Competition

The debate of the last couple of years about corporation tax in Europe resembles a popular ‘whodunnit’: point at an obvious suspect before realising that things are not as they seem. The storyline is still being written, but it risks taking a shortcut by identifying some politically convenient suspects, without uncovering whether any wrongdoing has occurred. This would certainly not please the fictional Belgian detective Mr Hercule Poirot who was insistent that “It is the brain, the little gray cells on which one must rely. One must seek the truth within–not without.”

It is to that standard the European Commission’s competition enforcement teams must live up as they investigate claims that state aid has been granted by certain countries to certain companies.

As we have written previously here on DisCo, there has been much debate about corporation tax in Europe recently. The debate has sometimes assumed that Internet companies pay less corporation tax than other firms while the opposite is true according to the European Commission’s expert group: they pay many times the average effective rate of European firms. In this political climate Europe’s competition enforcers, DG Competition, have opened state aid investigations into some European countries’ tax rulings to see if the arrangements provide firms with an unfair advantage.

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As Jon noted on Friday, the Supreme Court invited the views of the U.S. Solicitor General on whether to hear the Oracle v. Google case.  This suggests the Court is far likelier to review the Federal Circuit’s decision regarding copyright, interoperability, and the Java APIs (previously discussed here).

The Solicitor General (SG) coordinates the U.S. Government’s litigation before the Supreme Court, and the Court from time to time will invite the SG’s views on whether to take a case.  Roughly a dozen times a year, the SG is asked to file such briefs, in an order referred to by Supreme Court wonks as a “CVSG order” (which calls for the views of the Solicitor General).

Empirical evidence suggests that (a) this bodes well for the petition, and (b) that the substantive views of the SG can be influential.

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01/12/15 Update: The Court issued an invitation calling for the views of the U.S. Solicitor General, an act that shows interest in the case.  It suggests the Court is more likely to grant the petition, although it is now very unlikely to be heard this Term.


 

Today the Supreme Court conferences over whether to review the Federal Circuit’s decision in Google v. Oracle America. This is a welcome development because it provides the Supreme Court with the opportunity to overturn the Federal Circuit’s flawed decision relating to the protectability of the Java Application Program Interfaces (APIs) under copyright.

We previously discussed the Federal Circuit’s May 2014 decision here, here, here, and here. Google incorporated elements of the Java API in the Android API. Oracle acquired the rights in Java when it purchased Sun Microsystems, the company that developed Java. After the acquisition, Oracle sued Google for patent and copyright infringement. The district court dismissed the patent claims, and the case presently centers on the copyright claims. MORE »

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Buying airfare online is a complicated and frequently fraught experience.  You can buy your ticket directly from the airline of your choice, from online travel booking sites, or even via travel metasearch engines—and your purchase price might be different depending on the time of day or day of the week you choose to shop.  All of that is to say that airline pricing structures are very complex, and a cottage industry has grown out of consumers’ demonstrated demand for better tools to navigate air travel booking.

At first glance, Skiplagged would seem to be just that—another tool for consumers to parse the secretive pricing strategies of airlines.  The website takes advantage of an obscure quirk of airline pricing: trips that include a stopover in a high-demand destination prior to a final leg to a less-frequented one are regularly cheaper than direct flights to the same high-demand destination.  So a prospective traveler (without checked baggage) looking to fly to San Francisco from DC might book a trip to Lake Tahoe with a stopover in SFO and then skip the final leg of the trip to take advantage of the lower total fare for the Tahoe itinerary.  Skiplagged shows consumers these “hidden city” deals and directs them to the travel booking sites from which they can be purchased. MORE »

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2014

New Year’s is always a time for remembrance and nostalgia, with lots of “top” lists. This is another, focused on the most important, entertaining and reverberating technology law cases of 2014.

