. This positive feedback effect drives investors’ exuberance and regulators’ concerns.

There is a critical point, however, that often seems to be overlooked.

Market share only translates into market power to the extent the incumbent is protected against entry within some reasonable time horizon.  If Warren Buffett’s moat requirement is not met, market share is immaterial. If XYZ.com owns 100% of the online pet food delivery market but entry costs are asymptotic, then market power is negligible. There is another important limiting principle. In platform markets, the depth of the moat depends not only on competitors’ costs to enter the market, but users’ costs in switching from one platform to another or alternating between multiple platforms. If users can easily hop across platforms, then market share cannot confer market power given the continuous threat of user defection. Put differently: churn limits power over price.

Contrary to natural intuitions, this is why a platform market consisting of only a few leaders can still be intensely competitive, keeping prices low (down to and including $0) even if the number of competitors is low. It is often asserted, however, that users are typically locked into the dominant platform and therefore face high switching costs, which therefore implicitly satisfies the moat requirement. If that is true, then the “high churn” scenario is a theoretical curiosity and a leading platform’s high market share would be a reliable signal of market power. In fact, this common assumption likely describes the atypical case. 

AWS and the Cloud Data-Storage Market

This point can be illustrated by considering the cloud data-storage market. This would appear to be an easy case where high switching costs (due to the difficulty in shifting data among storage providers) insulate the market leader against entry threats. Yet the real world does not conform to these expectations. 

While Amazon Web Services pioneered the $100 billion-plus market and is still the clear market leader, it now faces vigorous competition from Microsoft Azure, Google Cloud, and other data-storage or other cloud-related services. This may reflect the fact that the data storage market is far from saturated, so new users are up for grabs and existing customers can mitigate lock-in by diversifying across multiple storage providers. Or it may reflect the fact that the market’s structure is fluid as a function of technological changes, enabling entry at formerly bundled portions of the cloud data-services package. While it is not always technologically feasible, the cloud storage market suggests that users’ resistance to platform capture can represent a competitive opportunity for entrants to challenge dominant vendors on price, quality, and innovation parameters.

The Surprising Instability of Platform Dominance

The instability of leadership positions in the cloud storage market is not exceptional. 

Consider a handful of once-powerful platforms that were rapidly dethroned once challenged by a more efficient or innovative rival: Yahoo and Alta Vista in the search-engine market (displaced by Google); Netscape in the browser market (displaced by Microsoft’s Internet Explorer, then displaced by Google Chrome); Nokia and then BlackBerry in the mobile wireless-device market (displaced by Apple and Samsung); and Friendster in the social-networking market (displaced by Myspace, then displaced by Facebook). AOL was once thought to be indomitable; now it is mostly referenced as a vintage email address. The list could go on.

Overestimating platform dominance—or more precisely, assuming platform dominance without close factual inquiry—matters because it promotes overestimates of market power. That, in turn, cultivates both market and regulatory bubbles: investors inflate stock valuations while regulators inflate the risk of competitive harm. 

DoorDash and the Food-Delivery Services Market

Consider the DoorDash IPO that launched in early December 2020. The market’s current approximately $50 billion valuation of a business that has been almost consistently unprofitable implicitly assumes that DoorDash will maintain and expand its position as the largest U.S. food-delivery platform, which will then yield power over price and exceptional returns for investors. 

There are reasons to be skeptical. Even where DoorDash captures and holds a dominant market share in certain metropolitan areas, it still faces actual and potential competition from other food-delivery services, in-house delivery services (especially by well-resourced national chains), and grocery and other delivery services already offered by regional and national providers. There is already evidence of these expected responses to DoorDash’s perceived high delivery fees, a classic illustration of the disciplinary effect of competitive forces on the pricing choices of an apparently dominant market leader. These “supply-side” constraints imposed by competitors are compounded by “demand-side” constraints imposed by customers. Home diners incur no more than minimal costs when swiping across food-delivery icons on a smartphone interface, casting doubt that high market share is likely to translate in this context into market power.

Deliveroo and the Costs of Regulatory Autopilot

Just as the stock market can suffer from delusions of platform grandeur, so too some competition regulators appear to have fallen prey to the same malady. 

