Glenn Manishin

The strangely named Rockstar Consortium has been in the news again, in part because some of its members just formed a new lobbying group, the Partnership for American Innovation, aimed at preventing the current political furor over patent trolls from bleeding into a general overhaul of the U.S. patent system. Yet Rockstar is perhaps the most aggressive patent troll out there today. Hence the mounting pressure in Washington, DC for the Justice Department’s Antitrust Division — which signed off on the initial formation of Rockstar two years ago — to open up a formal probe into the consortium’s patent assertion activities directed against rival tech firms, principally Google, Samsung and other Android device manufacturers.

Usually the fatal defect in antitrust claims of horizontal collusion is proving that competing firms acted in parallel fashion from mutual agreement rather than independent business judgment. In the case of Rockstar — a joint venture among nearly all smartphone platform providers except Google — that problem is not present because the entity itself exists only by agreement among its owner firms. The question for U.S. antitrust enforcers is thus the traditional substantive inquiry, under Section 1 of the Sherman Act, whether Rockstar’s conduct is unreasonably restrictive of competition.

Rockstar Consortium logo

Despite its cocky moniker, Rockstar is simply a corporate patent troll hatched by Google’s rivals, who collectively spent $4.5 billion ($2.5 billion from Apple alone) in 2012 to buy a trove of wireless-related patents out of bankruptcy from Nortel, the long-defunct Canadian telecom company. It is engaged in a zero-sum game of gotcha against the Android ecosystem. As Brian Kahin explained presciently on DisCo then, Rockstar is not about making money, it’s about raising costs for rivals — making strategic use of the patent system’s problems for competitive advantage. Creating or collaborating with trolls is a new game known as privateering, which allows big producing companies to do indirectly what they cannot do directly for fear of exposure to expensive counterclaims. Essentially, it’s patent trolling gone corporate. As another pro-patent lobbying group said at the time, Rockstar represents “a perfect example of a ‘patent troll’ − they bought the patents they did not invent and do not practice; and they bought it for litigation.” Predictiv’s Jonathan Low put it quite well in his The Lowdown blog:

The Rockstar consortium, perhaps more appropriately titled “crawled out from under a rock,” is using classic patent troll tactics since their own technologies and marketing strategies have fallen short in the face of the Android emergence as a global power. Those tactics are to buy patents in hopes of finding cause, however flimsy, to charge others for alleged violations of patents bought for this purpose. Rockstar calls this “privateering” in order to distance itself from the stench of patent trolling, but there are no discernible differences.

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Google’s competitors “are locked in hand-to-hand combat with Google around the world and have the mistaken belief that criticizing us will influence the outcome in other jurisdictions.” — (Former) FTC Chairman Jon Leibowitz, Jan. 2013

The coalition of companies that for years has unsuccessfully been pressing antitrust complaints against Google for search “abuse” — FairSearch.org — insists Google must be restrained for fear the Mountain View company will steer search users to its commercial products, like flight bookings. The group’s most recent publicity event, held at the ABA’s Antitrust Section annual spring meeting last week, repeated those same claims. FairSearch ventured as well into new ground, attacking what it terms Google’s unreasonably restrictive Android licensing practices.

There are four straightforward reasons FairSearch is wrong.

1.  Predictions of Foreclosure Have Proven Totally Baseless.

When Google purchased travel software maker ITA in 2011, FairSearch maintained that Google would exploit its control over the ITA tools that power other online travel agencies, along with many of the airlines’ own sites, to usher competing search services off the stage, then jack up ad rates for travel queries and favor flights from particular airlines. google-eu-antitrust Three years later, nothing like that has happened. In fact, Google Flight Search is not among the top 100 or even the top 200 travel listing sites. Rather, it’s in 244th place, behind Hipmunk, with just .04% of travel queries. Real-world experience, in other words, reveals that the predicted competitive risks on which FairSearch bases its advocacy are both hypothetical and fanciful. MORE »

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Is Bazaarvoice Bizarre?

by Glenn Manishin on January 28, 2014

When is a prediction not worth relying upon? For purposes of analyzing mergers under the Clayton Antitrust Act, a recent decision in favor of the Justice Department indicates that predictions are worth less — perhaps are even worthless — when they are contradicted by the actual facts of the marketplace. The government’s successful legal challenge a couple of weeks ago to the merger of two Internet start-ups ironically shows that the force of predictive judgments remains powerful, even when courts could employ reality as a basis for accurate comparison.

