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Last week, Rob Haralson did a quick interview with TPI’s Tom Lenard for his site five Q’s on tech.
Tom discusses why he thinks policymakers looking at privacy issues are going about it all wrong, network neutrality, and upcoming TPI projects.
Video is here:
Five Q’s with Tom Lenard, Tech Policy Institute from FiveQsOnTech.com on Vimeo.
It has been the practice of some prominent Silicon Valley companies (and perhaps other companies as well) to refrain from “cold calling” employees of companies with whom they collaborate. This seems like it could be a reasonable practice since companies may be less willing to enter into beneficial collaborations if they think their best employees can easily be stolen away. In any event, the companies never agreed to refrain from talking to employees who expressed some interest in changing jobs (that would not be a cold call) or to refrain from hiring any of their collaborators’ employees, so the effect of these cold-call agreements was likely small.
Nevertheless, the Antitrust Division of the Department of Justice opened an investigation because it was concerned that the do-not-cold-call agreements were anticompetitive and had the effect of depressing wages. That investigation is now complete and six major companies—Adobe, Apple, Google, Intel, Intuit, and Pixar—have settled with the DOJ and essentially agreed not to enter into do-not-cold-call agreements for a period of five years.
We don’t know whether this is a good or bad settlement, but neither does the Division, because it didn’t look at the economic consequences of the do-not-cold-call agreements or of the settlement on wages or on competition. Instead of looking at the evidence, which the Division would have done had it evaluated the case under a “rule of reason,” the Division viewed these agreements are per se violations of the antitrust laws.
These agreements could be anti-competitive, but they may also could be pro-competitive, for at least two reasons: They remove a potential impediment to pro-competitive collaborations between companies. They may also serve as some balance to California’s weak do-not-compete legal regime. (Strong do-not-compete employment provisions are not enforceable in California).
The Division should have viewed this as a “rule of reason” case and evaluated both the potential pro- and anti-competitive effects of do-not-cold-call agreements. Expanding the scope of per se antitrust violations in the absence of analysis can interfere with productive collaboration, efficient employment practices, and, ultimately, innovation in these critically important high-tech industries.
The deadline for comments regarding the Comcast/NBCU merger has come and gone, resulting in over 10,000 filings from a wide variety of groups. From fears over loss of diversity to concerns over media localism, many commenters seem to see the process as a vehicle for their favorite causes rather than as a review of the effects of the merger itself.
In light of this, it seems like a good time to highlight the recent TPI paper by James Speta, “Screening and Simplifying the Competition Arguments in the NBC/Comcast Transaction.” In the paper, he states that antitrust analysis of the proposed merger between Comcast and NBC Universal should focus only on its effect on competition in relevant markets and resulting harm to consumers. Specifically, the analysis should ask:
Hopefully, regulators will focus on the task at hand and not be distracted by irrelevant—even if well-meaning—comments filed in the proceeding.
Three months after the Comcast decision the FCC issued a Notice of Inquiry (NOI) asking, basically, “what should we do now?” Not being a lawyer, I have a difficult time understanding, let alone caring, whether the FCC’s regulatory authority derives from Title I or Title II. As an economist, however, I do care about the content of proposed regulations.
So what problem does this NOI seek to solve? It does not propose directly any new rules industry must follow. Instead, it seeks a framework in which the FCC can regulate broadband in the future.
In other words, this NOI does not address how industry should behave, but rather how the FCC itself should behave. Somewhat ironically, therefore, this NOI asks how to regulate the FCC, and reveals an existential problem for the Commission: what is it supposed to do, and does it have the authority to do it?
The Commission is to be commended for laying out the legal issues, but the road forward it proposes is inherently flawed. Consider that scholars of new institutional economics generally agree that in order to be effective, regulatory institutions must meet several criteria: they must be independent from short-term political influence, transparent, accountable, and have clear limits on the extent of their jurisdiction.[1]
The NOI highlights the problem the FCC now faces as an institution—it does not know the extent or limits of its jurisdiction. Ultimately, the FCC cannot set those boundaries itself. Instead, it is up to Congress to define the FCC’s mission and the Courts to define the extent of its authority within its legislative mandate.
The current confusion is not the FCC’s fault. Our telecommunications laws are antiquated and no longer appropriate for the fast-changing world of broadband and information technologies. No amount of reclassification, forbearance, or other fancy footwork can change that basic fact.
It is time for Congress to rewrite our telecommunications laws in ways that do not rely on arbitrary definitions of services, and instead create an analytical framework flexible enough to accommodate these rapidly changing industries. A new telecommunications law could recognize, for example, the inherent antitrust issues in many current debates, such as the question of vertical relationships underlying net neutrality.
Such a rewrite involves risks, to be sure. Every interest group will fight to influence the process for good and ill, nobody will end up entirely happy, and we could end up with laws worse than those we have today. Regardless, we could at least rest assured that a new law would better reflect the will of the people, as expressed through their elected representatives, than would the FCC’s current attempt to fit a square peg in a round hole.
Congress already appears to be taking the beginning steps in rewriting the 1996 Telecommunications Act. It should view the NOI as a cry for help and further evidence that it should take action. A regulatory agency simply cannot function properly when it has to ask in a public notice what it is allowed to do and how. The courts have attempted to define boundaries in recent decisions, but the Commission believes it must act to meet Congress’s objectives. But only Congress can define its objectives, and the time has arrived for it to do so.
