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Popular Media On Thursday I will be participating in an ABA panel discussion on the Apple e-books case, along with Mark Ryan (former DOJ attorney) and Fiona . . .
On Thursday I will be participating in an ABA panel discussion on the Apple e-books case, along with Mark Ryan (former DOJ attorney) and Fiona Scott-Morton (former DOJ economist), both of whom were key members of the DOJ team that brought the case. Details are below. Judging from the prep call, it should be a spirited discussion!
Readers looking for background on the case (as well as my own views — decidedly in opposition to those of the DOJ) can find my previous commentary on the case and some of the issues involved here:
Other TOTM authors have also weighed in. See, e.g.:
Federal Civil Enforcement Committee, Joint Conduct, Unilateral Conduct, and Media & Tech Committees Present:
July 16, 2015 12:00 noon to 1:30 pm Eastern / 9:00 am to 10:30 am Pacific
On June 30, the Second Circuit affirmed DOJ’s trial victory over Apple in the Ebooks Case. The three-judge panel fractured in an interesting way: two judges affirmed the finding that Apple’s role in a “hub and spokes” conspiracy was unlawful per se; one judge also would have found a rule-of-reason violation; and the dissent — stating Apple had a “vertical” position and was challenging the leading seller’s “monopoly” — would have found no liability at all. What is the reasoning and precedent of the decision? Is “marketplace vigilantism” (the concurring judge’s phrase) ever justified? Our panel — which includes the former DOJ head of litigation involved in the case — will debate the issues.
Moderator
Panelists
Register HERE
Filed under: administrative, antitrust, cartels, contracts, doj, e-books, economics, Efficiencies, error costs, law and economics, litigation, market definition, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, antitrust, Apple, doj, e-books, iBookstore, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, vertical restraints
Popular Media Last year, Microsoft’s new CEO, Satya Nadella, seemed to break with the company’s longstanding “complain instead of compete” strategy to acknowledge that: We’re going to . . .
Last year, Microsoft’s new CEO, Satya Nadella, seemed to break with the company’s longstanding “complain instead of compete” strategy to acknowledge that:
We’re going to innovate with a challenger mindset…. We’re not coming at this as some incumbent.
Among the first items on his agenda? Treating competing platforms like opportunities for innovation and expansion rather than obstacles to be torn down by any means possible:
We are absolutely committed to making our applications run what most people describe as cross platform…. There is no holding back of anything.
Earlier this week, at its Build Developer Conference, Microsoft announced its most significant initiative yet to bring about this reality: code built into its Windows 10 OS that will enable Android and iOS developers to port apps into the Windows ecosystem more easily.
To make this possible… Windows phones “will include an Android subsystem” meant to play nice with the Java and C++ code developers have already crafted to run on a rival’s operating system…. iOS developers can compile their Objective C code right from Microsoft’s Visual Studio, and turn it into a full-fledged Windows 10 app.
Microsoft also announced that its new browser, rebranded as “Edge,” will run Chrome and Firefox extensions, and that its Office suite would enable a range of third-party services to integrate with Office on Windows, iOS, Android and Mac.
Consumers, developers and Microsoft itself should all benefit from the increased competition that these moves are certain to facilitate.
Most obviously, more consumers may be willing to switch to phones and tablets with the Windows 10 operating system if they can continue to enjoy the apps and extensions they’ve come to rely on when using Google and Apple products. As one commenter said of the move:
I left Windows phone due to the lack of apps. I love the OS though, so if this means all my favorite apps will be on the platform I’ll jump back onto the WP bandwagon in a heartbeat.
And developers should invest more in development when they can expect additional revenue from yet another platform running their apps and extensions, with minimal additional development required.
It’s win-win-win. Except perhaps for Microsoft’s lingering regulatory strategy to hobble Google.
That strategy is built primarily on antitrust claims, most recently rooted in arguments that consumers, developers and competitors alike are harmed by Google’s conduct around Android which, it is alleged, makes it difficult for OS makers (like Cyanogen) and app developers (like Microsoft Bing) to compete.
