Antitrust & Competition Policy

When it comes to the threat of automation, I agree with Ryan Khurana: “From self-driving car crashes to failed workplace algorithms, many AI tools fail to perform simple tasks humans excel at, let alone far surpass us in every way.” Like myself, he is skeptical that automation will unravel the labor market, pointing out that “[The] conflation of what AI ‘may one day do’ with the much more mundane ‘what software can do today’ creates a powerful narrative around automation that accepts no refutation.”

Khurana marshals a number of examples to make this point:

Google needs to use human callers to impersonate its Duplex system on up to a quarter of calls, and Uber needs crowd-sourced labor to ensure its automated identification system remains fast, but admitting this makes them look less automated…

London-based investment firm MMC Ventures found that out of the 2,830 startups they identified as being “AI-focused” in Europe, 40% used no machine learning tools, whatsoever.

I’ve been collecting examples of the AI hype machine as well. Here are some of my favorites. Continue reading →

A decade ago, a heated debate raged over the benefits of “a la carte” (or “unbundling”) mandates for cable and satellite TV operators. Regulatory advocates said consumers wanted to buy all TV channels individually to lower costs. The FCC under former Republican Chairman Kevin Martin got close to mandating a la carte regulation.

But the math just didn’t add up. A la carte mandates, many economists noted, would actually cost consumers just as much (or even more) once they repurchased all the individual channels they desired. And it wasn’t clear people really wanted a completely atomized one-by-one content shopping experience anyway.

Throughout media history, bundles of all different sorts had been used across many different sectors (books, newspapers, music, etc.). This was because consumers often enjoyed the benefits of getting a package of diverse content delivered to them in an all-in-one package. Bundling also helped media operators create and sustain a diversity of content using creative cross-subsidization schemes. The traditional newspaper format and business is perhaps the greatest example of media bundling. The classifieds and sports sections helped cross-subsidize hard news (especially local reporting). See this 2008 essay by Jeff Eisenach and me for details for more details on the economics of a la carte.

Yet, with the rise of cable and satellite television, some critics protested the use of bundles for delivering content. Even though it was clear that the incredible diversity of 500+ channels on pay TV was directly attributable to strong channels cross-subsidizing weaker ones, many regulatory advocates said we would be better off without bundles. Moreover, they said, online video markets could show us the path forward in the form of radically atomized content options and cheaper prices.

Flash-forward to today. Continue reading →

Image result for joseph schumpeterIn my first essay for the American Institute for Economic Research, I discuss what lessons the great prophet of innovation Joseph Schumpeter might have for us in the midst of today’s “techlash” and rising tide of techopanics.  I argue that, “[i]f Schumpeter were alive today, he’d have two important lessons to teach us about the techlash and why we should be wary of misguided interventions into the Digital Economy.” Specifically:
We can summarize Schumpeter’s first lesson in two words: Change happens. But disruptive change only happens in the right policy environment. Which gets to the second great lesson that Schumpeter can still teach us today, and which can also be summarized in two words: Incentives matter. Entrepreneurs will continuously drive dynamic, disruptive change, but only if public policy allows it.
Schumpeter’s now-famous model of “creative destruction” explained why economies are never in a state static equilibrium and that entrepreneurial competition comes from many (usually completely unpredictable) sources. “This kind of competition is much more effective than the other,” he argued, because the “ever-present threat” of dynamic, disruptive change, “disciplines before it attacks.”
But if we want innovators to take big risks and challenge existing incumbents and their market power, then it is essential that we get policy incentives right or else this sort of creative destruction will never come about. The problem with too much of today’s “techlash” thinking is that it imagines the current players are here to stay and that their market power is unassailable. Again, that is static “snapshot” thinking that ignores the reality that new generations of entrepreneurs are in a sort of race for a prize and will make big bets on the future in the face of seemingly astronomical odds against their success. But we have to give them a chance to win that “prize” if we want to see that dynamic, disruptive change happen.
As always, we have much to learn from Schumpeter. Jump over to the AIER website to read the entire essay.

Recently, Noah Smith explored an emerging question in tech. Is there a kill zone where new and innovative upstarts are being throttled by the biggest players? He explains,

Facebook commissioned a study by consultant Oliver Wyman that concluded that venture investment in the technology sector wasn’t lower than in other sectors, which led Wyman to conclude that there was no kill zone.

But economist Ian Hathaway noted that looking at the overall technology industry was too broad. Examining three specific industry categories — internet retail, internet software and social/platform software, corresponding to the industries dominated by Amazon, Google and Facebook, respectively — Hathaway found that initial venture-capital financings have declined by much more in the past few years than in comparable industries. That suggests the kill zone is real.

A recent paper by economists Wen Wen and Feng Zhu reaches a similar conclusion. Observing that Google has tended to follow Apple in deciding which mobile-app markets to enter, they assessed whether the threat of potential entry by Google (as measured by Apple’s actions) deters innovation by startups making apps for Google’s Android platform. They conclude that when the threat of the platform owner’s entry is higher, fewer app makers will be interested in offering a product for that particular niche. A 2014 paper by the same authors found similar results for Amazon and third-party merchants using its platform.

