Why is it illegal in many states to purchase an electric vehicle directly from a manufacturer? In this new Federalist Society podcast, Univ. of Michigan law school professor Daniel Crane and I examine how state protectionist barriers block choice and innovation for no good reason whatsoever. The only group that benefits from these protectionist, anti-consumer direct sales bans are local car dealers who don’t want the competition.

Additional Reading :

• Daniel A. Crane, “Reforming Michigan Vehicle Direct Sales Laws,” Regulation, Summer 2021.
• Adam Thierer, “Why make direct car-buying illegal?” Tribune News Service, April 18, 2022.
• Adam Thierer & Christopher M. Kaiser, “The Contradictions and Confusion of Getting Americans To Buy Electric Cars,” Discourse, March 10, 2022.

Corbin Barthold invited me on Tech Freedom’s “Tech Policy Podcast” to discuss the history of antitrust and competition policy over the past half century. We covered a huge range of cases and controversies, including: the DOJ’s mega cases against IBM & AT&T, Blockbuster and Hollywood Video’s derailed merger, the Sirius-XM deal, the hysteria over the AOL-Time Warner merger, the evolution of competition in mobile markets, and how we finally ended that dreaded old MySpace monopoly!

What does the future hold for Google, Facebook, Amazon, and Netflix? Do antitrust regulators at the DOJ or FTC have enough to mount a case against these firms? Which case is most likely to have legs?

Corbin and I also talked about the of progress more generally and the troubling rise of more and more Luddite thinking on both the left and right. I encourage you to give it a listen:

The Federal Trade Commission (FTC) voted on July 1 to withdraw its pubic affirmation of consumer welfare as the guiding principle for antitrust enforcement. While this change is symbolic at this point, it weakens the agency’s public commitment to an objective consumer-based approach to antitrust. The result opens the door to politicized and unprincipled antitrust enforcement that will ultimately hurt rather than benefit consumers.

The FTC is the nation’s primary consumer protection agency, focused on ensuring a healthy market that avoids the dangers of monopolistic practices. The statement on the agency’s antitrust enforcement had been uncontroversial up to this point. A bipartisan group of commissioners passed the statement in 2015—during the Obama Administration—and the statement primarily clarified that the FTC’s antitrust enforcement under Section 5 of the FTC Act concerning the agency’s authority over unfair and deceptive trade practices was guided by consumer welfare. In other words, the FTC would focus on those acts that cause or are likely to cause harm to consumers, based on objective economic analysis rather than the effects of business moves on competition itself or other policy standards. The statement sought to provide clarity to consumers and businesses, and in fact, the sole vote against it was on the basis that the statement was too abbreviated to provide meaningful guidance.

Despite these uncontroversial origins, on Thursday at a hastily announced open meeting, the current FTC voted 3-2 to withdraw this statement. The withdrawal of the FTC’s statement is the latest signal that antitrust policy, particularly at the FTC, is shifting away from focusing on consumers and using the consumer welfare standard.  Instead, there are now real concerns the FTC will enforce antitrust policy in a way that promotes competitors or ideology at consumers’ expense.

Most specifically, rejecting the consumer welfare standard signals the FTC may apply its enforcement power in more subjective ways based in changing political motives and policy preference, as was seen in earlier eras of antitrust enforcement. For example, if not focused on the consumer welfare standard, the FTC could act against some of the largest tech companies to break them up or prevent mergers even though consumers were not harmed—or were even helped—by these changes in the market. This shift would have three specific, if related, implications.

First, it would undermine confidence among consumers in the FTC’s actions. It is far less clear now by what standards antitrust enforcement will be guided and if they are truly objective. As a result, it is unclear what the purpose behind enforcement is.

Second, such expansive enforcement could diminish the options available to consumers. Without the consumer welfare standard, aggressive antitrust enforcement could lead to regulatory interventions in competitive and dynamic markets apart from a data-based and consumer-focused analysis. The result of such unnecessary enforcement could be to raise costs or eliminate products, preventing consumers from having access to products they enjoy or face higher prices, not because of unfair or anti-competitive behavior but because of political animus against a particular industry.

Finally, this shift away from the consumer welfare standard is likely to result in inefficient markets. Unprincipled or politically motivated enforcement could result in some products and services never making it to consumers. In other cases, markets may find certain “competitors” kept alive past their value, or other markets could remain with few choices because companies fear that entrance would be considered anticompetitive. Without the consumer welfare standard, misguided notions of concentration or “bigness” could result in a less beneficial market and instead benefit competitors with inferior products that would not have otherwise survived—all to the detriment of consumers.

When regulators move away from an objective, consumer-focused approach to antitrust, it is ultimately the consumers who are harmed in the form of higher prices, inferior products, and less innovation. As Commissioner Christine Wilson stated prior to the vote, “If the Commission is no longer focused on consumer welfare then consumers will be harmed.”

Is it a time for the return of the trustbusters? Some politicians seem to imply that today’s tech giants have become modern day robber barons taking advantage of the American consumer and, as a result, they argue that it is time for a return of aggressive antitrust enforcement and for dramatic changes to existing antitrust interpretations to address the concerns associated with today’s big business.

This criticism is not limited to one side of the aisle, with Senators Amy Klobuchar (D-MN) and Josh Hawley (R-MO) both proposing their own dramatic overhauls of antitrust laws and the House Judiciary Committee majority issuing a report that greatly criticizes the current technology market. In both cases these new proposals create presumptive bans on mergers for companies of certain size and lower the burdens on the government for intervening and proving its case. I have previously analyzed the potential impact of Senator Klobuchar’s proposal, and Senator Hawley’s proposal raises many similar concerns when it comes to its merger ban and shift away from existing objective standards.

Proponents on both sides of the aisle argue changing current antitrust standards is needed to fight big business, but sadly these modern-day trustbusters may not be the heroes they see themselves as. In fact, such a shift would harm American consumers and small businesses well beyond the tech sector.

The Trustbusters-Era Standards Would Fail Consumers

The original trustbusters of the late 19^th and early 20^th century created a system that was not always clear and could be abused by regulators subjectively determining what was and was not anti-competitive behavior. The result was that, in this earlier era, businesses and consumers could never be certain what behaviors would be considered violations.

The shift to the consumer welfare standard helped fixed that problem by providing an objective framework using economic analysis to weigh the risk and benefits of behavior and judging it based on its impact on consumers and not specific competitors. Unfortunately, these new proposals would shift away from this objective focus and return to a presumption that big is bad. This shift would be bad news not only for big business but for smaller businesses and consumers as well. Small businesses would lose an important exit strategy option with the presumptive ban on mergers with large companies, and consumers would miss out on benefits such as price reductions, improvements, and innovations that these mergers could bring.

While much of the debate around antitrust changes focuses on large tech firms such as Google, Apple, Facebook, and Amazon, changing antitrust laws would impact far more of the economy than just tech. Both the Hawley and Klobuchar proposals would bar mergers unless there is strong evidence proving their value (a “regulatory presumption” against mergers), but this presumption would impact industries such as pharmaceuticals, finance, and agriculture that also frequently have mergers and acquisitions that benefit consumers by helping to expand the distribution of a product or improve on an existing service. In fact, companies including L’Oreal and Nike could find any mergers or acquisitions presumptively prohibited under the limits in these proposals.

Existing Standards Can Adapt to Dynamic Markets Like Tech

Existing standards are still able to address the concerns associated with this dynamic and changing markets as well as more established markets. For example, the Antitrust Modernization Commission concluded, “There is no need to revise the antitrust laws to apply different rules to industries in which innovation, intellectual property, and technological change are central features.”

Sometimes regulators’ sense of the market in technology may prove to be wrong by the evolution of a technology or the disruption caused by a dramatic shift in the industry. For example, debates used to be focused on MySpace and AOL , which have now become things of internet nostalgia. Today’s tech giants are facing growing challenges not only from each other in many cases, but also from many newer entrants, from ClubHouse and TikTok to Zoom and Shopify. Removing the need to firmly establish the existing standards of an antitrust case would risk unnecessary intervention into the market or, more likely, could prevent actions that benefit consumers.

Some question whether this economic analysis-based standard can handle the zero-price services offered by many technology companies. While price is often the easiest focus, this standard also considers issues such as quality and innovation, making it elastic enough to address potential concerns even if the price is zero. Still, this does not mean that the definition of harm under the consumer welfare standard should be expanded to address any litany of concerns that cannot be objectively shown to have market harm.

Trustbusters’ Concerns with Tech Are Unlikely to Be Solved by Antitrust

Antitrust is also a poor tool to address concerns such as data privacy or content moderation, and using it to do so could allow for future abuse for other political ends. There is no guarantee that smaller companies would respond to existing market demands around issues such as content moderation any differently than the current large players. Additionally, when it comes to privacy and targeted advertising, smaller platforms would have to find new ways to gain revenue and might be forced to monetize the platform more to stay afloat without being able to rely on the revenue from a larger parent company. Finally, there is no guarantee that these smaller companies would be more innovative or dynamic particularly as existing teams and talents are divided by break ups and walls are erected to prevent entry into certain markets.

The good news is some policymakers have realized that these problems exist and argued for preserving the existing framework and addressing these other concerns with appropriately targeted policies. For example, Sen. Mike Lee recently defended the consumer welfare standard and was critical of the negative impact “radically alter[ing] our antitrust regime” could have while still questioning some recent decisions around content moderation.

Conclusion

Many have hoped for a return of bipartisan cooperation in Washington, but unfortunately bad ideas can also emerge on both sides of the aisle. Shifting away from the consumer welfare standard would ultimately harm consumers at a time when innovation and economic recovery are especially critical.

Here’s a new animated explainer video that I narrated for the Federalist Society’s Regulatory Transparency Project. The 3-minute video discusses how earlier “tech giants” rose and fell as technological innovation and new competition sent them off to what the New York Times once appropriately called “The Hall of Fallen Giants.” It’s a continuing testament to the power of “creative destruction” to upend and reorder markets, even as many pundits insist that there’s no possibility change can happen.

This is an important lesson for us to remember today, as I noted in the recent editorial for The Hill about why, “Open-ended antitrust is an innovation killer“:

Those who worry about today’s largest tech giants becoming supposedly unassailable monopolies should consider how similar fears were expressed not so long ago about other tech titans, many of which we laugh about today. Just 14 years ago, headlines proclaimed that “MySpace Is a Natural Monopoly,” and asked, “Will MySpace Ever Lose Its Monopoly?” We all know how that “monopoly” ceased to exist. At the same time, pundits insisted “Apple should pull the plug on the iPhone,” since “there is no likelihood that Apple can be successful in a business this competitive.” The smartphone market of that era was viewed as completely under the control of BlackBerry, Palm, Motorola and Nokia. A few years prior to that, critics lambasted the merger of AOL and TimeWarner as a new corporate “Big Brother” that would decimate digital diversity and online competition.

Accordingly, policymakers should be humble and recognize that, “it’s better to let rivalry and innovation emerge organically,” and only bring in the wrecking ball of heavy-handed antitrust regulation as a last resort, I argued. Technological change and entrepreneurialism has a way of upending and reordering markets when we least expect it. Just ask all those members of the Hall of Fallen Giants.

Interoperability is a topic that has long been of interest to me. How networks, platforms, and devices work with each other–or sometimes fail to–is an important engineering, business, and policy issue. Back in 2012, I spilled out over 5,000 words on the topic when reviewing John Palfrey and Urs Gasser’s excellent book, Interop: The Promise and Perils of Highly Interconnected Systems.

