Investigating Big Tech!

Elizabeth Warren is calling for aggressive enforcement of the antitrust laws. The House Judiciary is opening hearings on big tech, and the Justice Department and FTC have allocated amongst themselves responsibility for particular Big Tech companies. Pundits are saying it’s time for Big Tech to be broken up. So, should Big Tech be worried? Are we going to see an antitrust renaissance? Is Gilded Age 2.0 coming to an end? The short answer is, I doubt it.

The economic and legal theories that have enabled Big Tech to grow into the colossuses they are today are entrenched in the jurisprudence, and world views, of the courts and enforcers, and represent significant barriers to any meaningful enforcement and ultimately change. Antitrust enforcement underwent a major contraction, beginning in the 1970s as fiscal conservatives grafted onto the jurisprudence with increasing success “the Chicago school” notion that antitrust should promote economic efficiency. One of the most troubling of their successes, particularly for proponents of diluting Big Tech’s social and economic power, was Brooke Group. Brooke Group held that predation is only actionable if the plaintiff can show that the defendant has monopolized a market and can recoup the losses associated with its predation through supra-competitive pricing, in the monopolized market. Big Data platforms price significantly below cost in high-value data feeder markets, specifically for purposes of becoming the de facto provider of the underlying good. The purpose is not to extract rents in the underlying market, but to observe as much of the activities of the price insensitive purchasers, within that underlying market, as possible. Doing so allows them to develop a comprehensive understanding of those customers’ demands. Big Data then takes that individualized understanding and correlates it to others, to build a product-by-product, consumer-by-consumer demand database that can move product more quickly and more efficiently, at maximal prices. Losses in the data input markets are then recovered in the data analytics markets. Consumer ignorance of the value of their data—which is intractable because they can never know how their data augments the value of the other data within the set—enables continued predation in the underlying markets.

So long as the narrative espoused by the Agencies, Congress and the politicians remains consistent with Chicago school notions of economic efficiency, you will see no meaningful change, or outcome, in how Big Tech will be treated. This is the Grinnell narrative–that monopoly gained by virtue of superior product, business acumen or historical accident, will immunize Big Data’s behavior. If you see Google described as a “search company,” Facebook as “social media” and Amazon as an “ecommerce marketplace,” you will not be able to recognize the predation or remedy it. Google mastered search, Facebook social media and Amazon ecommerce. Their monopolies are the archetypal Grinnell monopolies. They give away valuable products in exchange for a “few bits of information” about their participants. “Zero cost” markets must benefit consumers because they are “costless.” But search, social media and ecommerce are not where the company’s value or power is nor are these “costless markets” costless. These companies provide advanced, granular data analytics about their users to the highest bidders. And they compete for data inputs. Their output is consumer data analytics that enable sellers (purchasers of the data analytics) to increase sales, and, beyond commerce, increase the penetration and effectiveness of their social and political messages. This data has value, and consumers exchange their data for their costless search, social media and ecommerce baubles, which may be nothing more than bags of beans. The companies compete for dominance in data input markets (like purchases of New York Times Best Sellers) so that they can control, and observe, as much behavior as possible by the profitable price insensitive.

A far more radical, and effective, enforcement initiative would be to add another antitrust statute. Rather than simply try to reframe existing, and entrenched, caselaw around concepts that render behaviors that have historically been illegal but now find themselves excused under rubrics of “economic efficiency,” make them illegal under statutes that contemplate more than just economic efficiency. These statutes would view substantial lessening of innovation and the marginal loss of competition (something less than a “substantial lessening of competition”) as harmful and illegal.

Absent a serious discussion about expanding the common law of antitrust enforcement and changing the narrative around Big Data beyond the current Chicago school orthodoxy, you won’t see any meaningful change in enforcement. Big Data is safe.

Breaking Up Facebook?

There seems to be a growing concern that Facebook is too big and should be broken up. Among those calling for the breakup are Elizabeth Warren, Chris Hughes and Alexandria Ocasio-Cortez. The FTC has asked Congress to pass a national privacy law to regulate the industry. While some disagree, it seems pretty clear that foreign agents were able to manipulate voters in the 2016 election. But, would breaking up Facebook put an end to foreign intervention? Would it “help” democracy?

