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Yesterday the International Center for Law & Economics and eleven independent professors and scholars of law and economics filed Reply Comments to address concerns raised in the Comments and Petitions to Deny in the Comcast Time Warner merger proceeding at the FCC. We make the following key points:

The merger does not reduce competition in the relevant markets.

• The FCC has found that the relevant market for analysis in similar mergers is local. In these cases, the FCC found that the broadband market is competitive, and when there is little or no geographic overlap among ISPs that seek to merge, then there is no reduction in competition.The FCC should continue this reasoned analysis and reject national broadband share as a meaningful metric: the relevant market is a local one.

The FCC must properly attribute and consider merger-specific benefits.

• The transaction will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology. Before anyone even considered using the Internet to distribute Netflix videos, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent Comcast’s broadband infrastructure investments, we would still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

Vertical issues (like limiting access to independent programming content) will be unaffected by the merger.

• Vertical integration in the cable industry does not harm consumers, and, often, has substantial benefits. And the merger changes little overall in terms of incentives for vertical foreclosure: Comcast currently has no ownership interest in the vast majority of programming it distributes ” and it eagerly distributes it and it makes its own content widely available for distribution by competitors. Nothing about the proposed merger will change any of that.

Concerns about Comcast’s interconnection agreement with Netflix are completely misplaced.

• The availability of multiple alternative avenues to deliver traffic to Comcast, and the ready availability of access to a transit market where prices have been falling precipitously, firmly constrain Comcast’s ability to set prices for direct connections. It is also important to appreciate that the bargaining power of Internet edge providers is not nearly as insignificant as some critics would claim.

• Post-merger, the bargaining power of smaller edge providers will not be affected at all.  Small edge providers (who happen also to be the vast majority of participants in the Internet edge ecosystem) will be able to choose from a multitude of interconnection paths in a highly competitive market to deliver their Internet content to Comcast.

• Meanwhile, post-merger, the bargaining power of the few edge providers that generate vast amounts of traffic will not be affected either. In addition to the existence of the multitude of alternative highly competitive paths to deliver traffic to Comcast, these large edge providers will also be able to leverage the high demand for their Internet content among Comcast’s broadband subscribers.

An Appendix to the filing included the summary results of a recent MIT study, Measuring Internet Congestion. The clear implication of the study is that, despite Netflix’s claims that Comcast acts as an insurmountable bottleneck, Netflix has ” and uses ” considerable power in its transactions with Comcast. In particular, as our Reply Comments discuss:

• Large Internet edge providers are able to route their enormous traffic in ways to exert commercial pressure on ISPs, and large edge content providers are able to both determine, as well as avoid (or exploit) congestion at a moment’s notice.

The scholars signing on to the Reply Comment were:

• David Balto, Former Policy Director of the Bureau of Competition of the Federal Trade Commission
• Babette E. Boliek, Associate Professor of Law, Pepperdine University
• Donald J. Boudreaux, Professor of Economics, George Mason University
• Henry N. Butler, Foundation Professor of Law, George Mason University
• Richard A. Epstein, Laurence A. Tisch Professor of Law, New York University
• Thomas A. Lambert, Wall Chair in Corporate Law and Governance, University of Missouri
• Roslyn Layton, Fellow, Center for Communication, Media and Information Technologies, Aalborg University
• Geoffrey A. Manne, Executive Director, International Center for Law & Economics
• Scott E. Masten, Professor of Business Economics and Public Policy, University of Michigan
• Paul H. Rubin, Dobbs Professor of Economics, Emory University
• Michael E. Sykuta, Associate Professor of Economics, University of Missouri

Read the full comments here, and see our other work on the Comcast-Time Warner Cable merger, especially:

 

• ICLE’s Initial Comments in the FCC’s Comcast-TWC Merger Proceeding
• Beneficence Is Beside the Point: The Antitrust Realities of the Comcast/Time Warner Cable Merger, CPI Antitrust Chronicle, Apr. 2014(1).
• Why the Antitrust Realities Support the Comcast-Time Warner Cable Merger, Truth on the Market (Apr. 14, 2014).
• Actually, the Comcast-Time Warner Merger Doesn’t Hurt Netflix, Wired (May 9, 2014).

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Today, the International Center for Law and Economics (ICLE) filed comments in response to the FCC’s public notice requesting public comments on the proposed merger of Comcast Corporation and Time Warner Cable, Inc. The comments focus on analyzing the merger under the consumer welfare standard of antitrust law.

