Donald Trump and the Fundamental Weakness of Economic Science

The New York Times this morning ripped presidential contender Donald J. Trump’s economic precepts to shreds, which got me thinking about the weakness in economic science as the basis on which a modern society arrives at optimal strategies for government policy, business strategy, and household behavior.

Wharton-trained Trump, the Times said, held “inherently contradictory perspectives that often lie far outside the boundaries of accepted economic thought.” Theses economic claims, the paper said, are “cynically misleading the American public.”

And that, I thought, is the greatest weakness of economics, namely, its capacity to be (mis)used to support ridiculous, nonsensical policies, such as fanciful stories in which a president Trump can rebuild U.S. infrastructure, repatriate millions of jobs lost through the inevitable process of globalization, deport 11 million undocumented immigrants, rebuild the defense department, modernize the VA, and strengthen Social Security and Medicare, all while cutting taxes.

True, they’re not the laws of physics, but the tenants of economic science do encompass some principles that are clearly right and contains some warnings about ideas that are clearly wrong. The weakness of economics it that it’s just way too easy to sell the public on economic propositions that by any reckoning are just plain wrong.

Economics is sometimes defined as optimization under conditions of scarcity. That’s a definition some politicians might want get familiar with the next time they tout an economic program that promises the moon but just doesn’t add up.

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How I Missed the Republican Presidential Debate

The simple answer: I was on an airplane from Florida at 9 p.m. last night when Fox aired the debates so I missed it. I lacked a device to stream the debate through the airline’s WiFi (assuming I could find the password to the “walled garden” in which Fox makes streaming available, and into which only bone fide residential pay-TV subscribers of Comcast, Verizon, TWC, or some other Fox-carrying legacy TV distributor are admitted).

But, I figured that by the time I got home at 11:30 or so, I’d be able to find some rebroadcast or re-stream somewhere. After opening a few browser tabs to locate a link with, preferably, a video without interruption, where I could enjoy that special pleasure of watching the Republicans duke it out on national TV.

Then I found this: “Fox News is making it difficult to watch the first 2016 GOP presidential debate online. … Fox is closely protecting the only legal stream option, and heavily restricted the venue’s audience.”

I couldn’t help thinking: They must not want me (or others) to actually see the debates. At least not yet. They probably figure that smaller the audience for the kind of adolescent squabbling engaged in by the candidates, the better (I’ve since seen a healthy proportion of out-takes). Later, maybe, when the spectacle is lessened, Fox might be more comfortable with letting CNN or NBC or someone else take over the hosting of the Republicans and, in the process, make the video much more broadly available (hello? C-Span?).

As I see it, the more serious problem—even more serious than the private discretion Fox News seems to have wielded by circumscribing the viewership of the first GOP debate, supposedly a civic activity—is that there is a potentially unbridgeable gulf between the cult of personality by which we elect a president—after watching a series of reality shows we call “debates” and deciding who we like best, kicking the losers off the island while anointing a wise and infallible winner—and the other, real part of the job, in which complex institutions have to be navigated, steered, and nurtured, and powerful and smart operators who’ve staffed the state and federal government for years, all of whom have to be respected, resisted, revered, and commanded all at the same time and all for the public good.

When you think about it, it’s amazing that the winner of the fraternity house free-for-all that takes place at the debates (Republican, Democratic, General, doesn’t matter) frequently turns out to deliver the right candidate for each constituency. It says something about the wisdom of crowds and the genius of our system, even while at the same time it’s counterintuitive. Crowds ordinarily exemplify madness, not wisdom. [see, e.g., Charles Mackay, “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds,” London: 1852, available at http://www.cmi-gold-silver.com/pdf/mackaych2451824518-8.pdf ]

So, no matter where one stands (sits?), videos of future debates should be made as widely available as technology currently permits, whether sponsored by private networks or not (those involved ought to pony-up the fees, particularly since the marginal costs of streaming are near-zero). At this perilous stage of our history, the apparent benefits of our collective wisdom should be given every chance to succeed.

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How Keurig Green Mountain Fall Through the ICE

Like razors that use disposable blades, Keurig coffeemakers from Green Mountain Coffee Roasters (“GMCR”) operate by consuming disposable, single-use pods of ground coffee. Once upon a time the company’s “K-Cups” were patent protected and like makers of razor blades GMCR earned high margins on each coffee pod they sold. To its credit, GMCR since 2006 has thrived by partnering, and then acquiring, the coffee businesses of Tully’s, Timothy’s, Diedrich and Van Houtte, and by licensing its pod technology to numerous partners, including Dunkin Donuts, Swiss Miss, Folgers, Millstone, and Starbucks.