From an antitrust standpoint, it seems unlikely that the government would succeed in an antitrust suit against Facebook. It’s unclear if Facebook is a monopoly, and even if it were, monopolies gained by virtue of superior product, business acumen or historical accident are not illegal. It’s also not clear what breaking them up would do. One of the benefits of being on Facebook is that a lot of other people also utilize the platform. If you move 1/3 of users to Facebook Blue, 1/3 to Facebook Red and 1/3 to Facebook Yellow, users would tend to migrate to the Facebook where their friends and family are, potentially recreating the “original Facebook”. From an economic perspective, the value of Facebook is not only understanding a particular user, but finding and understanding super-users, and using that information to understand other users who may not interact with the site as much. Through a repetition of behaviors, Facebook (and Amazon and Google) can get a pretty good idea of what you like to buy, when, and at what price. They can use that model to compare you to other people who have purchased similar things. They then can develop projected demand curves for whole classes of people, and use them to sell more things to you at optimized prices. Say you find a frozen mastodon with 1/3 of its’ DNA preserved. You know some things about that animal but not a lot. Now say you find 6 mastodons each with 1/3 of their DNA preserved. You know a lot more about that species as a whole even though you still have just a few data points per specimen. The value of each specimen is enhanced by the presence of the others.

If you gave each New Facebook all of the data, you’ve just tripled your problem, because each New Facebook has a complete data set and the algorithms the data built. And there doesn’t seem to be a way to “break up” the algorithms. You can get rid of a particular user’s data, but you will still have the algorithms that predict the demand for particular things that class has. Even if you could “break apart” those algorithms, it still wouldn’t prevent the New Facebooks from regenerating them as new users join and participate.

Data extraction and assimilation is not going away. In fact, the valuations the market gives to companies like Amazon but not Walmart explain this clearly. Amazon is worth so much because it can tell sellers who will buy their products, when and at what price. Moreover, the intimacy of the user experience, where the user can be served a unique website with unique pricing and product description, means that platforms like Amazon can price discriminate perfectly and instantaneously. It doesn’t have to wait for a retail window to close. It can sell a product for more to a price insensitive buyer at the same time it’s selling the same thing at a lower price to a price sensitive buyer.

It’s this hidden intimacy that makes people call Facebook “dangerous to democracy.” Democracy depends on the marketplace of ideas, where we and our putative representatives advocate for their positions openly to the citizenry, where those ideas can be assessed and challenged. People on social medial platforms tend to like others and organizations that have significance for them. When you look at a feed, you could see your church, your children’s school, your school, your trusted periodicals, your friends, and your mother. The problem is that these organizations are not curating the content you see. You see the indicia of those organizations but cannot trust that what you’re seeing is the full and complete, unexpurgated opinions of that organization, friend or family member. Facebook edits them and does not have the same incentives as the organizations. Indeed, Facebook is incentivized not to tell you anything except what you want to hear. They are incentivized to edit out anything unpleasant that might drive you from their site—it’s your behavior on their site that tells them who you and others like you are, which is what they are selling. You actually don’t see conflicting content that might challenge some of your ideas. Ultimately, they are free-riding off the goodwill your organizations have created to sell advertisements to you.

When I was a child, I remember standing at the checkout line at the grocery with my mother and reading that space aliens had landed in Utah. I was thrilled! My mother was not nearly as thrilled, and told me that space aliens had not in fact landed in Utah despite what the periodical said. I distinctly remember going home and watching the evening news for the story to prove her wrong. Shockingly, the story didn’t run. I eventually learned that there were differences in news sources, that a story from the New York Times was different than one from the Weekly World News. Learning that difference and what sources have value to you, moreover, is not a one-off event either. It’s life-long.

This analysis suggests the best response is education, in particular civics; informing the public that they are not looking at an open marketplace of ideas where all their favorite, most trusted sources are speaking freely, but a unique unshared reality curated by an organization that makes money selling you things based on what you say and do.

Having said that, more could be done to combat false identities and foreign propaganda. Presently, platforms have no incentive to stop them, as they bring more eyeballs and advertisers to sites. Perhaps requiring all paid content to be displayed on a special site, so anyone who wants to can see all of them and their sponsors. Perhaps fine the platform for allowing political advertising where the advertiser does not verifiably identify himself and his country of origin. A more fulsome disclosure about not only what data they do pull but how they massage it to make it valuable to sellers and about how they formulate the feeds people see might also help. This would also go a long way to informing users about the value of the data they are giving and relieving some of the informational asymmetry that clouds the market. The FTC’s 6(a) investigation might be expanded to platforms as well.

“Break up Facebook” is a nice rallying cry but not practical or respectful of our First Amendment. Facebook is a new way of delivering content which needs to be understood more widely.

United States v. Academy of Motion Picture Arts & Science

The Academy of Motion Picture Arts & Science, the folks who bring you the Oscars, are voting on a rule change that would exclude movies by companies like Netflix from consideration. The Justice Department apparently does not take kindly to the idea. According to Variety, Makan Delrahim, Assistant Attorney General for Antitrust, wrote the Academy stating that “agreements among competitors to exclude new competitors can violate the antitrust laws when their purpose or effect is to impede competition by goods or services that consumers purchase and enjoy but which threaten the profits of incumbent firms.”

