Information, Innovation, and Competition Policy for the Internet

1. Information, Innovation, and Competition Policy for the Internet Howard Shelanski FTC University of Colorado February 11, 2013 DRAFT

2. *Disclaimers • I am speaking in my personal capacity, not as an official of the FTC. My remarks are my own and are not on behalf of the FTC or any Commissioner or officer thereof. • My remarks should not be taken to apply to any actual investigation before the FTC or to signal in any way the direction the FTC might be taking in those investigations.

3. Digital Industries: A Focus of Competition Enforcement • EU and US investigations of Google • E-books price fixing case against Apple and others • Google/ITA merger investigation • Patent portfolio acquisitions by Apple/Microsoft et al. (Nortel patents) and by Google (Motorola patents) • Etc.

4. What are Digital Platforms? • Products or services that connect consumers with providers of a wide variety of “on line” products, services, or information (“applications”) that go well beyond the specific product or service that constitutes the “platform” itself. • Devices (e.g. phones and tablets), software (e.g. operating systems and browsers), and services (e.g. search, social networking, and e-commerce) may all be digital platforms.

5. Vertical Conduct and Mergers are Key Issues for Digital Platforms • Mergers, particularly vertical acquisitions. • Vertical discrimination • Conditional refusals to deal

6. Characteristics of Digital Platforms • Potential amplification of market power • gateway to a very broad universe of products and services; could affect many markets. • Network, feedback, and lock-in effects • a platform’s comparative appeal to consumers might rise with the number of users, possibly entrenching market position. • Continuous Innovation • Innovation is the production process

7. Characteristics, cont’d • Platforms are multi-sided • They must consider how decisions affect their customers on different sides of the market .

8. Characteristics, cont’d • Information rules • Customer information is an important input of production • Access to customer data becomes a strategic asset • Information can be a medium of exchange between platforms and consumers

9. General Characteristics of Technologically Dynamic Markets • Market shares may change rapidly and unpredictably • Competition may be innovation-based rather than price-based • Competition might be more for sequential monopoly than for simultaneous market share • Longitudinal rather than horizontal competition • Sources of entry are less predictable

10. Challenges for Competition Policy • The characteristics of digital platforms create additional challenges for competition policy: • Markets harder to define • Price and output effects harder to gauge and less important than some non-price effects • Link between market structure and performance less systematic • Harder to distinguish horizontal and vertical effects

11. Error-Costs and Enforcement • The above challenges have led some to argue that the error-costs of antitrust intervention in digital markets are too high • Might deter innovation • Market will be different by time action is taken • Anticompetitive harms to the market will be short-lived • As a result, they argue that the risks of over-enforcement are higher than the risks of under-enforcement.

12. Possible Policy Responses • The above difficulties have led a number of influential commentators, particularly in the U.S., to advocate a broad retreat from antitrust enforcement in digital platform markets. • Over-enforcement errors are likely, and less likely to be undone by the market than under-enforcement errors • Others have advocated strong regulatory oversight of digital platforms • Under-enforcement will entrench monopolies and over-enforcement errors are unlikely to diminish innovation incentives.

13. Limitations of the Error Cost Argument • Partly rooted in traditional price effects framework • Incomplete analysis of innovation and incentives • Does not account for important non-price effects related to customer data • => under-counts under-enforcement costs • => over-estimates likelihood of over-enforcement errors

14. Reasons for Caution: Lessons from Actual Experience • Cautionary tales • Telecommunications Act of 1996 and emphasis on a vanishing market for local, land-line, voice communications • FTC’s investigation into the Google/Admob Merger • Reasons to persist • Microsoft • Thoratec/HeartWare merger challenge

15. A Different Approach • Modesty in application of conventional antitrust analysis is warranted, but the policy prescription should not end there • Can antitrust enforcement be refocused in ways that reduces errors of both under-enforcement and over-enforcement in digital platform markets?

16. Some Possible Changes • Disruptive innovation is something incumbents will have incentives not just to outrun (a good incentive), but also something they will have incentives to impede (a bad incentive). • Take seriously innovation-blocking activity. • Raising rivals costs (e.g. API allegations against Google) • Limiting access and imposing switching costs • Free riding (e.g. “scraping” allegations against Google) • Deterring innovation by others and reducing own need/incentive to innovatie

17. Changes, cont’d • Take seriously the role of customer information • Information as the relevant product in mergers and in (anti)competitive conduct • Information as something that can be used to benefit consumers, or not • Can competition drive better use of customer data? • Information as something that can be protected better or less well • Can competition drive better privacy and data-security policies?

18. Implications for Competition Policy for Digital Platforms • What not to do • Presume market power from market share • Overemphasize price effects • What to do • Look at interference with innovation by others: Monopoly maintenance through innovation blocking/stealing and acquisitions • Look at customer traffic as key asset • Look at use and protection of customer information as a competitive effect