In September 2012, however, two key K-Cup U.S. patents expired. More than 20 companies have since started marketing unlicensed portion packs at lower price points, threatening GMCR’s revenue growth in pod sales. The result? The share price of Keurig Green Mountain has fallen dramatically, dropping almost 30% today alone.

In announcing its new, next-gen Keurig system last year, the company made clear its intention to prevent consumers from using unauthorized, off-brand coffee pods with Keurig brewers. This strategy of “locking-out” unlicensed vendors—what engineering types would call “non-interoperability”—is a fundamental error committed by the company because it doesn’t understand—and, so, can’t take advantage of—the “ICE principle.”

This critical economic concept—“internalizing complementary efficiencies,” or, “ICE,”—holds that firms have a strong incentive to implement modularity voluntarily when modularity enhances consumer value. In other words, GMCR should have opened its installed base of coffee brewers (numbering into the millions) to any and all comers who think they can make a buck selling Keurig-compatible coffee pods.

The logic of the ICE principle is lucidly described by Joseph Farrell and Philip J. Weiser, writing in the Harvard Journal of Law & Technology (Volume 17, Number 1, Fall 2003) in an article called, “Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age.” Farrell and Weiser explain that:

ICE maintains that the platform monopolist cannot increase its overall profit by monopolizing the applications market, because it could always have charged consumers a higher platform price in the first place; it has no incentive to take profits or inefficiently hamper or exclude rivals in the applications market because it can appropriate the benefits of cheap and attractive applications in its pricing of the platform. To the contrary, ICE claims that a platform monopolist has an incentive to innovate and push for improvements in its system —including better applications — in order to profit from a more valuable platform.

The bottom line is this: the more coffee companies offer their product in Keurig-compatible pods, the greater the penetration of the GMCR system and the more money the company makes in the long run as consumers begin to accept the brewers as useful, modular, high-quality appliances from which every coffee/tea-drinking home or office could benefit.

Instead, in a misguided attempt to capture illusory profits from supra-competitively priced branded coffee pods, GMCR has “broken the ICE,” and in the process alienated its customer base with unfriendly incompatibilities that limit the usefulness of their platform and spread FUD among potential purchasers considering a Keurig brewer.

GMCR might take a lesson from Microsoft—which seems of late to have learned the lessons of ICE (at least compared to the bad-old-monopoly days when it attempted futilely to control every important application that ran on their platform).

A fundamental change in GMCR’s strategy—particularly, respect for the ICE principle—might go a long way to rehabilitating GMCR’s stock price and instill some confidence in the company’s management to boot.

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The Demise of Comcast-Time Warner: The Cost of Schizophrenia

On the Friday morning Comcast announced that it was abandoning its proposed merger with Time Warner Cable, CEO Brian Roberts went on NBCUniversal’s business channel to assure the street that Comcast was “Okay, and looking forward to the future.”

He respected the government’s judgment against the deal, he said, stressed there was no financial penalty or “walk away fee,” and insisted that the 14-month ordeal had been worth it, because of what it taught the company about itself.

But, query yet whether the company has learned the antitrust lesson from the ordeal.

Although the show’s hosts used their best efforts to elicit from Mr. Roberts the government’s rationale for blocking it, he diplomatically demurred. So, the legalities got lost. To block the deal, the DOJ’s Antitrust Division is required to convince a federal district court that the merger would tend substantially to lessen competition. And the FCC has to weigh whether the applicants carried their burden of showing that the deal is in the public interest.

Because the merging parties territories didn’t overlap, the DOJ’s draft complaint setting forth its antitrust case against the deal (they had 14 months to draft one) probably focused on the transaction’s vertical effects, that is, on the effects on websites that depend on reaching customers through broadband Internet access (57% of broadband consumers would have been served by Comcast-TWC) and on programmers that supply video to the cable-TV industry (30% of cable-TV subscribers would have been served by Comcast-TWC).

