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[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I, Part II and Part III.]
To make out a monopolization case, any plaintiff, FTC or otherwise, must not only show monopoly power in a relevant market, but also that anticompetitive practices led to (obtained) or protected (maintained) that power. Antitrust lawyers dub this the “conduct” element of Section 2. It’s what differentiates lawful monopolies, earned by innovation and business skill, from unlawful acts of monopolization.
Exclusionary or anticompetitive conduct — the terms are the same — is something other than competition on the merits. A colloquial definition which basically matches the judicial one is that anticompetitive conduct is business behavior that defeats competing firms on a basis other than efficiency. Likewise, conduct that sacrifices short-run profits in order to “recoup” those relative losses with higher future prices is not rational business behavior and is thus regarded by the law as presumptively predatory, the most egregious form of anticompetitive behavior.
4. Google Has Not Engaged In Exclusionary Practices
Try as they might, the proponents of an FTC case against Google have not made a credible showing anything Google has done meets these accepted tests for exclusionary conduct. The fallacy of their critique is summed up with a Web ad running now asking whether we can “trust” Google. Neither trust nor fairness have anything to do with the antitrust laws. Monopolization is not unfair competition, it is illegal competition.
Unfairness represents a qualitative judgment that has nothing to do with current antitrust law. As the modern 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 or “purport to afford remedies for all torts committed by or against persons engaged in interstate commerce”…. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator’s losses and to harvest some additional gain.
In sum, marketplace competition is not boxing and there are no Marquess of Queensberry Rules governing how firms must fight “fairly”. Anything goes in our market system so long as it pits product against product and is not illegal — in other words, so long as the challenged practices do not use the power of a monopoly position to drive out equally-efficient competitors.
[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I and Part II.]
Antitrust law is characterized by rigorous, fact-intensive analysis, so much so that the prevailing jurisprudence holds that market definition (explored in Part II) generally should not be resolved on the “pleadings” alone, in other words without factual discovery. Nothing typifies the demanding analytical framework of antitrust more than monopoly power, part of the first element of a Section 2 monopolization case — possession of monopoly power in the relevant market. With respect to monopoly power, the potential case of FTC v. Google, Inc. will likely run into some especially significant barriers, no pun intended.
3. Google Has No Monopoly Power, Even In Internet Search/Advertising
There’s precious little room in a relatively brief blog series to expound on all the various elements that factor into a judicial finding of monopoly power. The basic principle is that a high market share (typically 70% or more), coupled with barriers to entry, allows an inference of monopoly power to be drawn. But like nearly all legal inferences that’s merely a rebuttable, prima facie construct, as direct proof of the “power to control price or exclude competition” is the best evidence of monopoly. (It’s just hard to find.)
This author has written elsewhere about The Fantasy Google Monopoly, in which I noted 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.”
Like the Red Queen in Through the Looking Glass, Google succeeds only by running faster than its competitors — merely to stay in the same place. There’s nothing about Internet search that locks users into Google’s search engine or its many other products. Nor is new entry at all difficult. There are few, if any, scale economies in search and the acquisition of data in today’s digital environment is relatively cost free. Microsoft’s impressive growth of Bing in a mere two or so years shows that new competition in search can come at any time.
While that sums up, rather cogently I must say, the antitrust analysis, let’s go to the coaches’ tape and break it down.
No Bottleneck or “Gateway” Control. Ten years ago, when the FCC and FTC both believed America Online — which boasted a very high share of dial-up Internet access — had monopoly power, the (fleeting) conclusion rested on the fact that AOL controlled access by its customers to the Internet and thus competing Internet content. Much like the pre-divestiture AT&T Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not own the Internet’s tramsission lines or 4G spectrum, and is thus not a bottleneck. Regardless of search share or volume, the reality is that Google has no control over the content its search users can access on the Internet. Web search is one of many ways, together with links, URLs, browser bookmarks, directories, QR codes, email marketing and uncountable others, for Internet sites to drive traffic and hits. Google is not a gateway so much as it is a highly and quickly searchable index of the Web. When there’s a host of other ways to find a page, the index itself is just a convenience, as much for bound books as for Web sites.
