Jury Says Apple DRM Not An Antitrust Violation

from the which-is-probably-right dept

We've written a few times about the long-standing class action lawsuit against Apple over whether its DRM efforts, designed to block out RealNetworks' attempt to reverse engineer a way into the iPod, violated antitrust law. As we noted recently, despite the case going on for years, the class action lawyers who brought the lawsuit ran into a bit of a stumbling block recently when it came out that none of the named plaintiffs were actually in the class, having purchased iPods outside the window which the class covered. The judge let the lawyers find a new plaintiff just a few days ago, but it certainly looks like the rotating plaintiffs issue may have helped Apple. The jury wasted little time in siding with Apple and saying that there was no antitrust violation. Apple's lawyers played up the plaintiff problem:

“There’s not one piece of evidence of a single individual who lost a single song, not even a complaint about it,” said William Isaacson, Apple’s lead lawyer in the case. “This is all made up at this point.”

There was a lot of interesting side notes to this case, but the failure of the class action lawyers to have an actual plaintiff was a pretty big deal -- and basically made it clear that these lawyers were just in this for the money, rather than to right some sort of wrong.

And, while I'm generally interested in the idea that DRM could potentially be seen as anti-competitive, the fact that this case was about iTunes and RealNetworks kind of highlights how infrequently antitrust law makes sense in the tech industry. The entire digital music ecosystem has changed dramatically since the case began. While iTunes is certainly still a big player, it's facing serious competition on a variety of different fronts including from streaming services like Spotify (one reason why Apple purchased Beats Music). Competition comes in all different ways, and even if you're dominant today, it doesn't mean you'll be dominant very long.

Filed Under: antitrust, class action lawsuits, drm, innovation, ipods, technology
Companies: apple

Class Action Lawsuit Over Apple DRM Stumbles Because Plaintiffs Aren't Actually In The Class

from the you-had-one-job... dept

We've written a few times about the long-running class action lawsuit against Apple alleging that its use of DRM on music (the "FairPlay" system) violated antitrust laws by locking users into Apple's platform. The case is interesting on a few different levels -- including the question of whether or not DRM could lead to antitrust violations (very interesting...) and showing how quickly the technology world changes (music DRM is basically long gone). However, with the trial being held this week, a new stumbling block arose late in the game. Apple lawyers have pointed out to the judge in the case, Yvonne Gonzalez Rogers, that neither of the two women named as plaintiffs actually qualify to be in the class.

As you might imagine, that makes for a difficult class action lawsuit, when you don't have any actual plaintiffs.

Specifically, after testimony this week, Apple realized that the iPod that one of the plaintiffs owned was purchased outside of the period of time covered by the class action lawsuit. Apple stopped using Fairplay in March 2009, so the class action lawsuit only applies to iPods bought between September 2006 and March 2009. That's a problem when the main plaintiff actually bought hers in... July 2009.

After plaintiff Marianna Rosen testified on Wednesday, Apple attorneys said they checked the serial number on her iPod Touch and found it was purchased in July 2009. In a letter sent to the court late Wednesday night, Apple lawyer William Isaacson said it appears the other plaintiff, Melanie Wilson, bought iPods outside the relevant time frame or, in one instance, purchased a model that didn't have the specific version of software at issue in the case.

Isaacson, who suggested the lawsuit can't proceed without a plaintiff, said he's asked for proof that either woman had purchased an iPod covered by the case. Plaintiffs' attorney Bonny Sweeney said her side is checking for other receipts. She conceded that Wilson's iPods may not be covered, but she also noted that an estimated 8 million consumers are believed to have been purchased the affected iPods.

In other words, the class action lawyers are admitting that they may not have a plaintiff, but say it doesn't matter because they can find another one without too much trouble.

And of course, this just reinforces what a total scam so many class action lawsuits are. We've written about this for years. While the basic idea may seem sound, the reality is that most class action lawsuits are just about ways for class action lawyers to get super wealthy. They seek out anything they can sue over, find a stand-in plaintiff whose only job is basically to be the name on the lawsuit, and then when the final payout comes, the lawyers take a huge chunk, the stand-in plaintiff gets a small amount, and the rest of the class splits a further tiny amount. It's not about righting wrongs. It's about enriching class action lawyers. The very fact that the lawyers in this case admit that they can toss out their plaintiffs and bring in others seems to highlight what a total joke this whole thing is.

Still, someone really, really, screwed up on the lawyers' side. How the hell do you set up a class action lawsuit without first confirming that your plaintiff is in the class? That seems like a total and complete fuck up.

Thankfully, Judge Rogers seems to recognize that this is not a good situation:

"I am concerned that I don't have a plaintiff. That's a problem," the judge said in court Thursday afternoon at the end of the trial's third day of testimony in Oakland.

As interested as I am in the idea that DRM might be anticompetitive, I'm still troubled by the abuse of class action lawsuits (and related antitrust efforts in general as well). This particular case just seems like a total mess.

