Is the Justice Department taking a stand against music licensing gridlock?

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Yesterday Billboard wrote that the Department of Justice was reportedly taking a position against a major source of gridlock in music licensing: so-called “fractional licensing.”

As readers of DisCo may recall, the Department of Justice has been investigating alleged anticompetitive activities by the nation’s performance rights organizations (PROs).  Two of the major PROs, ASCAP and BMI, are already governed by long-standing consent decrees originating from previous antitrust cases.  In the course of efforts to update those consent decrees, DOJ has reportedly said that it will look disfavorably on contractual terms that gridlock musical compositions.

This is a crucial development, because gridlock is one of the greatest impediments to more viable options for music delivery, and, one federal judge has already found, has been used anticompetitively in an effort to extract supra-competitive prices.MORE »

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An Uber Victory For Consumers

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New York City officials on Wednesday abruptly abandoned plans to rein in Uber, dropping a fiercely contested proposal to cap the company’s growth in its largest market. That’s a good result, because as Mitchell Moss, director of the Rudin Center for Transportation Policy at NYU, commented, it signals “that the days of taxi industry cartels are over.”

Yet the even better lesson is that competition, if left unregulated — without political or regulatory barriers protecting incumbents — can work quickly to correct market failures. The problem in New York for decades has ben a shortage of taxi availability on rainy days and during rush times.  Here:

Consumers have become too attached to apps like Uber’s that now make ordering a car as easy as two clicks on a smartphone. That base of users has now in many cities proven more powerful than the company’s not insignificant opposition, from traditional taxi providers and labor critics.

Uber triumphs as New York City officials abandon plans to limit transportation company | WashPost

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The Disruptive Benefits of Zenefits (and Lemonade Stands)

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You may not have heard of cloud-based business HR and insurance provider Zenefits, but the folks at industry giant Automatic Data Processing Inc. (ADP) certainly have. ADP recently shut off Zenefits’ access to client information needed to run payroll, charging that the startup was gleaning this information in an unauthorized manner and posed a security risk. Zenefits countered with a blog post claiming that ADP was actually shutting off access because it had developed a competing service to Zenefits. ADP took issue with that accusation and then filed a lawsuit against both Zenefits and its CEO Parker Conrad.

The Zenefits story is fascinating, both ADP’s snarky legal reply and the unusual circumstance of a disruptive entrant challenging a de facto monopolist (or duopolist). The two largest U.S. payroll processors — ADP and Paychex — combine for some 40% of the payroll market, which indicates that their share of outsourced payroll services is probably far higher. Analysts have also noted that both firms share lock-in advantages, raising entry barriers, and enjoy what one market observer terms a “rational duopoly,” with ADP focusing on larger businesses and Paychex targeting smaller concerns. The firms are able to lock customers into long-term deals and “consistently raise prices.” And both companies have strong brand identities that help them against upstart, unproven competitors.

As a competition matter, of course, a 40% share does not qualify as monopoly power for antitrust purposes. On the other hand, when a dominant firm uses the legal process as a tool to intimidate or retard the growth of new, upstart rivals, it faces some serious antitrust risks. So while the details remain to be disclosed, the glimpse inside the dynamics of payroll processing provided by ADP’s libel litigation suggests something possibly untoward.

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The Disturbing State of Uber In California and France

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You’ve probably read news reports of two current developments that are directly threatening the continued viability of Uber’s ride-sharing service — California’s ruling that Uber drivers are “employees” of the company, and France’s decision to indict two of Uber’s top French executives on criminal charges of “enabling illegal taxi services” that could bring fines and jail time. The company called the latter “[t]otally unheard of,” and a “piece of pure calumny,” and is appealing the former.

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

These represent just the latest conflict between the sharing economy and legacy regulations, issues we have explored several times at Project DisCo. Uber, which is in talks to raise more investments at a whopping $50 billion valuation, has rapidly upended entrenched taxi and transportation industries with its model of letting people hail rides via their smartphones. Airbnb has done the same thing to hotels and motels, with similar blowback from local regulators, as in New York City. Tesla’s direct automobile sales model has been opposed at the state level by auto dealers.

All of these examples share the common thread of treating innovative new services as if they were clones of traditional industries with which they compete, and thus subject to the same legal restrictions. But they are not. There’s no public policy or legal difference between asking a friend to drive you to the airport and hailing an Uber driver with the company’s smartphone app; both perform exactly the same function, and neither involves holding the driver or company out as offering “common carriage” transportation to the general public. The fact that modern technology allows on-demand ride-sharing to be organized at scale is precisely why Uber’s service is different from taxi rides. Cabs can cruise the streets, wait at hotels and airports for fares and, in many locales — like Washington’s Dulles Airport — enjoy a franchise monopoly. Uber drivers have none of those benefits, especially the municipal-sanctioned protection from new entry.

