Below, we have provided the full transcript of the third episode of our series Antitrust in a Digital World: Does It Work?. Read below to see the discussion about Analyzing the Antitrust Remedies in Digital Markets.
Graham DUFAULT:
Hello and good afternoon. My name is Graham Dufault, and I am the senior director of public policy for ACT | The App Association. And for those who are not familiar, the App association represents and advocates for about 5,000 small to mid-sized mobile software and connected device companies in the app economy. We’re all around the world, and our member companies have a number of different interests. We advocate on issues from privacy, competition, digital health, and workforce development. So welcome to the third installment of our series on antitrust and platforms in the digital economy. This one is called Analyzing the Antitrust Remedies in Digital Markets. And today’s discussion is especially interesting because we are going to dive into what the potential remedies are for perceived antitrust issues surrounding digital platforms and all their different shapes and sizes.
So, while the previous panels discussed how governments overseas are dealing with antitrust issues in digital markets versus how the US authorities are dealing with them, and then also how the U.S administration is looking at enforcement and reform in this area. This one’s really going to be looking at the merits of different proposals that would remedy those competition issues. So, a special thanks to our partner Competition Policy International, which has done an outstanding job producing this series, and we’re very thankful for the partnership there. Please also note that you can watch these events on CPS website, they’re all recorded and the next one is next Thursday at noon, Eastern. 12:00 PM Eastern. So please tune in for that and register. So, why don’t we get started, and I will have our panelists introduce themselves starting with Phil Verveer. Phil.
Philip VERVEER:
Alright. I’ve been a Washington lawyer for many decades, with a typical Washington lawyer’s career in and out of the government, working on competition, communications and technology. In the last couple of years, I’ve been at the Shorenstein Center at the Harvard Kennedy School looking at the question of social controls of the major digital platforms.
DUFAULT:
Thank you, Phil. We’re honored to have you with us and very lucky given your experience being in the center of some of the seminal cases on antitrust in this area. And so thank you for being here with us today. Next we’ve got Randy picker. Randy.
Randal PICKER:
Thanks, Graham. So I am indeed Randy Picker. I’m a professor at the university of Chicago Law School. I teach and write in these areas. I have an online course, a moot course, we used to call them; that you can go watch if you want 20 hours. You can binge watch me this weekend. I highly recommend it. I don’t think I have any conflicts of interest here, so there you have it.
DUFAULT:
Randy, we’re very excited to have you with us and draw on your expertise. Not only have you written some of the leading articles in this area, you’re teaching the class on it, so we really appreciate you being here. And next let’s go to Emily Hart. Emily.
Emily HART:
Thank you, Graham. I’m so excited to be here today. Thank you for inviting me. I’m Emily Hart. I am chief operating officer of MotionMobs. We are custom software development and a technical advisory firm. We are a certified woman-owned business located in Birmingham, Alabama. And our firm has a very special emphasis on monetizing software and how the business model and software play together. And so we do a lot of work with our clients in helping them understand exactly how to build the right SaaS model, how to go to market in a way that’s going to yield a positive return on investment, and helping them walk through all the difficult and complex nuances of what it takes to launch a new product to market.
DUFAULT:
Well, thank you so much for being here, Emily. MotionMobs is an excellent member company of the App Association. We’re lucky to have you join us and to have you in our membership. So thank you. And then finally we have Michael Katz. Michael.
Michael KATZ:
So I’m an emeritus professor at the University of California, Berkeley. I’m an economist. I also did a couple of stints in the government both as a chief economist at the Federal Communications Commission, and then also the equivalent to the chief economist at the antitrust division, the US department of Justice. I also want to disclose that I have worked for several, and some ongoing engagements with several Big Tech firms. So I’m going to try and stay away from discussing specific cases, but I did want to make it clear to people that I have had involvement in this.
DUFAULT:
Well, we sure appreciate being able to draw on your experience, your expertise in this area. So thank you for being here, Mike.
KATZ:
Thank you.
DUFAULT:
So, as we get started, I thought it would be useful for us to separate the different kinds of platforms that are at the center of these inquiries that are antitrust in nature, but also antitrust adjacent inquiries, both in Congress and investigations being conducted by the enforcement agencies. So, first we have software platforms which are the app stores and operating systems on your smart devices, and then retail platforms like the one Amazon runs, search and advertising like the one Google operates, and of course social media platforms like Facebook and Twitter. And so, with each of those different types of platforms, we’re seeing a number of different proposals to remedy the potential or perceived harms that are taking place around those specific different kinds of platforms. And so the remedies that we’ll probably be able to discuss here today are interoperability and portability, structural separation, stricter merger standards which is a legislative remedy, and then of course the idea of having a non-discrimination regime. So, why don’t we start with-
PICKER:
Graham, I should say I have not read Facebook’s motion to dismiss yesterday, but I gathered they do not agree with your description of the marketplace.
DUFAULT:
Yeah. Okay. Yes.
PICKER:
The marketplace is the internet.
DUFAULT:
The internet.
PICKER:
Yeah. Okay. Yeah, there we go.
DUFAULT:
Market definition is what it’s all about. We’re here to talk to some degree about the arguments around what is the market. But in any case as we try to treat this subject, being able to separate these things out hopefully is helpful even as we can recognize that we are talking about a very broad market generally. So, why don’t we start, Randy, with the idea of structural separation specifically as it’s proposed to be applied in the software platform context?