“The most obvious outward effect of this merger will be to change the logo on the side of cable service vans, said Geoffrey Manne, Executive Director of ICLE. That’s a terrible reason for challenging this merger, but most of the criticism amounts to little more than an objection to Comcast taking over Time Warner Cable’s operations in cities where the two companies don’t compete.

Opposition to the merger rests largely on the unsubstantiated belief that ˜big is bad,’ and the highly politicized and emotional belief that the government should ˜do something about Comcast,’ adds Ben Sperry, Associate Director of ICLE. Neither of these concerns has any grounding in fact or in rigorous competition analysis, and we urge the Commission to reject them as grounds for stopping or conditioning this merger.

Foreclosure simply isn’t a problem here, adds Manne. Comcast currently has no ownership interest in the vast majority of programming it distributes ” and yet it eagerly distributes it. And it makes its own content widely available for distribution by competitors. Nothing about the proposed merger will change any of that.

In its merger review, the FCC should consider that:

1. Increased concentration is not, in itself, evidence of anticompetitive effect, as President Obama’s Department of Justice has noted.
2. Product markets should include all the reasonable substitutes to cable, like fiber, wireless, DSL, and satellite.
3. Generally, mergers, like this one, that combine to meet only a 30% threshold (or less, if the market is properly defined) cannot be presumed to enable enough foreclosure to result in consumer harm.
4. Mergers like this one, offer many efficiencies, from increasing shared knowhow among vertical steps in the production chain and increasing bargaining power against strong inputs, to improving governance, reducing transaction costs, and increasing economies of scale that can lead to benefits for consumers.

Read the full comments here. For some of our previous work on the Comcast-TWC merger, see:

• Beneficence Is Beside the Point: The Antitrust Realities of the Comcast/Time Warner Cable Merger, CPI Antitrust Chronicle, Apr. 2014(1).
• Why the Antitrust Realities Support the Comcast-Time Warner Cable Merger, Truth on the Market (Apr. 14, 2014).
• Actually, the Comcast-Time Warner Merger Doesn’t Hurt Netflix, Wired (May 9, 2014).

 

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials.

http://truthonthemarket.com/2014/07/28/joshua-wright-martin-gaynor-and-past-ftc-officials-to-speak-at-icle-event-on-apple-and-amazon-cases/

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why net neutrality regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See the Truth on the Market blog post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive, said Geoffrey Manne, Executive Director of ICLE. If the Internet really is ˜open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?

The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation, said Berin Szoka, President of TechFreedom. In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. So-called reclassification risks catching other Internet services in the crossfire, explained Szoka. The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess ” essentially hitting the pause button on better broadband.

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. This is an absurd interpretation, said Szoka. This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.

A better approach. The best policy would be to maintain the ˜Hands off the Net’ approach that has otherwise prevailed for 20 years, said Manne. That means a general presumption that innovative business models and other forms of ˜prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation, added Szoka. A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission, he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

For some of our other work on net neutrality, see:

Understanding Net(flix) Neutrality, an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

The Feds Lost on Net Neutrality, But Won Control of the Internet, an op-ed by Berin Szoka and Geoffrey Manne in Wired.com.

That startup investors’ letter on net neutrality is a revealing look at what the debate is really about, a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ˜96 Telecom Act is Long Overdue, a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

ICLE and TechFreedom filed joint comments in response to questions from the House Committee on Energy and Commerce relating to its third white paper, “Competition Policy and the Role of the Federal Communications Commission,” in its series of white papers addressing the need for a rewrite of the Communications Act to address modern communications markets.

Our comments focus on the disconnect between the formalism of the current Telecommunications Act and the sort of effects-based analysis that modern competition policy demands:

There is, however, a fairly simple (philosophically, at least) solution: Adopt effects- based competition principles from antitrust to adjudicate disputes arising within the purview of the FCC, and reject the formalistic presumptions and resulting regulatory apparatus of the Communications Act. Such a framework is the best way, perhaps the only way, for Congress to give the FCC both the flexibility needed to keep up with technological change and the analytical rigor needed to ensure that the FCC’s interventions actually do more to help consumers than to harm them.

Whereas the 1996 Act, particularly in Title II, adopts formalistic presumptions and imposes specific regulatory outcomes, even in the face of ever-increasing uncertainty and technological change, an effects-based approach would generally employ ex post analysis of conduct and a broad assessment of its economic consequences to determine the propriety of various actions. Instead of foreclosing or mandating specific conduct, it allows innovation, technological development and changes in consumer preferences to guide conduct, intervening only where actual competitive harms develop (or, in a few cases, are substantially likely to develop in the future).