A vivid illustration is provided by the 2019 decision by the Competition Markets Authority (CMA), the British competition regulator, to challenge Amazon’s purchase of a 16% stake in Deliveroo, one of three major competitors in the British food-delivery services market. This intervention provides perhaps the clearest illustration of policy action based on a reflexive assumption of market power, even in the face of little to no indication that the predicate conditions for that assumption could plausibly be satisfied.

Far from being a dominant platform, Deliveroo was (and is) a money-losing venture lagging behind money-losing Just Eat (now Just Eat Takeaway) and Uber Eats in the U.K. food-delivery services market. Even Amazon had previously closed its own food-delivery service in the U.K. due to lack of profitability. Despite Deliveroo’s distressed economic circumstances and the implausibility of any market power arising from Amazon’s investment, the CMA nonetheless elected to pursue the fullest level of investigation. While the transaction was ultimately approved in August 2020, this intervention imposed a 15-month delay and associated costs in connection with an investment that almost certainly bolstered competition in a concentrated market by funding a firm reportedly at risk of insolvency.  This is the equivalent of a competition regulator driving in reverse.

Concluding Thoughts

There seems to be an increasingly common assumption in commentary by the press, policymakers, and even some scholars that apparently dominant platforms usually face little competition and can set, at will, the terms of exchange. For investors, this is a reason to buy; for regulators, this is a reason to intervene. This assumption is sometimes realized, and, in that case, antitrust intervention is appropriate whenever there is reasonable evidence that market power is being secured through something other than “competition on the merits.” However, several conditions must be met to support the market power assumption without which any such inquiry would be imprudent. Contrary to conventional wisdom, the economics and history of platform markets suggest that those conditions are infrequently satisfied.

Without closer scrutiny, reflexively equating market share with market power is prone to lead both investors and regulators astray.  

In antitrust, barriers to entry, internet, monopolization, technology, truth on the market , , , , , ,
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Building the Digital Future: Can the EU Foster a Dynamic and Crime-Free Internet?

Geoffrey Manne & Dirk Auer —  16 December 2020

The European Commission has unveiled draft legislation (the Digital Services Act, or “DSA”) that would overhaul the rules governing the online lives of its citizens. The draft rules are something of a mixed bag. While online markets present important challenges for law enforcement, the DSA would significantly increase the cost of doing business in Europe and harm the very freedoms European lawmakers seek to protect. The draft’s newly proposed “Know Your Business Customer” (KYBC) obligations, however, will enable smoother operation of the liability regimes that currently apply to online intermediaries. 

These reforms come amid a rash of headlines about election meddling, misinformation, terrorist propaganda, child pornography, and other illegal and abhorrent content spread on digital platforms. These developments have galvanized debate about online liability rules.

Existing rules, codified in the e-Commerce Directive, largely absolve “passive” intermediaries that “play a neutral, merely technical and passive role” from liability for content posted by their users so long as they remove it once notified. “Active” intermediaries have more legal exposure. This regime isn’t perfect, but it seems to have served the EU well in many ways.

With its draft regulation, the European Commission is effectively arguing that those rules fail to address the legal challenges posed by the emergence of digital platforms. As the EC’s press release puts it:

The landscape of digital services is significantly different today from 20 years ago, when the eCommerce Directive was adopted. […]  Online intermediaries […] can be used as a vehicle for disseminating illegal content, or selling illegal goods or services online. Some very large players have emerged as quasi-public spaces for information sharing and online trade. They have become systemic in nature and pose particular risks for users’ rights, information flows and public participation.

Online platforms initially hoped lawmakers would agree to some form of self-regulation, but those hopes were quickly dashed. Facebook released a white paper this Spring proposing a more moderate path that would expand regulatory oversight to “ensure companies are making decisions about online speech in a way that minimizes harm but also respects the fundamental right to free expression.” The proposed regime would not impose additional liability for harmful content posted by users, a position that Facebook and other internet platforms reiterated during congressional hearings in the United States.

European lawmakers were not moved by these arguments. EU Commissioner for Internal Market and Services Thierry Breton, among other European officials, dismissed Facebook’s proposal within hours of its publication, saying:

It’s not enough. It’s too slow, it’s too low in terms of responsibility and regulation.