Filed Under: antitrust, class, class action, class action lawsuits, class action lawyers, competition, drm, plaintiffs
Companies: apple

Forget EU's Toothless Vote To 'Break Up' Google; Be Worried About Nonsensical 'Unbiased Search' Proposal

from the that's-where-the-real-threat-is dept

As was widely expected after leaking out a few days earlier, last week the EU Parliament "voted" on its proposal to support the breakup of Google. And yet, that might not really be as important as a second part of the EU's vote, concerning a bizarre and nonsensical requirement for "unbiased" search results. As discussed earlier, the headlined proposal for breaking up Google is both completely toothless and kind of stupid. On the toothless part, not only can the EU Parliament not actually do anything about this, if the EU Commission wanted to break up Google, it would need to go through a long and involved process, that would likely fail. As Vox notes:

For Google to actually get broken up, the European Commission would first need to take Google to court alleging violation of European competition laws. The EC would then have to win the case and convince the courts that a breakup was the appropriate remedy.

"I can't believe that would happen," [antitrust expert Mark] Patterson told me on Monday. "I don't think there have been cases of anyone being broken up in years."

Patterson says that "there's never been a smoking gun" showing that Google has abused its dominance in the search or advertising markets to harm competitors

But still, here's what the EU Parliament approved [pdf] by a 384 to 174 vote:

Notes that the online search market is of particular importance in ensuring competitive conditions within the digital single market, given the potential development of search engines into gatekeepers and the possibility they have of commercialising secondary exploitation of information obtained; calls, therefore, on the Commission to enforce EU competition rules decisively, based on input from all relevant stakeholders and taking into account the entire structure of the digital single market in order to ensure remedies that truly benefit consumers, internet users and online businesses; calls, furthermore, on the Commission to consider proposals aimed at unbundling search engines from other commercial services as one potential long-term means of achieving the aforementioned aims;

As for why this is stupid, the Economist has a rather good explanation:

Google is clearly dominant, then; but whether it abuses that dominance is another matter. It stands accused of favouring its own services in search results, making it hard for advertisers to manage campaigns across several online platforms, and presenting answers on some search pages directly rather than referring users to other websites. But its behaviour is not in the same class as Microsoft’s systematic campaign against the Netscape browser in the late 1990s: there are no e-mails talking about “cutting off” competitors’ “air supply”. What’s more, some of the features that hurt Google’s competitors benefit its consumers. Giving people flight details, dictionary definitions or a map right away saves them time. And while advertisers often pay hefty rates for clicks, users get Google’s service for nothing—rather as plumbers and florists fork out to be listed in Yellow Pages which are given to readers gratis, and nightclubs charge men steep entry prices but let women in free.

Furthermore, the Economist points out that, not only does this move appear to be anti-consumer, but it's also just blatantly protectionist for companies unwilling to innovate:

Instead of attacking successful American companies, Europe’s leaders should ask themselves why their continent has not produced a Google or a Facebook. Opening up the EU’s digital services market would do more to create one than protecting local incumbents.

But within the proposal, a few lines down, there was something that might be even more concerning, and more ridiculous, even if it generated fewer (actually, almost no) headlines. And it's that, beyond "breaking up" search engines, the resolution also included this bit of nonsense, saying that search engines need to be "unbiased":

Stresses that, when operating search engines for users, the search process and results should be unbiased in order to keep internet searches non-discriminatory, to ensure more competition and choice for users and consumers and to maintain the diversity of sources of information; notes, therefore, that indexation, evaluation, presentation and ranking by search engines must be unbiased and transparent; calls on the Commission to prevent any abuse in the marketing of interlinked services by search engine operators;

But what does that even mean? Search is inherently biased. That's the point of search. You want the best results for what you're searching for, and the job of the search engine is to rank results by what it thinks is the best. An "unbiased" search engine isn't a search engine at all. It just returns stuff randomly.

What this really is, is a way for the EU to try to insert itself into being able to edit search results. They're trying to insert themselves into the algorithm to determine which search results it thinks should be up top, rather than whatever the algorithms find. This is very worrisome -- in part because it demonstrates how little the EU politicians who voted for this understand. Years ago, James Grimmelmann (no friend of Google -- as he's actively fought against Google on a number of issues), explained why this concept (sometimes called "search neutrality") makes no sense at all, and actually sets up a conflicting set of requirements where the "ends and means don't match." He concludes that the very idea of unbiased search is "incoherent." In fact, he notes that an attempt towards "unbiased search" almost certainly leads to not just worse results for users, but a more likely situation in which users get pushed to the kinds of sites policy makers think they're going to demote.

Requiring search engines to behave “neutrally” will not produce the desired goal of neutral search results. The web is a place where site owners compete fiercely, sometimes viciously, for viewers and users turn to intermediaries to defend them from the sometimes-abusive tactics of information providers. Taking the search engine out of the equation leaves users vulnerable to precisely the sorts of manipulation search neutrality aims to protect them from. Whether it ranks sites by popularity, by personalization, or even by the idiosyncratic whims of its operator, a search engine provides an alternative to the Hobbesian world of the unmediated Internet, in which the richest voices are the loudest, and the greatest authority on any subject is the spammer with the fastest server. Search neutrality is cynical about the Internet—but perhaps not cynical enough.

Meanwhile, the sole Pirate Party member of the European Parliament, Julia Reda, has a bit more detail about how this bogus claim of "unbiased search" is really just an attempt to prop up publishers who failed to innovate via so-called "ancillary rights," like the attempt to force Google to pay newspaper publishers for sending them traffic. As Reda notes:

Here, it is demanded that search algorithms and results should be impartial to keep internet searches “nondiscrimatory” and to “secure competition and freedom of choice for users and consumers”. Consequently, indexing, weighting, display and ordering of search engines should be impartial and transparent.