Some background. A 2013 DisCo post authored by the undersigned contrasted “future markets,” where the contours of products and entry do not yet exist and cannot reliably be predicted, with “nascent markets,” in which those features indeed exist but only in their infancy. My thesis was that antitrust enforcement in the latter is preferable because looking back at nascent markets once they have a chance to develop gives the government a more accurate basis on which to assess the actual impact of mergers and concentration than rank projections in which policymakers have no comparative expertise.

Bazaarvoice logo

The case used to illustrate this theme was United States v. Bazaarvoice, Inc., in which the Justice Department sued to unwind a 2012 merger, already completed, between two firms in what it called the online ratings and reviews platform market. I concluded that

by challenging the merger post-consummation, DOJ has avoided basing its enforcement decisions on predictions of future markets and instead the case should rise or fall on the accuracy of its ex post analysis of actual competitive effects.

That’s not at all what happened, though.

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Every new year sees a slew of top 5 and top 10 lists looking backwards. Here’s one that looks forward, predicting the five biggest disruptive technologies and threatened industries for 2014.

Making projections like these is really hard. Brilliant pundit Larry Downes titles his new book (co-authored with Paul Nunes) Big Bang Disruption: Strategy In an Age of Devastating Innovation. Its thesis is that with the advent of digital technology, entire product lines — indeed whole markets — can be rapidly obliterated as customers defect en masse and flock to a product that is better, cheaper, quicker, smaller, more personalized and convenient all at once.

Since adoption is increasingly all-at-once or never, saturation is reached much sooner in the life of a successful new product. So even those who launch these “Big Bang Disruptors” — new products and services that enter the market better and cheaper than established products seemingly overnight — need to prepare to scale down just as quickly as they scaled up, ready with their next disruptor (or to exit the market and take their assets to another industry).

Disruptors can come out of nowhere and happen so quickly and on such a large scale that it is hard to predict or defend against. ”Sustainable advantage” is a concept alien to today’s technology markets. The reputation of the enterprise, aggregated customer bases, low-cost supply chains, access to capital and the like — all things that once gave an edge to incumbents — largely no longer exist or are equally available to far smaller upstarts. That’s extremely unsettling for business leaders because their function is no longer managing the present but inventing the future…all the time.

I certainly have no crystal ball. Yet just as makers of stand-alone vehicle GPS navigation devices were overwhelmed in 2013, suddenly and seemingly out of nowhere, by smartphone maps-app software, e.g., Google Maps, etc., so too do these iconic industries and services face a very real and immediate threat of big bang disruption this year.

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Despite the failures in recent years of such well-known retail chains as Circuit City, Borders and the like, it is way too soon to declare that the Internet will replace brick-and-mortar retailing. In part that is because consumer research suggests that in some segments, such as clothing, feeling and touching merchandise is an important part of the buying experience. Of interest to students of technological disruption, retailers are beginning in earnest to deploy technologies marrying the best aspects of online retailing with shopping malls and physical stores.

Delivery is one area where online retailers remain at a disadvantage. Amazon counters with its Prime membership for free two-day delivery, Amazon Lockers for local pick-up and its experimental foray into drone deliveries. Startups like Deliv (described as “a crowdsourced same-day delivery service for large national multichannel retailers”) are now providing equivalently fast store or home delivery for both online and in-person purchases.

Four of the nation’s largest mall operators are turning their properties into mini-distribution centers for rapid delivery, meaning shoppers can ditch their bags and keep spending. The service promises set delivery times for purchases consumers make at the mall or online from mall tenants, facilitated by a Silicon Valley start-up, Deliv Inc….The move highlights how delivery has become a key battleground in the war between physical and online retailers.