1.  Apple’s iPod Class Action Win.  Near the end of the year, a decade-old antitrust class action against Apple Inc. finally went to trial in early December. The gist of the claim was that by reconfiguring its DRM system for the then new (now iconic) iPod MP3 players in a way that broke compatibility with RealNetworks’ protocol back in 2006, Apple monopolized the market for digital music. Although the Sherman Act theory was questionable, at best, the presiding federal judge refused to dismiss the complaint or enter summary judgment for either side. After just three hours of deliberations, the jury returned a unanimous verdict for Apple, finding that the new software was a meaningful product improvement over previous versions. (This was also the case where the late Steve Jobs testified, by way of videotaped deposition, from the grave.) Lesson: even monopolists get the blues.

2.  Software & Business Methods Patents Narrowed.  In one of several precedent-setting Supreme Court cases involving intellectual property, the Court ruled in Alice Corp. v. CLS Bank that vague or generic patents, which do little more than operate mathematical algorithms on a general purpose computer, are not “patentable subject matter.” CLS Bank has already had a profound effect on the Court of Appeals for the Federal Circuit, which for nearly the first time invalidated some business method patents on patentablity grounds in its wake, and the the U.S. Patent & Trademark Office, which was far more aggressive in rejecting patent applications during the second half of the year. The longer term consequences in the ongoing debate over patent trolls and patent reform legislation remain to be seen. Lesson: the era of easy patents may be ending. MORE »

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On Monday, the New York Times reported about Amazon “disrupting” itself, not referring to Clay Christensen or his disruptive innovation theory by name, but using it in that sense.  (Coincidentally, VC Marc Andreessen had a 17-part tweetstorm on the disruption concept and its misconceptions yesterday, which DisCo has covered before.)  One aspect of this theory is that companies may have to radically shift directions when faced with competition from disruptive entrants — or cannibalize their own existing revenue stream when they realize that a disruptive innovation is what consumers will want and need, not an incremental innovation on their existing product.  As DisCo has explained, Christensen’s work notes that executives at dominant companies are often hesitant to change business models to adopt lower profit margins:

One of the reasons why successful incumbents are so vulnerable to disruptive technologies — as Clayton Christensen pointed out in his seminal work — is that they have a hard time adopting a lower margin business model that would mean sacrificing their current hefty profit margins.  This initial hesitance is often their death, as they are quickly forced out by new, more efficient competitors.

The New York Times discusses how, although Amazon’s revenues went down this quarter, it’s because they are in the process of shifting from a focus on physical books to digital media consumption, including television, movies, and music.  Apple similarly disrupted itself when it released the iPhone, which made the iPod irrelevant, and shifted its focus from personal computers to consumer devices.  Companies like Autodesk have also disrupted themselves with apps.  Many other technology companies face these challenges, as Vivek Wadhwa wrote in a great Washington Post piece earlier this year about the technology industry and disruption, and challenges in leadership.

Self-disruption is likely to occur even more now that technology companies provide so much more than just technology products and services, and compete in industries like entertainment, media, and communication.

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Sit down before you read this: Internet companies pay more corporation tax than the European average, in some cases many times more.

According to the European Commission the average ‘effective’ corporate tax rate in the European Union and EFTA is 12.9%; in 2012 Amazon had a whopping 78% in corporation tax on its global profits. In that same year Yahoo had 37% and Google 19.4%.

It is important to note that corporation tax is paid on profits and not on revenues. In 2012 for example, the Commission says Amazon had global revenues of USD 61 billion, but profits of only USD 544 million. The difference comes from being a low margin business and from investments. If you don’t make much profit, you don’t pay much tax.

The Lux Leaks files list 340 companies who have received ‘comfort letters’ from the Luxembourg tax authorities. Of these, 32 are categorised as ‘Tech’, meaning more than 90% are not tech. Other sectors include: energy, finance, food, health, manufacturing, media, retail and travel. There is also a broad geographical spread with prominent European names including Ikea, Burberry, Vodafone, Volkswagen, GlaxoSmithKline and the Guardian Media Group.

The files have one clear message: companies from all sectors and all regions of the world have been using tax optimisation techniques.

A review of the tax incentives for the knowledge economy will need to address the whole knowledge economy and not just the digital sector. This is the conclusion the European Commission has arrived at.

