Let’s divorce the source of legal authority and the optimal net neutrality policies for a moment.
With regard to policy considerations, we had a fairly savvy political and economic compromise in the FCC’s 2010 Order that effectively dealt with the two forms of net neutrality discrimination: It used rules against blatant forms of discrimination (blocking, throttling), and it applied standards to police mild forms of discrimination (at the time, paid priority). Economists prefer standards to rules whenever conduct can be motivated for efficiency reasons. And so should you! Alas, the DC Circuit largely took away the FCC’s legal authority used in support of the 2010 compromise.
The remaining source of legal authority (Title II) is not palatable to the Tech Right. Indeed, it is not palatable to most economists, as it exposes Internet service providers (ISPs) to regulations that were never intended to address net neutrality concerns. So thanks to the DC Circuit, we are in a regulatory hellhole in which Title II-based net neutrality rules (Obama’s 2015 order replaced the 2010 standards with rules) will be repealed with effectively no protections whenever a Republican occupies the White House. This cannot be acceptable to anyone who truly cares about net neutrality.
The ISPs have strongly signaled their willingness to go back to the 2010 compromise. They have offered to live by rules against blocking and throttling, and to abide by standards for the mild forms of discrimination such as zero rating.
The solution to this dilemma is simple: Congress needs to create a new source of legal authority to allow the FCC to do effectively what it wanted to do in the 2010 order. Namely, apply rules against the blatant forms of discrimination, and apply (nondiscrimination) standards to the mild forms.
My only tweak to the 2010 Order would be to move from the guilty-before-proven-innocent presumption to an innocent-before-proven-guilty presumption when adjudicating disputes under the standard—that is, put the burden of proof on the complainant, as we do for program carriage disputes. But this is a detail that can be hammered out. We could even use a burden shifting regime, in which the complainant has to meet an initial evidentiary standard, after which the burden flips to the ISP.
Now I recognize that moving from Title II-based net neutrality rules—with disruptions every time the GOP takes the White House—to a 2010 framework grounded in a new source of authority might be considered a loss for some on the Tech Left. So I propose two left-leaning “sweeteners” to make this compromise go down a bit easier:
(A) Attach opt-in privacy protections to the bill and have them apply to both ISPs and edge providers symmetrically; and
(B) Extend the ambit of the nondiscrimination standard to include conduct by a dominant tech platform (e.g., Google, Amazon, Facebook).
There is growing sentiment on both sides of the aisle that the dominant tech platforms threaten edge innovation (and our privacy) to the same degree or even more than do ISPs. It makes no sense to have two sets of standards and two sets of regulators for identical threats to edge innovation that emanate from two different layers of the Internet ecosystem. We should aspire to have a layer-neutral approach to regulation.
I also recognize that bringing tech platforms into the ambit—by attaching symmetric privacy and nondiscrimination standards—raises tricky issues of jurisdiction. Should the FCC be allowed to police bad acts by tech platforms? But this is a healthy discussion. And it is more important to get the policy right than to fight about which regulator should enforce the policies. My preference would be to port this policing/adjudication of disputes to a different agency, or even to a tribunal that operates outside of an agency (so as to remove any influence of politics during the appeal of the tribunal’s decision on a particular case). Others might prefer to see the scope of the FCC broadened. But again these are details to be hammered out.
Let’s end this net neutrality quagmire once and for all!
- I do not believe that all vertical mergers in the video industry should be approved. The DOJ should block vertical mergers that would materially impair the ability of a distribution rival to compete effectively and thereby substantially lessen downstream competition, in this case for video subscribers. And for rival impairment of this kind, there are two necessary conditions: (1) the integrating content firm must own a must-have input and (2) the integrating distributor must have a large share of the downstream market so as to grab departing customers in search for the withheld content. Neither condition is satisfied here. And when either condition is not satisfied, the DOJ should use a behavioral remedy or, for atomistic vertical deals, do nothing.
- The DOJ’s decision here has huge implications on vertical integration in media, as a DOJ victory would mean than any deal with even the slightest predicted price effects could be condemned. The Nash bargaining model used by DOJ’s expert will generate positive price effects under any parameterization with non-zero inputs. So we have to be very careful not to condemn a deal simply because the price effect is positive but small (like 27 cents per subscriber per month small). What the DOJ is seeking here is tantamount to a categorical ban on any vertical merger in the media industry, regardless of the importance of the (integrating) content or the market power of the (integrating) distributor. Should the Food Network, which is clearly not a must-have input, be required to fund and develop customer service, network administration, direct marketing, and sales capabilities in order to stay in business in an a-la-carte/over-the-top environment because it cannot sell itself to an atomistic distributor such as DISH?
