I’ve spent a fair amount of time at Project DisCo discussing how political, legal and regulatory processes in the United States are largely biased against disruptive innovators in favor of legacy incumbents. That’s typically just as true for Uber and its ride-hailing competitors as it is for Aereo, Hulu, Netflix and other streaming video — or over the top (“OTT”) — Internet television services. But perhaps no longer.
The Consumer Choice in Online Video Act (S.1680), introduced by Sen. Jay Rockefeller, chairman of the Senate Commerce Committee, aims to change things. The legislation’s stated objectives are to “give online video companies baseline protections so they can more effectively compete in order to bring lower prices and more choice to consumers eager for new video options” and to “prevent the anticompetitive practices that hamper the growth of online video distributors.” It does so by (a) requiring television content owners to negotiate Internet carriage arrangements with OTT providers in good faith, (b) guaranteeing such firms reasonable access to video programming by limiting the use of contractual provisions that harm the growth of online video competition, and (c) empowering the FCC to craft regulations governing the program access interface between online providers and traditional television networks and studios.
S.1680 is a remarkable legislative effort to predict where the nascent online programming market is headed. It anticipates that in order to fulfill their competitive potential, OTT video entrants will require similar legal protections to what satellite television providers have for years enjoyed. The bill applies the program access model developed several decades ago for satellite television to the new world of OTT video.
As Rockefeller explained:
[He] has watched as the Internet has revolutionized many aspects of American life, from the economy, to health care, to education. It has proven to be a disruptive and transformative technology, and it has forever changed the way Americans live their lives. Consumers now use the Internet, for example, to purchase airline tickets, to reserve rental cars and hotel rooms, to do their holiday shopping. The Internet gives consumers the ability to identify prices and choices and offers an endless supply of competitive offerings that strive to meet individual consumer’s needs.
But that type of choice — with full transparency and real competition — has not been fully realized in today’s video marketplace. Rockefeller’s bill addresses this problem by promoting that transparency and choice. It addresses the core policy question of how to nurture new technologies and services, and make sure incumbents cannot simply perpetuate the status quo of ever-increasing bills and limited choice through exercise of their market power.
Modeled explicitly on the controversial 1992 Cable Act (which itself passed only over a presidential veto), S.1680 appears to be the first piece of legislation embracing disruption as a procompetiitive form of market evolution, including as its initial congressional “finding” that OTT services have the potential to “disrupt the traditional multichannel video distribution marketplace.” That’s excellent. At the same time, the bill’s choice of solution is contentious, by subjecting vertically integrated cable and television providers (e.g., Comcast-NBCu) to another regime of program access and retransmission mandates. The legal standard fashioned for testing the validity of a television distribution contract in S.1680 is whether it “substantially deters the development of an online video distribution alternative.” Given the highly visible retransmission disputes that have arisen in recent months, such as the Tennis Channel and CBS, plus the lack of evidence that vertical integration in fact provides an incentive for exclusive dealing and content foreclosure, free market advocates are likely to object to this. Proponents of net neutrality rules, especially where data caps are concerned, have already spoken out in support.
Continue reading OTT Disruption: Is the “Rockefeller Bill” the Answer?
No one in government or business has a crystal ball. Yet predictions of what is coming in markets characterized by rapid and disruptive innovation seem to be being made more often by competition enforcement agencies these days than in the past. It’s a trend that raises troublesome issues about the role of antitrust law and policy in shaping the future of competition.
Take two examples. The first is Nielsen’s $1.3 billion merger with Arbitron this fall. Nielsen specializes in television ratings, less well-known Arbitron principally in radio and “second screen” TV. Nonetheless, the Federal Trade Commission — by a divided 2-1 vote — concluded that if consummated, the acquisition might lessen competition in the market for “national syndicated cross-platform measurement services.” The consent decree settlement dictates that the post-merger firm sell and license, for at least eight years, certain Arbitron assets used to develop cross-platform audience measurement services to an FTC-approved buyer and take steps designed to ensure the success of the acquirer as a viable competitor.
