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May 13, 2013
Satellite Carrier Subsidies Are Unwarranted

DISH Network gets another opportunity on Tuesday to plead with Congress for another Satellite Home Viewer Act reauthorization--ostensibly to protect consumers from unwarranted rate increases and program blackouts, but actually to preserve and expand DISH Network's and DirecTV's access to broadcast programming at regulated, below-market rates.

A couple minor provisions in the Act that have nearly outlived their original purpose are due to expire, but DISH Network is taking advantage of this opportunity to argue that "there is much more that Congress can do to expand consumers' access to local programming..." DISH's plea is an example of the narcotic effect of supposedly benign regulation intended to promote competition by giving nascent competitors a leg up. DISH Network, in particular, has become addicted to artificially low prices for broadcast programming, and will seize any opportunity to reduce its programming costs some more through regulation.One of the problems with betting your shareowners' company on regulation is that in politics, nothing lasts forever. Another is that there are certain laws of economics, and they still apply. Shareowners really ought to be on high alert for the appearance of a Beltway, State Capitol or City Hall strategy--firms that can compete and win in the marketplace have no need for regulatory advantages.

Continue reading...

June 14, 2012
Government cares more about politics than the tech economy

The hottest companies in Washington, DC right now include Netflix, Sprint and T-Mobile. What do these firms have in common? They are all marketplace losers.

A few years ago, the Supreme Court said that the Sherman Act "does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition" (see: Verizon v. Trinko, 2004). Yet this is precisely the course of action that technocrats are taking as a result of accepting invitations from Netflix to conduct a "wide-ranging antitrust investigation" of the cable industry and from Sprint and T-Mobile to find a way to block Verizon Wireless' acquisition of additional spectrum.

Netflix built a successful mail order DVD business when it wasn't very practical to download movies over the Internet. Fortunately for Netflix, consumers can send and receive, but they cannot rent DVDs from the Post Office. There are legal and political constraints that prevet the U.S. Postal Service from diversifying into new lines of business, and these restrictions conferred a significant degree of monopoly protection on Netflix. Incidentally, saving the Postal Service requires diversification, among other things. What was great for Netflix wasn't so good for the postal system (upon which we all depend).

Although some advocates of network neutrality wanted to postalize broadband, the Federal Communications Commission said no. Apparently, we are going to have that debate all over again.

Cable companies obviously will not be prevented from competing against Netflix and other online video providers. But a drive to eliminate any conceivable competitive advantage that cable providers may have would ultimately lead to extensive regulation, including, most likely, infrastructure sharing rules like those the Supreme Court looked at in AT&T v. Iowa Utilities Board (1999). In his separate opinion, Justice Stephen Breyer warned that "rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."

The current administration promised to reinvigorate antitrust enforcement. What that means is a return to the economic stagnation of the 1970s, when antitrust forced consumers to do business with uncompetitive, inefficient firms. It is no exaggeration to speak of antitrust as a form of corporate welfare financed by hidden taxes on consumers. The reality is that government cannot create competition; it can only suppress competitors.

Continue reading "Government cares more about politics than the tech economy" »

April 16, 2012
New Client of the Regulatory State Expects Results

When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration's commitment to "reinvigorate antitrust enforcement," it created a new client in search of official protection and favors.

It was clear there is no way T-Mobile - which lost 802,000 contract customers in the fourth quarter - is capable of becoming a significant competitor in the near future. T-Mobile doesn't have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.

T-Mobile's parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant. In 2008, T-Mobile sat out the last major auction for spectrum the company needs.

The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S. But it must acquire additional capital and spectrum to become a viable competitor.

Unfortunately, every wireless service provider requires additional spectrum. "[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use," according to the President's Council of Economic Advisers. Congress recently gave the FCC new authority to auction more spectrum, but it failed - in the words of FCC Chairman Julius Genachowski - to "eliminate traditional FCC tools for setting terms for participation in auctions."

Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles "in the public interest." That's why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.

Continue reading "New Client of the Regulatory State Expects Results" »

December 1, 2011
FCC strikes out on AT&T + T-Mobile opportunity

AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.

The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.

In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.

This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.

The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.

The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.

Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.

What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.

The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.

This agency could use some humility, or some adult oversight.

September 6, 2011
Blocking AT&T + T-Mobile merger will not create jobs

Blocking the merger between AT&T + T-Mobile is apropos of this administration's strategy for creating jobs, according to James M. Cole, the deputy attorney general.

The view that this administration has is that through innovation and through competition, we create jobs. Mergers usually reduce jobs through the elimination of redundancies, so we see this as a move that will help protect jobs in the economy, not a move that is going in any way to reduce them.

Remarkably, someone forgot to include that in the complaint filed by the Department of Justice in the District Court for D.C. The complaint itself does not allege that the merger will cost jobs, nor does it suggest that blocking the merger would create or save jobs. As a technical matter, antitrust is not concerned with job protection, although many seek to exploit it for that and other purposes. More on why that is a bad idea in a minute.

Instead, the complaint is focused specifically on the possibility that the combined company may not longer offer T-Mobile's lower-priced data and voice plans to new customers or current customers who upgrade their service.

Yet, the complaint concedes that from a consumer's perspective, local areas may be considered relevant geographic markets for mobile wireless telecommunications services. On the other hand, enterprise and government customers require services that are national in scope, according to the complaint.

Continue reading "Blocking AT&T + T-Mobile merger will not create jobs" »

April 20, 2011
AT&T/T-Mobile merger debate

41802_11272407594_9840_n.jpgOver at Technology Liberation Front, several colleagues and I recently "debated" the proposed merger between AT&T and T-Mobile from a free market perspective. For a skeptical take on the merger, see the item by Milton Mueller. The rest of us are more optimistic.

The AT&T - T-Mobile Merger: Beyond the Arithmetic, by Larry Downes (Apr. 18, 2011)

Why I fear the AT&T-T-Mobile merger, by Milton Mueller (Apr. 18, 2011)

Open minded on the AT&T/T-Mobile merger, by Hance Haney (Apr. 19, 2011)

Information Control, Market Concentration, and the AT&T/T-Mobile Deal, by Ryan Radia (Apr. 20, 2011)

For The Last Time: The Bell System Monopoly Is Not Being Rebuilt, by Steven Titch (Apr. 22, 2011)

Continue reading "AT&T/T-Mobile merger debate" »

November 15, 2010
Most monopolies are temporary, thanks to the free market

Ryan Singel explains why Google may not dominate the net, at Wired. And it has nothing to do with antitrust scrutiny of the company's activities, such as the flap over Google's purchase of ITA Software.

Google slayed Microsoft and Yahoo in the battle for search supremacy but it has been slowly losing momentum in what may turn out to be the real war -- the one for the display ad revenues -- to an unlikely foe: the dorm-room-born Facebook.
At a recent conference sponsored by the Technology Policy Institute, Robert W. Crandall and Charles L. Jackson shared a draft of a paper they are working on analyzing the IBM, AT&T and Microsoft antitrust cases. Crandall and Jackson argue that in each of the three cases,
the ultimate source of major changes in the competitive landscape appears to be innovation and new technology -- technology that was apparently not unleashed by the antitrust litigation.

November 13, 2010
New monopolists have a tenuous grip, at best

Prof. Tim Wu has a provocative essay in Saturday's edition of the Wall Street Journal, arguing in effect that a company which is successful is by definition a monopoly that should be regulated. Fortunately, the antitrust laws don't punish companies that are successful as a result of superior skill, foresight and industry; only those who engage in anticompetitive conduct. That would not include Google, Facebook, eBay, Apple nor Amazon so far as I know.