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 monopoly power criterion of control over price. As micro-economics teaches, a monopolist can increase prices above marginal costs, resulting in a “deadweight” loss to consumer welfare. Yet Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys the ads (as many or as few as it wants) at the winning bid price. Certainly, there are ways to game any auction to favor some bidders over others or to exert indirect influence on the wining auction price. But so far as we can tell, such a theory of pricing power is not involved in the FTC’s threatened monopolization claim against Google. And if it were, that case would be even harder to prove than this overview analysis concludes.
No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on so-called “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, where subscriber demand for service rose in proportion to the number of interconnected telephone companies (and thus other telephone subscribers) the end user could call. Network effects are in part a barrier to entry, by increasing requirements for scale economies by new firms, and a source of power to exclude rivals, by allowing the dominant network effects firm to deny competitors critical mass. Yet there is no, or at least precious little, evidence that with respect to search users and search advertisers, there are any network effects at all involved with Google. That you may conduct Web searches using Google’s engine makes it no more likely that me or any other Web users will select Google for search. That Sears may buy some AdWords keywords for search advertising makes it only slightly if at all more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads via a Google auction.
No Entry Barriers. A monopoly in a market in which entry by new competitors is unlimited cannot be sustained for long. Thus, as noted antitrust law couples market share with barriers to entry in assessing monopoly power. It is difficult if not impossible to make a serious case that there are substantial entry barriers in Internet search or advertising. Web page indexing — the key input to search — is a product of raw computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s Internet economy. That Facebook is planing to launch 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. As the UK’s Daily Mail wrote, “Facebook is looking to tackle Google by making search a much more prominent part of it social network.” The Red Queen strikes again.
“Data” Is Not a Search Entry Barrier. Proponents of a Google monopolization prosecution have recently refined their analysis, suggesting that the wealth of demographic data assembled by Google from users’ Web searches is a barrier to entry. That’s a smokescreen. Data about consumer preferences and behavior — aggregated and (much to the annoyance of privacy advocates) individualized — is also a commodity in our modern economy. Whether credit and commercial transaction data via the “big three” credit reporting agencies, product preference and consumer satisfaction data from J.C. Power and the like, or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap. (The U.S. legal presumption that a company owns, and thus can sell, data about its customers plays into this point, but is not relevant for antitrust purposes.) The corollary to this argument is that economies of scale pose a barrier to entry, an even more subtle concept which, unlike network effects, has not been recognized by mainstream antitrust courts as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all. Suffice it to say, the FTC would have to make new antitrust law if it relies on this novel theory, which seems to contradict the factual realities of the ubiquitous availability of inexpensive data and data storage on consumer preference and behavior today.
To sum up, claims that Google enjoys monopoly power in Internet search or search advertising fail in the face of the recognized criteria for that crucial Section 2 monopolization factor. Without monopoly power, unilateral (as opposed to concerted among competitors) action by a single firm is of no antitrust significance. Indeed, an implicit — and sometimes articulated — presumption in the arguments in favor of an FTC monopolization case is that Internet search is a “natural monopoly,” one dictated and preordained by the economic structure of the market. As an antitrust lawyer who while with the DOJ in the 1980s railed against the proposition that cable TV represented a natural monopoly — something satellite television and IPTV have at long last conclusively disproven — this author abhors that construct.
Even if they are correct, the parties pressing for government antitrust action against Google cannot claim the courts have ever recognized the concept of natural monopoly as a surrogate for the United States v. Grinnell Corp.requisite demonstration of actual monopoly power, willfully obtained or sheltered by exclusionary practices. We’ll turn to that question, whether Google has engaged in conduct antitrust law deems anticompetitive, next.
