Tech business news these days is dominated by headlines about the trial of United States v. Apple, Inc., where the U.S. Department of Justice (DOJ) is charging Cupertino with masterminding a massive conspiracy among publishers to increase prices for e-books. Apple’s defense lawyers and CEO Tim Cook call the allegations “bizarre.” What is really bizarre, though, is the plethora of private treble-damages lawsuits seeking to hold Apple liable under the antitrust laws for its vertical integration strategy with iTunes, iPhone and the App Store.
Just a bit more than a decade ago, Apple Computer (having since changed its corporate name) was decidedly stuck in the backwater of the PC industry. Its introduction of the USB-only iMac in 1998 failed to change the marketplace dynamics, where Apple’s closed Macintosh design and refusal to license its Mac OS to other manufacturers was viewed as the source of diminishing relevance. Apple was such a non-entity that its presence was flatly rejected by the federal courts as part of the relevant market in the Microsoft monopolization cases. Pundits predicted that like the fabled Betamax, Apple’s proprietary strategy would lead to its ultimate competitive demise.
But then along came the “iLife” software suite and the first generation iPod. What differentiated these products was not that Apple invented the technologies — after all, MP3s had been around for years and digital cameras as well — but rather that they all worked well together. Since then, the same business model has been applied to iPads and iPhones: native sync integrated with the Mac OS and Apple’s iCloud service, plus software content, whether media or apps, available easily through Apple’s online stores, with the company taking a 30% cut of retail prices for third-party content.
When the iPod and iPhone proved to be winners, big ones, Apple’s financial fortunes turned around dramatically. iTunes now is the largest digital music retailer, accounting for some 60% of all downloads, and the various iPhones are the most popular smartphones globally. Apple’s annual revenues soared from $5 billion in 2001 to $108 billion last year. But what short memories we have. The plaintiffs’ antitrust bar accuses Apple of unlawfully monopolizing these markets and has filed a series of sometimes confusing consumer class actions challenging Apple’s vertical integration and closed product systems. (Nine separate lawsuits have been unified into one action in California focusing on the tight grip Apple exerts on the iPhone’s services and applications; other individual and class suits are pending elsewhere.) The EU reportedly has investigated Apple’s App Store restrictions, and more recently its deals with European wireless carriers, to determine whether the company “abused” a “dominant position.”
Continue reading Five Reasons Apple’s Private Antitrust Risks Are Minimal
Just a couple of weeks ago I put together a brief synopsis of the now-closed Federal Trade Commission (FTC) investigation of Google, Inc. for alleged monopolization, titled Deconstructing the FTC’s Google Investigation. To make the article fit within the space constraints of the American Bar Association’s Monopoly Matters newsletter, though, a few thoughts had to be edited out. One that is particularly appropriate now is the cogent observation by former FTC Chairman Jon Leibowitz that rivals frequently operate under the “mistaken belief” that criticizing the agency “will influence the outcome in other jurisdictions.”
Last Wednesday’s PR event by the FairSearch.org coalition made that evident in spades. We’ve discussed before that use of competition law to handicap other firms, rather than removing barriers to market competition, is unabashed protectionism, which can (perhaps should) backfire. The FairSearch companies continue to insist, as the coalition’s U.S. lawyer summarized, that the FTC “did not take on the issue of search bias.” That’s hogwash. The Commission found no evidence of harm to competition and, more importantly, rejected the FairSearch call for “regulating the intricacies of Google’s search engine algorithm.” And yet like Chicken Little, these companies continue to claim the sky is falling.
Leave aside for a moment that the FairSearch media event featured four legal presenters, all of whom are supporters of its lobbying positions, instead of a “fair and balanced” debate. And forget for a moment that the European Union’s parallel investigation (wrapped in much of the secrecy typical of an EU approach to competition regulation) is some 42 months old, with a possible end just recently within sight. What is most remarkable about the denial exhibited at the FairSearch media event is its blatant internal inconsistency. Three examples of the group’s positions make this abundantly clear.
- “Deception” Warrants a Disclosure Remedy. Former Assistant Attorney General Tom Barnett testified in 2011, for a founding FairSearch member, that Google acted anticompetitively because its “display of search results is deceptive to users.” FairSearch’s European counsel said the same thing recently, namely that Google “uses deceptive conduct to lockout competition in mobile.” But as I’ve noted previously, deception of this sort raises consumer protection issues, not legitimate antitrust concerns. Remarkably, Gary Reback scoffed at the reported suggestion by the EU’s Joaquin Almunia that a labeling remedy for Google’s revamped universal search results is appropriate, saying it’s “like telling McDonald’s customers they should eat healthy…it will not make a difference.” To the contrary, if deception is the problem then full disclosure has always been the answer. Where consumers are free to choose other search engines, and are told explicitly that some search results point to Google’s own “vertical” sites, whether they opt not to act is something about which competition authorities should be indifferent. Antitrust, at least in the United States, is not a Mayor Bloomberg-type vehicle for social engineering.
- Price Regulation Is Not the Job of Competition Enforcers. Ironically, the newest FairSearch approach raises the even more subtle antitrust issue of whether Google can be required to sell sponsored link ads to vertical rivals like Kayak and Yelp. Known in competition parlance as a “unilateral refusal to deal,” the idea is that the remedy for Google’s preferential placement of its own services in organic search results should be a mandatory sale of ad space to purportedly “demoted” competitors. That’s hard to swallow under American antitrust doctrine, which makes unilateral refusal cases very difficult to win, described by the Supreme Court as the “outer limits” of the Sherman Act. More importantly, as Reback put it, the obligation would be to sell ad space on “reasonable and nondiscriminatory terms,” which in turn means that an enforcement agency or court would have to decide whether the ad rates charged by Google were “reasonable.” So while disclaiming an intention to create a federal search regulatory commission, the FairSearch companies are in fact doing just that. Even in price fixing cases, antitrust agencies and courts do not decide what a fair or reasonable price is, because they lack the ability to do so and because, after all, that’s the function of competition.
