Antitrust & Competition Policy

Perpetual Techno-Hysteria about Mergers

by Berin Szoka on November 12, 2009 · 5 comments

Mercury News Columnist Chris O’Brien warns Beware the hype around mergers! O’Brien catalogs the many failed that ultimately ended in divestitures in the tech sector in recent years citing data provided by PricewaterhouseCoopers’ Bryan McLaughlin, who estimated tha:

in the third quarter, which ended in September, about 40 percent of the acquisition deals involved some kind of divestiture, up from 25 percent for the same period one year ago. That is, companies weren’t buying smaller, stand-alone outfits; they were buying essentially the castoffs of other companies.

And a recent survey by Pricewaterhouse found that 69 percent of the 215 companies polled expected divestiture activity to either stay the same or increase over the next year.

Many of these divestitures are the fruit of ill-considered acquisitions made over the past few years. This failure rate should come as a surprise to no one in the board room or executive cubicle. A few years ago, McKinsey & Co. published a study indicating that 70 percent of mergers failed to generate the expected returns. Hope, however, seems to spring eternal in boardrooms as companies keep making deals.

Let’s try to keep these failure rates in mind as we see increased antitrust fervor about blocking or otherwise restricting or simply bogging down mergers. The truth is that most mergers don’t work out in the end. But that’s an argument against aggressive antitrust enforcement scratch that intervention, rather than for it, because some mergers do create great value for consumers through greater efficiencies and government bureaucrats are unlikely to be able to guess which are which. If they could, they’d be making a fortune in the private sector advising companies how to avoid boneheaded deals! This problem is particularly acute in the tech sector, where today’s leaders tend to become tomorrow’s laggards because of the inevitability of disruptive innovation, which big companies manage poorly.

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Europeans Obstruct Oracle/Sun Deal

by Berin Szoka on November 10, 2009 · 13 comments

One might have thought European Commission antitrust regulators had their hands full with harassing Microsoft about the “Browser Ballot” (our comments) and fining Intel, but apparently they’re already looking for new targets so they can “stay busy”: Sun disclosed on Monday that the EC had objected to the “combination of Sun’s open source MySQL database product with Oracle’s enterprise database products and its potential negative effects on competition in the market for database products.”

It’s difficult to see how Oracle’s takeover of Sun would reduce competition in the intensely competitive database market. Since Sun’s MySQL software is open source and uses the strongly “copyleft” GNU General Public License (GPL) v2, Oracle will have little control over its future evolution. If Oracle decided to stop updating MySQL tomorrow, anyone in the MySQL development community could simply “fork” the project. Oracle knows this. (Do the European regulators?) If anything, Oracle’s proposed acquisition of Sun indicates that they are embracing the business model of commercial open source. In Sun’s case, that has meant striving to lead the best collaborative project possible and making money on providing the best product support.

European antitrust regulators should be celebrating this deal, rather than obstructing it.

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Against Browser Ballot Mandates: EC Now Designing Software?

by Adam Marcus on November 10, 2009 · 8 comments

The European Commission is now designing software. And that software is Microsoft Windows…

Comments of Adam Marcus & Berin Szoka to the European Commission on the Matter of Microsoft’s Browser Ballot Proposal, COMP/C-3/39.530 — Microsoft (Tying)*

Submitted Nov. 9, 2009 [PDF of filing]

We applaud the Commission for not repeating its earlier approach to concerns about tie-ins to Microsoft Windows by ordering Microsoft to cripple the functionality of its operating system— such as occurred with the Windows Media Player. While a “browser ballot” is certainly a less restrictive approach, we remain unconvinced that mandating such a ballot is necessary in this case, and concerned about the precedent that government intervention may set here for the future of the highly dynamic and innovative software sector. If, however, a ballot is to be required, we encourage the Commission to accept Microsoft’s ballot as proposed.