Startup Offers Same-Day Delivery at Shopping Malls | WSJ.com.

IBeacon

That in itself is remarkable. It shows that disruption is not a one-way street for legacy retailers. Yes, theirs is a challenging business environment, but technology is beginning to supply features for physical stores that meet and in some cases can beat online shopping providers. Home Depot, for instance, offers a smartphone app that allows consumers to check store inventory and aisle location, scan QR and UPC codes to get more information about products and order online with in-store delivery, overcoming some of the chain’s long-standing weaknesses: confusing layouts, out-of-stock merchandise and resulting abandoned visits.

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We spend a fair amount of time at DisCo discussing how political, legal and regulatory processes in the United States are largely biased against disruptive innovators in favor of legacy incumbents. That’s typically just as true for Uber and its ride-hailing competitors as it is for Aereo, Hulu, Netflix and other streaming video — or over the top (“OTT”) — Internet television services. But perhaps no longer.

The Consumer Choice in Online Video Act (S.1680), introduced by Sen. Jay Rockefeller, chairman of the Senate Commerce Committee, aims to change things. The legislation’s stated objectives are to “give online video companies baseline protections so they can more effectively compete in order to bring lower prices and more choice to consumers eager for new video options” and to “prevent the anticompetitive practices that hamper the growth of online video distributors.” It does so by (a) requiring television content owners to negotiate Internet carriage arrangements with OTT providers in good faith, (b) guaranteeing such firms reasonable access to video programming by limiting the use of contractual provisions that harm the growth of online video competition, and (c) empowering the FCC to craft regulations governing the program access interface between online providers and traditional television networks and studios.

S.1680 is a remarkable legislative effort to predict where the nascent online programming market is headed. It anticipates that in order to fulfill their competitive potential, OTT video entrants will require similar legal protections to what satellite television providers have for years enjoyed. The bill applies the program access model developed several decades ago for satellite television to the new world of OTT video.

As Rockefeller explained:

[He] has watched as the Internet has revolutionized many aspects of American life, from the economy, to health care, to education. It has proven to be a disruptive and transformative technology, and it has forever changed the way Americans live their lives. Consumers now use the Internet, for example, to purchase airline tickets, to reserve rental cars and hotel rooms, to do their holiday shopping. The Internet gives consumers the ability to identify prices and choices and offers an endless supply of competitive offerings that strive to meet individual consumer’s needs.

But that type of choice — with full transparency and real competition — has not been fully realized in today’s video marketplace. Rockefeller’s bill addresses this problem by promoting that transparency and choice. It addresses the core policy question of how to nurture new technologies and services, and make sure incumbents cannot simply perpetuate the status quo of ever-increasing bills and limited choice through exercise of their market power.

Modeled explicitly on the controversial 1992 Cable Act (which itself passed only over a presidential veto), S.1680 appears to be the first piece of legislation embracing disruption as a procompetiitive form of market evolution, including as its initial congressional “finding” that OTT services have the potential to “disrupt the traditional multichannel video distribution marketplace.” That’s excellent. At the same time, the bill’s choice of solution is contentious, by subjecting vertically integrated cable and television providers (e.g., Comcast-NBCu) to another regime of program access and retransmission mandates. The legal standard fashioned for testing the validity of a television distribution contract in S.1680 is whether it “substantially deters the development of an online video distribution alternative.” Given the highly visible retransmission disputes that have arisen in recent months, such as the Tennis Channel and CBS, plus the lack of evidence that vertical integration in fact provides an incentive for exclusive dealing and content foreclosure, free market advocates are likely to object to this. Proponents of net neutrality rules, especially where data caps are concerned, have already spoken out in support.

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No one in government or business has a crystal ball. Yet predictions of what is coming in markets characterized by rapid and disruptive innovation seem to be being made more often by competition enforcement agencies these days than in the past. It’s a trend that raises troublesome issues about the role of antitrust law and policy in shaping the future of competition.

