antitrust — VOICES for REASON

As soon as I spied the headline in the Wall Street Journal, I knew it was only half the story. “AT&T to Buy Rival in $39 Billion Deal,” it said, followed by a story describing an agreement between AT&T and T-Mobile, the second- and fourth-largest wireless carriers in the country.

I paged through the paper, waiting for the other shoe to drop. And there it was, on Page B1: “T-Mobile Deal Faces Antitrust Barriers.” Turns out the two companies need permission to merge from at least three government agencies: the Federal Communications Commission, the Justice Department, and the Federal Trade Commission.

So, the “deal” wasn’t really a deal. It was more like a very complicated, very expensive petition for Uncle Sam’s permission to do a deal. What that means is that AT&T and T-Mobile don’t have freedom of contract. They don’t have the right to make the final decision on whether to merge.

It’s not just big companies that lack freedom of contract. Think about it: how many contracts in your own business or profession require prior permission from a bureaucrat? How many deals require the parties to be licensed? How many projects require a special permit, or certificate of need? How many exports must satisfy a quota? How many deals have to be crafted so as not to draw government attention? And perhaps most important of all: How many deals don’t make it past the back-of-a-napkin stage because permission would be too hard to get?

I think of it this way: the number of government permissions needed for private parties to go about their business is one measure of how far our legal system has moved away from freedom of contract. We wouldn’t tolerate such interference with our freedom of speech. Why do we so often tolerate it when it comes to voluntary contracts?

One of the commenters on my recent Investor’s Business Daily op-ed argued that if antitrust law were abolished,

we’d ultimately regress to the big monopolies we had a century or so ago. Those big monopolies were a problem, to say the least. Monopolies are good only for the monopolizing entity and they are bad news for everybody else . . . .

I’m here to say that the widespread fear of monopolies is based largely on historical myths. My colleague Alex Epstein has written extensively on what is generally regarded as the biggest, baddest granddaddy of all monopolies: Standard Oil. If you’re troubled by scary notions of what might befall the consumer on a free market without antitrust laws, you should read his article, “Vindicating Capitalism: The Real History of the Standard Oil Company.”

I can’t repeat all the factual documentation Alex assembles, but here’s a passage that summarizes an important point:

The fact that Standard Oil faced such stiff competition and was driven to expand output and lower prices even further demonstrates the myth of Rockefeller’s “control” of the market. Markets are not possessions that one can acquire or control. They are dynamic, evolving systems of voluntary association, in which competing producers have no ability to force customers to buy their product, nor any ability to prevent others from offering their customers superior substitutes. The expression “control a market share,” translated into reality, means simply that at a given time one has persuaded a given group of individuals to buy one’s product—a state of affairs that can quickly change if someone offers a superior substitute. Read the rest of this entry »

In Investor’s Business Daily, my colleague Tom Bowden writes:

Apple Computer, which for decades played second fiddle to Microsoft, has achieved the unthinkable. Not only has it surpassed Microsoft as the nation’s biggest tech company (in terms of market capitalization), but it’s now poised to displace Exxon Mobil as the nation’s largest company.

With Apple’s crowd-pleasing success has come antitrust scrutiny. Both the Justice Department and Federal Trade Commission are investigating Apple’s business practices. News reports of antitrust enforcers’ “keen interest” in Apple are reminiscent of how Microsoft was targeted back in the 1990s, for the sin of packaging Web browsers and media players with its popular Windows operating system.

Said one former FTC official: “Apple is playing right out of Microsoft’s playbook — and it’s one they complained about a lot.”

Why is one of America’s most admired and successful companies caught in the prosecutorial cross hairs?

Read the whole thing here.

The Wall Street Journal recently featured a debate on the subject of “Is Google a Monopolist?” I agree with Amit Singhal, who defends Google as an innovative company for whom “competition is literally just one click away.”  But I would like to make an additional point in response to the “Google is a monopolist” argument of Charles Rule, an attorney whose firm represents corporations suing Google. Mr. Rule contends that since some of Google’s leaders once supported the antitrust case against Microsoft for market dominance, then they should acknowledge that “Google’s overwhelming dominance” is also illegal. Rule writes: “Failing to apply antitrust rules evenhandedly–particularly to politically well-connected monopolists like Google–would neither be just nor promote the cause of free-market capitalism.”

Actually, yes it would. Ever hear of the expression “Two wrongs don’t make a right”? It was completely wrong for the government to persecute Microsoft for adding a free web browser to its wildly successful operating system, and it is completely wrong for the government to persecute Google forchoosing its own prices and terms for its market-leading advertising services. As I wrote in: “An antitrust case against Google: a threat to free competition”:

All of this talk of Google’s power makes Google sound like a menace to competition and customers. But let’s take a closer look at this power, to see where it comes from, and whether it’s good or bad.

