Daniel O'Connor

At the end of 2013, Project DisCo hosted its first physical world event, The Disruptive Competition Policy Forum.  Over the next few days, we are going to post the videos of the great panels and keynotes here.

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If you are a reader of DisCo, you undoubtedly know about the fight between Tesla and independent auto dealers.  To sum it up, independent auto dealers have successfully lobbied for laws in nearly every state that prevent manufacturers from operating their own dealerships (i.e. auto manufacturers must use an “independent” dealer to sell cars to consumers) – thus protecting the dealer’s privileged economic position as the middleman in the auto distribution chain.

Therefore, today’s news that the New Jersey Motor Vehicle Commission, with the backing of Governor Christie, reversed its previous course and voted to ban the direct sales of automobiles in New Jersey should not come as a surprise to anyone.  Unfortunately for New Jersey consumers, this puts Tesla’s future expansion in the Garden State in serious doubt and casts a shadow of uncertainty over the two stores it currently operates in New Jersey.  As the company describes the situation in its blog:

Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith.

Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state.

The larger problem for Tesla is that the independent auto dealer model that has been statutorily enshrined in the majority of states thanks to the political influence of the car dealer lobby does not work well for the company.  As a company that, at least right now, only sells a little more than 20,000 vehicles a year (compared to 15.6 million cars sold annually in the United States), they don’t have the scale to support a nationwide network of dealers.  Furthermore, as Tesla’s CEO has previously referenced, Teslas are competing directly against nearly all the other gasoline powered inventory on the dealers’ lots.  Would independent dealers really be fully vested in disparaging the majority of their inventory in order to sell a few Teslas?  Probably not.

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A few weeks ago, the tech press lit up with several articles discussing Google’s recently revealed “Mobile Application Distribution Agreement” (MADA).  The Wall Street Journal was others based their articles on claims surfaced by Ben Edelman — a Harvard Business School professor who consults for many of Google’s competitors — claiming that certain contractual terms surrounding Google Mobile Services were anticompetitive.

Specifically, Edelman contends that the following MADA provisions harm consumers:

Conditioning access to certain Google mobile applications (i.e Search, Maps, Play, YouTube, Gmail, Google Calendar, etc.) on a commitment to

(a) preload an integrated suite of applications on the device;

(b) give certain Google applications premium placement on the phone; and

(c) make Google search and Google network location provider the default options.

Unfortunately, most of the articles left many of the premises underlying Edelman’s arguments unchallenged.  There is a lot going on here that needs unpacking and a lot of assumptions built into Edelman’s “analysis” that don’t pass a common sense test, let alone an economics test.  I’ll tackle a few of the biggest problems in Edelman’s arguments below.

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Citing inside sources, the Wall Street Journal reported yesterday that Yahoo and Yelp have agreed to a partnership where Yahoo will show Yelp listings and reviews of local businesses in its search results.  Although this has yet to be officially confirmed by the companies, it makes perfect sense.

Too often commentators stovepipe “Internet verticals.”  It’s easy to become fixated with static market definitions: Facebook is a social network that competes with Twitter, Google is a search engine that competes with Bing, Yelp enables user-generated local business reviews that competes with Foursquare, etc.

In reality, however, the Internet marketplace isn’t about a compartmentalized series of vertical markets competing with one another.  The Internet is a hypercompetitive online space (for why, see this blog post) where markets blur and evolve continuously.  The rapid pace of progress in the online ecosystem means that there is a constant churn of not only innovation, but also alliances, deals and strategic relationships.

An abridged history of the last couple years of just a few of the major players in the Internet space points to the dynamism of both competition and the relationships between companies.

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Two Senators released a bill last week that could have major implications for the U.S. approach to economic diplomacy in the 21st century.  Between budget fights, NSA hearings and the ongoing health care website saga, it is not surprising you might have missed it.

Senator Wyden (D-OR) and Senator Thune (R-SD) came together to sponsor a bipartisan bill — the Digital Trade Act of 2013 — that directs U.S. trade negotiators (and other diplomats with economic portfolios) to prioritize attention to the needs of the digital economy.  Although the simple bill might seem small compared to the front page political fights that have captured attention over the past few months, the long term effect of such legislation — if passed — could very well be profound as international commerce is increasingly important to global trade, but it lacks most of the protections that legacy goods and services trade enjoy.