I’ve always struggled with the interoperability issues, however, and often avoided them became of the sheer complexity of it all. Some interesting recent essays by sci-fi author and digital activist Cory Doctorow remind me that I need to get back on top of the issue. His latest essay is a call-to-arms in favor of what he calls “adversarial interoperability.” “[T]hat’s when you create a new product or service that plugs into the existing ones without the permission of the companies that make them,” he says. “Think of third-party printer ink, alternative app stores, or independent repair shops that use compatible parts from rival manufacturers to fix your car or your phone or your tractor.”

Doctorow is a vociferous defender of expanded digital access rights of many flavors and his latest essays on interoperability expand upon his previous advocacy for open access and a general freedom to tinker. He does much of this work with the Electronic Frontier Foundation (EFF), which shares his commitment to expanded digital access and interoperability rights in various contexts.

I’m in league with Doctorow and EFF on some of these things, but also find myself thinking they go much too far in other ways. At root, their work and advocacy raise a profound question: should there be any general right to exclude on digital platforms? Although he doesn’t always come right out and say it, Doctorow’s work often seems like an outright rejection of any sort of property rights in networks or platforms. Generally speaking, he does not want the law to recognize any right for tech platforms to exclude using digital fences of any sort.

Where to Draw the Lines?

As someone who has authored a book about the importance of permissionless innovation, I need to be able to answer questions about where these lines between open versus closed systems are drawn. Definitions and framing matter, however. I use “permissionless innovation” as a descriptor for one possible policy disposition when considering where legal and regulatory defaults should be set. Another conception of permissionless innovation is more of an engineering ideal; a general freedom to connect, tinker, modify, etc. (I speak more about these conceptions in my latest book, Evasive Entrepreneurs.) Of course, someone advocating permissionless innovation as a policy default will sometimes be confronted with the question of what the law should say when someone behaves in an “evasive” fashion in the latter conception of permissionless innovation.

Doctorow would generally answer that question by saying that law should not be rigged to favor exclusion through laws like the DMCA (and specifically the law’s anti- circumvention provisions), Computer Fraud and Abuse Act, patent law, and various other rules and laws. “[T]he current crop of Big Tech companies has secured laws, regulations, and court decisions that have dramatically restricted adversarial interoperability.”

Generally speaking, I agree. I’m not a fan of technocratic laws or regulations that seek to micro-manage interoperability and which stack the deck in favor of exclusionary conduct with steep penalties for evasion. But does that mean adversarial interoperability should be permitted in all cases? Should there exist any sort of common law presumption one way or the other when a user or competitor seeks access to an existing private platform or device?

Specifics matter here and I don’t have time to get into all the case studies that Doctorow goes through. Some are no-brainers, like the infamous Lexmark case involving refillable printer ink cartridges. Other cases are far more complicated, at least for me. Does Epic, creator of Fortnite, have a right of adversarial interoperability that it can exercise against Apple and their AppStore? As Dirk Auer suggests in a new essay, this episode looks more like a straightforward pricing dispute. Epic is making it out to be much more than that, suggesting Apple is guilty of unfair and exclusionary practices that require a legal remedy.

Why not take that logic further and just say Apple’s App Store us tantamount to a natural monopoly or digital essential facility that Epic and everyone else is entitled to on whatever terms they want? For that matter, why not apply the same logic to Epic’s Fortnite platform or even its Unreal Engine? Does every other gaming developer have a right to piggyback on the juggernaut that Epic has built?

This gets to the core question about Doctorow’s concept of adversarial interoperability: Exactly what should common law and the courts say platform owners make access rights a simple pricing matter and say: “You pay or you are out.” Like Doctorow and EFF, I don’t want Apple to benefit from any special favors from laws like DMCA. Where we differ is that I would still leave the door open for Apple to exercise various other common law contractual rights or property rights in court.

I suspect Doctorow would deny any such claims by Apple or anyone else. If so, I would like to see him spell out in more precise terms exactly what Apple’s property rights and contractual rights are in this instance. Or, again, should we just treat the App Store as a digital commons with unfettered open access rights for developers? If so, would Apple be required to still manage the resource once it is a quasi-commons?

I think that would end miserably, but would like to hear Doctorow’s preferred approach before saying more. I suspect a lot rides on the distinction between “open” verses “proprietary” standards, but compared to Doctorow and EFF, I am willing to embrace a world of both open and proprietary systems, and many hybrids in between. I don’t want the law favoring one type over the other, but that means I need to endorse a generalized property right for digital operators such that they can still exclude others (even in the absence of artificial regulatory rights like DMCA creates). Again, I suspect Doctorow would reject that standard, preferring a generalized right of access, even if that means the platforms become de facto commons.

More Radical Steps

Elsewhere, Doctorow has said is that some of these questions would be better addressed through more aggressive antitrust regulation. Mere data portability or mandatory interoperability isn’t enough for him. “Data portability is important,” Doctorow says, “but it is no substitute for the ability to have ongoing access to a service that you’re in the process of migrating away from.”

In his latest online book on “How to Destroy Surveillance Capitalism,” Doctorow suggests that it is time to “make Big Tech small again” through an “anti-monopoly ecology movement.” That “means bans on mergers between large companies, on big companies acquiring nascent competitors, and on platform companies competing directly with the companies that rely on the platforms.” And he desires a host of other remedies.

So, here we have the convergence of interoperability policy and antitrust policy, with a layer of property confiscation layered on top apparently. “Now it’s up to us to seize the means of computation, putting that electronic nervous system under democratic, accountable control,” he insists in his latest manifesto.

What’s funny about this is that Doctorow begins most of his essays by pointing out all the ways that politics is the problem when it comes to access issues, only to end by suggesting that a lot more political meddling is the required solution. He repeatedly laments how large tech players have so often been able to convince lawmakers and regulators to pass special laws or regulations that work to their favor. Yet, in his We-Can-Build-A-Better-Bureaucrat model of things, all those old problems will apparently disappear when we get the right people in power and get rid of those nefarious capitalist schemers.

Thus, what really animates Doctorow’s advocacy for adversarial interoperability is a deep suspicion of free market capitalism and property rights in particular. In this worldview, interoperability really just becomes a Trojan Horse meant to help bring down the entire capitalist order. Am I exaggerating? “As to why things are so screwed up? Capitalism.” Those are his exact words from the conclusion of his latest book.

Adversarial Innovation & Evolutionary Interop

Still, Doctorow raises many legitimate issues about interconnection and digital access rights. But we need a better approach to work though these questions than the one he suggests.

In my lengthy review of the Palfrey and Gasser Interop book, I tried to sketch out an alternative framework for thinking seriously about these issues. I referred to my preferred approach as “experimental interoperability” or “evolutionary interoperability.” I described this as the theory that ongoing marketplace experimentation with technical standards, modes of information production and dissemination, and interoperable information systems, is almost always preferable to the artificial foreclosure of this dynamic process through state action. The former allows for better learning and coping mechanisms to develop while also incentivizing the spontaneous, natural evolution of the market and market responses.

Adversarial interoperability is important, but not nearly as important as adversarial innovation and facilities-based competition. Stated differently, access rights to existing systems is an important value, but the incentives we have in place to encourage entirely new systems is what really matters most. At some point, a generalized right of access to existing systems discourages the sort of platform-building that could help give rise to the sort of creative destruction we have seen at work repeatedly in the past and that we still need today. Taken too far, adversarial interoperability threatens to undermine this goal. Why seek to build a better alternative platform if you can just endlessly free ride off someone else’s by force of law?

Thus, I prefer to work at the margins and think through how to balance these competing claims of access / interoperability rights versus contractual / property rights. My take will be too utilitarian for not only Doctorow but also for some libertarians, who want clear answers to all these questions based upon their preferred natural law-oriented constructions of rights. The problem with that approach is that it leads to all-or-nothing extremes (complete digital property rights, or virtually none) and that approach is fundamentally unworkable and destructive. We need to work harder about how to balance these rights and values in pro-competitive, pro-innovation fashion.

There is No Such Thing as Optimal Interoperability

In sum, there is no such thing as “optimal interoperablity.” Sometimes proprietary or “closed” systems will offer the public features and options that they will find preferable to “open” ones.  “There are many reasons why consumers might prefer ‘closed’ systems – even when they have to pay a premium for them,” argues Dirk Auer in a separate essay. It could be greater convenience, security, or other things. Palfrey and Gasser correctly noted in their book that, “the state is rarely in a position to call a winner among competing technologies” (p. 174). Moreover, they concluded:

“Lawmakers need to keep in view the limits of their own effectiveness when it comes to accomplishing optimal levels of interoperability. Case studies of government intervention, especially where complex information technologies are involved, show that states tend to be ill suited to determine on their own what specific technology will be the best option for the future (p. 175)

A thousand amens to that! The law should not artificially foreclose experimentation with many different types of platforms, standards, devices and the interoperability that exists among them.

Does anyone remember Blockbuster and Hollywood Video? I assume most of you do, but wow, doesn’t it seem like forever ago when we actually had to drive to stores to get movies to watch at home? What a drag that was!

Yet, just 15 years ago, that was the norm and those two firms were the titans of video distribution, so much so that federal regulators at the Federal Trade Commission looked to stop their hegemony through antitrust intervention. But then those firms and whatever “market power” they possessed quickly evaporated as a wave of Schumpeterian creative destruction swept through video distribution markets. Both those firms and antitrust regulators had completely failed to anticipate the tsunami of technological and marketplace changes about to hit in the form of alternative online video distribution platforms as well as the rise of smartphones and robust nationwide mobile networks.

Today, this serves as a cautionary tale of what happens when regulatory hubris triumphs over policy humility, as Trace Mitchell and I explain in this new essay for  National Review Online entitled, “The Crystal Ball of Antitrust Regulators Is Cracked.” As we note:

There is no discernable end point to the process of entrepreneurial-driven change. In fact, it seems to be proliferating rapidly. To survive, even the most successful companies must be willing to quickly dispense with yesterday’s successful business plans, lest they be steamrolled by the relentless pace of technological change and ever-shifting consumer demands. It is easy to understand why some people find it hard to imagine a time when Amazon, Apple, Facebook, and Google won’t be quite as dominant as they are today. But it was equally challenging 20 years ago to imagine that those same companies could disrupt the giants of that era.

Hopefully today’s policymakers will have a little more patience and trust competition and continued technological innovation to bring us still more wonderful video choices.

[OC] Blockbuster Video US store locations between 1986 and 2019 from r/dataisbeautiful

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.

First off, the nature of the venture capital market has changed due to the declining costs of computing. Not too long ago, much of a tech company’s Series A and B would be dedicated to buying  server racks and computing power. But with the advent of Amazon Web Services (AWS) and other cloud computing technologies, this need has dried up.

What does this mean for the ecosystem? Ben Thompson explained the impact back in 2015 :

In fact, angels have nearly completely replaced venture capital at the seed stage, which means they are the first to form critical relationships with founders. True, this has led to an explosion in new companies far beyond the levels seen previously, which is entirely expected — lower barriers to entry to any market means more total entries — but this has actually made it even more difficult for venture capitalists to invest in seed rounds: most aren’t capable of writing massive numbers of seed checks; the amounts are just too small to justify the effort.

Instead, venture capitalists have gone up-market: firms may claim they invest in Series’ A and B, but those come well after one or possibly two rounds of seed investment; in other words, today’s Series A is yesteryear’s Series C. This, by the way, is the key to understanding the so-called “Series A crunch”: it used to be that Series C was the make-or-break funding round, and in fact it still is — it just has a different name now. Moreover, the fact more companies can get started doesn’t mean that more companies will succeed; venture capitalists just have more companies to choose from.

Research is only now catching up with Thompson’s hunch. In a newly released NBER working paper , economists David Byrne, Carol Corrado, Daniel E. Sichel find that prices for computing, database, and storage services offered by AWS dropped dramatically from 2009 to 2016. As they concluded, “cloud service providers are undertaking large amounts of own-account investment in IT equipment and that some of this investment may not be captured in GDP.”