But Microsoft’s interoperability announcements (along with a host of other rapidly evolving market characteristics) actually serve to undermine the antitrust arguments that Microsoft, through groups like FairSearch and ICOMP, has largely been responsible for pushing in the EU against Google/Android.
The reality is that, with innovations like the one Microsoft announced this week, Microsoft, Google and Apple (and Samsung, Nokia, Tizen, Cyanogen…) are competing more vigorously on several fronts. Such competition is evidence of a vibrant marketplace that is simply not in need of antitrust intervention.
The supreme irony in this is that such a move represents a (further) nail in the coffin of the supposed “applications barrier to entry” that was central to the US DOJ’s antitrust suit against Microsoft and that factors into the contemporary Android antitrust arguments against Google.
Frankly, the argument was never very convincing. Absent unjustified and anticompetitive efforts to prop up such a barrier, the “applications barrier to entry” is just a synonym for “big.” Admittedly, the DC Court of Appeals in Microsoft was careful — far more careful than the district court — to locate specific, narrow conduct beyond the mere existence of the alleged barrier that it believed amounted to anticompetitive monopoly maintenance. But central to the imposition of liability was the finding that some of Microsoft’s conduct deterred application developers from effectively accessing other platforms, without procompetitive justification.
With the implementation of initiatives like the one Microsoft has now undertaken in Windows 10, however, it appears that such concerns regarding Google and mobile app developers are unsupportable.
Of greatest significance to the current Android-related accusations against Google, the appeals court in Microsoft also reversed the district court’s finding of liability based on tying, noting in particular that:
If OS vendors without market power also sell their software bundled with a browser, the natural inference is that sale of the items as a bundle serves consumer demand and that unbundled sale would not.
Of course this is exactly what Microsoft Windows Phone (which decidedly does not have market power) does, suggesting that the bundling of mobile OS’s with proprietary apps is procompetitive.
Similarly, in reviewing the eventual consent decree in Microsoft, the appeals court upheld the conditions that allowed the integration of OS and browser code, and rejected the plaintiff’s assertion that a prohibition on such technological commingling was required by law.
The appeals court praised the district court’s recognition that an appropriate remedy “must place paramount significance upon addressing the exclusionary effect of the commingling, rather than the mere conduct which gives rise to the effect,” as well as the district court’s acknowledgement that “it is not a proper task for the Court to undertake to redesign products.” Said the appeals court, “addressing the applications barrier to entry in a manner likely to harm consumers is not self-evidently an appropriate way to remedy an antitrust violation.”
Today, claims that the integration of Google Mobile Services (GMS) into Google’s version of the Android OS is anticompetitive are misplaced for the same reason:
But making Android competitive with its tightly controlled competitors [e.g., Apple iOS and Windows Phone] requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS). Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.
In fact, some commenters have even suggested that, by effectively making the OS more “open,” Microsoft’s new Windows 10 initiative might undermine the Windows experience in exactly this fashion:
As a Windows Phone developer, I think this could easily turn into a horrible idea…. [I]t might break the whole Windows user experience Microsoft has been building in the past few years. Modern UI design is a different approach from both Android and iOS. We risk having a very unhomogenic [sic] store with lots of apps using different design patterns, and Modern UI is in my opinion, one of the strongest points of Windows Phone.
But just because Microsoft may be willing to take this risk doesn’t mean that any sensible conception of competition law and economics should require Google (or anyone else) to do so, as well.
Most significantly, Microsoft’s recent announcement is further evidence that both technological and contractual innovations can (potentially — the initiative is too new to know its effect) transform competition, undermine static market definitions and weaken theories of anticompetitive harm.
When apps and their functionality are routinely built into some OS’s or set as defaults; when mobile apps are also available for the desktop and are seamlessly integrated to permit identical functions to be performed on multiple platforms; and when new form factors like Apple MacBook Air and Microsoft Surface blur the lines between mobile and desktop, traditional, static anticompetitive theories are out the window (no pun intended).
Of course, it’s always been possible for new entrants to overcome network effects and scale impediments by a range of means. Microsoft itself has in the past offered to pay app developers to write for its mobile platform. Similarly, it offers inducements to attract users to its Bing search engine and it has devised several creative mechanisms to overcome its claimed scale inferiority in search.