U.S. antitrust law struggles with anticompetitive conduct by which market power in one market is exercised in a complementary market. While the European “abuse of dominance” standard hands antitrust authorities there a tool to attack monopolists who leverage market power from one market to another, U.S. law has no analogous provision. Rather, U.S. law usually applies the rule of reason to determine whether contractual relationships between parties in separate markets constitute an unreasonable restraint or whether there is attempted monopolization of the complementary market. Such analyses are considered “vertical” because these markets frequently are at different levels of the distribution chain,

By contrast, the central concern of American antitrust law is with “horizontal” restraints, such as cartels, where rivals in the same market agree to restrain competition rather than compete on the merits or monopolization of a market by illegitimate means.

No doubt one reason the parties thought the Comcast-TWC merger would pass antitrust muster is that the company’s cable and broadband operations did not compete horizontally anywhere. Thus, any case the Antitrust Division would have brought would have entailed a rule of reason analysis of the merger agreement in light of its vertical effects on parties in adjacent markets, forcing the government to confront in court difficult issues of anticompetitive effects, market foreclosure, and buyer power in the programming and edge provider markets. The Comcast team probably thought these legal difficulties would carry the day for them at the DOJ.

They may even have been right, since the conventional wisdom is that the final blow came at the hands not of the DOJ but when Jonathan Sallet, the FCC’s general counsel, told the parties that he planned on recommending the transaction be sent to a year-long hearing before an FCC Administrative Law Judge. It would be war, but a war of attrition, without a defining battle. At that point the parties abandoned the deal.

The issues considered by the FCC are much broader, because it’s up to the Commission to judge whether the parties have carried their burden of showing that the transaction is in the public interest. The competition issues that faced the FCC in reviewing the deal under the public interest standard, however, were precisely the same vertical issues that confronted the DOJ under the Clayton Act.

Nonetheless, Comcast had more to work with at the FCC. For example, Comcast could tout the powerful near-national integrated telecommunications infrastructure the deal would have created, or the more efficient and rational coverage maps that would have resulted for itself and Charter, or make commitments to provide economical broadband to disadvantaged communities, or promise to invest immediately to improve the lot of TWC customers, or promise to continue to observe the conditions of the NBCUniversal merger, including open Internet rules, all of which they did.

But, this put the FCC is a bind. On the one hand, the network that Comcast was proposing would have been an engineering marvel and a truly capable rival to the legacy incumbent wireline networks operated by AT&T and Verizon, particularly in the business enterprise space. On the other hand, many players elsewhere in the industry were urging the Commission not to let the deal proceed, raising the same putative anticompetitive effects they had brought to the DOJ. It’s no wonder that when faced with an indeterminate public interest outcome the Commission’s staff recommended another year of study.

So, what is the lesson of the failure of Comcast-TWC? It was foreshadowed in the Wall Street Journal some months ago when they wrote that Comcast would be better off divesting NBCUniversal and making its money as a broadband provider. It takes only a moment’s reflection to trace nearly all of Comcast-TWC’s problems with the government to its vertical integration into content and its control of NBCUniversal.

This continues to be lost on Mr. Roberts, who reiterated that Comcast always wanted to be a “diversified company with the best networks.” But that’s not possible. If you want to be the best network, you can’t also be the best content provider.

It seems to be clear is that Comcast’s management is enamored with show business and that divestiture of its content assets to create a nationwide broadband network was for them a non-starter. “NBCU gave us a real opportunity to invest in theme parks,” Roberts said. “And Universal’s Fast and Furious 7 is the leading movie.” In other words, don’t worry about creating the Bell system for the 21st Century. We’re a great content company.

But, that’s because the government said they couldn’t be both. Comcast’s schizophrenia cost it this deal.

“Got to move the studio to Philly,” said Andrew Ross Sorkin.

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Verizon’s Provocative Bet on Unbundling

Verizon announced recently that its FiOS video services will be available in slimmed-down, customizable bundles of fewer channels. These smaller bundles presumably will cost less and better reflect what subscribers actually watch.

“Unbundling” has been a point of contention in the cable industry for decades. The issue is usually framed as whether the FCC or Congress should impose some regulation or law prohibiting the practice or mandating a-la-carte ordering.