It’s a fairly aggressive position to take, particularly for a Republican administration. To win, Justice would have to show that being nominated for an Oscar has an important effect in the market. Generally, films that are nominated for Oscars do much better, so the statement is at least plausible on its face. More importantly, however, Netflix is a new and aggressive format. They could easily be described as a nascent, disruptive and maverick competitive force. If one of their films were to be nominated, it could very well have a disproportionate affect on their “legitimacy” as a substitute to in-theater films and therefore on the market for films. In addition, the film industry has plenty of reason to squash new disruptive technologies as they threaten to take consumers away. Lastly, there is a decent chance the agreement could be characterized as a per se concerted refusal to deal.

This is not a frivolous threat. If the Academy proceeds to exclude Netflix, I would anticipate not only action from Justice but from Netflix and the plaintiff’s bar. And Mr. Spielberg one of the first to be deposed.

Elizabeth Warren Wants to Break Up Big Data – Could She Do It?

Presidential Candidate Elizabeth Warren thinks Big Tech is too big and wants it—and, in particular, Amazon, Facebook and Google—broken up and their past mergers and acquisitions unwound. And the FTC recently announced it was forming a Task Force to look into the technology markets. There do seem to be issues with Big Tech. But is antitrust, as currently practiced, the best tool to address them?  Ms. Warren contemplates this by suggesting a new regulatory regime should be implemented to control Big Tech.  Should we treat platforms like a regulated utility?  Should we pass a new antitrust law that supplements current common law and allows for more vigorous enforcement?  Or are there tools available to modern antitrust that can address Big Tech and the issues Ms. Warren identifies?  We ask those questions and suggest some high-level responses to further the dialogue.

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Webtaxi: A Wrong Decision on “Algorithmic Price Fixing”

The Luxembourg Competition Authority recently handed down a decision that found an app-based taxi booking system, Webtaxi, was not a hardcore violation of the relevant competition law banning price fixing.  The algorithm determined the precise fare the passenger would pay for a trip.  The taxis remained competitors otherwise and the cabs on the app represented only 26 percent of the relevant taxi market.  Fares were otherwise negotiable.  The Authority found the efficiency gains material and the pricing reasonably necessary to obtain the gains.   Specifically, they found the app would reduce fares, reduce empty taxis, reduce pollution, and reduce waiting times.  They also found that the collective price setting was “necessary” to achieve these goals.   Absent the price fixing, customers would not choose the nearest taxi but the one with the best price.

This “venture” would be condemned as naked price fixing in the States. The only integration the venture offers is the app.  The only thing the app does is set the fare and allocate the customer to nearest physical taxi participating in the app.  At 26 percent of the market, the conspiracy would likely fail as consumers could switch to non-participating taxis relatively easily, but that doesn’t mean it isn’t a conspiracy of “collusion.”  The US has regularly, and for over a century, condemned price fixing agreements that set “fair prices.”

Uber and Lyft are different than Webtaxi. They are more than mere aggregations of independent drivers (notwithstanding what they may claim about the independence of their drivers and the view of the lower court).  Uber sets their prices.  Uber provides them with the technology and branding as well as a widely distributed app that is easy to use.  They provide a rating system.  And there is system competition.  Incumbent taxi companies.  Lyft. Continue Reading

Courts Must Only Offer “Respectful Consideration” to Foreign Governments’ Statements Interpreting Their Laws in Antitrust Cases

On June 14, 2018, in Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co., the Supreme Court held that Courts are not obliged to accept statements from a foreign government agency on the meaning and effects of its laws but should consider other evidence in addition to such statements to judge their value.  The Court overruled a Second Circuit decision that treated the statements themselves as determinative. 

The case involves price fixing of vitamin C. A group of purchasers sued four Chinese companies in the Eastern District of New York alleging the companies had engaged in a price fixing conspiracy in violation of Section 1 of the Sherman Act.  The sellers moved to dismiss on the grounds that the government of the People’s Republic of China required them to engage in the behavior, and so it was immune under the state action and foreign sovereign compulsion doctrines and international comity.  China’s Ministry of Commerce filed an amicus stating that China required such agreements by law.  The plaintiffs argued that there was in fact no written law or regulation, that China had announced the pricing scheme would be voluntary and that China had made the opposite representations to the World Trade Organization.  The trial court did not find the statement compelling, denied the motion to dismiss and a motion for summary judgment, and the defendants ultimately lost with a jury finding them liable for $147 million in damages after trebling.  The Second Circuit reversed finding that the court should have dismissed because the statement from the Ministry of Commerce was determinative.