A further irony (and market complication) is that now some of these apps — the ones with network effects of their own — threaten in turn to challenge the reigning mobile operating systems, exactly as Netscape was purported to threaten Microsoft’s OS (and lead to its anticompetitive conduct) back in the day. Facebook, for example, now offers not only its core social media function, but also search, messaging, video calls, mobile payments, photo editing and sharing, and other functionality that compete with many of the core functions built into mobile OS’s.
But the desire by apps like Facebook to expand their networks by being on multiple platforms, and the desire by these platforms to offer popular apps in order to attract users, ensure that Facebook is ubiquitous, even without any antitrust intervention. As Timothy Bresnahan, Joe Orsini and Pai-Ling Yin demonstrate:
(1) The distribution of app attractiveness to consumers is skewed, with a small minority of apps drawing the vast majority of consumer demand. (2) Apps which are highly demanded on one platform tend also to be highly demanded on the other platform. (3) These highly demanded apps have a strong tendency to multihome, writing for both platforms. As a result, the presence or absence of apps offers little reason for consumers to choose a platform. A consumer can choose either platform and have access to the most attractive apps.
Of course, even before Microsoft’s announcement, cross-platform app development was common, and third-party platforms like Xamarin facilitated cross-platform development. As Daniel O’Connor noted last year:
Even if one ecosystem has a majority of the market share, software developers will release versions for different operating systems if it is cheap/easy enough to do so…. As [Torsten] Körber documents [here], building mobile applications is much easier and cheaper than building PC software. Therefore, it is more common for programmers to write programs for multiple OSes…. 73 percent of apps developers design apps for at least two different mobiles OSes, while 62 percent support 3 or more.
Whether Microsoft’s interoperability efforts prove to be “perfect” or not (and some commenters are skeptical), they seem destined to at least further decrease the cost of cross-platform development, thus reducing any “application barrier to entry” that might impede Microsoft’s ability to compete with its much larger rivals.
Moreover, one of the most interesting things about the announcement is that it will enable Android and iOS apps to run not only on Windows phones, but also on Windows computers. Some 1.3 billion PCs run Windows. Forget Windows’ tiny share of mobile phone OS’s; that massive potential PC market (of which Microsoft still has 91 percent) presents an enormous ready-made market for mobile app developers that won’t be ignored.
It also points up the increasing absurdity of compartmentalizing these markets for antitrust purposes. As the relevant distinctions between mobile and desktop markets break down, the idea of Google (or any other company) “leveraging its dominance” in one market to monopolize a “neighboring” or “related” market is increasingly unsustainable. As I wrote earlier this week:
Mobile and social media have transformed search, too…. This revolution has migrated to the computer, which has itself become “app-ified.” Now there are desktop apps and browser extensions that take users directly to Google competitors such as Kayak, eBay and Amazon, or that pull and present information from these sites.
In the end, intentionally or not, Microsoft is (again) undermining its own case. And it is doing so by innovating and competing — those Schumpeterian concepts that were always destined to undermine antitrust cases in the high-tech sector.
If we’re lucky, Microsoft’s new initiatives are the leading edge of a sea change for Microsoft — a different and welcome mindset built on competing in the marketplace rather than at regulators’ doors.
Filed under: antitrust, barriers to entry, exclusionary conduct, google, market definition, markets, monopolization, technology, tying, tying Tagged: Android, antitrust, competition, Cyanogen, google, Google Mobile Services, innovation, microsoft, Mobile, Satya Nadella, tying, Windows Phone
Popular Media The Wall Street Journal reported yesterday that the FTC Bureau of Competition staff report to the commissioners in the Google antitrust investigation recommended that the . . .
The Wall Street Journal reported yesterday that the FTC Bureau of Competition staff report to the commissioners in the Google antitrust investigation recommended that the Commission approve an antitrust suit against the company.
While this is excellent fodder for a few hours of Twitter hysteria, it takes more than 140 characters to delve into the nuances of a 20-month federal investigation. And the bottom line is, frankly, pretty ho-hum.
