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The Corner Newsletter, August 23, 2018: Why the Paramount Consent Decrees Matter —Tech Giants Threaten Banking — An Overlooked Dissent at the FTC

Welcome to The Corner. In this issue, we argue that the Department of Justice should continue to prevent movie studios from buying theater chains. We also examine the potential harms of Facebook and other tech giants getting into the banking business, or simply into your bank account. And we look at why a lone dissent in an obscure FTC case is much more than it may first appear.

August 24, 2018  |  by Open Markets

Open Markets Files Comments for FTC “Hearings on Competition and Consumer Protection in the 21st Century”

This past Monday, the Open Markets Institute filed three comments to the Federal Trade Commission for their upcoming “Hearings on Competition and Consumer Protection in the 21st Century.”

The first comment calls for the FTC to use existing legal precedents as well as “its full suite of legal authorities (under the Sherman, Clayton, and FTC Acts) to challenge anticompetitive mergers and exclusionary conduct and protect and restore fair, competitive markets.”

The second comment criticizes the flaws in merger enforcement and proposes some solutions.

The third argues that the FTC “should start tackling the power of employers and stop targeting … workers’ attempts to organize and build power in labor markets.”

The Freedom From Facebook coalition also submitted a comment calling on the FTC to use its 2011 consent decree with the technology giant to tame its power.

You can read the comments here.

Lights, Camera, Monopoly: DOJ Could Revive the Studio System

The Department of Justice this month announced plans to review the once famous “Paramount Decrees,” enacted in 1948 to halt vertical integration and anticompetitive behavior in the movie industry. The effort is part of a larger review of nearly 1,300 legacy antitrust decisions to assess their present-day relevance.

A few days after the DOJ’s announcement, Amazon expressed interest in purchasing Landmark Theatres, an example of the very same vertical integration the Paramount Decrees sought to quash.

The Paramount Decrees were a response to the growing power of the Big Five studios (Paramount, MGM, Warner Bros., 20th Century Fox, and RKO Pictures) over the post-War movie industry. From the writers and directors that created the films to the theaters that showed them, the Big Five controlled each step of the process. To break this oligopoly and establish a more open and competitive market for films, the DOJ sued all major studios for a variety of illegal trade practices, including discriminating against independent theaters and forcing theaters to purchase a group (or “block”) of movies from studios, regardless of their quality. The settlement forbids studios from owning movie theaters, and bars a number of other anticompetitive practices. What followed was the end of the so-called “studio system” and immense growth in the number of independent filmmakers and studios.

A DOJ decision to end the Paramount Decrees would allow major studios to buy up theater chains and impose the same anticompetitive practices on filmmakers and consumers barred 70 years ago. More troubling is that this would come at a time of increased concentration in the studio, movie theater, and online distribution markets. Disney’s recent purchase of 20th Century Fox means that four corporations now control 75 percent of the movie production business. In theaters, three firms now control 60 percent of the domestic market. Online, two companies dominate the streaming market, where 30 percent of consumers report using Amazon Prime Video and 50 percent report using Netflix as of 2017.

Landmark only has around 50 theaters in 27 markets, making it a tiny player in the overall cinema business. So at first glance, an Amazon play for Landmark may look like a minor event, unlikely to set off any alarm bells with antitrust agencies.

But three factors make the deal of potential concern to both filmmakers and film viewers. First, Landmark has long specialized in showing the sorts of independent and foreign films that mass-market chains like AMC and Lowes tend to ignore. Second, in many specific cities, such as Washington, Landmark entirely dominates the market.

Third, Amazon is moving fast to grow its business of producing its own films, including such hits as “Manchester by the Sea” and “The Big Sick.” Many Hollywood observers believe Amazon’s main goal in targeting Landmark is to be able to promote its own films over those of independent filmmakers and rival studios. As one former studio executive put it, Amazon’s move is just “about having a theater chain that will take their movies.”

Amazon’s strategy here appears similar to the one it used to dominate the book market. In that instance, the corporation leveraged its leading position in online sales to build a dominant position in book sales; Amazon sells more than half of all physical books and 90 percent of e-books in the U.S. That, in turn, gave Amazon the ability to largely dictate terms to publishers, which rely on the corporation to get to market. It also allowed Amazon to integrate into publishing (both its own imprints and so-called “self-published” books of independent authors). And it allowed Amazon to integrate into physical retail, with a rapidly growing list of outlets across America, including many in former locations of Barnes & Nobles and Borders.

This interlocking, vertically integrated system of control over both book authors and publishers and book retailing creates numerous conflicts of interest that prevent Amazon from serving as an honest broker of other peoples’ books. Given Amazon’s immense and growing power over the production and retail of films, the same is likely in store for filmmakers and film viewers.

In announcing the plan to review the Paramount consent decrees, Assistant Attorney General for Antitrust Makan Delrahim said that “much has changed in the motion picture industry since” the Paramount Decrees. That’s true. In many key respects, the film industry is more concentrated now than it was in 1948.