In deciding against the Second Circuit, the Court held that a court should “carefully consider a foreign state’s views about the meaning of its own laws” but should only offer “respectful consideration” of those views. A court needs to look at the totality of the circumstances, at the “statement’s clarity, thoroughness, and support; its context and purpose; the transparency of the foreign legal system; the role and authority  of  the  entity  or  official  offering  the statement;  and  the  statement’s  consistency  with  the  foreign government’s past positions.”

Animal Science stands for the proposition that defendants, when asserting their anticompetitive behavior was accomplished pursuant to a foreign law, have to do more than secure a statement from the government that the law in fact compels that behavior.  Defendants counsel should do diligence into the law and be prepared to support the assertion.  A statement from the government should still be useful, but one would want to consult local attorneys, hiring one perhaps as an expert, who would be able to offer an opinion that the defendants could seek to be admitted as an expert opinion.

The Bayer/Monsanto Digital Farming Licensing Remedy: Structural or Behavioral?

The European Union (“EU”) recently concluded its investigation of the Bayer Monsanto transaction.  As part of the remedy, Bayer has agreed to license to BASF its “entire global digital agriculture product portfolio and pipeline products to ensure continued competition on this emerging market.”  According to the EU’s press release, “[d]igital agriculture uses public data such as satellite pictures and weather data as well as private data collected from farmers’ fields. It applies agronomic knowledge and algorithms to that data to recommend to farmers how to best manage their fields. For example, how many seeds to use, and on how much and when to use pesticide and fertiliser. This makes digital agriculture important, not only to farmers but also to the environment.”

The use of the word “license” is important; it is not, apparently, an assignment. The reason why it’s important is because Bayer can continue to use and market the intellectual property itself.  At first blush, it would appear that the EU has created another “flavor” of the Bayer product that BASF can do with as it pleases.

At the outset, it is important to note that the intellectual property being licensed is not a patent. A patent describes clearly a particular art and grants the owner the ability to exclude others from practicing that art for a period of time.  In exchange for that exclusivity, the world gets to see the art.  A software license, or the code that executes an algorithm, is copyrightable.  But a copyright protects the expression, not the idea.  Moreover, software can be millions of lines long and will almost necessarily change over time.  People’s needs change.  Functionality can be added or deleted.  Bugs are corrected.  Software is a very dynamic product whereas the art in a patent is static.  These are important differences.

Let’s say Microsoft is convicted of monopolization of the spread sheet market, and they are required to “license” Excel to someone who can sell it in competition with Microsoft’s product. At first, the two flavors of Excel sell equally well, perhaps even the divested version sells better because the purchaser can afford to sell the product for less as its sunk costs are less.  Customers use the products and their needs change, adapt and grow.  If I have just the right to sell the software and no knowledge of how it was built, it is very difficult for me to make any meaningful changes to the platform.  Indeed, the more complicated the software is, the more likely I may destabilize it by altering it.  In effect, with just a license, my “flavor” stagnates.  It remains Windows 95 in a world where everyone is using Windows 10.

As the EU mentioned, there is a great deal of data associated with digital farming. It’s not only the weather, but the composition of a particular farmer’s soil, the atmosphere, the fertilizers, the timing of planting.  It is also the type of seeds, the genetic composition of the seeds, how the seeds react in different environments.  There is a great deal of data, and it’s not stagnant.  To be useful, BASF would need access not only to historic data, but ongoing data.  They would need access to the genetic code of the seeds, how that code interacts with the pesticide, how that pesticide is faring with the pests.  And BASF would need “honest and complete” access to that data over time.

The digital farming product therefore is tied to the actual seeds, the traits and the pesticides; needs long term relationships with farmers; and the engineers who created the code in the first place. So long as the divestiture is of all of these things, freeing BASF from any tether to Bayer, the remedy is structural.  If the license is just of the software, however, it would be an almost useless remedy because the government would have to impose a huge number of conditions on the licensing party to support the software in the hands of the competitive.  And it would be inferior.  The employees of Bayer would have little incentive to keep BASF up to date on the new and great functionality and analysis Bayer has discovered.  Such a divestiture would become a behavioral remedy in practice.  Software licenses (including big data) and patents are very different animals.  You should never assume a software license (even an “assignment”) is necessarily a remedy as effective as a patent license.