- Mobile Really Is Different. The FairSearch event also included a competition lawyer for Nokia (Ms. Jenni Lukander), who contended that Google acted irrationally by giving away its Android mobile operating system, claiming the OS is merely a “Trojan Horse to monetize mobile markets.” So what? Providing free or open source software while profiting from ancillary products or services is a valid business strategy, pioneered by Netscape nearly 20 years ago and exemplified by Java, MySQL and numerous “freemium” sites such as Dropbox, Evernote, etc., available today. (This complaint is even stranger given that Nokia open-sourced its own mobile operating system in 2010, presumably for rational business reasons.) The FairSearch panelists argue that mobile is different because Google is supposedly “dominant” in mobile search, citing a market share of some 97%. That is both factually wrong and immaterial. Mobile is indeed different because Web search is rapidly being replaced by voice-search and app-based queries, which make any Google advantage in desktop search engines irrelevant. When Yelp gets nearby 50% of its traffic from its own smartphone app, it is impossible to seriously maintain that Google’s search engine is “diverting traffic” in the mobile space from rivals. Moreover, what the newest FairSearch complaint in Europe contends is that Google’s control over the Android OS limits OEM freedom by requiring some Google app icons (like the Google Play app store) to be displayed. As Dan Rowinski observed in readwrite mobile, that’s incorrect — “all kinds of stupid,” in his words. See Amazon’s locked-down Kindle, which runs Android without a single Google icon or app, as just one example. Most significantly, none of these vertical restrictions, even if they have the effect Nokia suggests, has any impact at all on search or search advertising in the mobile market. It is a fair conclusion that by venturing into the mobile OS arena, FairSearch is not looking for search fairness as much as to handicap and distract a rival with the threat of government regulation.
Here is how the New York Times summarized the new Android complaint by FairSearch.
The complaint was filed by Fairsearch Europe, a group of Google’s competitors, including the mobile phone maker Nokia and the software titan Microsoft, and by other companies, like Oracle. It accuses Google of using the Android software “as a deceptive way to build advantages for key Google apps in 70 percent of the smartphones shipped today,” said Thomas Vinje, the lead lawyer for Fairsearch Europe, referring to Android’s share of the smartphone market.
Any believer in the merits of competitive market economies must object to such misuse of competition laws. They should also, I suggest, react the same way to the most recent indication from Mr. Almunia that the EU’s purpose in investigating Google is to “guarantee that search results have the highest possible quality.” Nothing distills the difference between the European and American approaches to competition law as much as that revealing admission. Product quality is a function of the marketplace, not the government. And if regulation of search quality is deemed a subject warranting governmental regulation (which this author hopes never occurs), the one principle on which every objective observer would agree is that a regulatory scheme should apply uniformly to all firms in the market. That is plainly not what FairSearch strives to achieve, and thus why its proposals should be rejected by enforcement authorities worldwide.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
This article was published by the ABA Antitrust Section’s Unilateral Conduct Committee in its Monopoly Matters journal for Spring 2013. (Reprinted with permission.)
The recently closed Federal Trade Commission (“FTC”) investigation of Google, Inc. for alleged monopolization illustrates a truism of antitrust practice. The flexibility of antitrust law in adapting to new industries and modes of anticompetitive conduct is also a source of frustration, because the ex ante application of the domain’s broad principles to particular business practices is tricky to forecast without highly intensive, fact-specific analysis.
While a lot of ink was spilled following now-former Chairman Jon Leibowitz’s January 3, 2013 press conference, not much has attempted an analytical review of the merits. With the caveat that no outsider knows precisely what evidence the agency collected, this article tries to do just that. The lessons drawn are surprisingly unremarkable. Even in “new economy” industries, the tried-and-true elements of a monopolization claim remain crucial. Where unilateral conduct exhibits plausible efficiencies without serious evidence of competitive harm in a relevant market, it is impossible to make a viable case of monopoly maintenance under Section 2 of the Sherman Act (“Section 2”).
A. Market Definition
As every antitrust practitioner can recite, being a monopoly is not itself illegal, rather it is unlawful to obtain or maintain monopoly power by exclusionary or anticompetitive means in a relevant antitrust market. The existence of a putative “Internet search” market is thus a core proposition in any attack on Google for unlawful monopolization; the necessary premise is that Google’s high share — estimated to be anywhere between 65 to 80% — for Web searches is the foundation of an alleged monopoly.
Here the legal analysis begins to break down. Internet search is a free product for which consumers (Internet users) are charged nothing, with the service supported by advertising revenues. Since monopoly power is the power to control price or exclude competition, Google’s high “market share” may not in fact reflect any actual market power. More importantly, search users are like television viewers; they are an input into a different product, search advertising, in which consumers are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC and ABC compete for television viewers in order to sell more advertising, so too do search engines monetize the service by selling Internet eyeballs to advertisers.
Relevant market analysis must therefore focus on the area where Google in fact competes with other search engines, namely the sale of search advertising. There are two significant problems with a “search advertising” market. First, this market definition does nothing to advance the cause of complainants such as Yelp, Kayak and other so-called “vertical” competitors of Google’s non-search products, because they do not compete for search advertisers. Second, the relevant market cannot be so limited:
- Web search ads are good substitutes for display (e.g., banner) ads. Because advertisers pay for users who click through to their sites, both represent alternative ways to reach consumers. If Google raised prices for search ads,customers would switch more of their advertising dollars to display ads. And the Internet display ad segment is something in which Google has lagged well ll behind the leader, Facebook.
- Both search and display ads increasingly compete against mobile search ads. This rapidly growing segment is radically different, with searches designed to retrieve more targeted results and in which a near-majority of searches are performed within smartphone and tablet apps like OpenTable, FourSquare and others, bypassing traditional search engines.
- Advertising-supported Internet services increasingly compete with traditional media for revenues. Newspapers have lost huge swaths of advertising revenues — especially, though hardly just, classified ads to Craigslist, etc. — but are making money in digital advertising. Nearly 1/3 of the New York Times’ total revenue came from online ads as far back as 2010.
Neither the Chairman’s press conference nor the FTC’s parallel opinion on standard-essential-patents reveal whether the Commission agreed search advertising is a relevant market. One point seems clear: whatever the FTC concluded in its 2007 Google-DoubleClick merger review, there are precious little indicia today supporting either Internet search or search advertising as stand-alone product markets for Section 2 purposes. See, e.g., Peterson v. Google, Inc., 2007 U.S. DIST LEXIS 47920 (N.D. Cal. 2007) (no basis to distinguish search advertising from other Internet advertising in market definition). As the Commission cautioned in 2007, “accounting for the dynamic nature” of “the online advertising space … requires solid grounding in facts and the careful application of tested antitrust analysis.”
