Posts Tagged Congress

The FTC’s Decision to Reject the Search Antitrust Case against Google

In light of recent stories hinting that the Federal Trade Commission (FTC) will not pursue antitrust claims that Google discriminates in its search results, advocates for rival websites are sounding the alarms.  One attorney who represents several websites that have complained about Google’s alleged favoritism in search decried: “If a settlement were to be proposed that didn’t include search, the institutional integrity of the FTC would be at issue.” Ironically, the opposite is true: By reportedly dropping search discrimination from its case, the FTC has bolstered its integrity.

This is not to say that discrimination against rival websites is a good thing. Rather, discrimination of the kind allegedly practiced by Google is generally not recognized as an antitrust violation. With the exception of extreme cases, such as when a monopolist refuses to sell a product or service to a competitor that it makes available to others for discriminatory reasons, a firm does not expose itself to antitrust liability by merely refusing to deal with a competitor. (By contrast, a firm may expose itself to antitrust liability by refusing to deal with customers or suppliers so long as they deal with the firm’s rival.) Because Google is not refusing to sell a product or service to a rival website that it makes available to others, but instead places its specialized search results—such as maps, image, shopping or local results—at the top of the page when it believes they will be useful to consumers, Google arguably has no “duty to deal” under the antitrust laws.

To make a discrimination square peg fit into an antitrust round hole, the FTC would have needed to invoke an unorthodox section of the FTC Act (Section 5), thereby stretching the agency’s authority. By recognizing the incongruence between the conduct that the antitrust laws are meant to stop and the consumer-centric justifications for Google’s behavior, the FTC appears to have spared itself a tough slog. For example, one element of a duty-to-deal claim under the Sherman Act is proving that Google’s treatment of rival websites harms consumers; even the cleverest economist would be stumped with that assignment.

Google’s rivals are now seeking a do-over at the Justice Department (DOJ). They analogize the Google case to the FTC’s Microsoft investigation, where the DOJ picked up that case shortly after the FTC commissioners deadlocked in 1993. But the FTC does not appear to be deadlocked here; the agency is likely rejecting the Google case because the antitrust law does not support the complainants’ arguments.

Although regulatory relief at the FTC appears to be fleeting (and the DOJ is not the proper forum), website rivals could seek protection against search discrimination from Congress. The blueprint is already established: In 1992, Congress amended the Cable Act to protect independent cable networks against discrimination by vertically integrated cable operators. Section 616(a)(3) of the Act directs the Federal Communications Commission to establish rules governing program carriage agreements that “prevent [a cable operator] from engaging in conduct the effect of which is to unreasonably restrain the ability of an unaffiliated video programming vendor to compete fairly by discriminating in video programming distribution on the basis of affiliation or nonaffiliation of vendors in the selection, terms, or conditions for carriage of video programming provided by such vendors.”

This explains why, for example, the NFL Network brought a discrimination cases against Comcast—a vertically integrated cable operator that owns a national sports network—under the Cable Act and not under the Sherman Act. Had the NFL Network pursued its discrimination claims in an antitrust court, it likely would have failed. By styling its case as a program-carriage complaint, however, the NFL Network took advantage of cognizable harms under the Cable Act such as preserving independent voices that, for better or worse, are not appreciated by the antitrust laws.

If independent websites such as Nextag want relief, then they should lobby Congress to write the analogous non-discrimination provisions covering search engines. Once an agency is designated with the authority to police Google and other vertically integrated search engines (Bing included), website rivals could pursue individual discrimination claims just like the NFL. Importantly, website rivals would have to fund these battles, not with taxpayer money (of which millions were likely spent by the FTC in its antitrust investigation of Google), but with their own resources. Self-funding ensures that only the strongest discrimination cases would come forward; when someone else is footing the bill, all bets are off.

Admittedly, the relief contemplated here would not come quickly. It took years for independent cable networks to convince Congress of their plight. But the impatience of Google’s rivals is no reason for the FTC to bend the antitrust laws. Better to keep the powder dry—and the FTC’s integrity intact—and go after a monopolist that is more blatantly violating the antitrust laws on another day.

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Divining a Regulator’s Intent

Regulated firms and their Washington lawyers study agency reports and public statements carefully to figure out the rules of the road; the clearer the rules, the easier it is for regulated firms to understand how the rules affect their businesses and to plan accordingly. So long as the regulator and the regulated firm are on the same page, resources will be put to the most valuable use allowed under the regulations.

When a regulator’s signals get blurry, resources may be squandered. For starters, take the FCC’s annual wireless competition report and the Commission’s pronouncements on spectrum policy. For several years, the competition report cited a trend of falling prices and increasing entry as evidence of robust competition while at the same time noting that industry concentration was slowly rising.

In an abrupt turnaround, the FCC’s 2010 competition report cited the slow but steady increase in concentration as evidence of a lack of competition despite the continued decline in prices and increase in new-firm entry. In other words, in the face of the same industry trends, the agency’s conclusion on competition reversed. The increased weight placed on concentration also seemed at odds with the DOJ’s revised Merger Guidelines, which deemphasized concentration in favor of direct evidence of market power.

At last week’s Consumer Electronics tradeshow, the FCC chairman suggested that the competition report’s objective was not to provide guidance on Commission policy but instead “to lay out data around the degrees of competition in the different sectors.” So much for clearing up the ambiguity. Industry participants expect more than a Wikipedia entry on something so weighty as an annual report to Congress regarding one of the economy’s most critical sectors.

The agency’s signals on spectrum policy are even murkier. On one hand, during the last few years, the current FCC has been calling for more frequencies to be made available to support and grow wireless broadband networks. The FCC has also been publicly supporting voluntary incentive auctions—a market-based tool to compensate existing spectrum licensees for returning their licenses—as the best way to reallocate unused broadcast spectrum to wireless broadband. However, in a confusing set of remarks at the same tradeshow, the FCC now seems to be saying that it only wants to see more spectrum made available if the agency can dictate who gets the spectrum and how they can use it. The very discretion that the FCC now seeks will invite rent-seeking behavior among auction contestants, who will lobby the agency to slant the rules in a way that limits competition and advances their narrow interests; better to immunize the FCC from this lobbying barrage by limiting its discretion.

The agency’s inconsistent and confusing analysis and statements in these two critical policy arenas—wireless competition and spectrum policy—created the perfect storm last year when AT&T sought to acquire T-Mobile. AT&T argued that it wanted to purchase T-Mobile and use its spectrum to augment existing spectrum and infrastructure resources, consistent with the agency’s acknowledgement that wireless carriers needed more spectrum to support surging demand for bandwidth-intensive wireless services such as streaming video. Had AT&T understood the FCC’s intentions, it would not have offered a four-billion-dollar breakup fee to T-Mobile’s parent; these resources could have been put to better use.

The singular objective that should drive the Commission in all matters wireless is getting spectrum into the hands of firms that value it the most. The last 20 years of wireless-industry growth has proven that those who value spectrum the most put it to use most quickly. To commit to this course of action, the agency needs to more clearly and consistently signal its regulatory intentions. If the agency wants to spur competition, it should support Congressional efforts to authorize incentive auctions without restrictions. It also needs to let the evidence of lower prices, growing adoption, and increasing innovation inform its understanding of the state of competition.

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