In announcing the decree, FTC chair Edith Ramirez noted that “Effective merger enforcement requires that we look carefully at likely competitive effects that may be just around the corner.” That’s right, and the underlying antitrust law (Section 7 of the Clayton Act) has properly been described as an “incipiency” statute designed to nip monopolies and anticompetitive market structure in the bud before they can ripen into reality. Nonetheless, the difference is that making a predictive judgment about future competition in an existing market is different from predicting that in the future new markets will emerge. No one actually offers the advertising Nirvana of cross-platform audience measurement today. Nor is it clear that the future of measurement services will rely at all on legacy technologies (such as Nielsen’s viewer logs) in charting audiences for radically different content like streaming “over the top” television programming.
The problem is that divining the future of competition even in extant but emerging markets (“nascent” markets) is extraordinarily uncertain and difficult. That’s why successful entrepreneurs and venture capitalists make the big bucks, for seeing the future in a way others do not. That sort of vision is not something in which policy makers and courts have any comparative expertise, however. Where the analysis is ex post, things are different. In the Microsoft monopolization cases, for instance, the question was not predicting whether Netscape and its then-revolutionary Web browser would offer a cross-platform programming functionality to threaten the Windows desktop monopoly — it already had — but rather whether Microsoft abused its power to eliminate such cross-platform competition because of the potential long-term threat it posed. By contrast, in the Nielsen-Arbitron deal, the government is operating in the ex ante world in which the market it is concerned about, as well as the firms in and future entrants into that market, have yet to be seen at all.
This qualitative difference between nascent markets and future markets (not futures markets, which hedge the future value of existing products based on supply, demand and time value of money) is important for the Schumpterian process of creative destruction. When businesses are looking to remain relevant as technology and usage changes, they are betting with their own money. The right projection will yield a higher return on investment than bad predictions. Creating new products and services to meet unsatisfied demand may represent an inflection point, “tipping” the new market to the first mover, but it may also represent the 21st century’s Edsel or New Coke, i.e., a market that either never materializes or that develops very differently from what was at first imagined.
Continue reading Future Markets, Nascent Markets and Competitive Predictions
Are copyright holders allowed to decide without legal constraint to whom they will license their content and on what terms? That is the issue facing Pandora and other new streaming radio firms, for whom music and its associated licensing fees represent the biggest hurdle to commercial success against more established broadcast radio competitors. The answer lies in the sometimes obscure interface between the Copyright Act and antitrust law in the U.S.
In Pandora Media, Inc. v. American Society of Composers, Authors & Publishers, an antitrust case currently pending in federal court in New York, the streaming company is suing ASCAP and some of the major record labels for “withdrawing” their content from the ASCAP joint licensing venture, thus forcing individualized negotiations. It’s a leading-edge dispute, scheduled for trial by year-end, that may help catalyze a new approach to the old question of whether — and if so to what extent — owners of copyrighted digital content are permitted to refuse to deal with competing distribution channels on dramatically different commercial terms.
Most Project DisCo readers likely know about Pandora, a prominent start-up in the Internet radio space — one of the hottest markets around these days, especially given the launch of iTunes Radio by Apple. What is less understood is that streaming music on the ‘Net is fraught with legal issues surrounding copyright, constraints that effectively function as a barrier to the more widespread adoption of such disruptive technologies.
That’s not a lot different from the case of streaming Internet television pioneer Aereo, which as Ali Sternburg points out is caught in legal limbo between different rules (from conflicting judicial decisions) in different regions of the county: and a whopping legal defense bill as well. Copyright in addition plays a key role in the current exemption of traditional over-the-air radio stations from licensing music, an implicit subsidy the recording industry has been lobbying to change for years.