Against this backdrop, the draft DSA includes many far-reaching measures: transparency requirements for recommender systems, content moderation decisions, and online advertising; mandated sharing of data with authorities and researchers; and numerous compliance measures that include internal audits and regular communication with authorities. Moreover, the largest online platforms—so-called “gatekeepers”—will have to comply with a separate regulation that gives European authorities new tools to “protect competition” in digital markets (the Digital Markets Act, or “DMA”).

The upshot is that, if passed into law, the draft rules will place tremendous burdens upon online intermediaries. This would be self-defeating. 

Excessive regulation or liability would significantly increase their cost of doing business, leading to significantly smaller networks and significantly increased barriers to access for many users. Stronger liability rules would also encourage platforms to play it safe, such as by quickly de-platforming and refusing access to anyone who plausibly engaged in illegal activity. Such an outcome would harm the very freedoms European lawmakers seek to protect.

This could prove particularly troublesome for small businesses that find it harder to compete against large platforms due to rising compliance costs. In effect, the new rules will increase barriers to entry, as has already been seen with the GDPR.

In the commission’s defense, some of the proposed reforms are more appealing. This is notably the case with the KYBC requirements, as well as the decision to leave most enforcement to member states, where services providers have their main establishments. The latter is likely to preserve regulatory competition among EU members to attract large tech firms, potentially limiting regulatory overreach. 

Indeed, while the existing regime does, to some extent, curb the spread of online crime, it does little for the victims of cybercrime, who ultimately pay the price. Removing illegal content doesn’t prevent it from reappearing in the future, sometimes on the same platform. Importantly, hosts have no obligation to provide the identity of violators to authorities, or even to know their identity in the first place. The result is an endless game of “whack-a-mole”: illegal content is taken down, but immediately reappears elsewhere. This status quo enables malicious users to upload illegal content, such as that which recently led card networks to cut all ties with Pornhub. 

Victims arguably need additional tools. This is what the Commission seeks to achieve with the DSA’s “traceability of traders” requirement, a form of KYBC:

Where an online platform allows consumers to conclude distance contracts with traders, it shall ensure that traders can only use its services to promote messages on or to offer products or services to consumers located in the Union if, prior to the use of its services, the online platform has obtained the following information: […]

Instead of rewriting the underlying liability regime—with the harmful unintended consequences that would likely entail—the draft DSA creates parallel rules that require platforms to better protect victims.

Under the proposed rules, intermediaries would be required to obtain the true identity of commercial clients (as opposed to consumers) and to sever ties with businesses that refuse to comply (rather than just take down their content). Such obligations would be, in effect, a version of the “Know Your Customer” regulations that exist in other industries. Banks, for example, are required to conduct due diligence to ensure scofflaws can’t use legitimate financial services to further criminal enterprises. It seems reasonable to expect analogous due diligence from the Internet firms that power so much of today’s online economy.

Obligations requiring platforms to vet their commercial relationships may seem modest, but they’re likely to enable more effective law enforcement against the actual perpetrators of online harms without diminishing platform’s innovation and the economic opportunity they provide (and that everyone agrees is worth preserving).

There is no silver bullet. Illegal activity will never disappear entirely from the online world, just as it has declined, but not vanished, from other walks of life. But small regulatory changes that offer marginal improvements can have a substantial effect. Modest informational requirements would weed out the most blatant crimes without overly burdening online intermediaries. In short, it would make the Internet a safer place for European citizens.

In european commission, international, international competition, markets, regulation, technology, truth on the market , , , , ,
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The Dishonesty of Conservative Attacks on Section 230

Ben Sperry —  17 November 2020

President Donald Trump has repeatedly called for repeal of Section 230. But while Trump and fellow conservatives decry Big Tech companies for their alleged anti-conservative bias, including at yet more recent hearings, their issue is not actually with Section 230. It’s with the First Amendment. 

Conservatives can’t actually do anything directly about how social media platforms moderate content because it is the First Amendment that grants those platforms a right to editorial discretion. Even FCC Commissioner Brendan Carr, who strongly opposes “Big Tech censorship,” recognizes this. 