PICKER:
Sure. So, look, I think when people talk about that idea, they’ve got in the background a couple of situations in mind, and then we can maybe apply it to a particular case now. So, the AT&T breakup was a situation where 1982 consensual agreement in response to the 1974 lawsuit from AT&T’s perspective, a chance to get from under the 1956 final judgment which barred them from going into computers. But we separated the Bell company. So we created a competitive company AT&T and the regional Bell operating companies. And then we put a variety of limits on certainly what the R-Box could do, even a little bit what AT&T could do on electronic publishing. That’s one model. So it’s an antitrust remedy. Different model is this sort of Glass-Steagall.
So, Glass-Steagall was a separation of investment banking and commercial banking. So we just pass a law and say, “You guys are in two businesses right now. You can’t be in both of those businesses. You pick.” And so the Morgan empire was divided up into JP Morgan on the commercial side and Morgan Stanley on the investment banking side. Okay. So now let’s move that into today’s world a little bit. People are certainly talking about that idea with regard to Amazon. Can you run both a store and the platform. In the apps context, which I know is of interest to this group especially, I think it’s worth remembering the iPhone history when Steve Jobs, announced the iPhone in January of 2007. And I periodically watch that product launch. He’s killer. You should watch it. He’s such a showman.
The iPhone was a completely locked down device. There was no App Store. You couldn’t add anything. It came with whatever Steve said you were going to get. And that was a few apps from Apple. It had Google Maps and maybe had YouTube. That was it. It was locked down. So the App Store evolves from there. So I think we want to have that idea in mind. I don’t think the iPhone would have been as successful had they not taken that path. All right. What does that mean for now? Obviously the App Store is being looked at. In the epic lawsuit it’s being looked at by the UK, it’s being looked at by the EU. Think of some possibilities. One possibility is as we say, “Apple, you can build a device, you can build an operating system, that’s it. Other people will build app Stores. Let those flourish.” Different approach, we could say, “Apple, you can build an app store, but so can other people,” so no exclusivity with regard to the app store.
Different ideas, we say, “Apple, okay, you can have an exclusive app store, but when it comes to competing in apps, we’re going to have to figure out what the rules are going to be.” Either a non-discrimination regime or some sort of level setting such that Spotify can compete on an even playing field with Apple music. Those are a different number of ways you could implement either structural separation or a kind of interoperability.
DUFAULT:
So pulling on, on one of those flavors of structural separation that you described, keeping the abstract operator from providing a product or a service on the App Store. I wanted to turn to Emily actually, and see what’s the real world impact of requiring a platform operator to separate from the offerings on the App Store?
HART:
Absolutely. So a little bit of background. MotionMobs was founded just 18 months after the inception of the App Store. So we’ve been building apps for about as long as apps have even existed. And throughout our experience, you come to rely on some of these natural apps that come with a device. And so there are a lot of somewhat boring and basic functions that you expect from applications. To be able to tap a phone number and be able to call somebody, to be able to tap an email address and it will email somebody, to open up the camera and capture an image. These are basic functions that as developers we rely on.
Our clients pay us to build applications that serve a very unique purpose for their particular business. They’re not in the business of sending text messages or building cameras, they’re doing something else and they just need to capitalize on what we come to think of as just these basic apps that come on a smartphone that you could either download if it’s a little bit fancier than what may come on it when you open it up out of the box, but they’re just baseline functionality that really provides us as developers a really excellent foundation for us to be able to leverage what we know is already on the device and therefore it makes our client be able to focus on what they do really well rather than reinventing the wheel.
DUFAULT:
So, that’s an interesting perspective because I think people talk about the potential efficiencies that are brought to bear for consumer benefit when you’re talking about making an offering available and being able to price it a little lower, for example. But it’s not often you think about the benefits to other competitors that are drawing on those apps, for example that have to be installed on a device, either part of the operating system, but also offered on the app store. So, I wonder if turning to the applicability of structural separation in the retail space. Wonder, Phil, what’s your take on structural separation there? And mostly I’m thinking about keeping Amazon from selling on its own platform.
VERVEER:
Well, there I think probably the most salient example at the moment is what Vice President Vestager in the European Commission has said about this, which is if you’ve got a dominant platform, you need to make a choice, I think very assertively looking for a separation. And others might back into this because if you think about lesser measures, rules of the road, for example with respect to platforms, you begin to run into an awful lot of very difficult questions. In the case of Amazon, how should placement on its platform be in terms of the availability of products. Should there be rules about appropriating or not information that it might be able to discern from the commercial activities of unrelated users of the platform?
What about pricing? What kinds of information thinking about pricing. A whole range of things like that. And you can see, as you begin to worry about that, how you might back into the notion that a strict prohibition is really the only way really that you might be able to control the issue because you think it needs to be controlled, and that then of course we’re on all kinds of questions about scope economies or whether or not it’s a good idea to do this in the first place. But you can see how the relative simplicity, I guess, something that might be appealing to policy makers.
DUFAULT:
Those are great points. And I want to turn to Randy and see what what your reaction might be there in the retailer context.
PICKER:
Yeah, sure. So look, always when I hear Amazon, I go “Walmart.” So, really? So look, the history of Amazon is the history of Cirrus, is the history of Walmart, is the history of most retailers. So, they sell some of their own products, they have private label brands, they sell others. Sears, the Craftsman brand, I’m going to guess a date of 1927. So, this is not a new phenomenon, and it’s really important to recognize that. And what Phil said about economies of scale, look, the platform that Amazon has created and has been able to extend to all of these merchants, the last time I looked, I think they were 53% maybe, third-party sales and 47% of their own sales. And the trend on that has been powerfully in favor of third-party sales.