As I said recently,
One of life’s unfortunate certainties, as predictable as death and taxes, is this: regulators regulate.
The Bureau of Competition staff is made up of professional lawyers — many of them litigators, whose existence is predicated on there being actual, you know, litigation. If you believe in human fallibility at all, you have to expect that, when they err, FTC staff errs on the side of too much, rather than too little, enforcement.
So is it shocking that the FTC staff might recommend that the Commission undertake what would undoubtedly have been one of the agency’s most significant antitrust cases? Hardly.
Nor is it surprising that the commissioners might not always agree with staff. In fact, staff recommendations are ignored all the time, for better or worse. Here are just a few examples: R.J Reynolds/Brown & Williamson merger, POM Wonderful , Home Shopping Network/QVC merger, cigarette advertising. No doubt there are many, many more.
Regardless, it also bears pointing out that the staff did not recommend the FTC bring suit on the central issue of search bias “because of the strong procompetitive justifications Google has set forth”:
Complainants allege that Google’s conduct is anticompetitive because if forecloses alternative search platforms that might operate to constrain Google’s dominance in search and search advertising. Although it is a close call, we do not recommend that the Commission issue a complaint against Google for this conduct.
But this caveat is enormous. To report this as the FTC staff recommending a case is seriously misleading. Here they are forbearing from bringing 99% of the case against Google, and recommending suit on the marginal 1% issues. It would be more accurate to say, “FTC staff recommends no case against Google, except on a couple of minor issues which will be immediately settled.”
And in fact it was on just these minor issues that Google agreed to voluntary commitments to curtail some conduct when the FTC announced it was not bringing suit against the company.
The Wall Street Journal quotes some other language from the staff report bolstering the conclusion that this is a complex market, the conduct at issue was ambiguous (at worst), and supporting the central recommendation not to sue:
We are faced with a set of facts that can most plausibly be accounted for by a narrative of mixed motives: one in which Google’s course of conduct was premised on its desire to innovate and to produce a high quality search product in the face of competition, blended with the desire to direct users to its own vertical offerings (instead of those of rivals) so as to increase its own revenues. Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google’s monopoly power over search and search advertising. On a global level, the record will permit Google to show substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.
We are faced with a set of facts that can most plausibly be accounted for by a narrative of mixed motives: one in which Google’s course of conduct was premised on its desire to innovate and to produce a high quality search product in the face of competition, blended with the desire to direct users to its own vertical offerings (instead of those of rivals) so as to increase its own revenues. Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google’s monopoly power over search and search advertising.
On a global level, the record will permit Google to show substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.
This is exactly when you want antitrust enforcers to forbear. Predicting anticompetitive effects is difficult, and conduct that could be problematic is simultaneously potentially vigorous competition.
That the staff concluded that some of what Google was doing “harmed competitors” isn’t surprising — there were lots of competitors parading through the FTC on a daily basis claiming Google harmed them. But antitrust is about protecting consumers, not competitors. Far more important is the staff finding of “substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.”
Indeed, the combination of “substantial innovation,” “intense competition from Microsoft and others,” and “Google’s strong procompetitive justifications” suggests a well-functioning market. It similarly suggests an antitrust case that the FTC would likely have lost. The FTC’s litigators should probably be grateful that the commissioners had the good sense to vote to close the investigation.
Meanwhile, the Wall Street Journal also reports that the FTC’s Bureau of Economics simultaneously recommended that the Commission not bring suit at all against Google. It is not uncommon for the lawyers and the economists at the Commission to disagree. And as a general (though not inviolable) rule, we should be happy when the Commissioners side with the economists.
While the press, professional Google critics, and the company’s competitors may want to make this sound like a big deal, the actual facts of the case and a pretty simple error-cost analysis suggests that not bringing a case was the correct course.
Filed under: antitrust, error costs, exclusionary conduct, exclusive dealing, federal trade commission, google, Internet search, law and economics, monopolization, settlements, technology Tagged: error costs, Federal Trade Commission, ftc, google
Popular Media It’s easy to look at the net neutrality debate and assume that everyone is acting in their self-interest and against consumer welfare. Thus, many on . . .