- Contrary to conventional wisdom, the behavioral remedies used in the Comcast-NBCU order and in program-carriage disputes generally have been successful. I should know. I’ve gone against Comcast on behalf of Tennis Channel, NFL Network, MASN, and Project Concord. We extracted settlements in two cases (NFL and MASN), and we got to a finding in the complainant’s favor in the other two (Tennis and Concord). Those findings never produced relief for the complainant due to a faulty appeals process, but that problem lies outside the adjudication process and can be resolved via binding arbitration (which AT&T has offered) or removal of FCC Commissioners from the appeals process (who have always voted along party lines when reviewing a finding of discrimination). Even when I wasn’t involved, complainants have won relief, including in Blooming and an unnamed OVD per the annual DOJ report on Comcast-NBCU—proof that I, like Time Warner’s content, am not a must-have input!
- The Nash bargaining model turns on the product of three parameters, and all three work against the government here: A tiny fraction of a tiny fraction of a small number (DIRECTV’s video margins) yields a very tiny price effect. DIRECTV’s video margins are razor-thin even if it owns the Time Warner content because a) virtually none of that content is either the expensive ESPN nor the also expensive must have regional sports, both of which are found in basic tiers and b) the expensive Showtime and AMC content also must be acquired. This means AT&T doesn’t gain a lot by winning a new video subscriber. DIRECTV’s market share is small, which means AT&T doesn’t stand a good chance of landing a departing subscriber from a rival. And operators such as Dish Chairman Charlie Ergen claimed in November 2014 that “things like CNN are not quite the product that they used to be,” and that Dish’s standoff with Time Warner has been “almost a nonevent” in terms of subscriber departures. Multiply three small numbers against each other and you get a really small price effect.
- Shapiro used a 12% departure rate from the Suddenlink-Time Warner standoff and got a measly 27 cents per month price effect. But per the AT&T brief, independent parties that studied that standoff put the departure rate at 5%, which eliminates the price effect entirely. AT&T’s brief also suggests that the implied departure rate from the Cable One-Time Warner standoff was 0%, which would imply no price effects. And my own research based on the Dish-Time Warner standoff, which shows no material increase in churn in the 4Q of 2014, implies a departure rate of 0%. This means that the confidence interval around the predicted price effect ranges from 0 cents to 27 cents a month (Shapiro’s original estimate, using a formula that was unreasonably weighted against the merger). And when compared against the average cable bill, that small increase at the consumer level is insufficiently certain or large enough for the fact-finder to credibly block the merger.
- Finally, Shapiro’s bargaining model failed to account for AT&T’s baseball-style arbitration offer, which would weaken AT&T’s hand, and thus reduce the price effects below 27 cents. And Shapiro’s model failed to account for the fact that Time Warner cut a four-year deal with Comcast, which immunizes Comcast from price hikes that Shapiro estimates will happen post merger.
- The government’s coordinated effects theory is highly speculative and most likely window dressing. The DOJ wouldn’t bring this case on just the coordinated theory. Note that if AT&T and Comcast explicitly coordinate, the DOJ could bring a separate action against them. We are talking about tacit coordination now. The DOJ wants you to believe that even if AT&T figures out that the losses to the upstream division exceed the gains to the downstream division from complete foreclosure, the calculus will somehow reverse itself so long as Comcast can be involved. Even if Comcast raised its prices to (say) Dish, that doesn’t help AT&T so long as departing Dish customers gravitate to Comcast.
- Per AT&T’s brief, Shapiro wouldn’t say whether coordinated interaction was probable. Nor could he. It’s hard for the DOJ to advance a theory without the assistance of its expert.
- Conflict of interest between AT&T and Comcast: AT&T has an advantage in wireless, and virtual MVPDs are most likely to thrive over wireless connections. AT&T will want Turner content to be included in virtual MVPDs, to obtain greater affiliate fees and advertising and promotional revenue. Let’s not forget all the tie-ins, like action figures for Game of Thrones and opportunities to sponsor segments/events on NBA “soft” shows, like NBA related shows with Ernie, Chuck, Kenny and Shaq. Comcast also has a limited geographic footprint, whereas DIRECTV is ubiquitous. This means Comcast would not want to go along with a nationwide foreclosure strategy against a virtual MVPD.
- DOJ’s brief said that a behavioral remedy wasn’t workable here because the FCC isn’t available. This makes no sense. I’ve been involved in more arbitration disputes than you can count. And all that’s needed is an arbitrator, a law clerk, and authority. No government bureaucrats are needed. And because AT&T has submitted to binding arbitration, there is no opportunity for agency review of an arbitration decision. It upsets me to hear Delrahim peddle this “fake news” claim that enforcement of nondiscrimination provisions imposes large administrative or agency costs. Even when the FCC’s ALJ was involved, he was salaried, had other matters on his docket, and the incremental cost to the FCC and to taxpayers was zero.
