Competition

A DisCo post last week described how Taylor Swift was using social media to promote her latest album, 1989. And previous DisCo posts have discussed the phenomenon of innovative artists embracing Internet platforms to reach new markets. Social media, however, has become far more than an alternative means for promoting and distributing entertainment content; often it is integral to the content itself.

Social media is a central theme of this summer’s sleeper hit, Chef. Chef Carl Casper, played by Jon Favreau, finds his career in trouble after engaging in a public dispute via Twitter with a food blogger, which he didn’t realize was public because he didn’t understand how Twitter operated. (His young son established the Twitter account for him.) Twitter also plays a critical role in the resurrection of his career, as his son tweets about his new food truck as they drive across the country. Further, Twitter helps reconnect the chef with his son. (Favreau insists that Twitter didn’t pay for the product placement.) Twitter is to Chef what AOL was to the Tom Hanks/Meg Ryan 1998 rom-com You’ve Got Mail.

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In June, when I wrote about the release of Amazon’s new smartphone, I promised a more comprehensive article about the competitive dynamics of the mobile ecosystem.  While tech journalists tend to fixate on new releases from household name companies such as Amazon’s Fire Phone, it is all too easy to miss the big picture.  Emerging markets pose the biggest threat to the current market leaders and promise to be incubators of disruptive innovations.

Although much of the focus in the developed world remains on the competition between Google’s Android and Apple’s iOS, a host of plucky competitors are targeting emerging markets.  And for good reason.  Not only is the smartphone adoption rate growing nearly twice as fast in emerging markets as it is in more established markets, certain characteristics make it easier for new platforms to establish a foothold in emerging markets, as the market research firm GSMA Intelligence stressed in a recent report:

Emerging markets represent the largest unrealised source of new mobile Internet subscribers.  Given that smartphone penetration is nascent, the take-up and use of mobile data is rising, lock-in mechanisms have yet to kick in for incumbents and subsidies are less prevalent, the markets present more fertile ground for challenger platforms.

In a nutshell, the advantages held by established competitors like Google and Apple don’t necessarily carry over into emerging markets.  The market structures and desired uses of mobile technology differ greatly in markets such as China, Vietnam and India than from those in the US, Europe, Japan and South Korea.

The most obvious reason for this is simply that the smartphone penetration rate is much lower in emerging markets, therefore less people are committed to a particular mobile platform.  Furthermore, characteristics such as price point and unique local content and services are the more important considerations for new users in those markets where lock-in factors, such as prior purchases, subsidized contracts and large mobile app suites, don’t factor in purchasing decision to nearly the same extent they do in more advanced markets.  Low price and local market customization are areas where smaller competitors can compete against industry leaders.

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DisCo readers may be familiar with a recurring theme pitting incumbents versus disruptive innovators. But new research seems to suggest that the relationship isn’t always adversarial.

The Knowledge@Wharton blog has an article about a soon to released paper by three professors, David Hsu, Matthew Marx and Joshua Gans, which illustrates that disruptive startups do not just compete with market leaders, but often partner with them as well.  The authors use the automated speech recognition (ASR) market as their test case, as the frequent technological disruptions in the field make it a paradigmatic industry to study; similar to Clayton Christensen’s disk drive market.

The study finds that 60% of the firms in the ASR market started out competing in the marketplace while 38% cooperated with market leaders (2% had a “hybrid” approach).  However, the blog notes that breaking it down by firms using a “disruptive” approach versus an “existing technologies” approach tells a slightly different story.

The researchers find that early adopters of disruptive technology were much less likely to cooperate with incumbents, with only 21% doing so, compared with 36% of start-ups whose businesses were based on existing technologies. But early adopters or disruptors were more likely to switch from a competitive to a cooperative strategy: 12.7% did so, versus 7.8% for non-disruptors. (The switch from a cooperative to a competitive strategy was not meaningfully different between the two groups.)

The authors use their research to give advice to startups: be open early on to the possibility that your competition/cooperation strategy could change over time.

The study’s authors also have advice for incumbents: it may be useful to let the disruptive startups slug it out among themselves and license/acquire/partner with the winner, rather than trying to develop the disruptive technologies in house.  As one of the authors of the study notes, predicting a winner is difficult:

You sort of have to predict the future. What we’re saying is, you don’t have to predict the future. There may be 30 start-ups out there trying different disruptive or potentially disruptive technologies. So, you can take this wait-and-see approach.