This wording is explosive. I am led to suspect that its aim is to prepare a European ancillary copyright for press publishers. The attempt to cross-finance big publishers through Google most recently spectacularly backfired in Germany. Is this resolution an attempt to create the puzzle piece that had been missing in Germany?

In October, Günther Oettinger, the EU Commissioner for the Digital Economy and Society, provoked a debate on an EU-wide ancillary copyright law for press publishers before even taking office. Not a month later, the next move is made in that direction – this time in the parliament.

As you may recall, when German publishers demanded payments for the traffic, Google removed their snippets, and the publishers claimed it was "blackmail." As Reda notes, the whole "neutrality" or "unbiased" language in the resolution suggests a plan in which Google would be forced to (1) continue providing the snippets and traffic and then, later, (2) pay the publishers for sending them the traffic. In short, the idea is to force Google to "violate" the (made up) rights of publishers in order to give them a way to force Google to give them money.

Reda, along with Michel Reimon, put forth amendments that would block this possible interpretation of the resolution... and had those amendments rejected.

It's clear that Europe, for whatever reason, has decided to go to war against American internet companies, with Google being the main target. As we noted last week, it's not clear what the reasons are other than that Google is big and American. It's perfectly reasonable to be concerned about potential abuse, and to vigilantly watch to make sure no such abuse occurs, but that's not what's happening here. It appears that these moves are just designed to punish not only Google, but the very users of the service in Europe, pressuring the company to deliver a lesser product... just to benefit a few companies and industries that have failed to innovate.

It is difficult to see how such an effort could possibly be good for the people of Europe.

Filed Under: antitrust, eu, eu commission, eu parliament, julia reda, search neutrality, unbiased search
Companies: google

EU Parliament Wants To Break Up Google... Because It's Big & American Or Something

from the gotta-any-better-reason? dept

On Friday, the Financial Times broke the story that the European Parliament is going to call for breaking up Google. Of course, the European Parliament can't actually do that, but it appears designed to put pressure on the EU Commission, which has been talking about antitrust actions against Google for quite some time. While it had looked like there was a settlement earlier this year, those plans more or less appeared to fall apart. Just recently, we wrote about efforts to force Google to change some of its search results in Europe -- and noted how problematic it gets when governments start telling search engines how to program their algorithms.

But, actually breaking up Google would go a hell of a lot further. The idea had been floated earlier this year by a top German official, but who would have thought anyone would take it seriously.

And here's the thing: as far as I can tell, there isn't any real reason for trying to break up Google, other than the fact that it's very big and very not European.

There's no discussion about any actual harm... just the fact that some people don't like the fact that the company is so big (and not European):

Since his nomination to be the EU’s digital commissioner, Germany’s Günther Oettinger has suggested hitting Google with a levy for displaying copyright-protected material; has raised the idea of forcing its search results to be neutral; and voiced concerns about its provision of software for cars.

Google has become a lightning rod for European concerns over Silicon Valley, with consumers, regulators and politicians assailing the company over issues ranging from its commercial dominance to its privacy policy. It has reluctantly accepted the European Court of Justice’s ruling on the right to be forgotten, which requires it to consider requests not to index certain links about people’s past.

If they were alleging real consumer harm, that would be one thing, but no one seems to be discussing that.

The NY Times has more details on the expected resolution, which talks about "unbundling" Google's various other services from the search engine:

The language in the draft resolution calling for the break up of powerful search engines does not attack Google directly. Instead, according to a version seen by The New York Times, the resolution calls on the European Commission “to consider proposals with the aim of unbundling search engines from other commercial services” to introduce more competition into online search in Europe.

The resolution was written by Andreas Schwab, a member of the center-right European People’s Party from Germany, where powerful publishing groups have strongly campaigned for measures to rein in Google’s market power.

If true, then it seems that Microsoft -- one of the leading drivers behind antitrust actions in Europe -- may have shot itself in the foot here, since it, too, is a "search engine" that has plenty of other "commercial services."

While I do think antitrust is an important tool in stopping abusive monopolistic powers that block out any and all competition, it seems only reasonable that you should at least have to show some sort of actual consumer harm. Furthermore, it's difficult to see how this plan would actually do what its backers seem to want to accomplish. Breaking up Google, if it can even be done realistically, doesn't magically lead to more search engines in the market. There are lots of upstart search engines out there trying -- we hear about new ones all the time. And they're not, in any way, "blocked" by Google. So what would this move do other than punish Google for being successful?

Filed Under: antitrust, breakups, competition, consumer harm, eu, eu commission, eu parliament, search engines
Companies: google, microsoft

Antitrust, DRM & Coffee: Is It Illegal For Keurig To Lock Down Its Brewers?

from the the-k-cup-dilemma dept

Even before the landmark United States v. Microsoft Corp. antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability. Monopolists have no general duty to make their products work with those of competitors, but what about the situation where a dominant firm deliberately re-designs products to render them incompatible with others? That is the provocative question raised by several pending antitrust lawsuits filed against Green Mountain Coffee, manufacturer of the Keurig line of single-serve coffee makers and coffee "pod" products.

TreeHouse Foods alleged in a complaint last winter that after its patent on "K-Cups" expired in 2012, Green Mountain:

abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain's monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors' products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers' function.