A Browser Ballot Mandate Is Not Necessary

The European Community’s Discussion Paper on exclusionary abuses recognizes that bundled discounts infringe Article 82 only when the discount is so large that “efficient competitors offering only some but not all of the components, cannot compete against the discounted bundle.”[1] In this case, a number of alternative browser producers have successfully competed against Internet Explorer in the past—despite it being bundled with Microsoft’s Windows operating system. Continue reading →

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Introducing ACT’s “This Week in Antitrust”

by Braden Cox on October 27, 2009 · 4 comments

There are a lot of interesting weekly roundups on the ‘Net. A search on “this week in” using Google reveals these weekly segments (among the top 50 results) on:

pictures

science

education

the history of chemistry

the Poconos

blackness

evolution

virology

amateur radio

Palestine

My colleagues at ACT aim to join the Poconos and Palestine by adding “antitrust” to the list! Per the ACT blog:

Today, we’re kicking off a new feature on the blog, a weekly round up of the tech industry’s various antitrust cases and “potential” antitrust concerns. While last week’s antitrust news was dominated by competition concerns outside the technology industry (health insurers and the BCS), there were a few notable stories coming out of the world tech competition.

It goes on to list antitrust discussion around Amazon, IBM, Google, Microsoft, and Oracle/Sun. Given the hard line talk from Christine Varney, head of DOJ’s antitrust division, this could be an ACTive weekly blog.

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Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction

by Berin Szoka on October 23, 2009 · 43 comments

by Berin Szoka & Adam Thierer, Progress Snapshot 5.11 (PDF)

Ten years ago, Nobel Prize-winning economist Milton Friedman lamented the “Business Community’s Suicidal Impulse:” the persistent propensity to persecute one’s competitors through regulation or the threat thereof. Friedman asked: “Is it really in the self-interest of Silicon Valley to set the government on Microsoft?” After yesterday’s FCC vote’s to open a formal “Net Neutrality” rule-making, we must ask whether the high-tech industry—or consumers—will benefit from inviting government regulation of the Internet under the mantra of “neutrality.”

The hatred directed at Microsoft in the 1990s has more recently been focused on the industry that has brought broadband to Americans’ homes (Internet Service Providers) and the company that has done more than any other to make the web useful (Google). Both have been attacked for exercising supposed “gatekeeper” control over the Internet in one fashion or another. They are now turning their guns on each other—the first strikes in what threatens to become an all-out, thermonuclear war in the tech industry over increasingly broad neutrality mandates. Unless we find a way to achieve “Digital Détente,” the consequences of this increasing regulatory brinkmanship will be “mutually assured destruction” (MAD) for industry and consumers.

New Fronts in the Neutrality Wars

The FCC’s proposed rules would apply to all broadband providers, including wireless, but not to Google or many other players operating in other layers of the Net who favor such broadband-specific rules. With this rulemaking looming, AT&T came after Google with letters to the FCC in late September and then another last week accusing the company of violating neutrality principles in their business practices and arguing that any neutrality rules that apply to ISPs should apply equally to Google’s panoply of popular services. In particular, AT&T accused Google of “search engine bias,” suggesting that only government-enforced neutrality mandates could protect consumers from Google’s supposed “monopolist” control.

The promise made yesterday by the FCC—to only apply neutrality principles to the infrastructure layer of the Net—is hollow and will ultimately prove unenforceable. Continue reading →

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My Net Neutrality Debate with Public Knowledge

by Berin Szoka on October 8, 2009 · 12 comments

I debated PK’s Art Brodsky last week about net neutrality on the international news channel, RussiaToday. Here are a few of my key points of disagreement with Art:

The glittering generality of “Neutrality,” once enshrined in law for one layer of the Internet will be extended, sooner or later, to other layers. As Adam and I have warned, “the same rationale would apply equally to any circumstance in which access to a communications platform is supposedly limited to a few ‘gatekeepers.'” We’re already seeing this with fights over application neutrality and device neutrality, and calls for search neutrality are growing.
Art insists that antitrust suits work too slowly. But he doesn’t address the basic question of what standard should govern network management. Should it be “neutrality uber alles” or, if we’re going to regulate in fashion, why shouldn’t we ask what’s good for consumers—the standard proposed by PFF’s 2005 Digital Age Communications Act (DACA)? Neutrality isn’t always best!
Common carriage regulation didn’t work well for railroads (contrary to popular myth) and it worked even less well for communications media, retarding the development of new services like faxes, Internet services and cell phones. Regulating broadband providers the same way will work even more poorly because they aren’t just “big dumb pipes” providing a plain vanilla service and incapable of innovation that can benefit consumers.

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Wu (2006) is right on Google Books Search

by Jerry Brito on October 4, 2009 · 4 comments

In his latest Slate column, Tim Wu endorses a modified Google Books Search settlement because he fears that without such a deal–through which a giant like Google gets a de facto monopoly–we will never see an online library that includes orphan works and out-of-print books. He writes:

Books in strong demand, whether old (Dracula) or contemporary (Never Let Me Go), are in print and available no matter what happens. … The Google Book Search settlement makes it easier to get books few people want, like the Windows 95 Quick Reference Guide, whose current Amazon sales rank is 7,811,396, or The Wired Nation, which in 1972 predicted a utopian age centered on cable television. These are titles of enormous value for research and that appeal to a certain type of obsessive. Yet they are also unlikely to be worth much money.

And this, I hope, makes clear my point. A delivery system for books that few people want is not a business one builds for financial reasons. Over history, such projects are usually built not by the market but by mad emperors. No bean counter would have approved the Library of Alexandria or the Taj Mahal.

I’m curious how Prof. Wu can square that with what he wrote in his Slate review of Chris Anderson’s The Long Tail in 2006:

The products in the Long Tail are less popular in a mass sense, but still popular in a niche sense. What that means is that some businesses, like Amazon and Google, can make money not just on big hits, but by eating the Long Tail. They can live like a blue whale, growing fat by eating millions of tiny shrimp. …

What are the Long Tail’s limits? As a business model, it matters most 1) where the price of carrying additional inventory approaches zero and 2) where consumers have strong and heterogeneous preferences. When these two conditions are satisfied, a company can radically enlarge its inventory and make money raking in the niche demand. This is the lifeblood of a handful of products and companies, Apple’s iTunes, Netflix, and Google among them, all of which are basically in the business of aggregating content. It doesn’t cost much to add another song to iTunes—having 10,000 songs available costs about the same as having 1 million. Moreover, people’s music preferences are intense—fans of Tchaikovsky aren’t usually into Lordi.

Scanning books is expensive, but not so expensive that we need the government or a regulated utility provider (as Wu suggests) to do it. If a fair use exemption or other workaround was available, I’m sure we’d see more than one competitor jump into the space. Like Prof. Wu understood in 2006, and as Google knows now, there is lots of money to be made in hyper-narrow niches.

Cross-posted from Surprisingly Free. Leave a comment on the original article.

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Social Advertising Is Just Around the Corner: Why A Facebook Ad Network Would Benefit Users

by Berin Szoka on October 1, 2009 · 17 comments

It seems the whole web is incorporating social networking functionality. Microsoft recently led the way in incorporating functionality to search, allowing users to share search results they like with their social networking contacts directly from the search results page through Twitter and Facebook. I’ve also noted that it’s just a matter of time before the same thing happens with advertising—and that Facebook will likely lead the way.

Websites have long used social networking buttons to encourage visitors to join their Facebook group, follow them on Twitter, etc. Facebook recently made this even easier by creating a widget for pages that can easily be embedded on any site. So why is Facebook blocking advertisers from including social networking functionality in ads like this one? Facebook’s terms of service using the new Fan Box widget in ads. Facebook’s spokesperson told InsideFacebook.com:

We want Page owners to have an easy way to connect with fans both on and off of Facebook. In order to protect the the Fan Box widget from being used for the wrong reasons, we do not allow it to be used in third party advertising.