So, I don’t doubt that there are cases that don’t look attractive when you stare at them. Amazon’s full of aggressive people, but I do think the benefits of having them both able to provide services, I buy cables from them. I always say this, I don’t know if I’m supposed to save this. I am wearing Amazon branded underwear. It’s perfectly fine, right? Okay. Exactly. And I will say that there’s a story in the financial times today the European Union has been investigating for a couple of years. They’re struggling to find an antitrust violation. We can do something else. We can regulate it, that’s part of the conversation, but who knows how it’ll turn out. But the story this morning is, is they’re struggling to find that violation.
KATZ:
Can I add some of my perspective on that, because I completely agree with what Phil was saying about these various forms of conduct could make separation appealing, but I think the next step is all of those issues that Phil raised and that Randy was raising come up even after you have separation because if you’re worried about creating a dominant app, or if you have a favorite in certain retailers, presumably if it had to separate, Amazon’s going to try to monetize the superior placements on various pages. You get to the question of sharing proprietary information, Amazon still collecting the information. So then you’re going to need to have some sort of laws or rules that say, “Well, you can’t sell that to other companies.” And actually a similar issue with the economies of scope.
So what it really comes down to, I think, is if we separate these two operations, which frankly I think is almost impossible to do. Maybe if you say you can’t go into physical goods, that’s an enduring definition. But I think for the reasons Emily said, when you think about software platforms, finding the boundaries for the separation over time, I think it’s impossible. But I think the fundamental issue that you end up asking yourself is, if we can impose separation, are there ways that the firms can still get the economies of scope despite being arms-length or not, and are there ways they can behave anti-competitively despite being an arms length? And in each of those, sometimes there are contractual solutions, but I think that’s what you really want to ask yourself. Are you doing more damage to the companies of scope or more debt “damage” to the ability to behave anti-competitively? And I think it’s not always so obvious.
DUFAULT:
Well, this is a great discussion that hopefully informs the debate and helps ensure that policy makers have their eyes open to the potential costs of such a drastic maneuver and also of the proposals that are out there that fall a little bit short of structural separation. And I’m thinking what are the next things we could talk about is the idea of data portability and data interoperability. So, two separate concepts that go hand-in-hand, but are being proposed mostly to remedy the perceived competitive issues are around social media platforms to ameliorate the really high startup costs in building a big network, which is all the value there. So, I want to turn first to Phil to see if you could talk a little bit about how interoperability or a data portability regime might work as applied to social media networks.
VERVEER:
First as a preliminary statement, it seems absolutely clear to me that to ask an antitrust court to impose that kind of a remedy and then police it, is to ask an enormous amount, probably realistically more than an antitrust regime can manage. So you’re in the role now of some sort of ongoing regulatory activity. And I guess I would make again an important distinction. Portability, I think tends to suggest something that’s reasonably static, in which you can move some set of assets from one place to another, in some appropriate way. Indeed, when we’re talking about data sets, of course you can copy a dataset, send it off someplace else, but maintain it where it was originally. Interoperability is vastly more complicated. It suggests dynamic arrangements. There certainly are ways that you can, you can abstractly conceive of how you could work out a situation.
For example, where there would be access by a third-party by others to the data sets, to the information that Facebook controls, for example. But think about all the complexities in this, and again if you’re going to do it, you almost certainly need a regulator. The question will be, well, what kinds of information should be subject to mandated access? Should it be observed information? Should it be volunteered information? Should it be inferred information? How do you contend with privacy related complications? And in the nature of the thing, how do you you allocate the costs? How do you apportion the costs and permit them to be recovered? How do you contend with the notion that technology is going to continue to evolve as also obviously will business models and consumer preferences. So we have a very complicated ongoing set of requirements.
Having said that, if you’re genuinely concerned about the place in the world of a Facebook or other social media companies or perhaps other of the major digital platforms, then interoperability may in fact be the most effective remedy that one can conceive of if you think that you need to intervene.
DUFAULT:
Well, those are very interesting insights, Phil. And one thing I’ll note is that in the first hearing out of the gate and the 117th congress, the antitrust subcommittee on the house side held a hearing and all the witnesses seem to agree at a very high level, at least that interoperability might be an appropriate government intervention, but very quickly it was difficult to try and define those details. So Mike, I want to turn to you. And Phil mentioned this, I want to get your thoughts on interoperability, data portability, and other countervailing concerns policymakers ought to be aware of around privacy.
KATZ:
I will start by talking about interoperability. I think some level of interoperability could be a good idea, to help overcome your network effects and associated issues of tipping or entry barriers, but I think then it’s going to be really important though, that we not set our sights. Because the products we’re talking about, the platforms are going to keep evolving and you don’t want interoperability to become the straight jacket. But that said, I think there’s probably baseline levels of interoperability that we could set that would help things. And so I guess it’s one of these things, that let’s not let the best be the enemy of the good, because we do know that, as I said, this can strengthen competition. If you have more interoperability, there are cases where it goes the other way, but I think most people think here it would strengthen competition. And we know that the dominant firms can try to block interoperability that actually collectively would be good for market participants.