By the same token, even if one were to grant that conservatives are right about the bias of moderators at these large social media platforms, it does not follow that removal of Section 230 immunity would alter that bias. In fact, in a world without Section 230 immunity, there still would be no legal cause of action for political bias. 

The truth is that conservatives use Section 230 immunity for leverage over social media platforms. The hope is that, because social media platforms desire the protections of civil immunity for third-party content, they will follow whatever conditions the government puts on their editorial discretion. But the attempt to end-run the First Amendment’s protections is also unconstitutional.

There is no cause of action for political bias by online platforms if we repeal Section 230

Consider the counterfactual: if there were no Section 230 to immunize them from liability, under what law would platforms face a viable cause of action for political bias? Conservative critics never answer this question. Instead, they focus on the irrelevant distinction between publishers and platforms. Or they talk about how Section 230 is a giveaway to Big Tech. But none consider the actual relationship between Section 230 immunity and alleged political bias.

But let’s imagine we’ve done what President Trump has called for and repealed Section 230. Where does that leave conservatives?

Unfortunately, it leaves them without any cause of action. There is no law passed by Congress or any state legislature, no regulation promulgated by the Federal Communications Commission or the Federal Trade Commission, no common law tort action that can be asserted against online platforms to force them to carry speech they don’t wish to carry. 

The difficulties of pursuing a contract claim for political bias

The best argument for conservatives is that, without Section 230 immunity, online platforms could be more easily held to any contractual restraints in their terms of service. If a platform promises, for instance, that it will moderate speech in a politically neutral way, a user could make the case that the platform violated its terms of service if it acted with political bias in her particular case.

For the vast majority of users, it is unclear whether there are damages from having a post fact-checked or removed. But for users who share in advertising revenue, the concrete injury from a moderation decision is more obvious. PragerU, for example, has (unsuccessfully) sued Google for being put in Restricted Mode on YouTube, which reduces its reach and advertising revenue. 

Even where there is a concrete injury that gets a case into court, that doesn’t necessarily mean there is a valid contract claim. In PragerU’s case against Google, a California court dismissed contract claims because the YouTube terms of service contract was written to allow the platform to retain discretion over what is published. Specifically, the court found that there can be no implied covenant of good faith and fair dealing where “YouTube reserves the right to remove Content without prior notice” and to “discontinue any aspect of the Service at any time.”

Breach-of-contract claims for moderation practices are highly dependent on what is actually promised in the terms of service. For instance, under Facebook’s TOS the company retains the right “to remove or restrict access to content that is in violation” of its community standards. Facebook does provide a process for users to request further review, but retains the right to remove content. The community standards also give Facebook broad discretion to determine, among other things, what counts as hate speech or false news. It is exceedingly unlikely that a court would ever have a basis to find a contract violation by Facebook if the company can reasonably point to a user’s violation of its terms of service. 

For example, in Ebeid v. Facebook, the U.S. Northern District of California dismissed fraud and breach of contract claims, finding the plaintiff failed to allege what contractual provision Facebook breached, that Facebook retained discretion over what ads would be posted, and that the plaintiff suffered no damages because no money was taken to be spent on the ads. The court also dismissed an implied covenant of good faith and fair dealing claim because Facebook retained the right to “remove or disapprove any post or ad at Facebook’s sole discretion.”

While the conservative critique has been that social media platforms do too much moderation—in the form of politically biased removals, fact-checking, and demonetization—others believe platforms do far too little to restrain bad conduct by users. But as long as social media platforms retain editorial discretion in their terms of service and make no other promises that can be relied upon by their users, there is little basis for a contract claim. 

The First Amendment protects the moderation policies of social media platforms, and there is no way around this

With no reasonable cause of action for political bias under the law, conservatives dangle the threat of making changes to Section 230 immunity that could prove costly to the social media platforms in order to extract concessions from the platforms to alter their practices.

This is why there are no serious efforts to actually repeal Section 230, as President Trump has asked for repeatedly. Instead, several bills propose to amend Section 230, while a rulemaking by the FCC seeks to clarify its meaning. 