It’s easy to look at the net neutrality debate and assume that everyone is acting in their self-interest and against consumer welfare. Thus, many on the left denounce all opposition to Title II as essentially “Comcast-funded,” aimed at undermining the Open Internet to further nefarious, hidden agendas. No matter how often opponents make the economic argument that Title II would reduce incentives to invest in the network, many will not listen because they have convinced themselves that it is simply special-interest pleading.
But whatever you think of ISPs’ incentives to oppose Title II, the incentive for the tech companies (like Cisco, Qualcomm, Nokia and IBM) that design and build key elements of network infrastructure and the devices that connect to it (i.e., essential input providers) is to build out networks and increase adoption (i.e., to expand output). These companies’ fundamental incentive with respect to regulation of the Internet is the adoption of rules that favor investment. They operate in highly competitive markets, they don’t offer competing content and they don’t stand as alleged “gatekeepers” seeking monopoly returns from, or control over, what crosses over the Interwebs.
Thus, it is no small thing that 60 tech companies — including some of the world’s largest, based both in the US and abroad — that are heavily invested in the buildout of networks and devices, as well as more than 100 manufacturing firms that are increasingly building the products and devices that make up the “Internet of Things,” have written letters strongly opposing the reclassification of broadband under Title II.
There is probably no more objective evidence that Title II reclassification will harm broadband deployment than the opposition of these informed market participants.
These companies have the most to lose from reduced buildout, and no reasonable nefarious plots can be constructed to impugn their opposition to reclassification as consumer-harming self-interest in disguise. Their self-interest is on their sleeves: More broadband deployment and adoption — which is exactly what the Open Internet proceedings are supposed to accomplish.
If the FCC chooses the reclassification route, it will most assuredly end up in litigation. And when it does, the opposition of these companies to Title II should be Exhibit A in the effort to debunk the FCC’s purported basis for its rules: the “virtuous circle” theory that says that strong net neutrality rules are necessary to drive broadband investment and deployment.
Access to all the wonderful content the Internet has brought us is not possible without the billions of dollars that have been invested in building the networks and devices themselves. Let’s not kill the goose that lays the golden eggs.
Filed under: antitrust, law and economics, markets, monopolization, net neutrality, technology, telecommunications, vertical restraints, wireless Tagged: antitrust, net neutrality, open internet, tech companies, Title II
Popular Media Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” . . .
Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” contracts to license its proprietary suite of mobile apps, Google Mobile Services, to device manufacturers.
I’ve written about this at length before. As I said previously,
In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential). For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.”
In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).
For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.”
Microsoft (via another of its front groups, ICOMP) responded in predictable fashion.
While the hysteria over private, mutually beneficial contracts negotiated between sophisticated corporations was always patently absurd (who ever heard of sensitive commercial contracts that weren’t confidential?), Edelman’s claim that the Google MADAs operate to “suppress competition” with “no plausible pro-consumer benefits” was the subject of my previous post.
I won’t rehash all of those arguments here, but rather point to another indication that such contract terms are not anticompetitive: The recent revelation that they are used by others in the same industry — including, we’ve learned (to no one’s surprise), Microsoft.
Much like the release of Google’s MADAs in an unrelated lawsuit, the ongoing patent licensing contract dispute between Microsoft and Samsung has obliged the companies to release their own agreements. As it happens, they are at least as restrictive as the Google agreements criticized by Edelman — and, in at least one way, even more so.
Some quick background: As I said in my previous post, it is no secret that equipment manufacturers have the option to license a free set of Google apps (Google Mobile Services) and set Google as the default search engine. However, Google allows OEMs to preinstall other competing search engines as they see fit. Indeed, no matter which applications come pre-installed, the user can easily download Yahoo!, Microsoft’s Bing, Yandex, Naver, DuckDuckGo and other search engines for free from the Google Play Store.