So, I think it does make some sense, but we are going to quickly run into what’s covered, and also this question of who pays. Does anybody pay, which… I’m not sure we have time to get in it today, but I think when we’re talking about different flavors, we also need to think about different flavors of interoperability in the following sense. Are we talking about more or less peer platforms or peer networks being interoperable, or are we saying we want to make firms that have complements or something that’s going to build on top of the platform, so you might think of an app as opposed to another platform. And I think those can really be very different in the way that pricing could be very different. You could imagine, for example if you’re talking about peer platforms that perhaps you would want to move to something like settlement free. So when I say things like that, people remember both from telephony and from the internet. And we’ve been fighting these battles on what the prices are for decades.
Anyways, that’s just something I want to flag that I think that would be a big issue. And I think there will be this distinction between whether you’re talking about pure platforms versus some of these layers on top. Now, in terms of data portability, Phil touched on a bunch of the issues and what kinds of information, but particularly with social networks, we’re getting this issue. Well, what happens when it’s information about your friends or other… Again, this whole question of whose information is it any way? And we’ve already seen regulators having to grapple with this and what is it you should be able to transfer and people share certain information with you on Facebook. Did they think, “Well, I’m willing to share it if it’s on Facebook, but I’m not willing to share it with you, I know you’re putting it somewhere else.”
I think again Phil touched on, can you only move information that you posted? What if people posted information about you? What do you do if someone sends you a text message? Do you get to move it? Yes, I could tell under some of the rules what would happen is, if someone sent you a text message, you would not be able to forward it over unless you forward it to yourself. And once you’ve forwarded it to yourself, then you could forward it over, because then you would have posted it. Although I guess you have to promise only to be looking at the forwarded copy and not ever scroll back to see the original. I’m obviously making a joke here, but I think there’re really serious issues of privacy, I think you’re also going to get into issues of when you say data what you mean by that because a lot of this stuff is going to be processed and stored in some reforms.
And so then you’re going to get in this question, well, is this proprietary information to the platform because they did a lot to create what’s ultimately the information there. And you could see it being competitively sensitive even when information with collect. So, at least it used to be in the credit card industry. You tracked whether people were moving to Florida and buying jewelry, because if they were doing those two things that meant they were likely to default. Well, somebody figured that out. It was actually at one point worth a lot of money to them to be the only people in the industry who knew that. But if you had to see, well, your data’s portable or people get insight and say, “How come these guys are always tracking whether buying jewelry? And again, an extreme example, but I think it does point out that there can be a lot of intellectual property that goes into what you may end up just calling data.
You’re also going to get this question of when you take your data with you, does a copy reside with your old platform? I know you might say, “Well, that’s crazy. They shouldn’t get to keep it.” Well, two things on that. One, that may affect their willingness to provide you the service for free in the first place because they’re investing in you by doing it. And two, it’s not so easy to define what it means to take your information with you, because suppose they start storing various summary statistics or statistical analysis, then you’d say, “Okay, well that’s probably okay,” because you’re one of millions of data points that went in that regression coefficient. Well they say, “Well, actually we ran a regression and only had one person in it, you.” Again, the extreme cases you’d be able to fix, but I guarantee you once you started having the rules, people would manage to come up with intermediate cases that would really cause trouble.
So, I think this whole question of whose information is it, the privacy issues and such, are much harder than I think people appreciate. And that’s one of the reasons why again interoperability is properly preferable. One last thing on that is I think the other issue you’re going to get is the data portability is not going to solve a lot of the antitrust issues because you’re going to get into this question of whether people figured out what Facebook… Suppose Facebook says, “You own your data, it’s yours. Do what you want. By the way, we’ll give you a coupon for a dollar if you sign a contract that you’re selling your information. It’s your decision, but you’re going to sell it to us forever and never to anybody else.” I’m guessing lots of people would go for that. And then you’d end up having an antitrust case about that. So I think that the data portability is also not going to make the antitrust issues go away. It’s just going to end up taking a somewhat different form.
DUFAULT:
Those are very interesting insights around the line drawing exercise that a regulator would have to undertake around the types of data that we’re talking about in portability, especially, but also to some extent in interoperability and the line drawing around what kind of company it should apply to. So, the platform, and then what about those who are building on top of the platform? So Emily and I were talking just beforehand, and I wonder if I could turn to you Emily, just to share your perspectives on interoperability, being an appropriate remedy and in certain circumstances and not others, maybe.
HART:
It depends an awful lot on what market you’re trying to get into. So we’ve talked a lot about social networks and we all know that to be a new entrant into a social media space is very, very difficult. There’s just such a lion’s share of the market that’s already on existing platforms. To try to get enough people onto your platform requires an immense number of features. You can’t really release a minimum viable product social network. The consumers expectations are just too high. And so you have to put a lot of work in up-front to be able to deliver a brand new social network that is compelling enough to get people to use it. And if there are then, say regulations about interoperability, well now you’re not just building a social network that you’re trying to figure out how to build a user base and monetize. Now you’re also responsible for building an API for your brand new social network.
Okay. Like Mike was saying, who’s going to pay for that. Is this just money out of the pocket of the entrepreneur? No, this is data. Somebody should be paying for it. So now you have to build two revenue models. You’ve got one that’s based on your software that you’re providing, and then you’ve got one that’s based on your API. As far as the way that you technically build the transactions on both sides of that is immensely different. And so now by forcing these new entrants into the social media network to both compete at a level that makes consumers want to participate, but also then participate in interoperability, you are increasing their barrier to entry because now they have to build so much. They have to come out of the gate with so many revenue streams. It almost limits the market to the people who already have enough cash, because they’ve probably done this before in order to build a new one.