Conventional wisdom presumes that governmental intervention is necessary because programmers—principally, Disney, Viacom, NBCUniversal, Fox, CBS, and Time Warner, Inc.—only offer cable companies all-or-nothing affiliate agreements, requiring the system to carry the entire bundle of each programmer’s channels. A cable operator carrying Disney’s ESPN, for instance, must also agree to carry all of Disney’s other programming, such as the Disney Channels for children; cable operators carrying MSNBC must also carry Telemundo and about twenty-plus other NBCU channels, and so on.

Nonetheless, Verizon executives reportedly said that the new packages were allowed “under our existing contracts.” As it turns out, programmers learned about the FiOS mini-bundles at the same time as everybody else. The next day business reporters were hearing from Disney and other programmers that the mini-bundles could be at odds with existing agreements. It appears then that Verizon may be breaching its affiliate agreements. If so, it’s not very likely that it’s doing so unknowingly.

So, what’s going on? Rank speculation? My guess is that Verizon is betting that this is the right time to take on wholesale bundling and if there’s a showdown it’s counting on the programmers to blink first.

After having suffered service disruptions of various sorts on a regular basis caused by disputes over price, the general public understands by now that cable providers must negotiate with programmers to acquire content in a costly and complex wholesale marketplace. However, when popular channels “go dark,” consumers are unhappy with both sides. They have no dog in the hunt and just want service to resume. They can’t possibly judge whether Disney is demanding too high a fee for its programming, for example, or the cable operator is too cheap or inefficient to pay the going rate.They know they want lower prices and greater choice, but they have no way of knowing whether one side or the other is to blame for a service disruption.

But, if programming goes dark on Verizon’s system because the programmer claims that the FiOS mini-bundles breach its affiliate agreement, inconvenienced consumers will know exactly who to blame.

Uncomfortable as it may be, a withholding programmer would have to admit that the blackout is necessary in their view because Verizon insists on being more flexible, economical, and consumer-friendly. In short, a public relations nightmare, even for the most hard-bitten of content companies.

Moreover, any programmer who cuts the cord on Verizon would probably also feel obliged to file a lawsuit, both to establish that Verizon (and not the programmer) is the party in breach and also to request a court order to tell Verizon to cut it out. Can you imagine the presser after that suit is filed? (Reporter to programmer’s lawyer: “Sir, is it correct you want the court to order Verizon to cease and desist from offering smaller, more convenient, and less costly subscriptions for channels through FiOS?”)

Meanwhile, Verizon will be explaining to its subscriber-base why, regretfully, HBO or NBC or ComedyCentral or ESPN is no longer available on FiOS. They’ll say Verizon does not believe in forcing consumers to buy what they don’t wish to consume. Such a one-sided scenario is almost unthinkable for the programmer, and the more one thinks about it, the more unthinkable it gets.

Defections away from FiOS video would probably not be likely. The company, which does business in the lucrative and important northeast megalopolis and southern California markets, is already coping with consumers’ migration from cable packages to the Internet. It knows a lot about how and what video its users—both FiOS and wireless—are consuming. Verizon’s video service already directly competes with “over the top” programmers, and more programmers are coming on line every month, including some of the same companies who might be tempted to claim that Verizon is breaching the no-unbundling provisions of their agreement.

Unlike cable service disruptions in the past, consumers could have an alternative retail supply. Pay-per-view, Internet subscriptions, and over-the-air HDTV are all potential substitutes for programming that could go missing in a dispute over unbundling with Verizon.

Verizon’s provocative bet is that most programmers will blink by agreeing to modify its affiliate agreements so as to allow the FiOS mini-packages rather than allow such an open and obviously anti-consumer scenario play out at their expense. One or two might decide to try to take Verizon to the mat, but such a move won’t grow market share for the programmer, won’t hurt Verizon too much, and, if the programmer is significant and high-profile enough, will frame the unbundling battle in a new, pro-consumer way that benefits Verizon, its FiOS customers, and the industry as a whole.

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Some Astonishing—and Astonishingly Wrong—Remarks about the Antitrust Case against Google in Europe

After the news broke on April 15 that the European Commission had sent a Statement of Objections to Google alleging antitrust violations in how it presented its general search results commentators said some astonishing things.

Jim Cramer said on CNBC that the FTC didn’t sue Google a few years ago on largely the same allegations for violating the antitrust laws because Google understood Washington “pretty well,” and was “pretty good as schmoozing.” But in Europe, according to Cramer, Google is a taker of market share, not a maker of jobs. “You have to be a job-maker in Europe,” said Cramer, like Cisco in France, in order not to get tagged with an antitrust case from the European Commission.