B. Monopoly Power
This author has written elsewhere about The Fantasy Google Monopoly, in which I observed that “the reality is that Google neither acts like nor is sheltered from competition like the monopolists of the past, something the company’s critics never claim because they just can’t.” The facts suggest that regardless of Google’s share in a properly defined market, Google does not enjoy market power.
No Bottleneck or “Gateway” Control. Ten years ago, when the FTC believed America Online had market power, the conclusion rested on the fact that a vertically integrated AOL controlled access to competing Internet content. Much like the pre-divestiture Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not control the Internet’s physical network and is thus not a bottleneck. “Google, or any search engine, cannot be a gateway to the Internet.”
No Power Over Price. Whether search ad rates are the price of search or alternatively the relevant antitrust market itself, they fail on the central criterion of control over price. Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys at its winning bid price. Certainly, there are ways to game an auction to favor some bidders and exert indirect influence on price. But such a novel theory of auction pricing power was apparently not asserted in the FTC’s investigation of Google.
No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on “network effects.” Network effects exist when the value of a product increases in proportion to the number of other users of the product, hence a name which originated in telephone antitrust cases. There is little to suggest there are significant network effects in search or search advertising. That Sears may buy some search ad keywords, for example, makes it only slightly more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads.
No Entry Barriers. A monopoly in a market in which entry is unlimited cannot be sustained for long. It is difficult to make a serious case that there are substantial entry barriers in Internet search. Web page indexing, the key input, is a product of computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s economy. That Facebook has recently launched its own search product says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier.
“Data” Is Not a Search Entry Barrier. Proponents of a Google prosecution argued that the demographic data assembled from Web searches is a barrier to entry. Yet data about consumer preferences and behavior is also a commodity. Whether credit and commercial transaction data via the “big three” reporting agencies, consumer satisfaction data from J.C. Power or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap. The corollary suggestion that economies of scale pose an insurmountable barrier to search entry represents an even more subtle concept which, unlike network effects, has not been recognized as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all.
C. Exclusionary Practices
The proponents of an FTC case obviously did not make a credible showing that Google’s search practices meet the requisite tests for exclusionary conduct — competition on a basis other than efficiency or the predatory sacrifice of short-term profits. The failure was an analytical one, summed up with a Web ad running now, asking whether consumers can “trust” Google. Unfairness is a qualitative judgment that has nothing to do with current antitrust law. As the Supreme Court has written: “Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition.”
Search “Fairness” Is Not An Antitrust Obligation. The firms pushing for a prosecution contended that Google’s algorithms artificially lowered search results for specialized vertical rivals. Their theory that Web search has an inherent standard of fairness, something once called “search neutrality,” is epitomized by the name of the coalition that lobbied the FTC: FairSearch.org.
Dividing this issue into two parts, first consider whether such practices have an adverse effect on competition. Even if travel booking sites, for instance, compete with Google in search, there is no evidence that so-called link demotion diminishes their Web traffic. Some of these are the same companies that forecast Google would force them out of business but now boast of successful IPOs. Moreover, driving traffic to a website can easily be duplicated through other low-cost means, from email campaigns to QR codes.
Second, consider whether there is a practical way to ferret out from Google’s constant tweaking of its algorithms which changes “demoted” quasi-search rivals. Since nearly everyone admits Google got to its present position by building a better search engine, the trade secret and IP consequences of such a monopolization theory are enforcement quicksand.
Most importantly, the changes Google makes to its search algorithms are designed to offer consumers a superior product. As Leibowitz summarized, “Google’s primary reason for changing the look and feel of its search results to highlight its own products was to improve the user experience.”  Where unilateral conduct exhibits such plausible efficiencies without evidence of substantial competitive harm, the exclusionary conduct element of a Section 2 case is not present.
Deception Without Much More Is Not Exclusionary. Former AAG Tom Barnett said in 2011 that the search firm acted anticompetitively because “Google’s display of search results is deceptive to users.” Hardly. Although the Microsoft decision broke new legal ground in assessing when networks effects matter under Section 2, it did not create a “deception” prong of monopolization. Lying may violate truth-in-advertising and consumer protection statutes, such as Section 5 of the FTC Act, but does not constitute anticompetitive conduct for Sherman Act purposes.
Use of Monopoly Power For “Leverage” Is Not Unlawful. A final problem with an FTC antitrust case was that it represented the discarded notion of monopoly leveraging. Vertical rivals like TripAdvisor and Kayak in reality compete with Google’s complementary content (e.g., Zagat and profiles) and sales (e.g., Google Checkout and ITA travel booking software) products. In other words, the claim is that Google uses its purported power in the search market to gain a competitive advantage in a second, different market. Of course, monopoly leveraging has been overruled as a stand-alone Section 2 violation. Only if the competitive impact in the second market amounts to an attempt to monopolize is this sort of behavior illegal. It is impossible to conceive of an FTC complaint that could have credibly asserted there exists a “dangerous probability” Google would monopolize airline bookings, travel reviews or any other Internet content.
Consumer allegiance in technology is fleeting. The dramatically changed market positions of Myspace, Yahoo!, AOL and other, former online behemoths are the result of disruptive business models fueled by sweeping changes in underlying technology. No firm, including Google, is immune to such inflection points. With the accelerating substitution of apps, voice-response and social search (e.g., Apple’s Siri and Facebook’s Graph Search) — bolstered by evidence that in 2012, Google’s search advertising rates fell significantly for the first time — there is little to suggest that any market power Google may hold exhibits the durability necessary for proof of monopoly power.
Chairman Leibowitz noted that the complainants had asked to “regulate the intricacies of Google’s search engine algorithm.” The evident implication is one of institutional competence. Just as the Microsoft court articulated a policy of avoiding extension of per se rules like tying to volatile technology markets, the FTC was obviously worried that delving into the innards of Google’s “secret sauce” could do more bad than good.
