Archive for March, 2018

My Remarks at the Catholic Law School Symposium on Net Neutrality

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in which Title II-based net neutrality rules (Obama’s 2015 order replaced the 2010 standards with rules) will be repealed with effectively no protections whenever a Republican occupies the White House.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!

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My Remarks at the American University Law School on the AT&T-Time Warner Merger

Opening remarks

  1. 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.
  2. 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?
  3. 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!

Unilateral effects

  1. 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.
  2. 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.
  3. 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.

Coordinated effects

  1. 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.
  2. 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.
  3. 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.

Remedies

  1. 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.
  2. 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.
  3. 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.

Closing remarks

  1. 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.
  2. 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.
  3. 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.

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