Every businessperson dreams of a monopoly advantage. The pursuit of a monopoly advantage either justifies the high rent that a retailer pays to an airport or the owner of a shopping mall in exchange for an exclusive right to serve coffee or ice cream on the premises, or it summons investment and innovation to offer a superior product or service. Other than in a walled garden during the term of a lease, monopolies are inherently temporary, unless aided and abetted by government.

Perhaps in gratitude for free tickets to sporting or cultural events or in anticipation of future employment opportunities, FCC commissioners and bureaucrats protected Ma Bell for years, for example. The old Civil Aeronautics Board protected airlines (intrastate airlines in California and Texas not subject to CAB regulation offered lower fares than interstate airlines flying the same routes).

If a temporary monopoly advantage offers a profit window, that is intrinsically pro-consumer because it incentivizes investment and innovation.

Absent a regulatory umbrella, a profitable monopoly advantage summons eager competitors seeking a piece of the action. We can either force rivals to compete in the marketplace by offering a superior product or superior terms, or we can allow them to hire lobbyists and lawyers to influence policymakers to apply misguided antitrust laws to hobble successful innovators and deprive innocent investors of their just rewards.

Wu claims that the costs of monoploy are "mostly borne by entrepreneurs and innovators," but this is absurd. Monopolies are only a detriment for speculators seeking to profit from offering copy-cat products or services. True entrepreneurs and innovators are people who seek to dethrone a dominant player by offering a better value proposition.

I wonder if Wu, as chairman of Free Press, is working backward from his objective. In other words, I wonder if Wu is determined to regulate the Internet and is simply casting about for a rationale. Perhaps this column was a pathetic test balloon.

December 10, 2009
Comcast + NBC = Blackmail

A Sunday editorial in the New York Times expressed concerns about Comcast's proposed acquisition of NBC, but explicitly stopped short of calling for rejection of the deal.

According to the Times, this combination could be just awful

Comcast could bar rival cable and satellite TV companies from access to desirable NBC shows, or it could offer them only at a high price, bundled with less attractive content .... Comcast could now be tempted to limit access to NBC content on rival Internet services, or charge them high fees. And Comcast could take its bundling business model to the Internet by forcing customers to buy cable packages in order to see content from NBC's network online.
After citing these horrific possibilities, the Times then says,
These concerns might not justify blocking a merger. But they do justify a careful review .... What regulators must not do is let this deal pass unchallenged.
What? If it's so bad, shouldn't we call 911?

Well, if the deal is rejected or withdrawn, various special interests get nothing.

Continue reading "Comcast + NBC = Blackmail" »

October 6, 2009
Verizon Wireless-Google partnership could trigger lawyerfest

Verizon Wireless and Google plan to

co-develop several devices based on the Android system that will be preloaded with their own applications -- plus others from third parties, a possible contender to Apple's huge iPhone application store. They will market and distribute products and services, with Verizon also contributing its nationwide distribution channels.
If the network neutrality mandates in the Markey-Eshoo bill were to become law, I don't see how VZW and GOOG could preload applications, if the applications favor certain content on the Internet when they are used. That would seem to violate the "duty" of Internet access service providers to
not block, interfere with, discriminate against, impair, or degrade the ability of any person to use an Internet access service to access, use, send, post, receive, or offer any lawful content, application, or service through the Internet.
I also wonder how VZW and GOOG could effectively market products and services utilizing VZW's wireless Internet access service without prioritization or favoritism?

Perhaps someone has thought of a clever legal argument already why they could do these things, but I'm reminded of a recent editorialwhich correctly observes that "[o]nce net neutrality is unleashed, it's hard to see how anything connected with the Internet will be safe from regulation."

VZW and GOOG's competitors won't like whatever they do. The competitors will have a captive audience at the FCC. The burden of proof will be on VZW and GOOG to justify every move.

September 5, 2009
Good enough is great

Wired has a good article by Robert Capps, "The Good Enough Revolution: When Cheap and Simple Is Just Fine."

Cheap, fast, simple tools are suddenly everywhere. We get our breaking news from blogs, we make spotty long-distance calls on Skype, we watch video on small computer screens rather than TVs, and more and more of us are carrying around dinky, low-power netbook computers that are just good enough to meet our surfing and emailing needs. The low end has never been riding higher.

So what happened? Well, in short, technology happened. The world has sped up, become more connected and a whole lot busier. As a result, what consumers want from the products and services they buy is fundamentally changing. We now favor flexibility over high fidelity, convenience over features, quick and dirty over slow and polished. Having it here and now is more important than having it perfect. These changes run so deep and wide, they're actually altering what we mean when we describe a product as "high-quality."

Capps acknowledges this sounds a lot like what Professor Clayton Christensen described in Innovator's Dilemma (1997).

These insights have profound implications for antitrust enforcement, e.g. nimble competitors can overthrow established titans without help from antitrust enforcers.

The secret lies in discovering when the qualities consumers value in a particular product are changing, and it isn't rocket science.

Basis of competition

Christensen says the marketing literature provides numerous descriptions of different phases in the life cycle of any product.

He notes that a product evolution model produced by Windermere Associates posits that the product characteristic consumers initially value most is functionality. When two or more vendors fully supply that, consumers demand reliability; and the basis of competition shifts from functionality to reliability. Convenience is the next characteristic, followed by price.

Another model by Geoffrey Moore from his book Crossing the Chasm (1991) says that products are initially used by innovators and early adopters who base their buying decision solely on product functionality; then by the early majority after the demand for functionality has been met and vendors begin to address the need for reliability; by the late majority when reliability issues have been resolved and the basis of competition shifts to convenience; then by the rest when the focus of competition shifts to price.

Markets are sometimes attacked for being "broken" when vendors aren't in a race to cut prices. This is one of the arguments advocates for a government-led National Broadband Strategy are making now.

But a market may simply be in the formative stages of supplying other characteristics consumers demand. It's no fun if you're a price-conscious consumer and you have to wait for the price to fall, but you benefit from this process because the development costs of high value products which will ultimately be vastly more affordable are being subsidized by others.

Integration and modularity

Christensen's sequel (coauthored by Michael E. Raynor), Innovator's Solution (2003) notes that when the basis of competition is convenience and price, vendors solve the problem by evolving the architecture of their products from being proprietary and interdependent toward being modular. Modularity allows firms to introduce new products faster and more cheaply because they can upgrade individual components or subsystems without having to redesign the whole product.

It also permits an industry structure consisting of independent firms who can specialize in individual components and subsystems.

Modularity enables the dis-integration of the industry. A population of nonintegrated firms can now outcompete the integrated firms that had dominated the industry. Whereas integration at one point was a competitive necessity, it later becomes a competitive disadvantage.
Network neutrality regulation is aimed in part at preserving and promoting modularity by limiting the opportunities for integrating content, devices and applications with broadband services.

But Christensen and Raynor point out that market participants must have the flexibility to pursue integration or modular strategies depending on whether existing products do not match consumer expectations for functionality and reliability versus whether product functionality and reliability exceeds consumer expectations.

We emphasize that the circumstances of performance gaps and performance surpluses drive the viability of these strategies [integration, modularity, reintegration, modularity, etc.]. This means, of course, that if the circumstances change again, the strategic approach must also change. Indeed, after 1990 there has been some reintegration in the computer industry.
If technology permits a better product than the market offers, they say competitors "must" have the flexibility to develop an integrated offering to shake up the market.
When firms must compete by making the best available products, they cannot simply assemble standardized components, because from an engineering point of view, standardization of interfaces (meaning fewer degress of design freedom) would force them to back away from the frontier of what is technologically possible.
Think of consumer expectations in the era before the iPhone versus afterwards. The preexisting offerings by firms such as Motorola and Nokia exceeded consumer expectations for a wireless phone, but fell short of consumer expectations for a smart phone, i.e., a mobile computer or "teleputer."