So, are American tech companies making it difficult for startups? Perhaps, but there are some other reasons to be skeptical. Continue reading →

The Supreme Court is winding down for the year and last week put out a much awaited decision in Ohio v. American Express. Some have rung the alarm with this case, but I think caution is worthwhile. In short, the Court’s analysis wasn’t expansive like some have claimed, but incomplete. There are a lot of important details to this case and the guideposts it has provided will likely be fought over in future litigation over platform regulation. To narrow the scope of this post, I am going to focus on the market definition question and the issue of two-sided platforms in light of the developments in the industrial organization (IO) literature in the past two decades. Continue reading →

Voices from all over the political and professional spectrum have been clamoring for tech companies to be broken up. Tech investor Roger McNamee, machine learning pioneer Yoshua BengioNYU professor Scott Galloway, and even Marco Rubio’s 2016 presidential digital director have all suggested that tech companies should be forcibly separated. So, I took a look at some of the past efforts in a new survey of corporate breakups and found that they really weren’t all that effective at creating competitive markets.

Although many consider Standard Oil and AT&T as classic cases, I think United States v. American Tobacco Company is far more instructive.  Continue reading →

Two years ago, ProPublica initiated a conversation over the use of risk assessment algorithms when they concluded that a widely used “score proved remarkably unreliable in forecasting violent crime” in Florida. Their examination of the racial disparities in scoring has been cited countless times, often as a proxy for the power of automation and algorithms in daily life. Indeed, as the authors concluded, these scores are “part of a part of a larger examination of the powerful, largely hidden effect of algorithms in American life.”

As this examination continues, two precepts are worth keeping in mind. First, the social significance of algorithms needs to be considered, not just their internal model significance. While the accuracy of algorithms are important, more emphasis should be placed on how they are used within institutional settings. And second, fairness is not a single idea. Mandates for certain kinds of fairness could come at the expense of others forms of fairness. As always, policymakers need to be cognizant of the trade offs.   Continue reading →

Mobile broadband is a tough business in the US. There are four national carriers–Verizon, AT&T, T-Mobile, and Sprint–but since about 2011, mergers have been contemplated (and attempted, but blocked). Recently, the competition has gotten fiercer. The higher data buckets and unlimited data plans have been great for consumers.

The FCC’s latest mobile competition report, citing UBS data, says that industry ARPU (basically, monthly revenue per subscriber), which had been pretty stable since 1998, declined significantly from 2013 to 2016 from about $46 to about $36. These revenue pressures seemed to fall hardest on Sprint, who in February, issued $1.5 billion of “junk bonds” to help fund its network investments. Analysts pointed out in 2016 that “Sprint has not reported full-year net profits since 2006.” Further, mobile TV watching is becoming a bigger business. AT&T and Verizon both plan to offer a TV bundle to their wireless customers this year, and T-Mobile’s purchase of Layer3 indicates an interest in offering a mobile TV service.

It’s these trends that probably pushed T-Mobile and Sprint to announce yesterday their intention to merge. All eyes will be on the DOJ and the FCC as their competition divisions consider whether to approve the merger.

The Core Arguments

Merger opponents’ primary argument is what’s been raised several times since the 2011 AT&T-T-Mobile aborted merger: this “4 to 3” merger significantly raises the prospect of “tacit collusion.” After the merger, the story goes, the 3 remaining mobile carriers won’t work as hard to lower prices or improve services. While outright collusion on prices is illegal, they have a point that tacit collusion is more difficult for regulators to prove, to prevent, and to prosecute.

The counterargument, that T-Mobile and Sprint are already making, is that “mobile” is not a distinct market anymore–technologies and services are converging. Therefore, tacit collusion won’t be feasible because mobile broadband is increasingly competing with landline broadband providers (like Comcast and Charter), and possibly even media companies (like Netflix and Disney). Further, they claim, T-Mobile and Sprint going it alone will each struggle to deploy a capex-intensive 5G network that can compete with AT&T, Verizon, Comcast-NBCU, and the rest, but the merged company will be a formidable competitor in TV and in consumer and enterprise broadband.

Competitive Review

Any prediction about whether the deal will be approved or denied is premature. This is a horizontal merger in a highly-visible industry and it will receive an intense antitrust review. (Rachel Barkow and Peter Huber have an informative 2001 law journal article about telecom mergers at the DOJ and FCC.) The DOJ and FCC will seek years of emails and financial records from Sprint and T-Mobile executives and attempt to ascertain the “real” motivation for the merger and its likely consumer effects.

T-Mobile and Sprint will likely lean on evidence that consumers view (or soon will view) mobile broadband and TV as a substitute for landline broadband and TV. Much like phone and TV went from “local markets with one or two competitors” years ago to a “national market with several competitors,” their story seems to be, broadband is following a similar trajectory and viewing this as a 4 to 3 merger misreads industry trends.