- AT&T’s baseball-style arbitration offer is a good start, but I would add something. For me, the most important content in the Time Warner portfolio is HBO. I realize that HBO is available over the top now, which thwarts any foreclosure strategy regarding HBO, but I’d like to see AT&T offer to keep this product on a standalone basis and not impose a penalty price (say, above the current price of $15) based on the consumer’s ISP. AT&T could still zero rate Time Warner content as part of its Internet offerings.
- DOJ fairly notes that “fair market value” is ambiguous, and I’ve seen an arbitrator (no names) get turned around in a case involving vertical integration. Here, the term “fair market” means what a non-vertically integrated owner of the same content would charge, or what economists call the “standalone” profit-maximizing price. This understanding should be made explicit in any consent order to remove any ambiguity in future disputes.
- AT&T appears to have abandoned the political angle here, but as a fierce defender of the free press, I’m not willing to let it go. This is a fact: Delrahim went on TV (BNN) in October 24, 2016 and said “I don’t see this as a major antitrust problem.” This is also a fact: Trump has condemned CNN repeatedly on Twitter, including retweeting an image of CNN on the bottom of his shoe. And he led a rally in a “CNN Sucks” chant as recently as last weekend. This despite the fact that CNN is not even the most liberal news network on cable. (Hello Rachel!) The White House has avoided taking CNN’s questions at press briefings. Given the lack of merit to the DOJ’s case, we must be vigilant in not allowing any president, regardless of party, to use his DOJ to go after political opponents in the media.
- While the judge may not have allowed discovery of White House documents, AT&T should be allowed to question Delrahim regarding the basis for his “no problem” statement. After all, there should be no privilege for explaining a public statement made before his name was placed in nomination; he had no client at that point. The reason for the question is simple: If Delrahim (who worked actively on the Comcast matter) didn’t think the case was problematic before being given the antitrust position, then the case cannot be as clear cut as DOJ would like the public to believe. There must have been a theory of the case under which Delrahim found the merger approvable. Given two theories, one for approving the transaction and the other for stopping it, the procedural and persuasion burden is, as always, on the government.
- I’ve found no rational theory under which the merger should be barred, but even if one were to exist, I conclude the government cannot carry its burden of persuasion. Additionally, if the DOJ loses this case on the merits, and I suspect it will, there ought to be a full Congressional hearing into why the case was brought in the first instance. We are owed that much if we want to maintain any semblance of a democracy.
In my thirties, I had a bit of a temper. I’ve since mellowed. I used to smoke and yell. Now I yoga and preach moderation.
So it takes quite a bit of mishegas to get me to blow a fuse these days. But Tesla’s shoddy customer service managed to do just that.
Yesterday morning I took to Twitter to let loose on my entrepreneurial idol, Elon Musk, sharing with my followers Tesla’s horrific rating from the Better Business Bureau. It was a gratuitous shot, but I was pissed.
By late yesterday afternoon, Tesla delivered a replacement Model X to my home—for reasons likely unrelated to my tweet.
Here is the story of what got me there. Just the facts, in chronological order.
* * *
September 28, 2017: A driver rear-ended my one-year-old Model X, denting the back bumper and damaging the back sensors. The car was drivable, but only in an impaired state, as the sensors play a key role for the Tesla (and the panel flashes a sign when the sensors are out). Tesla doesn’t have its own repair shop, but has contracted with authorized third-party repair shops. I took my car to one such authorized repair shop (Service King Collision Repair) to begin the healing process shortly thereafter.
October 6, 2017: Service King orders the parts from Tesla. I agree to drive the car in an impaired state while the parts ship, under the assumption that shipment and installation would occur in short order.
October 20, 2017: Tesla ships the parts to Service King.
November 6, 2017: I drop off the car at Service King. Geico, the insurer of the driver who struck my car, covers the rental expense for a Cadillac SRX from Enterprise. (The SRX is a fine car, but it is not a Model X and it is not what I paid for.) Upon removing the bumper, Service King learns that more parts are needed from Tesla. Service King requires authorization from Geico to purchase the additional parts.
November 20, 2017: Service King orders the additional parts from Tesla.
December 7, 2017: My Model X has now been at Service King for over 30 days. I’ve reached my limit. We are now two months into this ordeal. To add insult to injury, Tesla has never updated me as to the status of the replacement parts; it’s as if they don’t care. I ask the salesman at the Tysons Corner Tesla dealership to have a manager contact me that day. No manager will speak with me—the head of sales and service are allegedly out of the office. I am told to contact an associate in Tesla’s service shop. I tell the associate that I am making a firm demand: Either Tesla can give me a new Model X while Tesla locates the parts, or I can retrieve and return my Model X to Tesla for a full refund of what I paid. I further tell the associate that I want an answer from a manager the following morning.