The review of the Paramount decision is also a key test of Delrahim’s stated principles in the case he brought to block AT&T’s takeover of Time Warner. The DOJ has repeatedly claimed that it opposes AT&T’s effort to buy Time Warner because the vertical integration of AT&T’s distribution platforms and Time Warner’s news and entertainment content would give AT&T both the power and incentive to manipulate these markets in ways that would harm the interest of viewers. (Read the Open Markets amicus brief in support of the DOJ’s position.)

The minimum degree of consistency would require Delrahim both to oppose any Amazon attempt to purchase Landmark and to keep the Paramount decrees in place. If anything, the DOJ should be moving to break off Amazon’s movie production and book publishing businesses from its online sales platform, in the same way that it is seeking to keep AT&T and Time Warner separate.

ANTI-MONOPOLY RISING:

  • On Monday, eight fast food chains signed an agreement with Washington State Attorney General Bob Ferguson to stop franchisees from enforcing “no-poaching” agreements designed to prevent workers from moving from one outlet to another within the same chain.
  • Sen. Elizabeth Warren, D-Mass., recently released two new pieces of legislation: The first aims to give workers more power within corporations, while the second is a set of anti-corruption measures, including one that would prevent members of Congress and White House staff from owning individual stocks.

? WHAT WE’VE BEEN UP TO:

  • Sarah Miller spoke to Fox Business about why Facebook ought to be broken up to restore competition among social media companies.
  • Barry Lynn explained to MSNBC’s Chris Hayes that while he wants conspiracy theorist Alex Jones to “burn in hellfire” we also “have to have a conversation about the power of these corporations [like Google and Facebook] to create an Alex Jones in the first place.”
  • The Financial Times’ Colby Smith noted Lina Khan’s recent move to the FTC, and cited her Yale Law Journal article, “Amazon’s Antitrust Paradox,” as an example of an “advocate[] for the antitrust explanation” for why workers’ wages have stagnated. And Bloomberg Quint recommended reading the article in preparation for the Federal Reserve’s upcoming discussion of market power and political economy at its annual Jackson Hole conference.
  • In its article discussing breaking up Amazon, Salon cited Lina Khan’s “Amazon’s Antitrust Paradox,” and quoted Sandeep Vaheesan explaining how essential Amazon is to online commerce.
  • The Flathead Beacon quoted Barry Lynn’s 2012 Harvard Business Review paper where he wrote, “The great effervescence in America’s beer industry is largely the product of a market structure designed to ensure moral balances, one that relies on independent middlemen to limit the reach and power of the giants.”
  • Open Markets’ amicus curiae brief to the Court of Appeals for the D.C. Circuit urging it to overturn a lower court decision allowing AT&T and TimeWarner to merge was covered by Rapid TV Newsand Oakland News Now. Read the brief, which points out that the merger would give the powerful distributor AT&T essential content that it could use to hurt competition, here.
  • Politico’s “Morning Agriculture” newsletter shared Claire Kelloway’slatest Food & Power article, which pointed out how an increasingly consolidated, distant agricultural lending industry hurts farmers.

There’s Nothing to Like About Facebook Wanting Financial Info

Earlier this month, The Wall Street Journal reported that Facebook had asked major banks for their customers’ personal financial information and history, including checking account balances and card transactions, reportedly to allow users to access banking customer service functions from its Messenger app. The Journal article was similar to a reportby American Banker last year.

In a statement to Open Markets, Facebook disagreed with the Wall Street Journal’s implication that it was “actively asking” for customers’ financial information, and claimed that it would not use the information for advertising: “Like many online companies with commerce businesses, we partner with banks and credit card companies to offer services like customer chat or account management.”

Whatever Facebook’s intentions, its inquiry touches on a trend: technology platforms increasingly looking to enter the financial industry. Amazon has been experimenting with various ways since the late 1990s to act as a payment processor, credit card, and even commercial bank. News broke in May that Apple and Goldman Sachs were partnering to offer a credit card. And Google has flirted with mobile payments via its Google Pay app.

Done right, better integration between banks and online communications platforms could prove to be of real value, making it easier and cheaper to buy and sell online. Think of PayPal, for instance.

But done improperly, the integration of banking and platform monopoly can result in all sorts of harms to individual citizens and the public as a whole. One potential problem is first-degree price discrimination. Knowing how much money is in a person’s account, and what that individual likes to purchase and when, can make it easier for a corporation like Amazon or Uber to manipulate the price it charges that individual for a particular good or service.

Another potential problem is race and class discrimination. As the mathematician and author Cathy O’Neil has argued, and ProPublica reporters Julia Angwin and Terry Parris, Jr. have shown, big technology platforms can use algorithms and vast caches of data to offer loans or other financial products based on factors that are not obvious to customers. Indeed, the Department of Housing and Urban Development recently filed a lawsuit against Facebook for enabling violations of fair housing laws.