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Two weeks ago in Facebook’s Q2 earnings call, Mark Zuckerberg reiterated Facebook’s desire to become a more effective online “search” competitor, although in his description of the initiative it became clear that he was talking about becoming a more effective competitor in the “market for answers,” as the Wall Street Journal pointed out:

Facebook is trying to give people answers to what they’re looking for in hopes they’ll spend more time on the site or in the app, and in turn stealing searches away from Google or Microsoft’s Bing.

In fact, responding to an analyst’s question, Zuckerberg cited Facebook’s unique advantages in the answers market:

There is huge potential. There are a lot of questions that only Facebook can answer, that other services aren’t going to be able to answer for you. We’re really committed to investing in that and building out this unique service over the long-term. And I think at some point there is going to be an inflection where it starts to be useful for a lot of use cases. But that may still be years away. But we’re just committed to doing this investment and making this right.

Given our frequent musing here on the nature of competition online and its antitrust implications, Zuckerberg’s description of where Facebook is going was telling.  Namely, that the narrow market definitions that rely on colloquialisms (“search engines” and “social media”) do not reflect the true nature of competition online.

A fundamental tenet of antitrust law is that in order to figure out if a company is monopolizing a product market, one has to define what that relevant product market is.  Sounds simple enough, right?  Well, maybe not, especially in the online world.

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Last month a Paris appeals court annulled some €3.9 million (US$5.2M) in fines imposed on endive producers and their trade associations by the French Competition Authority (the Autorité de la concurrence). Not dissuaded, that French competition agency just slapped a €1.6M (US$2.1M) fine on Caribbean yogurt maker Societe Nouvelle des Yaourts de Littee (SNYL) for falsely questioning the safety and quality of a rival brand in Martinique and Guadeloupe, characterizing the practice as “abuse of dominance” in the marketplace. SNYL

This epitomizes a fundamental disconnect between antitrust law and competition policy in the U.S. and that of many other nations. (No, the French are not alone…) American antitrust principles and decisions generally limit the reach of competition law — aside from competitor collision like price-fixing cartels — to business conduct that uses market power in an exclusionary manner. As the Supreme Court emphasized in 1993, “[e]ven an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or ‘purport to afford remedies for all torts committed by or against persons engaged in interstate commerce.’” In sharp contrast, the FCA reasoned about yogurt that “the dissemination of misleading and disparaging remarks by a dominant operator against one of its competitors is a serious practice with regard to competition rules.”

“Between December 2007 and December 2009, SNYL broadcast information discrediting the sanitary quality of Laiterie de Saint-Malo products using the questionable results of bacteriological tests and questioning the irregular consumption deadlines affixed to its products,” the FCA reported in a (translated) statement. This led a number of retailers to pull Malo products from shelves for an extended period. “This behavior had the effect of limiting product sales of Laiterie de Saint-Malo in Martinique and Guadeloupe — an abuse of dominant position prohibited by Article L 420-2 of the Commercial Code,” the FCA concluded.

In the United States, legal standards for proving antitrust claims are rightly rigorous; they are strict in order to reduce the risk that enforcement of the antitrust laws may chill the very sort of vigorous, competitive conduct they are intended to encourage. It’s been true for at least 35 years that the Sherman Act “is not a panacea for all evils that may infect business life.” Legendary antitrust law scholars Phillip Areeda and Herbert Hovenkamp have advocated a nearly insurmountable presumption against deception and fraud serving as the basis for a monopolization claim, a presumption most courts have readily embraced. As one court of appeals cogently explained, “[i]solated tortious activity alone does not constitute exclusionary conduct for purposes of a [Sherman Act] § 2 violation, absent a significant and more than a temporary effect on competition, and not merely on a competitor or customer…. Business torts will be violative of § 2 only in ‘rare gross cases.’”