Such an approach stands in stark contrast to the 1996 Act, which, as Bob Crandall has described it,

is not deregulation but a vast new regulatory program designed to mold and shape competition through mandatory wholesale leasing of pieces of an incredibly complicated network at prices that are based on regulators’ imperfect understanding of costs.

We also address the problem that Net Neutrality presents for sensible competition policy reform at the FCC:

Net Neutrality is, in some ways, borne out of the same realization that animates our comments here: The rise of broadband and the delivery of Everything over IP have so disrupted the existing regulatory regime that competition concerns can no longer be adequately addressed by the existing regulations. But where Net Neutrality falters is in its embrace of both the vertical structural assumptions of the Act, as well as its affinity for the Act’s outdated, ex ante, prescriptive approach. Moreover, Net Neutrality is itself inherently non-neutral, in that it begins with the assumption (discussed above and enshrined in the Act) that innovation and competition in complementary markets should always trump network innovation and competition. As a result, instead of arguing for an ex post assessment of competitive effects arising out of the uncertain and always-evolving relationship between broadband networks and edge providers, Net Neutrality advocates essentially adopt the apparatus of Title II as their competition policy lodestar.

The Comments are available here:

ICLE/TechFreedom Comments on Competition Policy and the Role of the FCC

ICLE has released a new study on the effect of payment card interchange fees on consumers, retailers and banks by Todd Zywicki, Geoffrey Manne and Julian Morris, titled: Price Controls on Payment Card Interchange Fees: The US Experience

Payment cards are frequently safer, quicker, and more convenient than cash or checks. But, according to the new study, interchange fee caps under the Durbin Amendment to the Dodd-Frank financial regulatory reforms have made electronic payments more expensive for consumers. While debit interchange fees charged by regulated banks (those with assets of over $10 billion) in the US fell by about 50% following the regulation, consumers, as well as smaller retailers, have not benefited from the cost reductions — and poorer consumers, especially, have been significantly harmed.

Interchange fee price control proponents claim that reducing these fees reduces costs paid by merchants, who pass the savings on to consumers. But the US experience detailed in the study suggests that, while most large retailers have experienced savings, to date there is no evidence that those savings have been passed-through to consumers.. Meanwhile, smaller merchants haven’t seen any appreciable savings to begin with, and both small and large merchants alike that engage in small-ticket transactions have actually seen costs go up.

At the same time, the costs of operating the payment system have to be recovered somehow “ which has meant an increase in other bank and card charges. In order to make up the estimated $8 billion per year lost as a result of the price controls, regulated banks:

• Reduced the availability of fee-free checking accounts by 50% between 2009 and 2013.
• More than doubled the minimum monthly holding required on fee-free checking accounts.
• Doubled average monthly fees on (non-free) checking accounts.

These changes contributed to a 10% increase in the number of “unbanked” — people without bank accounts.

Thus, while consumers have seen large and immediate increases in the cost of bank accounts, to date there is no evidence of reduced prices at the pump or checkout. The study estimates that as a result of the Durbin Amendment, there will be a net transfer of between $1 billion and $3 billion annually from consumers — especially in low-income households — to large retailers and their shareholders, who have thus far been the primary beneficiaries of the Durbin Amendment.

As the EU considers its own interchange regulation, the US experience should stand as a cautionary tale.

The study is available here:

Price Controls on Payment Card Interchange Fees: The US Experience by Geoffrey A. Manne, Julian Morris & Todd J. Zywicki [updated 5 June 2014 to include abstract]

Today, the International Center for Law & Economics joined a coalition of think tanks, academics and commentators on technology policy in a letter urging the President, Senate Republicans and Senate Democrats to “look foremost for humility as both a guiding principle and a personal characteristic of the candidates” considered for the new Democratic Chairman of the Federal Communications Commission, Republican FCC Commissioner and Democratic Commissioner at the Federal Trade Commission. The full text of the letter follows below:

To: The President, Senate Republicans and Senate Democrats

Date: April 23, 2013

As you consider whom to appoint and confirm to lead the Federal Trade Commission and Federal Communications Commission ”two of the principal agencies that regulate the Internet, telecommunications and emerging digital technologies ” we urge you to look foremost for humility as both a guiding principle and a personal characteristic of the candidates you consider.Many of those who follow Internet policy assume simply that we need more tech-savvy regulators ” in other words, better technocrats. Tech-savvy is important, but not as important as appreciating that even the smartest among us don’t know what the future will look like or how to get there ” as if “there” were a single place. Beware those who talk about “steering” technological change, “comprehensive” approaches, or “pulling policy levers.” These technocratic buzzwords reveal a fundamental misconception: that a better future can be engineered from the top down. Instead, the first rule for policymakers should be:

First, do no harm. We need regulators who can resist the frequent urge to “do something” about problems that are rapidly mooted by technological change anyway. Often, government’s best response is to do nothing. Competition, innovation and criticism from civil society tend to resolve problems better, and faster, than government can and the best kind of law evolves from the bottom up ” through the messy “multi-stakeholder” interaction among civil society groups, media watchdogs, companies and consumers themselves.

Holding companies to the promises that emerge from that ongoing process should be government’s primary role.

The International Center for Law and Economics (ICLE) is pleased to announce that its founder and Executive Director, Geoffrey A. Manne, has been appointed by Federal Communications Commission Chairman Tom Wheeler to serve on the FCC’s Consumer Advisory Committee.

The appointment is for a term of two years, and the Committee will meet a few times a year in Washington, DC. ICLE, and Mr. Manne’s role at ICLE, will be unaffected by his participation on the Committee.

The Consumer Advisory Committee’s mission is:

[T]o make recommendations to the Commission regarding consumer issues within the jurisdiction of the Commission and to facilitate the participation of consumers…

The Committee may consider issues including, but not limited to, the following topics:

• Consumer protection and education
• Implementation of Commission rules and consumer participation in the FCC rulemaking process; and,
• The impact of new and emerging communication technologies…

In particular, as directed by the FCC’s 2015 Open Internet Order, the CAC will formulate and submit to the Commission a proposed Open Internet enhanced transparency rule disclosure format.

A nationally recognized expert in the law and economics of telecommunications, antitrust, consumer protection, intellectual property, and international economic regulation, Geoffrey Manne is the editor, with FTC Commissioner Joshua Wright, of Competition Policy and Intellectual Property Law Under Uncertainty: Regulating Innovation, a volume from Cambridge University Press. His other publications have appeared in the Journal of Competition Law and Economics, the Harvard Journal of Law and Public Policy and the Columbia Business Law Journal, among many other law reviews and popular media outlets.

Mr. Manne has written extensively on consumer protection issues, including the regulation of corporate disclosures, privacy and data security. He is regularly invited to speak on the economic impacts of public policy issues and to provide oral and written testimony on these issues to the United States Congress. Mr. Manne recently participated in the FCC’s Open Internet Roundtable on transparency, and he has filed numerous comments before the FCC and the FTC, as well as amicus briefs in the Supreme Court and several federal appeals courts.

Prior to founding ICLE, Geoffrey Manne was a law professor specializing in antitrust law and economics, intellectual property, corporate governance and international economic regulation at Lewis & Clark Law School in Portland, OR. From 2006-2008, while on leave from teaching, he directed Microsoft’s law and economics academic outreach program.

Mr. Manne practiced antitrust and appellate law at Latham & Watkins LLP, and served as a lecturer in law at the University of Chicago and the University of Virginia law schools. His father, Henry G. Manne, was Dean Emeritus at George Mason University and one of the four founders of the Law and Economics movement.

The FCC announcement can be found here.

Earlier this month New Jersey became the most recent (but likely not the last) state to ban direct sales of automobiles. Although the rule nominally applies more broadly, it is directly aimed at keeping Tesla Motors (or at least its business model) out of New Jersey. Automobile dealers have offered several arguments why the rule is in the public interest, but a little basic economics reveals that these arguments are meritless.

Today ICLE sent an open letter to New Jersey Governor Chris Christie, urging reconsideration of the regulation and explaining why the rule is unjustified — except as rent-seeking protectionism by independent auto dealers.

The letter, which was principally written by University of Michigan law professor, Dan Crane, and based in large part on his blog posts at Truth on the Market (see here and here), was signed by more than 70 economists and law professors.

As the letter notes:

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation.

The letter concludes:

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Among the letter’s signatories are some of the country’s most prominent legal scholars and economists from across the political spectrum.

Read the letter here:

Open Letter to New Jersey Governor Chris Christie on the Direct Automobile Distribution Ban