Already, in China, the government is using platform monopolies like Alibaba and Baidu to collect information on individual citizens, which it then turns into a “social credit score” that it uses to determine whether to allow individuals to travel or receive certain forms of healthcare, as Open Markets’ Matt Stoller has warned about in BuzzFeed.

Facebook’s collection of personal financial information also raises obvious concerns for a corporation that has repeatedly abused its custody of data, or simply failed to do a good job of protecting the personal information and secrets of its users from hackers and thieves. Financial information would make Facebook’s cache of data an even more appealing target.

Most broadly, giant technology corporations’ entry into the financial industry raises concerns about the structural resilience of the macroeconomic system. Karen Shaw Petrou, co-founder and managing partner of Federal Financial Analytics, which advises both regulators and banks on financial policy, asks, “What happens if one of [these servers] fails? How much of banking stops and what economic interests are at risk? It’s one thing if you can’t get on Tinder for a couple of days. It’s very different if you can’t get your money.”

After the 2008 crash, new financial regulations mandated capital and operational rules for banks. “But now,” Petrou explains, “a lot of the financial infrastructure is moving very quickly outside of the regulated banking system where none of the same capital and resilience controls apply.”

? WHAT WE’RE READING:

  • “Time for a New – and Effective – Antitrust” (Verdict, Thomas Greaney and Samuel R. Miller): Two antitrust professors criticize the current state of antitrust law, writing, “What started in 1890 as a legal sword to keep markets competitive, antitrust law, as interpreted in court decisions over the last 40 years, has increasingly become a shield insulating large companies from competition.
  • “Platform Companies Have to Learn to Share,” (Financial Times, Rana Foroohar): A call for technology corporations to work with public governments to harness the benefits of technological advances while also ensuring that workers and society don’t suffer.
  • “It’s Not Technology That’s Disrupting Our Jobs” (The New York Times, Louis Hyman): In a time when many throw up their hands and think that technological change inexorably shifts labor from traditional full-time work to independent, “gig” work, economic historian Louis Hyman reminds, “far from being an unavoidable consequence of technological progress, the nature of work always remains a matter of social choice.”

Why One FTC Dissent Is More Than It Seems

Federal Trade Commissioner Rohit Chopra is continuing his campaign to amp up enforcement at the Federal Trade Commission. Last week, he issued a rare dissent against a proposed FTC order on a little-noticed consumer protection violation by Speedway Motorsports.

It’s a small case, and at first glance seemingly unimportant. Yet it points to a tectonic shift at the Commission.

The case dates to 2001 when the FTC charged Speedway with lying to consumers about one of its products, an automobile lubricant. The company agreed to pay $1 million to customers who bought the products and cover all expenses associated with the refunds. After 15 years, Speedway reported to the FTC that it didn’t comply with the consent decree, and had failed to refund all the money it owed buyers.

Four FTC commissioners, including Democrat Rebecca Kelly Slaughter, agreed to allow Speedway to pay the balance of the fine to the Commission, instead of completing the order as written. They levied no additional penalty on the company for ignoring the order.

Chopra’s dissent is part of a larger initiative to reinvigorate enforcement at the Commission. At a congressional hearing in July, Chopra answered a question by Rep. John Sarbanes, D-Md., on the Commission’s inaction on Facebook by laying out his theory regarding dealing with repeat violators. He then criticized an FTC proposal to allow perpetrators of a wage suppression conspiracy to go unpunished.

With the Speedway dissent, Chopra is arguing that clear violations of consent decrees should be met with genuine penalties, or, he argues, corporations will simply choose to violate orders if they think they can profit by doing so. “If we fail to enforce our orders even when small sums of money are at stake,” he wrote, “will we have the credibility we need to reach just outcomes in cases involving widespread failures and harm?”

Chopra’s campaign seems to be resonating, at least among fellow commissioners. Slaughter and the three Republican commissioners wrote a justification for their decision in which they conceded that Speedway violated the order while arguing that it would be a waste of resources to seek additional penalties. There is merit in this argument, but it shifts the burden of proof that the FTC is a credible enforcement agency onto those commissioners who have openly chosen to ignore a corporation’s decision to violate one of their orders. It is now up to them to present a practical alternative plan to restore the Commission’s credibility.

? VITAL STAT:

$172,000,000

The amount Virginians will pay after the state’s House of Delegates approved plans for Virginia’s largest utility, Dominion Energy, to pass on the costs of an aboveground power line it built to a data center run by an Amazon subsidiary, according to a recent article by Bloomberg.

? WHAT WE’RE WATCHING:

  • Fed Up?: This week, the U.S. Federal Reserve is hosting central bankers from around the world in Jackson Hole, Wyoming to discuss the effects of concentration on the United States and other economies. We’re watching to see if they come up with any practical plans to actually address the problem.
  • A New Interpretation of Section 230: The Justice Department filed a statement of interest in a lawsuit alleging that Facebook violated fair housing laws. DOJ agreed with housing advocates’ claim that Facebook is a “content provider” under Section 230 of the Communications Decency Act, and therefore not entitled to immunity. We’re watching to see whether the federal court agrees.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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