Six months may not seem a great deal of time in the general business world, but in the Internet space it’s a lifetime as new websites, tools and features are introduced every day that change where and how users get and share information. The rise of Facebook is a great example: the social networking platform that didn’t exist in early 2004 filed paperwork last month to launch what is expected to be one of the largest IPOs in history. To put it in perspective, Ford Motor went public nearly forty years after it was founded.

Read the full piece here. 

As has become customary with just about every new product announcement by Google these days, the company’s introduction on Tuesday of its new “Search, plus Your World” (SPYW) program, which aims to incorporate a user’s Google+ content into her organic search results, has met with cries of antitrust foul play. All the usual blustering and speculation in the latest Google antitrust debate has obscured what should, however, be the two key prior questions: (1) Did Google violate the antitrust laws by not including data from Facebook, Twitter and other social networks in its new SPYW program alongside Google+ content; and (2) How might antitrust restrain Google in conditioning participation in this program in the future?

Read the full piece here.

Summary

In recent months a veritable legal and policy frenzy has erupted around Google generally, and more specifically concerning how its search activities should be regulated by government authorities throughout the world in the name of ensuring “search neutrality.”  Concerns with search engine bias have led to a menu of proposed regulatory reactions.  Although the debate has focused upon possible remedies to the “problem” presented by a range of Google’s business decisions, it has largely missed the predicate question of whether search engine bias is the product of market failure or otherwise generates significant economic or social harms meriting regulatory intervention in the first place.  “Search neutrality” by its very name presupposes that mandatory neutrality or some imposition of restrictions on search engine bias is desirable, but it is an open question whether advocates of search neutrality have demonstrated that there is a problem necessitating any of the various prescribed remedies. This paper attempts to answer that question, and we evaluate both the economic and non-economic costs and benefits of search bias, as well as the solutions proposed to remedy perceived costs. We demonstrate that search bias is the product of the competitive process and link the search bias debate to the economic and empirical literature on vertical integration and the generally-efficient and pro-competitive incentives for a vertically integrated firm to favor its own content. We conclude that neither an ex ante regulatory restriction on search engine bias nor the imposition of an antitrust duty to deal upon Google would benefit consumers. Moreover, in considering the proposed remedies, we find that by they substitute away from the traditional antitrust consumer welfare standard, and would impose costs exceeding any potential benefits.

Download: “International Signals: The Political Dimension of International Competition Law”

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

Read the full piece here.

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15^th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

1. Local markets, where there are five, six, or more carriers to choose from;
2. Non-contract/pre-paid providers, whose strength is rapidly growing;
3. Technology that is making more bands of available spectrum useful for competitive offerings;
4. The reality that LTE will make inter-modal competition a reality; and
5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post.

Jobs

First, although it’s not really in my bailiwick to comment on the job claims that have been such an important aspect of the public conversations surrounding this merger, some things are simple logic, and the staff’s contrary claims here are inscrutable.  As Cicconi suggests, it is hard to understand how the $8 billion investment and build-out required to capitalize on AT&T’s T-Mobile purchase will fail to produce a host of jobs, how the creation of a more-robust, faster broadband network will fail to ignite even further growth in this growing sector of the economy, and, finally, how all this can fail to happen while the FCC’s own (relatively) paltry $4.5 billion broadband fund will somehow nevertheless create approximately 500,000 (!!!) jobs.  Even Paul Krugman knows that private investment is better than government investment in generating stimulus – the claim is that there’s not enough of it, not that it doesn’t work as well.  Here, however, the fiscal experts on the FCC’s staff have determined that massive private funding won’t create even 96,000 jobs, although the same agency claims that government funding only one half as large will create five times that many jobs.  Um, really?

Meanwhile the agency simply dismisses AT&T’s job preservation commitments.  Now, I would also normally disregard such unenforceable pronouncements as cheap talk – except given the frequency and the volume with which AT&T has made them, they would suffer pretty mightily for failing to follow through on them now.  Even more important perhaps, I have to believe (again, given the vehemence with which they have made the statements and the reality of de facto, reputational enforcement) they are willing to agree to whatever is in their control in a consent decree, thus making them, in fact, legally enforceable.  For the staff to so blithely disregard AT&T’s claims on jobs is unintelligible except as farce—or venality.