“We like monopolies,” Cramer said. “In Europe, they don’t like monopolies.”

The next day Farhed Manjoo declared in the New York Times that the EU’s prosecution of Google will “inevitably” be compared to the government’s case against Microsoft, which was sued in the 1990s by the Department of Justice for anticompetitive conduct related to its Windows operating system. According to Manjoo, “the theories supporting the case against Microsoft have all but fallen apart” since then. The same result, he assures us, will eventually befall the European’s (read: misguided) case against Google.

Randolph May, head of the Free State Foundation, blogged about a fictitious meeting at the FCC at which Chairman Wheeler and his staff reason that, since the EU’s complaint is based on Google’s presentation of “non-neutral” search results, such conduct would surely be prohibited under the FCC’s new open Internet regulations. (At the conclusion of the piece, May admits that the “sources” for the article were “inside his head” and not at the FCC. But, still.)

The problem with such pseudo-analytic, psycho-political speculations is that they leave out the real legal basis on which the relevant authorities take their decisions.

In the first place, any discussion of the different treatment of Google in the U.S. and in the EU that fails to take account of the deep differences between the antitrust laws of the two jurisdictions is destined to be misinformed. Under European law, a “dominant firm” can violate the competition laws by “abusing” its monopoly. In Europe, a monopolist that exercises its economic power by gouging consumers with supra-competitive prices, or uses its high market share to steer customers away from rival complementary products, can be prosecuted under the EU treaty’s competition laws.

No so in America, where, as long as one’s monopoly has been lawfully obtained, the Sherman Act does not prohibit monopolist from exercising the economic power inherent in a lawful monopoly. On the other hand, the acquisition or maintenance of a monopoly by anticompetitive means is prohibited under U.S. law. Microsoft’s antitrust liability in 1999 was firmly grounded in the factual evidence of Microsoft’s preference for interfering with the competitive process rather than competing on the merits, by distributing polluted Java, charging per-processor fees, unreasonably restraining retailers, and other illegitimate means. The theories that underlie Microsoft’s liability in that well-reasoned decision remain very much current U.S. law.

Monopoly acquisition or maintenance by anticompetitive conduct is, of course, also unlawful in the EU. In that sense, there is a gap in the U.S. antitrust law compared to EU competition law. The EU prohibits abuse of a monopoly position; the U.S. does not.

Thus, when it came to Google, the U.S. Federal Trade Commission was presented with complaints from Google’s rivals for conduct—abuse of Google’s dominance in general search—that fell squarely in the gap in U.S. law that does not prohibit abuse of dominance. Instead, the FTC examined the putative case against Google under Section 5 of the FTC Act, which authorizes the FTC to take action against any conduct that the Commission finds to be an “unreasonable method of competition” or a “deceptive act or practice.”

The application of Section 5 to conduct that is not already prohibited by Sections 1 or 2 of the Sherman Act is a matter of some controversy among antitrust scholars. The principal disagreement is the extent to which firms are entitled to some ex ante understanding of what would violate the statute. Opponents of expanding the boundaries of the FTC’s antitrust authority claim that the absence of preannounced standards for Section 5 creates uncertainty in the business community. Supporters doubt this and feel a relatively greater confidence that the expert Commission appointed to serve at the FTC will use its collective wisdom in competition law appropriately. So by taking a case against Google, the Commission would be creating case law and building a body of Section 5 jurisprudence, i.e., using the case to create the standards the business lawyers claim to need.

Whether the complaints reviewed by the FTC against Google in 2011 added up to a good case for the Commission to use in the process of building up the jurisprudence of Section 5 is doubtful. A rationale for the case not grounded on abuse of dominance would have raised difficult issues of the nature of competition in platform industries and the relationship between system competition and component competition, answers to which are not immediately apparent in the search industry. We’ve learned recently that the FTC’s staff recommended at the time proceeding with a case against Google, but the Commission was probably wise to wait for a better opportunity to begin (or, more precisely, continue) defining Section 5 standards.

By contrast, the European Union. The differences from U.S. law can be traced to the historical beginnings of the European Community and their ultimate project of building a European Union. The authority to intervene against abuses of dominance was necessary legal authority if a European Directorate for Competition was to have any hope of breaking down the traditional national barriers to trade that exist in Europe and dissolving the grip of each Member State’s national champion in this industry or that. Europe doesn’t like monopolies, Mr. Cramer? You’ve got to be kidding. (Cf. mercantilism, a decidedly European invention).