The difference is that between competition and consumer protection, which are quite distinct concepts in American jurisprudence. If a firm uses a monopoly to harm competition without business justification, that’s an antitrust violation. If a firm lies about a competitor’s products or runs false advertising, that’s a deceptive business practice. The two legal regimes are directed at different constituencies and conduct, which is why the Federal Trade Commission Act was amended in the 1930s to add a separate provision (Section 5) for “unfair or deceptive” business practices, and why the FTC accordingly is separated into its two principal divisions: the Bureau of Competition and the Bureau of Consumer Protection. Likewise, the Lanham Act specifically prohibits false advertising and provides a damages remedy for injured companies. Thus, false representations around a firm’s own, or it’s competitor’s, products can be legally actionable, as the Supreme Court again ruled this year in a case about beverage labeling (Pom Wonderful v. Coca-Cola). They’re just not an antitrust violation in the United States.

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There’s been much press coverage of the travails of the AmLaw 100 — America’s largest law firms. Clients are aggressively pushing back against ever-increasing hourly rates and significant inefficiencies. Storied firms have been foldingmerging and laying off staff and even attorneys at unprecedented levels. Electronic discovery specialists and legal outsourcing are compressing margins for the litigation work that historically fueled big firm profits. Non-traditional legal providers are hardly faring better. Clearspire, a much-heralded pioneer of the virtual law firm concept, closed shop in June.

Yet at the same time — and perhaps as a consequence — the market for legal startups is booming. VentureBeat commented that the profession’s ongoing transition is “fueling innovation throughout the entire industry.” In 2009, just 15 legal services startups were listed on AngelList. There are now more than 400 startups and almost 1,000 investors. A whopping $458 million was invested into legal startups last year, a remarkable increase from the $66 million that went into the space in 2012. Legal entrepreneurs are focused on two different objectives: helping lawyers do their work better, faster and cheaper, and making the law more accessible, sometimes eliminating the need for lawyers altogether.

Law

It is the second, consumer-facing portion of this trend that portends a fundamental change in the legal market. By giving both individual and corporate consumers the resources to do it yourself, today’s crop of disruptive legal startups is laying the groundwork for an era in which software tools, social sharing and document comparison-assembly programs are positioned to replace attorneys’ stock in trade, namely reuse of contracts and other legal “forms.”

A century ago the bar protected itself with arcane Latin phrases and obscure judicial reporters. Two decades ago, it used the expense of private legal research databases like LexisNexis, an information barrier that is increasingly archaic in today’s era of Web-enabled courts and Google Scholar. With the present challenge to the largest traditional domain of legal practice — creation, revision and execution of legally binding documents — technology is breaking down walls that made have legal U.S. services unaffordable, and thus essentially unavailable, to many except the wealthy those at the opposite end of the economic spectrum who qualify for free and pro bono legal services.

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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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Yesterday, it was reported that Community, which had been canceled by NBC in May, was just picked up for a sixth season (at least) by Yahoo.

The creation and distribution of original programming by new entrants is a growing phenomenon.  Traditional over-the-air broadcast television is no longer the sole source of episodic programming.  As DisCo has previously noted, shows like House of Cards and Alpha House have risen to fame on web-based services like Netflix and Amazon, entirely in the absence of network backing.  Just as record labels are no longer the sole gatekeepers to music production, it is increasingly clear that television networks are no longer the gatekeeper to serialized video content.

Increased competition and disintermediation in the market for video content is unmistakably a good thing for consumers, who have more options for entertainment than ever before, and for creators and entrepreneurs, who can produce programming without needing permission or funding from existing gatekeepers.  This allows for more risk-taking and creative choices, without having to worry about what incumbents find desirable.

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The French have a wonderful saying, la plus ça change, plus c’est la même chose, which roughly translates to “the more things change, the more they remain the same.” That’s an apt description of current, high-profile wrangling in the United States about music licensing under federal copyright law. Despite all the jarring changes to the recording industry over the past decade — remember Tower Records? — it’s the same issues and (mostly) the same players as always, arguing over a Rube Goldberg-like system of arcane complexity.

Tomorrow the House of Representatives (specifically the Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet) will hold a second round of hearings on music licensing. This inquiry coincides with a recent announcement by the Justice Department that it will review — and solicit public feedback on — the 73-year-old antitrust decrees that govern ASCAP and BMI, two groups which act as licensing clearinghouses for a range of outlets that use music, including radio stations, websites and even restaurants and doctors’ offices. As the New York Times has observed, “billions of dollars in royalties are at stake, and the lobbying fight that is very likely to unfold would pit Silicon Valley giants like Pandora and Google against music companies and songwriter groups.” MORE »

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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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