Last week I participated in a “parliamentary” debate, sponsored by TechFreedom, on the Federal Trade Commission’s anticipated lawsuit against Google for monopolization. The dialog is interesting, if I say so myself!!
[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I.]
Section 2 of the 1890 Sherman Act (15 U.S.C. § 2) makes “monopolization” unlawful. As every antitrust practitioner can recite by heart, this means that being a monopoly is not illegal, rather it is illegal to obtain or maintain monopoly power in a “relevant market” by exclusionary or anticompetitive means.
The most famous articulation of this basic principle comes from the case of United States v. Grinnell Corp. (“Grinnell“), 384 U.S. 563 (1966), in which the U.S. Supreme Court explained that a monopoly position reached as a result of a “superior product, business acumen or historic accident” is different from one achieved by the “willful acquisition or maintenance of that power.” That slightly schizophrenic approach reflects the basic conflict within antitrust itself. The law encourages, and permits, firms with market power (typically a synonym for monopoly power, although economists disagree at the margins) to compete aggressively on the merits, and even to eliminate competitors. Yet to tame the results of unbridled capitalism, Section 2 constrains companies from creating or defending monopoly power with anticompetitive practices.
2. Internet Search and Search Advertising are Not Relevant Antitrust Markets
The starting point for every antitrust case is market definition — outlining the contours of a market, in which the defendant participates, in order to assess whether the firm possesses monopoly power in that market. In defining the relevant antitrust market, courts determine which products compete with the defendant’s product and thus limit or prevent the exercise of market power. Typically, this process involves examining substitutability of products (both from a demand and a supply perspective) to find whether consumers and rivals could switch to another source (or sources) if the defendant firm were to raise price or restrict output. For example, in the 1950s chemical innovator duPont was charged with monopolizing the cellophane market, a product it invented, but the courts ruled that the relevant antitrust market could not be so narrowly limited because cellophane was interchangeable with other food wrapping materials. The “great sensitivity of customers in the flexible packaging markets to price or quality changes” prevented duPont from exerting monopoly control over price.
The more broadly the relevant antitrust market is defined, the less likely it is the defendant has the ability to exercise monopoly power in that market. As a corollary, if the targeted firm does not have monopoly power in the relevant market, there generally cannot be Section 2 liability. Many recent antitrust cases, including the FTC’s controversial attempt to block Whole Foods’ acquisition of Wild Oats and the Justice Department’s challenge to the Oracle-PeopleSoft merger, have turned on market definition.
With that background, let’s look at the purported “Internet search” market. That’s obviously the core proposition in any attack on Google for unlawful monopolization, because the necessary premise is that Google’s dominant share — estimated at from 65 to 80% — of Web searches is the foundation of its alleged monopoly. But here the antitrust analysis begins to break down. Internet search is a free product in which the 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,” one must necessarily ask whether Google’s high “market share” reflects any market power at all. More importantly, search users are just like broadcast television viewers; they are an input into a different product — search advertising — in which consumers themselves are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC, ABC, CBS and Fox compete for television eyeballs in order to sell more advertising (hence profiting) to sponsors, so too do Internet search engines monetize the service by selling eyeballs to advertisers.
Google’s share of search by itself is therefore almost meaningless. Even if the relevant market is confined to search, moreover, there is nothing that enables Google to prevent users from switching, instantaneously, to another of the scores of search engine providers on the Internet. (It should go without saying that even the government does not contend that Google displaced Yahoo!, Alta Vista, Ask.com and the many former search giants that dominated the Internet in the 1990s with anything other than better, more useful, search results, a consequence of better algorithms — the epitome of Grinnell’s “superior product.”) So the relevant market analysis must therefore focus on the area where Google in fact competes with other search engine providers, namely in the sale of search advertising. We all know that the links displayed alongside so-called “organic” search results are paid, listed conspicuously as “sponsored” results. Without search advertising, in today’s Internet economy there would be no free search engine services.