In the consolidated multi-district litigation that ensued, Green Mountain is specifically charged with designing a so-called "Keurig 2.0″ brewer which features technology that allows it to detect whether a coffee cartridge is one of Keurig's K-Cups or is made by a third party that does not have a licensing agreement with the company. The machine will not brew unlicensed coffee pods.

The federal court overseeing the MDL cases denied the plaintiffs' motion for an injunction on procedural grounds in September, issuing an opinion which reasoned that commercial success of the "2.0" brewers was uncertain and that coffee competitors would still have open access to some 26 million Keurig "1.0" machines for several years. In other words, the court did not reach the merits of the monopolization claim against Green Mountain.

So where does that leave Keurig? As Ali Sternburg observed before revelations of its new 2.0 technology, Green Mountain's prior 20 years of patent protection allowed the company to build a competitive advantage by "cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first-mover advantage." More than ten years before those patents first issued, moreover, the federal courts had ruled that new product introductions by monopoly firms — in one well-known instance, Kodak — would not be considered an antitrust violation because "a firm that pioneers new technology will often introduce the first of a new product type along with related, ancillary products that can only be utilized effectively with the newly developed technology."

So-called technological ties exist all over the tech world, from smartphone apps that work only with a single website, to PC printers that only accept chip-enabled ink cartridges from the printer manufacturer, to proprietary media DRM protocols such as Apple's AAC format for music, to Sony's failed attempts at proprietary flash-memory stick technology. Yet there's a profound difference between designing a new photographic system like the then-revolutionary Instamatic II in 1978 (subject of the Foremost Pro Color decision quoted above) and re-designing an existing product line to disable competitive substitutes.

The Verge called Green Mountain's tactics "locking down its coffee makers to keep out cheap refills." And despite world-class defense counsel, little that Keurig has said so far connotes serious efficiency or product quality advantages to its pseudo-DRM approach to coffee pods. If those are the facts, the courts will be forced to face the competitive merits of the MDL plaintiffs' claims in circumstances in which innovation, the keystone of the doctrine permitting technological tying, is notably absent. Conversely, the first antitrust competitor, TreeHouse, announced in August that it had successfully reverse-engineered the Keurig 2.0 system so that its coffee pod products "will work in both existing and next generation coffee makers manufactured by the leading supplier of personal at-home brewing systems in the United States."

Which is it, innovation or predation? Certainly it is impossible to judge from afar or to make generalizations. Under the burden-shifting legal approach to monopolization claims laid out by the Microsoft courts, proof of exclusionary effects require a Section 2 defendant to come forward with a procompetitve rationale for the challenged practices. Keurig claims its pod-detection interactive technology allows 2.0 coffee makers to determine which type of package (including Vue-packs, an earlier Green Mountain technology for larger brew sizes and more intense flavors that never achieved commercial success) has been inserted and offer up the appropriate user interface. "Keurig 2.0's interactive technology is Keurig's platform for future innovation," write the company's antitrust lawyers.

As the law stands today in the U.S., antitrust courts recognize that whether any particular act of a monopolist is exclusionary, rather than a form of vigorous competition, can be difficult to discern: "the means of illicit exclusion, like the means of legitimate competition, are myriad." Faced with conflicting evidence and a non-pretextual claim of efficiencies, the MDL court will therefore be required to balance good versus bad — that is, determine whether "the anticompetitive harm of the conduct outweighs the procompetitive benefit." That's a tall challenge in the case of Keurig.

Yet it is also one at the cutting-edge of competition law that presents serious ramifications for disruptive innovation. Could Uber be required as an antitrust matter to open its system to Hailo drivers? Is Twitter liable to TwitPic for integrating its own photo-posting function into the 140-character tweet service, thus effectively putting some third-party companies out of business? Are Microsoft, or Google, or Apple required to open their APIs to competitors or, once opened, legally prevented from reverting to a closed ecosystem? Those are competition questions that cannot, and should not, be answered based on either a 30-year old case involving Instamatic cameras and film or a 15-year old case involving Windows '95 and Internet Explorer 1.0.

In another context, American courts have long held that First Amendment protection for the free exercise of religion means the judiciary cannot assess whether a belief system that claims to be a religion really is one, because courts lack the basic competence to make such judgments reliably. One could often say the same thing about competition analysis, since differentiating innovation from exclusion is fraught with dangers. One court of appeals has held, as a consequence, that

[t]here is no room in [antitrust law] for balancing the benefits or worth of a product improvement against its anticompetitive effects… There are no criteria that courts can use to calculate the ‘right' amount of innovation, which would maximize social gains and minimize competitive injury. A seemingly minor technological improvement today can lead to much greater advances in the future.

Indeed, the leading U.S. antitrust treatise concludes that "[b]ecause courts and juries are generally incapable of addressing the technical merits or anticompetitive effects of innovation, they quickly make the relevant question turn on intent. We believe this is the worst way of handling claims that innovation violates the antitrust laws."

Yet a black-letter rule of "per se lawfulness" that necessarily prohibited competitors from challenging product re-designs based on facial claims of technological innovation would, in this author's judgment, go too far in the other direction. Hopefully, the Keurig 2.0 antitrust lawsuits will not end as a re-affirmation of the old legal adage that hard cases make bad law.