And realistically, the vast majority of the app developers who have put apps in the App Store and on Google Play aren’t making millions of dollars. They’re making enough to keep their app alive, but they’re not the Facebooks of the world. They’re not the Amazons of the world. They’re the MotionMobs. They’re the little guys who’ve saved up their life savings, they’ve got a passion and they’re going to build an app. And it’s good enough to retain being a small business. And so you really have to balance. It was like what Mike was saying. Interoperability is good to a point, but if you go too far, it then becomes a disadvantage to everybody who doesn’t have disposable cash just falling out of their pockets.
It’s a very different story, I think, when you start looking in the healthcare space, because this is no longer, just a “I feel happy about using the platform.” It’s I’m concerned about my health data as a patient, I want access to it, I want to be able to go to different doctors, and I want those doctors to have access to my medical history. It benefits me as a patient.
We have a couple of clients who are in the healthcare space and interoperability is crucial to them being able to provide their products. And it’s because if everything operates in silos and everybody says, “No, this is my patient data, nobody else can have it,” it disadvantages the patient. That’s a space where you really, really want that patient to have access to all of the different sources where their data may be stored in order for them to literally take better care of themselves. And so, I think at the end of the day you can’t fix this with a sledgehammer. It is very specific based on the implementation of this data portability and data interoperability.
DUFAULT:
Excellent points there. And Emily points to one of the issues that we’ve been active on, which is around interoperability between EHR systems, but also as otherwise HIPAA covered information flows outside the HIPAA covered umbrella as it’s supposed to be able to do at the patient’s request. And so that boils down to what does interoperability look like between the EHR companies and companies that are building on top of EHRs or adjacent to EHRs. And so it’s a really interesting issue, and one where the applicability of interoperability is probably an important development here. And so, wondering too, since we’re talking about healthcare and the applicability of interoperability in other areas other than social media, Randy, if we could turn to you talk a little bit about the applicability of those concepts to the search space and including with the digital markets act in Europe.
PICKER:
Yeah, sure. So I thought what Emily said was right that the more we impose these obligations generically across all firms in these spaces, obviously the bigger the consequences, the more we’re going to worry about discouraging, it sounds like the MotionMobs of the world. So we don’t want to do that. But I will say in defense of the Europeans, I think they sort of get that. And so I think the digital market stack will target these large gatekeepers. They don’t name them, but that’s who they have in mind. And so I think they intend to impose a variety of obligations on those. So, again what Emily said about more general laws like HIPAA, those are going to probably bind everybody. And so Emily’s clients are going to have to deal with that.
Okay. On search. So, the Digital Market Act has a specific provision which contemplates, and it goes back to what Phil was saying earlier, not a one-time data dump as it were, but an ongoing access by new competitors to Google directly in the search space. Again, not necessarily complementors, it could be complementors as Michael was talking about. But really direct search competitors. If you’re Europe and you stare at what Statcounter says, Google’s market share has been flat at 90 to 95% for a decade, it’s a straight a line as you can see, it’s really quite remarkable. And I think Europe would like to try to do something about that and so far has failed. They tried to do that with regard to the Google shopping case. That’s accomplished nothing and I think is now seen by many as a bit of an embarrassment.
And they tried to do it with regard to Android, and that hasn’t so far accomplished anything either. So this is our next tool. And I do think, and I have a piece on pro-market today in which I focus this particular example. I thought the points that Phil and Mike made about, well, how do you define what you’re allowed to get access to and at what price, we have played that movie in the United States and it has a bad ending. Now I don’t want to overstate. We’re going to need to look at all the examples, but the 1996 Telecommunications Act did exactly that. The conception of that was I’m going to break up the local telephone network into little pieces we’ll let people buy the pieces they want to and compete where they want to. A so-called unbundled network elements. At what price? Well, the statute says, “Well, we’re not going to tell you what the price is. FTC, you go figure it out.”
And the FCC said, “Oh, it’s TELRIC.” “What?” “Total Element Long Run Incremental Cost to forward-looking cost.” And so there’s basically a decade fight over that. Two Supreme court cases, four sets of rules. And by the time we’re done no one cares about landlines anyhow, everyone just wants to sell phones. So, one example. But the lure here is that we look at all of these examples from, “Look, had I been there in 1996, I think I’m a reasonably smart guy. I might’ve been seduced as well. I get it. I see why that’s attractive.” And then you look back, it didn’t work very well. And each time we go, “No, no, we’re smarter than those people.” Well, no, we’re not. They were smart. We’re not any smarter now. So I’m not saying it can’t work, so I want to be careful. But I do think we want to have a sense. I hear a little humility is really valuable and my friend John Ford who was at the house hearing that I think Phil mentioned, John said, “Well, that’s an engineering problem. Yeah. And a hard one.” So okay, I’ll stop.
DUFAULT:
These are very good points for drawing on historical examples to show that it’s not costless to have that bigger intervention, especially where the regulatory entity is going to have to be making those decisions down the road around what the cost is or what the framework is for determining the cost TELRIC. And those are things that people are more than happy to try and convince the government of their position on, and there’s a lot of resources that go into that. And that’s not necessarily a bad thing. It’s just we should know what the costs are.
PICKER:
Yeah. Okay. I teach people who are going to be lawyers, and who are going to make a bunch of money off of that world. Don’t blame me, blame the game. Okay.