But none of these proposed bills would directly affect platforms’ ability to make “biased” moderation decisions. Put simply: the First Amendment protects social media platforms’ editorial discretion. They may set rules to use their platforms, just as any private person may set rules for their own property. If I kick someone off my property for saying racist things, the First Amendment (as well as regular property law) protects my right to do so. Only under extremely limited circumstances can the government change this baseline rule and survive constitutional scrutiny.

Social media platforms’ right to editorial discretion is the same as that enjoyed by newspapers. In Miami Herald Publishing Co. v. Tornillo, the Supreme Court found:

The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with First Amendment guarantees of a free press as they have evolved to this time. 

Social media platforms, just like any other property owner, have the right to determine what they want displayed on their property. In other words, Facebook, Google, and Twitter have the right to moderate content on news feeds, search results, and timelines. The attempted constitutional end-run—threatening to remove immunity for third-party content unrelated to political bias, like defamation and other tortious acts, unless social media platforms give up their right to editorial discretion over political speech—is just as unconstitutional as directly imposing “fairness” requirements on social media platforms.

The Supreme Court has held that Congress may not leverage a government benefit to regulate a speech interest outside of the benefit’s scope. This is called the unconstitutional conditions doctrine. It basically delineates the level of regulation the government can undertake through subsidizing behavior. The government can’t condition a government benefit on giving up editorial discretion over political speech.

The point of Section 230 immunity is to remedy the moderator’s dilemma set up by Stratton Oakmont v. Prodigy, which held that if a platform chose to moderate third-party speech at all, they would be liable for what was not removed. Section 230 is not about compelling political neutrality on platforms, because it can’t be consistent with the First Amendment. Civil immunity for third-party speech online is an important benefit for social media platforms because it holds they are not liable for the acts of third-parties, with limited exceptions. Without it, platforms would restrict opportunities for third-parties to post out of fear of liability. 

In sum, the government may not condition enjoyment of a government benefit upon giving up a constitutionally protected right. Section 230 immunity is a clear government benefit. The right to editorial discretion is clearly protected by the First Amendment. Because the entire point of conservative Section 230 reform efforts is to compel social media platforms to carry speech they otherwise desire to remove, it fails this basic test.

Conclusion

Fundamentally, the conservative push to reform Section 230 in response to the alleged anti-conservative bias of major social media platforms is not about policy. Really, it’s about waging a culture war against the perceived “liberal elites” from Silicon Valley, just as there is an ongoing culture war against perceived “liberal elites” in the mainstream media, Hollywood, and academia. But fighting this culture war is not worth giving up conservative principles of free speech, limited government, and free markets.

In constitutional law, First amendment, internet, regulation, technology, truth on the market , , , ,
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How does antitrust measure nonprice effects like political bias?

Ben Sperry —  17 September 2020

In the latest congressional hearing, purportedly analyzing Google’s “stacking the deck” in the online advertising marketplace, much of the opening statement and questioning by Senator Mike Lee and later questioning by Senator Josh Hawley focused on an episode of alleged anti-conservative bias by Google in threatening to demonetize The Federalist, a conservative publisher, unless they exercised a greater degree of control over its comments section. The senators connected this to Google’s “dominance,” arguing that it is only because Google’s ad services are essential that Google can dictate terms to a conservative website. A similar impulse motivates Section 230 reform efforts as well: allegedly anti-conservative online platforms wield their dominance to censor conservative speech, either through deplatforming or demonetization.

Before even getting into the analysis of how to incorporate political bias into antitrust analysis, though, it should be noted that there likely is no viable antitrust remedy. Even aside from the Section 230 debate, online platforms like Google are First Amendment speakers who have editorial discretion over their sites and apps, much like newspapers. An antitrust remedy compelling these companies to carry speech they disagree with would almost certainly violate the First Amendment.

But even aside from the First Amendment aspect of this debate, there is no easy way to incorporate concerns about political bias into antitrust. Perhaps the best way to understand this argument in the antitrust sense is as a non-price effects analysis. 

Political bias could be seen by end consumers as an important aspect of product quality. Conservatives have made the case that not only Google, but also Facebook and Twitter, have discriminated against conservative voices. The argument would then follow that consumer welfare is harmed when these dominant platforms leverage their control of the social media marketplace into the marketplace of ideas by censoring voices with whom they disagree. 

