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The FTC As a Threat To Tech Innovation

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.

The FTC’s Threat to Web Consumers | WSJ.com.

Could not have said it better myself!

Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.

Airline Mergers and Oligopoly Pricing

In an editorial titled Some Myths About Airline Mergers, the Wall Street Journal today comments on the potential impact of a Delta-Northwest combination.

There is no question that the track record of airline mergers has been mixed, but the entire industry is the product of consolidation…. The industry that has resulted is the most competitive in the world, and provides Americans with far more airline service, at much lower prices, than before the industry was deregulated.

I think this is demonstrably correct. Although I can — and often do — complain about travel as much as the next frequent flier, the reality is that airlines give consumer exactly what they want. As customers, Americans have been seduced by cheap air fares and continue to insist on low prices despite the “costs” associated with them in reduced service, meals, baggage allowances, etc. The airline industry charges lower prices today than a decade ago, despite substantial consolidation and massive, billions-per-year operating losses. As a matter of economics, those facts teach that the market is highly competitive.

Some year ago, “oligopoly theory” was all the rage, predicting (like the standard Justice Department Merger Guidelines) that increased concentration in a market is likely to result in higher prices, as no firm in an interdependent market would risk a price war. In today’s economy, airlines — together with cellphone and wireless services, automobiles and numerous other highly concentrated markets — are proving that to be a big myth. Some antitrust Neanderthals may disagree, but IMHO they are reading from a hymnal that no longer has much spiritual resonance.

When Is a Market Not?

The recent history of antitrust — from Microsoft to PeopleSoft to Whole Foods — is one in which the conventional wisdom of how to define the “market” affected by mergers and other transactions is not infrequently dead wrong. Today’s big deal is Yahoo! establishing a test advertising outsourcing deal with Google. Many observers, including Microsoft’s General Counsel, have already opined that such a deal would be DOA, as it would add to the dominant firm in the “search advertising market.”

But is that really what’s going on here? I am not so sure. Search is only important as a vehicle by which web sites and portals aggregate users to sell to advertisers. It is also free to non-enterprise users. So a cogent argument can be made that Internet search is irrelevant except as an advertising tool and that Internet advertising is NOT the relevant market for this deal, because online advertising already is or shortly will be competitive with (in other words, a substitute for) traditional media advertising like radio, newspapers and magazines. And to limit Internet advertising to “search advertising,” but ignore the fact that it is AOL, Microsoft and Yahoo! who collectively have a significant advantage in non-search Internet advertising — which seems to account for a majority of all Internet advertising — on first blush suffers from that same old market defintion problem.

In fact, here’s what the Wall Street Journal had to say this morning:

Major brand advertisers are gearing up to move big chunks of money from traditional ads including TV commercials and glossy magazine spreads to online outlets such as video-sharing services and Web sites for women. Although online ads garnered only an estimated 7% of total U.S. advertising dollars last year, Internet companies believe the percentage will increase sharply as Americans ratchet up their daily use of the Web and advertisers gain confidence in the medium.

As an antitrust lawyer, that tells me the data to establish that Internet ads are a subset of a broader advertising market — one in which, almost by definition, Google is not a “dominant” or even large player — may be there. Now it’s up to the advocates, economists and enforcement officials to figure out the answer.

Disclaimer — I have provided analysis to stock brokers and market research analysts on the Microsoft-Yahoo! fight, but am not currently working as a lawyer for any party to or company interested in the potential transaction.

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