Convergences

FCC & Broadband Policy: Learning from History

As the FCC strains to produce a National Broadband Plan, it should recall some history, and be humble.

[I]n 1872, a committee on railroad amalgamation was appointed. . . . [A]fter taking a vast amount of evidence, they proceeded to review the forty years of experience. . . .  They showed with grim precision how, during that period, the English railroad legislation had never accomplished anything which it sought to bring about, nor prevented anything that it sought to hinder. The cost to the companies of this useless mass of enactments had been enormous, amounting to some L80,000,000; for these were 3,300 in number and filled whole volumes.
   -- Charles Francis Adams, Railroads: Their Origin and Problems (1878), pp.89-90.

The decision was made not to borrow trouble, as the old phrase goes, but to let the system "develop itself in its own way," and act only in response to actual problems, which worked quite well.

Speaking of Net Neutrality . . .

I. L Sharfman, Railway Regulation (1913), pp. 23-25:

            RAILWAY DISCRIMINATION AND THE PUBLIC WELFARE

The danger as well as the injustice of discriminatory practices cannot be overemphasized. If our industrial life is to reach its natural and most efficient economic development, there must be freedom of enterprise and fairness of treatment for all persons, all sections, and all undertakings. In a sense, transportation is a fundamental industry underlying all others, for it is essential to the conduct of all business and goes far towards determining the direction and conditions of industrial activity. The item of transportation, whatever it may be, is one of the elements in all costs, and the outcome of competition between different producers may be largely affected by any divergence in railway rates which must be paid by each of two or more competitors. It follows clearly, then, that the railway officials who make transportation rates exercise a tremendous power.

By the soundness of their adjustment of rates and by the degree of fairness with which established rates are observed, the railways may profoundly affect—or, even absolutely determine—the prosperity of individuals, of industries, of cities and towns, or of entire sections of the country.

By discriminating between competing shippers, they may destroy the business of one and build up that of another, making one man rich and another poor.

By stimulating or discouraging a particular class of traffic, they may increase or diminish the importance of industries and the extent of production in particular lines of commerce, thus shaping the direction of industrial activity.

By discriminating among cities and towns, they may cause one to grow and another to decay, and thus determine the commercial importance of business centers.

By modifying their rate schedules in special instances, they may determine the location of industries, guide the movements of population, and affect the prosperity and welfare of extensive localities.

By these unfair practices the railways also have it within their power to build up industrial monopoly; and the most powerful of the trusts against which the people are now struggling made their first advances towards control of the market through the agency of special favors in the form of railway discriminations.

Free Association about Chrome OS

Last week, Google announced its new netbook Web-focused operating system -- Chrome OS, to match its browser. The OS will be open source, a variation on Linux, so Google will be able to tap into the strength of that community from the get-go, and of course free ride on the  work supported by IBM, HP, and the other tech companies who fund Linux.

There is a lot of cross-talk in the press and web about how this is or is not a deadly or minor threat to Microsoft's core Windows business, done with or without deliberate malice by Google, and how it is a disruptive or minor innovation that can be extended up the value chain (unless it is not), and how Microsoft must be very worried or perhaps highly amused.

The day before, I was at Google's DC office to hear Chris Anderson talk about his new book Free: The Future of a Radical Price. One point he made is that there is a big psychological distance between "free" and even a trivial cost and that the business models of the future must cater to this. This does indeed seem to be a pre-occupation of the tech world, which thus assumes that Google's free OS should sweep the board, except of course for the power of those Microsoft people who seem to cheat by charging for their products.

Anti-Industrial Policy

H.R. 2743, the Automobile Dealer Economic Rights Restoration Act of 2009, has 230 co-sponsors. The CRS summary:

 Prohibits an automobile manufacturer (manufacturer) in which the federal government has an ownership interest, or which receives loans from the federal government, from depriving an automobile dealer (dealer) of its economic rights. Requires the manufacturer to honor those rights as they existed for Chrysler LLC and General Motors Corporation dealers prior to the commencement of the bankruptcy cases of each corporation, including dealer rights to recourse under state law.

Requires the appropriate manufacturer to restore the franchise agreement between the dealers and Chrysler LLC or General Motors that was in effect prior to the commencement of their respective bankruptcy cases, and to take assignment of such agreements.

One of the companies' problems is an antiquated dealer network, long protected by state laws, that siphons money from both consumers and manufacturers.

The information revolution, the Internet, and the rise of overnight delivery have created a desperate need to re-structure, something that would readily occur by private contract absent the meddling of governments. So Congress is announcing that wherever the power of the Federal Government extends, no such industrial restructuring will occur.