The Pandora-ASCAP fight represents a tricky issue at the intersection of intellectual property (IP) and antitrust. The ASCAP litigation actually dates to 1941, when the government entered into a consent decree settling a complaint that alleged monopolization of performance rights licenses. The settlement, still in place more than 60 years later, requires the organization to license “all of the works in the ASCAP repertory.” A month ago, presiding District Judge Denise Cote (who also issued the decision finding Apple’s e-book pricing deals a violation of the antitrust laws) entered summary judgment for Pandora. She reasoned that the consent decree gave Pandora the legal right to a blanket license
even though certain music publishers beginning in January 2013 have purported to withdraw from ASCAP the right to license their compositions to “New Media” services such as Pandora. Because the language of the consent decree unambiguously requires ASCAP to provide Pandora with a license to perform all of the works in its repertory, and because ASCAP retains the works of “withdrawing” publishers in its repertory even if it purports to lack the right to license them to a subclass of New Media entities, [Pandora must prevail].
Continue reading Opening Pandora’s Box: Copyright and Antitrust
While lots of bits and ink have been devoted to Apple Inc.’s well-publicized run-in with the Department of Justice over its role in a price-fixing conspiracy among e-book publishers, most of the media has not analyzed the array of private antitrust cases — mainly consumer class actions — brought against the iconic company. These typically allege that Apple’s closed ecosystem of iTunes, the iPod and iPhone are unlawful efforts to monopolize various media or hardware markets. After looking more closely at the merits of these various cases, I predicted in June that
the choice of a vertically integrated structure is unlikely to get Apple into antitrust trouble — either private or governmental, and whether in the United States or the EU — unless Tim Cook and company add some seriously bad acts to their competitive arsenal
Yesterday, a federal court of appeals (the Ninth Circuit in San Francisco) tossed one of the private antitrust class actions, which had challenged the lawfulness of the proprietary DRM technology Apple initially used for downloadable digital music, claiming the lack of interoperability inflated iTunes music prices. The court’s opinion concludes on procedural grounds that
under basic economic principles, increased competition — as Apple encountered in 2008 with the entrance of Amazon — generally lowers prices. See Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 895 (2007); Barr Labs., Inc v. Abbott Labs., 978 F.2d 98, 109 (3d Cir. 1992). The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible [the plaintiffs'] conclusory assertion that Apple’s [DRM] software updates affected music prices.
I’m glad to have been right. More important, though, is one obvious point, which bears repeating: “On the pure antitrust merits, whether to pay off these class action plaintiffs is a decision Apple really should not have to make.” But as we say in the law, “deep pocket” defendants will always be put in that rather untenable position.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
A few weeks ago I examined how copyright law — like most legal subjects dealing with technology — is lagging behind the fast-moving and disruptive changes wrought by social media to old legal rules for determining rights to Internet content. Part of my critique was that in deciding ownership of user-generated content (UGC), courts have not yet evaluated the difference between posting content “in the clear” and restricting content to “friends” or some other defined class far smaller than the entire Internet community.
Things may at last be getting a bit more settled. A New Jersey federal court ruled last Tuesday that non-public Facebook wall posts are covered by the federal Stored Communications Act (18 U.S.C. §§ 2701-12). The SCA, part of the broader Electronic Communications Privacy Act (18 U.S.C. §§ 2510 et seq.) that addresses both “the privacy expectations of citizens and the legitimate needs of law enforcement,” protects confidentiality of the contents of “electronic communication services,” providing criminal penalties and a civil remedy for unauthorized access. It’s a decades-old 1986 law that was enacted well before the commercial Internet and either email or social media had become ubiquitous. Yet by interpreting the statute, in light of its purpose, to apply to new technologies, District Judge William J. Martini has done Internet users, and common sense, a great service.
Plaintiff Deborah Ehling, a registered nurse, paramedic and president of her local EMT union — apparently a thorn in the side of her hospital employer for pursuing EPA and labor complaints as well — posted a comment to her Facebook wall implying that the paramedics who arrived on the scene of a shooting at the D.C. Holocaust museum should have let the shooter die. Unbeknownst to Ehling, a co-worker with whom she was Facebook friends had been taking screenshots of her profile page and sending them to a manager at Ehling’s hospital.
