Daniel O'Connor

Back in March, I blogged about a slate of competition accusations that had been leveled at the Android mobile operating system.  Although I am not going to rehash my initial arguments here, I wanted to point readers to a recent paper by Dr. Torsten Körber, which analyzes the same claims and comes to similar conclusions (including noting that both the US FTC and Korean antitrust regulators examined the Android ecosystem as part of their antitrust reviews of Google’s practices and found no cause for concern).

Given that this is a blog, and not an academic journal, I’m not going to analyze Körber’s entire paper (although I recommend it to anyone interested in a deep dive on these issues), but instead point out a few interesting takeaways from it on the nature of competition in the mobile ecosystem.  Specifically, I will focus on how the mobile market is different than the PC market, as much of the current high-tech antitrust thinking and analysis is influenced by prior landmark antitrust cases, not least of which being the Microsoft cases.

1) The mobile market turns over much faster than the PC market

In the mobile world, turnover of devices is much faster.  Although it varies by country and manufacturer, it is very common for consumers to replace their smartphones every year, or every other year.  Compare this to the PC world, where — as Körber points out — Windows XP still has nearly a 30 percent share, and it was released in 2001!

So, what does this mean for antitrust/competition analysis?  It means that market power is more difficult to come by and market share is more ethereal than in the PC market, as consumers are continually faced with inflection points where they reevaluate their choice of handset and mobile OS.  Whereas if the average consumer replaces his or her computer once or twice a decade, then market power is more permanent and market share changes are much slower.  This partially explains the ephemeral nature of the leading smartphone and mobile OS makers over the decade, which is illustrated by this quote from comScore market research highlighted in the paper:

“In 2005, the market was dominated by Palm, Symbian and BlackBerry. However, by the following year all three had ceded control to Microsoft as the new market share leader. 2008‐2010 saw BlackBerry stage a comeback to assume the #1 position before eventually giving way to the upstart Android platform in 2011”.

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Last week, the head U.S. trade negotiator, Ambassador Michael Froman, delivered a speech addressing the Trade in Services Agreement (TiSA).  What got my attention was the prominence that the Internet and Internet-centric commerce received in the speech.

Although this might seem like common sense given the immense role that the Internet plays in international commerce (particularly trade in services), the international trade regime has been slow to embrace this technological revolution.  As I have written before on this blog, Internet trade has traditionally received relatively short shrift from traditional trade negotiators.  However, at least in the U.S., that trend is changing.

[As an interesting aside, watch this presentation by J. Bradford Jensen to get a better understanding of the importance of trade in services to the U.S. and global economy.]

Before I chronicle the USTR’s evolution on Internet-enabled trade rhetoric and action, I want to throw out a few recent examples of why trade negotiators — in the U.S. and the rest of the world — should focus on facilitating a free and open Internet if they want to help consumers and global commerce.

At the risk of stating the obvious, I need to lay out the keystone fact up front for the purposes of my argument:  the Internet has an enormous positive effect on international commerce: particularly for small businesses.  The Boston Consulting Group estimates that the G-20’s Internet economy will be worth $4.2 trillion by 2016 and that more than one-fifth of the growth of modern economies from 2007-2012 is attributable to the Internet.  These effects are predicted to significantly increase as Internet penetration grows in the rest of the world.

For major U.S. Internet companies, international markets have become increasingly more important.  And the potential for international competition has become more robust.  In the latest installment of Mary Meeker’s routinely fabulous annual report on internet trends, she documents this phenomenon.  While nine out of the top ten “global Internet properties” are made in the U.S.A., 79% of their users come from outside the U.S.  Compare this to 2005, when Google’s total international revenue was 39% of its overall sales.  Now, 56% of Google’s revenue comes from overseas.  For Facebook, it is a similar story.  Currently, 86 % of Facebook’s users are international, while less than 50% of Facebook users were international as of 2008.

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Amazon entered the smartphone scene in a major way today with its much hyped Fire Phone.  Although technology reviewers are furiously picking over the products new specs, such as its 3D screen, 13 megapixel camera and the dynamic perspective technology, I wanted to step back and examine how the tech embedded in this phone can accelerate the disruptive innovation already taking place in the tech ecosystem as we speak.  One particular feature of the phone deserving attention is the Firefly technology, which allows users to use their phone’s camera and microphone to directly identify objects, products, movies or songs in the real world and take actions based on that recognition.

I will take a more detailed look on what Amazon’s entry means for competition in the smartphone world in a follow up post, but without further ado, here are some disruptive aspects of the new Amazon smartphone:

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The Wall Street Journal published a story today on Facebook requesting that the European Commission, not individual domestic competition regulators, review its recent transaction to acquire WhatsApp.  The announcement came as a surprise as the acquisition already sailed through U.S. approval and, as the WSJ points out, the EC “wasn’t expected to review the deal because the acquisition is unlikely to materially boost Facebook’s revenues.”

Although Facebook’s request might seem strange on the surface, it follows on the footsteps of political pressure from European wireless companies to oppose the deal.  Given that these companies are powerful political forces in their respective states, fighting for merger approval in many individual countries against politically powerful local incumbents doesn’t seem like a great proposition.

As the WSJ notes:

European telecom executives have nevertheless railed against what they describe as the assault by so-called over-the-top companies that they believe are competing unfairly against traditional phone companies. At a conference in Brussels last month, some lambasted the EU antitrust agency’s perceived lack of interest in the WhatsApp merger.

It’s pretty clear why telcos are opposing this transaction.  Combining WhatsApp, which has “been hugely disruptive to the [telco’s] traditional text messaging business,” with a well-heeled market leader with a huge user base promises to make the new combination a stronger competitor for the telcos.  Therefore, it is not surprising that the telcos are pushing back: consumers saved $33 billion in texting fees in 2013 alone thanks to WhatsApp and similar messaging applications.  The problem for telcos: that savings came out of their pockets.  The other problem for the telcos: the very purpose of the European Commission’s competition policy is consumer welfare, not incumbent revenue protection.

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Despite being popularized in the 1990s by AOL Instant Messenger (AIM), instant messengers are becoming retro cool, especially if you are are global tech company with a couple billion dollars in cash on hand.  Besides (or possibly because of) the $19 billion that Facebook paid for WhatsApp and its 450 million users, other instant messaging platforms have been put on the auction block recently as well.  Most notably, Rakuten, a large Japanese e-commerce and Internet company, spent $900 million buying Viber, a four-year-old cross-platform instant messaging application.  Also, Alibaba, the Chinese e-commerce heavyweight, invested $215 million in the parent company of Tango, another instant messaging newcomer, to acquire a minority stake in the Mountain View-based company whose messaging product has 200 million registered users.

What’s going on here?  Why are instant messengers all the rage in an era when the cutting edge of technology consists of driverless cars, supersonic ground transit via pneumatic tube and elevators to space?

The tales of America Online (AOL) and Tencent shed some light on the recent popularity of instant messengers, and they also provide case studies in some of the finer points of disruptive innovation theory. MORE »

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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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