Happy New Year from the Open Markets Institute. In this issue of The Corner, we look closely at three of the biggest anti-monopoly questions for 2018, the boom in anti-monopoly political candidates, and a compounding factor behind the Spectre and Meltdown flaws in Intel computer chips.
3 BIG ANTI-MONOPOLY QUESTIONS FOR 2018
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1) Will the big three platform monopolies be able turn around the growing chorus of criticism they face? The short answer is “no.” Consider the following:
Amazon is still one of the most popular companies in the country, yet it has many vulnerabilities. Consider that the corporation has allowed every state and most major metro area in the country to believe that if only they come up with the right set of incentives they might become the sight of Amazon’s second headquarters (“HQ2”). Yet all but one will come away disappointed, if not insulted, when Amazon rejects their elaborately prepared bids.
Meanwhile, Amazon continues to erode state and local tax receipts. It has received $1 billion in tax subsidies and continues to displace local retail, as even the strongest remaining stores now largely sell through the Amazon platform. Outrage over the corporation’s employment standards and working conditions may also be reaching an inflection point. Over 10% of Amazon workers in Ohio use food stamps and the corporation’s warehouses have been the site of frequent visits by emergency responders. Add all of these facts together, and you have a growing coalition ready to take on Amazon.
Google has a new leadership team in place, after Eric Schmidt stepped down as Chairman. Yet the corporation faces mounting political scrutiny and regulatory threats. On January 17, Google executives must again appear before Congress to account for the corporation’s role in spreading extremist propaganda. Then on May 25, new European Union rules go into effect that will require internet service firms to get the explicit permission of consumers to use their data for ad targeting, which some believe poses a severe—perhaps even existential—threat to Google’s business model.
Meanwhile, smaller countries are joining the battle as well. Israel’s antitrust chief, for instance, has vowed to dedicate this year to scrutinizing the Google dominance of web-advertising, while also looking into abuses by Facebook.
Facebook’s Mark Zuckerberg appears to have admitted that the platform contributes to widespread social harm, including fostering polarization, enabling the subversion of democracy, and causing addiction. “The world feels anxious and divided, and Facebook has a lot of work to do—whether it’s protecting our community from abuse and hate, defending against interference by nation states, or making sure that time spent on Facebook is time well spent,” Zuckerberg wrote on his Facebook page on Jan. 4.
Yet Facebook will be hard pressed to come up with any credible plan for fixing these faults that doesn’t involve rolling back its monopoly power and sacrificing its super-size profits. On the contrary, rather than self-regulation, we are likely to witness a growing call for state regulation—of some form or another. Already, for instance, Germany’s top antitrust enforcer announced a new front against Facebook, charging that the way it collects user data is an abuse of market dominance.
2) Will the Supreme Court ratify a dangerous new antitrust concept?
In February, the Supreme Court will take up a little noticed case, Ohio vs. American Express Co., which has the potential to effectively immunize tech platforms from antitrust action. While American Express is not a tech company, the Second Circuit Court of Appeals in its decision introduced a new rule that makes it much harder to bring antitrust suits against companies that call themselves “two-sided” platforms.
While a host of businesses are lining up behind the Second Circuit’s analysis, prominent antitrust scholars, economists, public interest groups, and over fifteen state AGs are urging the Supreme Court to discard this misguided approach. Notably, firms threatened by the tech platforms—including Walmart, Walgreens, and Target—also have filed briefs against American Express. How the high court rules on the Second Circuit decision could determine significantly the future course of antitrust enforcement against the biggest of the tech corporations. (View the Open Markets Amicus Brief on the issue here.)
3) Is this the year when “vertical integration” becomes a dirty word?
Antitrust enforcers in the United States once commonly prevented mergers that would have resulted in a single business controlling both the transport and/or distribution of a particular good, and the production of that good. Hollywood studios, for instance, were long barred from owning their own movie theaters, and railroads and banks were long barred from going into manufacturing. But since the early 1980s, enforcers have generally turned a blind eye to deals involving vertical integration.