Digital trade issues, despite the Internet’s centrality to modern international commerce, currently occupy a position of peripheral importance to the United States Trade Representative (and even less to most other trade negotiators from other countries) compared with more traditional trade disciplines, such as agriculture, financial services and manufacturing.  Of note, there is not even an Industry Trade Advisory Committee (ITAC) devoted to Internet-enabled commerce and the needs of online platforms (ITAC 8, which includes e-commerce, is a hodge podge of mostly telecom and hardware interests that have much different, but still important, concerns and expertise), despite the United States International Trade Commission study acknowledging that digital trade is one of our largest export industries.  Given that ITACs are one of the main avenues through which the USTR solicits input from the private sector during confidential trade negotiations, this is a problem.

Ironically, the same rapid technological innovation on the Internet that is drastically lowering the transaction costs associated with international trade is now obsoleting the agreements and norms that facilitated 20th century commerce.  If policymakers don’t keep pace with the technology, we risk backsliding into an international commerce wild west that lacks the predictability and certainty that businesses need to thrive. MORE »

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CCIA launched DisCo (the Disruptive Competition Project) almost a year and a half ago; our first post was June 1, 2012.  Since then, the project has grown, and we’re excited about all of the interesting news and views we’ve had to share with you.

And DisCo is now more than just a blog; we’re having our first event next month, the DisCo Policy Forum 2013, featuring speakers on a lot of the topics we frequently cover.  Please join us in person as we explore several topics, including local restraints on Internet-enabled competition, data policy and 21st century copyright.

The agenda is below.  RSVP on Eventbrite.  (There’s also a Facebook event; invite your friends!)

DISCO POLICY FORUM 2013

Tuesday, December 10th

Arent Fox LLP, 1717 K Street NW

9:45am: Registration Opens

 

10:15am: Welcome, Opening Remarks

Featuring: Stephanie Joyce, Partner, Arent Fox LLP

10:30am: Policymaker Keynote Address

Featuring: Joshua Wright, Commissioner, Federal Trade Commission

11:15am: “Breaking Barriers to Internet-enabled Competition”

The Internet has been a game changer for the average consumer. Its ubiquity and malleability empower entrepreneurs and enhance consumer choice by expanding markets and connecting producers and consumers from all over the world. However, it also displaces traditional middlemen and reshapes markets in ways that have engendered political pushback from traditional incumbents. In this panel, we hope to discuss this trend and policy responses, including the FTC’s recent advocacy focused on anticompetitive local regulations.

Featuring:

  • Jim Chen, VP of Regulatory Affairs and Associate General Counsel, Tesla Motors, Inc.
  • Michael McGeary, Co-Founder and Chief Political Strategist, Engine Advocacy
  • Corey Owens, Head of Public Policy, Uber
  • Patrick Roach, Attorney-Advisor, Office of Policy Planning, FTC
  • Chris Sagers, Law Professor, Cleveland-Marshall College of Law & Advisory Board Member, American Antitrust Institute

12:15pm: Lunch

 

1:15pm: Q&A with Rep Jared Polis (D-Co.)

Moderated by: Rob Pegoraro

1:45pm: “Planning our Data Future: Privacy and Innovation in the 21st Century”

Declining data storage prices, ubiquitous broadband connections and advances in analytical capability have sparked an economic and technological boom over the last couple of years. In fact, advances in data processing and analytics are at the heart of many of the most cutting-edge disruptive technologies and business models. As policymakers and trade negotiators across the world grapple with the 21st century data rules of the road, this panel will discuss not only how these technologies are changing the world around us, but also how lawmakers and regulators should approach these technological advances.

Featuring:

  • John Boswell, SVP, Chief Legal Officer and Corporate Secretary, SAS
  • Josh Galper, Chief Policy Officer and General Counsel, Personal, Inc.
  • Ross Schulman, Public Policy & Regulatory Counsel, CCIA
  • Adam Thierer, Senior Research Fellow, Mercatus Center

3:00pm: “Cutting Edge Commerce and Copyright”

Reflecting the persistent friction between copyright and modern technology, Congress is again contemplating copyright legislation. Increasingly, copyright functions in a regulatory manner, instead of a well-ordered system of property rights. It is timely to discuss how new products and services navigate the uncertain rights and the ever-present threat of litigation in order to bring consumers what they want.