Take two examples. The first is Nielsen’s $1.3 billion merger with Arbitron this fall. Nielsen specializes in television ratings, less well-known Arbitron principally in radio and “second screen” TV. Nonetheless, the Federal Trade Commission — by a divided 2-1 vote — concluded that if consummated, the acquisition might lessen competition in the market for “national syndicated cross-platform measurement services.” The consent decree settlement dictates that the post-merger firm sell and license, for at least eight years, certain Arbitron assets used to develop cross-platform audience measurement services to an FTC-approved buyer and take steps designed to ensure the success of the acquirer as a viable competitor.

In announcing the decree, FTC chair Edith Ramirez noted that “Effective merger enforcement requires that we look carefully at likely competitive effects that may be just around the corner.” That’s right, and the underlying antitrust law (Section 7 of the Clayton Act) has properly been described as an “incipiency” statute designed to nip monopolies and anticompetitive market structure in the bud before they can ripen into reality. Nonetheless, the difference is that making a predictive judgment about future competition in an existing market is different from predicting that in the future new markets will emerge. No one actually offers the advertising Nirvana of cross-platform audience measurement today. Nor is it clear that the future of measurement services will rely at all on legacy technologies (such as Nielsen’s viewer logs) in charting audiences for radically different content like streaming “over the top” television programming.

Crystal Ball

The problem is that divining the future of competition even in extant but emerging markets (“nascent” markets) is extraordinarily uncertain and difficult. That’s why successful entrepreneurs and venture capitalists make the big bucks, for seeing the future in a way others do not. That sort of vision is not something in which policy makers and courts have any comparative expertise, however. Where the analysis is ex post, things are different. In the Microsoft monopolization cases, for instance, the question was not predicting whether Netscape and its then-revolutionary Web browser would offer a cross-platform programming functionality to threaten the Windows desktop monopoly — it already had — but rather whether Microsoft abused its power to eliminate such cross-platform competition because of the potential long-term threat it posed. By contrast, in the Nielsen-Arbitron deal, the government is operating in the ex ante world in which the market it is concerned about, as well as the firms in and future entrants into that market, have yet to be seen at all.

This qualitative difference between nascent markets and future markets (not futures markets, which hedge the future value of existing products based on supply, demand and time value of money) is important for the Schumpterian process of creative destruction. When businesses are looking to remain relevant as technology and usage changes, they are betting with their own money. The right projection will yield a higher return on investment than bad predictions. Creating new products and services to meet unsatisfied demand may represent an inflection point, “tipping” the new market to the first mover, but it may also represent the 21st century’s Edsel or New Coke, i.e., a market that either never materializes or that develops very differently from what was at first imagined.

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As a recent story from the The Washington Post illustrates well, “tradition” is a gating factor in the ongoing transformation of the legal industry. Despite the highly conservative nature of courts, bar associations and attorneys, however, in the post-Great Recession legal market of 2013, technology and changing values are rapidly disrupting traditional legal services.

My colleague and friend Jonathan Askin, Founder of the Brooklyn Law Incubator & Policy Clinic, hosted a seminar on legal start-ups in late August. Many of the companies highlighted there are focused on low-hanging fruit, taking the trend started by LegalZoom of moving do-it-yourself work product to consumers into spaces that for decades have remained buttoned-up by prohibitions against “unauthorized practice of law” and the resistance of lawyers to allowing clients document control. (LegalZoom itself has been challenged by bar groups and class action plaintiffs in North Carolina, Connecticut, Missouri and California for allegedly engaging in the practice of law, a classic and anticompetitive use of regulations designed to protect consumers, not prohibit new business models.)  Like taxi-hailing companies Uber and Sidecar, legal start-ups thus face opposition from incumbents who are well-situated to employ archaic regulatory regimes to thwart new entry. MORE »

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Are copyright holders allowed to decide without legal constraint to whom they will license their content and on what terms? That is the issue facing Pandora and other new streaming radio firms, for whom music and its associated licensing fees represent the biggest hurdle to commercial success against more established broadcast radio competitors. The answer lies in the sometimes obscure interface between the Copyright Act and antitrust law in the U.S.