Perhaps Congress did not read GE CEO Jeff Immelt's column yesterday on the importance of our industrial base. It certainly has not read my piece on the coming crack-up of the Special Interest State.

Antitrust Non-News

FTC’s Bureau of Competition today highlights on its website a quotation from the Supreme Court’s opinion in Topco v. United States (1972):

Antitrust laws...are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. – Justice Thurgood Marshall, US v. Topco (1972)

The sentiment is common, but it’s application in the context of Topco was risible.

A group of 25 small/medium regional supermarket chains, with an average market share of 6% in their areas, set up a cooperative purchasing agent to enable them to achieve efficiencies comparable to those of the three big national chains.  A part of the structure was creation of private label products, and in connection with this the coop members got territorial exclusivity for the label. That is, one member could extend into another’s territory, and they often did so, but the invader could not use the Topco private label in the extension.

The district court held for Topco on the ground that the private label program was an essential and reasonable way for the small chains to compete with the large ones, but the Supreme Court would have none of it. This was a horizontal restraint, so even though it was in fact pro-competitive the Court would hold it illegal because the Court had long ago decided that horizontal restraints are always anti-competitive, and it does not want to get into the jungles of economic analysis.  (Despite the fact that the Court’s original conclusion that horizontal restraints are always anticompetitive was itself an a-empirical product of abstract reasoning, not the fruit of experience.)

Broadband News

Conferences and reports on the future of broadband probably deserve their own SIC code, but the latest is given some piquance because a co-author is Phil Weiser, the new Deputy Assistant Attorney General for International, Policy and Appellate Matters in DOJ's Antitrust Division.

The report is on a recent Roundtable on the End of Scarcity, Open Architecture, and the Future of Broadband Competition Policy (June 2009), conducted by the Information Technology & Innovation Foundation (ITIF) and the Silicon Flatirons program of the University of Colorado, written by Robert Atkinson for ITIF and Weiser for SF.

A few areas of agreement were noted – that targeted subsidies could be use to ensure access for all, and that the “middle mile” is an important constraint – but the most interesting part is the "questions left on the table for further discussion”:

 1) The participants were uncertain or differed about “the nature of broadband competition, the level of competition, and the role of next generation wireless networks”;

2) Consensus was lacking on the “optimal nature of network management” and on whether control should lie with the consumer or the ISP;

3) There was no consensus on the best strategy to ensure that broadband providers “continue to provide robust and growing levels of basic best efforts access.”

That these questions were left on the table is not a surprise, since that is where they have resided for as long as there has been an Internet, or perhaps even a telecom industry. The real issue is how to create mechanisms to resolve them, perhaps not permanently, but with enough certainty that the tech world can progress.

XM Sirius and the Antitrust Goldfish Bowl

A friend is fond of quoting the factoid "a goldfish has a short-term memory of six seconds, so every trip around the bowl is a new experience."

Antitrust partisans suffer from the same condition. Earlier this week, Sirius XM avoided, or perhaps only postponed, bankruptcy. Yet up to only eight months ago, when the companies were finally allowed to merge, endless time and money was spend on hand-wringing over the potential monopoly power of such a merged entity. And conditions were imposed that seriously impact the survival capacity of the merged entity.

Even before this most recent round, when satellite radio was first set up the FCC, prodded by various paladins of "the public interest," insisted that there be two companies. Competition with entrenched existing radio, the Internet, and personal devices was not enough. It was essential that two satellite providers be pitted at each other in ruinous prices wars and talent payments that would ensure that neither achieved a sound financial footing. We call this "competition policy."

All of this has gone down the memory hole. As a big fan of satellite radio, I want an apology from all the meddling fools who have brought this great service to the brink of ruin.

FTC Patent Hearings

There is a general expectation that patent reform will return to the Congressional agenda next year, so the Federal Trade Commission has put itself at the head of the hearings queue.

On Dec. 5, it "will hold the first of a possible series of public hearings to explore the evolving market for intellectual property (IP). . . .  The FTC will examine changes in IP law, patent-related business models, and new learning about the operation of the IP marketplace since the issuance in October 2003 of the Commission report To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy."

The Chief Judge of the Federal Circuit will give a keynote address, and three panels will address developing business models, recent and proposed changes in remedies law (including their impact on innovation and consumers), and legal doctrines that affect the value and licensing of patents, such as the recent Supreme Court cases on obviousness, declaratory judgment and exhaustion, and doctrines that make the scope and enforcement of patents unpredictable.

Comments will be open until February 5.

The Ghost of Antitrust Future

Truth in Markets looks at Obama antitrust.