While this has theoretical plausibility, there are real practical difficulties. As Geoffrey Manne and I have written previously, in the context of incorporating privacy into antitrust analysis:

The Horizontal Merger Guidelines have long recognized that anticompetitive effects may “be manifested in non-price terms and conditions that adversely affect customers.” But this notion, while largely unobjectionable in the abstract, still presents significant problems in actual application. 

First, product quality effects can be extremely difficult to distinguish from price effects. Quality-adjusted price is usually the touchstone by which antitrust regulators assess prices for competitive effects analysis. Disentangling (allegedly) anticompetitive quality effects from simultaneous (neutral or pro-competitive) price effects is an imprecise exercise, at best. For this reason, proving a product-quality case alone is very difficult and requires connecting the degradation of a particular element of product quality to a net gain in advantage for the monopolist. 

Second, invariably product quality can be measured on more than one dimension. For instance, product quality could include both function and aesthetics: A watch’s quality lies in both its ability to tell time as well as how nice it looks on your wrist. A non-price effects analysis involving product quality across multiple dimensions becomes exceedingly difficult if there is a tradeoff in consumer welfare between the dimensions. Thus, for example, a smaller watch battery may improve its aesthetics, but also reduce its reliability. Any such analysis would necessarily involve a complex and imprecise comparison of the relative magnitudes of harm/benefit to consumers who prefer one type of quality to another.

Just as with privacy and other product qualities, the analysis becomes increasingly complex first when tradeoffs between price and quality are introduced, and then even more so when tradeoffs between what different consumer groups perceive as quality is added. In fact, it is more complex than privacy. All but the most exhibitionistic would prefer more to less privacy, all other things being equal. But with political media consumption, most would prefer to have more of what they want to read available, even if it comes at the expense of what others may want. There is no easy way to understand what consumer welfare means in a situation where one group’s preferences need to come at the expense of another’s in moderation decisions.

Consider the case of The Federalist again. The allegation is that Google is imposing their anticonservative bias by “forcing” the website to clean up its comments section. The argument is that since The Federalist needs Google’s advertising money, it must play by Google’s rules. And since it did so, there is now one less avenue for conservative speech.

What this argument misses is the balance Google and other online services must strike as multi-sided platforms. The goal is to connect advertisers on one side of the platform, to the users on the other. If a site wants to take advantage of the ad network, it seems inevitable that intermediaries like Google will need to create rules about what can and can’t be shown or they run the risk of losing advertisers who don’t want to be associated with certain speech or conduct. For instance, most companies don’t want to be associated with racist commentary. Thus, they will take great pains to make sure they don’t sponsor or place ads in venues associated with racism. Online platforms connecting advertisers to potential consumers must take that into consideration.

Users, like those who frequent The Federalist, have unpriced access to content across those sites and apps which are part of ad networks like Google’s. Other models, like paid subscriptions (which The Federalist also has available), are also possible. But it isn’t clear that conservative voices or conservative consumers have been harmed overall by the option of unpriced access on one side of the platform, with advertisers paying on the other side. If anything, it seems the opposite is the case since conservatives long complained about legacy media having a bias and lauded the Internet as an opportunity to gain a foothold in the marketplace of ideas.

Online platforms like Google must balance the interests of users from across the political spectrum. If their moderation practices are too politically biased in one direction or another, users could switch to another online platform with one click or swipe. Assuming online platforms wish to maximize revenue, they will have a strong incentive to limit political bias from its moderation practices. The ease of switching to another platform which markets itself as more free speech-friendly, like Parler, shows entrepreneurs can take advantage of market opportunities if Google and other online platforms go too far with political bias. 

While one could perhaps argue that the major online platforms are colluding to keep out conservative voices, this is difficult to square with the different moderation practices each employs, as well as the data that suggests conservative voices are consistently among the most shared on Facebook. 

Antitrust is not a cure-all law. Conservatives who normally understand this need to reconsider whether antitrust is really well-suited for litigating concerns about anti-conservative bias online. 

