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Antitrust in 60 Seconds: Does Size Matter in Competition Policy?

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The 60-Second Read

Recent commentary on competition law and policy might lead one to believe that size is all that matters in the competition policy sphere: big is bad; small is beautiful. However, an assessment of the evolution of modern competition law enforcement shows that size is just one element of a broader and more sophisticated analysis.

In the early days, antitrust enforcement penalized successful companies based solely on market share. The ¨retro antitrust¨ approach created disincentives for companies to invest, innovate, and grow. Subsequent refinement in the application of economic analysis led the U.S. Supreme Court to adopt the consumer welfare standard and recognized that: “Congress designed the Sherman Act as a consumer welfare prescription.” This approach established the right balance for companies to compete and agencies to effectively maintain competition in the markets.

Hence, the adoption of a consumer welfare standard has provided for a “wise technocratic equilibrium”, spurring economic growth in the form of new and better products and services at lower prices to the benefit of consumers. Therefore, testimonials worrying about bigness are old-fashioned and mistaken. Well-informed analysis must understand that size is not a proxy for monopoly power.

Does size matter?

Antitrust’s “size” debate has been reignited, but historical experimentation with antitrust enforcement informs us that “bigness” in and of itself is not an antitrust concern.

The so-called “modern competition” or “hipster” antitrust proposals suggest, among other things, taking antitrust actions against big tech companies for no other reason than because these companies are big ones. This is anything but a modern proposal. In fact, it is a rather vintage suggestion that resembles the old days (notably from the 20s through the 60s) when antitrust enforcement cared simply about the size of corporations and ignored the benefits that these companies brought to consumers.MORE »

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Music Consent Decree Battle Takes a Turn as DOJ Brief Charts New Path Forward

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On August 31, the Department of Justice made an interesting strategic move that turned a fight over consent decree language into an epic standoff. In its reply brief, the DOJ called BMI’s bluff and almost completely turned BMI’s legal strategy on its head. Reading the brief, one could almost imagine the DOJ reciting Dirty Harry’s famous line “You have to ask yourself, do I feel lucky?”

(If you’re new to the intersection of antitrust law and copyright in the music industry, see our three-part explainer here, here, and here.)

The fight is over fractional licensing, or the licensing of only a portion of a song’s copyright. Fractional licensing does not give a licensee the rights to play a song, because the licensee must first contract with all other fractional owners to assemble 100% of the rights. Fractional licensing can be a drag on the use of music, so Congress set the default rule as full-work licensing – meaning each copyright owner can license the full work but owes each co-owner their share of profits. While parties are free to change the default rule by contract, the DOJ argues that the antitrust consent decrees that govern ASCAP and BMI contain restrictions on the use of fractional licensing. BMI disagrees.

If that explanation seems vague, it’s because it is now clear that what we all thought the DOJ was arguing is dramatically different from their actual position. It all started with BMI’s attempt at a strawman argument. BMI thought the DOJ was taking the position that fractional licensing is completely barred by the consent decrees. BMI argued that under current law on consent decree construction, the DOJ can’t get all the way there, due to the way the consent decree is drafted. BMI argued that if you only take DOJ’s plausible arguments, you get the result that fractional licensing is not regulated under the consent decree at all. Perhaps believing that this could not possibly be what the DOJ wants, BMI then advanced its interpretation where it gets to engage in fractional licensing but under the antitrust restrictions of the consent decree.

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Why Online Platforms Lose Sleep Over Disruption

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A new paper by economist David Evans takes aim at the notion that Internet platforms are, in the words of some commentators, “unstoppable.” Evans differs from these implausible declarations, identifying several aspects of online platforms that lead to many a “sleepless night,” as cutting-edge platforms worry about disruption by existing rivals or new entrants. (DisCo has covered some of Evans’ scholarship before; he also co-authored the 2016 book Matchmakers on the subject.)

To start, what’s a “platform?” As I noted in a paper last year, few Internet terms are used with such imprecision as “platform.” In fact, as both Evans and other DisCo writers have observed, many traditional businesses have online presences that are indistinguishable from major online platforms. Evans uses the term “platform” specifically, in order to indicate a “businesses that connect two or more different types of users,” or what scholarly literature has called “multi-sided markets.”

Evans identifies several features of online platforms that result in leadership being less durable than other sectors, some of which will be familiar to regular DisCo readers. Platforms tend to be characterized by (1) rapid innovation in inter-firm competition; (2) disruptive innovation that moots the relevance of existing industries; and (3) the fact that users can “multi-home”, or use multiple competing services between which they can easily switch.