The iPhone is an example of reintegration, where modularity in cellphones eventually led to smart phone integration. The iPhone also demonstrates how reintegration can lead again to modularity (think of the Apps Store).

The broadband service industry never had a period of integration. It has always been modular. Keeping it modular wouldn't be a problem if it was in a position to supply anticipated demand without further investment. But that's not the case. Massive investment is needed, and broadband providers are struggling to convince investors they can make a profit when regulators have successfully driven most profit out of the telephone business.

Integration could be jeopardized if network neutrality regulation becomes the law.

Shifting from modularity to integration won't be easy if a subsequent Act of Congress or FCC order is a necessary prerequisite.

Net neutrality regulation does not prohibit integration, but it does ensure broadband service providers will reap none of the rewards and will face a regulatory minefield if they attempt to work individually with innovative content, device and application providers to maximize the user experience.

The result will be that they won't, meaning that we will be back where we were in the 1960s (remember Lily Tomlin's character, Ernestine?) with a telephone company which -- due to regulation -- cannot derive any benefit whatsoever from innovating and is rewarded only to the extent the status quo prevailes

This is a recipe not for innovation but of self-inflicted failure.

July 6, 2009
Telecoms face antitrust scrutiny

The Department of Justice is looking into whether large U.S. telecommunications companies such as AT&T Inc. and Verizon Communications Inc. are abusing the market power they have amassed in recent years, according to the Wall Street Journal.

One area that might be explored is whether big wireless carriers are hurting smaller rivals by locking up popular phones through exclusive agreements with handset makers. Lawmakers and regulators have raised questions about deals such as AT&T's exclusive right to provide service for Apple Inc.'s iPhone in the U.S.

The department also may review whether telecom carriers are unduly restricting the types of services other companies can offer on their networks, one person familiar with the situation said. Public-interest groups have complained when carriers limit access to Internet calling services such as Skype.

I discussed why cell phone exclusivity is procompetitive here. A small carrier (Madison River Communications, LLC) limited access to Internet calling services, but the FCC intervened. No large U.S. carrier has limited access to Internet calling services.

The Supreme Court has ruled,

The Sherman Act is indeed the "Magna Carta of free enterprise," but it does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition. (citation omitted.)
This was a judgment delivered by Justice Scalia in which Justices Rehnquist, O'Connor, Kennedy, Ginsburg and Breyer joined. Justice Stevens filed a concurring opinion in which Justices Souter and Thomas joined.

AT&T and Verizon are not monopolists, although they are large, successful companies. They are not monopolists because their customers can terminate their service and take their business somewhere else -- to a cable company offering Internet voice service or to a competitive wireless carrier.

The Justice Department can review whatever it likes, but it will need to prove a violation of the antitrust laws before it will be allowed to reorganize an entire sector of the economy pursuant to its interpretation of antitrust jurisprudence.

June 29, 2009
'Special access' shouldn't be fixed

George S. Ford and Lawrence J. Spiwak at the Phoenix Center conclude in a new paper that government intervention is not warranted in the market for special access services purchased by businesses and institutions (which I discussed most recently here).

They note that the rates of return a prominent study estimated AT&T, Qwest and Verizon are currently earning either are similar to or less than the rates of return these companies used to earn when the market was fully regulated.

NRRI bases this analysis on ARMIS rates of return, a perplexing approach once one calculates ARMIS rates of return from the period in which all special access services were price regulated. In 1999, for example, the average rate of return for special access computed using ARMIS data was 32% for Qwest, 37% for AT&T, and only 4.5% for Verizon. For Qwest and AT&T, the returns under complete price regulation are not much different than the "adjusted" returns computed in the NRRI Study. The conclusion, then, is the pricing flexibility has had no effect. For Verizon, its rate of return prior to the Pricing Flexibility Order was substantially lower than the other Bell companies and even below any reasonable estimate of the firm's cost of capital. One interpretation, then, is that a more deregulatory approach has provided for more reasonable returns on investment for the firm. (footnote omitted.)
There is always a high risk well-intentioned regulators will fall victim to lobbyists or simply guess wrong. Ford and Spiwak point out that in the current environment the risk is heightened due to the impairment of credit markets.
In the current financial and economic crisis, [the] costs and risks of regulation are even more pronounced, particularly with regard to rate regulation. At the most basic level, one cost of rate regulation is the risk that regulators will establish an incorrect rate. If regulators set a rate too high, then they might redirect investment inefficiently and also whittle away any prospective welfare gains by that intervention. If regulators set a rate too low, then investment will be squelched and entry will be deterred. It is important to note that not only would investment by incumbents be squelched and deterred, but that investment by entrants might be similarly affected. With fixed and sunk costs, regulatory-mandated reductions in prices or profits may very well dissuade new entrants from offering service.

The risk of a regulator setting a rate incorrectly is particularly acute in the current environment, because any form of rate regulation requires the regulator to examine and establish a cost of capital. In a normal rate case, a regulator can obtain reasonably valid estimates of the cost of capital by observing borrowing and equity costs for other firms exhibiting "comparable" risk characteristics.

But today, the Federal Reserve Board of Governors and the Department of the Treasury have concluded that the financial markets are currently so dysfunctional that the public authorities must step in and recapitalize banks, large insurers, and so on. Future taxpayers are being used as a source of capital-of-last-resort for many of these institutions, a process that is necessarily distorting the standard methods in which a regulator may establish a cost-of capital for the industry. Stated simply, if it is true that even economically worthwhile projects are now unable to obtain funding under any conditions, what is the true cost of capital? Once credit is being rationed, the risks of establishing an incorrect rate for a service are very high, and policymakers ought to take this into account when reviewing proposals for immediate regulation of special access rates, at least until the financial markets return to normalcy. (footnotes omitted.)

The paper confirms that re-regulating the special access market would be both unnecessary and highly risky.

Related post: "Don't believe 'special access' hype" (6-23-2009).

May 13, 2009
Antitrust Won't Revive Tech Sector

The European Union issued the opinion explaining its decision to fine Intel $1.45 billion for offering discounts to large purchasers (see this and this), a common and typically procompetitive business practice.

Although antitrust originated in the U.S., antitrust enforcement has become more active in other parts of the world where awareness of the limitations and dangers of overly-aggressive antitrust enforcement is still in the embryonic stages. This has created a regrettable forum-shopping opportunity for less-successful U.S. and foreign competitors. According to one report,

Many smaller companies complaining of abusive practices by their larger rivals were so frustrated that they went overseas to the European Commission and to Asian authorities to find receptive enforcement officials.
The Obama administration plans more aggressive antitrust enforcement, and it has withdrawn a 215-page report, entitled "Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (2008)," which was issued by the Department of Justice during the Bush administration. According to Christine A. Varney, who is the new Assistant Attorney General in charge of the Antitrust Division, the report
raised too many hurdles to government antitrust enforcement and favored extreme caution and the development of safe harbors for certain conduct within reach of Section 2[.]
Antitrust enforcement is supposed to prevent monopolists from stifling competition and harming consumers. But frequently the interests of competitors and consumers are not closely aligned.

Obviously, consumers are better off when prices are low and there is a wide variety of products to choose from. But it also stands to reason that competitors are better off when they can produce a minimum number of products and charge high prices.