DUFAULT:
It’s employment, but I just made sure that there’s a decent balance between those who can afford all the lawyers, and those who can’t. And so another brings us to the next one down the list, I think, which is another area where a lot of attorneys have been focused and in the court system in particular, which is what’s the standard by which you’re able to challenge a merger. And I think it at least at the house antitrust committee, one of the concerns that they have is that there was a statute enacted and then the courts have sort of over time made it a little bit more difficult to challenge a merger. And so, they’re proposing legislative remedies and other ideas. And so Mike, I wonder, since you’ve written about this subject and recently saw you on CNBC as well opining on it, wondering if you could talk a little bit about the problem policymakers are seeing in that space and some of the proposed solutions.
KATZ:
Happy to. So, fundamentally the concern is that it’s cheaper to buy up an emerging rival than it is to compete with them now. And it’s become clear though it’s hard to bring a case against that. Now, partly it’s hard to bring a case against that because it’s hard to know when you have a problem. The usual defense would be… Well wait, we’re talking about either a firm that hasn’t even entered the market yet, or that it’s just a nascent competitor, they don’t look like they’re that big a deal. There are lots of firms like that. So how could we possibly be buying them just to stop competition? There are too many of them to buy. Or even if we do buy them to stop competition, there are plenty of other firms who will come in. So, that’s the argument that’s been made, and it turns out it’s quite an effective argument for the defense the way the statutes have been interpreted by the courts, because the courts in general have been seeking a I would say maybe even unreasonably high, but certainly as a practical matter, a high level of certainty about the future effects at the entrance.
of course these firms are very earlier in their lives and it’s extremely hard to know what the future effects are going to be. I think that where it’s come up here, one of them that’s come up being named is obviously is with Instagram and WhatsApp and Facebook. Facebook-
PICKER:
What’s Up would have been a better name.
KATZ:
I know. I meant to say what’s up with WhatsApp. What’s up with those mergers, lots of people actually, even at the time that the FTC approved them raised issues about them in the house committee, come out now with internal documents saying that it looks like they were motivated to just to buy up competitors. So, obviously there’s a lot of concern. And it’s not just a theoretical concern, we see this, we see Big Tech picking lots of acquisitions. I think one thing that’s important to understand here is where is this a problem or when. And I think there’s been a lot of focus just on bigness, which personally I think is a bit of a mistake. I think what’s important here really is we’re especially worried about this in industries that have a winner-take-all flavor, or what economists would say is Schumpeterian competition where you may see a firm dominate market and there may be some other rivals, but pretty much one firm at a minute time dominates, but then a new firm comes in and displaces.
And there’s some people who try to use that as an argument against antitrust enforcement. They say, “Look, sure we have a 97% market share today, but we could be swept away at any moment by a new entrant, so don’t make much of our market share.” Well, there may be something to that argument, but if you believe that argument, then you also should believe don’t make much of the fact that the current entrant has a very small market share, because if your theory is they can grow to displace it, then you need to be worried about removing that small entrant from the marketplace. So I think this competition for the market or Schumpeterian competition is actually a reason for heightened antitrust scrutiny, because these are markets where entry is especially important.
And I also think, and there seems to be evidence we’ve seen with Facebook is given the nature of these markets with network effects and that there is going to be this dominance, all entrants aren’t the same. There is a sense in which you can wait and see which entrance seems like they have a chance of taking off, that they’re going to get the positive feedback cycle going where consumers for some reason the new social network becomes hot, people start being optimistic about it, they want to join it and you can see the process start. And I think reasonably that’s what was happening with Facebook. They saw this and they said, “Okay, well, time to nip it in the butt. Let’s go buy them rather than have to battle it out for dominance.”
So, I think there is a problem here, and I think there’s something to do about it. And this is already mentioned, I think partly Congress needs to do a reset on the court’s interpretations of the statute and Senator Kobe Charles put a bill that tries to do that. But do we need to make it easier to bring a case based on potential competition concerns? And there are various ways to do it in terms of shifting the burden, like do you have to prove the merger’s good to get it through, do you have to prove it’s bad to stop it? What level of certainty do you need? I think those are all things that it makes sense for us to try to adjust. I will also say in some other jurisdictions, I think antitrust enforcers are hampered by various limits that get put on the review that they’re not allowed to look at small deals. And I think that’s something that needs to be changed as well because these small deals in some of these industries have potentially a huge impacts.
DUFAULT:
You bring up a bunch of really interesting points around the limitations in current law and how you might better equip enforcers in this area. But on the other hand, wondering, Emily, if you could talk a little bit about what are the dangers of going maybe too far in terms of lowering the standard for the challenge of a merger across the board.
HART:
Absolutely. We have a number of clients who have full intent that their exit strategy is to sell to somebody larger. And I fully support them. That’s the way that we can support innovation in the software industry, where you get somebody who comes in, who’s got just a unique enough idea that they can build something that’s not currently offered elsewhere. They grow it, they catch the attention of somebody bigger, they make the deal, they sell, they get out and then they do it again. That’s an excellent way to see the market work, and we want to see that continue going. My concern comes in, if you make it so difficult for these small companies to negotiate am I selling, am I not selling? Is it an okay deal, is it not an okay deal? Do the small companies have the ability to decline an offer to acquire? Because realistically while some want to sell and exit and then start again, for others this is a passion project.