There is ample basis for caution. Witness, for instance, the 1982 AT&T consent decree, which most knowledgeable observers conclude transformed the Antitrust Division from a litigation agency into a de facto telecommunications regulator. While the FTC is better-positioned institutionally to act as regulator, it nonetheless shares the same antitrust policy bias favoring what the late Judge Harold Greene famously called the “surer, cleaner” remedy of divestiture.
It is true that in vertical mergers, the enforcement agencies have more recently fashioned consent decrees which impose behavioral conditions. Yet the deferential judicial oversight of merger settlements “leaves the issue of remedies as one where the antitrust agencies possess considerable discretion.” That ambiguity has led former enforcement officials to bemoan the departure from a “law enforcement” antitrust model in favor of a regulatory one where “antitrust counselors find themselves focusing, not just on whether conduct contemplated by their clients is illegal,” but on what agencies are likely to seek in the nature of remedies.
The late Judge Robert Bork and Prof. Greg Sidak have observed that “a mandate that Google provide its competitors access to the top Google search positions through antitrust injunction or consent decree would be virtually impossible to enforce.” There are no neutral or objective criteria on which to assess the appropriate listing order of search results; by its very nature, Internet search is an effort to predict the information users are looking to obtain. “Rankings” of Web sites are based on a myriad of factors (reciprocal links, hits, metadata, etc.) that is the role of search engines to interpolate. To wade into the morass of regulating the operations of Google’s algorithms would place the FTC in the untenable position of deciding, as a legal matter, the business merits of nearly every change to the highly automated delivery of search results. As the Court emphasized in Trinko, antitrust remedies are inappropriate if they require courts “to act as central planners, identifying the proper price, quantity and other terms of dealing — a role for which they are ill suited.” That is surely a recipe for subjectivity and ultimately disaster.
Unlike in the EU, a Federal Trade Commission decision not to institute enforcement action does not result in a formal opinion. That hinders exploration of the antitrust analysis utilized by the agency in closing its two-year monopolization investigation of Google. Deconstructing that analysis with informed inferences nonetheless reveals that the FTC faced a daunting task in seeking to hold Google accountable under Section 2. The decision to fold-up its tent represents an admirable instance of prosecutorial restraint by an agency that had been very publicly hounded by Google’s rivals.
* Glenn Manishin was counsel to MCI in the AT&T antitrust case and served as a principal lawyer for ProComp (AOL, Oracle, Sun, etc.) and several software trade associations in the Microsoft monopolization case. Manishin does not represent Google.
 See Google Press Conference, Opening Remarks of FTC Chairman Jon Leibowitz, Jan. 3, 2013, http://ht.ly/ j0vWQ (“Leibowitz Remarks”); In re Motorola Mobility LLC, a limited liability company, and Google Inc., a corporation, FTC File No. 121 0120 (Jan. 3, 2013), http://ht.ly/j0jcm.
 253 F. 3d 34, 84 (D.C. Cir. 2001) (en banc). Microsoft was held liable under Section 2 for deceiving Java developers that programs written with Microsoft’s Java tools would be OS-indifferent. In reality, the Microsoft interface created Windows-only Java apps that would not run on any other platform, thus reinforcing the Windows desktop monopoly. No one argues that Google has tricked advertisers or search users into utilizing Google products when they thought they were creating a Google-free computing environment.
Yesterday the U.S. Securities & Exchange Commission did something routine. It issued a so-called “Wells-notice” against a company, charging the firm preliminarily with releasing confidential financial information to a select portion of the market, instead of publicly to all investors as required by Reg FD (“fair disclosure”). What is remarkable, and potentially troubling, is that the basis for the charge was a short social media message by Netflix CEO Reed Hastings, reposted on the company’s public Facebook page.
As Law360 explained:
Netflix Inc. and its CEO Reed Hastings could face action by the SEC over Hastings’ July post revealing that Netflix members had watched more than one billion hours that month, the online video service said in a regulatory filing Thursday. Netflix and Hastings received a Wells notice on Wednesday that said the company could face either a cease-and-desist or civil injunctive suit for fair-disclosure violations allegedly prompted by the posting on the social networking site, according to an SEC filing by Netflix.
The juxaposition of a good-intentioned securities regulation and the disruptive impact of new technology could not be clearer. In his post, Hastings congratulated the Netflix team for a job well done in early July, noting the one billion hours of video delivered to subscribers the previous month. The message was just 43 words. In the usual social media fashion, the post was forwarded by his followers. Bloggers picked up on it. Media reports cited it.
So what’s the deal? Technically, Netflix had not filed an “8K” update with that data at the SEC nor issued a traditional press release. But the company had revealed the 1B streaming hours in its public blog well before the CEO’s Facebook post. And in 2008, the SEC became the first federal agency to recognize the growing communications functions of blogs by issuing landmark guidance saying that corporate use of blogs for release of material financial information would satisfy Reg FD.
In this context, the action against Hastings seems to make little sense. Even if the prior blog post had not disclosed the 1B figure adequately, Hastings’ post was open to more than 200,000 followers of his Facebook page, could be “subscribed” by anyone (“friends” or not) and was widely and immediately disseminated, both in social and traditional media. Had Hastings done this via a Twitter DM (direct message) or a private Facebook message to one or more individual friends, that would be completely different. But his post was public and thoroughly publicized.
That’s the precise purpose of Reg FD. But the SEC’s Wells notice illustrates that even government agencies that “get it” technically are often trapped in outmoded world views. It’s one thing for a public company CEO to post messages about financial performance on financial chat rooms and lists, under a pseudonym, to pump up trading volume artificially. It’s quite another for bureaucrats to decide that unless one uses the obsolescent technology of the past, public disclosures are inadequate. Would the SEC also suggest that a webinar, rather than telephonic conference call, is insufficient under Reg FD when announcing earnings guidance because not all investors have broadband Web access? That is hardly a sensible result.
We’ve written a lot in this blog about social media policies and how to reduce enterprise legal exposure. The irony of the Netflix case is that a company and executive who seem to have had a valid policy and followed the government’s own guidelines for use of social media has been targeted in a possible enforcement action nonetheless. That raises the spectre, which numerous commentators noted in connection with more a recent SEC alert on social media usage by investment advisors, that vague agency guidelines may lead to policy making by criminal complaint, rather than rules of general applicability. If that is the case with regard to blogs and Facebook as mechanisms for Reg FD compliant disclosures, there’s an equally great risk that these new modes of communication and interaction will be rendered impotent for corporate purposes due to the unknown scope of potential SEC exposure. That’s a bad result which everyone should hope we do not reach.