Like jazz, antitrust is decidedly American, and the evils of monopoly were addressed here before anywhere. We legislated the gap that allows American companies to abuse their dominance for good reason. Not only were we not breaking down long-standing national-industrial barriers, the antitrust framers also understood the notion of “quasi-monopoly,” the economic power enjoyed by first movers, visionaries, innovators and others crazies whose industry we want to encourage, not punish. That distinction is passed over too often. Quasi-monopoly is an incentive, but temporary. It is the reward to success in a Schumpeterian system in which success invites competition. (It’s not a permanent monopoly, and particularly not one like the old phone company, protected by governmental regulations. Are you listening, Justice Scalia?)

Why the FTC passed on bringing a case against Google search and the Europeans didn’t, then, has nothing to do with schmoozing quality or discredited theories. It has everything to do with the currently applicable antitrust law in the two jurisdictions.

The Europeans, with a different experience and a different aspiration, have deemed it wise to anoint DC-Comp with the power to intervene against abuse of dominance. Because an action against Google is not rationally related to increasing intra-Union commerce, we are particularly dependent on the wisdom of the European officials to appropriately apply competition law principles. If the evidence marshalled and presented by Google over the next 10 weeks is sufficiently persuasive to demonstrate that its search algorithm is truly competitively neutral, the company may be able to convince DG-Comp that a prosecution is beyond the spirit of the abuse of dominance standard because it serves no competitive purpose. But, the case is going to have to be made.

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What the New Net Neutrality Rules Mean for the Future of U.S. Telecom

Since the last post, the FCC, on March 12, 2015, approved an Order adopting what the Commission called “strong rules that protect consumers from past and future tactics that threaten the open Internet.” There were few surprises, as the Order followed closely the “Fact Sheet” released a few weeks before the Order. I’ll explain in this post why we have the industry itself to thank for the new net neutrality regulations.
The FCC’s Order contains three principal sections and final regulations. The first section is a “Report and Order” that responds to the D.C. Circuit Court of Appeals’ reversal of the FCC’s previous iteration of open Internet rules in Verizon v. FCC. Some of those rules, adopted as “policies” in 2010, impermissibly imposed common carrier regulation of the type contained in Title II of the Communications Act. By law, common carrier rules (such as a duty of non-discrimination) can apply only to “telecommunications services” regulated under Title II. But, the FCC years ago decided that cable broadband was not a telecommunications service but an “information service,” not subject to Title II regulation. The D.C. Circuit’s Verizon decision vacated the offending rules and sent the matter back to the FCC, which was then faced with the legal options of either dropping its attempt to impose common carrier-type regulation of cable broadband altogether or reclassifying the service as a “telecommunications service” so it lawfully could be regulated under Title II.
The second part of the Order reclassified cable broadband as a telecommunications service, changing its status so that the FCC could in its discretion impose Title II regulation. The third principal part Ordered forbearance of nearly all Title II obligations for cable broadband.
The final regulations are exceedingly simple. Under the heading “Protecting and Promoting the Open Internet,” the new regulations specify four basic prohibitions: No blocking (of edge providers by ISPs), No throttling (or degrading of service), No paid prioritization (giving some edge providers superior access to subscribers than similarly situated edge providers), and No unreasonable interference (or unreasonable disadvantages for end users or edge providers).
While the Order contains discusses not only broadband Internet networks and their subscribers, it also addresses the various relationships in interconnection and access used by networks and edge providers to reach end users. The FCC did not adopt ex ante rules of conduct for the interconnection sector, opting instead for a case-by-case evaluation of any market complaint a participant chooses to initiate.
It’s easy to attribute the new open Internet regulations to a triumph of consumerism over entrenched corporate interests, as do many a consumer who is passionate about net neutrality. In reality, though, we have only, Comcast, its acquisition target, Time Warner Cable, and Charter and Bright House Networks to thank for the new regulations.
When Comcast proposed to acquire Time Warner Cable last year, it put the FCC and antitrust enforcers in a quandary. Comcast’s mantra, “no overlapping zip codes,” seemed to answer any and all antitrust objections to the deal, and the upstream effects of the transaction were indeterminate and difficult to analyze (dramatic increases in programming costs work in Comcast’s favor, although the company has wisely soft-pedaled the “countervailing monopoly” angle, and, anyway, it’s a programmer itself).
However it came about, whether through the intentional joint efforts of forward-looking people at the DOJ’s Antitrust Division and the FCC or a more haphazard realization that something had to be done, nudged by fairly unusual public opining on regulatory matters by a president, the open Internet Order it likely to turn out to be a historic event. The government, powerless, and, perhaps, even foolish, to prevent the merger of Comcast and TWC, and the deal’s concomitant trading of territories with Charter, (and, now, Charter’s own acquisition of Bright House), it became clear that if the mergers could not be stopped the regulatory environment had to be changed. The government must have the authority to compel, if necessary, the new, consolidated, enormous, oligopolistic (and in some cases, vertically integrated) high-capacity Internet networks, serving tens of millions of subscribers each with the most powerful information utility in history, to treat those consumers and edge providers fairly.
Industry spokespeople adore calling the new regulations “a solution in search of a problem.” All the net neutrality proponents can feebly offer in response is only a few instances of truly bad behavior by ISPs. But, that debate misses the point. The new regulations are necessary not because the soon-to-be merged networks have behaved badly in the past, but because those firms are about to acquire the kind of economic power and social influence that put them in the position of behaving devastatingly badly in the future. Americans deserve to expect that these giant networks will act like “common carriers” and treat everyone’s traffic equally. The need for new regulations grows out of what the industry itself is engineering, the profound change in the structure of the Internet networks that serve the citizenry. Past bad behavior doesn’t drive the need for Title II; the future of the industrial structure of the U.S. telecom sector does.
Chairman Wheeler (and seemingly everybody else engaged in the net neutrality debate) seems to regard the Comcast-TWC, ATT-DirecTV, and Charter-Bright House mergers as some kind of separate business that the FCC and DOJ are handling in some different department. But, that can’t be. An essential consideration for any antitrust analysis is not only the organization of the industry itself, but the applicability of governmental regulation that may accomplish some or all of what the antitrust laws themselves are supposed to do. That is precisely the logic behind the exercise of the FCC’s authority under Title II, should the need for such prove to be the case.
Consumerism is wonderful, but in this case it is consolidation in high-capacity Internet networks by the industry itself that has elicited from the FCC its reasonable, and also very necessary, regulatory response.