Second, a decline in startups was predicted by Nobel winning economist Robert Lucas back in 1978 . Over time, Lucas surmised, productivity increases will yield wage increases, which in turn will incentivize marginal entrepreneurs to become employees. This will increase productivity at the company, but also increases the size of the firm. Over time, as productivity and wages inch upwards, working at a firm gets incentivized over starting a company. Entrepreneurs as a portion of the economy will thus decline and industries with higher productivity rates will see bigger firms.

Recent analysis of 50 separate national economies confirmed the inverse relationship between entrepreneurship rates and Gross Domestic Product (GDP), which has also been confirmed by the World Bank Group Entrepreneurship Survey as well. Time series analysis also hints at this relationship. Employment within large firms tends to grow over time as a country gets wealthier. Analysis of the Census Business Dynamics Statistics (BDS) illustrates this, as does groundwork conducted in American manufacturing from 1850 to 1880. But the United States isn’t the only country where this relationship can be found. The same trend exists for Canada , Germany , Indonesia , Japan , South Korea , and Thailand .

Moreover, the distribution of firms tends to change as a country becomes wealthier. As economist Markus Poschke noted, “richer countries thus feature fewer, larger firms, with a firm size distribution that is more dispersed and more skewed.” So, it not just the United States that has large firms. Sweden, the Netherlands and Ireland all have large firms, but they too are relatively wealthy by international standards. Productivity goes a long way to explain the distributional changes.

Nicholas Kozeniauskas, a recent minted economist from NYU, also has been working on research showing the skewed nature of entrepreneurism, which adds some depth to this conversation. As he found , the decline in entrepreneurship has been more pronounced for higher education levels. Overall, “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.”  

As of right now, I think we should be unsatisfied with the evidence of a kill zone. The research doesn’t point in the same direction. But as new insight comes in, we will need to update, as always.  

[first published at The Bridge on August 9, 2018]

What happens when technological innovation outpaces the ability of laws and regulations to keep up?

This phenomenon is known as “the pacing problem,” and it has profound ramifications for the governance of emerging technologies. Indeed, the pacing problem is becoming the great equalizer in debates over technological governance because it forces governments to rethink their approach to the regulation of many sectors and technologies.

The Innovation Cornucopia

Had Rip Van Winkle woken up his famous nap today, he’d be shocked by all the changes around him. At-home genetics tests, personal drones, driverless cars, lab-grown meats, and 3D-printed prosthetic limbs are just some of the amazing innovations that would boggle his mind. New devices and services are flying at us so rapidly that we sometimes forget that most did not even exist a short time ago. At this point, it feels like our smartphones have been in our lives forever, but even just a decade ago, very few of us had one. Likewise, plenty of people now regularly enjoy the benefits of the sharing economy, but ten years ago, Uber, Lyft, and Airbnb did not even exist. Most of the social networking platforms or online video and audio streaming services that we use today had not even been created 15 years ago. Back then, Netflix’s DVD mail subscription service seemed downright revolutionary.

With every innovation comes more questions about how the law should keep pace, or whether it even can. “There has always been a pacing problem,” observes Yale University bioethicist Wendell Wallach, author of  A Dangerous Master: How to Keep Technology from Slipping beyond Our Control. But what Wallach and many other scholars worry about today is that the pace of change has been kicked into overdrive, making it more difficult than ever for traditional legal schemes and regulatory mechanisms to stay relevant. Larry Downes refers to this as “The Law of Disruption.” In his 2009 book on this “law,” Downes showed how “technology changes exponentially, but social, economic, and legal systems change incrementally” and that this law was becoming “a simple but unavoidable principle of modern life.”

Moore’s Law Quickens the Pace

There are three primary reasons the pacing problem is such a force in our modern world. The root cause lies in the power of “combinatorial innovation,” which is driven by “Moore’s Law.”  The Information Revolution spawned a stunning array of new technological capabilities that build on top of one another in a symbiotic fashion. Think about the shared foundational elements of most modern inventions: microchips, sensors, digital code, big data, cloud computing, remote data storage, wireless networking and geolocation capabilities, machine-learning, cryptography, and more. Each of these underlying capabilities is becoming faster, cheaper, smaller, more powerful, and easier to find and use. Innovators are combining them as part of their ongoing search for new and better ways of doing things.

Moore’s Law powers these developments. Moore’s Law is the principle named after Intel co-founder Gordon E. Moore, who first observed in 1965 that “computing would dramatically increase in power, and decrease in relative cost, at an exponential pace” in coming years. Indeed, it has continued to do so for the past half century for many information technologies. A recent Technology Policy Institute white paper noted that “data transit prices fell from about $1200 per Mbps in 1998 to $0.02 per Mbps in 2017.”

These forces are now revolutionizing other sectors as “software eats the world” and innovators utilize these new technologies to address nearly every conceivable need and want. In the field of genetics, the biological equivalent of Moore’s Law is known as the “Carlson curve.” The past two decades have seen the cost of sequencing a human genome fall from over $100 million to under $1,000, a rate nearly three times faster than Moore’s Law.

What the Public Wants, the Public Gets

The second reason the pacing problem is accelerating is that the public wants it to! It is true that many people say they are uneasy with many emerging technologies. When new gadgets and services first gain attention, a “technopanic” attitude often ensues. That is unsurprising because, as others have noted, “fear has gone hand in hand with technological advancements throughout history.”

But societal attitudes toward technological change often shift rapidly. They do so even faster today as citizens quickly assimilate new tools into their daily lives and then expect that even more and better tools will be delivered tomorrow. As more people begin to realize how new technologies improve our lives in meaningful ways, it becomes extremely hard for policymakers to take those innovations away or even tell us not to expect better ones. This relationship between technological change and societal expectations acts as an extraordinarily powerful check on the ability of regulators to “roll back the clock” on innovative activities.

Broken Government Exacerbates the Problem

Finally, the pacing problem is becoming more acute because “demosclerosis” and “kludgeocracy” have taken hold within American government. Jonathan Rauch coined the term demosclerosis in his 1999 book Government’s End: Why Washington Stopped Working to describe “government’s progressive loss of the ability to adapt.” “[A]s layer is dropped upon layer,” he argued, “the accumulated mass becomes gradually less rational and less flexible.”

Instead of cleaning up old legalistic messes and adapting to the times, government solutions are more often clumsily cobbled together to patch past problems and create temporary solutions. Steven Teles refers to this as kludgeocracy. “The complexity and incoherence of our government often make it difficult for us to understand just what that government is doing,” Teles says. Kludgeocracy creates serious costs for individual citizens, governments themselves, and to our democratic systems more generally, he argues. Taken together, demosclerosis and kludgeocracy breed highly dysfunctional governments and make it even easier for the pacing problem to speed ahead.

Can Policymakers Adapt?

Regulators are not oblivious to the challenges posed by the pacing problem. “I have said more than once that innovation moves at the speed of imagination and that government has traditionally moved at, well, the speed of government,” remarked Michael Heurta, head of the Federal Aviation Administration, in a 2016 speech regarding drones. Shortly after Huerta made those comments, the Department of Transportation released a report on the regulation of driverless car technology which noted that “The speed with which [driverless cars] are advancing, combined with the complexity and novelty of these innovations, threatens to outpace the Agency’s conventional regulatory processes and capabilities.”

Food and Drug Administration (FDA) regulators have increasingly referenced the pacing problem when discussing the challenge of keeping up with new medical innovations.  The New York Times recently asked Dr. Peter Marks, director of the FDA’s Center for Biologics Evaluation and Research, how the agency planned to deal with hundreds of “rogue” stem cell treatment clinics. “There are hundreds and hundreds of these clinics,” he said. “We simply don’t have the bandwidth to go after all of them at once.”

The pacing problem has even crept into antitrust enforcement. The US Department of Justice (DOJ) sought to break up Microsoft in the late 1990s, but as the legal proceedings dragged on through the early 2000’s, the market moved and made the DOJ’s case moot. Google Chrome and Mozilla Firefox emerged as legitimate competitors to Microsoft’s Internet Explorer without regulatory remedy. In the end, Microsoft reached a settlement with the DOJ that fell far short of the government’s original ambitions to bust up the firm, all because the market moved at a pace much faster than the regulator’s pace. More recent antitrust action in the US and EU also suffer from the pacing problem. Multi-year antitrust investigations reach conclusions that don’t reflect market trends in the intervening years and offer remedies that may be “too little, too late,” especially in the information technology sector.

Is the Pacing Problem Really the Pacing Benefit?

What should policymakers do in light of these new challenges? The extremes will not work. Lawmakers or regulators cannot simply double-down on the lethargic and unwieldy technocratic regulatory schemes of the past. Command-and-control tactics are not going to be effective in an age when technology evolves in a quicksilver fashion. In a world where “innovation arbitrage” is easier than ever, repressive crackdowns on new tech will often backfire. Evasive entrepreneurs will often move to those jurisdictions where their innovative acts are treated more hospitably. That, too, exacerbates the pacing problem.

From the perspective of many innovation advocates, this will make it seem like the pacing problem is more like the pacing  benefit. Generally speaking, that intuition is sound. Innovation is the fundamental driver of human betterment. We need more “moonshots”—“radical but feasible solutions to important problems”—to ensure that current and future generations enjoy more choices, greater mobility, increased wealth, better health, and longer lifespans. We don’t want archaic regulatory schemes and regimes holding that back.

Constructive Solutions

But policymakers will not abandon oversight of emerging technologies altogether, nor should we want them to. The potential harms associated with some new technologies could be significant enough that a certain degree of regulatory oversight will be required. But the pacing problem means the old, inflexible, top-down approaches will need to be discarded and that the administrative state itself must become more entrepreneurial.

In a forthcoming law review article entitled, “Soft Law for Hard Problems: The Governance of Emerging Technologies in an Uncertain Future,” Jennifer Skees, Ryan Hagemann, and I discuss how “soft law” mechanisms—multi-stakeholder processes, industry best practices and standards, workshops, agency guidance, and more—can help fill the governance gap as the pacing problem accelerates. Many agencies are already tapping soft law tools to help guide the development of new technologies such as driverless cars, drones, the Internet of Things, mobile medical applications, artificial intelligence, and others. In fact, we argue that soft law has already become the dominant form of technological governance for emerging tech in the US.

Critics might decry soft law as either being too lax (and open to private abuse) or too informal (and open to government abuse), but the pacing problem makes both arguments increasingly irrelevant. We need a new governance vision for the technological age. Our new governance systems must be more flexible and adaptive than the heavy-handed regulatory regimes that preceded them.

___________________

Related Reading

• Adam Thierer, “Evasive Entrepreneurialism and Technological Civil Disobedience: Basic Definitions,” The Bridge, July 20, 2018.
• Adam Thierer, “Making the World Safe for More Moonshots,” The Bridge, February 5, 2018.
• Jennifer Skees, “Do You Need a License to Innovate?” The Bridge, June 29, 2018,
• Andrea O’Sullivan & Adam Thierer, “3D Printers, Evasive Entrepreneurs and the Future of Tech Regulation,” The Bridge, August 1, 2018.
• Adam Thierer, “Does “Permissionless Innovation” Even Mean Anything?” Technology Liberation Front, May 18, 2017.
• Adam Thierer, “Wendell Wallach on the Challenge of Engineering Better Technology Ethics,” Technology Liberation Front,  April 20, 2016,

A curious thing happened last week. Facebook’s stock, which had seem to have weathered the 2018 controversies, took a beating.