Folks in the tech industry have for the most part been conspicuously silent, at least publicly, about the Federal Trade Commission’s lengthy investigation of and apparent intention — perhaps as soon as year end — to file an antitrust case against Google for monopolization. In part that’s because Silicon Valley companies typically do not understand or want to get bogged down in legal and political controversies. In part, it’s because many tech innovators realize that staying part of Google’s AdWords ecosystem can be very profitable.
This silence is not driven by fear of retaliation, as Google has never done that to its vertical channel partners or even erstwhile ex-corporate joint venturers like Apple and Yahoo!. But it is likely emboldening the FTC to think that the Washington, DC agency has the interests of competition in high-tech at heart in moving against Mountain View. That’s a disquieting conclusion which should be especially troubling to young Internet-centric companies from Facebook and Twitter to shoestring-funded app developers.
This series of posts dissects the threatened FTC case and concludes that a monopolization prosecution by the federal government of Google would be a very bad idea. We divide the topic into five parts, one policy and four legal. We’ll start with policy because that’s something which does not turn on the rather arcane elements of antitrust law.
So much media attention was paid to the spectacular collapse of U.S. Senate deliberations on a cybersecurity bill in August — and the Obama Administration’s controversial move to fashion an Executive Order on the subject — that few if anyone focused on the biggest change affecting the data protection landscape. The Securities & Exchange Commission (SEC) guidelines on disclosure of cyber attacks by publicly traded corporations have become de facto rules for at least six companies, including Google Inc. and Amazon.com Inc., according to recent agency enforcement letters.
Last fall, the SEC completed a long process of issuing staff “guidance” on when cybersecurity risks must be disclosed in public company securities filings (annual reports, 10Qs, etc.). The sensible conclusion was that if a hack or intrusion would be “material” to an ordinary investor, corporations need to disclose the cyber risk and discuss their actions to ameliorate or prevent it. Unlike Y2K, however, these guidelines, released by the SEC’s corporate finance section, did not come with a “safe harbor” for disclosing companies. In 1999, congressional legislation created a legal safety zone for Y2K disclosures, avoiding liability under the Securities Act of 1934, that has not been replicated with respect to more general cybersecurity risks.
The recent SEC enforcement steps also have taken place at the corporate finance division level, but presumably with the informal approval at least of SEC Chair Mary Schapiro. In these cases, the agency “requested” that a number of large Internet companies clarify or modify their SEC filings to disclose cyber incidents that previously had not been reported to investors. In April, the SEC asked Amazon to disclose in its next quarterly filing that hackers had raided its Zappos.com unit, stealing addresses and some credit card digits from 24 million customers in January, which Amazon did. Google likewise agreed in May to put a previously disclosed cyber atack in its formal earnings report. AIG, Hartford Financial Services Group, Eastman Chemical and Quest Diagnostics were also asked to improve disclosures of cyber risks, according to agency staff correspondence reported by Bloomberg News.
We note your disclosure that if your security measures are breached, or if your services are subject to attacks that degrade or deny the ability of users to access your products and services, your products and services may be perceived as not being secure, users and customers may curtail or stop using your products and services, and you may incur significant legal and financial exposure. We also note your Current Report on Form 8-K filed January 13, 2010 disclosing that you were the subject of a cyber attack. In order to provide the proper context for your risk factor disclosures, please revise your disclosure in your next quarterly report on Form 10-Q to state that in the past you have experienced attacks. Please refer to the Division of Corporation Finance’s Disclosure Guidance Topic No. 2 at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm for additional information.
The difference between fall 2011 and spring 2012 is that, irrespective of the formal legal effect of staff guidance, the SEC is using its administrative processes to produce a disclosure result not specifically compelled by the agency’s rules for corporate securities filings. That in itself is not surprising, since the securities laws and implementing SEC regulations are broad enough to encompass any factor, whether financial or otherwise, that could affect stock prices. Here, the SEC staff opined in its guidance that basic SEC rules about market manipulation, insider trading and misleading shareholders (e.g., Rule 10b-5) required disclosure of cyber incidents and cybersecurity risks by any business potentially affected by hacking. And that’s obviously not confined to online retailers or Web-centric businesses.