December 8, 2017: I dash off a reminder text to my salesman, expressing dismay from not having heard from a manager. I post the angry tweet. I later discover that the service manager was in fact trying to call me that morning, but did not have my phone number. That Tesla did not have my number is a reflection of a broken customer service operation. During a frank conversation, the service manager offers to loan me a new Model X. I accept the offer, and the new Model X arrives at my home in the afternoon.
December 9, 2017: I return the Cadillac to Enterprise, and I am presented with a copy of the invoice (pictured above) that Geico will receive for 34 days of a rental. My original Model X is still at Service King, and for all I care, Tesla can take its time to locate the replacement parts.
* * *
I am sharing this story with the hopes that Mr. Musk will notice this ordeal and begin to take the customer-service side of his operation seriously. You can’t sell a car that can’t be repaired; the two things go hand in hand. Thus, I can no longer recommend a Tesla to a friend or associate without the caveat that “It is the best car on the planet provided no one hits you.”
Tesla needs to recognize that the kind of people who can buy a Tesla are accustomed to being treated as if they are VIPs. In that spirit, I would hire away the head of customer service from Mercedes or from a high-end hotel like the Four Seasons. This seems mission critical.
Mr. Musk has mastered the art of making cars. Now he must master the art of dealing with prima donna customers.
In Defense of Some (But Not All) Behavioral Remedies: A Response to Feld’s Case for Structural Relief
I promised a rejoinder to Harold’s latest blog bashing behavioral remedies in the media space. My Forbes piece explained the success of several discrimination complaints against Comcast, but I want to spill a little more ink on this passage from Harold below:
As I noted back above, Comcast/NBCU is usually held up as exhibit “A” in “why behavioral conditions totally suck.” None of the behavioral conditions effectively stopped Comcast from using its market power in exactly the way we were worried about (such as zero-rating its own streaming service, or refusing to sell content to online streaming services, or discriminating against independent programmers in favor of its own content and other whacky shennanigans). The experience was so awful and pathetically lame that it led directly to rejecting the Comcast/TWC deal.
First, that a complainant avails itself of the protections of a complaint system is not proof that the behavioral remedy is failing. What matters is the speed (and probability) of achieving relief for meritorious complaints. And the success of Bloomberg, an unnamed OVD, NFL Network, and MASN suggests that complainants can and do achieve relief under the FCC’s case-by-case protections.
Second, as Trump tests the limits of our constitution, Comcast is a stress test of behavioral remedies. Comcast appears hardwired to discriminate in favor of its own, or at least it has acted that way in the past. Subjecting any other distributors to a nondiscrimination standard—whether it’s AT&T or Google in a soon-to-be created Net Tribunal—would likely generate fewer complaints, as the culture of any platform (other than Comcast) would be more amenable to following the rules and respecting social norms of neutrality. So if the behavioral remedy survives the Comcast stress test, it can survive anything. Ditto for our constitution.
Third, ex post adjudication under both the Comcast-NBCU protections and section 616 of the Cable Act (program-carriage rules) has warts—namely, the appeals process—but those warts should be identified and (excuse the pun) cut off. The seemingly endless appeals process of case-by-case review at the FCC is highly politicized (with FCC commissioners always voting their party lines); postpones the delivery of justice; and benefits the well-heeled distributors who can afford to extend the fight with first-rate appellate lawyers. (Yes, I’m still licking my wounds from Tennis Channel.) Rather than trash the adjudication process, however, we should press for reforms to expedite relief and to level the playing field between independent content providers and vertically integrated distributors. For example, I have advocated for injunctive relief immediately upon a finding of discrimination by the administrative law judge (ALJ) or tribunal, as well as for skipping over the appeals to the FCC commissioners and going straight to the D.C. Circuit. You wouldn’t send a Porsche 911 to the scrap heap because it needed a new muffler, now would you?
[Note: Because the FCC is not involved in the AT&T/Time Warner review, the FCC wouldn’t be tasked with adjudication here. But that does not imply that adjudication is impossible. The ALJ and her staff could be housed anywhere.]
With respect to Harold’s thesis that the “The DOJ’s Case Against AT&T Is Stronger Than You Think,” that is largely an empirical question: The case will come down to whether the content in Time Warner’s portfolio is sufficiently powerful such that AT&T could lure enough new video subscribers away from rival distributors to offset the loss in content license revenues from a foreclosure strategy. In a case cited by Harold (Time Warner/Turner), the Federal Trade Commission certainly believed these networks to be must-have as of 1996 (the year in which MSNBC and Fox News were both launched), alleging that “CNN, TNT and WTBS are viewed by cable distributors as ‘marquee’ or crown jewel services.” Query whether the same is true in the (richer) media landscape of 2017. During a standoff with Turner involving the same properties in 2014, Dish Chairman Charlie Ergen reportedly “told Wall Street analysts that he wasn’t sure that CNN was still a must-carry network.” Whether Ergen was bluffing or being sincere, those words might get special attention in DOJ’s suit. Stay tuned!