But Microsoft has sought to impose even-more stringent constraints on its device partners. One of the agreements disclosed in the Microsoft-Samsung contract litigation, the “Microsoft-Samsung Business Collaboration Agreement,” requires Samsung to set Bing as the search default for all Windows phones and precludes Samsung from pre-installing any other search applications on Windows-based phones. Samsung must configure all of its Windows Phones to use Microsoft Search Services as the
default Web Search . . . in all instances on such properties where Web Search can be launched or a Query submitted directly by a user (including by voice command) or automatically (including based on location or context).
Interestingly, the agreement also requires Samsung to install Microsoft Search Services as a non-default search option on all of Samsung’s non-Microsoft Android devices (to the extent doing so does not conflict with other contracts).
Of course, the Microsoft-Samsung contract is expressly intended to remain secret: Its terms are declared to be “Confidential Information,” prohibiting Samsung from making “any public statement regarding the specific terms of [the] Agreement” without Microsoft’s consent.
Meanwhile, the accompanying Patent License Agreement provides that
all terms and conditions in this Agreement, including the payment amount [and the] specific terms and conditions in this Agreement (including, without limitation, the amount of any fees and any other amounts payable to Microsoft under this Agreement) are confidential and shall not be disclosed by either Party.
In addition to the confidentiality terms spelled out in these two documents, there is a separate Non-Disclosure Agreement—to further dispel any modicum of doubt on that score. Perhaps this is why Edelman was unaware of the ubiquity of such terms (and their confidentiality) when he issued his indictment of the Google agreements but neglected to mention Microsoft’s own.
In light of these revelations, Edelman’s scathing contempt for the “secrecy” of Google’s MADAs seems especially disingenuous:
MADA secrecy advances Google’s strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response…Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google’s restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.
If, as Edelman claims, Google’s objectionable contract terms “serve both to help Google expand into areas where competition could otherwise occur, and to prevent competitors from gaining traction,” then what are the very same sorts of terms doing in Microsoft’s contracts with Samsung? The revelation that Microsoft employs contracts similar to — and similarly confidential to — Google’s highlights the hypocrisy of claims that such contracts serve anticompetitive aims.
In fact, as I discussed in my previous post, there are several pro-competitive justifications for such agreements, whether undertaken by a market leader or a newer entrant intent on catching up. Most obviously, such contracts help to ensure that consumers receive the user experience they demand on devices manufactured by third parties. But more to the point, the fact that such arrangements permeate the market and are adopted by both large and small competitors is strong indication that such terms are pro-competitive.
At the very least, they absolutely demonstrate that such practices do not constitute prima facie evidence of the abuse of market power.
[Reminder: See the “Disclosures” page above. ICLE has received financial support from Google in the past, and I formerly worked at Microsoft. Of course, the views here are my own, although I encourage everyone to agree with them.]
Filed under: antitrust, contracts, exclusionary conduct, google, licensing, monopolization, technology, tying, tying Tagged: Android, Ben Edelman, google, Google Mobile Services, microsoft
TOTM PayPal co-founder Peter Thiel has a terrific essay in the Review section of today’s Wall Street Journal. The essay, Competition Is for Losers, is adapted from Mr. . . .
PayPal co-founder Peter Thiel has a terrific essay in the Review section of today’s Wall Street Journal. The essay, Competition Is for Losers, is adapted from Mr. Thiel’s soon-to-be-released book, Zero to One: Notes on Startups, or How to Build the Future. Based on the title of the book, I assume it is primarily a how-to guide for entrepreneurs. But if the rest of the book is anything like the essay in today’s Journal, it will also offer lots of guidance to policy makers–antitrust officials in particular.
Read the full piece here.
Popular Media Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again. The latest volley in its tiresome and ironic campaign to bludgeon . . .
Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.
The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.
In a recent polemic, Microsoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).
Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”
In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.
But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.
Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:
(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.
It’s time to take a step back and consider the real issues at play.
For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”
Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:
The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.
Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:
Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.
The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.
Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engine; Nokia provides mapping services, and the app store is Amazon’s own.
Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.
It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.
But Google Android is far from the only Android experience.
Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.
Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:
The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.
Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.
Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.
But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS). Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.
Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.
In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.
In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.
For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).
On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:
By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.
Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.