Reposted from the Disruptive Competition Project

Filed Under: antitrust, coffee, compatibility, competition, drm, interoperability, k-cups, keurig
Companies: green mountain coffee, treehouse foods

Apple Facing Trial Over Whether Its Use Of DRM Violated Antitrust Laws

from the this-could-matter... dept

When Apple first launched the iTunes store for music, it had DRM deeply embedded in it. According to reports around the time, this DRM was a key part of allowing Apple to get into the business of selling music. The labels demanded strong DRM. It didn't take long for most people to recognize how the labels' own demands for DRM actually gave Apple tremendous leverage over the record labels by basically handing the market over to Apple while making it that much more difficult for a competitor to jump into the space. While, years later, Apple and the labels finally ditched the DRM on music, one of Apple's competitors, Real Networks had tried to hack its way around Apple's DRM, which was called FairPlay, with its own DRM, called Harmony, that more or less reverse engineered Apple's DRM. Apple responded by changing things so that Real's music wouldn't work on iPods (yes, this was back in the day of iPods). Real adjusted... and Apple broke it again.

While all that went on a decade ago, a lawsuit over whether or not Apple's use of FairPlay to keep out Real's music violated antitrust laws appears to finally be heading to trial:

In this lawsuit, plaintiffs are claiming the anti-Harmony measures in iTunes 7.0 broke antitrust laws, because it had the effect of illegally raising the price of iPods. Users were continually forced to either stop playing any songs they had bought from the Real store, or convert them to a non-DRM format, for example by burning the music to CD and then ripping the CD to their computer.

That produced "lock-in" to the iTunes environment and increased consumers' "switching costs," the plaintiffs argue.

Apple sought to have the lawsuit tossed out, but the judge is letting it go forward. While the specifics of this case now seem like ancient history, the eventual results, should it get very far, could be interesting for other makers and users of DRM (Amazon might want to pay particular attention). From the judge:

That theory is intricate, but ultimately it amounts to a charge that Apple's release of 7.0 unlawfully maintained Apple's monopoly in the market for portable digital media players by making demand for iPods less elastic. Specifically, plaintiffs claim that 7.0 resulted in an increased "lock-in" effect for iPod owners who purchased songs online. Lock-in, according to plaintiffs' principal economics expert, "is a form of foreclosure that arises from actions that increase the cost to consumers of switching to a product that has better quality and/or a lower price."....

Plaintiffs offer expert opinion that Apple, by counteracting Harmony, "raised the cost of switching from iPods to competing portable digital media players by eliminating the ability of consumers to collect a library of downloads that could be played on all players." (Id.) That is, 7.0 made iPod owners unable to play songs purchased from iTS competitor Real and thus pushed them to make their online song purchases only on the iTS. As a result, it discouraged iPod owners from buying a competing, non-iPod digital portable music player when it came time to replace their iPods due to loss, breakage, or a desire to upgrade. (Id.) Such owners would have to either forego use of the songs they had purchased through Real (as well as any other online music store besides iTunes, though that is not part of the damages alleged in this case), repurchase such songs through other, iPod-compatible means (for instance, iTS or physical CDs), or convert music bought from Real into a non-DRM format, for example, by "burning" that music to a CD and then "ripping" the CD onto their computers in a file format with no DRM, from whence the songs could then be loaded on their iPods. These increased "switching costs," plaintiffs argue, locked iPod owners into continuing to purchase iPods, notwithstanding the allegedly similar or better quality of and lower prices of competing products. They also locked out owners of non-iPod portable digital media players who had downloaded songs from the Real store. The effect of both lock-in and lock-out, plaintiffs say, was to reduce competition in the market for digital portable music players and to reduce the price elasticity of iPods, which permitted Apple to charge a supracompetitive price therefor.

While other DRM situations may not be quite as involved, the idea of using DRM as a form of lock-in, increasing switching costs is clearly a legitimate concern. Having DRM present a potential antitrust concern could make for some interesting situations for companies today who rely on DRM.

Filed Under: antitrust, drm, fairplay, harmony
Companies: apple, realnetworks

Even If Google Could Improve Its Recommendations, Is It The Government's Job To Tell It To Do So?

from the seems-troubling dept

There were reports a few weeks ago that the European Commission has reopened its antitrust investigation into Google. The main issue is how Google promotes certain (usually internal) results in so-called "answer boxes" in a way that may hurt other sites. We've been skeptical of the idea of European bureaucrats deciding what Google's search results should look like, but earlier this year, it appeared that a settlement had been reached in which Google would point to competitors' results in some cases.

Against this backdrop, a few organizations, led by Yelp and TripAdvisor have created a somewhat fascinating site and tool called Focus On The User -- a play on Google's own core philosophy of "focus on the user and all else will follow." The site makes a very compelling argument that when Google is returning opinions (i.e., ratings) rather than factual answers, that it could do a much better job than just pointing to results from Google+. That is, if you do a search on "best restaurants in San Francisco" Google will show you results as rated by Google+ user reviews.

The Focus on the User site shows that rather than just relying on Google's own data, users would benefit greatly if Google used its own search algorithm to pull in results from reviews elsewhere. In short, where you might see a box up top with seven to ten reviews (all linking to Google pages), Yelp and TripAdvisor are arguing that if you just used Google's "organic" search algorithm to find the most relevant review pages, consumers get a much better experience. And they have a fair amount of data to back that up, showing a greater number of clicks in such a box (which you can test yourself via the site).