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A Toxic Mix of Antitrust, Politics and Jobs

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For nearly five decades there has been a basic, relatively stable consensus among United States antitrust practitioners, scholars and courts that the goals of competition policy, and thus of governmental antitrust enforcement, should be the neutral economic principles of market competition, consumer welfare and efficiency. That consensus is under threat today, a potential victim of the extraordinarily divisive politics we are witnessing in contemporary America.

Two examples are illuminating. First, President Trump remarked during the campaign, and tweeted after his inauguration, that the pending AT&T/Time Warner merger should be blocked, leading to much speculation that he would use the Justice Department to punish CNN, an outspoken Trump critic and a Time Warner property. Second, Democratic Party leaders recently unveiled a new, populist theme which highlights as one of its three pillars more aggressive merger enforcement, in part as a job-preservation vehicle, namely to “protect consumers, workers and competition.” (That itself is a revision to settled doctrine that antitrust protects competition and consumers, not competitors.)

In the 1970s, the infamous “Dita Beard memo” — revealing the Nixon Administration’s secret application of political leverage favoring a controversial ITT acquisition spree — led to a push for more open and independent antitrust merger enforcement. This resulted in bi-partisan passage of the Tunney Act and the Hart-Scott-Rodino Act to mandate merger reporting, enforcement transparency and judicial review of governmental antitrust consent decrees. The related Horizontal Merger Guidelines embody that transparency, provide predictable guidance on antitrust merger policy for corporate acquisitions, and have been accepted by both conservative and liberal administrations since 1982. No one seriously questions the wisdom of those policies.

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Should Antitrust Policy Begin with Competition or Competitors?

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A recent Washington Post editorial criticized European regulators’ years-old Google Shopping case — previously covered here on DisCo — as “a case of punishment without crime”, and argues that regulators concerns seem “a bit dated.”  Other commentary in the WaPo has defended the EU decision, such as Jonathan Taplin’s factually incorrect June 28 op-ed.  The Post editorial board appears to disagree.

The Post’s column attributes EU regulators’ decision to Trans-Atlantic differences in first principles of antitrust theory.  In recent decades, U.S. antitrust policy has focused on encouraging competition to protect consumer welfare.  While European antitrust policy has the same objective, this particular case seems to be more about protecting competitors from one another. MORE »

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Did the FTC Overrule Its Own Staff? Setting an Alternate History Straight

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Following the European Commission’s antitrust decision against Google, some commentators have incorrectly claimed that FTC Commissioners’ overrode the agency’s staff when closing the FTC’s so-called ‘search bias’ investigation of Google.[1]  As we explained here on DisCo before, this is wrong.

What actually happened?  In 2013, the FTC’s five Commissioners (three Democrats, two Republicans) voted unanimously to close a 19-month investigation of Google Search, stating “we have not found sufficient evidence that Google manipulates its search algorithms to unfairly disadvantage vertical websites that compete with Google-owned vertical properties.”  In doing so, the FTC concluded “Google adopted the design changes that the Commission investigated to improve the quality of its search results,” and that data showed “that users benefited from these changes to Google’s search results.”  Contrary to EU regulators’ recent finding, the FTC reasoned that “changes to Google’s search algorithm could reasonably be viewed as improving the overall quality of Google’s search results.”

Did this overrule FTC staff recommendations?  No.  FTC Commissioners emphasized that the Commission’s conclusion was “in accord with the recommendations of the FTC’s Bureau of Competition, Bureau of Economics, and Office of General Counsel.”

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“Creative Culture” Is Not Cause For Tech, Antitrust Break-Ups

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Former music and film producer Jonathan Taplin, now director emeritus of the content industry’s Annenberg Innovation Lab, waxes poetic on faux antitrust policy in the continuing promotional tour for his book Move Fast and Break Things: How Facebook, Google and Amazon Cornered Culture and Undermined Democracy. Appearing in DC a few weeks ago, Taplin morphed a thin veneer of anti-Trump rhetoric and some self-selected statistics into this remarkable non sequitur: “Facebook, Google and Amazon have created powerful monopolies that now control the economic success of the journalism, music, video and book industries.” Taplin is way out of his element, merging two distinct issues into a superficial “#resistance” meme that contradicts the central tenets of U.S. antitrust law.

The headline of Taplin’s speech at that New America event in Washington — “Have Internet Giants Taken Over Creative Culture?” — is illuminating. Creative culture and antitrust bear no relation to one another. Taplin’s thesis that Internet platform providers are monopolies is factually inaccurate and devoid of real antitrust analysis. His call to break up these supposed “monopolies” is not only “spectacularly wrong,” it turns the political wars in America over “fake news” and the like on their head. In an odd juxtaposition, Taplin explained that because Google and other digital platforms have experienced unprecedented revenue growth over the past decade, while content creators witnessed a decrease in their own earnings, users should mount a “#resistance” to YouTube “for what it has done to the music business” and punish Facebook “for the election of Donald Trump.”