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Why Conditions and New Regulations Won’t Stop the Telecom Mega-Mergers

Some commentators believe that the government–the DOJ and/or FCC–could impose such onerous conditions on the mergers of Comcast/TWC/Charter and AT&T-DirecTV merger deals that the companies could walk away. After, neither deal carries a “breakup fee,” so throwing in the towel is virtually costless. There is a reasonable threat, therefore, that the parties to these mega-mergers could call their deals off if regulators come out with a too heavy-handed regulatory regime. Except, it ain’t gonna’ happen. The network is more important.

What sometimes gets lost when competitors, consumers, or suppliers opposing opposing  the mergers focus on the technical antitrust problems is the actual purpose of the deals, which involve new and substantially nationwide broadband and wireless networks. With sufficient scale to serve consumers and businesses coast-t0-coast, Comcast and AT&T have a business case for investing in best-in-class digital infrastructure, improving U.S. competitiveness and our low standing in the rankings of broadband access among industrialized countries.

With the prospect of creating such valuable network assets–both privately for Comcast and AT&T for the nation as a whole–it’s not likely that proposed, threatened, or even adopted net neutrality or other regulations–including so-called Title II common carrier regulations–will derail either deal.

In the first place, litigation could tie up the final effect of rulemaking for years. For another, Republicans in Congress could pass laws after the mergers are approved that could restrain the scope of the FCC’s enforcement authority (a measure that would have to be veto-proof, since it’s unlikely the Obama White House would go along). But, most importantly, both Comcast and AT&T are old hands at litigating at the FCC and in the courts and beating back the Commission’s regulatory reach and tying private opponents up for years in administrative litigation and judicial appeals.