Good morning. I want to thank Marshall Steinbaum and Eric Bernstein for organizing this important event. And thanks to Sally for that kind introduction. People might not know that, as her night gig, Sally hosts a podcast called Women Killing It, which celebrates women’s accomplishments in business, politics, and the arts, and is quite inspiring. And sticking with the feminist theme, I can’t help but noticing the gender composition of this panel. They all should look this way, right? Marshall called me in panic, saying he needed a token, bald Jewish man on a DC policy panel for diversity reasons.
I want to use my opening to discuss remedies that have been floated to combat the threat to edge innovation posed by dominant platform owners. Some like Sally are calling for beefed-up antitrust enforcement under the current standards. Others like Marshall and Lina Khan are calling for a change in the standards, to accommodate concerns not captured under the consumer-welfare framework. Still others like retired tech columnist Walt Mossberg are calling for new protections that would operate outside of antitrust, such as a tribunal to adjudicate disputes between edge providers and dominant platforms. I affectionately call last this one the “Mossberg Plan.”
These various remedies may be complementary, in which case no one has to prove that her plan is best. But my competitive juices compel me to make the case today for the Mossberg Plan. To do that, I offer three principles that should guide us as we tackle this difficult competition problem: (1) Policy Stability, (2) Speed, and (3) Symmetry.
Policy stability is the notion that regulatory outcomes involving a particular issue are reasonably predictable, so that the relevant actors—here, in the Internet ecosystem—can make long-term plans. Confidence in equitable outcomes is the key to spurring edge innovation by independent content and app providers. The same confidence in predictable results attracts platform owner investment that spurs innovation. Of course, there is no such thing as a perfectly predictable outcome; even antitrust cases aren’t perfectly predictable. But procedural and substantive precedent from the repeated application of well-understood standards will guide the next decision, narrowing the range of outcomes and making prediction easier.
Relative to agency review, adjudication in a court or a tribunal is shielded from political influence—another force working against policy stability. A judge with a lifetime appointment or a sufficiently long tenure is not thinking about how her decision will affect her future income path, as determined by her political constituency.
For the opposite of policy stability, check out the modern FCC, which has become highly politicized. FCC Commissioners have injected politics and thus policy instability, for example, by voting perfectly along party lines when presented with an Administrative Law Judge’s findings of discrimination by a vertically integrated cable operator. Republicans have voted to overturn a finding of discrimination in both cases—an admittedly small sample size, but troubling nonetheless.
Not to pick on Republicans, Tom Wheeler, the Democratic Chairman under President Obama, injected an unhealthy dose of policy instability in his design of a case-by-case regime in the 2015 Open Internet Order. Rather than commit to a well-understood standard such as nondiscrimination, as his predecessor Julius Genachowski did in the FCC’s 2010 Open Internet Order, Chairman Wheeler opted for something more nebulous called the “General Conduct” standard and declined to use an independent factfinder to adjudicate disputes. This gave Wheeler, and future FCC Chairs, maximum flexibility to achieve whatever regulatory result they desired, enshrining an arbitrariness that undermines investment. In January 2017, Wheeler’s Wireless Telecom Bureau found that AT&T’s and Verizon’s zero-rating plans were in violation of the nebulous General Conduct standard—only to be reversed by Chairman Pai a few months later. This is the opposite of policy stability.
In contrast, an independent tribunal tasked with enforcing a well-understood standard such as nondiscrimination, whose decisions have binding influence on future cases and could not be reversed by agency heads, would achieve policy stability.
Let’s move to the second principle for identifying a good remedy here—speed. Speed in this context is the notion that a complainant that prevails on the merits enjoys injunctive and potentially monetary relief in a timely fashion. Proponents of the use of antitrust as a means to police discriminatory conduct on the Internet, such as Josh Wright, are silent when it comes to speed. Based on my 20-year career working on antitrust cases, I can say with some authority that antitrust moves like molasses. It’s as if antitrust procedures were designed by lawyers to ensure job security! The breakup of AT&T occurred ten years after DOJ’s complaint in 1974, and Microsoft also took a decade to resolve. That means Netscape and others operating on the edge of Microsoft’s platform were allowed to twist in the wind for ten years. And this is how edge innovation dies.
In contrast to the five-to-ten year ordeal of antitrust litigation, a specialized tribunal tasked only with determining whether discrimination had occurred and, as a result, the complainant was materially injured, should be able to adjudicate cases in one-to-two years.