In the Washington Post, Craig Timberg and Elizabeth Dwoskin explained that the stock market drop was representative of a larger wave:

The cost of years of privacy missteps finally caught up with Facebook this week, sending its market value down more than $100 billion Thursday in the largest single-day drop in value in Wall Street history.

Jeff Chester of the Center for Digital Democracy piled on, describing the drop as “a privacy wake-up call that the markets are delivering to Mark Zuckerberg.”

But the downward pressure was driven by more fundamental changes. Simply put, Facebook missed its earnings target. But it is important to peer into why the company didn’t meet those targets.

As Zuckerberg noted in the earning call ,

Now, perhaps one of the most important things we’ve done this year to bring people closer together is to shift News Feed to encourage connection with friends and family over passive consumption of content. We’ve launched multiple changes over the last half to News Feed that encourage more interaction and engagement between people, and we plan to keep launching more like this.

Later in the call, Facebook CFO David Wehner signaled total revenue growth rate would decelerate due to the choices made by Zuckerberg,  

We plan to grow and promote certain engaging experiences like Stories that currently have lower levels of monetization, and we are also giving people who use our services more choices around data privacy, which may have an impact on our revenue growth.

Moreover, the costs would continue to rise as they also embedded more privacy and security features into the platform:

Turning now to expenses; we continue to expect that full-year 2018 total expenses will grow in the range of 50% to 60% compared to last year. In addition to increases in core product development and infrastructure, this growth is driven by increasing investment in areas like safety and security, AR/VR, marketing, and content acquisition. Looking beyond 2018, we anticipate that total expense growth will exceed revenue growth in 2019.

So, Facebook got hammered because it invested more in privacy and security, while also transitioning to less revenue generating source of content. At first glance, this might seem to signal from the market to not invest in these sort of changes. Indeed, as Blake Reid noted ,

They got punished by the market for investing in less-monetized content and spending more on privacy and security. Doesn’t that send a signal to not do that?

Yes and no.

It has been widely accepted that corporations often adopt short term strategies that attempt to maximize earnings. As one well cited survey of financial executive explained, “Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target.”

This preference for the near term, especially for payoffs in the near term, seems to be a common feature among humans . People tend to prefer small rewards that occur now over much larger rewards that come later. This is known as hyperbolic discounting and it helps to explain why households under-save , why smokers find it tough to quit , and why firms prefer near term earnings.

Pulling together the insights from finance and behavioral psychology, two economists pointed out “that a firm exhibiting hyperbolic discounting preferences faces an underinvestment problem, i.e. there exists another feasible investment plan that improves all periods’ present values.” Conversely, a firm exhibiting time invariant preferences would invest, even if it meant a short term hit.   

Facebook is probably playing the long game. Zuckerberg has an overwhelming controlling stake in the company and wants to build value in the long term . And if these changes lead to more durability, that is, if users stay on the site longer in the next 5 or 10 years, then it makes sense to take the short term hit. It would be better to do this than have a massive exodus at some point down the road.

In the same kind of way, Amazon has been criticized for years for spending too much money on company investments to the detriment of returns. But, Amazon’s Q2 2018 numbers came in this week and they were double expectations . Bezos’ 1997 shareholder letter laid out the strategy, “We believe that a fundamental measure of our success will be the shareholder value we create over the long term.” Bezos is also more concerned with building for the long term.

I’m working on a more formal model of this, but I think there are reasons to believe that Facebook would be especially sensitive to privacy concerns. And Facebook’s missing earnings also point to a real concern about the long term viability of the platform.

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.

Just to review, Amex centers on what is known as anti-steering provisions. These provisions limit merchants who take the credit card payment from implying a preference for non-Amex cards; dissuading customers from using Amex cards; persuading customers to use other cards; imposing any special restrictions, conditions, disadvantages, or fees on Amex cards; or promoting other cards more than Amex. Importantly, these provisions never limited merchants from steering customers toward debit cards, checks, or cash.

In October 2010, the Department of Justice (DoJ) and several states sued Amex, Visa, and Mastercard for these contract provisions, and Amex was the only one among the three to take it to court. Initially, the District Court ruled in favor of the DoJ and states, explaining that the credit card platforms should be treated as two separate markets, one for merchants and one for cardholders. In that analysis, the court cleaved off the merchant side and declared the anti-steering provisions as being anticompetitive under Section 1 of the Sherman Act.

On appeal, the Court of Appeals for the Second Circuit reversed that decision because “without evidence of the [anti-steering provisions’] net effect on both merchants and cardholders, the District Court could not have properly concluded that the [provisions] unreasonably restrain trade in violation” of Section 1 of the Sherman Act. The Department of Justice petitioned the Appeals Court to reconsider the case en banc , but that was rejected and then headed to the Supreme Court.

The Supreme Court agreed with this two-sided theory as “credit-card networks are best understood as supplying only one product—the transaction—that is jointly consumed by a cardholder and a merchant.” Even though the DoJ was able to show that the provisions did increase merchant fees, “evidence of a price increase on one side of a two-sided transaction platform cannot, by itself, demonstrate an anticompetitive exercise of market power.” To prove this, the DoJ would have to prove that Amex increased of the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the two-sided credit-card market.

The decision only briefly mentions why this is important, so consider a platform with two sides, users and advertisers. If users experience an increase in price or a reduction in quality, then they are likely to exit or use the platform less. Yet, advertisers are on the other side because they can reach users. So in response to the decline in user quality, advertiser demand will drop even if the ad prices stay constant. The result echoes back.  When advertisers drop out, the total amount of content also recedes and user demand falls because the platform is less valuable to them. Demand is tightly integrated between the two side of the platform. Changes in user and advertiser preferences have far outsized effects on the platforms because each side responds to the other. In other words, small changes in price or quality tends to be far more impactful in chasing off both groups from the platforms as compared to one-sided goods. In the economic parlance, these are called demand interdependencies. The demand on one side of the market is interdependent with demand on the other. Research on magazine price changes confirms this theory.   

In the last two decades, economics has been adapting to the insights and the challenges of two-sided markets. In the case of a one-sided business, like a laundromat or a mining company, there is one downstream or upstream consumer, so demand is fairly straightforward. But platforms are more complex since value must be balanced across the different participants in a platform, which leads to demand interdependencies.

In an article cited in the decision, economists David Evans and Richard Schmalensee explained the importance of their integration into competition analysis, “The key point is that it is wrong as a matter of economics to ignore significant demand interdependencies among the multiple platform sides” when defining markets. If they are ignored, then the typical analytical tools will yield incorrect assessments.

While it didn’t employ the language of demand interdependencies, the Court did agree with that general assessment:

To be sure, it is not always necessary to consider both sides of a two-sided platform. A market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor. Newspapers that sell advertisements, for example, arguably operate a two-sided platform because the value of an advertisement increases as more people read the newspaper. But in the newspaper-advertisement market, the indirect networks effects operate in only one direction; newspaper readers are largely indifferent to the amount of advertising that a newspaper contains. Because of these weak indirect network effects, the market for newspaper advertising behaves much like a one-sided market and should be analyzed as such.

Why does this bit matter?

In a piece in the New York Times in April, Law scholar Lina Khan worried that this case would “effectively [shield] big tech platforms from serious antitrust scrutiny.” Law professor Tim Wu followed up with an op-ed just this past week in the Times expressing similar concern,

To reach this strained conclusion, the court deployed some advanced economics that it seemed not to fully understand, nor did it apply the economics in a manner consistent with the goals of the antitrust laws. Justice Stephen Breyer’s dissent mocks the majority’s economic reasoning, as will most economists, including the creators of the “two-sided markets” theory on which the court relied. The court used academic citations in the worst way possible — to take a pass on reality.

Respectfully, I have to disagree with Wu’s assessment and Khan’s worries. Both Google and Facebook more evidently fall into the newspaper category than the payments category under the majority’s opinion. Moreover, the opinion didn’t define what “weak indirect network effects” actually means in practice, so this case doesn’t leave Google and Facebook off the hook by any means.

How the Court reached that conclusion is worth exploring, however.

In contrast to newspapers, credit card payment platforms “cannot make a sale unless both sides of the platform simultaneously agree to use their services,” so, “two-sided transaction platforms exhibit more pronounced indirect network effects and interconnected pricing and demand.” The Court seems to connect two-sidedness with the simultaneity requirement. On this front, Wu is correct. They didn’t seem to fully understand the economic reasoning. It isn’t the simultaneous nature of credit cards that makes them two-sided markets, but their demand interdependencies. Newspapers also have strong demand interdependencies even though they may not feature the simultaneity of credit cards. Yet, the Court was correct in defining the market as a transactional one, where cardholders and merchants are intimately connected.  

That being said, Breyer’s economic reasoning isn’t any sharper than the majority’s:

But while the market includes substitutes, it does not include what economists call complements: goods or services that are used together with the restrained product, but that cannot be substituted for that product. See id., ¶565a, at 429; Eastman Kodak Co. v. Image Technical Services, Inc., 504 U. S. 451, 463 (1992). An example of complements is gasoline and tires. A driver needs both gasoline and tires to drive, but they are not substitutes for each other, and so the sale price of tires does not check the ability of a gasoline firm (say a gasoline monopolist) to raise the price of gasoline above competitive levels. As a treatise on the subject states: “Grouping complementary goods into the same market” is “economic nonsense,” and would “undermin[e] the rationale for the policy against monopolization or collusion in the first place.” 2B Areeda & Hovenkamp ¶565a, at 431.

Here, the relationship between merchant-related card services and shopper-related card services is primarily that of complements, not substitutes. Like gasoline and tires, both must be purchased for either to have value. Merchants upset about a price increase for merchant related services cannot avoid that price increase by becoming cardholders, in the way that, say, a buyer of newspaper advertising can switch to television advertising or direct mail in response to a newspaper’s advertising price increase.

Breyer makes a bit of a mess when it comes to the idea of demand complementarity. It isn’t the case that “both must be purchased for either to have value.” That is perfect complementarity, which is rare. Rather, when the price of gasoline increases, then the demand for tires is likely to decrease as well. However, it doesn’t need to run the other way. When the price of tires decreases, the demand for gasoline doesn’t typically inch up. This kind of asymmetric demand relationship is counter to the kind of relationship on platforms where demand in linked on both sides.

Still, Breyer buries the lede. Attributing a price increase to firms in the tire market might be wrong if demand fluctuations in the adjacent gasoline market partially caused those prices changes. In other words, the reason why complementary demand matters in the first place is to ensure that the court’s analysis is correct. Going back to Evans and Schmalensee, “The key point is that it is wrong as a matter of economics to ignore significant demand interdependencies among the multiple platform sides” when defining markets. You get the assessments wrong.        

To his credit, Breyer does rightly point out the thin definition offered by the majority:

I take from that definition that there are four relevant features of such businesses on the majority’s account: they (1) offer different products or services, (2) to different groups of customers, (3) whom the “platform” connects, (4) in simultaneous transactions.

Having simultaneous transactions isn’t the defining feature of two-sidedness and if the lower courts come to rely on this feature to define platforms, then some assessments of competitive effects are likely to be wrong.

Amex offers up a lot for the antitrust community to consider, but in key ways, the decision is incomplete. Importantly, the Court didn’t address the validity of many new analytical tools that have popped up in the past decade to understand platform market power. Take a quick glance at the papers cited in the majority opinion and you will notice how many of references dates from after 2010 when this case was first brought. In other words, Amex hardly shuts the door for future litigation.     

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 Bengio,  NYU 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. 

Like Standard Oil, the American Tobacco Company was organized as a trust and came to acquire nearly 75 percent of the total market by buying both the Union Tobacco Company and the Continental Tobacco Company. But unlike Standard Oil, as soon as these companies were bought, they were integrated within American Tobacco. In 1908 the federal government filed and eventually won a lawsuit under the Sherman Act, which dissolved the trust into three companies, which in theory matched the original three companies.