As noted above, the results are compelling. Using Google's own algorithm to rank all possible reviews seems like a pretty smart way of doing things, and likely to give better results than just using Google's (much more limited) database of reviews. But here's the thing: while I completely agree that this is how Google should offer up reviews in response to "opinion" type questions, I still am troubled by the idea that this should be dictated by government bureaucrats. Frankly, I'm kind of surprised this isn't the way Google operates, and it's a bit disappointing that the company doesn't just jump on this as a solution voluntarily, rather than dragging it out and having the bureaucrats force it upon them.

So while the site is fascinating, and the case is compelling, it still has this problem of getting into a very touchy territory where we're expecting government's to design the results of search engines. It seems like Yelp, TripAdvisor and others can make the case to Google and the public directly that this is a better way to do things, rather than having the government try to order Google to use it.

Filed Under: antitrust, eu, government, recommendations, regulators, search
Companies: google, tripadvisor, yelp

Reporter Annoyed To Discover He Doesn't Own Facts; Suggests 'Global Paywall' For Reporters Like Himself

from the good-luck-with-that dept

Every so often we see this kind of thing: a reporter (who may very well do amazingly good work) gets upset to realize that other news sites and aggregators pick up on some of his stories and write about them -- potentially even getting more attention than the original. In this case, it's reporter Matthew Taub, who is annoyed that other sites got the glory for his investigative reporting on... on a guy dressing up as a clown and running around a Brooklyn cemetary:

A story I did, like this, gets repackaged, like this (with a reference to the original reporting deep in the second page), and finally reaches you, like this:

Hey, we've all been there. I've had plenty of stories that I've written get rewritten and repurposed by other, much bigger sites and then watched those sites get all the traffic. It happens. Of course, sometimes it's happened the other way as well, in which we get traffic that we probably don't deserve after we write about a story that originated elsewhere, but for reasons unknown, the world bestowed the traffic to our story first.

Taub takes the silly line that, because of things like this, "original reporting" (as he defines it) "will cease to exist in about five to ten years." Of course, we've been hearing this refrain for longer than five to ten years and it never really changes. And it's silly and somewhat meaningless. First of all, reporters don't own facts. Period. It's something that's kind of important to learn if you're going to report on stuff. Hell, for the cemetary clown story, is Taub paying the clown? Of course not, but the story really originates with that guy, not Taub, right?

Furthermore, the idea that original reporting will go away is just silly. In fact, if you look at sites that often start out doing the kind of aggregating and rewriting that Taub complains about, many of them also do plenty of original reporting, and that role keeps growing over time as they realize how important that can be. Just look at the prototypical example of a site that got big by "aggregating" information from elsewhere: BuzzFeed. Yet these days, it has a large and growing "original reporting" staff that often does amazing work. Many people don't realize it yet because they're still focused on the other junk the site produces, but the idea that original reporting goes away is just silly.

But Taub thinks the answer is a "global paywall" where all "real" publications can all team up:

Solution: A Global Pay Wall Across All Sites.

All cooperating media outlets agree to the same pay wall appearing on their sites, with revenue divided behind the scenes.

No fear of a loss of eyeballs to competitors: everyone is behind the pay wall.

Except, no. Not everyone is behind the paywall, because any even halfway entrepreneurial journalist will look at Taub's global paywall and leap for joy over the fact that Taub just cleared the field for competition by taking all those papers out of the open internet. And it's not like this idea hasn't been discussed before.

Taub compares his solution to Spotify and iTunes -- but, again, the industry tried to set up an "iTunes for news" five years ago and it hasn't worked out particularly well. It's just been a bunch of paywalls that haven't really helped. Music and news are very different products. Not realizing the difference in how they're consumed (and what the substitutes are) dooms this particular analogy.

But the real problem here is that Taub is overvaluing the reporter and undervaluing the audience. We've tried to make this point for years, but the whole reason that newspaper businesses were viable in the first place was that they brought together a community of attention, and then were able to sell advertisements against that. That "community" was often local. But the problem today is that there are so many competing communities, made possible by the internet, that newspapers no longer have that kind of monopolistic control on attention.

But the problem with a paywall is that it's actually a barrier to building a community. It's limiting the community and providing less value to the community for more money. Consumers of news today want to be able to share it with others and discuss it. And a paywall gets in the way of that. Thus, you're making the news significantly less valuable, yet expecting people to pay more for it and devaluing the community value that the publication itself needs. Economically, it's stupid.

Here's a better idea: if other sites are getting all the traffic for your stories, maybe look at why the traffic is going to them and see what you can do better to get that traffic directly. There's a reason people went to those other sites rather than the original, and maybe instead of just blaming the evils of the open internet, it's because you or your publication could be doing a better job attracting and keeping a community of interest.

Filed Under: aggregation, antitrust, community, global paywall, journalism, matthew taub, paywall, sharing

Why Internet Access Monopolies Harm Innovation

from the innovation-stifling dept

When antitrust stories make headlines—as the Comcast-Time Warner Cable merger has—even well-intentioned analysis often confuses harm to competitors with harm to competition. Viewing antitrust law through a "competition" lens, as opposed to a "competitors" lens, is not intuitive: consumers are harmed not by being denied access to existing services, but by being denied new ones.