And finally, let’s briefly touch on the third principle to guide us in policy design—symmetry. Symmetry is the notion that no set of dominant firms is immunized from the regulation. Just as it made zero sense to subject some Internet firms to opt-in standards for privacy protections and others subject to opt-out, it would make zero sense to design a regime that policed ISPs (and only ISPs) for discriminatory conduct, while permitting Google/Facebook/Amazon to discriminate against independent edge providers with impunity, especially since the tech platforms are a bigger threat to edge innovation. According to two dozen interviews by the Post’s Elizabeth Dwoskin of top tech investors and entrepreneurs, the threat posed by Facebook “is having a profound impact on innovation in Silicon Valley, by creating a strong disincentive for investors and start-ups to put money and effort into creating products Facebook might copy.”
A tribunal that created a forum for edge providers to bring discrimination complaints against both tech platforms and ISPs, evaluated pursuant to the same evidentiary criteria, would satisfy the symmetry principle.
When judged along these dimensions—policy stability, speed, and symmetry—the Mossberg Plan is the best option for policymakers. It would make innovation great again.
My Comment on Wright’s “Antitrust Provides a More Reasonable Framework for Net Neutrality Regulation”
Professor Josh Wright has written a piece that responds, at least in part, to my new article explaining why antitrust cannot accommodate net neutrality violations in particular, nor other mild forms of discrimination on the Internet in general. In his Perspective for the Free State Foundation, Wright argues that my analysis of the limits of antitrust as applied to this particular type of discriminatory conduct “reveal[s] a profound and fundamental lack of understanding of the rule of reason framework.” Ouch. As it turns out, Wright’s understanding of antitrust, as reflected in prior writings, is exceedingly narrow, which proves my point.
For those getting up to speed, my article makes two major points: (1) a pure innovation-based case that lacks short-run price and output effects—the types of antitrust injury that are readily cognizable and more easily proven—would be exceedingly difficult to win given prevailing evidentiary requirements under antitrust law; and (2) even if one could prevail on the merits of such a case, the practical difficulties for a private litigant to bring a pure innovation-based case, in terms of time and resources, renders antitrust ineffective in policing discrimination on the Internet.
Wright ignores the second point of my article entirely, focusing instead on the claim that antitrust does in fact recognize innovation-based harms. But the practical challenges to an antitrust approach cannot be ignored: The speed of decision-making in this arena is critical, and as demonstrated below, the Federal Trade Commission (FTC) has not shown it can move fast. Wright fails to appreciate that securing a lasting solution—dare I say legislative compromise—to the net neutrality problem requires offering a good-faith alternative to Title II-based rules that provides timely relief to edge providers. Telling an edge provider that it must endure a three-to-ten year adjudication process costing multiple millions of dollars fails that requirement.
With respect to the first point of my article, the cases Wright cites as evidence of the FTC’s willingness and ability to take on pure innovation (non-price) cases actually prove my point, since in each substantive discussion, the FTC cites higher prices as at least a partial basis for their requested relief. (And even if an agency would be willing to bring such a hypothetical case, Wright offers no prescription for how a private litigant could secure relief from discrimination.) None of the cases he cites serves as counterexamples to my claim that a pure innovation-based, single-firm monopolization case would not likely prevail under current antitrust standards. Deprived of any compelling counterexamples, Wright is left to cite an amicus brief by the FTC in Mylan.
In Intel, his best counterexample, Wright fails to note that the FTC pulled the plug by settling, which means the case has no precedential value for future plaintiffs. He also fails to note that the FTC’s theory of harm in Intel involved both short-run price effects and innovation harms. A quick review of the complaint reveals the FTC’s price-based theory of harm, demonstrating the case supports my theory, contrary to Wright’s claim:
- “On the one hand, Intel threatened to and did increase prices, terminate product and technology collaborations, shut off supply, and reduce marketing support to OEMs that purchased too many products from Intel’s competitors.” (paragraph 6)
- “Intel’s use of penalties, rebates, lump-sum and other payments across multiple products, differential pricing, and other conduct alleged in this Complaint maintained or is likely to maintain Intel’s monopoly power to the detriment of competition, customers, and consumers. Intel would not have been able to continue charging comparably higher prices across its product lines but for its conduct, as alleged in this Complaint, that harmed competition.” (paragraph 55)
- “To combat this competition, Intel charged those OEMs significantly higher prices because they used a non-Intel graphics chipset or GPU.” (paragraph 89)
- “Intel’s conduct adversely affects competition and consumers by, including but not limited to: causing higher prices of CPUs and GPUs and the products containing microprocessors;” (paragraph 94)
- “Absent such relief, for OEMs and consumers of the relevant products, the consequences have been and likely will continue to be supracompetitive prices, reduced quality, and less innovation.” (paragraph 95)
Economists have demonstrated that, under certain conditions, share-based loyalty discounts can be used by monopolists to extract supra-competitive prices; when a firm enjoys monopoly power over a buyer’s initial requirements (or “noncontestable units”), the firm can offer to waive a “penalty price” on the noncontestable units in exchange for higher prices on the contestable units. Because Intel allegedly employed this precise strategy to secure higher chip prices, the case does not make for a good counterexample to my thesis regarding lax antitrust enforcement of pure innovation-based cases.