In antitrust, truth on the market , , , , , , , ,
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What Mark Zuckerberg’s Emails Don’t Tell Us about the Instagram Acquisition

Dirk Auer and Sam Bowman —  21 August 2020

Recently-published emails from 2012 between Mark Zuckerberg and Facebook’s then-Chief Financial Officer David Ebersman, in which Zuckerberg lays out his rationale for buying Instagram, have prompted many to speculate that the deal may not have been cleared had antitrust agencies had had access to Facebook’s internal documents at the time.

The issue is Zuckerberg’s description of Instagram as a nascent competitor and potential threat to Facebook:

These businesses are nascent but the networks established, the brands are already meaningful, and if they grow to a large scale they could be very disruptive to us. Given that we think our own valuation is fairly aggressive and that we’re vulnerable in mobile, I’m curious if we should consider going after one or two of them. 

Ebersman objects that a new rival would just enter the market if Facebook bought Instagram. In response, Zuckerberg wrote:

There are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different.

These email exchanges may not paint a particularly positive picture of Zuckerberg’s intent in doing the merger, and it is possible that at the time they may have caused antitrust agencies to scrutinise the merger more carefully. But they do not tell us that the acquisition was ultimately harmful to consumers, or about the counterfactual of the merger being blocked. While we know that Instagram became enormously popular in the years following the merger, it is not clear that it would have been just as successful without the deal, or that Facebook and its other products would be less popular today. 

Moreover, it fails to account for the fact that Facebook had the resources to quickly scale Instagram up to a level that provided immediate benefits to an enormous number of users, instead of waiting for the app to potentially grow to such scale organically. 

The rationale

Writing for Pro Market, Randy Picker argued that these emails hint that the acquisition was essentially about taking out a nascent competitor:

Buying Instagram really was about controlling the window in which the Instagram social mechanic invention posed a risk to Facebook … Facebook well understood the competitive risk posed by Instagram and how purchasing it would control that risk.

This is a plausible interpretation of the internal emails, although there are others. For instance, Zuckerberg also seems to say that the purpose is to use Instagram to improve Facebook to make it good enough to fend off other entrants:

If we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale. 

If this was the rationale, rather than simply trying to kill a nascent competitor, it would be pro-competitive. It is good for consumers if a product makes itself better to beat its rivals by acquiring undervalued assets to deploy them at greater scale and with superior managerial efficiency, even if the acquirer hopes that in doing so it will prevent rivals from ever gaining significant market share. 

Further, despite popular characterization, on its face the acquisition was not about trying to destroy a consumer option, but only to ensure that Facebook was competitively viable in providing that option. Another reasonable interpretation of the emails is that Facebook was wrestling with the age-old make-or-buy dilemma faced by every firm at some point or another. 

Was the merger anticompetitive?

But let us assume that eliminating competition from Instagram was indeed the merger’s sole rationale. Would that necessarily make it anticompetitive?  

Chief among the objections is that both Facebook and Instagram are networked goods. Their value to each user depends, to a significant extent, on the number (and quality) of other people using the same platform. Many scholars have argued that this can create self-reinforcing dynamics where the strong grow stronger – though such an outcome is certainly not a given, since other factors about the service matter too, and networks can suffer from diseconomies of scale as well, where new users reduce the quality of the network.

This network effects point is central to the reasoning of those who oppose the merger: Facebook purportedly acquired Instagram because Instagram’s network had grown large enough to be a threat. With Instagram out of the picture, Facebook could thus take on the remaining smaller rivals with the advantage of its own much larger installed base of users. 

However, this network tipping argument could cut both ways. It is plausible that the proper counterfactual was not duopoly competition between Facebook and Instagram, but either Facebook or Instagram offering both firms’ features (only later). In other words, a possible framing of the merger is that it merely  accelerated the cross-pollination of social mechanics between Facebook and Instagram. Something that would likely prove beneficial to consumers.

This finds some support in Mark Zuckerberg’s reply to David Ebersman:

Buying them would give us the people and time to integrate their innovations into our core products.

The exchange between Zuckerberg and Ebersman also suggests another pro-competitive justification: bringing Instagram’s “social mechanics” to Facebook’s much larger network of users. We can only speculate about what ‘social mechanics’ Zuckerberg actually had in mind, but at the time Facebook’s photo sharing functionality was largely based around albums of unedited photos, whereas Instagram’s core product was a stream of filtered, cropped single images. 