Yet, the breakup wasn’t as easy as simply splitting the larger company into its original three companies, since the successor companies had intertwined processes. A single purchasing department managed the leaf purchasing. Processing plants has been assigned to specific products without any concern for their previous ownership. For eight months over tense negotiations, the government pulled apart factories, distribution and storage facilities, and name brands. Office by office, the company was pulled apart by government fiat.

Historian Allan M. Brandt had this to say in  The Cigarette Century,

It was one thing to identify monopolistic practices and activities in restraint of trade, and quite another to figure out how to return the tobacco industry to some form of regulated competition. Even those who applauded the breakup of American Tobacco soon found themselves critics of the negotiated decree restructuring the industry. This would not be the last time that the tobacco industry would successfully turn a regulatory intervention to its own advantage.

While some might think that breaking up companies would be a clean operation, American Tobacco suggests the opposite. And I’m not alone in this assessment. Here is what Robert Crandall had to say a couple of years back  in a piece for the Brookings Institution:

[W]ith one exception, the breakup of AT&T in 1984, there is very little evidence that such relief is successful in increasing competition, raising industry output, and reducing prices to consumers. The exception turns out to be a case of overkill because the same results could have been obtained through a simple regulatory rule, obviating the need for vertical divestiture of AT&T.

In other words, this method simply does not achieve competitive markets.

If you’re interested in the longer piece, you can find it over at American Action Forum.

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

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.” Meanwhile, the  WSJ article opens with this interesting story about the epiphany EU regulator Věra Jourová had upon visiting with the supposed victims of the EU’s new General Data Protection Regulation, or GDPR:

When the European Union’s justice commissioner traveled to California to meet with Google and Facebook last fall, she was expecting to get an earful from executives worried about the Continent’s sweeping new privacy law. Instead, she realized they already had the situation under control. “They were more relaxed, and I became more nervous,” said the EU official, Věra Jourová. “They have the money, an army of lawyers, an army of technicians and so on.”

Indeed they do. And that means that they are better positioned to absorb the significant costs of compliance that will be associated with the new GDPR rules, which are somewhat ambiguous and will require a great deal of ongoing interpretation and legal wrangling.  The Journal essay also cites an unnamed Brussels lobbyist for an media-measurement firm saying, “The politicians wanted to teach Google and Facebook a lesson. And yet they favor them.” Consider this paragraph from the WSJ essay about how the two firms worked diligently to come into compliance with the new GDPR regulations:

Once the law passed in spring 2016, Google and Facebook threw people at the problem. Google involved lawyers in the U.S., Ireland, Brussels and elsewhere to pore over contracts and procedures, said people close to the company. Facebook mobilized hundreds of people in what it describes as the largest interdepartmental team it has ever assembled. Facebook lawyers spent a year scrutinizing the law’s lengthy text. Designers and engineers then toiled over how to implement changes, according to Stephen Deadman, Facebook’s global deputy chief privacy officer. During the process, Facebook got frequent access to regulators across Europe. It met with Helen Dixon, the data protection commissioner in Ireland, where the company bases its European operations, and her staff to run through changes Facebook was planning. Ms. Dixon’s agency provided the firm with feedback on the wording of its consent requests, Facebook said.

Now ask yourself how many other smaller existing or new firms would be in a position to do the same thing. Answer: Not many. We’re already seeing the deleterious effects of the GDPR on market structure, the  Journal reports. “Some advertisers are planning to shift money away from smaller providers and toward Google and Facebook,” Schechner and Kostov note. And they end their essay with the telling thoughts of Bill Simmons, co-founder and chief technology officer of Dataxu, Boston-based company that helps buy targeted ads, who says, “It is paradoxical. The GDPR is actually consolidating the control of consumer data onto these tech giants.” The  NYT essay included a funny tidbit about how “Some privacy advocates also bristle at the idea that these new restrictions would help already powerful internet companies, noting that is a well-worn argument employed by tech giants to try to prevent future regulation.” That’s a highly unfortunate attitude. If privacy advocates really care about improving the situation on the ground, then the best way to do that is with more and better choices. Sadly, it seems that with each passing day the write off the idea of any new competition emerging to today’s tech giants. “Can Facebook be replaced?” asks Olivia Solon writing in The Guardian today. Some probably think not, but as Solon notes, “prominent Silicon Valley investor Jason Calacanis, who was an early investor in several high-profile tech companies including Uber certainly hopes so. He has launched a competition to find a ‘social network that is actually good for society,'” and his “Openbook Challenge will offer seven “purpose-driven teams” $100,000 in investment to build a billion-user social network that could replace the technology titan while protecting consumer privacy.” In a blog post announcing the Challenge, Calacanis wrote: “All community and social products on the internet have had their era, from AOL to MySpace, and typically they’re not shut down by the government — they’re slowly replaced by better products. So, let’s start the process of replacing Facebook.” I don’t have any idea whether this Openbook Challenge will succeed. It’s hard building big, scalable digital platforms that satisfy the diverse needs of a diverse world. But this is exactly the sort of innovation that we should be encouraging. Even the very threat of new competition will keep the big dogs on their toes. Alas, all the new regulations being consider will likely just leave us with fewer choices and regulations that probably won’t even do all that much to truly better protect our data or privacy. But hey, at least it was all well-intentioned!

Updates :

• Nick Kostov and Sam Schechner, “Google Emerges as Early Winner From Europe’s New Data Privacy Law,” Wall Street Journal, May 31, 2018, https://www.wsj.com/articles/eus-strict-new-privacy-law-is-sending-more-ad-money-to-google-1527759001

On Monday, April 16th, the Technology Policy Institute hosted an event on “Facebook & Cambridge Analytica: Regulatory & Policy Implications.” I was invited to deliver some remarks on a panel that included Howard Beales of George Washington University, Stuart Ingis of Venable LLP, Josephine Wolff of the Rochester Institute of Technology, and Thomas Lenard of TPI, who moderated. I offered some thoughts about the potential trade-offs associated with treating Facebook like a regulated public utility. I wrote an essay here last week on that topic. My remarks at the event begin at the 13:45 mark of the video.

I wanted to draw your attention to this important address on online platform regulation by Alex Chisholm, the head of UK’s Competition and Markets Authority. That’s the non-ministerial department in the UK responsible for competition policy issues. Chisholm delivered the address on October 27th at the Bundesnetzagentur conference in Bonn. It’s a terrific speech that other policymakers would be wise to read and mimic to ensure that antitrust and competition policy decisions don’t derail the many benefits of the Information Revolution.

“Today, as regulators, we have the responsibility but also the great historical privilege of playing an influential role in the deployment throughout the economy of the latest of these defining technological eras,” Chisholm began. “As regulators, we must try to minimise the inevitable mismatch between how we’ve done things before and the opportunities and risks of the new,” he argued.

He continued on to specify three recommendations for those crafting policy on this front:

1. “First, blanket solutions should be avoided. Instead an evidence-based assessment of potential adverse effects of specific industry features or practices should be carried out before either ex ante regulatory or ex post enforcement tools are deployed. In either case this should be closely targeted to the specific harm identified, and every care given to avoid disproportionate actions and unwelcome side-effects. In that respect, online platforms and the digital economy do not differ from any other sector: there is no need to reinvent the regulatory wheel.
2. Secondly, the significant risks associated with premature, broad-brush ex ante legislation or rule-making point towards a need to shift away from sector-specific regulation to ex post antitrust enforcement, which is better adapted to the period we’re in, with its fast-changing technology and evolving market reactions.
3. Thirdly, as regulators, policymakers, businesses and consumers, we all need to adapt our practices to harvest the benefits of the new while containing its costs and risks.”

That’s an excellent framework that can and should guide future antitrust and competition policy decisions by policymakers across the globe. But Chisholm wasn’t done. Here are some of my other favorite highlights from his address:

• On avoiding “one-size-fits-all” regulation: “[T]here is no ‘digital one size fits all’. . .  [O]penness is not necessarily always good for competition, nor are closed systems always bad.”
• On dealing with the pace of change: “Leaving aside costs of compliance, protecting consumers by virtue of ex ante regulation is inherently difficult in digital markets where consumer preferences evolve fast and in a less predictable manner.”
• On the difficulty of forecasting: “Where ex ante regulation is introduced, it therefore risks harming innovation by locking in existing standards and discouraging or preventing more disruptive innovations. The evolution of digital markets has been particularly difficult to predict.”
• On how to level the playing field: “Finally, consider deregulation. If policymakers were to seek to avoid every hypothetical consumer harm through pre-emptive ex ante regulation, they would likely prevent many best-case scenarios entailing significant consumer benefits from ever coming about. Policymakers and regulators should be open to the idea that a review of existing regulation and its suitability in the context of online platforms may in certain cases actually result in a withdrawal of such regulation – creating a reasonably level playing field by ‘levelling down’ as opposed to ‘levelling up’.”

I really appreciate those last few points, and they are very much consistent with the recommendations set forth in my recent book on  Permissionless Innovation. In the book, I argued that, “Trying to preemptively plan for every hypothetical worst-case scenario means that many best-case scenarios will never come about.”

I was pleased to see the book cited in Chisholm’s speech, as well as some work that Mercatus scholars had done on how to level the proverbial playing field within sectors undergoing rapid technological and regulatory change. Chris Koopman, Matt Mitchell, and I have argue that, while regulatory asymmetries represent a legitimate policy problem,

the solution is not to punish new innovations by simply rolling old regulatory regimes onto new technologies and sectors. The better alternative is to level the playing field by “deregulating down” to put everyone on equal footing, not by “regulating up” to achieve parity. Policymakers should relax old rules on incumbents as new entrants and new technologies challenge the status quo. By extension, new entrants should only face minimal regulatory requirements as more onerous and unnecessary restrictions on incumbents are relaxed.

Anyway, make sure to read Alex Chisholm’s entire speech. It’s very much worth your time. Incidentally, I think his vision is very much consistent with that of  Maureen K. Ohlhausen, a Commissioner with the Federal Trade Commission (FTC). I have written extensively here and elsewhere about Commissioner Ohlhausen’s laudable vision for wise tech policy-making, most recently in this essay.

The big news out of Europe today is that the European Court of Justice (ECJ) has invalidated the 15-year old EU-US safe harbor agreement, which facilitated data transfers between the EU and US. American tech companies have relied on the safe harbor to do business in the European Union, which has more onerous data handling regulations than the US. [PDF summary of decision here.] Below I offer some quick thoughts about the decision and some of its potential unintended consequences.

#1) Another blow to new entry / competition in the EU: While some pundits are claiming this is a huge blow to big US tech firms, in reality, the irony of the ruling is that it will bolster the market power of the biggest US tech firms, because they are the only ones that will be able to afford the formidable compliance costs associated with the resulting regulatory regime. In fact, with each EU privacy decision, Google, Facebook, and other big US tech firms just get more dominant. Small firms just can’t comply with the EU’s expanding regulatory thicket. “It will involve lots of contracts between lots of parties and it’s going to be a bit of a nightmare administratively,” said Nicola Fulford, head of data protection at the UK law firm Kemp Little when commenting on the ruling to the BBC. “It’s not that we’re going to be negotiating them individually, as the legal terms are mostly fixed, but it does mean a lot more paperwork and they have legal implications.” And by driving up regulatory compliance costs and causing constant delays in how online business is conducted, the ruling will (again, on top of all the others) greatly limits entry and innovation by new, smaller players in the digital world. In essence, EU data regulations have already wiped out much of the digital competition in Europe and now this ruling finishes off any global new entrants who might have hoped of breaking in and offering competitive alternatives. These are the sorts of stories never told in antitrust circles: costly government rulings often solidify and extend the market dominance of existing companies. Dynamic effects matter. That is certainly going to be the case here.