Wright cites Grifols, S.A. as an example of a “conduct case where the theory of harm was decreased innovation.” But Grifols arose in a merger context, where the theories of harm that an antitrust agency may pursue are arguably more expansive than those an agency can pursue in a single-firm monopolization case; merger review is made pursuant to Section 7 of the Clayton Act, whereas monopolization cases are pursued under Section 2 of the Sherman Act. Again, these are weak counterexamples.
Lastly, by citing Microsoft (a case that is nearly two decades old), Wright inadvertently proves my second point, which he is otherwise silent on: Antitrust generally, and the antitrust agencies specifically, are currently ill-equipped to effectively pursue a platform owner that commands sufficient market power to stifle innovation. While the Department of Justice arguably prevailed over Microsoft, it was unable to do so fast enough to save Netscape, the innovative browser company that was run over by Microsoft’s unlawful support of Explorer, its rival. (Rival chipmaker AMD similarly twisted in the wind for years while Intel was resolved.) That the FTC/DOJ have not litigated a major Section 2 case since Microsoft, certainly not one involving platform technologies, is remarkable. Until the FTC demonstrates a track record and the willingness to bring Section 2 cases, Wright’s arguments are nothing more than hollow promises.
In today’s global Internet marketplace, any delay of innovation in the United States will likely be countered by deployments of innovation elsewhere, disadvantaging U.S. companies and consumers. Attempting to address inequities in the fast-moving Internet space with the hoop-jumping required by the Administrative Procedure Act of 1946 and the Federal Trade Commission Act of 1913 is as nonsensical as trying to govern the Internet with the 1934 Communications Act, which even Wright agrees is in adequate for the Information Age.
Perhaps most surprisingly, Wright appears to abandon his prior stance that modern antitrust is ineffective in combatting a monopolist’s efforts to stifle innovation. In a 2010 publication titled Google and the Limits of Antitrust—the title says it all—Wright offers an exceedingly narrow view of antitrust. Wright and his co-author Geoff Manne are generally skeptical about the scope of antitrust enforcement as applied to platform providers such as Google. They conclude (page 74): “that plaintiffs cannot or should not prevail against Google in a monopolization claim based on the two types of conduct considered here: exclusive syndication agreements and use of the quality score metric to extract greater rents.” Given “the apparent lack of any concrete evidence of anticompetitive effects or harm to competition,” they argue, “an enforcement action against Google on these grounds creates substantial risk for a false positive which would chill the innovation and competition currently providing immense benefits to consumers.” It is not clear how a plaintiff could ever prove “concrete evidence anticompetitive effects” for an innovation-based harm that has not yet materialized.
Perhaps most revealing, Manne and Wright block quote (at page 63) the evidentiary standards from the Areeda-Hovenkamp treatise for exclusive dealing cases:
In order to succeed in its claim of unlawful exclusive dealing, a plaintiff must show the requisite agreement to deal exclusively and make a sufficient showing of power to warrant the inference that the challenged agreement threatens reduced output and higher prices in a properly defined market. Then it must also show a foreclosure coverage sufficient to warrant an inference of injury to competition, depending on the existence of other factors that give significance to a given foreclosure percentage, such as contract duration, presence or absence of high entry barriers, or the existence of alternative sources or resale.
The treatise does not say that a harm to innovation can be substituted for a showing of “reduced output or higher prices.” When it comes to exclusionary conduct, it’s all about the prices!
When the FTC appeared poised to file an antitrust complaint against Google, Manne and Wright issued a statement in June 2011 that succinctly reflected their views of the limits of antitrust: “The focus of any antitrust inquiry must always be on consumer harm—not harm to certain competitors. We are skeptical that any such harm can be proven here.” On this Wright and I agree: Under the consumer-welfare standard, discriminatory or exclusionary conduct by a platform provider that does not generate a price or output effect will largely go unchecked by antitrust law.
And that’s precisely the regulatory gap that my proposed tribunal seeks to fill. Under the consumer-welfare lens, the antitrust agencies and courts take a narrow approach to antitrust; until that changes, we cannot count on the FTC to police discrimination on the Internet.
I’m not a fan of all-inclusive resorts. Having just returned from one in Punta Cana (DR), which appears to offer over 100 all inclusives, the indignities suffered are fresh in my mind. Allow me to share my horror and impart a bit of economics.