Note: Originally written for and reposted with permission of my law firm’s Information Intersection blog.
Disintermediation is the heart of the Internet’s value proposition; cutting out the middleman in order to reduce distribution costs at scale. Now the first and best example of this point, Amazon.com, is quietly going a bit in the other direction.
According to a report Monday by Reuters, Amazon is installing “lockers” in 1,800 Staples office supply stores nationwide. These are not cloud-based digital content lockers, but instead large automated dispensing machines.
The Amazon lockers at Staples will allow online shoppers to have packages sent to the office supply chain’s stores. Amazon already has such storage units at grocery, convenience and drug stores, many of which stay open around the clock. Amazon.com Inc., the world’s largest Internet retailer, is trying to let customers avoid having to wait for ordered packages due to a missed delivery.
The reason for Amazon’s move, which Seattle-based GeekWire says was quietly launched a year ago, is not difficult to figure out. The “last 30 yards” are the most important part of its supply chain, for which Amazon largely relies on UPS. Yet as consumers, especially Americans, now spend little or no time at home during business hours, there is often no one available at the shipping address to receive packages. That makes the opportunity cost of buying from Amazon, namely the time required for delivery, higher than otherwise the case, in turn making alternatives such as Walmart, Apple and Best Buy in-store pick-up or RedBox DVD rental kiosks far more attractive to buyers. Marketing experts call this the “omnichannel” retail strategy, designed to prevent “showrooming.”
The irony is clear. A company born on the Web, one that essentially birthed the distinction between virtual and brick-and-mortar retailing, is making a big investment (including whatever undisclosed fees it will pay to Staples) in the very companies its business model threatens. While Apple’s retail stores may have been unexpected for a PC manufacturer, they represented an incremental change to the company’s distribution system. Amazon, in contrast, is moving stealthily into a new, mixed-mode business model that embraces part of the IRL retailing segment it once promised to make irrelevant.
Whether this will make a competitive difference remains to be seen. Consumers can now (literally) vote with their feet.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
Late Friday afternoon, several stories appeared quoting unnamed sources that the Federal Trade Commission (FTC) has received a staff memo recommending an antitrust prosecution of Google. Now, in a letter just days ago to FTC Chairman Jon Leibowitz, Colorado Rep. Jared Polis — founder of bluemountain.com and ProFlowers.com — counseled that an FTC monopolization case against Google could lead to legislative blowback.
I believe that application of antitrust against Google would be a woefully misguided step that would threaten the very integrity of our antitrust system, and could ultimately lead to congressional action resulting in a reduction in the ability of the FTC to enforce critical antitrust protections in industries where markets are being distorted by monopolies or oligopolies.
Google Antitrust Action Could Cost FTC Power, Dem Warns | Law360. That’s consistent with what I suggested in my five-part series Why An FTC Case Against Google Is A Really Bad Idea, but of course goes even further as my legal analysis did not address potential political or legislative reaction to a formal FTC complaint.
Meanwhile, commentators are whacking each other silly. Sam Gustin observed in TimeBusiness that “Microsoft and its anti-Google allies have spent untold millions waging an overt and covert campaign designed to persuade regulators to hobble the search leader. Perhaps if these companies spent a little less time complaining and a little more time innovating, they’d have a better chance of competing in the marketplace.” In response, John Paczkowski at AllThingsDigital noted the Polis letter’s “fortuitous timing” and implied that it “seems a bit odd” for a junior legislator to threaten a sitting FTC chairman, concluding that “maybe we should all wait and see the FTC’s evidence and the merits of its case — if there is one — before threatening to limit the agency’s authority.”
It is clear to any objective observer that there is a case in the works and that the FTC, which on background leaked that four of five commissioners are already on board, sent a trial balloon out through the press last week. Paczkowski is naive if he believes the timing of the stories last Friday was also not “fortuitous” or that the “merits” of the FTC’s case may not properly be a matter of policy and political debate. Having witnessed this same pas de deux for years in connection with United States v. Microsoft Corp., it’s just business as usual in Washington, DC. That may not make it right or courteous, but it does make it completely unexceptional.
A few weeks ago, the head of competition for the European Union, Joaquin Almunia, reportedly instructed Google that the search giant must make “sweeping changes” to its business model by extending restrictions the Europeans are insisting upon for Web search into the mobile realm. (See EU Orders Google to Change Mobile Services | Reuters.)
Is he possibly for real? We all know mobile is growing by leaps and bounds, powering political revolutions, connecting the developing world to the new information economy, and disrupting legacy industries. That market dynamism should instead counsel for a restrained approach, delaying government intervention until at least some of the dust settles, because mobile is different. Here’s why — and how that matters.
1. Apps Rule Mobile, Not Web Search
With more than 300,000 mobile applications released in the last year alone, “apps are increasingly replacing browsers as the method of choice for connected consumers to find and use information.” This striking user preference is neither difficult to discern nor hard to understand. One can see it walking on nearly any downtown street as teenagers query Foursquare and Facebook apps for friend check-ins, businessmen find lunch spots with OpenTable or Yelp, and 20-somethings search for trending hashtag topics inside Twitter’s app. In other words, in the mobile realm apps rule.
Wired’s editor-in-chief Chris Anderson in 2010, along with Square’s COO Keith Rabois in 2011, both predicted flatly that the Web is dying and mobile devices with dedicated apps are to blame. Apple’s Steve Jobs (watch his keynote) said it a bit more provocatively:
On a mobile device, search hasn’t happened. Search is not where it’s at. People aren’t searching on a mobile device like they do on the desktop. What is happening is they are spending all of their time in apps.