Through incredible technical innovation and brilliant management and marketing, Google has created by far the most popular search engine on the planet, earning hundreds of millions of users. Through additional innovation, it has created the AdSense program, which has enabled millions to engage in highly profitable advertising to the user-base Google brought together. Because Google offers customers an unmatched advertising audience, it has the power to charge higher prices and demand more favorable terms than, say, a less-popular search engine can. For example, Google holds expensive auctions for top keywords. Or, to take another bugaboo of Google opponents, the company has an at-will customer policy that allows them to drop any customer at any time (such as the many outfits that have tried to defraud Google) without the onerous legal obligation to explain themselves case-by-case.

Google’s prices and terms, denigrated as “overcharging” and “unfair,” are in fact earned. And Google’s power to demand them exists only insofar as it continues to offer superior value to its competitors. The second AdSense stops making financial sense to advertisers, Google will see its so-called monopoly position disappear. Clemons and others note that it will be hard for a competitor to overtake Google in search and advertising–but that just proves how much value Google brings to the table relative to anyone else. This is grounds for admiration for being a superior competitor–not prosecution for being “anticompetitive.”

So long as Google has no power to force consumers to use its products and no power to prevent competitors from offering competing products of their own, it can pose no threat to the competitive process.

There is, however, one player in today’s market that can thwart competition: the government. By using the vast and arbitrary political power given to it by antitrust law, the government can forcibly control successful companies like Google and Microsoft, telling them what products they can sell, what markets they can enter, what prices they can charge.

As for any hypocrisy in Google’s stand, that should be resolved, not by sinning twice against free competition, but by defending it clearly and on principle. Quoting my article again:

In recent years, competition has been perverted by an embarrassing series of skirmishes in which industry leaders like Google and Microsoft defend their own dominance as being earned and beneficial, but declare that the dominance of others is “anticompetitive” and in need of government prosecution. But it’s not too late for someone to stand up on principle. So Google, Microsoft, and everyone else: “Don’t be evil.” Stand up for true freedom of competition in high-tech.

Image: Wikimedia Commons

The other day I blogged about an antitrust class action suit against Apple and AT&T, relating to Apple’s hugely successful iPhone. That post was based on press reports. I’ve now had a chance to read the plaintiffs’ complaint as filed in court, and a subsequent court decision. They provide interesting detail, but the basic injustice of this antitrust case remains.

As I mentioned in my earlier post, Apple sells “locked” iPhones. That means they work only on AT&T’s network. Consumers know the phones are locked into one network—there’s no mystery or fraud involved.

Okay, so what about the plaintiffs in this class action? They managed to scrape together enough money to buy iPhones and enter into two-year contracts with AT&T. They used their phones for the full two years. Then their contracts expired. Now they want to unlock their phones and use them on T-Mobile or some other network. There’s only one small problem with that—their individual software license agreements with Apple forbid such tampering. That’s not to mention violation of Apple’s software copyrights. But none of that bothers the plaintiffs and their class action lawyers.

Elsewhere, I have called antitrust laws a “war against contract,” and this case is a perfect illustration. These plaintiffs don’t want to be bothered with the contracts they signed. “I promise” means nothing to them. Instead, they assert what amounts to a divine right of hacking—to be achieved with the help of the infamous Sherman Act.

Here’s the plaintiffs’ legal theory: Apple and AT&T are monopolizing the so-called aftermarket for the iPhone. This “aftermarket” is not to be confused with the market for smartphones—that’s a huge market in which Apple is a significant but by no means dominant player (Blackberry, anyone?). No, the “aftermarket” amounts to the various ways of hacking the iPhone to make it work outside AT&T. Do you get this? Since the only way you can keep making calls on an iPhone after two years is sign up with AT&T for another two years, that’s evidence the companies are “monopolizing” the “aftermarket.”

Now you might say, wait: This “aftermarket” sounds more like an illegal enterprise than a market. If licensing agreements forbid unlocking, then why would the law protect an “aftermarket” devoted to unlocking? Well, in the wonderland of antitrust, anything is possible. If this class action is successful, Apple and AT&T may have to pay damages and abandon their policies against unlocking.

So much for sanctity of contract, which is but a distant memory in American law.

Image: WikiMedia Commons

In California, a federal judge has ruled that an antitrust class action suit can proceed against Apple and AT&T. What have those companies done to warrant being hauled into court? Basically, they agreed to sell only “locked” iPhones. A locked phone is one that works only on a specific mobile network—in this case, AT&T’s network.