The basic problem with all inclusives is vertical integration of hotels into restaurants. The lack of synergy between the two skill sets is made worse by the big bundle, which eliminates prices for the “tied” product—in this case, resort food and drinks.
Don’t mistake this as a rant against vertical integration generally. Some skill sets nicely complement each other. For example, local breweries tend to be good at making food, presumably because someone who has a knack for making tasty brews understands the palate. Economists call these “synergies,” and they should be exploited whenever possible.
I learned this lesson first hand at the Atlantis Resort in the Bahamas. Atlantis offers its own restaurants. It also (wisely) contracts out resort space to third-party restaurateur such as Nobu. Trust your fearless blogger when he tells you the homegrown resort food is barely edible. In contrast to our local brewery example, the skills sets of making elaborate water parks (or just plain swimming pools) and making cuisine simply don’t overlap.
(A quick econ digression: A seminal piece by Carlton (2001) shows how bundling by an all-inclusive resort also can be bad for island natives. Before the resort bundled food with hotel stays, there was a thriving sector of independent restaurateurs, which catered to both island natives and tourists. After the bundle is introduced, tourists now eat all of their meals “for free” at the resort—really at no incremental charge—driving the independents out of business due to a lack of viable scale. Island natives are suddenly beholden to a monopoly provider of restaurants. But this piece is trying to convince you that tourists like you are harmed as well!)
When mediocre, resort-owned restaurants and bars are not allowed to charge a price due to the all-inclusive bundle, the problem of vertical integration in the absence of synergies is exacerbated. Now the interests of the resort and the guests are almost perfectly in conflict—the resort’s new profit objective is to minimize expenditure on food and drink given their zero incremental contribution to margin. And the guests can’t buy their way out of the predicament.
Even when something is “free” for guests at the margin, so long as there is a cost to provide the good (a meal or a drink), the supplier will find a way to ration supply. This is the role normally reserved for prices. But all inclusives kill the normal market mechanism.
In the case of an all-you-can-drink poolside bar—a cool idea in theory once you get over where guests are urinating—that means understaffing the bar so that patrons tread water for long periods before getting the bartender’s attention.
Rationing can also be achieved by decreasing the quality of spirits. Put bluntly, this entails cheating their guests. Stock the crummiest wine possible: Call one “white” and the other “red.” The all inclusive at which I stayed offered one red, one white, and one beer (Presidente). You should have seen the bartender’s expression when I asked for an Old Fashioned with Rye.
At the extreme end of the cheating spectrum, look to the Spanish chain Iberostar, an all-inclusive resort that substituted bootleg liquor for the real stuff across several properties in Mexico, and sent several guests to the hospital and some to their death. (When I fumed on Twitter the other day, Iberostar responded by saying: “We only purchase sealed bottles that satisfy all standards required. Safety and satisfaction of our guests is of utmost importance for us.” Hope they have a better defense in court!)
The same incentives apply to all-inclusive resort food. None of these outfits could survive outside of the resort. I met some New Yorkers who paid a hotel chain $1,500 on day three of their vacation to move from one resort to another (mine), because their family could not stomach the grub at the original resort. They literally upgraded from horrible to not horrible.
In addition to suffering low quality and long queues, guests at an all inclusive cannot incentivize staff via tipping. When you pay for drinks on the beach a la carte, you can add a gratuity at the end of your experience when presented with the bill. The next day your friendly server will remember the tip, and (hopefully) give you the royal treatment. Sometimes the gratuity is even already added to the bill. But at the all-inclusive resorts, because guests are not presented with a bill, the only way to tip your server and thus incentivize him is with cash. But who swims with cash in their pockets?
Are you convinced that prices are wonderful? Of course, charging a positive price at the margin for booze has a drawback, in that it causes guests to drink too little relative to the socially optimal level. Resorts make more money the more you drink, and your friends have more fun (making fun of you) the more you drink. But good resorts that offer food and drink a la carte know how to solve that problem—namely, by giving away free drinks.
“Hold on one second,” my free-market friends insist. “All inclusives are sensitive to the reputational costs of driving away repeat business. There must be at least some all-inclusives that have built up a brand name, have a lot of loyal repeat customers, care about their reputation, and treat their loyal customers well. They follow an all-inclusive model not to screw their customers, but to guarantee an all-around high quality experience.”
If only. The all inclusives rely on a steady supply of myopic, one-shot guests. Sure there are loyalists, but by repeatedly withstanding these indignities, they have revealed that they either don’t put a premium on food—did I mention there was free booze?—or don’t know good food from bad food. And economists like Gabaix and Laibson (2006) have shown that firms would find it more profitable to pursue a pricing strategy that exploited myopic consumers with higher prices than to attempt to steal customers from one another by slashing prices of ancillary services, even in “highly competitive markets.”
There. I’m done with that rant. And I’m also done with all inclusives.