Ozzy Osbourne is an Antitrust Plaintiff

Ozzy Osbourne has filed an antitrust suit against against AEG, the operator of the O2 Arena in London and operator of the Staples Center in LA, among others.  Ozzy is alleging that AEG is illegally requiring artists perform at Staples if they want to perform at O2, the “Staples Center Commitment.”  It is a fairly straight-forward and plausible claim.  AEG has market power in large-scale venues in London and is leveraging that power to increase sales in Los Angeles to the detriment of competition in Los Angeles, where there is a lot of choice in venues.  The allegation that AEG took the time to give their scheme a name is probably the most shocking, and damming, allegation in the complaint.  And Ozzy has hired highly-regarded Dan Wall of Latham San Francisco.  This case is legitimate.

I suspect that the few of you who read, and the fewer of you who enjoy, antitrust blogs are likely not particularly adamant fans of Mr. Osbourne. He’s purportedly done some interesting things in life, and writes songs some view as a bit “dark.”  Like Mr. Crowley, a song about English occultist Aleister Crowley.  Ozzy has purportedly bit the head off a live bat in concert, a fact that people appear to bring up to him and every one of his relatives on a fairly regular basis.  He also starred in an MTV reality program called the Osbournes, which I actually enjoyed.

There is nothing particularly novel about the case—other than tying cases are increasingly difficult to prove. A positive result for Ozzy will be valuable to any artist forced to play a venue she didn’t want just to get access to a better facility.  But there aren’t many acts that can play O2 in the first place.  It’s just cool that Ozzy Osbourne is the plaintiff.

Tronox v. FTC: Ingenious or an Exercise in Futility?

In what may be the first case ever, a party to an FTC administrative merger challenge has filed suit in U.S. District Court asking the court to halt the administrative proceeding and order the FTC to pursue a preliminary injunction motion in that court. The gravamen of their argument is that the outside date for the transaction is in May, and there is no way that they could conclude an administrative trial in that amount of time.  They claim further that choice to proceed only with an administrative complaint is to delay deliberately the resolution of the suit so that the outside date passes and the deal breaks.  They “deserve their day in court.”  As a matter of substantive law, the case is unsound.  The FTC is free, within the confines of the FTC Act, to choose where it wishes to pursue an action, and this has been so for more than 100 years.  As a means to recapture some negotiating leverage from the FTC and perhaps save a few bucks, it’s probably not a bad strategy.  Perhaps the chance of a loss, however remote, and the potential “embarrassment” of dragging enforcement out “needlessly” will prompt the FTC to settle on more favorable terms.  The cost, however, is Tronox’s, and Tronox’s lawyers’, reputation at the Commission and may only prompt them to dig in their heels.

Tronox Limited and its target, Cristal, both make high purity titanium dioxide (TiO2), an input for products like paint. TiO2 makes paint white.  Tronox announced its intent to acquire Cristal in February 2017.  The FTC investigated the transaction under the HSR Act and purportedly allowed the waiting period to expire on December 1, 2017.  Tronox noted this fact in a press release suggesting it was free to close under the HSR Act.  Four days after that press release, on December 5, 2017, the FTC sued the companies alleging the combination would substantially lessen competition in the market for high purity TiO2.  In their press release announcing the suit, the FTC asserted that the waiting period had in fact expired on October 7, 2017, but the parties had entered into a timing agreement whereby they would provide the Commission 10 days’ notice of their intent to consummate.  The FTC suggested that the parties had not given adequate notice under the timing agreement.  The transaction is still under review in other suspensory jurisdictions that prevent the parties from closing globally. Continue Reading

Net Neutrality Repeal: An Implication for Content Mergers?

The FCC recently repealed the net neutrality rules.  Now your favorite ISP can charge more for better and faster access, deny you access to sites you really shouldn’t be looking at (we’re looking at you CNN), and degrade all those over-the-top services you should be getting indirectly on their platforms anyway.  One thing repealing net neutrality has done that isn’t particularly helpful to big business is make platform-content provider mergers harder.

How so, you ask.

One argument against platform-content mergers is that the platform provider can favor its own platforms for the delivery of must-have programming.  That could drive consumers away from competing platforms, distorting the market for the platform.  Justice has alleged that AT&T plans to do this very thing once it gets its hands on Time Warner.  And there are a variety of ways short of refusing to deal that a platform provider could favor its own platform.  Providing content on a delay or degrading its quality or delivery to competitors.  Engaging in price squeezes.  The net neutrality rules made doing a lot of these things at least moderately more risky.  Without them, it’s much easier for an integrated platform-content provider to engage in those behaviors.  Net neutrality therefore served as an argument that AT&T would not be able to prefer its platform and thus could not engage in the post-consummation predation Justice argues is possible.

That argument is gone now.