Archive for December, 2010

Pearlstein on Google

Wednesday, December 15th, 2010

Steven Pearlstein writes in the December 14 issue of The Washington Post that the antitrust authorities should not allow Google to make any more acquisitions.  His argument seems to be that Google is too successful and too big and therefore we need to slow it down and allow others to catch up.

Pearlstein’s approach is at odds with antitrust economics and antitrust history and would likely harm both consumers and innovation.

Pearlstein notes that “It is worth remembering that aggressive enforcement of the antitrust laws has been a crucial part of the history of technological innovation in this country, enforcement that allowed AT&T to be supplanted by IBM, IBM by Microsoft and Microsoft by Google.” This is a nice sounding sentence, but there’s no evidence that it is true.

A recent paper by Robert Crandall of Brookings and Charles Jackson of The George Washington University prepared for the Technology Policy Institute’s project on Antitrust and the Dynamics of Competition in High-Tech Industries examined in detail the major high-tech monopolization cases of the last half of the twentieth century:  IBM, AT&T, and Microsoft.  In each case, “the ultimate source of major changes in the competitive landscape appears to have been innovation and new technology – technology that was apparently not unleashed by the antitrust litigation.”

  • IBM lost its dominance because of the advent of personal computers, something the government never envisioned when it filed its suit in 1969.  Thirteen years later, the government asked the court to dismiss the suit because it was “without merit.”  Since then, IBM has transformed itself from a computer equipment manufacturer into the service company that it largely is today.
  • AT&T was never supplanted by IBM.  The Justice Department’s antitrust decree and the FCC’s regulatory actions shaped the competitive landscape in telecommunications.  More important, however, was the development of high-speed Internet access and platform-based competition from wireless and cable TV, which occurred long after the consent decree.
  • Finally, whatever the merits of the Microsoft case, it likely had little effect on the emergence of Google.  Microsoft remains dominant in desktop operating systems, but faces competitive threats from emerging technologies – smartphone operating systems, cloud computing, and virtual appliances.

Pearlstein suggests “it would probably be counterproductive to prevent Google from using its money and talent to expand into new areas.”  He believes, however, that the government should not allow “Google to buy its way into new markets and new technologies.”  In another paper prepared for the TPI project, Bruce Owen of Stanford (and former chief economist for the Antitrust Division) notes that while “the law distinguishes ‘organic’ (internal) integration from integration by acquisition…from an economic point of view there is no good reason for the distinction.”  He also points out that “Empirical evidence that vertical integration is harmful is weak, compared to evidence that vertical integration is beneficial – even in cases where market power appears to be present.”

Finally, according to Pearlstein, “by swooping in and buying these promising firms, Google forecloses on the possibility that they might be purchased by companies such as Microsoft or Facebook, which could use them to mount a serious challenge to Google’s dominant position.”  It would be news to learn that Microsoft and Facebook don’t have the financial wherewithal to compete with Google in the marketplace for acquisitions.  Indeed, such bidding wars can be very beneficial to innovation by increasing the return that entrepreneurs realize on their investment.  The $750 million price that Google paid for AdMob resulted from a bidding war between Google and Apple.  An antitrust policy that takes the biggest players out of the market for small companies would reduce the potential returns to innovation and therefore would reduce the amount of innovation.  Competition to acquire innovative new companies is a major aspect of competition that the antitrust authorities should take into account when deciding whether to challenge these acquisitions.

Research Roundup: File-sharing vs. music sales, Craigslist vs. newspapers, and more

Wednesday, December 8th, 2010

In this edition of the Research Roundup we highlight a paper by Julie Holland Mortimer and Chris Nosko of Harvard and Alan Sorensen of Stanford GSB that analyzes music file-sharing as it relates to a well-known off-line complement: concert performances. The authors observe that

“Redistribution of the digital good [music downloads] may increase demand for the complementary good [concert tickets], partially offsetting the losses due to illegal redistribution of the digital good. The implication… is that public policy aimed at promoting innovation should not ignore the impact of an innovation on goods or assets that are complementary to it.” (p 2)

The team undertakes to investigate such a relationship in the recent collapse of recorded music sales and concurrent boom in the demand for live music, depicted in their Figure 1, which is reproduced below.

Album Sales and Concerts, 1995-2004

Their study concludes that

“sales of recorded music declined precipitously with the entry of Napster and large-scale file-sharing. While file-sharing may have substantially displaced album sales, it also facilitated a broader distribution of music, which appears to have expanded awareness of smaller artists and increased demand for their live concert performances. Concert revenues for large artists, however, appear to have been largely unaffected by file-sharing.” (p 19)

These conclusions may be somewhat shaky. For example, the analysis employs little data on actual file-sharing activity (except in one ancillary point of analysis); Mortimer, Nosko, and Sorensen instead estimate the effect of file-sharing through regression with a “Napster” indicator marking whether observations are from “years following the entry of Napster (i.e., 2000 to 2002)” (p 15). This analysis is odd in that the authors themselves warn “time trends alone cannot establish any causal link” (p 10) , and since they do not identify and account for fixed effects (other than the intercept). Their attempt to estimate results with an eye for variation in broadband penetration is promising; unfortunately the data are too coarse for the tests to yield meaningful results.

In spite of any shortcomings, the work is a commendable attempt at understanding the early period of a trend that is often discussed but rarely studied. Still, for right policymaking we should require clearer conclusions.

(Click through to the full post to see the abstract and link for this paper and others in the Roundup.)


Peering or End of the Internet as we know It?

Tuesday, December 7th, 2010

One of the top tech stories in the headlines of late is the dispute between Comcast and Level 3.  For those of you who were ignoring mass media last week: the dispute is over traffic handling agreements, apparently spurred by the announcement of a deal between Level 3 and Netflix to carry the latter’s streaming video.

Depending on who you listen to, the Comcast / Level 3 dispute is either a simple peering disagreement blown out of proportion or a gross violation of network neutrality principles and the beginning of the “tiered internet.”  So, where does the truth lie?  According to TPI’s Scott Wallsten, probably somewhere in the middle.   

Scott shared his views on the Comcast / Level 3 dispute on the EEEI Spectrum podcast, “This Week in Technology,” hosted by Steven Cherry.  In short, he identified the conflict as a dispute over who will pay for the increased cost resulting from the video traffic.  He also explained that there is a possibility of incentives to erect barriers to competition in such a deal but that the DOJ can adequately deal with such concerns through antitrust enforcement.  Scott also discusses his predictions on the outcome of the dispute and the future of the video delivery business.  The podcast can be found here.