Yet this year may see a big flip back towards a general prohibition against such deals. The biggest challenge to the reigning enforcement regime may be the Justice Department’s suit against the merger of cable and internet service provider AT&T and content provider Time Warner, which goes to trial in March.
In addition, the proposed merger of health insurance giant Aetna and retail pharmacy giant CVS is currently undergoing merger review. Even deals that look horizontal in nature, such as Disney’s plan to acquire 21st Century Fox, will also pressure enforcers to address the integration of studio production with distribution channels (Hulu). Depending on what enforcers and the courts decide, even cable giant Comcast’s 2009 acquisition of NBC Universal could be revisited.
THE END OF TECHNOCRATIC ANTITRUST
Image Credit: Federal Times
For decades, antitrust policy in the United States has been dominated by a small group of legal scholars and economists who have largely rejected the traditional American approach to enforcing competition.
Rather than use antitrust to fight concentrated private power and promote other democratic values—including the liberty of the individual—as generations of Americans before them had done, these technocrats have insisted that the only legitimate use of antitrust is to maximize economic output and “consumer welfare” as defined by a cadre of credentialed economists deploying specialized economic models.
But now, maybe it’s back to the future.
Signal one: A new caucus in the U.S. House of Representatives with founding members Keith Ellison, Mark Pocan, Ro Khanna, Rick Nolan, Jamie Raskin, Pramila Jayapal, Seth Moulton, and David Cicilline.
The caucus is still in its organizational stages, but it’s drawing interest from across Capitol Hill. The caucus has already been mentioned in Bloomberg, New York Magazine, Wired, The Hill, and Vice. Meanwhile, on the Senate side, Senators Amy Klobuchar and Mike Lee on December 13 held a hearing to debate potential flaws with the “consumer welfare” standard in antitrust law, which has not been seriously questioned on Capitol Hill since the early days of the Reagan Administration. (Open Markets Institute’s Barry Lynn was a key witness in the hearing.)
Signal two: The Brookings Institution, which recently published a white paper by William Galston (formerly President Clinton’s domestic policy advisor) and Clara Hendrickson.
Surveying the mounting criticism of antitrust technocrats by people who want to restore America’s anti-monopoly tradition, Galston and Hendrickson declare that “the populists offer a plausible account of the historical record, we believe.” Although Galston and Hendrickson distance themselves from the traditional American practice of using anti-monopoly to fight excessive concentrations of private power, they confirm that this is how previous generations used antitrust to build the American economy and promote the American dream.
Signal three: the 2018 elections.
On the Republican side, Missouri Senate candidate Josh Hawley, currently the state Attorney General, launched a high-profile investigation of Google. Hawley’s campaign is backed with substantial resources by anti-Google Silicon Valley tycoon Peter Thiel. On the Democratic side, Texas Senate candidate Beto O’Rourke has made antitrust part of his campaign.
And a series of House candidates, including Democrats Lillian Salerno (TX-32), Kaniela Ing (HI-01), Austin Frerick (IA-03), and Jessica King (PA-16), are all running on anti-monopoly planks in contested primaries. (Frerick’s recent anti-monopoly ad, targeting the seed giants, is especially worth watching.) It’s unclear how many candidates will end up self-identifying as anti-monopolists, but it is clear that the age of antitrust consensus is over.
Roger McNamee, Open Markets Institute Advisory Board Member, authored a feature article in Washington Monthly about the dangers of Facebook’s platform business model. He also appeared on “CBS This Morning” to talk about the social media giant’s harmful effects on society.
Phil Longman published an article in Democracy Journal about the need for antitrust enforcement to curb consolidation in the healthcare sector.
Matt Stoller spoke about the growing influence of Google, Facebook, and Amazon; the political resurgence of anti-monopoly law, and modern monopolies, on the EconTalk podcast.
Leah Douglas published a feature article in Washington Monthly explaining how corporate-run agricultural co-ops squeeze the farmers they’re supposed to protect.
? WHAT’S MISSING FROM THE PICTURE?
Last week, news that flaws in computer chips, affecting virtually all servers, operating systems, and computers, went public. The flaws, named Meltdown and Spectre by security experts, would allow hackers to pull passwords, personal photos, emails, and other data off of chips manufactured by Intel and AMD, which beforehand were believed to be entirely secure.