In Pandora Media, Inc. v. American Society of Composers, Authors & Publishers, an antitrust case currently pending in federal court in New York, the streaming company is suing ASCAP and some of the major record labels for “withdrawing” their content from the ASCAP joint licensing venture, thus forcing individualized negotiations. It’s a leading-edge dispute, scheduled for trial by year-end, that may help catalyze a new approach to the old question of whether — and if so to what extent — owners of copyrighted digital content are permitted to refuse to deal with competing distribution channels on dramatically different commercial terms.

Most Project DisCo readers likely know about Pandora, a prominent start-up in the Internet radio space — one of the hottest markets around these days, especially given the launch of iTunes Radio by Apple. What is less understood is that streaming music on the ‘Net is fraught with legal issues surrounding copyright, constraints that effectively function as a barrier to the more widespread adoption of such disruptive technologies.

Pandora's Box via Wikipedia

That’s not a lot different from the case of streaming Internet television pioneer Aereo, which as Ali Sternburg points out is caught in legal limbo between different rules (from conflicting judicial decisions) in different regions of the county: and a whopping legal defense bill as well. Copyright in addition plays a key role in the current exemption of traditional over-the-air radio stations from licensing music, an implicit subsidy the recording industry has been lobbying to change for years.

The Pandora-ASCAP fight represents a tricky issue at the intersection of intellectual property (IP) and antitrust. The ASCAP litigation actually dates to 1941, when the government entered into a consent decree settling a complaint that alleged monopolization of performance rights licenses.  The settlement, still in place more than 60 years later, requires the organization to license “all of the works in the ASCAP repertory.” A month ago, presiding District Judge Denise Cote (who also issued the decision finding Apple’s e-book pricing deals a violation of the antitrust laws) entered summary judgment for Pandora. She reasoned that the consent decree gave Pandora the legal right to a blanket license

even though certain music publishers beginning in January 2013 have purported to withdraw from ASCAP the right to license their compositions to “New Media” services such as Pandora. Because the language of the consent decree unambiguously requires ASCAP to provide Pandora with a license to perform all of the works in its repertory, and because ASCAP retains the works of “withdrawing” publishers in its repertory even if it purports to lack the right to license them to a subclass of New Media entities, [Pandora must prevail].

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While lots of bits and ink have been devoted to Apple Inc.’s well-publicized run-in with the Department of Justice over its role in a price-fixing conspiracy among e-book publishers, most of the media has not analyzed the array of private antitrust cases — mainly consumer class actions — brought against the iconic company. These typically allege that Apple’s closed ecosystem of iTunes, the iPod and iPhone are unlawful efforts to monopolize various media or hardware markets. After looking more closely at the merits of these various cases, I predicted in June that

the choice of a vertically integrated structure is unlikely to get Apple into antitrust trouble — either private or governmental, and whether in the United States or the EU — unless Tim Cook and company add some seriously bad acts to their competitive arsenal

Yesterday, a federal court of appeals (the Ninth Circuit in San Francisco) tossed one of the private antitrust class actions, which had challenged the lawfulness of the proprietary DRM technology Apple initially used for downloadable digital music, claiming the lack of interoperability inflated iTunes music prices.  The court’s opinion concludes on procedural grounds that

under basic economic principles, increased competition — as Apple encountered in 2008 with the entrance of Amazon — generally lowers prices. See Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 895 (2007); Barr Labs., Inc v. Abbott Labs., 978 F.2d 98, 109 (3d Cir. 1992). The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible [the plaintiffs'] conclusory assertion that Apple’s [DRM] software updates affected music prices.

I’m glad to have been right. More important, though, is one obvious point, which bears repeating: “On the pure antitrust merits, whether to pay off these class action plaintiffs is a decision Apple really should not have to make.” But as we say in the law, “deep pocket” defendants will always be put in that rather untenable position.

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