#2) Cross-border digital trade suffers: This conclusion follows from point #1, of course. Writing just before the decision was announced, lawyers as Norton Rose Fulbright’s Data Compliance Report blog noted that if the safe harbor was invalidated, “the impact on the world economy would be immense.” Well, here we are.  Dan Castro of ITIF hopes that EU and US officials can pull back from the brink of this impending disaster and “finish the process of creating a Safe Harbor 2.0 with terms that give comfort to all parties.” I suspect that many tech companies are hoping for the same miracle to occur. But don’t hold your breath. The Europeans have decided that this is the hill that they will die on. They haven’t shown too much interest in preserving an innovative tech market or enhancing global digital trade flows in the past due to heightened concerns about privacy, and there’s no reason to think they will back down now with a more measured approach. Importantly, as I noted in my earlier essay, “How Attitudes about Risk & Failure Affect Innovation on Either Side of the Atlantic,” this trans-Atlantic clash of vision transcends the debate over privacy law. It’s about broader cultural and political attitudes toward risk-taking and disruption. Most leaders in Europe value stability–both economic and cultural stability–more than US officials and citizens. This tension was always bound to reach a breaking point and the Digital Economy and data handling policies is where the you-know-what is finally hitting the fan.

#3) Web Balkanization accelerates: This is just another blow to the idea of a seamless global Internet. But as tech lawyer Tiffany C. Li pointed out on Twitter this morning in response to the decision, while Web pundits decry balkanization in other contexts, many of them seem to be cheering it on in this case because this decision deals with privacy and data regulation, which they favor more regulation of. But you can’t have your cake and eat it to. Indeed, the great irony of so many “Internet freedom” debates today is that pundits absolutely hate the idea of Internet control and Web balkanization… right up until the point where they absolutely love it! Think of this as the tech policy world’s selective morality problem. (I elaborated on these themes in my essays “When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed,” and “Copyright, Privacy, Property Rights & Information Control: Common Themes, Common Challenges.”)

Interesting that the same ppl who decried Russia’s data localization law now cheer EU upping extraterritorial data regulation. #SafeHarbor

— Tiffany C. Li (@tiffanycli) October 6, 2015

@AnupamChander @AdamThierer Yes, #Schrems opens up possibility that companies will now have to comply w/28 different DPAs applying 95/46/EC. — Tiffany C. Li (@tiffanycli) October 6, 2015

This is the beginning of the Balkanization of the Internet: http://t.co/mbFxxhN7tQ

— Dino A. Dai Zovi (@dinodaizovi) October 6, 2015

Another step toward the jurisdictional balkanization of the Internet https://t.co/83FIYvU2Sm — Milton Mueller (@miltonmueller) October 6, 2015

#4) But the big dogs won’t bolt out of Europe: But this should also be another reminder that there are no “John Galt moments” in the world of tech, as some tech libertarians hope. The biggest players won’t pack their bags and head home because there’s still too much money sitting on the table in Europe. Big firms will instead scramble to comply, just as they are trying to do with the so-called Right to Be Forgotten ruling. Of course, this just exacerbates problem #1 already discussed above: The big dogs stay and do their best to comply with the costly regulatory regime while smaller players get crushed by the rules and all the other potential new entrants just stay home.

#5) The decision ignores the real problem: widespread government surveillance: I don’t often find myself agreeing with Cory Doctorow on much, but he gets it exactly right when he notes that, “this doesn’t mean that Europeans won’t be subjected to mass surveillance, including mass surveillance by the NSA.” He elaborates:

If the European Court of Justice wants to end mass surveillance of Europeans, it can only do so by banning mass surveillance — by ruling that laws that treat foreigners’ data as fair game are unconstitutional. If US tech giants want to get loose from a farcical, expensive, and pointless exercise that continues to treat them as adjuncts to the world’s spy agencies, they need to lobby the US government to change the laws under which it treats foreigners as fair game.

Thus, it would certainly be nice if, as CDT suggested in response to the ruling, that the “EU Safe Harbour Ruling Should Reinvigorate Surveillance Reform Efforts.” Of course, that requires that tech companies muster the courage to stand up to public officials here in the States who always want them to (literally) hand over the keys to the kingdom. That’s why the current debate over crypto backdoors is so essential. It’s good to see a number of tech companies pushing back on that front and refusing to get rolled by law enforcement and national security agencies the way that far too many telecom and tech companies have been in the past. Following today’s ECJ ruling, tech companies are realizing just how serious this problem really is because now European officials are striking out against the safe harbor agreement as a surrogate for their general frustrations with US surveillance more generally. Indeed, in a press release following today’s ECJ ruling, the Internet Association, which represents major US tech firms, noted that, “The Internet industry has consistently supported surveillance reform” and the Association pushed for swift congressional action to clarify and limit existing surveillance powers. It remains to be seen whether the US tech sector and other related industries will be able to push back effectively against the growing surveillance state leviathan, but it’s more clear today than ever before why that’s a fight worth having.

Last week, I participated in a program co-sponsored by the Progressive Policy Institute, the Lisbon Council, and the Georgetown Center for Business and Public Policy on “Growing the Transatlantic Digital Economy.”

The complete program, including keynote remarks from EU VP Neelie Kroes and U.S. Under Secretary of State Catherine A. Novelli, is available below.

My remarks reviewed worrying signs of old-style interventionist trade practices creeping into the digital economy in new guises, and urged traditional governments to stay the course (or correct it) on leaving the Internet ecosystem largely to its own organic forms of regulation and market correctives:

Vice President Kroes’s comments underscore an important reality about innovation and regulation. Innovation, thanks to exponential technological trends including Moore’s Law and Metcalfe’s Law, gets faster and more disruptive all the time, a phenomenon my co-author and I have coined “Big Bang Disruption.” Regulation, on the other hand, happens at the same pace (at best). Even the most well-intentioned regulators, and I certainly include Vice President Kroes in that list, find in retrospect that interventions aimed at heading off possible competitive problems and potential consumer harms rarely achieve their objectives, and, indeed, generate more harmful unintended consequences. This is not a failure of government. The clock speeds of innovation and regulation are simply different, and diverging faster all the time. The Internet economy has been governed from its inception by the engineering-driven multistakeholder process embodied in the task forces and standards groups that operate under the umbrella of the Internet Society.   Innovation, for better or for worse, is regulated more by Moore’s Law than traditional law. I happen to think the answer is “for better,” but I am not one of those who take that to the extreme in arguing that there is no place for traditional governments in the digital economy. Governments have and continue to play an essential part in laying the legal foundations for the remarkable growth of that economy and in providing incentives if not funding for basic research that might not otherwise find investors. And when genuine market failures appear, traditional regulators can and should step in to correct them as efficiently and narrowly as they can. Sometimes this has happened. Sometimes it has not. Where in particular I think regulatory intervention is least effective and most dangerous is in regulating ahead of problems—in enacting what the FCC calls “prophylactic rules.” The effort to create legally sound Open Internet regulations in the U.S. has faltered repeatedly, yet in the interim investment in both infrastructure and applications continues at a rapid pace—far outstripping the rest of the world. The results speak for themselves. U.S. companies dominate the digital economy, and, as Prof. Christopher Yoo has definitively demonstrated, U.S. consumers overall enjoy the best wired and mobile infrastructure in the world at competitive prices. At the same time, those who continue to pursue interventionist regulation in this area often have hidden agendas. Let me give three examples: 1.  As we saw earlier this month at the Internet Governance Forum, which I attended along with Vice President Kroes and 2,500 other delegates, representatives of the developing world were told by so-called consumer advocates from the U.S. and the EU that they must reject so-called “zero rated” services, in which mobile network operators partner with service providers including Facebook, Twitter and Wikimedia to provide their popular services to new Internet users without use applying to data costs. Zero rating is an extremely popular tool for helping the 2/3 of the world’s population not currently on the Internet get connected and, likely, from these services to many others. But such services violate the “principle” of neutrality that has mutated from an engineering concept to a nearly-religious conviction. And so zero rating must be sacrificed, along with users who are too poor to otherwise join the digital economy. 2.  Closer to home, we see the wildly successful Netflix service making a play to hijack the Open Internet debate into one about back-end interconnection, peering, and transit—engineering features that work so well that 99% of the agreements involved between networks, according to the OECD, aren’t even written down. 3.  And in Europe, there are other efforts to turn the neutrality principle on its head, using it as a hammer not to regulate ISPs but to slow the progress of leading content and service providers, including Apple, Amazon and Google, who have what the French Digital Council and others refer to as non-neutral “platform monopolies” which must be broken. To me, these are in fact new faces on very old strategies—colonialism, rent-seeking, and protectionist trade warfare respectively. My hope is that Internet users—an increasingly powerful and independent source of regulatory discipline in the Internet economy—will see these efforts for what they truly are…and reject them resoundingly. The more we trust (but also verify) the engineers, the faster the Internet economy will grow, both in the U.S. and Europe, and the greater our trade in digital goods and services will strengthen the ties between our traditional economies. It’s worked brilliantly for almost two decades. The alternatives, not so much.

There are several “flavors” of net neutrality–Eli Noam at Columbia University estimates there are seven distinct meanings of the term–but most net neutrality proponents agree that reinterpreting the 1934 Communications Act and “classifying” Internet service providers as Title II “telecommunications” companies is the best way forward. Proponents argue that ISPs are common carriers and therefore should be regulated much like common carrier telephone companies. Last week I filed a public interest comment about net neutrality and pointed out why the Title II option is unwise and possibly illegal.

For one, courts have defined “common carriers” in such a way that ISPs don’t look much like common carriers. It’s also unlikely that ISPs can be classified as telecommunications providers because Congress defines “telecommunications” as the transmission of information “between or among points specified by the user.” Phone calls are telecommunications because callers are selecting the endpoint–a person associated with the known phone number. Even simple web browsing, however, requires substantial processing by an ISP that often coordinates several networks, servers, and routers to bring the user the correct information, say, a Wikipedia article or Netflix video. Under normal circumstances, this process is completely mysterious to a user. By classifying ISPs as common carriers and telecommunications providers, therefore, the FCC invites immense legal risk.

As I’ve noted before, prioritized data can provide consumer benefits and stringent net neutrality rules would harm the development of new services on the horizon. Title II–in making the Internet more “neutral”–is anti-progress and is akin to putting the toothpaste back in the tube. The Internet has never been neutral, as computer scientist David Clark and others point out, and it’s getting less neutral all the time. VoIP phone service is already prioritized for millions of households. VoLTE will do the same for wireless phone customers.

It’s a largely unreported story that many of the most informed net neutrality proponents, including President Obama’s former chief technology officer, are fine with so-called “fast lanes”–particularly if it’s the user, not the ISP, selecting the services to be prioritized. There is general agreement that prioritized services are demanded by consumers, but Title II would have a predictable chilling effect on new services because of the regulatory burdens.

MetroPCS, for example, a small wireless carrier with about 3% market share attempted selling a purportedly non-neutral phone plan that allowed unlimited YouTube viewing and was pilloried for it by net neutrality proponents. MetroPCS, chastened, dropped the plan. With Title II, a small ISP or wireless carrier wouldn’t dream of attempting such a thing.

In the comment, I note other undesirable effects of Title II, including that it undermines the position the US has held publicly for years that the Internet is different than traditional communications.