This is what they’ve spent their life building up towards, and it’s like another child. And so they want to hold onto it. There’s a concern that if a large enough player wants to offer to acquire somebody who’s small enough who doesn’t really have any power to control the deal, if that smaller player just says, no, the larger player may just build those features into what they already offer and not change their pricing. And in that case, if you’re getting the same features elsewhere for less money, then you start seeing those smaller companies fade away because they couldn’t compete. They simply weren’t big enough to compete in that type of market. And so I don’t know what the correct legislation is in order to try to balance what we want to encourage sales when they are desirable, but we also want to preserve a company’s ability to say, no. It’s finding that happy medium of how do you allow the current owner to make the decision am I for sale, or am I not.
DUFAULT:
Those are great points there. And point to some of the difficulties of a really blunt instrument of lowering the standard across the board for a merger over a certain size, for example. Just the ability to challenge a nascent competitor where the standards are clear. You don’t want to favor the enforcer too much, but also you want to make sure that there is a negotiating position. Intellectual property is supposed to help with that, but doesn’t always work as well as you want it. So just wanted to turn to Randy though to see, how do you think enforcers might account for the difficulty of predicting nascent competition, what market effects might result from chilling merger activity?
PICKER:
Well look, I think the discussion has emphasized how hard this is. So, I thought that’s what Emily just said. So on the one hand I almost think about this in patent terms. Some people are good inventors, some people are good commercializers. Those aren’t necessarily the same people. So important that the person who’s got the idea who might say, “I don’t know what to do next” has a path out of that. And those are Emily’s clients, and that’s so important. And that’s socially valuable. We don’t want these inventions to get lost, and we want to incentivize these people to invent these next great features. Okay, I agree with all of that. At the same time, here’s where we go next. Emily said earlier that when her clients are building products, they want to know that there’s a set of features there that they can rely on.
And that’s been the history of software and the history of software has been, it’s not static. It evolves. So Windows, there is no Windows in the beginning. There’s DOS, right? And then there’re going to be what are called operating environments on top of that. There’s a whole interesting competition there, the Schumpeterian competition that Mike was talking about. Essentially windows wins it. That’s an interesting discussion. That gets incorporated. Then Windows adds this fragmentation, this compression, the browsers… Okay. So I think that’s very, very hard. And then the point, Graham, you raised I think goes to the timing at which we’re supposed to look at these. And so I’ve got another piece on ProMarket where I talk about Hart-Scott-Rodino. And look, I think we want to be careful about situations. The Facebook situation, Instagram and WhatsApp, you start to go, “Well, we had regulators there.” You came, looked at Instagram, they shoot a 10 page report, FTC looked at it, WhatsApp, EC issues a very long report on that. It’s not as if they didn’t look at it.
After the fact we go, “Guys, did you not get it?” This social dynamic, the social mechanism that we see in the Zuckerberg emails, that’s what was at stake there, those firms had it. You didn’t understand it? You blew it, and now what do we do after the fact? And what I want to say on that a little bit is, it’s so much better to do these interventions where the deal is in place. What you don’t want to do is discouraged firms from doing good deals, the sort that Emily’s clients want to do. Then with the concern that what’s they’re going to do is invest in this product building. Instagram wasn’t then what it is now?
They didn’t have a monetization model. Emily talked earlier. Her business is to monetize. They didn’t have a monetization model. Facebook built that up and you don’t want them to fear is they’re going to build it up, you’re going to rip it off from them. And then all of a sudden they will have invested to create their competitor. I think we will lose a lot of advantageous deals. That was just a judgment call. It’s just a judgment call, but that’s the space we’re in; hard judgment calls.
DUFAULT:
They’re annoyingly fact intensive, all of these antitrust questions.
KATZ:
Can I just say one thing about that one, because I agree with Randy in general there’s a lot of hindsight, but it is the case, I think there were with those acquisitions that people raised the issues at the time. I don’t know this for a fact, but I would guess there were a bunch of people at the FTC who thought the acquisitions were a problem who then said, it’s a problem, but there’s no way this will ever survive on appeal. There’s no point in bringing the case. So, I think part of it is whether people recognize it’s a problem, and another issue is, at least in the US, is whether anybody thought it was a winnable case.
PICKER:
There were other regulators who looked at it and passed as well. Yeah. Okay.
VERVEER:
But that perhaps leads to two thoughts that are relevant. One is, this may be a much more significantly a Section 2 matter than a Section 7 matter. They’re going to cast back, perhaps it’s best to do it in a monopolization or maintenance environment. And the second is this indicates why Senator Klobuchar and others are seeking to make some adjustment in terms of merger standards when we’re dealing with very large entities. And again, that may not be a bad idea. As Mike has said, we’ve had about 40 years of very, very strong non-interventionist philosophies that are prevalent. And perhaps they’ve gone a little bit too far in terms of access to courts and access to outcomes.
DUFAULT:
Well, thank you for those thoughts. We only have about six minutes left, but I do want to ask one final question before we do our wrap up. And that is, the proposal to establish a nondiscrimination regime. So, I think mostly it’s talked about in the software platform context and we pushed back on the idea just because it seems to be a proposal that benefits as we talked about earlier, folks that can afford to have representation in DC and babysit claims of non-discrimination to potentially to the detriment of folks who are trying to accomplish what they want to accomplish outside of such a regime. But I want to turn to Randy first and see what your thoughts are on such a non-discrimination regulatory regime. Again, this is antitrust adjacent remedy, that would be a regulatory regime.