Ehling was temporarily suspended with pay and received a memo stating that the hospital was concerned that her comment reflected a deliberate disregard for patient safety. After an unsuccessful NLRB complaint based on labor law, Ehling’s federal lawsuit alleged that the hospital had violated the SCA by improperly accessing her Facebook wall post about the museum shooting, contending that her Facebook wall posts were covered by the law because she selected privacy settings limiting access to her Facebook page to her Facebook friends.
Judge Martini concluded that the SCA indeed applies to Facebook wall posts when a user has limited his or her privacy settings. He noted that “Facebook has customizable privacy settings that allow users to restrict access to their Facebook content. Access can be limited to the user’s Facebook friends, to particular groups or individuals, or to just the user.” Therefore, because the plaintiff selected privacy settings that limited access to her Facebook wall content only to friends and “did not add any MONOC [hospital] managers as Facebook friends,” she met the criteria for SCA-covered private communications.
Facebook wall posts that are configured to be private are, by definition, not accessible to the general public. The touchstone of the Electronic Communications Privacy Act is that it protects private information. The language of the statute makes clear that the statute’s purpose is to protect information that the communicator took steps to keep private. See 18 U.S.C. § 2511(2)(g)(i) (there is no protection for information that is “configured [to be] readily accessible to the general public”). [The] SCA confirms that information is protectable as long as the communicator actively restricts the public from accessing the information.
That’s a bold move by a jurist sensitive to the constraints on Congress, especially one as polarized as we have in America today. It reflects a willingness to adapt the law to changing technology by application of the basic principles and purposes of legislation, even if the statutory framework is old and its language somewhat archaic. As Judge Martini observed with a bit of consternation, “Despite the rapid evolution of computer and networking technology since the SCA’s adoption, its language has remained surprisingly static.” Thus, the “task of adapting the Act’s language to modern technology has fallen largely upon the courts.”
Continue reading Friends With Benefits (How Privacy Law Evolves for Social Media)
When it comes to disruption, the advent of social media communications is decidedly in the front row. But along with revolutionizing personal (and political) relationships, the sharing of content on social media sites like Facebook, Twitter, Tumblr and Instagram — now a Facebook property — is steadily increasing pressures on a quite different regime, namely copyright law. The passage and forthcoming implementation in the UK of what has become known colloquially as The Instagram Act, boringly titled the Enterprise and Regulatory Reform Act, promises only to accelerate the conflict between new social media services and legacy copyright rules worldwide.
This author has written, and ranted, about ownership of user-generated content (UGC) for several years. The gist of the problem is not that social media providers want to claim ownership of UGC. None do, despite occasional outcries to the contrary, although they also insist rather unremarkably via terms of service (TOS) on a license to display UGC posts to those a user authorizes. Instead, the problem arises when third parties want to incorporate user-created content into their own sites or publications. After all, if CNN or Fox News broadcast tweets, status updates and Flickr photos as part of their news stories, wouldn’t these and other organizations be violating the inherent copyright users hold in their own content? Put another way, if posting users have legal rights to their UGC, doesn’t it follow that even “retweeting” constitutes unlawful copyright infringement?
In most of the world today, ownership of one’s creation is automatic, and considered to be an individual’s legally protected intellectual property. That’s enshrined in the Berne Convention and other international treaties, which abolished registration as a formal predicate for copyright interests (although not for judicial enforcement). What this means in practice is that one can go after somebody who exploits a creative work without the owner’s permission — even if pursuing them is cumbersome and expensive — once the work is registered with the appropriate governmental copyright authority.
Social media sharing throws all these regimes into chaos. Take first the issue addressed by The Instagram Act and, in a slightly different context, U.S. litigation over the Google Library service: “orphaned” works. The new UK law theoretically aims to make it easier for companies to publish orphan works, which are images and other content whose author or copyright holder can’t be identified. But whereas in the past, orphan works were often out-of-print books and historical unattributed photos, today millions of images are quickly orphaned online, as they move from Instagram to Twitter to Facebook to Tumblr without attribution along the way. The British response was to adjust copyright law so that an orphaned work can be republished without liability if a third party makes a “reasonably diligent” search to identify and locate the original owner.
Continue reading Social Media and Copyright Law In Conflict
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.