If the FCC further intermingles traditional telecommunications with broadband, it may increase the probability of the [International Telecommunications Union] extending sender-pays or other tariffing and tax rules to the exchange of Internet traffic. Several countries proposed instituting sender-pays at a contentious 2012 ITU forum and the United States representatives vigorously fought sender-pays for the Internet. Many developing countries, particularly, would welcome such a change in regulations, because, as Mercatus scholar Eli Dourado found, sender-pays rules “allow governments to export some of their statutory tax burden.” New foreign tariffing rules would function essentially as a transfer of wealth from popular US-based companies like Facebook and Google to corrupt foreign governments and telephone cartels.

Finally, I note that classifying ISPs as common carriers weakens the enforcement of antitrust and consumer protection laws. Generally, it is difficult to bring antitrust lawsuits in extensively regulated industries. After filing my comment, I learned that the FTC also filed a comment noting, similarly, that its Section 5 authority would be limited if the FCC goes the Title II route. Brian Fung and others have since written about this interesting political and legal development. This detrimental effect on antitrust enforcement should weigh against Title II regulation.

There are substantial drawbacks to Title II regulation of ISPs and the FCC should exercise regulatory humility and its traditional hands-off approach to the Internet. In the end, Title II would harm investment in nascent technologies and network upgrades. The harms to consumers and small carriers, particularly, would be immense. It almost makes one think that comedy sketches and “death of the Internet” reporting don’t lead to good public policy.

More Information

See my presentation (36 minutes) on net neutrality and “fast lanes” on the Mercatus website.

The Supreme Court hears oral arguments today in a case that will decide whether Aereo, an over-the-top video distributor, can retransmit broadcast television signals online without obtaining a copyright license. If the court rules in Aereo’s favor, national programming networks might stop distributing their programming for free over the air, and without prime time programming, local TV stations might go out of business across the country. It’s a make or break case for Aereo, but for broadcasters, it represents only one piece of a broader regulatory puzzle regarding the future of over-the-air television.

If the court rules in favor of the broadcasters, they could still lose at the Federal Communications Commission (FCC). At a National Association of Broadcasters (NAB) event earlier this month, FCC Chairman Tom Wheeler focused on “the opportunity for broadcast licensees in the 21st century . . . to provide over-the-top services.” According to Chairman Wheeler, TV stations shouldn’t limit themselves to being in the “television” business, because their “business horizons are greater than [their] current product.” Wheeler wants TV stations to become over-the-top “information providers”, and he sees the FCC’s role as helping them redefine themselves as a “growing source of competition” in that market segment.

If TV stations share Chairman Wheeler’s vision for their future, the FCC’s “help” in redefining the role of broadcast licensees in the digital era could represent a potential win rather than a loss. If Wheeler truly seeks to enable TV stations to deliver a competitive, fixed and mobile cable-like service, it could signal a positive shift in the FCC’s traditionally stagnant approach to broadcast regulation.

Like all regulatory pronouncements, the devil is always in the details — notwithstanding the existing and legitimate skepticism that TV stations have as to whether the FCC can and will treat them fairly in the future. For better or worse, many will judge the “success” of the broadcast incentive auction by the amount of revenue it raises. This reality provides the FCC with unique incentives to “encourage” TV stations to give up their spectrum licenses. In Washington, “encouragement” can range from polite entreaty to regulatory pain.

After the FCC imposed new ownership limits on TV stations last month, some fear the FCC will choose pain as its persuader. Last month’s FCC action prompts them to ask, if Wheeler is sincere in his desire to help broadcasters pivot to a broader business model, why impose new ownership limits on TV stations that could hinder their ability to compete with cable and over-the-top companies?

Chairman Wheeler attempted to address this question in his NAB speech, but his answer was oddly inconsistent with his broader vision. He said the FCC’s new ownership limits are rooted in the traditional goals of competition, diversity, and localism among TV stations. That only makes sense, however, if you believe TV stations should compete only with other TV stations. Imposing new ownership limits on TV stations won’t help them pivot to a future in which they compete in a broader “information provider” market — it would hinder them.

I expect TV station owners are wondering: If we accept Chairman Wheeler’s invitation to look beyond our current product, will he meet us on the horizon? Or will we find ourselves standing there alone? It’s hard to predict the future, because the future is always just over the horizon.

Most conservatives and many prominent thinkers on the left agree that the Communications Act should be updated based on the insight provided by the wireless and Internet protocol revolutions. The fundamental problem with the current legislation is its disparate treatment of competitive communications services. A comprehensive legislative update offers an opportunity to adopt a technologically neutral, consumer focused approach to communications regulation that would maximize competition, investment and innovation.

Though the Federal Communications Commission (FCC) must continue implementing the existing Act while Congress deliberates legislative changes, the agency should avoid creating  new regulatory disparities on its own. Yet that is where the agency appears to be heading at its meeting next Monday.

A recent ex parte filing indicates that the FCC is proposing to deem joint retransmission consent negotiations by two of the top four Free-TV stations in a market a per se violation of the FCC’s good-faith negotiation standard and adopt a rebuttable presumption that joint negotiations by non-top four station combinations constitute a failure to negotiate in good faith.” The intent of this proposal is to prohibit broadcasters from using a single negotiator during retransmission consent negotiations with Pay-TV distributors.

This prohibition would apply in  all TV markets, no matter how small, including markets that lack effective competition in the Pay-TV segment. In small markets without effective competition, this rule would result in the absurd requirement that marginal TV stations with no economies of scale negotiate alone with a cable operator who possesses market power.

In contrast, cable operators in these markets would remain free to engage in joint negotiations to purchase their programming. The Department of Justice has issued a press release “clear[ing] the way for cable television joint purchasing” of national cable network programming through a single entity. The Department of Justice (DOJ) concluded that allowing nearly 1,000 cable operators to jointly negotiate programming prices would not facilitate retail price collusion because cable operators typically do not compete with each other in the sale of programming to consumers.

Joint retransmission consent negotiations don’t facilitate retail price collusion either. Free-TV distributors don’t compete with each other for the sale of their programming to consumers — they provide their broadcast signals to consumers for  free over the air. Pay-TV operators complain that joint agreements among TV stations are nevertheless responsible for retail price increases in the Pay-TV segment, but have not presented evidence supporting that assertion. Pay-TV’s retail prices have increased at a steady clip for years irrespective of retransmission consent prices.

To the extent Pay-TV distributors complain that joint agreements increase TV station leverage in retransmission consent negotiations, there is no evidence of harm to competition. The retransmission consent rules  prohibit TV stations from entering into exclusive retransmission consent agreements with any Pay-TV distributor — even though Pay-TV distributors are allowed to enter into such agreements for cable programming — and the FCC has determined that Pay- and Free-TV distributors do not compete directly for viewers. The absence of any potential for competitive harm is especially compelling in markets that lack effective competition in the Pay-TV segment, because the monopoly cable operator in such markets is the de facto single negotiator for Pay-TV distributors.

It is even more surprising that the FCC is proposing to prohibit joint sales agreements among Free-TV distributors. This recent development apparently stems from a DOJ Filing in the FCC’s incomplete media ownership proceeding.

A fundamental flaw exists in the DOJ Filing’s analysis: It failed to consider whether the relevant product market for video advertising includes other forms of video distribution, e.g., cable and online video programming distribution. Instead, the DOJ relied on precedent that considers the sale of advertising in  non-video media only.

Similarly, the Department has repeatedly concluded that the purchase of broadcast television spot advertising constitutes a relevant antitrust product market because advertisers view spot advertising on broadcast television stations as sufficiently distinct from advertising on other media (such as radio and newspaper). (DOJ Filing at p.8)

The DOJ’s conclusions regarding joint sales agreements are clearly based on its incomplete analysis of the relevant product market.

Therefore, vigorous rivalry between multiple independently controlled broadcast stations in each local radio and television market ensures that businesses, charities, and advocacy groups can reach their desired audiences at competitive rates. (Id. at pp. 8-9, emphasis added)

The DOJ’s failure to consider the availability of advertising opportunities provided by cable and online video programming renders its analysis unreliable.

Moreover, the FCC’s proposed rules would result in another video market double standard. Cable, satellite, and telco video programming distributors, including DIRECTV, AT&T U-verse, and Verizon FIOS, have entered into a joint agreement to sell advertising through a  single entity, NCC Media (owned by Comcast, Time Warner Cable, and Cox Media). NCC Media’s Essential Guide to planning and buying video advertising says that cable programming has surpassed 70% of all viewing to ad-supported television homes in Prime and Total Day, and 80% of Weekend daytime viewing. According to NCC, “This viewer migration to cable [programming] is one of the best reasons to shift your brand’s media allocation from local broadcast to Spot Cable,” especially with the advent of NCC’s new consolidated advertising platform. (Essential Guide at p. 8) The Essential Guide also states:

• “It’s harder than ever to buy the GRP’s [gross rating points] you need in local broadcast in prime and local news.” (Id. at p. 16)
• “[There is] declining viewership on broadcast with limited inventory creating a shortage of rating points in prime, local news and other dayparts.” (Id. at p. 17)
• “The erosion of local broadcast news is accelerating.” (Id. at p. 18)
• “Thus, actual local broadcast TV reach is at or below the cume figures for wired cable in most markets.” (Id. at p. 19)

This Essential Guide clearly indicates that cable programming is part of the relevant video advertising product market and that there is intense competition between Pay- and Free-TV distributors for advertising dollars.  So why is the FCC proposing to restrict joint marketing agreements among Free-TV distributors in local markets when virtually the entire Pay-TV industry is jointly marketing all of their advertising spots nationwide?

The FCC should refrain from adopting new restrictions on local broadcasters until it can answer questions like this one. Though it is appropriate for the FCC to prevent anticompetitive practices, adopting disparate regulatory obligations that distort competition in the same product market is not good for competition  or consumers. Consumer interests would be better served if the FCC decided to address video competition issues more broadly — or there might not be any Free-TV competition to worry about.

Sprint’s Chairman, Masayoshi Son, is coming to Washington to explain how wireless competition in the US would be improved if only there were less of it.

After buying Sprint last year for $21.6 billion, he has floated plans to buy T-Mobile. When antitrust officials voiced their concerns about the proposed plan’s potential impact on wireless competition, Son decided to respond with an unusual strategy that goes something like this: The US wireless market isn’t competitive enough, so policymakers need to approve the merger of the third and fourth largest wireless companies in order to improve competition, because going from four nationwide wireless companies to three will make things even more competitive. Got it? Me neither.

An argument like that takes nerve, especially now. When AT&T attempted to buy T-Mobile a few years ago, Sprint led the charge against it, arguing vociferously that permitting the market to consolidate from four to only three nationwide wireless companies would harm innovation and wireless competition. After the Administration blocked the merger, T-Mobile rebounded in the marketplace, which immediately made it the poster child for the Administration’s antitrust policies.

It also makes Son’s plan a non-starter. Allowing Sprint to buy T-Mobile three years after telling AT&T it could not would take incredible regulatory nerve. It would be hard to convince anyone that such an immediate about face in favor of the company that fought the previous merger the hardest isn’t motivated by a desire to pick winners in losers in the marketplace or even outright cronyism. That would be true in almost any circumstance, but is doubly true now that T-Mobile is flourishing. It’s hard to swallow the idea that it would harm competition if a nationwide wireless company were to buy T-Mobile —  unless the purchaser is Sprint.

The special irony here is that Son has built his reputation on a knack for relentless innovation. When he bought Sprint, he expressed confidence that Sprint would become the number 1 company in the world. But, a year later, it is T-Mobile that is rebounding in the marketplace, even though T-Mobile has fewer customers than Sprint and less spectrum than Sprint. Buying into T-Mobile’s success now wouldn’t improve Son’s reputation for innovation, but it would double down on his confidence. I expect US regulators will want to see how he does with Sprint before betting the wireless competition farm on a prodigal Son.