The potential effects of the vulnerabilities are massive. “Almost every system is affected,” states a website created by the identifiers of the flaws, “desktops, laptops, cloud servers, as well as smartphones.” And while Intel and other companies have started rolling out fixes for Spectre and Meltdown, the patches increase computers’ CPU usage, hence the amount of energy needed to process information. This extra energy expenditure is expected to increase costs for cloud computing services by at least 10% over the coming months.
While much reporting has focused on the dangers posed by the flaws, most stories have overlooked why the damage has become so widespread—which is actually the result of extreme consolidation in the semiconductor industry. Indeed, Spectre and Meltdown are perfect examples of how market concentration can compound risk and instabilit
In the case of Intel, the ubiquity of the corporation’s chips trace to the 1982 decision by IBM to open the business of manufacturing personal computers—which IBM had completely dominated—to more competition. IBM, which at the time was settling a long-running antitrust case with the Department of Justice, announced it would thenceforth produce its own personal computer based on an open architecture. To some extent, this was a positive development. It allowed then-upstarts like Compaq and HP to manufacture IBM PC-compatible machines. But IBM’s architecture wasn’t completely open.
On the contrary, it rested on two de facto monopolies. One was Microsoft, which soared to prominence, power, and wealth after IBM chose its Disc Operating System (DOS) to manage software applications on the PC. The other was Intel, after IBM licensed that corporation to manufacture its 8088 semiconductor. Although IBM insisted that other manufacturers—notably AMD—have a stake in the business, both corporate buyers and the government left Intel largely free to capture control over the great bulk of the business.
The result was a sort of technological monoculture, somewhat akin to Monsanto’s dominance over corn and soy seed technology. Only in this case, it meant that huge swaths of the computer business came to rely on what for many years was known as the “Wintel” system.
Researchers are still investigating if Spectre affects all modern chips, but what is known is that Meltdown affects all Intel processors. This hyper-dependence on one chipmaker, indeed one technology, although billed as a way to lower prices, has had the effect also of greatly increasing society’s exposure not only to hackers but also to “shock events” that disrupt entire systems. Even more troubling, computer security experts say it will take a complete hardware refresh over the course of 10 years to completely fix the problem.
The Real Future of Work (POLITICO): How Congress has failed to respond to the shifting labor dynamics ushered in by the “gig economy.
America’s Worst Graveyard Shift Is Grinding Up Workers (Bloomberg Businessweek): An in-depth look into the dangerous conditions sanitation workers face at U.S. meatpacking plants.
The Return of the Trustbusters (The Week): A look at how Democrats have come to embrace anti-monopolism, a philosophy that market power reduces efficiency, harms innovation, and undermines democratic freedoms.
The percentage increase in the number of mergers and acquisitions per year in the pharmaceutical industry between 1986 and 2015, according to a recent law article. This amount of activity helps explain
soaring prices and cuts in supply in the drug, retail pharmacy, and health insurance industries in recent years.
Mailing it In? Two weeks ago, President Trump tweeted that USPS’s failure to charge Amazon higher prices for delivering its packages was “making Amazon richer and the Post Office dumber and poorer.” Trump often tweets to gauge sentiment around an issue. We’re watching if this is a signal for impending regulatory action against Amazon.
Hold the Phone: Hedge Fund Jana Partners and California public pension fund Calstrs organized a shareholder effort to make Apple consider how its technology is affecting children’s health. The move suggests that examining the physical and mental health effects of technologies may be a key drumbeat in 2018.
New Year, New Assignments: Democrats appointed Senators Cory Booker and Kamala Harris to the Senate Judiciary Committee on Tuesday. The appointments narrow the Republicans’ advantage on the committee to just one seat, and may provide a greater opportunity for the Democrats to carry out their Better Deal promises to take on monopolies. Notably, Sen. Booker last year sent a forceful letter to the FTC and DOJ, asking them to explain why they hadn’t used antitrust tools to protect workers from abuse of monopsony power. If he ends up on the Antitrust Subcommittee, he’ll have a perch to push this message harder and hold agencies to greater account.