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The Digital Single Market and A Duty of Care: Preserving the Transatlantic Legal Foundation of a Thriving Internet

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As part of the Digital Single Market (DSM) communication, the European Commission has discussed the possibility of imposing a “duty of care” on Internet intermediaries, which would require Internet platforms to take a more active role in policing user content.  Forcing Internet intermediaries to monitor and remove their users’ communications is ill-advised from both an economic and human rights standpoint.

The rapid growth of the Internet was not merely the function of technological innovation.  This fundamental restructuring of commerce and communications would not have been possible but for substantive legal reforms that adapted legacy legal concepts to comport with the realities of a hyper-connected Internet age.  Arguably the most important legal and legislative development of the Internet era was the concept of intermediary liability limitations for Internet service providers.  Or, stated in a less legalistic way, the policy choice that Internet services should not bear blame for bad people saying or doing bad things on the Internet.  Given the size and scope of the Internet and the volume of online communications, it is safe to say that Facebook, Twitter, Google, Yelp, YouTube, Allegro, and Dailymotion would not exist today if the law evolved to hold websites and Internet services liable for the actions of their users. Further, imagine operating a telecommunications network with the sum of all this information passing through without being shielded from responsibility for the actions of all of your users.  What venture capitalist in her right mind would invest in a platform that was exposed to liability for billions of websites beyond its control or trillions of posts composed by third parties?  What would Internet business models look like if companies had to pre-screen all user communications before they went live?

Recent developments in Europe, including the Delfi ruling and the DSM “duty of care” proposal, suggest that Internet services may soon be asked to take a more active role in filtering user content. Yet even with advanced filtering tools, unlawful speech is almost always context dependent.  Libel and defamation would not be obvious to a filter.  Even more complex is when lawful speech is used unlawfully, as in the case of copyright and trademark infringement.  Given that rules about these various types of speech are often the product of complex legal cases, even human review of every online communication would not completely shield an Internet company from liability, given that different people can come to different conclusions about whether speech is “harmful.” Not to mention that standards for what is permissible speech vary widely from country to country.

Besides the commercial impact, the implications for free speech would also be disastrous. Protections from intermediary liability enable platforms to give people around the world a simple way to express themselves and to share what they love with the world, and to challenge the restrictions of oppressive governments. One study found that when online platforms are regulated on the basis of content submitted by their users, they remove large amounts of controversial but legal content for fear of facing penalties. The UN’s Joint Declaration on Freedom of Expression on the Internet recognizes the success of laws such as the CDA, DMCA, and the E-Commerce Directive, stating that “intermediaries should not be required to monitor user-generated content and should not be subject to extrajudicial content takedown rules which fail to provide sufficient protection for freedom of expression.”

Even if pre-screening and filtering at scale were feasible, the value of each individual communication — whether it takes the form of a website, a tweet, a Facebook post or a YouTube video — is negligible, where the potential legal exposure is huge; the potential damages for copyright law can reach $150,000 per work infringed.  So, in a world where Internet companies were liable for the communications of their users, a rational company would be incentivized to aggressively censor content, leading to significant blocking of ostensibly legal speech as the costs of under blocking are significantly more than the costs of over blocking.MORE »

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The Layered Playing Field

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Recently Politico reported on Deutsche Telekom CEO Timotheus Hottges calling for “free competition” while reporting the company’s strong financial results, reliable dividend and strong free cash flow. But “free competition” in what? Mobile telephony?

Deutsche Telekom (DT) spokesman Philipp Blank clarified that “What we want are open platforms and inter-operability” apparently a reference to messaging applications such as WhatsApp, Apple’s FaceTime, Skype and Viber. DT wants such apps to be made interoperable with SMS. These demands have also been made by Telefonica and coincide with the European Commission’s recent release of the Digital Single Market strategy. Both companies want the European Union to bring about a ‘level playing field’.

Is this a good idea?

Rather than think about a level playing field, something the firms above have called for, a better way to approach this debate would be to think about a layered playing field.

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Time to Stick a Fork in These Android Competition Complaints

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Here we go again.  Another Android antitrust drumbeat.  In April, the European Commission announced a formal investigation into Google’s Android operating system.  This is not the first time antitrust allegations have been leveled at Android.

Let’s take a short trip back in time.  In early 2014, a flurry of media reports emerged accusing Google of anticompetitive conduct surrounding its Android licensing arrangements.  The reports cited industry insiders and experts who had “examined” contractual arrangements that surfaced through an unrelated court proceeding between Google and Oracle on intellectual property claims.  Much of that early reporting was fueled by a detailed blog post and paper by longtime anti-Google “consultant” Ben Edelman which accused Google of leveraging its monopoly power through secret nefarious contractual arrangements with device manufacturers (most of which actually had nothing to do with the Android operating system itself).  Unfortunately, much of the reporting (and much of Edelman’s analysis) turned out to be misleading or just plain wrong. Industry followers, open source experts and academics followed on to poke skyscraper-sized holes in the initial reporting.  (I had my own take.)