Featuring:

  • Marvin Ammori, Principal, The Ammori Group (counsel to companies including Automattic)
  • Michael Carrier, Professor, Rutgers School of Law
  • Michael Masnick, Founder and CEO, Floor 64
  • John Ossenmacher, CEO, ReDigi

4:15pm: Industry Keynote Address

Featuring: Chet Kanojia, Founder and CEO of Aereo, Inc.

5:00pm: Post-Event Networking Reception

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Wednesday, the South China Morning Post ran a story that cascaded around the tech world and even made the front page of many business sections.

The SCMP reported that Chinese officials have made a decision to lift the ban on politically sensitive foreign websites, such as Facebook, Twitter and the New York Times, within the Shanghai free-trade zone, a 28 square kilometer free-trade haven where China will relax rules restricting foreign investment and free-trade (the “free-trade zone” opens officially on Sunday).

Much of the subsequent media coverage focused on the opportunity for these companies in get a foothold in the Chinese market.  Unfortunately, that framing is problematic.  These companies originally had a foothold in China when the Internet market was still nascent.  In fact, they were the early market leaders.  Unfortunately for them (mostly U.S.-headquartered companies) they were blocked from the Chinese market by “the Great Firewall”.  At the time, the purported reasons for the blockings were that these sites presented a threat to public order and national security.  However, this thinly veiled rhetoric was pierced by reality, as the Chinese clones (aka copies of Twitter [Weibo], Facebook [RenRen] and Google [Baidu]) that filled the void contained nearly identical “objectionable” content:

Also in the aftermath of the Xinjiang riots, microblogging site Twitter was cut off by the Chinese firewall for similarly dubious reasons. Less than two months later, Chinese Internet giant Sina launched a near identical microblogging service. To further the business-over-politics angle of China’s foreign Internet purge, China’s wildly popular instant-messaging service QQ removed a censorship filter after users’ complaints. Dissidents and riot organizers can now use Chinese versions of Twitter to organize.

Even a seemingly harmless site, like photo-sharing website Flickr, has been blocked in China, while its identical clone Bababian has grown steadily with foreign technology and no foreign competition. Likewise, blog-hosting sites Blogger and WordPress have long been blocked in China. Instead, Chinese netizens use Tianya, the 13th-most popular site in China. Far from being a sanitized land of boring blogs about daily activities, Tianya also hosts China’s largest Internet forum, a vitriolic, sensationalized, and hate-filled arena that makes Western gossip sites seem like the Economist.

One prescient Reuters journalist highlighted the potentially bigger picture in an article whose name says it all: “Facebook and Twitter too late for China’s Internet.”  In an Internet world dominated by first-mover advantage and network effects, five years away from a market is an eternity that is going to be difficult to recover from.  Sure, if China opened up its Internet to foreign competition now, Facebook, Twitter and Google will surely advance from their current miniscule market share.  Unfortunately, they will be starting at an extreme disadvantage relative to the companies and online platforms that the Chinese have been using for the past 5 years.

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We’ve been a little boozy here at DisCo this summer.  Recently, my much classier colleague, Matt Schruers, dissected how creativity and innovation prosper in the high-end mixology market without intellectual property protection.  I’ll have to take his word on it, as they don’t let me into the joints where bartenders rock throwback suspenders (braces?) and well coiffed handlebar mustaches and hock haute couture cocktails for prices that are anything but retro, unless, of course, you were buying a Buick.

Instead I turn my attention to an alcohol more up my alley, the potent potable of the proletariat: beer.  Although one hardly associates a beverage that dates back to the Neolithic period with innovation, the history of beer can teach us a lot about the positive and negative effects of regulation and the benefits of decentralized creative forces.

Specifically, let’s look at the originator of the modern oat soda, Germany.  Germany has long been viewed as a hop-head’s heaven and home some of the best brewers in the world.  Not only did modern beer originate in Germany (first documented use of hops), but for 16 days every fall millions of pilsner pilgrims from all over the planet pay homage to the historical homeland of hops by flocking en masse to Munich for the biggest bacchanal bash on the planet (aka Oktoberfest).  In fact, Germany consumes the second most beer per capita in the world, with the average German consuming 107 liters of beer per year.