Spectrum

Although the report rarely misses an opportunity to fail to mention the spectrum crisis that has been at the center of the Administration’s telecom agenda and the focus of the National Broadband Plan, coincidentally authored by the FCC’s staff, the crux of the report seems to come down to a stark denial that such a spectrum crunch even exists.  As I noted, much of the staff report amounts to an extended meditation on why the parties can and should run their businesses as the staff say they can and should.  The report’s section assessing the parties’ claims regarding the transition to LTE (para 210, ff.) is remarkable.  It begins thus:

One of the Applicants’ primary justifications for the necessity of this transaction is that, as standalone firms, AT&T and T-Mobile are, and will continue to be, spectrum and capacity constrained. Due to these constraints, we find it more plausible that a spectrum constrained firm would maximize deployment of more spectrally efficient LTE, rather than limit it. Transitioning to LTE is primarily a function of only two factors: (1) the extent of LTE capable equipment deployed on the network and (2) the penetration of LTE compatible devices in the subscriber base. Although it may make it more economical, the transition does not require “spectrum headroom” as the Applicants claim. Increased deployment could be achieved by both of the Applicants on a standalone basis by adding the more spectrally efficient LTE-capable radios and equipment to the network and then providing customers with dual mode HSPAILTE devices. . . .

Forget the spectrum crunch!  It is the very absence of spectrum that will give firms the incentive and the ability to transition to more-efficient technology.  And all they have to do is run duplicate equipment on their networks and give all their customers new devices overnight.  And, well, the whole business model fits in a few paragraphs, entails no new spectrum, actually creates spectrum, and meets all foreseeable demand (as long as demand never increases which, of course, the report conveniently fails to assess).

Moreover, claims the report, AT&T’s transition to LTE flows inevitably from its competition with Verizon.  But, as Cicconi points out, the staff is unprincipled in its disparate treatment of the industry’s competitive conditions.  Somehow, without T-Mobile in the mix, prices will skyrocket and quality will be degraded—let’s say, just for example, by not upgrading to LTE (my interpretation, not the staff’s).  But 100 pages later, it turns out that AT&T doesn’t need to merge with T-Mobile to expand its LTE network because it will have to do so in response to competition from Verizon anyway.  It would appear, however, that Verizon’s power over AT&T operates only if T-Mobile exists separately and AT&T has a harder time competing.  Remove T-Mobile and expand AT&T’s ability to compete and, apparently, the market collapses.  Such is the logic of the report.

There is much more to criticize in the report, and I hope to have a chance to do so in the next few days.

Filed under: antitrust, business, law and economics, merger guidelines, regulation, technology, telecommunications Tagged: at&t, FCC, merger, t-mobile

AT&T’s proposed acquisition of T-Mobile presents an opportunity for judicial scrutiny of the newest iteration of the Department of Justice (“DOJ”) and Federal Trade Commission’s (FTC’s) Horizontal Merger Guidelines (“2010 Guidelines”). The Agencies revised the 2010 Guidelines with an eye toward increasing transparency and predictability by conforming them to actual agency analysis. The 2010 Guidelines highlight the Agencies’ adoption of a more economically sound analytical approach focusing directly upon the competitive effects of proposed mergers and de-emphasizing the importance of market definition and competitive inferences from market structure. But, oddly, the DOJ’s complaint reverts to its pre-revision approach, emphasizing a remarkable focus upon market definition and structural analysis. The structure-heavy approach the DOJ adopts in its complaint runs afoul of the standards it espouses in the Guidelines, raising the risk of undermining their continued success as measured by judicial adoption.

https://www.competitionpolicyinternational.com/will-the-2010-merger-guidelines-survive-the-doj-s-complaint-in-u-s-v-at-t

As I have posted before, I was disappointed that the DOJ filed against AT&T in its bid to acquire T-Mobile.  The efficacious provision of mobile broadband service is a complicated business, but it has become even more so by government’s meddling.  Responses like this merger are both inevitable and essential.  And Sprint and Cellular South piling on doesn’t help — and, as Josh has pointed out, further suggests that the merger is actually pro-competitive.

Read the full piece here.

Milton Mueller responded to my post Wednesday on the DOJ’s decision to halt the AT&T/T-Mobile merger by asserting that there was no evidence the merger would lead to “anything innovative and progressive” and claiming “[t]he spectrum argument fell apart months ago, as factual inquiries revealed that AT&T had more spectrum than Verizon and the mistakenly posted lawyer’s letter revealed that it would be much less expensive to expand its capacity than to acquire T-Mobile.”  With respect to Milton, I think he’s been suckered by the “big is bad” crowd at Public Knowledge and Free Press.  But he’s hardly alone and these claims — claims that may well have under-girded the DOJ’s decision to step in to some extent — merit thorough refutation.

Read the full piece here.