Plenty of folks believe that behavioral remedies don’t work (Exhibit A, B, and C: the Comcast/NBCU conditions + Bloomberg + Tennis Channel + SkyAngel). Such a dim view of behavioral remedies and merger conditions unfortunately may be more true than not, but, it’s not enough to stop the mergers. In fact, it’s precisely that the major players know behavioral remedies and conditions don’t work that no matter how many conditions and regulatory requirements are loaded up on the merging parties or the industry, the parties to Comcast/TWC/Charter and AT&T/DirecTV won’t be walking away.

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Net Neutrality: Old Wine in New Bottles

The New York Times and others have written approvingly in recent weeks of FCC Chairman Tom Wheeler’s apparent intent to reclassify the internet so it can be regulated according to common carrier principles, but the editorials omit the key development driving that policy.

The Vail Compromise, reached in 1910 and named after long-time AT&T President Theodore Vail, allowed the Bell System to retain the many independent telephone companies it had aggressively acquired in exchange for federal price regulation. Then, in a 1912 version of net neutrality known as the Kingsbury Commitment, an AT&T Vice President wrote a letter settling a Department of Justice antitrust case against AT&T. Kingsbury committed the network to connecting all incoming calls, even those initiated by independent telephone companies.

Now, a century later, the medium is broadband and the same kind of compromise is taking shape. Title II regulation of broadband is only one side of a grand bargain, whereby a new, near-national broadband network created by the merger of Comcast and Time Warner Cable is allowed to emerge in exchange for a federal regulatory regime legally authorized to impose common carrier principles of access and fairness.

This basic arrangement has served the nation well in telephony and other monopolistic, regulated industries. There is no reason why it should not work just as well for broadband services.

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The Lesson of Libor

Observers of the antitrust scene noted the recent dismissal by a federal court of what was a potentially huge private antitrust class action against the Libor-fixing banks. It is tempting to regard the failure of the suit as an antitrust case (some Commodities Act claims were permitted to proceed) as yet another example of judicial distain for antitrust. One antitrust lawyer quoted in Matt Taibbi’s article in Rolling Stone, “Everything is Rigged: The Biggest Price-Fixing Scandal Ever,” (April 25, 2013) called the decision a “farce.” Another said, simply, “Incredible.”

But, not so fast. The court decided that the plaintiffs had failed sufficiently to plead “antitrust injury.” Under judicial interpretations of the Sherman and Clayton Acts, private plaintiffs who suffer injury caused by an antitrust violation can only sue in certain circumstances, depending on precisely how the injury was caused. Thus, a purchaser in a market that pays inflated prices because the sellers in the market have colluded to fix the market price can recover under the antitrust laws, but a competitor who claims injury because a merger strengthens a rival is out of luck. In the first case, competition in the market has been injured, and the plaintiff’s injury flowed from that precedent injury to competition. In the second case, competition may not have been injured at all, even though the plaintiff may have been. Without an injury to competition, the antitrust laws don’t protect a plaintiff against its larger or more efficient marketplace rivals.

The Libor court’s application of the antitrust injury doctrine is clear. The Libor rate is not a market determined price. Instead, it is a “fixed” rate, agreed by the members of the British Bankers’ Association charged with setting it. As such, the plaintiffs were not able to establish that their injury flowed from a precedent injury to competition, even if they can establish their own injury. With no injury to competition, the plaintiffs cannot have suffered an “antitrust injury.”

To the extent that the Libor-fixing banks breached their duty to the BBA and the rest of the Libor-dependent world to report interest rates honestly and with integrity, there has been a serious wrong for which there should be a remedy. That remedy, however, does not appear to be available to private plaintiffs under the antitrust laws.

The wider implication to be drawn is the distinction between private antitrust intervention that fails as a consequence of judicial or political hostility to antitrust itself and private intervention that fails because government either tolerates, creates, or sanctions a non-competitive industrial structure. A private plaintiff cannot sue for injuries caused by conduct that impairs competition if there is no competition to impair in the first place.

Antitrust does not exist in a vacuum, but to protect and encourage competitive markets. When government policies or inaction work to replace competitive markets with non-competitive arrangements it is not the private antitrust regime that is at fault when private plaintiffs are booted out of court. The problem is the regulatory policy that suppresses competition in the first place. Thankfully, government antitrust enforcers do not need to establish injury from a diminution of competition. It is enough for anticompetitive conduct or practices to prevail where there should be competition. On that score, institutional animosity toward antitrust must not be allowed to erode the authority of the antitrust agencies to dismantle or replace previously tolerated anticompetitive structures, like Libor-fixing.

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