For antitrust enforcement, the issue boils down to whether it should aim only to prevent conduct by a monopolist which has disproportionately little or no procompetitive benefits, or whether it should go so far as to prohibit a big firm from doing anything which could cause smaller rivals to lose market share, i.e., cutting prices; bundling products; refusing to deal with rivals who seek access to inputs, property rights or resources; or supplying parties who agree to purchase all or a large share of their requirements from one source.

When enforcers employ measures like these to prevent weaker competitors from losing market share, consumers can easily be forced to pay higher prices or accept shoddier or less-convenient products, unfortunately.

Permitting less-efficient incumbent rivals to go under usually doesn't mean that a big firm will eventually be able to charge whatever it wants anyway. If it charges unreasonable prices (or fails to offer appealing products) in the future it will enable new competitors to profitably enter the market, unless there are unusual barriers to competition -- such as physical or legal barriers (not merely brand recognition).

The "Anti Dog-Eat-Dog Rule" in Atlas Shrugged, an indispensable desk reference for the modern age by Ayn Rand, was for the purpose of preventing shippers who were dissatisfied with the deteriorating service provided by an ailing railroad from taking their business to a more efficient rival who offered superior service. The rivalry between the two railroads was attacked for being "destructive," because the ailing railroad couldn't take it. The ailing railroad had political connections, however, so a new market was created in which the politically-connected were the winners and the losers were the most competent businesspeople. It's not as far-fetched as it sounds.

No one wants to see an evil monopoly crush a virtuous rival.

But as Professor Joseph Schumpeter once noted, the English-speaking public has acquired a habit of attributing to the term "monopoly" practically everything it dislikes about business.

To the typical liberal bourgeois in particular, monopoly became the father of almost all abuses--in fact, it became his pet bogey.
The alternative is for politicians and bureaucratic allies to attempt to create a utopia for small businesses through regulation -- not for the benefit of entrepreneurs who create a better mouse trap or offer superior service, because those who find and exploit a niche can be successful regardless of their size.

It is the smaller potential rivals who merely seek an advantageous street corner as their competitive advantage and offer little additional value who stand to benefit from aggressive antitrust enforcement.

Antitrust enforcement makes sense as a full-employment policy, but it reduces the incentives for innovation. It can channel investment into building gas stations on every corner as it did in the 1960s and 1970s, for example, but it reduces the incentives for innovators to find an alternative to gasoline.

In the computer age, it is doubtful that antitrust enforcement can accomplish what it once did. Consumers can now easily survey offerings not only on the nearest street corner but across the country, or even overseas.

The Department of Justice report that the new administration is attempting to erase synthesizes views expressed by over 100 academics, businesspeople and antitrust practitioners during a series of hearings over the course of a year which consisted of twenty-nine separate panels. It also encapsulates opinions from scholarly commentary, Supreme Court and lower court opinions and reflects the enforcement policy of the Department of Justice.

The purpose of the report is make progress toward the goal of clear and understandable standards that will lead to more predictability, which is what businesspeople and investors and investors want and need.

The only reason to make antitrust enforcement less clear, less understandable and less predictable is to increase the scope for politicians and allied bureaucrats to substitute their personal preferences for transparent principle.

March 2, 2009
Google as antitrust target

From a recent column in the New York Times:

"You almost feel sorry for Google," said Danny Sullivan, editor in chief of Search Engine Land. "They're doing a good job and people are turning to them. But when they pass 70 percent share, people are going to be uncomfortable about Google becoming a monopoly."
* * * *
"I have no beef with Google," said Jeff Atwood, a co-founder of Stack Overflow. "I like Google. But I'm concerned. If you project this trend forward four years, just follow the graph. A world in which there is no competition strikes me as unhealthy."
It is clear from the column that nobody is accusing Google of unfairly sabotaging its competitors; in fact, it is plain that consumers have a choice of Internet search providers and the overwhelming majority prefer the Google product.

The most serious allegation is "Google is a habit ... and habits are very hard to break."

This is an argument for nanny state socialism, not for antitrust enforcement.

There is no legitimate antitrust issue here.

The courts have confronted the situation before where a competitor achieves a dominant position simply because it is the best. In U.S. v. Aluminum Company of America, 148 F.2d 416 (2nd Cir. 1945), Judge Learned Hand wrote

It does not follow because 'Alcoa' had such a monopoly, that it 'monopolized' the ingot market: it may not have achieved monopoly; monopoly may have been thrust upon it.
* * * *
[I]t is unquestionably true that from the very outset the courts have at least kept in reserve the possibility that the origin of a monopoly may be critical in determining its legality[.]
Judge Hand is saying is that the thing which is illegal is monopolization -- not monopoly -- and that monopolization requires something more than offering a superior product or service.
A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although the result may expose the public to the evils of monopoly, the [Sherman] Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.
Monopolies are almost always temporary, according to Schumpeter, and the possibility of a temporary monopoly induces innovation.

Hobbling Google or breaking it up would benefit Google's competitors in the same way that raising taxes on the rich and distributing the money to the poor obviously promotes fairness from the narrow perspective of the poor, but it would harm consumers by leading to a market in which there can be no winners and no losers. That's a recipe for economic stagnation which -- some might not remember or care to recollect -- we had in the 1970s.

See: "Everyone Loves Google, Until It's Too Big," by Randall Stross, New York Times (Feb. 21, 2009).

July 7, 2008
Evolving theory of network effects

Should antitrust enforcers be concerned about entry barriers in the search ad market? Some believe the market exhibits "network effects," according to the New York Times.

Although traditionally applied to Industrial Age industries with high fixed costs like railroads and telephone exchanges, anything now exhibits a network effect if its value increases because more people use it. Network effects are "everywhere," according to a top former antitrust official. Coke and Pepsi drinkers, for example, "benefit from the network of their fellow consumers because Coke and Pepsi are widely available in restaurants and in vending machines," claims Timothy J. Muris.

A preexisting network of vending machines is admittedly tough for soft drink imitators to replicate. But a barrier to imitation can also be viewed as a spur to innovation because it acts as a reward which inspires creators and investors. Not an incentive to create a barely distinguishable alternative, to be sure, but to create something transformative.

The alleged network effects in search advertising are more subtle than in the case of railroads, telephone exchanges or soft drinks (in fact, they even bear a striking resemblance to what one might term legitimate and hard-won competitive advantages).

[E]conomists and analysts point out that Google does indeed have network advantages that present formidable obstacles to rivals. The "experience effects," they say, of users and advertisers familiar with Google's services make them less likely to switch. There is, for example, a sizable cottage industry of experts who tailor Web sites to get higher rankings on search engines, which drive user traffic and thus ad revenues. These experts understandably focus their efforts on the market leader, Google -- another network effect, analysts say.
This sounds remarkably like how the European Union sees the market for streaming media players. The EU prohibits Microsoft from including a free player with its PC operating system because its competitors couldn't give away enough copies of their own media players.

Network effect theory overlooks whether, perhaps, there are no other objective differences in the value propositions of the competing products. If consumers have a choice between a superior product versus an inferior product which most of their neighbors are using, the theory assumes most consumers will choose the latter. Thus, there is no incentive for anyone to design a superior streaming media player for a desktop PC.

But that may not be a bad enough thing to warrant letting politicians and bureaucrats rearrange the market. It is inherently destructive to innovation to allow them to do that, because they principally serve constituencies who are more interested in preserving the status quo.

May 22, 2008
Build a better mousetrap

The Rural Cellular Association wants the FCC to eliminate exclusivity arrangements between cellphone carriers and manufacturers of popular handsets.