The bigger question is how businesses can protect themselves from the embarrassment of such compelled, government-mandated cyber disclosures and the even greater potential for fines and formal enforcement actions the SEC may utilize in the IT security realm going forward. Here are a few pointers:
Do not assume that merely because your business is not online, cybersecurity cannot affect the company. Hundreds of “brick and mortar” retailers, for instance, have had consumer credit card records breached.
Treat data security just like your securities lawyers treat any other risk to the business’s future, since that is how federal regulators view cyber risks.
Do not assume the SEC’s focus on cybersecurity is limited to public companies, because the underlying rules cited by its corporate finance division apply just as much to private placements as they do to proxy solicitations and 10K reports.
When disclosing IT security risks, make sure they are balanced by something concrete and proactive to prevent, or diminish the severity of, cyber attacks. Otherwise diclosures may have the opposite effect of encouraging shareholder class action litigation.
Work closely with compliance counsel, IT technology experts and your insurance carriers to develop workable cybersecurity assessment and intrusion notification regimes, internally and externally. This should not only reduce legal exposure, but going forward lower the company’s costs for cyber insurance. Periodic outside reviews should provide both comfort and legal protection to CEOs or CFOs signing SEC submissions.
These SEC staff actions were balanced by the traditional caveat that “our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filings and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.” But the chances the full SEC would prosecute a public company for following staff suggestions are remote. On the other hand, for public corporations that ignore this lesson, and fail to disclose cybersecurity risks, we suspect only pain and expense — most likely in a Commission prosecution or fine — lie in their SEC futures. So rules are really rules, even when they are not.
Note: Originally written for and reposted with permission of my law firm’s Information Intersection blog.
In a post about Twitter several weeks back, I concluded that “[a] threat of government action can be just as debilitating to innovation as premature enforcement intervention into the marketplace.” Although the subject then was vertical integration, the same is true of broader antitrust issues, like mergers, and tech policy issues such as privacy. When the rules are ambiguous, and enforcement discretion allows for a wide range of subjective governmental decisions, uncertainty breeds business timidity because rivals can game the process.
A Wall Street Journal opinion piece by L. Gordon Crovitz on Monday made this same point. Commenting that Google’s proposed acquisition of travel guide publisher Frommer’s could disrupt the travel market even further (as Dan also covered on DisCo) — and reacting to all-too-typical calls by Google’s competitors for “close” Federal Trade Commission review of the deal — Crovitz wrote:
As a regulatory matter, there is real risk that the current antitrust review by the FTC will block innovation in the search industry. The agency could freeze Google into its historic way of doing business by stopping it from delivering answers directly (removing the consumer benefit) and by banning acquisitions such as Frommer’s…. For the technology companies that are supposed to be the drivers of our economy, this kind of regulatory uncertainty is a growing burden. The response to innovation by one company should be more innovation by others, not competitors calling in lawyers and lobbyists.
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. (SeeEU 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.
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.
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 —
Somewhere from 40% to 53% of all mobile searches are local. Coupled with GPS location detection, mobile users employ their devices to navigate and explore the world around them. Coffee anyone?
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.
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.
With calls for elimination of the U.S. penny going back decades, we are now on the verge of an inflection point for commercial payments. Between debit cards and emerging mobile payment systems, it seems innovation can disrupt even established roles of government that date to the U.S. Constitution (1789) and centuries beforehand.
Cash moved one small step nearer to its deathbed with the announcement on Wednesday that Square, the mobile payments start-up, would partner with Starbucks Coffee Company, reports Claire Cain Miller on Wednesday in The New York Times.
Social security checks are today almost completely a thing of the past. How many more years or decades before currency itself becomes extinct? And will this sea of change also disintermediate banks? Wait and see, but likely not for long.