As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.
By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.
In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.
In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.
As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:
Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.
Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.
In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.
Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:
Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry…. The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated…. The FTC is also a loser because it ran a high profile two-year investigation but came up dry.
Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….
The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….
The FTC is also a loser because it ran a high profile two-year investigation but came up dry.
EU regulators, take note.
Filed under: antitrust, contracts, exclusionary conduct, google, law and economics, monopolization, technology, tying, tying Tagged: Android, antitrust, Apple, competition, google, Google Apps, iOS, Kindle Fire, microsoft, Samsung, tying, Windows Phone
Popular Media Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit . . .
Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.
McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively. There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings. A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.
Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2. Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course. Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.
Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale. The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry. As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry. Thus, actual market experience seemed to undermine Star’s self-serving testimony.
Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy. Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing. Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy. These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.
In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters. We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy: it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings. Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available. McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.
In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements. Hopefully, the Eleventh Circuit will correct the Commission’s mistake.
Other professors signing the brief include:
The brief’s “Summary of Argument” follows the jump.
Unlike in a pre-merger investigation, the Federal Trade Commission (“FTC”) did not need to rely on indirect evidence related to market structure to predict the competitive effect of the conduct challenged in this case. McWane’s Full Support Program, which gave rise to the Commission’s exclusive dealing claim, was fully operational—and had terminated—prior to the proceedings below. Complaint Counsel thus had access to data on actual market effects.
But Complaint Counsel did not base its case on such effects, some of which suggested an absence of anticompetitive harm. Instead, Complaint Counsel theorized that McWane’s exclusive dealing could have anticompetitively “raised rivals’ costs” by holding them below minimum efficient scale, and it relied entirely on a self-serving statement by McWane’s chief rival to establish what constitutes such scale in the industry at issue. In addition, Complaint Counsel failed to establish the extent of market foreclosure actually occasioned by McWane’s Full Support Program, did not assess the degree to which the program’s significant exceptions mitigated its anticompetitive potential, and virtually ignored a compelling procompetitive rationale for McWane’s exclusive dealing. In short, Complaint Counsel presented only weak and incomplete indirect evidence in an attempt to prove anticompetitive harm from an exclusive dealing arrangement that had produced actual effects tending to disprove such harm. Sustaining a liability judgment based on so thin a reed would substantially ease the government’s burden of proof in exclusive dealing cases.
Exclusive dealing liability should not be so easy to establish. Economics has taught that although exclusive dealing may sometimes occasion anticompetitive harm, several prerequisites must be in place before such harm can occur. Moreover, exclusive dealing can achieve a number of procompetitive benefits and is quite common in highly competitive markets. The published empirical evidence suggests that most instances of exclusive dealing are procompetitive rather than anticompetitive. Antitrust tribunals should therefore take care not to impose liability too easily.
Supreme Court precedents, reflecting economic learning on exclusive dealing, have evolved to make liability more difficult to establish. Whereas exclusive dealing was originally condemned almost per se, Standard Oil of California v. United States, 337 U.S. 293 (1949) (hereinafter “Standard Stations”), the Supreme Court eventually instructed that a reviewing court should make a fuller inquiry into the competitive effect of the challenged exclusive dealing activity. See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 329 (1961). In In re Beltone Electronics, 100 F.T.C. 68 (1982), the FTC followed Tampa Electric’s instruction and embraced an economically informed method of analyzing exclusive dealing.
The decision on appeal departs from Beltone—which the FTC never even cited—by imposing liability for exclusive dealing without an adequate showing of likely competitive harm. If allowed to stand, the judgment below could condemn or chill a wide range of beneficial exclusive dealing arrangements. We therefore urge reversal to avoid creating new and unwelcome antitrust enforcement risks.
Filed under: antitrust, exclusionary conduct, exclusive dealing, federal trade commission, law and economics, monopolization
Popular Media Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenance, price squeezes) have become more economically sensible in the . . .
Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenance, price squeezes) have become more economically sensible in the last few decades, the law on tying remains an embarrassment. The sad state of the doctrine is evident in a federal district court’s recent denial of Viacom’s motion to dismiss a tying action by Cablevision.