In antitrust law there is a debate, known as Schumpeter-Arrow—based on the initial intellectual adversaries, Joseph Schumpeter and Kenneth Arrow—which concerns whether monopoly power leads to innovation. On the pro-monopoly side, Schumpeter believed that companies with market power have economies of scale and financial stability, which allow them to invest more capital into R&D. By contrast, more competitive firms have to focus their energy—and money—into maintaining their competitiveness. On the other side of the debate, Arrow argued that monopolists have no incentive to innovate. Anti-monopolists preach the gospel that competition begets innovation. Consumers will gravitate towards companies that are offering new and better services.

In reality, each view holds some validity, depending on the specific market at issue. In some markets, market power might have a more positive effect on innovation. For example, in certain markets—usually referring to patents—many believe that monopolies are sometimes necessary. The most commonly mentioned market of this nature is the development of new pharmaceuticals. Pharmaceutical companies claim they need the promise of a monopoly on their work if they are going to invest enormous research dollars into a new drug (whether or not this is actually true is another discussion for another day).

In most other markets, however, monopoly power is likely to do more harm than good. For example, in the market for Internet services, the Schumpeterian view that companies with dominant market power will invest their profits into innovation is both implausible and disproven. As Brendan Greeley wrote in Business Insider:

The utterly consistent position from the ISPs has been this: Guarantee us a higher income stream from a more concentrated market, and we'll build out new infrastructure to reach more Americans with high-speed Internet. A decade ago, this argument had at least the benefit of being untested.

A graph published by the National Communications and Telecommunications Association confirms that consolidation has not resulted in increased infrastructure expenditures.

Using inflation-adjusted dollars, it is clear that infrastructure investment has actually declined:

In sum, with experience as a guide, we know that monopoly power is harmful in the broadband industry.

In addition to monopolization of Internet service, ISPs can also exert market influence over the content that flows over those networks. But the Arrow-Schumpeter model is limited. It simply answers the question of whether less pipe manufacturers results in better or worse pipes. It does not take into account whether there will be less or more water, or what the quality of the water will be. In the network infrastructure industry, where monopoly power means control of networks which operate the Internet, monopoly harm is amplified.

In addition to residential broadband, the other crucially important network is wireless. They are not mutually exclusive. Verizon is both. And it has been reported that Comcast "might try its hand at mobile phone service." Verizon and Comcast have been able to use not just their existing monopoly in Internet service and wireless data to obtain and to maintain monopolies in television, phone service, and other content markets.

Competition would disrupt the incumbents' monopolies in all of these markets. These markets all exist on the Internet, and yet, the status quo allows Comcast and Verizon to charge separately for these markets. In other words, the Internet is, or could be, people's television and phone service as well. There already are Internet-based video and phone service alternatives. For phone service, Skype, Google Voice, and other free alternatives already exist. For "television," there are also numerous services available. YouTube, Hulu, Netflix, and Amazon Prime all have a vast array of content, with different pricing models and delivery methods.

Despite the fact that free or low-cost services are available for video, phone calls, and texting, consumers are still forced to pay individually for cable television, data plans, and calling/texting service. The Internet, in addition to being a gigantic market on its own, hosts the market for everything else. Advertising, banking, and mail are all done online. And entire industries like social media, servers, and coding have been created as a result of the Internet.

Perhaps the best example of the Internet's ability to transfer data for free is WhatsApp. Originally valued at 1.5 billion dollars, Facebook purchased the app for a total of $19 billion. In 2013, WhatsApp saved consumers $33 billion that they would have otherwise had to pay their cell phone carrier. In addition to ISPs and wireless companies, television networks and phone companies profit from the existing business model, where television, land line phone service, and cell phone service takes place without the aid of the Internet.

Having people pay for each individual thing they do online, in addition to diminishing the incredible power of the Internet, also costs consumers. And harm from monopolization—in all industries, not just network infrastructure—is often underestimated. Rutgers Law Professor Michael Carrier calls this "innovation asymmetry," where existing businesses and business-models are over-valued at the expense of yet-to-be-developed technologies.

Carrier notes that new, innovative technologies are often undervalued because they

are less tangible, less obvious at the onset of a technology, and not advanced by an army of motivated advocates. First, they are less tangible. [Moreover, the value of new technologies is] difficult to quantify. How do we put a dollar figure on the benefits of enhanced communication and interaction? . . . Second, they are more fully developed over time. When a new technology is introduced, no one, including the inventor, knows all of the beneficial uses to which it will eventually be put.

The essential problem is that monopolies prevent innovative technologies from reaching the market. The value of the technologies lost cannot be quantified. Carrier notes examples of new technologies initially being undervalued:

• Alexander Graham Bell thought the telephone would be used primarily to broadcast the daily news.
• Thomas Edison thought the phonograph would be used "to record the wishes of old men on their death beds."
• Railroads were originally considered to be feeders to canals.
• IBM envisioned only 10 to 15 orders for the computer in 1949.

In the Internet context, Google, Facebook, and Wikipedia are just some examples of companies that disrupted the existing marketplace.

With Internet service, we have ample evidence of what a more competitive market looks like, and what sort of service consumers could expect with a more open Internet. Many Europeans get Internet at substantially faster speeds for a fraction of the price. In the few cities that are lucky enough to get Google Fiber, users get Internet at exponentially higher speeds at much lower costs.