Zuckerberg’s plan to gradually bring these features to Facebook’s users – as opposed to them having to familiarize themselves with an entirely different platform – would likely cut in favor of the deal being cleared by enforcers.

Another possibility is that it was Instagram’s network of creators – the people who had begun to use Instagram as a new medium, distinct from the generic photo albums Facebook had, and who would eventually grow to be known as ‘influencers’ – who were the valuable thing. Bringing them onto the Facebook platform would undoubtedly increase its value to regular users. For example, Kim Kardashian, one of Instagram’s most popular users, joined the service in February 2012, two months before the deal went through, and she was not the first such person to adopt Instagram in this way. We can see the importance of a service’s most creative users today, as Facebook is actually trying to pay TikTok creators to move to its TikTok clone Reels.

But if this was indeed the rationale, not only is this a sign of a company in the midst of fierce competition – rather than one on the cusp of acquiring a monopoly position – but, more fundamentally, it suggests that Facebook was always going to come out on top. Or at least it thought so.

The benefit of hindsight

Today’s commentators have the benefit of hindsight. This inherently biases contemporary takes on the Facebook/Instagram merger. For instance, it seems almost self-evident with hindsight that Facebook would succeed and that entry in the social media space would only occur at the fringes of existing platforms (the combined Facebook/Instagram platform) – think of the emergence of TikTok. However, at the time of the merger, such an outcome was anything but a foregone conclusion.

For instance, critics argue that Instagram no longer competes with Facebook because of the merger. However, it is equally plausible that Instagram only became so successful because of its combination with Facebook (notably thanks to the addition of Facebook’s advertising platform, and the rapid rollout of a stories feature in response to Snapchat’s rise). Indeed, Instagram grew from roughly 24 million at the time of the acquisition to over 1 Billion users in 2018. Likewise, it earned zero revenue at the time of the merger. This might explain why the acquisition was widely derided at the time.

This is critical from an antitrust perspective. Antitrust enforcers adjudicate merger proceedings in the face of extreme uncertainty. All possible outcomes, including the counterfactual setting, have certain probabilities of being true that enforcers and courts have to make educated guesses about, assigning probabilities to potential anticompetitive harms, merger efficiencies, and so on.

Authorities at the time of the merger could not ignore these uncertainties. What was the likelihood that a company with a fraction of Facebook’s users (24 million to Facebook’s 1 billion), and worth $1 billion, could grow to threaten Facebook’s market position? At the time, the answer seemed to be “very unlikely”. Moreover, how could authorities know that Google+ (Facebook’s strongest competitor at the time) would fail? These outcomes were not just hard to ascertain, they were simply unknowable.

Of course, this is preceisly what neo-Brandesian antitrust scholars object to today: among the many seemingly innocuous big tech acquisitions that are permitted each year, there is bound to be at least one acquired firm that might have been a future disruptor. True as this may be, identifying that one successful company among all the others is the antitrust equivalent of finding a needle in a haystack. Instagram simply did not fit that description at the time of the merger. Such a stance also ignores the very real benefits that may arise from such arrangements.

Closing remarks

While it is tempting to reassess the Facebook Instagram merger in light of new revelations, such an undertaking is not without pitfalls. Hindsight bias is perhaps the most obvious, but the difficulties run deeper.

If we think that the Facebook/Instagram merger has been and will continue to be good for consumers, it would be strange to think that we should nevertheless break them up because we discovered that Zuckerberg had intended to do things that would harm consumers. Conversely, if you think a breakup would be good for consumers today, would it change your mind if you discovered that Mark Zuckerberg had the intentions of an angel when he went ahead with the merger in 2012, or that he had angelic intent today?

Ultimately, merger review involves making predictions about the future. While it may be reasonable to take the intentions of the merging parties into consideration when making those predictions (although it’s not obvious that we should), these are not the only or best ways to determine what the future will hold. As Ebersman himself points out in the emails, history is filled with over-optimistic mergers that failed to deliver benefits to the merging parties. That this one succeeded beyond the wildest dreams of everyone involved – except maybe Mark Zuckerberg – does not tell us that competition agencies should have ruled on it differently.

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