Out of Control Policy Blog

Your Handy Guide to Obama-Era High-Tech Antitrust Policy

You may have heard that the Obama Justice Department promises to become much more aggressive in pursuing antitrust action against the high-tech sector.  Taking its cues from the European Union, which, in a series of rulings against Microsoft, Apple and Intel, has shown that it sees its primary role as protector weaker competitors and unpopular products, even if it comes at the expense of lower consumer prices and innovation. Hence, the antitrust venue-shopping in Brussels, where the EU courts have prosecuted and penalized companies solely for their size, efficiency or size of market share and absent of any evidence of abuse.

In the U.S., on the other hand, for more than a generation, consumer harm was the measure of an antitrust violation. Now, Christine Varney, President Obama’s head of antitrust enforcement at the Department of Justice, has openly talked about moving U.S. enforcement toward the European model. "I believe that greater coordination with the FTC and foreign antitrust authorities is in the best interests of America's business community and consumers," Varney told the U.S. Chamber of Commerce in May, just days before the European Union announced its $1.44 billion judgment against Microsoft.

The EU has fined Intel over the discounts and rebates it offered personal computer manufacturers that purchased the company’s microprocessors in large volumes. While the EU found that Intel’s pricing was not predatory and acknowledged that the computer chip discounts significantly lowered the prices of all PCs sold in Europe, Brussels nonetheless found Intel guilty of illegal behavior. Its reasoning was that simply because Intel was able to use its larger market share to put pressure on prices, Advanced Micro Devices, Intel’s chief competitor (and a healthy, profitable company), was at an unfair disadvantage.

The New York Times led the cheering section for U.S. adoption of this idea in a May 22 editorial:

In the Bush administration’s view, to get in trouble a monopolist must do worse than use unfair methods to undermine a competitor. Regulators must usually prove that consumers were directly hurt, typically through high prices. When the wrongdoing is to offer a client conditional rebates — meaning lower prices — that can be especially hard to prove.

That view of consumer harm is too restrictive. It often seems to ignore the fact that a dominant firm that uses unfair tactics to marginalize its rivals deprives consumers of choice, another form of harm. Without competitors there is no competition. Without competition there is no incentive for innovation, or to reduce prices.

The Obama administration has a different view. The Justice Department’s antitrust division has rescinded Bush administration guidelines intended to shield monopolies from antitrust accusations. The FTC is also likely to be more active under its new chairman, Jon Leibowitz. He is already considering pursuing future antitrust cases with a little-used provision of antitrust law that directly outlaws unfair methods of competition.

Even though in the last 25 years, prices across the board in high-tech have done nothing but fall, products and services have proliferated beyond count, and each year, there seem to be a spate of entrepreneurial success stories, the telecom, computer and Internet industry seems to in the antitrust crosshairs of both DoJ and the FTC. Varney wants to investigate exclusive wireless handset deals and Leibowitz has already signaled that Intel might be a target, as will other high-tech successes like Google and Hulu, the video streaming service.

Now that it looks like proof of consumer harm is no longer the gauge for antitrust prosecution, and that any strategy or tactic used by one company to gain an edge could be ruled as inherently anticompetitive, in the spirit of public service, I offer the following points for high-tech companies to avoid, at least for the duration of the Obama administration:

Don’t cut prices.
This is how Intel got into trouble. Although it’s time-honored practice to charge less to a customer buying in volume (one for $10, three for $25), in part because it improves cash flow and reduces inventory costs, the new attitude at the Justice Department is to view discounts with grave suspicion. Price-cutting could be an attempt to drive out competitors and dominate the market for computer chips for a generation. Never mind that with computer chips, a generation lasts 18 months before the processing power doubles and its cost halves, necessitating the need to regularly scrap yesterday's chips and develop new, faster ones or lose business. 

Don’t do anything innovative.
Forget about attempting any sort of disintermediation, which means using a new technology, method or process to supplant a range of existing products. This tendency repeatedly has caused Microsoft problems, starting when it began integrating early stand-alone PC applications, such as Internet browsers, media players, photo editors and viewers, pocket calculators and such into its Windows operating system. This was, of course, unfair to anyone who wanted to sell these applications separately, even if it meant a net higher cost for consumers. This leads us to the next point.

Never, under any circumstances, give your product away for free.
This is worse than discounting. Younger readers may not know that at one time, if you wanted to surf the Web, you had to purchase an Internet browser from a company called Netscape. When Microsoft offered Internet Explorer for free, the Justice Department sued to stop it on grounds that it was unfair to Netscape. Varney, our new antitrust enforcer, was a Netscape lobbyist who pushed the Clinton administration to pursue this case. So don’t say you haven’t been warned. Is it any wonder then, that Varney has called Google, which offers a plethora of valuable Internet services free of charge, the new Microsoft?

Likewise, Hulu, which by virtue of moving quickly in the emerging area of video streaming, has locked up some large exclusive content deals plus financing from Disney, NBC Universal and News Corp., may find itself in legal trouble simply for not slowing down to allow its competitors to catch up. Hulu, of course, is free, but monetizes its exclusivity through online advertising. Let alone the fact that business models for online advertising and content  are still shaking out and someone may yet develop a new approach between now and the time you finish reading this blog post, the Feds appear ready to clamp down.

Avoid high brand recognition.
Hulu’s big mistake may have been advertising during the Super Bowl. Sure things move fast in the tech business, but if regulators are to be believed, in the space of 30-second ad spot, Hulu went from struggling entrepreneurial venture to being a step away from dominating the Internet.
As far as DoJ, the FTC and Congress are concerned, what matters is not how many competitors you actually have, only the competitors they can name off the top of their heads. When lawmakers accuse AT&T of unfairly locking up “the best” technology on the market, they are buying into Apple’s well-cultivated brand cachet, not the reality that there are at least a dozen other iPhone-like devices on the market whose makers would happily contest claims of iPhone superiority. 

Don’t be hip and popular.
If you are, you might as well be waving a sign that says “Prosecute Me!” After giving away products for free, the worst antitrust sin is to create an item that lots of people want to use, either because it’s fun, simple, cool or immensely useful and productive. But be warned, if you get this far, it’s usually because you’ve already engaged in the type of anticompetitive behavior set out already. Look at Facebook: It’s free, easy to use, proving more appealing to a demographic beyond teens (adults, professionals, user groups) and has high brand recognition. Given the recent layoffs at MySpace, Facebook may be deemed a monopoly threat. Again, that will be due to brand recognition. Since you never hear anyone talk about Plaxo and LinkedIn, in policy circles, they don’t exist.

Twitter, the short message service that’s all the rage, also better watch it. Never mind that it’s free, or that its business model is murky. If it has no competitors therefore must be reined in. Tinyurl.com, the site that condenses lengthy web addresses into short ones that can be packed into 140-character Tweets, could be in trouble for similar reasons. 

What hope can I offer to high-tech entrepreneurs? Well, if you’ve got a telecom or IT product or service that’s overpriced, unappealing, has a high failure rate, is difficult or clunky to use, doesn’t work well with any popular hardware or software, this is your time! You can now sue competitive innovators for, well, being competitive innovators. Contact your local DoJ or FTC office today. Attorneys and regulators are standing by.


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