So, let’s get this straight. Both Apple and AT&T want to make money. Apple makes money by creating cool mobile devices like the iPhone—creating, as in designing and manufacturing phones that didn’t exist before Apple’s brilliant designers and engineers thought of them. AT&T makes money by creating a mobile phone network–creating, as in erecting a complex array of electronic equipment capable of transmitting messages from handheld phones, a network that didn’t exist before AT&T created it.

Then Apple and AT&T decide to make money by working together. Although details of their deal aren’t public, it’s clear that AT&T saw an opportunity to increase its subscriber base by becoming the only retailer of iPhones. Apple, for its part, looked forward to receiving payments from AT&T based on a percentage of every iPhone subscriber’s monthly bill. Was this collaboration a good idea? You be the judge: consumers have bought 50 million iPhones in three years. Read the rest of this entry »

I originally started this post by writing: “Apple and Adobe are at war.” But they’re not—not yet, anyway. At this point—as long as antitrust authorities stay out of the way—Apple and Adobe are engaged in economic competition, not war.

The disagreement between the two companies centers on the place of Adobe’s Flash technology on Apple’s mobile products such as the iPhone, iPod, and iPad.

Much of the Internet’s video was created with Adobe’s proprietary Flash software, but those videos won’t play on Apple’s mobile products. Why? Because Apple refuses to allow Flash and has effectively barred developers from creating “apps” using Adobe’s software. CEO Steve Jobs has a 1,671-word explanation of Apple’s policy here. It’s filled with evidence that keeping Apple’s products Flash-free will enhance operational speed, battery life, security, and error-free functionality. Adobe disagrees.

Putting the technicalities aside, my point is this: It’s Apple’s prerogative to set the terms for software development on Apple’s own products. Disagreements among competitors are settled on the free market by persuading individual customers that a particular product will satisfy their own needs. Over time, technologies succeed or fail accordingly. Gasoline engines win, steam engines lose. VHS tape wins, Sony Betamax tape loses. CDs win, cassette tapes lose. Some businesses make money, others go bankrupt.

Now, however, news reports indicate that a real war is about to break out between Apple and Adobe—not with guns and bombs, but with the politer kinds of physical force that government regulators wield: fines, penalties, and jail terms. Adobe, it is rumored, wants to force its way into Apple’s devices by threat of prosecution for violating America’s antitrust laws.

Will antitrust enforcement give Adobe the revenues it couldn’t earn on a free market? Stay tuned …

Image: WikiMedia Commons

Commentators are aghast at the defense mounted by Intel, the leading manufacturer of computer chips, against the $1.45 billion fine levied by the European Union earlier this year for antitrust violations. The New York Times scoffed at Intel’s “bid … to raise sympathy among American antitrust regulators for a poor, abused American near-monopoly,” and one industry commentator sneered at “Intel’s ridiculous antitrust defense,” calling it a “novel—and frankly outrageous—stratagem.”

What is this legal strategy of Intel’s that is attracting such scorn? It is the assertion that Intel, a corporation, has a right to the same due process of law that individuals have. Intel’s argument, as summarized by the Times, is that corporations “are entitled to the due process rights that European human rights law grants in criminal cases to ensure that the accused—usually powerless individuals—are not steamrollered by the overwhelming power of the state.” Those due process rights were violated, Intel alleges, by the European Commission, which “unfairly plays the role of prosecutor, judge, and jury.” Read the rest of this entry »

The provocatively titled column “Munchausen Mommies of Antitrust,” by the Wall Street Journal’s Holman Jenkins, is a must-read. In fact, just about everything by Jenkins, who brings a rare combination of facts and insight to every week’s Business World column, is a must-read.

Read the rest of this entry »

Will Google follow in Microsoft’s footsteps and become the target of antitrust prosecution? In a recent article on the influential and popular blog TechCrunch, Wharton professor Eric Clemons argues that it could-and should.

Clemons’s argument, despite its considerable length and its use of multiple case studies and technical diagrams, can be summed up rather straightforwardly: Google is abusing the “market power” gained from its dominant search engine–by “overcharging” advertisers who want access to its search engine’s users. Clemons flatly asserts that “Google enjoys monopoly power over corporations that participate in its keyword auctions.” And: “Google is abusing its monopoly position by overcharging corporations for access to consumers.”

All of this talk of Google’s power makes Google sound like a menace to competition and customers. But let’s take a closer look at this power, to see where it comes from, and whether it’s good or bad Read the rest of this entry »