For many consumers, the end result of these exclusive arrangements is being channeled to purchase wireless service from a carrier that has monopolistic control over the desired handset and having to pay a premium price for the handset because the market is devoid of any competition for the particular handset.
Exclusivity deals are common throughout the business world and often serve procompetitive purposes. And there is no way to condemn AT&T-Apple iPhone, Verizon Wireless-LG Voyager or Sprint Nextel-Samsung Ace without condemning exclusivity generally. For one thing, there are five major cellphone carriers and many smaller competitors. AT&T (Mobility), the largest, has an approximate market share of only 26 percent. You can't argue this is a concentrated market. The only thing unique about this market is the unnecessary presence of a legacy regulator.

The obvious course of action for the rural carriers is to partner with a handset manufacturer and develop something of their own which customers will want. "If you build a better mousetrap...," as they say. Perhaps some rural carriers lack the imagination or the ingenuity. But it's really not the job of government to try to compensate for that.

Who can argue it's so much easier to go whining to a regulator? Particularly for some small rural carriers who've perhaps been treated far too indulgently over the years and appear to have developed traces of an entitlement mentality. Then again, the current FCC has acquired something of an unfortunate reputation lately as an easy target for anticompetitive populist appeals.

The rural carriers point out that for some rural consumers

these exclusivity arrangements prevent them from purchasing many of today's most popular handsets because they reside in areas not served by the one carrier offering the desired handset.
Well, yes, there is a multiplicity of cellphone carriers and none is big enough to serve the entire market. Both the markets for cellphone service and handsets are, to repeat, highly competitive. This is exactly the opposite of a valid basis to regulate the sale of handsets.

Note that if the rural carriers' customers "reside in areas not served by the one carrier offering the desired handset" then, by definition, a Big 5 carrier offering an exclusive handset can't be acting anticompetitively to crush a smaller rival.

What apparently is needed are better sales and marketing relationships between handset makers and rural carriers. You wonder what these guys are up to? Spending too much time in Washington, D.C.

Perhaps the rural carriers ought to persuade the handset makers next time to offer exclusivity to a Big 5 carriers only throughout the territory in which the big carrier offers service.

March 27, 2008
Problem solved

Comcast and BitTorrent are working together to improve the delivery of video files on Comcast's broadband network.

Rather than slow traffic by certain types of applications -- such as file-sharing software or companies like BitTorrent -- Comcast will slow traffic for those users who consume the most bandwidth, said Comcast's [Chief Technology Officer, Tony] Warner. Comcast hopes to be able to switch to a new policy based on this model as soon as the end of the year, he added. The company's push to add additional data capacity to its network also will play a role, he said. Comcast will start with lab tests to determine if the model is feasible.
Over at Public Knowledge, Jef Pearlman argues that the pioneering joint effort by Comcast and BitTorrent "changes nothing about the issues raised in petitions" before the FCC advocating more regulation, because Comcast and BitTorrent are "commercial entities whose goals are, in the end, to make sure that their networks and technology are as profitale as possible."

Setting aside whether the pursuit of profit is a good thing or not, what this episode actually proves is that the Federal Communications Commission has done its job, the threat of regulation is a credible deterrent to prevent unreasonable discrimination by broadband service providers and we don't need a new regulatory framework with the unintended consequences which regulation always entails.

If we want innovation, more choices and ultimately lower prices we have to be prepared to allow broadband service providers to experiment and to succeed or fail in the market. Regulator always discourages all three.

We also need an enforcement backstop, of course. But it doesn't have to be formalistic and inflexible.

Aside from FCC authority under the Communications Act of 1934 as amended, the professional staff of the Federal Trade Commission has concluded that antitrust law is "well-equipped to analyze potential conduct and business arrangements involving broadband Internet access."

Here at the Tech Policy Summit in Hollywood, one panelist claimed during a breakout session that antitrust enforecement in this area is impaired as a result of the Supreme Court's decision in Verizon v. Trinko (2004). But it isn't so.

In that case, the plaintiff was trying to convert an alleged breach of the Communications Act into an antitrust claim under §2 of the Sherman Act. In other words, the plaintiff was trying to expand the application of antitrust jurisprudence. The Court ruled that the Telecommunications Act of 1996 neither expanded nor limited the antitrust laws.

The 1996 Act has no effect upon the application of traditional antitrust principles. Its saving clause--which provides that "nothing in this Act ... shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws," 47 U. S. C. §152--preserves claims that satisfy established antitrust standards, but does not create new claims that go beyond those standards.
The Court went on to conclude that the activity of Verizon which Trinko complained of did not violate pre-existing antitrust standards.

The bottom line is that we have three federal agencies, which include the Antitrust Division of the Department of Justice in addition to the two previously mentioned, who have the jurisdiction, expertise and some actual experience to intervene if broadband providers unreasonably discriminate.

Groups like Public Knowledge have done a great job and can declare victory now.

March 12, 2008
Conyers opposing regulation
John Conyers, Jr.

If broadband providers turn the Internet into a "world where those who pay can play, but those who don't are simply out of luck," current antitrust law can solve the problem says House Judiciary Chairman John Conyers, Jr. (D-MI).

I believe that antitrust law is the most appropriate way to deal with this problem -- and antitrust law is not regulation. It exists to correct distortions of the free market, where monopolies or cartels have cornered the market, and competition is not being allowed to work. The antitrust laws can help maintain a free and open Internet.
The comment came at a Congressional hearing yesterday. Of course the broadband market isn't characterized by monopoly or cartel, so I would dispute whether antitrust could be used to prevent broadband providers from experimenting with innovative pricing and network management (and it wouldn't matter -- antitrust law wouldn't be needed because consumers could take their business elsewhere). But if one believes the market is or soon will become a cartel, Conyer's assessment should be reassuring.

The Federal Trade Commission staff have expressed the same opinion as Conyers:

The competitive issues raised in the debate over network neutrality regulation are not new to antitrust law, which is well-equipped to analyze potential conduct and business arrangements involving broadband Internet access.
Aside from antitrust law, the Congressional Research Service, among others, concludes that the Federal Communications Commission already has the authority to regulate broadband providers.
[N]either telephone companies nor cable companies, when providing broadband services, are required to adhere to the more stringent regulatory regime for telecommunications services found under Title II (common carrier) of the 1934 Act. However, classification as an information service does not free the service from regulation. The FCC continues to have regulatory authority over information services under its Title I, ancillary jurisdiction. (footnotes omitted)
Conyers acknowledged at the hearing that the Internet has become the "dominant venue for the expression of ideas and public discourse," as I believe everyone can agree.

But if there's a risk broadband providers could do something bad does that mean Congress should prohibit everything? Not according to Conyers.

[W]hen it comes to the Internet, we should always proceed cautiously. Unless we have clearly documented the existence of a significant problem that needs regulating, I do not believe Congress should regulate. And even in those instances, we should tread lightly.

December 12, 2007
FCC following EU precedent

The FCC has settled on an inappropriate definition of what constitutes a competitive market. A memorandum explaining why the FCC denied the Verizon's forbearance petition seeking deregulation in Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach suggested it's because Verizon's market share has to be less than 50% AND Verizon's competitors must have ubiquitous overlapping networks with significant excess capacity.

While there is some evidence in the record here regarding cable operators' competitive facilities deployment used in the provision of mass market telephone service in the 6 MSAs at issue, we find that it does not approach the extensive evidence of competitive networks with significant excess capacity relied upon in the AT&T Nondominance Orders ... where the Commission has found an incumbent carrier to be nondominant in the provision of access services, it had a retail market share of less than 50 percent and faced significant facilities-based competition. (footnote omitted)

A market share in excess of 50% would justify regulation in the EU, but not in the U.S. pursuant to settled antitrust principles.