According to Cablevision’s complaint, Viacom threatened to impose a substantial financial “penalty” (probably by denying a discount) unless Cablevision licensed Viacom’s less popular television programming (the “Suite Networks”) along with its popular “Core Networks” of Nickelodeon, Comedy Central, BET, and MTV. This arrangement, Cablevision insisted, amounted to a per se illegal tie-in of the Suite Networks to the Core Networks.
Similar tying actions based on cable bundling have failed, and I have previously explained why cable bundling like this is, in fact, efficient. But putting aside whether the tie-in at issue here was efficient, the district court’s order is troubling because it illustrates how very unconcerned with efficiency tying doctrine is.
First, the district court rejected–correctly, under ill-founded precedents–Viacom’s argument that Cablevision was required to plead an anticompetitive effect. It concluded that Cablevision had to allege only four elements: separate tying and tied products, coercion by the seller to force purchase of the tied product along with the tying product, the seller’s possession of market power in the tying product market, and the involvement of a “not insubstantial” dollar volume of commerce in the tied product market. Once these elements are alleged, the court said,
plaintiffs need not allege, let alone prove, facts addressed to the anticompetitive effects element. If a plaintiff succeeds in establishing the existence of sufficient market power to create a per se violation, the plaintiff is also relieved of the burden of rebutting any justification the defendant may offer for the tie.
In other words, if a tying plaintiff establishes the four elements listed above, the efficiency of the challenged tie-in is completely irrelevant. And if a plaintiff merely pleads those four elements, it is entitled to proceed to discovery, which can be crippling for antitrust defendants and often causes them to settle even non-meritorious cases. Given that a great many tie-ins involving the four elements listed above are, in fact, efficient, this is a terrible rule. It is, however, the law as established in the Supreme Court’s Jefferson Parish decision. The blame for this silliness therefore rests on that Court, not the district court here.
But the Cablevision order includes a second unfortunate feature for which the district court and the Supreme Court share responsibility. Having concluded that Cablevision was not required to plead anticompetitive effect, the court went on to say that Cablevision “ha[d], in any event, pleaded facts sufficient to support plausibly an inference of anticompetitive effect.” Those alleged facts were that Cablevision would have bought content from another seller but for the tie-in:
Cablevision alleges that if it were not forced to carry the Suite Networks, it “would carry other networks on the numerous channel slots that Viacom’s Suite Networks currently occupy.” (Compl. par. 10.) Cablevision also alleges that Cablevision would buy other “general programming networks” from Viacom’s competitors absent the tying arrangement. (Id.)
In other words, the district court reasoned, Cablevision alleged anticompetitive harm merely by pleading that Viacom’s conduct reduced some sales opportunities for its rivals.
But harm to a competitor, standing alone, is not harm to competition. To establish true anticompetitive harm, Cablevision would have to show that Viacom’s tie-in reduced its rivals’ sales by so much that they lost scale efficiencies so that their average per-unit costs rose. To make that showing, Cablevision would have to show (or allege, at the motion to dismiss stage) that Viacom’s tying occasioned substantial foreclosure of sales opportunities in the tied product market. “Some” reduction in sales to rivals–while perhaps anticompetitor–is simply not sufficient to show anticompetitive harm.
Because the Supreme Court has emphasized time and again that mere harm to a competitor is not harm to competition, the gaffe here is primarily the district court’s fault. But at least a little blame should fall on the Supreme Court. That Court has never precisely specified the potential anticompetitive harm from tying: that a tie-in may enhance market power in the tied or tying product markets if, but only if, it results in substantial foreclosure of sales opportunities in the tied product market.
If the Court were to do so, and were to jettison the silly quasi-per se rule of Jefferson Parish, tying doctrine would be far more defensible.
[NOTE: For a more detailed explanation of why substantial tied market foreclosure is a prerequisite to anticompetitive harm from tie-ins, see my article, Appropriate Liability Rules for Tying and Bundled Discounting, 72 Ohio St. L. J. 909 (2011).]
Filed under: antitrust, law and economics, tying