The numbers now prove that all three of these pundits were correct. As much as 50% of mobile search is happening in apps today. In March, a remarkably small 18.5% of all smartphone and tablet usage was in the browser; the rest was through apps. Nearly half of smartphone owners today shop using mobile apps. The international wireless association GSMA reported as far back as 2011 that second only to texting (and even more than actual calls), native apps comprise the highest level of smartphone activity. Yelp’s CEO Jeremy Stoppelman told Wall Street on August 2 that a majority of weekend searches now come in through its mobile app and that “by choosing the Yelp app people are bypassing search engines and consequently their engagement is higher.” Even venerable Craigslist is today battling mobile apps.
So mobile Web search is either dead or dying. That’s in part, as explained in the next bullet, because mobile users need, want and expect immediate answers, not a listing of URLs for browsing. Blue links just do not cut it anymore when users are mobile.
2. Search Is Local, Targeted and Interactive For Mobile Users
CNN Mobile’s VP Louis Gump, a mobile legend, says that every business must “start with the assumption that mobile is different.” Reflecting that difference, mobile sites typically include only the most crucial and time- and location-specific functions and features, while desktop Web sites contain a wide range of content and information. The reason is that mobile users are looking for local, immediate and interactive information.
Consider these stats —
Our “information needs and habits” are different on mobile, reports TechCrunch, where users want “smaller bits of information quicker, usually calibrated to location.” The end result is a relationship between device owner and information which is far more personal, immediate and reciprocal in the mobile environment than on the desktop. Marketers know this and are working feverishly to engage their audiences using these new selling points. Mobile marketing is “immediate, personal and targeted to specific consumer groups” says Twitter marketing rockstar Shelly Kramer.
3. Voice As the Mobile UI Is a Game Changer
Along with everything from in-car services like Ford’s Microsoft-powered Sync and even TV remote controls, mobile UIs are evolving rapidly to offer the consistency that made the graphical UI (GUI) so important in evolution of the desktop PC. But in the mobile environment, voice is becoming the always-available common denominator as the size of devices and the desire (and legal need) for hands-free use limit the effectiveness even of touchscreens.
Using market leader Apple as our example again, as Frank Reed commented in Marketing Pilgrim,
Siri is definitely a form of search. It’s a request and answer mechanism that can do tasks outside of search (texts, emails, etc.) but when a user asks it for the closest Italian restaurant it is, in essence, a search engine. It is presenting what its backend calculations have decided are the best possible answers for the question asked by the iPhone user. Sounds exactly like Google’s function as a search engine, doesn’t it? Different delivery of a result set but it’s search.
Android users have a similar capability with Google Now, which has been called “more than just a new voice search application for Android; it’s also an indication of how Google will overhaul the user interface for its search products.” Consumers will soon see this same sort of voice interaction in mobile apps (powered by Nuance and others), on Windows phones and from well-funded voice search venture AskZiggy.
Voice is “the most revolutionary user interface in the history of technology,” according to Forbes. And it is all about search: search on steroids that is. As far as Google, the Mountain View company countered with a just-announced voice search app for the Apple iOS and interactive search results on its mobile Web properties. Whether Google can recapture the inventiveness in voice and mobile search that allowed its Web algorithms to dominate is open to serious question. Right now it’s rather desperately playing catch-up.
4. No One Has Yet Figured Out How To Monetize Mobile
Look closely at that graphic. Notice the dramatic difference between advertising spending and usage rates on mobile platforms compared to other media? That’s because no one has really figured out yet how to monetize mobile services. Social media darling Facebook — illustrated painfully by its revenue and stock price stumbles — for years has stood as the dominant supplier of display ads on the Web, but has just barely tried to introduce advertising into its mobile app. Considering that in May total usage of Facebook mobile surpassed that of its classic website for the first time and the clear lesson is that profiting from mobile information is a difficult endeavor, lagging well behind most technology markets.
Other than wireless network carriers, that is. As The Economist explains:
The [mobile] combination of personalisation, location and a willingness to pay makes all kinds of new business models possible….. Would-be providers of mobile Internet services cannot simply set up their servers and wait for the money to roll in, however, because the network operators — who know who and where the users are and control the billing system — hold all the cards.
This is not the place to discuss data caps and shared wireless plans, but the fact is that few if any mobile Internet services except those employing a pay-per-subscriber model have even come close to monetizing the mobile experience. That will and must change, although when and how remain unclear. As BusinessWeek notes, “desktop Internet use led to the rise of Google, eBay and Yahoo, but the mobile winners are still emerging.”
5. Mobile FIRST Is The New Reality
Ten, five or even two years ago, developers all talked about the need to adapt content to fit the smaller form factor, screen real estate and touch navigation features of mobile devices. That’s already ancient history today. The new reality is that everyone from television and media companies to PC manufacturers are thinking “mobile first,” designing interfaces (gesture-based and voice-powered), content (shorter, punchier and more micro blog-like) and interactivity (social media integration, video clip streams, etc.) to cater to an audience that is dominantly mobile, most of the time.
The title of Luke Wroblewski’s new book Mobile First says it all. In a mobile world, all we thought we had learned about the Web is reversed and upside down. Mobile starts from scratch and leads everything else.
So how do these profound differences matter? This author (and my Project DisCo colleague Dan O’Connor) has previously written about the difficulties of “market definition” in search, a big term for the simple idea that display ads, text ads and organic search results are all competing for the same customers. If the Federal Trade Commission (FTC), which is still “investigating” Google for alleged search monopolization two years on, took this into account, its lawyers would scuttle any government prosecution because Google’s market share would be well below that of search alone, hardly in monopoly territory.
Earlier DisCo commented about the European Union’s penchant for regulating nascent products and industries before they even exist. By moving against Google in mobile Web search, the EU is instead trying to regulate a market that is dying and all but irrelevant to the realities of today’s mobile Internet usage and experience. With news just days ago that Americans spend more time watching their smartphones than watching television, the reality is that the mobile market may have already hit an important inflection point. In the name of protecting the future, however, Europeans are living in the past.
The FTC should pay attention. Mobile is different and poised to surpass fixed Internet usage. Whatever “gatekeeper” functions Google plays on desktop PCs (which we think is a huge overstatement), it is plainly not the same in the mobile realm. Let’s free the competitive battles to flourish in mobile search before government steps in with its thumb on the scale. In a mobile world, everything is different; those differences need to and should be reflected in antitrust enforcement policies.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
We’ve written previously about the Computer Fraud and Abuse Act (CFAA) being limited by judicial interpretation, especially for employers as civil plaintiffs, and offered tips on alternatives to controlling unauthorized access to or use of enterprise IT systems by employees. Reports Of The Computer Fraud and Abuse Act’s Demise Have Been Greatly Exaggerated | Information Intersection. The terrain is getting even murkier.