There’s preliminary evidence that mobile broadband will put competitive pressure on conventional, landline broadband. Census surveys indicate that in 2013, 10% of Internet-using households were mobile Internet only (no landline Internet). By 2015, about 20% of households were mobile-only, and the proportion of Internet users who had landline broadband actually fell from 82% to 75%. But this is still preliminary and I haven’t seen economic evidence yet that mobile is putting pricing pressure on landline TV and broadband.

FCC Review

Antitrust review is only one step, however. The FCC transaction review process is typically longer and harder to predict. The FCC has concurrent authority with the DOJ under the Clayton Act to review telecommunications mergers under Sections 7 and 11 of the Clayton Act but it has never used that authority. Instead, the FCC uses its spectrum transfer review authority as a hook to evaluate mergers using the Communication Act’s (vague) “public interest standard.” Unlike antitrust standards, which generally put the burden on regulators to show consumer and competitive harm, the public interest standard as currently interpreted puts the burden on merging companies to show social and competitive benefits.

Hopefully the FCC will hew to a more rigorous antitrust inquiry and reform the open-ended public interest inquiry. As Chris Koopman and I wrote for the law journal a few years ago, these FCC  “public interest” reviews are sometimes excessively long and advocates use the vague standards to force the FCC into ancillary concerns, like TV programming decisions and “net neutrality” compliance.

Part of the public interest inquiry is a complex “spectrum screen” analysis. Basically, transacting companies can’t have too much “good” spectrum in a single regional market. I doubt the spectrum screen analysis would be dispositive (much of the analysis in the past seemed pretty ad hoc), but I do wonder if it will be an issue since this was a major issue raised in the AT&T-T-Mobile attempted merger.

In any case, that’s where I see the core issues, though we’ll learn much more as the merger reviews commence.

On March 19th, I had the chance to debate Franklin Foer at a Patrick Henry College event focused on the question, “Is Big Tech Big Brother?” It was billed as a debate over the role of technology in American society and whether government should be regulating media and technology platforms more generally.  [The full event video is here.] Foer is the author of the new book, World Without Mind: The Existential Threat of Big Tech, in which he advocates a fairly expansive regulatory regime for modern information technology platforms. He is open to building on regulatory ideas from the past, including broadcast-esque licensing regimes, “Fairness Doctrine”-like mandates for digital intermediaries, “fiduciary” responsibilities, beefed-up antitrust intervention, and other types of controls. In a review of the book for Reason, and then again during the debate at Patrick Henry University, I offered some reflections on what we can learn from history about how well ideas like those worked out in practice.

My closing statement of the debate, which lasted just a little over three minutes, offers a concise summation of what that history teaches us and why it would be so dangerous to repeat the mistakes of the past by wandering down that disastrous path again. That 3-minute clip is posted below. (The audience was polled before and after the event and asked the same question each time: “Do large tech companies wield too much power in our economy, media and personal lives and if so, should government(s) intervene?” Apparently at the beginning, the poll was roughly Yes – 70% and No – 30%, but after the debated ended it has reversed, with only 30% in favor of intervention and 70% against. Glad to turn around some minds on this one!)

via ytCropper

Image result for Zuckerberg Schmidt laughing

Two weeks ago, as Facebook CEO Mark Zuckerberg was getting grilled by Congress during a two-day media circus set of hearings, I wrote a counterintuitive essay about how it could end up being Facebook’s greatest moment. How could that be? As I argued in the piece, with an avalanche of new rules looming, “Facebook is potentially poised to score its greatest victory ever as it begins the transition to regulated monopoly status, solidifying its market power, and limiting threats from new rivals.”

With the exception of probably only Google, no firm other than Facebook likely has enough lawyers, lobbyists, and money to deal with layers of red tape and corresponding regulatory compliance headaches that lie ahead. That’s true both here and especially abroad in Europe, which continues to pile on new privacy and “data protection” regulations. While such rules come wrapped in the very best of intentions, there’s just no getting around the fact that regulation has costs. In this case, the unintended consequence of well-intentioned data privacy rules is that the emerging regulatory regime will likely discourage (or potentially even destroy) the chances of getting the new types of innovation and competition that we so desperately need right now.

Others now appear to be coming around to this view. On April 23, both the New York Times and The Wall Street Journal ran feature articles with remarkably similar titles and themes. The New York Times article by Daisuke Wakabayashi and Adam Satariano was titled, “How Looming Privacy Regulations May Strengthen Facebook and Google,” and The Wall Street Journal’s piece, “Google and Facebook Likely to Benefit From Europe’s Privacy Crackdown,” was penned by Sam Schechner and Nick Kostov.

“In Europe and the United States, the conventional wisdom is that regulation is needed to force Silicon Valley’s digital giants to respect people’s online privacy. But new rules may instead serve to strengthen Facebook’s and Google’s hegemony and extend their lead on the internet,” note Wakabayashi and Satariano in the NYT essay. They continue on to note how “past attempts at privacy regulation have done little to mitigate the power of tech firms.” This includes regulations like Europe’s “right to be forgotten” requirement, which has essentially put Google in a privileged position as the “chief arbiter of what information is kept online in Europe.”
Continue reading →