J. Bruce McDonald
, formerly Deputy Assistant Attorney General
 with the Antitrust Division
, explains:

EU law seeks to control the conduct of firms that are dominant, while U.S. law addresses monopolies, the creation or maintenance of monopoly power. Take this practical comparison of market share thresholds. The dominance standard ­ the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers allows a presumption of dominance where a single undertaking holds 50% or more of the market, and less may be enough. The U.S. standard - the ability to raise price and exclude competition - would rarely be proved where market share is less than 70%. Of course, neither jurisdiction relies solely on market share evidence. (footnote omitted)

The FCC memorandum doesn't disclose Verizon's market shares. However, I suspect it is less than 50% in one or more places or the memorandum wouldn't make it so clear that even a market share below 50% won't justify deregulation unless competitors have ubiquitous overlapping networks with significant excess capacity like MCI and Sprint did in the long-distance market of the mid-1990s.

The U.S. doesn't regulate dominant companies like the EU and the FCC because it doesn't make any sense. If there is rising demand, other providers will enter the market. They will be successful if they offer better service or a superior product, or competitive pricing. If competitors can't figure out how to differentiate themselves in the market, they tend to hire former FCC staffers to importune their former colleagues to bestow regulatory advantages on the hapless competitors. That's called "competitor welfare," and it leads to higher prices for consumers and diminished innovation.

If Verizon has a market share below 50% or even in the 50% range, the FCC would do well to recall what Alan Greenspan says:

It takes extraordinary skill to hold more than fifty percent of a large industry's market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one's product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency -- and deserves praise, not condemnation.

In other words, even if the FCC didn't exist, it would be nearly impossible for Verizon or anyone else to sustain a market share above 50%. Greenspan continues:
The Sherman Act may be understandable when viewed as a projection of the nineteenth century's fear and economic ignorance. But it is utter nonsense in the context of today's economic knowledge. The seventy additional years of observing industrial development should have taught us something. If the attempts to justify our antitrust statutes on historical grounds are erroneous and rest on a misinterpretation of history, the attempts to justify them on theoretical grounds come from a still more fundamental misconception.

The FCC isn't ignorant. It's just trying to help its friends, who it hopes will one day return the favor. It's an incestuous little world.

December 6, 2007
FCC no free market ally

Two commentators tried to argue that FCC Chairman Kevin J. Martin has held true to conservative principles nowithstanding recent attempts to re-regulate the cable industry. Cesar V. Conda and Lawrence J. Spiwak posited that a "pro-entry/pro-consumer-welfare mandate" is the very "hallmark of economic conservatism." This is a bizarre statement.

"Pro-entry" is a euphemism for competitor welfare, the antithesis of consumer welfare. Competitor welfare used to be the guiding principle of antitrust law -- a legacy of the populist movement. The idea was that more competitors equaled stronger competition. It's intuitively appealing, but it confuses quantity with quality and is wrong if the competitors are inefficient. Protection of inefficient competitors is a form of subsidy.

For example, the Clinton FCC tried to jumpstart competition in telecom with a "pro-entry" policy which allowed startups to lease facilities and services below cost from incumbent providers like AT&T and Verizon. You might think that's no big deal, AT&T and Verizon can probably afford it. But the truth is they don't absorb such losses, they pass them on to their remaining customers.

Okay, you might say, maybe it's a negative in the short term, but won't all consumers be better off in the long run when pro-entry regulation leads to more competition -- which should push prices down for everyone?

The answer depends on whether the competitors are viable -- whether they can thrive in a free market without price controls or similar regulation.

The few remaining telecom startups who managed to avoid bankruptcy clearly cannot, but the FCC doesn't seem to have read the memo.

The trade association representing the startups, COMPTEL, has written to the FCC that its members "do not have the scale and scope to compete with the Bells for the major purchasers of special access," and reasons that regulation is in the public interest because this particular segment of competitors "have to offer extremely steep discounts off the Bells [sic] tariff price in order to win any modest portion of the customer's business."

Wall Street is of the same view. The viability of the startups, referred to as CLECs, is regarded as so bleak that Covad sold in late October for $1.02 a share, for example.

Since the fundamentals suck for the CLECs, they would be fools not to try to hire better lobbyists to convince the FCC to improve their regulatory advantage over the incumbents. This can become and endless game. And it has.

Yesterday the FCC refused to deregulate Verizon's local phone services in six cities including New York, Boston and Philadelphia, even though Verizon pointed out that in New York, for example, cable operators offer competitive voice services to the vast majority of homes and intend to provide voice services throughout virtually all of their franchise areas in the near future; and each of the nation's major wireless carriers offers service that is competitive with Verizon's wireline service and is available throughout (or virtually throughout) the New York area.

This afternoon, Covad was trading at 82 cents a share. Obviously, investors aren't optimistic that continued regulation of Verizon will revive Covad.

The FCC issued the following explanation:

The Commission found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of the forbearance Verizon requests. Accordingly, the Commission denied the requested relief in all six MSAs.

The forbearance standard, for all the criticism it has received lately, really gives the FCC wide latitude to do whatever it chooses. For example, it must make a finding that continued enforcement of a regulation is "not necessary for the protection of consumers." It also must find that forbearance is "consistent with the public interest." I just wish I were in the private practice of law right now so I could charge $500 an hour to argue what those terms mean.

The FCC ought to be asking itself why it is attempting to protect start-ups who, by their own admission, cannot cut it in a free market when cable operators and cellphone companies are offering competing voice services that consumers really want. But apparently irrational criticism from a few Congressional Democrats is becoming too much, and we are witnessing a classic case of Stockholm syndrome.

March 30, 2007
Podcast on patent reform and FreeConference v. AT&T
This week in the Tech Policy Weekly podcast, Jerry Brito, Drew Clark, Tim Lee and I discuss patent reform, FreeConference's antitrust suit against AT&T and e-voting.

On patent reform, I observed that the momentum for fundamental reform reminds me in some ways of the eagerness for telecom reform in the mid 1990s. The Telecommunications Act of 1996 created many problems, demonstrating the inevitability of unintended consequences. Meanwhile, the Supreme Court has stepped up to the plate and has a chance to recalibrate the patent system without major reform. I'd like to see what the Supreme Court does, and hope Congress takes it's time. A long time.

I'm not sure what to make of FreeConference v. AT&T. As Tim Lee points out, in effect, FreeConference appears to have been thwarted in an arbitrage scheme. I wonder why FreeConference hasn't filed a formal complaint with the FCC alleging a violation of the commission's rules or policies (the commission has a net neutrality policy, though you might never know it from the left-wing hype promoting net neutrality regulation). Last time the FCC considered a similar complaint it acted expeditiously against a midsize phone company named Madison River Communications. Why didn't FreeConference file an FCC complaint? Instead it has brought an antitrust claim in federal district court. That may take longer to resolve, and leads me to wonder what is FreeConference seeking here? Is it primarily interested in a cease-and-desist order -- which the FCC could issue -- or perhaps in a broader settlement agreement, or, possibly, some kind of ongoing publicity value. I don't know.

The podcast is here.

January 18, 2007
EU vs. Intel

Staff at the European Union's Competition Directorate are recommending formal charges against Intel, according to the Wall Street Journal.

At the heart of the EU case are AMD's allegations that Intel withholds rebates from computer makers when they buy too many AMD chips. "It is simply a coercive tactic," Tom McCoy, AMD executive vice president for legal affairs, said this month.
Forbes is reporting that AMD's complaints include the offering of rebates to computer manufacturers for shutting out AMD and allegations that Intel has engaged in predatory pricing aimed at keeping AMD's competing CPUs (central processing units) out of the market. Intel denies these charges.