The Court of Appeals for the Ninth Circuit last April in Nosal gave the statute a limited construction, holding that the “exceeds authorized access” offense is “limited to violations of restrictions on access to information, and not restrictions on its use.” That may make sense from the perspective of a law dating to 1984 and initially designed to criminalize physical damage to computing systems, but not from the perspective of how courts transition precedent from one technical era into another. The CFAA is not that old. Yet already we are confronted with an increasing conflict as to its basic scope when applied to civil remedies for insiders who exceed their authority and injure corporate good will or IP. Indeed, cybersecurity experts often warn that the greatest threats to business IT systems and the information they store arise not from hackers, but dishonest or disaffected employees, even “well-meaning insiders.”
Last week the Fourth Circuit added more fuel to the CFAA fire in WEC Carolina Energy Solutions LLC v. Miller, extending Nosal to civil claims and concluding that the law does not codify violations of corporate information technology policies. The employer’s IT policy (as this blog recommended) prohibited employees from using company information without authorization and from downloading information to their personal computers. So was use of information in violation of that policy, but obtained from a computer an employee is otherwise authorized to access, “without authorization” or “exceed[ing] authorized access”?
The WEC Carolina court said no. Unauthorized access applies to an employee who has “approval to access a computer, but uses his access to obtain or alter information that falls outside the bounds of his approved access…. Notably, neither of these definitions extends to the improper use of information validly accessed.” They do not cover information misuse alone, the court reasoned, because as a criminal statute the CFAA must be construed in accordance with the plain meaning of its language so defendants have fair warning about punishable conduct. The Fourth Circuit also rejected the “cessation-of-agency” theory espoused by the Seventh Circuit. Under this theory, if as an employee you use a corporate computer network in breach of your company’s policy, you have violated your fiduciary duty and therefore any right of access is terminated by operation of law, making ongoing use of the network a violation of the CFAA. The Fourth Circuit held that this approach would improperly suck in “millions of ordinary citizens” who innocently check Facebook or sporting event scores while at work.
Our conclusion here likely will disappoint employers hoping for a means to rein in rogue employees. But we are unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy. Providing such recourse not only is unnecessary, given that other legal remedies exist for these grievances, but also is violative of the Supreme Court’s counsel to construe criminal statutes strictly.
The ambiguities inherent in the often-amended CFAA are growing as aggressive litigants vie for competing interpretations. They expose the often-secret reality that the statute was not structured for an era when most employees have company-issued computing devices and are permitted remote BYOD access to corporate IT systems. The argument that the CFAA regulates the workplace today because everyone uses what the statute classifiues as “protected computers” (used in interstate commerce, i.e., with an Internet connection) is on its last legs. We do suspect that the wide gulf among the federal appellate courts may inspire the Supreme Court to take up a CFAA case next term, which begins in October 2012, but even if review is accepted a decision would likely not be handed down until 2013 or even 2014. Employers obviously cannot wait that long and, given political paralysis on cubersecurity in the Senate, a legislative clarification seems extremely unlikely.
The lesson: employers should keep tabs on the CFAA, but put more of their IT and IP protection ”eggs” into confidentiality agreements, NDAs and other “baskets” that do not raise the linguistic disputes and uncertainty plaguing civil CFAA litigation today.
Note: Originally written for and reposted with permission of my law firm’s Information Intersection blog.
People have been talking, and pontificating, about a coming “Internet of Things” since 1999. The idea is that the many sensors, actuators and digital data recorders in the environment around us — like the electronic control units (ECUs) in modern automobiles — will be uniquely identified and connected via IP to each other and to the world. This would allow instantaneous supply chain fulfillment, green initiatives like demand-side management and smart refrigerators, as well as simply cool stuff that puts remotely programming one’s DVR from a smartphone app to shame. As McKinsey & Co. noted in 2010:
The physical world itself is becoming a type of information system… When objects can both sense the environment and communicate, they become tools for understanding complexity and responding to it swiftly. What’s revolutionary in all this is that these physical information systems … work largely without human intervention.
So what’s going on? Two things. The obvious one is that more than a decade later (and despite the fact that by 2008 there were already more “things” connected to the Internet than people in the world) we are still not “there” yet. Refrigerators cannot detect when the last soda can is used, let alone order more autonomously; HVAC systems largely cannot interact with electricity genitors in real time to consume more energy when rates are lower, and vice-versa; and suitcases cannot communicate with airport luggage systems to tell the machines onto which flight they should be loaded (except with barcode readers). Partially, that’s because technologists frequently overstate adoption projections for new networks by 10 years or more. Less obvious is that there’s been a quiet push in the European Union (EU) to regulate the IoT even before it is fully gestated and born.
A European Commission “consultancy” on the Internet of Things was launched in 2008. By 2009 the EU had already issued an Action Plan for Europe for the IoT, which concluded:
Although IoT will help to address certain problems, it will usher in its own set of challenges, some directly affecting individuals. For example, some applications may be closely interlinked with critical infrastructures such as the power supply while others will handle information related to an individual’s whereabouts. Simply leaving the development of IoT to the private sector, and possibly to other world regions, is not a sensible option in view of the deep societal changes that IoT will bring about.
As a result, libertarian business groups such as the European-American Business Council and TechAmerica Europe have this summer come out in opposition to the EU’s approach, pressing for industry-led standards and application of existing measures, like the existing EU data protection rules (which already exceed the United States’ by a wide margin), “in lieu of a new regulatory structure.”
This is a scary prospect. That the EU would even consider crafting a regulatory scheme now for a technology revolution that realistically remains years away, requires immense levels of cooperation among industries, and holds the potential to transform business and life as we know it, is remarkable. Remarkable because such a philosophy is so alien to American economic values and to the spirit of innovation and entrepreneurship that launched the commercial Internet and Web 2.0 revolutions.