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Music Licensing Explainer, Part III: The Uncertain Impact on Antitrust Law

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This post assumes you’ve read the previous two, if you haven’t you can find them here and here.

It is indisputable that the performing rights organizations (“PROs”) have played an important and procompetitive role in making the music industry what it is today. The benefits that PROs provide are mainly that they offer “unplanned, rapid, and indemnified” access to the songs in their catalogue. Nearly all music users, until recently, have been able to get immediate access to public performance licenses for the music they need simply by taking blanket licenses from the major PROs of the time.

The full work licensing question has never definitively been answered, but it has at the very least historically been assumed by the DOJ, Supreme Court, and music users that the PROs effectively offer full work licenses. The language the Supreme Court uses to describe the service provided by the PROs – “unplanned, rapid, and indemnified access” – implies full work licensing. However, the reason why there is still even room for debate is that it’s never really mattered. Most music users take licenses from the three major PROs (ASCAP, BMI, and SESAC) and pay these PROs based on fractional market shares. In exchange, these music users have never worried that they do not have the rights to play the songs in these PROs’ catalogues. The question only becomes relevant when music publishers wish to fragment music licensing and move rights out of the PROs.

For the purposes of this post, I will assume that – despite the findings of the DOJ – it is debatable whether the PROs have offered full work licenses to date. Even still, the historical assumption of a full work licensing environment has great implications for how the courts and the DOJ have treated the music industry under the antitrust laws.MORE »

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Consent Decrees and the Music Industry: An Antitrust and Copyright Explainer

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As DisCo has covered before, a major legal battle is being waged in the music industry. The battle concerns the intersection of music copyright and antitrust law, and it could dramatically change how consumers interact with music. On May 18, the Department of Justice (“DOJ”) is expected to file its opening brief in an appeal of a district court decision rejecting its interpretation of a consent decree entered into in 1941 (and amended since). The outcome of this appeal could have major and long lasting repercussions for Internet radio and music streaming.

How the Music Industry Historically Worked Out Its Issues

The music industry joins a handful of other industries, like major league sports, which have a unique relationship with antitrust laws. These industries all have very significant and unique problems that are solved through competitor coordination, but competitor coordination is normally illegal under the antitrust laws. These industries generally operate under some kind of exception to the antitrust laws, because the problems outweigh the competitive concerns in a limited coordination. In the case of the music industry, a complicated basket of rights extended across millions of songs would make it nearly impossible for music services to exist without some market intervention. Every recorded song is covered by two copyrights, one for the recording and one for the composition, and every copyright can have any number of owners. This leads to a counter-intuitive relationship between buyers and sellers where buyers want the smallest number of sellers possible, as long as those sellers are required to play fair. This leads to the lowest search cost and the easiest way for buyers and sellers to find each other.

Enter the performance rights organizations (“PROs”). These PROs gather many composition licenses together and offer them at a blanket rate to music buyers. This is, of course, called price fixing in antitrust terms. However, the DOJ recognized the benefits of PROs and negotiated a settlement that would allow the PROs to continue to operate unchallenged by antitrust laws as long as they were bound by certain rules that ensure the PROs played fair and didn’t abuse their immense power. This assessment of the PROs was later endorsed by the Supreme Court. The set of rules the PROs operate under is called the consent decrees, which cover the two largest PROs in the music industry – ASCAP and BMI. These consent decrees provide a floor of protections for music buyers.

Today, virtually all music services take blanket licenses from the major PROs. The PROs in turn gather composition rights primarily from large publishing houses like Sony and Universal Music Publishing Group.

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Android, iOS and Market Power – What Does Mobile Platform Competition Really Look Like? – Part II

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A while back I wrote about the European Commission’s competition investigation into the Android operating system (OS) and today’s mobile platform competition. The main argument of my previous post was that competition in the mobile economy is best conceived as competition between mobile ecosystems with Android and iOS being by far the two most popular which, in my opinion, stand in clear competition with each other. All mobile OSs have to serve and balance the interests of a variety of parties to keep them attractive (or even alive) — that is the nature of a multi-sided platform like a mobile OS. The ‘Apple factor’ should be part of the Commission’s investigation into Android at the stages of determining dominance as well as potential abuse. It is very hard to imagine that Google can act ‘independently’, in the competition law sense of the word, of Apple in the market for mobile OSs. In that sense the Commission’s market definition of licensable smart mobile operating systems, which leaves Apple’s iOS outside that market, appears peculiar (you can read more on that point in my previous post). MORE »

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