FairSearch, an organization funded by Google’s competitors aimed at bringing regulatory scrutiny on the Mountain View company, used the Edelman claims as the basis for a complaint it filed in April 2013 with the European Commission — shortly after the original round of media coverage — claiming that Google’s below-cost distribution of Android (read: free, open source) was predatory pricing that made it difficult for Google’s competitors to compete.  It also claimed that Google’s practice of offering its suite of mobile applications in a package instead of a la carte (via so called MADA agreements) foreclosed competition in mobile platforms and applications.

In short, the claims were laughable.  The open source community cried foul, pointing out the dangerous implications such a precedent would set given that all open source software is available for free.  Furthermore, commenters noted the irony of a group funded by proprietary software companies attacking the free distribution of open source software as “predatory.”  Others pointed out that the MADA agreements are standard operating procedure for companies trying to build user friendly products and ensure that customers have an expected suite of services available to them “out of the box.”  At best, I thought, these claims were a sideshow.  A PR stunt orchestrated to keep Google’s PR and legal teams fighting on multiple fronts and that they would fade quickly.

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Bigger than Geo-blocking: How the European Commission’s Sector Inquiry Can Set E-Commerce Free

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Early this month the European Commission unveiled its Digital Single Market (DSM) strategy. The strategy has the very laudable goal of promoting the digital economy by furthering Europe’s integration in this sphere — something a borderless Internet is indeed ideally placed to do. It encourages European companies, citizens and institutions to think more digital and sheds some of the barriers that citizens and companies face when engaging in business transactions online.

While the DSM strategy’s vague discussion of online platforms and geo-blocking were among the issues that received most media attention, it is worthwhile to recall that a fully fledged competition sector inquiry into e-commerce is formally a part of the strategy. Expressed in competition policy terms, the sector inquiry will look at private barriers set up by companies that lead to territorial fragmentation and to restrictions of price competition.

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The Battle Over FDA’s E-Labeling: The Paper Industry’s Attempt to Prevent Sensible Safety Notice

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We know the familiar story.  New forms of competition arise and the incumbents rebel.  The free market usually permits consumer choice to govern and the marketplace decides which products will prevail.  But incumbents try to use regulation to prevent new products and competition.

The latest example is the almost decade long effort by some parts of the paper industry to prevent the Food and Drug Administration (FDA) from bringing drug notices into the 21st century.  Most are familiar with drug safety disclaimers to consumers, written in incredibly small font (perhaps the font size is promoted by opticians?) that consumers simply discard.  Well, there are similar, much more important notices to healthcare providers which provide even greater detail about safety and drug administration.  This information includes potential warnings and drug interactions, each of which are critical pieces of information for the healthcare provider. Known as “prescribing information,” these notices are incredibly long – they look like old-fashioned road maps and also are printed in incredibly small font.

Since 2007, the FDA has valiantly attempted to take the radical, death-defying step of actually permitting these notices to be made available electronically.  In particular, the FDA has sought to permit “e-labeling” – allowing drug manufacturers to provide information electronically.  This week, the FDA closed public comments on a proposed rule focusing on moving nearly all prescribing information online.

The advantages of e-labeling are obvious to anyone who has entered the 21st century.  E-labeling will reduce costs and is far more likely to be accessible to busy professionals.  E-labeling will be more current than old-fashioned paper notices and can be updated easily.  As the FDA observed:

FDA is taking this action so that the most current prescribing information for distributed prescription drugs will be available and readily accessible to health care professionals at the time of clinical decisionmaking and dispensing.

So why has it taken the FDA nearly a decade to finish a sensible, consumer-driven rule?  The paper industry.  In the United States, there are a number of paper printing companies that specialize in manufacturing drug labeling paper forms.  With the FDA proposing a rule that may diminish pharmaceutical companies’ demand for paper and printing services, it is unsurprising that they are strongly fighting against e-labeling.

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Competition Authorities and Regulators Should not Worry too much about Data as a Barrier to Entry into Digital Markets

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Data is often presented as the lifeblood of our digital economy (please see here why it should not be referred to as the ‘oil’ of the 21st century). Data is everywhere and is collected by Internet companies as well as more traditional businesses like banks. Data has been used by industries for years – think about grocery store reward cards – but advances in the speed of data analysis and the quantity of data available today brought new attention to its use. Of course, data analytics and processing help companies to better understand their customers, providing them with services and products tailored to their needs and preferences.

At the same time, it has been suggested that the possession and accumulation of big data ought to result in more rigorous competition law enforcement. But this argument fails to take into account the low barriers to entry in this market and the disruptive nature of Internet businesses that quickly allow a startup to topple even the most entrenched incumbents. One also needs to remember that the existence of barriers to entry does not in itself mean that competition authorities need to intervene. Competition law is concerned with anticompetitive conduct causing consumer harm. Hence, a competition law analysis of barriers to entry only becomes relevant in merger cases and in determining whether a given company is dominant in a relevant market. Traditional barriers to entry include for example exceptionally large capital investments into a sophisticated distribution network, economies of scale and even the need for large marketing investments (for a discussion of these traditional barriers to entry see the CJEU’s judgment in United Brands v Commission).

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