The existing business model is based on the dearth of competition in the high-speed residential broadband market and in the market for wireless data plans. In the former, Comcast-TWC dominates; in the latter, Verizon and AT&T dominate. In both of these industries, the incumbents have a substantial infrastructure advantage over their rivals, which creates an insurmountable barrier to entry, preventing significant competitors from entering the marketplace. The incumbents further solidify their position through frivolous litigation. As Ars Technica documented, potential new ISPs face a blizzard of lawsuits.

Another area of litigation which solidifies incumbents' market power is copyright litigation. Copyright is a form of artificial monopoly, which allows the owner to exclude others. The paradigmatic example of copyright in action is professional sports. Football and baseball broadcasts are "blacked out" nationally when a game is available in a local market. Comcast profits from sports both directly, through Comcast Spectacor, and indirectly, through NBC's licensing agreements.

When the sword of copyright law is given to companies with market power, the result is that incumbents' market power is solidified and compounded. For example, in June, the Supreme Court essentially ruled that TV-streaming service Aereo had an illegal business model because it violated copyrights. Because copyright damages can be exorbitant, the likely result of the Aereo decision is that investment in new technology companies will be chilled. As Carrier put it, "harms from ambiguous standards used as a litigation hammer are exacerbated by statutory damages and personal liability."

The result of the competitive landscape is that both wired and wireless companies can exploit their monopoly on the network to receive royalty payments from the content which the network hosts. There is a two-fold result: innovation in content markets is stifled and costs of entering the network market become insurmountable. We have ample evidence that consolidation in network infrastructure has harmed innovation, and that further consolidation will result in greater harms.

Filed Under: access, antitrust, innovation, internet access, monopolies, net neutrality
Companies: comcast, time warner cable

Parallel Conduct: How ISPs Make The Consolidated Internet Service Market Even Worse

from the making-monopolies dept

Much of the focus on consolidation in the broadband industry has focused on national market share. The problem is focusing solely on national market share implies that large companies are competing, when they don't. Just because there are multiple companies in an industry doesn't mean those companies compete. This is especially true in the broadband and wireless industries. As Susan Crawford explained

These companies don't have to agree in writing to carry this out or even raise their prices; they can simply, within their separate geographic and product territories, bundle and tie their services, buy up inputs that a competitor might need, and refuse to connect to competitors — among many other potential tactics. It's in their interest for these local monopolists to cooperate, because any defection would make the whole system crumble.

What Crawford is describing is parallel conduct, which is when companies that would otherwise compete create a monopoly-like setting without having to merge or coordinate operations. Parallel conduct in the broadband industry is not hypothetical. In 2011, Comcast and Time-Warner Cable sold parts of the wireless spectrum they owned in exchange for an agreement that Verizon would stop expanding its fiber optic network. Essentially, Comcast and Time-Warner Cable paid Verizon to stop offering new high-speed broadband service. (As part of the deal, Comcast and Time-Warner Cable also further divided up the United States geographically, foreshadowing the merger between the two companies.)

The 2011 agreement also resulted in Comcast and Verizon's "joint marketing campaign," where they are charging identical prices for Internet, television and phone service. In addition to charging the same price for the same service, Comcast and Verizon also would strongly encourage customers to buy service "bundles," of Internet, cable TV, and phone service. The bundles themselves are a potentially anti-competitive form of product tying. In antitrust law, tying is presumptively illegal when tied with market power.

Parallel conduct is not, by itself, harmful. In fact, companies imitating one another often benefits consumers. Google, for example, which is widely considered one of the most innovative tech companies of the last decade, has largely offered new services which are already offered by other companies, such as search (Yahoo), email (Hotmail), and driving directions (MapQuest).

There are two forms of parallel conduct: parallel pricing and parallel exclusion. With parallel pricing, companies can mimic monopoly behavior by pricing their products at the same level. Parallel exclusion is where companies can enter into similar agreements with suppliers or customers. For both parallel pricing and parallel exclusion, it is much more likely to occur in industries where there are fewer competitors, and where those competitors compete less within geographic markets. The result of parallel conduct is that a market with a small number of competitors, an oligopoly, acts as one firm, which is referred to—perhaps euphemistically—as a perfect monopoly.

Tim Wu and C. Scott Hemphill wrote an article arguing that parallel exclusion provides a better metric for antitrust enforcement than parallel pricing. In competitive markets, with lots of competitors and low profit margins, companies are forced to price their goods and services at the same price. However, in consolidated, noncompetitive markets, companies may also price goods similarly, through an agreement, explicit or implicit, to reduce competition. If companies are pricing similarly, there is no way to know if that is the result of a competitive marketplace or collusion. Punishing companies that are pricing similarly as a result of competition would be counterproductive.

The deal between Comcast, Time-Warner Cable and Verizon is the most pernicious form of parallel conduct: an exclusionary price control agreement between corporate behemoths. Granted, the agreement isn't exactly news. It happened in 2012. But the Comcast-Time Warner Cable merger has changed the competitive landscape in the industry. Absent the agreement between Comcast, Time-Warner Cable and Verizon, the number of truly national high-speed broadband providers would have gone from two to three. Post-merger, it will go from two to one.

Filed Under: antitrust, market power, monopolies, net neutrality, oligopolies, parallel conduct, pricing
Companies: comcast, time warner cable, verizon