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo (economist Thomas Hazlett quips the agency’s initials stand for “Forever Captured by Corporations”).

For these reasons, members of Congress every few years announce their intention to reform the 1934 and 1996 communications laws and modernize the FCC. Yesterday, some powerful House members unexpectedly reignited hopes that Congress would overhaul our telecom, broadband, and video laws. In a Google Hangout (!), Reps. Fred Upton and Greg Walden said they wanted to take on the ambitious task of passing a new law in 2015.

Much depends on next year’s elections and the composition of Congress, but hopefully the announcement spurs a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s–an effort led by reformist Democrats.

About ten years ago, more than fifty scholars and technologists crafted reports which constituted the Digital Age Communications Act (or DACA) that is largely deregulatory (a majority of the group had served in Democratic administrations, interestingly enough). In 2005, then-Sen. Jim DeMint proposed a bill similar to the working group’s proposals. The working group’s recommendations aged very well in eight years–which you can’t say about the 1996 Act–and represents a great starting point for future legislation.

As Adam has said the DACA reports have five primary reform objectives:

– Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law – Eliminate regulatory silos and level the playing field through deregulation – Comprehensively reform spectrum not just through more auctioning but through clear property rights – Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs; and – Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

DACA redefines the FCC as a specialized competition agency for the communications sector. The FCC largely sees itself as a competition agency today but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate–the agency has a notoriously bad record in federal courts. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. The DACA proposals aren’t perfect but it is a resilient framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives.

Jon Brodkin at Ars Technica and Brian Fung at The Switch have posts featuring a New America Foundation study, The Cost of Connectivity 2013, comparing international prices and speeds of broadband. As I told Fung when he asked for my assessment of the study, I was left wondering whether lower prices in some European and Asian cities arise from more competition in those cities or unacknowledged tax benefits and consumer subsidies that bring the price of, say, a local fiber network down.

The report raised a few more questions in my mind, however, that I’ll outline here.

The NAF report concludes that US consumers would see lower prices if there was more competition. Or, as Brodkin says,

What’s the takeaway from all this data? It’s not a surprising one: lack of competition makes for bad choices.

I don’t disagree with the sentiment but the report makes no mention of competition data that would tend to support their broad conclusion. How many wireline competitors are there in Paris, Seoul, NYC, and Prague? Is there correlation between more competitors and lower (quality-adjusted) prices? NAF never tells us.

I raise this because the US actually has more market fragmentation (measured by HHI, an established tool used by antitrust agencies) for wireless carriers than many European countries, yet higher prices. If the cause of relatively higher prices is lack of competition, per NAF, wouldn’t we expect lower advertised prices in the US for wireless subscriptions because there is more competition? The fact that the US has higher prices indicates there are other factors besides number of competitors that drive price.

This lack of discussion of competition data is the major gap of the NAF study. Despite concluding that lack of competition is the problem in the US, the authors seem uninterested in rigorously examining the state of competition in the cities and countries they highlight (but perhaps this will be taken up in their promised forthcoming full report).

Another problem is that the report mostly consists of documenting advertised download speeds. While sensible since it’s easily available, this reliance on advertised speeds warrants a warning. The FCC publishes an annual report comparing international broadband offerings and noted in its 2012 report that advertised speeds are a troublesome metric that often misrepresent what consumers actually see. Recently in the UK, for instance, broadband packages with an advertised speed of 24 Mbps featured an actual speed around 5 Mbps for the typical customer. (Recent truth-in-advertising reforms have made this problem less likely–but only in the UK.) Different countries have different methodologies and advertising standards, and the US carriers tend to have more “honest” advertised speeds. Unlike the FCC, which carefully notes issues with these sorts of measurements, NAF makes no mention of possible discrepancies despite letting advertised speeds do a lot of the work that leads to their conclusion.

My final dispute is with the inclusion of “triple play” subscriptions (combination voice, Internet, television service). Documenting the price for this bundle is next to worthless because the quality of the television package is a substantial reason for buying. For example, what do we learn from the fact that you can get phone service, 20 Mbps Internet speeds, and a television package in Riga, Latvia for $22? Is the $99 price in San Francisco high because of a lack of competition or because the television package is so much better than the channels offered in Riga? Or because of regulatory distortions in US television policy? (Retrans, anyone?) Without some measure of quality-adjusted price, the triple play comparisons are just noise.

Adam Thierer, Senior Research Fellow at the Mercatus Center discusses his recent working paper with coauthor Brent Skorup, A History of Cronyism and Capture in the Information Technology Sector. Thierer takes a look at how cronyism has manifested itself in technology and media markets — whether it be in the form of regulatory favoritism or tax privileges. Which tech companies are the worst offenders? What are the consequences for consumers? And, how does cronyism affect entrepreneurship over the long term?

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Related Links

• A History of Cronyism and Capture in the Information Technology Sector, Thierer
• Video: A History of Cronysim and Capture in the Information Technology Sector, Thierer
• Adam Thierer Biography, Mercatus Center
• Adam Thierer on Anti-Tech Grump Evgeny Morozov, Thierer

Richard Brandt, technology journalist and author, discusses his new book, One Click: Jeff Bezos and the Rise of Amazon.Com. Brandt discusses Bezos’ entrepreneurial drive, his business philosophy, and how he’s grown Amazon to become the biggest retailer in the world. This episode also covers the biggest mistake Bezos ever made, how Amazon uses patent laws to its advantage, whether Amazon will soon become a publishing house, Bezos’ idea for privately-funded space exploration and his plan to revolutionize technology with quantum computing.

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Related Links

• One Click: Jeff Bezos and the Rise of Amazon.com, Brandt
• History of Google/About Google, Brandt
• Five minutes with Richard Brandt, Author of One Click, Ennyman

This week at CTIA 2013, FCC Commissioner Jessica Rosenworcel presented ten ideas for spectrum policy. Though I don’t agree with all of them, she articulated a reasonable vision for spectrum policy that prioritizes consumer demand, incorporates market-oriented solutions, and establishes transparent goals and timelines. Commissioner Rosenworcel’s principled approach stands in stark contrast to the intellectually bankrupt incentive auction recommendation offered by the Department of Justice last month.

Commissioner Rosenworcel clearly defines three simple goals for a successful incentive auction:

• Raising enough revenue to support the nation’s first interoperable, wireless broadband public safety network;
• Making more broadband spectrum available through policies that are attractive to broadcasters; and
• Providing fair treatment to those broadcasters who do not wish to participate in the auction.

All three goals are consistent with consumer demand for wireless broadband services, the market-oriented reassignment of broadcast spectrum envisioned by the National Broadband Plan, and the will of Congress.

In comparison, the DOJ’s recommendation focuses on only one goal: Subsidizing two particular companies – Sprint Nextel and T-Mobile – to ensure they obtain spectrum in the auction. The DOJ claims these subsidies are necessary to promote competition. But, there is a substantial difference between fair government policies that promote competition generally and a policy of favoring foreign-owned companies over their domestic competitors.

Unfortunately, the DOJ is not alone in its belief that bestowing government benefits on favored companies is a legitimate goal in a free society. Some members of the House Commerce Committee believe the DOJ’s past merger reviews provide “a solid factual and analytical basis” for its current recommendation to the FCC.

The fatal flaw in this theory is that the DOJ’s recommendation to the FCC is inconsistent with the factual findings and analysis of the DOJ in its past merger reviews. As I’ve noted previously, in its complaint against the AT&T/T-Mobile merger, the DOJ found that, “due to the advantages arising from their scope and scale of coverage,” Sprint Nextel and T-Mobile are “especially well-positioned to drive competition” in the wireless industry. That finding doesn’t provide any factual or analytical basis whatsoever to conclude that Sprint Nextel and T-Mobile require special government treatment in the incentive auction in order to compete with Verizon and AT&T.

That’s why the DOJ recommendation relies on an irrational and discriminatory presumption that Verizon and AT&T are using spectrum less efficiently than Sprint Nextel and T-Mobile. A speculative presumption doesn’t require the DOJ to admit its own deceit. It merely requires audacity.

In an era when government officials routinely revise the facts to suit their preferred outcomes and disclaim responsibility for the actions of the agencies they’re charged with leading, Commissioner Rosenworcel’s speech required intellectual bravery and political courage. Her ideas deserve a fair hearing.

I plan to write more about broadband competition and the impact of Google Fiber but in the meantime, there is a New York Times article on the subject that I’ll briefly address.

The author, Eduardo Porter, misdiagnoses why tiered pricing in broadband exists, giving readers the impression that only monopolies price discriminate:

That means that in most American neighborhoods, consumers are stuck with a broadband monopoly. And monopolies don’t strive to offer the best, cheapest service. Rather, they use speed as a tool to discriminate by price — coaxing consumers who are willing to pay for high-speed broadband into more costly and profitable tiers.

Consumer advocacy groups regularly–and wrongly–equate price discrimination with monopoly. Price discrimination–where firms price different customers different prices because of their willingness to pay–tells us nothing about the existence of monopoly (and little about market power). Firms lacking monopoly–in industries like airlines, clothing retail, movie theaters, and restaurants–use price discrimination. No one alleges monopoly in these industries, so I don’t know why the author makes this connection between monopoly and price discrimination. Had Porter thought about it, this paragraph makes little sense since even in the urban areas that have 2 or 3 high-speed broadband providers you still see tiered pricing. This should be a tip-off that tiered pricing does not arise from monopoly.

Porter makes another error, which I think just signals the sloppy reporting in this piece:

The preferred strategy seems to involve more cooperation than competition. In 2011, Verizon tried to cobble together agreements with the nation’s major cable firms to jointly market each others’ services — offering itself as the wireless complement to cable’s wireline plans. It was foiled only because the Justice Department slapped the deals down as anticompetitive.

As Gigi Sohn (who generally agrees with the author) points out on Twitter, this is not right either.

Great @nytimes piece on why US #broadband is mediocre: nytimes.com/2013/05/08/bus…Correction: DoJ did *not* block Verizon-cable spectrum deal

— Gigi Sohn (@gigibsohn) May 8, 2013

The agreements to jointly market others’ products were not in any meaningful sense “foiled.” Those agreements were approved with conditions, namely, that Verizon couldn’t market a cable company’s service where FiOS is available.

I don’t think these are minor nitpicks. The fact is, journalists and advocates regularly employ loose definitions of “monopoly,” often intentionally in order to increase the urgency to further some political end. And the portion about the Verizon deal gives readers the distinct impression that Verizon was doing something colluding and nefarious that was stopped by the DOJ, and that’s just not true.

The Information Economy Project at the George Mason University School of Law is hosting a conference tomorrow, Friday, April 19. The conference title is From Monopoly to Competition or Competition to Monopoly? U.S. Broadband Markets in 2013. There will be two morning panels featuring discussion of competition in the broadband marketplace and the social value of “ultra-fast” broadband speeds.

We have a great lineup, including keynote addresses from Commissioner Joshua Wright, Federal Trade Commission and from Dr. Robert Crandall, Brookings Institution.

The panelists include:

Eli Noam, Columbia Business School

Marius Schwartz, Georgetown University, former FCC Chief Economist

Babette Boliek, Pepperdine University School of Law

Robert Kenny, Communications Chambers (U.K.)

Scott Wallsten, Technology Policy Institute

The panels will be moderated by Kenneth Heyer, Federal Trade Commission and Gus Hurwitz, University of Pennsylvania, respectively. A continental breakfast will be served at 8:00 am and a buffet lunch is provided. We expect to adjourn at 1:30 pm. You can find an agenda here and can RSVP here. Space is limited and we expect a full house, so those interested are encouraged to register as soon as possible.