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In discussions of Taylor Swift pulling her music from Spotify because the service wouldn’t make the music available solely to paying subscribers, which pays higher royalty rates, and Aloe Blacc’s Wired op-ed calling for higher royalties for songwriters from streaming services (but see: Spirit Animal frontman Steve Cooper’s thoughtful piece in Business Insider on “why Spotify is not the enemy”), there are a few important economic realities being ignored.

Spotify currently pays about 70% of its revenue to rightsholders.  That typically goes to middlemen — publishers for the musical work copyright, who then pay a portion to the songwriters, and record labels for the sound recording copyright, who then pay a portion to the musicians.

VC David Pakman (who testified in November 2012 before the House Judiciary IP Subcommittee about why the current music licensing scheme deters VC investment in new music services) recently analyzed data from middlemen in a few industries and found that many legacy middlemen are not earning the large share they take from creators in the digital age.  Record labels, for example, contributed a lot more value when they coordinated and financed studio time (which can now be done with a basic computer and Internet connection, and possibly a Kickstarter campaign), manufacturing records and CDs and got them to retailers (which is no longer the primary way of selling music), and marketing (which can be done online with free services).  Now, in the digital age, many of these services are no longer needed or performed.

In remarks last week at the Web Summit Conference in Dublin, Bono explained that rather than fighting against streaming, artists should be fighting for transparency:

Spotify is giving up 70% of all their revenues to rights owners.  But it’s just that people don’t know where the money is going because the record labels haven’t been transparent.

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The Internet has brought change to our society, just like previous technological advances such as the printing press, canals, cars, or mobile phones. Every advance engenders a debate about the appropriate policy and regulatory response. Sometimes actors affected by the changes around them call for a regulatory response to preserve that status quo or slow change.

In recent months, we’ve heard two arguments in European circles about Internet companies: the first is that Internet companies are not regulated; the second is a concept called “platform neutrality.”

Let me explain why both of these concepts are wrong.

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For tech industry watchers, a recent narrative has emerged that involves Amazon and Google evolving into head-on competitors.  Although this iteration of the narrative is new, the plot is merely a variation on a common theme: two Internet giants who started in different markets evolve quickly into fierce competitors.  (In fact, the Economist devoted a feature article to this phenomenon a few years ago, aptly named “Another Game of Thrones”).  The most famous recent example of this is Google and Apple in the mobile space, where Google’s former CEO, and now its Chairman, Eric Schmidt was booted off of Apple’s board after the two companies quickly morphed into fierce rivals.

Schmidt features in this story as well, as he — to the surprise of many — identified Amazon as Google’s biggest rival in a recent speech:

Many people think our main competition is Bing or Yahoo. But, really, our biggest search competitor is Amazon. People don’t think of Amazon as search, but if you are looking for something to buy, you are more often than not looking for it on Amazon. They are obviously more focused on the commerce side of the equation, but, at their roots, they are answering users’ questions and searches, just as we are.

It is helpful to look back at the origin stories of the two companies to understand how they are evolving.  When Google was founded in 1998, the number of websites on the World Wide Web was just starting to climb up the exponential growth curve.  At that time web search engines were relatively dumb (and “portal focused”) and one of the biggest Internet problems was how to find websites that had information that users were looking for.  Google set about revolutionizing the search space.  It also presented Google with its business model: if it could build a better search tool, it could also use the same insights behind that search tool to serve up more relevant ads to users.  The more relevant the ad, the more useful the ad would be to advertisers and the more they would be willing to pay for it.

Amazon, on the other hand, was founded to tackle a different problem with the early web.  The potential for the Internet to change how people shop was readily apparent (even to the U.S. government), but the logistical problems were immense.  A company needed grand ambitions, if its goal was to scale to such a size where shopping online would present a feasible alternative to running to the nearest big box store.  Skepticism about the security of exchanging financial information online was one of many 800-pound gorillas in the room; another was the daunting prospect of streamlining backend IT and warehouse technology to work efficiently at such a scale.  On top of that, the cost of shipping items around the country would be an added cost that its brick and mortar competitors did not have to bear.

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