PICKER:
Yeah. And I’ll watch the clock here, so I’ll be quick. So, I don’t think it’s just in software. So, I don’t think it’s just app stores. Certainly the non-discrimination idea, a lot of people would apply it to Amazon with regard to the buy box and their own inventory versus third-party inventory. And then a lot of people want to apply it to Google, especially with regard to so-called universal search and does Google favor its own properties over the opposite of the world and the other. So, I think it’s a much broader idea. I’ll also say it’s a very old idea. So, the Interstate Commerce Act of 1887 had a non-discrimination regime and it’s a standard move we make in regulated industries. So, in that sense it’s got a perfectly good history. A complicated history, but a perfectly good history.
PICKER:
So, it’s a tool that I could easily see a legislator voting in favor of. I guess I want to say I think it’s going to be especially complicated in these spaces. So, let me just offer one example. So, the Apple App Store is a really interesting example. The 30% fee is something that a lot of people, Spotify in particular is unhappy about. And I have another piece on ProMarket about this one. Spotify doesn’t pay anything for ad supported apps. So, millions of downloads they don’t pay anything. What Spotify wants to be able to do is, is it the point where someone converts, not from an ad supported version of Spotify, but to the premium version where they pay cash, Apple wants to collect money at that point. And that’s just the point in the process where Apple is saying Spotify, that’s how we’re collecting money from you. If we kill that off, Apple’s going to rethink the business model. Maybe they’re going charge for every API access. There are any number of different ways to do this.
And so what Phil said earlier about the fact that these are dynamic businesses, dynamic technologies, dynamic business models, that’s the piece of it we have to have in mind as well. And again, I understand the law of non-discrimination. We’re going to invest a lot of resources in it, and the question is, what are we going to accomplish at the end? Is Spotify going to pay less to Apple? That’s what Spotify cares about. I don’t think they care exactly whether we multiply two times six or six times two, that’s 12 in both cases, what they care about is 12. And the question is, is Apple going to be able to reconfigure in a way that will be consistent with the non-discrimination regime where Spotify still writes the same size checks? I suspect the answer to that is they can do that.
DUFAULT:
Thank you, Randy. I think we have time for one reaction to that before we move on. Any takers?
VERVEER:
Well, let me. It seems to me, just as Randy said, the non-discrimination requirement is of ancient vintage. It is probably the center of gravity in terms of most of these kinds of issues. And it has struck me for decades that the only way really to hope to deal with this is to have someone with undisputed ability to intervene in the event of the aggravated circumstances. Now, that is tremendously vague as a standard, but if you try to get more specific than that, it gets you into an awful lot of trouble. So, it’s the question of reposing with a regulatory entity of some shot the ability to intervene, usually on ex-post basis in the event that something happened that one can rightly regard it aggravated. And that probably ought to be a relatively high standard, but it seems to me we have no better way. I can’t think of any better way to try to contend with those kinds of issues than that.
DUFAULT:
You bring up some interesting points. And one of the things that comes up for us over and over again, is there is a fundamentally different set of circumstances around where a company has built its own platform, has its own platform, and then is making decisions about which apps will go on the app store for example, and doing so with an eye toward privacy and other consumer protection notions. And the other types of situations where, for example, you have a technology and you get it adopted as part of a standard. And you say, “This is going to be open for anybody who wants to implement this standard. And I have voluntarily done that.”
And so that raises a bunch of different issues than if you have created the platform and are managing it and competing, Schumpeterian style with others for the market. So one thing just to note in closing on those on pieces, but as a last question just for the group with the final minute that we have, I know that funding for the enforcement agency is a really important piece. I want to ask the panelists just to think about what do you see potentially happening legislation wise, especially in the next year or so, and that could include just funding. And I’ll start first with Phil.
VERVEER:
Well, I think we can be confident there’s going to be more funding. For the FTC and the Antitrust Division. Beyond that’s a little bit harder to see, although you could imagine Senator Klobuchar has indicated she’s willing to break up her bill, and it’s entirely possible that some pieces of that will move, but the funding part, I think, is something that’s just about uncertainty.
DUFAULT:
Perfect. And Mike.
KATZ:
I’ll be a contrarian. Actually until a few hours ago, I would have agreed with Phil, but Senator Klobuchar and Grassley, actually I think several times they proposed increasing funding. So we had two bipartisan support, and I believe it’s died in Congress, but it does seem like… So maybe not quite as bold as this bill, but I do believe there’ll be some increase, but frankly I don’t think spending more money is going to make much difference unless there’s some sort of legislative reset of the antitrust laws. Certainly from what I see on the DOJ side, I know less about the FTC. I just don’t think funding has been the issue. I think it’s been the legal standards.
DUFAULT:
Excellent. And then we can go to Randy.
PICKER:
I think there’ll be more money and I think there will be some sort of legislative reset.
DUFAULT:
And Emily, what do you think we will see more funding or are you think Congress might come together on something bigger?
HART:
While I can’t foresee the future, I can at least say from the small business space, additional funding for regulations on behalf of small businesses is extremely advantageous because none of these small businesses have the resources to wage a legal battle against one of these tech giants. And so if they can’t be protected individually, regulations that protect them are best for competition in the market as a whole.
DUFAULT:
Excellent way to end the discussion, I think. And with those final thoughts we’re at our time limit today. I want to thank our panelists. Thank you all very much for taking the time and sharing your expertise with us. And for those of you who are able to tune in, thank you for joining us. And just a reminder, our series concludes next week. We’re looking at competition regulation around the world. You can register for that episode and view the previous installments of our series on CPI’s website. Thank you all very much.
