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.
 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.
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.
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.
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.
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.
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" »
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.
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.
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.
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.
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)
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