InsideFacebook.com speculates:

it’s safe to assume that Facebook wants to protect the “Become a Fan” experience from becoming too intertwined with aggressive online ads that it hasn’t approved. One can imagine the variety of ways advertisers could (potentially misleadingly) push users to become a fan in an ad unit on a web site, then pollute their Facebook stream later. Facebook wants more control over that experience, even if it means partially restricting growth for Facebook Pages.

So why might policymakers be interested in this? Because, as Fred Vogelstein predicted in Wired this June, Facebook will likely someday soon expand beyond selling ads on its own site to selling ads on the wider Internet that incorporate social networking functionality like the “Become a fan” button above. There is a vast untapped market for online advertising, and if Facebook’s going to get a piece of it, they’ll have to offer something no other ad network can. If and when this happens, Facebook will likely get a lot of grief from the anti-advertising zealots, but this would actually be a good thing for consumers for five reasons: Continue reading →

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Apple rejected my iPhone App, and I’m glad

by Jerry Brito on September 28, 2009 · 134 comments

One of the projects I run is OpenRegs.com, an alternative interface to the federal government’s official Regulations.gov site. With the help of Peter Snyder, we recently developed an iPhone app that would put the Federal Register in your pocket. We duly submitted it to Apple over a week ago, and just received a message letting us know that the app has been rejected.

The reason? Our app “uses a standard Action button for an action which is not its intended purpose.” The action button looks like the icon to the right.

According to Apple’s Human Interface Guidelines, its purpose is to “open an action sheet that allows users to take an application-specific action.” We used it to bring up a view from which a user could email a particular federal regulation. Instead, we should have used an envelope icon or something similar. Sounds like an incredibly fastidious reason to reject an application, right? It is, and I’m glad they can do so.
Continue reading →

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The Washington Post Slams Net Neutrality Regulation

by Berin Szoka on September 28, 2009 · 15 comments

The Post, hardly a bastion of radical cyber-libertarianism, has come out strongly against FCC Chairman Julius Genachowski’s plans to have the FCC issue “Net Neutrality” regulations. The editorial asks the critical threshold question we crazy cyber-libertarians always insist on:

Is this intervention necessary?

Mr. Genachowski claims to have seen “breaks and cracks” in the Internet that threaten to change the “fundamental architecture of openness.” He and other proponents of federal involvement cite a handful of cases they say prove that, left to their own devices, ISPs… will choke the free flow of information and technology. One example alluded to by the chairman: Comcast’s blocking an application by BitTorrent that would allow peer-to-peer video sharing. Yet that conflict was ultimately resolved by the two companies — without FCC intervention — after Comcast’s alleged bad behavior was exposed by a blogger.

Thus, the FCC oppposes pre-emptive regulation that would “prohibit ISPs from ‘discriminating against’ different applications,” noting that this would mean that “ISPs, which have poured billions of dollars into building infrastructure, would have little control — if any — over the kinds of information and technology flowing through their pipes.”

Three cheers for the Post for recognizing both the property rights of ISPs in their networks and the fact that, even with Genachowski’s “slight concession” to allow “managed services in limited circumstances… unneeded regulation could still interfere with [ISPs] ability to manage bandwidth-hogging applications that can hamper service, especially during peak times.” Instead, the Post called for simple transparency, supporting a requirement that “ISPs be candid with the agency and the public about network management practices. The last paragraph hits the ball out of the park:

Mr. Genachowski claims that the FCC “will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity and entrepreneurial activity.” He will advance this goal by insisting on transparency; he will jeopardize it — and stifle further investments by ISPs — with attempts to micromanage what has been a vibrant and well-functioning marketplace.

Amen! The Post is about as “mainstream” as it gets in American journalism, so their strong opposition really underscores that preemptive “net neutrality” regulation isn’t the popular cause some in Washington think it is. It is simply infrastructure socialism.

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