This could just be negative spin for volume discounts. Intel, or any other firm, offers volume discounts to induce further sales. The discounts are justified because higher sales volumes lower unit production costs. Predatory pricing occurs if the discounts reduce the sale price below the cost of production. Predatory pricing is inefficient. Assuming, that is, that we're talking about Intel's cost of production and not AMD's. Sometimes what the complainant is really saying is it can't make a profit, so it assumes the defendant's price is below-cost. Besides, if it can't make a profit then it will go out of business and the defendant could raise its prices with impunity. Sounds scary. Problem is, the remedy would be awful. If we required the most efficient firm in a market to set its prices high enough to allow the least efficient firm to make a profit, we would wind up with a cartel where prices constantly rise, quality falls, innovation suffers and everyone except the consumer is fat and happy. Since Intel can't possibly know what AMD's cost of production is, we either have to accept collusion or accept that Intel will attempt to avoid further legal trouble by setting its prices in a safe zone, which is likely to be well above its costs. These are some of the reasons antitrust law doesn't protect less efficient firms, since to do so would saddle consumers with higher prices.
Competition law as practiced by the EU provides far more scope than our own antitrust jurisprudence for enforcers to intervene in the market in search of perfection. Yet Competition Commissioner Neelie Kroes'ds summation of her own philosophy is consistent with our approach,

My own philosophy on this is fairly simple. First, it is competition, and not competitors, that is to be protected. Second, ultimately the aim is to avoid consumers harm.

Trouble is, the EU is trying to make Europe more competitive without making it more efficient.

January 8, 2007
Status of merger conditions unclear

Jonathan S. Adelstein

AT&T's opponents may not get everything they thought they had from the FCC's review of the AT&T/BellSouth merger. The process was a disgrace, as I discussed here and elsewhere leading up to the final decision. No federal or state regulator identified any competitive or public interest harms, yet Commissioner Jonathan S. Adelstein and Commissioner Michael J. Copps leveraged the process to deliver cash to state and local officials, unwarranted discounts to AT&T's competitors and 3,000 previously outsourced positions to the labor unions.

AT&T also volunteered to maintain "a neutral network and neutral routing in its wireline broadband Internet access service," subject to certain limitations. I argue that a nondiscrimination principle applied to the Internet would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts (see, e.g., this and this).

Continue reading "Status of merger conditions unclear" »

December 14, 2006
What should McDowell do?

It may not entirely be Commissioner Robert M. McDowell's fault that the AT&T/BellSouth merger is languishing at the FCC despite the fact the Antitrust Division of the Department of Justice has already concluded it poses no significant threat to competition. After all, as McDowell pointed out in a recent statement, his four colleagues managed to approve the recent SBC/AT&T merger without him. But the analogy isn't useful. Back then, many in Washington thought telecommunications legislation appeared to be moving through Congress and all sides had high hopes for their agendas. Everyone realizes the legislation is now dead, and this merger is the only opportunity on the horizon to enact a net neutrality nondiscrimination principle and prop up the unsustainable CLEC business model. Indications are McDowell doesn't want to participate; the question is, should he anway?

During McDowell's confirmation hearing, McDowell promised to rely on the FCC's office of general counsel if confronted with potential conflict of interest scenarios.

STEVENS: You've had a substantial relationship with some of the communications interests and I note in your statement that you indicate that you do intend to very jealously apply the conflict of interest concepts and will disqualify yourself in any matter that you've had connection with before or any entity you've had before.

Can you elaborate on that a little bit?

MCDOWELL: Well, I will certainly rely on the opinion of the Office of the General Counsel of the FCC and they do have a system in place and rules in place.

Well, the FCC's general counsel, Sam Feder, has concluded that it's in the government's (and, by extension, the public's) interest that McDowell should participate in this proceeding:

... the Government's interest in your participation here is at least as strong as, if not stronger than, the Government's interest in Chairman Kennard's participation in the proceeding on the repeal of the personal attack and political editorial rules .... there is currently no way to move forward here absent your participation because a three-member majority is necessary for the Commission to take any action whatsoever on the merger.

The problem for McDowell is if he participates he will be under pressure to support his chairman, Kevin Martin, at least to some extent. If he doesn't participate, the entire merger could fail unless AT&T and BellSouth give the FCC's two Democratic commissioners everything they want. Under this scenario, McDowell gets to appear completely innocent while his former associates get everything they want. Thus, McDowell can inflict the maximum damage on the rivals of his former associates, with the least collateral damage, by adopting the role of spectator. This may or may not be what he desires or intends, but it's clearly how the whole thing might look in retrospect.

The word on the street is that McDowell has told at least one member of Congress he won't agree to vote on the merger until June. Sources report McDowell has reached out to several members of Congress in the last few days and that he is seeking "cover."

Bruce Fein, a former FCC general counsel, writes that, "FCC precedents speak volumes in favor of McDowell's participation."

Earlier in 2006, a forbearance petition was filed by a CompTel member with the agency. McDowell initially recused himself. It was reported that the FCC deadlocked 2-2 and that the FCC's general counsel then determined that McDowell's participation was in the public interest (the petition was withdrawn before a vote). McDowell also participated and voted in a universal services proceeding in which CompTel participated. Neither CompTel nor any other party raised any objection to his participation in that proceeding.

In 2000, the FCC had continually deadlocked over the FCC's Personal Attack and Political Editorial Rule Proceeding because Chairman Willian Kennard had recused himself. His non-participation stemmed from prior employment with the National Association of Broadcasters (a party to the rulemaking). After the prolonged stalemate on an issue of public importance, the FCC's general counsel advised the Chairman that "the difficulty of reassigning the matter is now of controlling importance." Chairman Kennard thus reversed course and participated.

Of course, one of the key factors Kennard cited in support of his decision to participate was the fact that the parties opposing his former associates, who would be the parties most likely to question his impartiality, made it clear they believed he should participate. The same "plus factor" is present here. AT&T and BellSouth, the parties whom the conflict of interest guidelines are intended to protect in this instance, are asking McDowell to participate.

Former Chairman Reed E. Hundt also faced an argument from Commercial Realty St. Pete that he should have recused himself from a proceeding that included a rival spectrum bidder whom Hundt represented in private practice. The FCC explained that the "speculative allegations do not rise to the level of specific statements 'clearly showing prejudgment' required by the applicable law of recusal."

Fein points to what could happen if commissioners don't follow the conflict of interest guidlines, including the provision authorizing participation in spite of a potential appearance of conflict:

Agencies like the F.C.C. are entrusted with authority over industries that are keys to the nation's economic development and competitiveness. It would be extremely damaging to the public interest if these agencies were repeatedly deadlocked--like the FEC--in executing their public interest responsibilities. Governing ethics rules are designed to avoid that harm by giving proper weight to both the need to decide and the need to avoid direct financial conflicts of interest. They recognize that recruitment from regulated industries will be frequent, but that fact, in isolation, should not lead to recurring recusals and agency immobility.

Or, as a federal judge once noted in Center for Auto Safety v. FTC, "it might be difficult for the government to employ policymakers who had the requisite knowledge of the particular subject matter."

Fein is of the opinion that, once authorized, McDowell is obligated to participate since he cannot delegate his vote on ther merger to another. But setting this aside, even if McDowell doesn't have to participate, he clearly should. Not only will this merger will promote investment in broadband in the BellSouth region, but there are other urgent priorities before the FCC (like Universal Service) which could suffer from continued deadlock on this matter.