This article is not the place to debate the conflicts, trade-offs and differing views of government animating current technology policy issues like net neutrality, privacy and cybersecurity, copyright and the like. The reality though, is that issues such as those are generally being assessed within a spectrum of solutions, worldwide, which reflect known risks and benefits, some proposals of course being more interventionist than others. But that is far different from allowing a single bureaucratic monolith to dictate the shape of an industry and technology that remains embryonic. How is it even possible to develop fair rules for the IoT when no one has any real idea what or when it will be?
More than 15 years ago, this writer worked for one of his corporate clients on a legislative amendment offered by Rep. Anna Eshoo (D-Cal.) to the Telecommunications Act of 1996. The so-called “Eshoo Amendment,” designed to limit the role of the Federal Communications Commission in mandating standards for emerging, competitive digital technologies like home automation, passed. The irony, of course, is that at the time Congresswoman Eshoo analogized home automation to a future world like that of The Jetsons. Now 16 years down the road, we are barely closer to George, Elroy and their flying cars, robotic maids and the like than we were then.
But that ’96 effort illustrated a fundamental difference between the United States and the European Union about the proper role of government with respect to innovation. The EU subsidizes research, sets agendas and looks to intervene in the marketplace in order to establish rules of the road even before new industries are launched. The US sits back, lets the private sector innovate, and generally intervenes only when there has been a “market failure.” That’s a philosophy largely embraced by both major American parties regardless of the increasingly polarized political landscape in Washington, DC.
This basic difference in world views between the home of the Internet and European regulators — as true today as in 1996, if not more so — could doom the Internet of Things. So if you are a fan of future shock, then it’s clear you should not react to the EU’s efforts to shape the IoT with a viva la difference attitude. The difference is dangerous to innovation and especially dangerous to disruptive innovation. It’s no wonder that few real digital innovations have come from Europe. Don’t expect many in the future unless the EU finds a way to decentralize and privatize its bureaucratic tendency towards aggrandizing government in the face of what IoT experts anticipate will be “a small avalanche of disruptive innovations.”
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
For all the discussion, dead-on accurate, about law holding back technological innovation, sometimes it works the other way around. When industries are transformed by disruptive new technologies and business models, the law itself can be in for a game-changing, forced makeover.
Take the European Union (EU) and digital music. Everyone by now realizes that the introduction of portable MP3 music players, coupled with Apple’s pioneering iPods and iTunes music store, have revolutionized the market for distribution of recorded music. Gone are the days of buying albums (or even CDs) just to get one hit song. Music is available on any device, in the cloud, streaming on desktops, and everywhere else, and it’s intensely personal playlists involved. As a result, the hockey stick adoption curve shows that hardly a decade after digital music downloads first gained popularity, “record stores” – Tower Records,
anyone? – are a thing of the past, record labels (EMI as the latest) appear to be on their last hurrahs, and fully 1/2 of all music
purchased in the United States is totally digital, never burned to a physical product.
That has not been the case in the EU. Despite a standard of living in excess of the US, less than 20% of music sold in Europe is digital. That’s in part because, under the EU Treaty, copyright licensing is conducted on a member state basis. This “balkanization” of the law (pun intended) means that digital sellers in the EU need to negotiate separate deals with each label and for each country, from France to the Czech Republic to Turkey, under very different legal regimes. That’s obviously a recipe for increasing costs and timeframes for entry, bad for business and keeping new distribution models from consumers.
In response, the EU Commission used its competition powers a couple of years ago to harmonize copyright laws in order to make them consistent throughout the EU, aimed at breaking down national barriers in the digital music business and making it possible for rights holders to issue pan-European licenses. As one can observe from a similar step towards telecom “liberalisation” in the ‘00s, however, that itself requires a vigilant enforcer at the EU level to ensure that parochial national legislatures and courts do not slow roll the process. This 2008 licensing change helped Apple launch its iTunes music store in all 27 European nations, but so far no one else. In 2009, major members of the online music industry — including
Amazon, iTunes, EMI, Nokia, PRS for Music, Universal, and others — signed a pact with the European Commission to work towards wider music distribution in Europe.
Yet Apple remains the only digital music seller with licenses to operate in every EU country. And even then, Apple rolled out iTunes stores in Poland, Hungary and 10 other European countries just last year, seven full years after arriving in Germany, the UK and France. As ArsTechnica comments:
Unlike the US, online music in Europe is typically only sold through one country’s stores at a time — this is despite the EU’s efforts to effectively eliminate the borders of its 27-country membership when it comes to products and services. As such, if you’re in Spain and want to buy a song from France’s iTunes store, you can’t — the store blocks you from making the purchase because you aren’t in France. This has led to companies like Apple rolling out individual music stores for each European country with a large enough market, but the fragmentation has caused nothing but headaches for end users who just want to listen to their favorite music.
Finally—One iTunes Store to Rule Them All (in Europe).
The reality is therefore that the “single market” for intellectual property rights (IPR) contemplated in the EU’s 2011 report is far from ready to roll. As Neelie Kroes, who once took on Microsoft and now serves as the EU’s Vice President, asked rhetorically in ’08, “Why is it possible to buy a CD from an online retailer and have it shipped to anywhere in Europe, but it is not possible to buy the same music, by the same artist, as an electronic download with similar ease?”
So this week the EU is going a step further. Singling out “collecting societies” – European analogs to ASCAP and BMI which gather royalties of about €6 billion, or $7.5 billion, annually from radio stations, restaurants, bars and other music users and distribute the proceeds to authors, composers and other rights holders – the EU plans to push towards a directive requiring greater efficiency, transparency and reciprocity. Royalty-collection societies could be forced under the draft rules to transfer their revenue-gathering activities to rivals if they lack the technical capacity to license music to Internet services in multiple countries. The idea seems to be that if it cannot reduce the sheer number (some 250) of collecting societies, at least the European Commission can make sure they operate as much in unison as possible.
A lesson to be drawn from this ongoing saga is that just as technical innovation can disintermediate industries and eliminate arbitrage as an economic profit motive among different markets, so too can it work to force elimination of legal differences among jurisdictions. Especially where the medium is the Internet, inherently global and regulated by no one (unless the European-centric International Telecommunications Union has its way), these legal changes can occur very quickly. Believe it or not, the four years over which the EU has been working for digital copyright licensing harmonization is lightning pace for the law.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.