“If we had any more innovation [in wireless] I think our heads would explode.”
– Professor Gerald Faulhaber, comment at wireless conference in Berkeley, April 2010.
Hats off to the FCC for its new approach to evaluating wireless competition. Its latest report on wireless competition explicitly recognizes that wireless services now include such a broad range of industries, activities, and linkages to other sectors that it no longer makes sense to think of wireless as a single, overarching “industry.” Many observers believe—happily or indignantly, depending on who they are—that by failing to apply the phrase “effective competition” to everything wireless the FCC is sending a signal that it sees reasons to be concerned.
Perhaps that is the Commission’s intent. Perhaps not. I’ll leave divining its intentions to the Kremlinologists. Instead, let’s step back and take a look at some of the economics underlying the analysis and the report’s central conclusions.
Until the 1980s economic analysis relied on the so-called “structure-conduct-performance paradigm” (SCPP) in which market structure was taken as given and a concentrated market was assumed to allow firms to behave as monopolists and therefore raise prices and reduce output. Therefore, a small number of firms was, by itself, cause for concern. It sounds reasonable, and policymakers still seem implicitly to embrace the SCPP. But a funny thing happened along the way to testing this seemingly obvious theory. The empirical relationship between market structure and firm performance turned out to be weak.
It remains true that it is easier for a smaller number of firms to collude to raise prices and lower output than it is for a larger number of firms, so estimating market concentration can be a useful starting point for analysis. However, economists realized in the 1980s that analyses of competition had to recognize that there is no straight line between market structure and performance, other factors are involved, and, indeed, firm performance itself plays an important role in determining market structure. That means analyses of competition must focus on firm behavior and actual market outcomes to determine whether an industry is competitive.
Which brings us back to the FCC’s latest wireless competition report.
The report compiles lots of data on both market structure and the various aspects of behavior and performance of firms related to wireless.
Any concerns about the industry must come from certain features of market structure. In particular, the report notes that the weighted average national Herfindahl-Hirschman Index increased to 2848, which indicates a concentrated industry, though the indicator varies widely across geographic areas.
Key indicators of behavior and performance in the industry—and therefore the most relevant features to evaluating its competitiveness—are eye-opening.
Other data are more ambiguous. The report notes, for example, that some providers have increased early termination fees, but that those increases seem to be associated with higher handset subsidies. The report further notes that the same handsets are available without early termination fees at much higher prices.
In short, we see in wireless an excellent example of why economists have largely abandoned the SCPP approach to evaluating competition in favor of looking at actual outcomes. Thus, even if we accept the premise that the market for wireless providers has become more concentrated, we nevertheless see an incredibly dynamic market that is yielding new devices, new services, and lower prices. Professor Gerry Faulhaber remarked at a conference on wireless in Berkeley last month, “if we had any more innovation I think our heads would explode” (see video at 9:35).
The FCC made a smart decision to gather lots of data about the myriad components of wireless and to focus most of its efforts on examining outcomes. This approach will allow the Commission to make changes to its reports almost in real-time—a necessity given the rate of change in the industry itself.
The FTC today cleared Google’s acquisition of AdMob – a good decision – stating that “the Commission voted unanimously to close its investigation of Google’s acquisition of AdMob because it lacked reason to believe that the transaction would likely result in a substantial lessening of competition, especially in light of marketplace developments that occurred during the course of its investigation….In any nascent market there will be uncertainty about the path of competition and the durability of early leads in market share.” This is the difficulty of applying the merger guidelines in such markets. It’s good that the Commission came to this decision and did so unanimously. To the extent that this sends a signal to other start-ups in similar situations, it is a pro-innovation signal, as I discussed in an earlier piece.
A decision by the FTC on whether to allow Google’s acquisition of AdMob to go forward is imminent and Tech Daily Dose today referenced a blog post by mobile app developer Wertago about its experience with the FTC staff investigating the deal. Its a very interesting little essay and I recommend it to anyone interested in how the antitrust agencies review mergers in the technology sectors. Wertago is a customer in this market, so they would be expected to be concerned if the proposed acquisition was anticompetitive.
One of the things the essay emphasizes is the importance of maintaining vigorous competition in the market to acquire innovative new start-ups:
Just imagine, as a thought experiment, what would happen if Google explicitly stated that it would buy up every start-up ad network that reached some minimum level of ad revenue. The FTC might think that’s presumptively anti-competitive, but we’re not sure that’s necessarily correct. The incentive might spur more entrants into the ad network business, just as the ADC prize money incentivized us to create the great nightlife app that is Wertago. As we pointed out to the FTC staff members we spoke to, many ad networks likely start out tacitly HOPING to one day be bought out by Google, just as app developers tacitly hope to be bought out by this or that category-dominant player. Blocking the AdMob deal could actually remove one (very lucrative) exit possibility and thereby effectively reduce the returns on the risky enterprise of starting a business. As a result, blocking the deal could actually REDUCE incentives to compete in the ad network space.
This is an extremely important consideration that I also emphasized in a recent Forbes.com oped. A policy that takes the biggest, most successful companies out of the acquisition market is not good for innovation. It’s not clear how, or even whether, the antitrust agencies incorporate this type of consideration into their analysis, but they need to.
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