Unfortunately for German brewers, the 107 liters per year represents a 10% decrease in average beer consumption over the past decade.  Although German physicians might consider this good news, German brewers are concerned.  Many have blamed “boring beer” for the annual decline in beer consumption.  Furthermore, foreign imports, once a trivial part of Germany’s beer market, are growing in popularity and now make up over 8% of the German beer market.  One of the fastest growing imports by volume are American craft beers and microbrews.  Germans paying a premium to import American beer; has the world gone mad?  Maybe.  But maybe the boring beer has something to do with it.

And before you go all Jared Diamond or Max Weber on me and say that the explanation for why there is so little variety in the German beer market is explained by the natural endowments of Northern European landscape or the cultural heritage of the populace, Germany’s neighbor, Belgium, is famous for its freewheeling beer culture and the tiny country boasts over 450 different varieties of beer.  In Germany, however, one beer — pilsner — accounts for over 50% of beer sales (that’s not to say that its not really good pilsner).

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In Glenn’s recent post on the political fight against Tesla, he references an informative article by Steve Blank on “rent seeking” in the digital economy.  It describes a phenomenon oft-documented here on DisCo.

Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.

Academically, rent seeking is defined as an attempt to obtain (or maintain) economic rents by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth (aka “adding value”).

To understand rent seeking, one must understand the concept of “economic rents,” which are different from the rent you pay to your landlord (although not entirely unrelated because Adam Smith originally derived “rent” from money generated by stodgy landlords who risked neither their own capital or labor in the production process).  The academic definition of “economic rent” is the portion of income paid to a factor of production in excess of what is needed to keep it in production.  In English, that translates to more money being paid to someone (or some company) than is necessary for them to perform a task or supply a product (aka supracompetitive profits).  Or, in plain English, the inefficient use of resources.

Why Rent-Seekers Target Internet Services

So, with those definitions in hand, I’ll move on to the question at the heart of this blog post: why is the Internet, in general, on the receiving end of so much rent-seeking behavior?

The short answer is that the Internet is challenging old business models and introducing furious competition into many sectors that are not accustomed to it.  Furthermore, the scope, scale and ease of use of the Internet is making whole job categories obsolete.  Many of these can be classified as “middlemen” — whether those middlemen be record labels, independent auto dealers, or local banks.  Facing economic and technological advancements that would make their whole industry obsolete (or squeeze their economic rents at the very least), these vested interests often respond by lobbying aggressively to protect their privileged economic positions.  In the process, they hamper economic efficiency and harm consumers (which is ironic, as many of the protectionist legislative and regulatory policies they push for are in the guise of “consumer protection”).

For a more thorough answer to the question, a stroll through Economics 101 and the dynamics of the Internet are necessary.

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Conflating privacy debates has become a hobby of chattering class as of late.  The former chairman of the FTC, Jon Leibowitz, discussed this conflation (without seeing a problem) recently when he said:

“The implications of the NSA data breach are going to be greater in the context of protecting consumers’ commercial privacy…. People are increasingly concerned about their own privacy vis-à-vis commercial entities…. Americans are going to be concerned about this breach, and things will move much more quickly into the commercial context.”

While Leibowitz might accurately reflect the political reality, having public backlash from the NSA controversy seep into the consumer commercial privacy debate is, at best, unhelpful and, at worst, dangerous.  Commercial privacy and warrantless government surveillance are two different animals.  Even though some overlap exists, at their heart they have different foundations, and — more importantly for the purposes of this blog — different policy imperatives.

Print media isn’t helping.  Yesterday, the WSJ had an article discussing an internal debate within Google on how to simplify its privacy policy settings.  In the article, the author, Amir Efrati, says that “the breadth of Google’s information gathering about Internet users rivals that of any single entity, government or corporate.”  Although the rest of the article proceeds in a somewhat disjointed discussion of internal debates within Google about how to structure its data collection while providing adequate user safeguards and accessible levels of user choice, the initial conflation of a private company vis-a-vis governments is unhelpful.

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