December 13, 2006
Net neutrality doesn't belong in AT&T/BellSouth merger

In the present merger review, Commissioner Michael J. Copps and Commissioner Jonathan S. Adelstein demanded that the FCC conduct what they euphemistically call a "thorough review" even though there is virtually no competition between AT&T and BellSouth. With practically no overlap in the present operations of the two companies, by definition there can't be an increase in market concentration of any significance. That doesn't matter to Copps and Adelstein, who view a leisurely review process as more likely to yield concessions from applicants AT&T and BellSouth.

This merger is about visceral impressions (Copps and Adelstein claim it would "represent one of the largest mergers in history"), plus it's a chance to advance dubious proposals that probably couldn't survive the process of notice, comment, public hearings, majority approval and judicial review. Reports indicate Copps and Adelstein are intent on using this merger proceeding to impose network neutrality conditions on the nation's largest telecom provider and thereby establish a precedent, they hope, for spreading it throughout the rest of the industry.

Net neutrality doesn't belong here. The Antitrust Division found the merger would neither significantly increase concentration in broadband markets nor in the Internet backbone. Nevertheless, the companies have pledged not to block access to particular web sites or degrade someone else's services and applications. But consumer groups and their clients in Silicon Valley want more. In July, when some thought Congress might vote for tougher net neutrality, the FCC easily approved the Adelphia/Time Warner/Comcast merger by a vote of 4 to 1. But net neutrality regulation failed in Congress and this merger proceeding is currently the only game in town. Advocates of net neutrality mandates now desperately hope the FCC will impose an "additional fifth principle of non-discrimination" on AT&T and BellSouth as a condition of the merger. A merger condition wouldn't be subject to the uncertainty of judicial review because the merger applicant would be ineligible to appeal it -- technically, the condition was voluntary. A normal rulemaking process can be extremely lengthy and uncertain before it even gets to judicial review. By then it may be clear that net neutrality is unnecessary to protect consumers and may actually harm them.

But government makes many of its worst mistakes when it acts in haste.

If the FCC imposes a non-discrimination requirement on AT&T and BellSouth, it would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts. That would harm consumers, who benefit the most from advertising. Online advertising generated $12.5 billion in revenues last year, and is one potential source of new revenues to finance costly Internet upgrades. Network operators have relied mostly on flat subscription fees, but want to try adapting their business models to the new capabilities of advanced fiber-optic connections to homes and businesses. Advertising could be used to reduce broadband subscription fees (Google CEO Eric Schmidt sees a future where mobile phones are free to consumers who accept watching targeted forms of advertising, and the same model might work in the broadband market). Free or discounted broadband would clearly be pro-consumer and the market should be allowed to allocate ad revenues between Internet content and delivery.

AT&T/BellSouth merger: No competitive significance

The Antitrust Division, led by Assistant Attorney General Thomas O. Barnett, subjected the AT&T/BellSouth merger to the traditional antitrust analysis and concluded that no it would not harm competition. On the residential side of the market, AT&T is virtually nonexistent, or, as the Antitrust Division put it, of "limited and declining competitive significance." On the business side, there is some slight competition. Competitive Local Exchange Carriers are arguing this justifies re-regulating "special access" and imposing baseball-type arbitration on access negotiations between AT&T and its smaller rivals. How significant is the competitive overlap betwen AT&T and BellSouth that supposedly justifies new regulation? Although AT&T's specialty is large business customers, it can provide services over its own facilities to only a small minority of buildings in the BellSouth region. That's why out of an estimated 219,000 buildings in the region, only 30 in Atlanta and Miami are: (1) served only by BellSouth and AT&T (and thus would go from 2 providers to 1 provider when this merger goes through) and (2) could be considered, under present conditions, uneconomical for competitive carriers to connect to their networks. But even that's no big deal, because competitors can obtain UNE loops to serve at least two-thirds of these buildings with minimal, if any, additional investment.

December 11, 2006
More on the conspiracy theory nonsense

The Wall Street Journal has a good editorial on the subject of an antitrust conspiracy theory involving some of the biggest telecom companies, which I have talked about here and here.

Markets can behave in unison -- think of airline tickets or gas prices -- without necessarily engaging in anticompetitive behavior. And that's as it should be. If the threshold for bringing antitrust conspiracy suits is lowered to the point where, well, you need no direct evidence of an actual conspiracy, then the sky's the limit for the plaintiffs bar. And as Justice Breyer's comment makes clear, a lot more than the cost of phone service would be at stake.

The Journal also observes -- correctly, I believe -- that a conspiracy cannot be inferred in Bell Atlantic v. Twombly because local phone competition wasn't an enticing business opportunity for reasons having nothing to do with precluding competition.

There's no money in residential service, and the profit from business customers is relatively small.

November 28, 2006
Conspiracy or rational business judgment?

Why didn't the Baby Bells compete with one another when Congress ended their exclusive franchises in 1996? Each possessed the necessary expertise and vast resources. The FCC was most eager to help. Did the Baby Bells conspire to carve up their territories in order to maintain their respective monopolies?


In Bell Atlantic Corp. v. Twombly, counsel for Twombly allege that they did, though they can't cite any direct evidence. The Supreme Court heard oral arguments yesterday. Counsel for Twombly are alleging, for now, that a conspiracy can be inferred. Their logic is it would have been in the Bells' self-interest to compete. And they even told Congress they would. But they didn't. Each fought to get in the long-distance market while ignoring the local market. This common behavior, or "parallel course of conduct," doesn't make any sense, the argument goes, unless there was a conspiracy to protect each other. Well, yes it could.

JUSTICE GINSBURG: ... You say ... they were acting against their self- interest ... and I'm questioning that by saying that they might have seen this whole area as not the best place to invest their money.
As I have noted before, the Baby Bells targeted the long-distance market, because regulation allowed fat profit margins despite declining costs. They avoided local competition because regulation kept prices below cost or because the UNE-P regulation made facilities investment uneconomical and it was legally unsustainable (the courts repeatedly struck it down, see, e.g., USTA v. FCC (2004)).

Assistant Attorney General for Antitrust Thomas G. Barnett pointed out that parallel conduct is "ubiquitous in our economy" but "conscious parallelism" is not an agreement within the meaning of Section 1 of the Sherman Act. Counsel for Twombly are hoping to get a court's permission to examine documents and question executives of the Baby Bells in order to come up with more compelling evidence. Think of the billable hours!

Conscious parallelism is hypothetically possible, of course, but imagine trying to define it for purposes of antitrust enforcement?

CHIEF JUSTICE ROBERTS: ... would it state an antitrust violation if you had a grocery store on one corner of the block and a pet store on the other corner of the block and you say, well, the grocery store is not selling pet supplies and they could make money if they did, therefore that's an antitrust violation?
The danger of relying on inferences of agreement to convict under the Sherman Act is placing bureaucrats and judges in the posibition of having to second-guess a potentially wide range of business decisions.
JUSTICE BREYER: I thought the law to date was that the Department of Justice is not given by the Sherman Act the authority to remake the entire American economy. But if we accept your view I guess it is.
The marketplace constantly defies the expectations of professional managers and investors, and no one has ever shown that public officials can do a better job.
JUSTICE SCALIA: I used to work in the field of telecommunications and if the criterion is [what] Congress expected to happen when it passed its law, your case is very weak.

Transcript of the Oral Argument (Nov. 27, 2006)

Brief for Petitioners Bell Atlantic Corp et al. (Aug. 25, 2006)

Brief for Respondents Twombly et al. (Oct. 13, 2006)

Dotted Divider Line

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