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The Corner Newsletter: Net Neutrality, Disney-Fox Concentration Creep, NYC’s Empty Stores

Happy holidays from the Open Markets Institute. In this issue of The Corner, we cover developments ranging from the repeal of net neutrality and its effect on telecommunications and media corporations, to the details behind the Disney-21st Century Fox merger, to the real reason behind the loss of independent stores in New York City.
December 23, 2017  |  by Open Markets

ARE COMCAST AND AT&T THE REAL LOSERS FROM THE NET NEUTRALITY REPEAL?

When the Republican majority on the Federal Communications Commission last week reversed the FCC’s landmark 2015 order that established net neutrality, the decision was widely seen as a big victory for Internet Service Providers (ISPs) like AT&T and Verizon. No longer required to treat all traffic equally, these companies are now free to discriminate among customers and can speed up, slow down, or block any content or service.

Yet the real long-term winners in the decision may in fact be the very platform monopolists the ISPs most fear. Yes Google has long offered at least rhetorical support for the concept of net neutrality. And yes, the end of net neutrality enables the ISPs to exercise certain new powers over Google and Facebook. But the blunt fact today is the platforms have come to dominate online commerce to such a degree that the balance of power between the ISPs and the platforms has shifted dramatically. To understand, just ask yourself how many customers Comcast could keep if, for example, the corporation tried to make it harder to access Google, Facebook, or Amazon.

Today, the relationship between the tech platforms and the ISPs is increasingly akin to what developed between the Standard Oil trust and the railroads during the Gilded Age. In the 1880s, Standard Oil needed railroads to get its oil to market. But as Standard Oil became one of the country’s largest shippers, the railroads came to need Standard Oil just as much or even more. The result was that Standard Oil was able to exercise power over the railroads in ways that turned those corporations into de facto extensions of Standard Oil itself. Even without any formal form of vertical integration, Standard Oil used its market power to force the railroads to offer it unique discounts, or rebates, on standard freight rates, that gave it a dramatic advantage over rival oil companies.

One result was that Standard Oil was able to build a horizontal monopoly that went unchallenged until it was finally broken up by antitrust action by the U.S. government. Another was a loss of independence by the railroads that came to depend on Standard Oil’s business.

The gutting of net neutrality may lead to a similar outcome. The AT&T-Time Warner, Disney-Fox, and Verizon-Yahoo-AOL deals should be understood as attempts to vertically integrate in ways that foreclose competition from small and mid-size players, while also giving these corporations sufficient scale to stand up to the platform goliaths.

DISNEY-FOX DEAL WOULD FURTHER BALKANIZE MEDIA

Entertainment conglomerate Disney made a $52 billion bid for most of 21st Century Fox, including Fox’s film and television studios, cable entertainment networks, and international TV businesses. The deal also would give Disney a majority stake in the video streaming business Hulu. The Murdoch family would retain certain broadcast properties and Fox News in the form of a separate company to be spun off to shareholders. Disney CEO Robert Iger, who is in line to head the combined company, would receive stock worth as much as $142 million under the deal.

The proposal is part of a wave of consolidation in the telecommunications and media industries driven largely by fear of the soaring scale and power of the Big Three tech monopolists: Amazon, Google, and Facebook.

The deal also promises to accelerate the balkanization of the media industry. Disney is seeking to go head to head with Netflix and Amazon in the streaming distribution business. The corporation recently removed its content from Netflix, and will likely do the same with the Fox catalogue. This is a major blow to Netflix, as Disney-Fox will together have roughly 40% of domestic box office market share, and its catalogue will now include many of the top franchises in moviemaking, including Star Wars, Planet of the Apes, Alien, Kingsmen, Predator, Die Hard, Night at the Museum, and all Disney- and Pixar-branded entertainment.

If antitrust enforcers ultimately approve the deal, the elimination of a major studio and the tightening number of distribution outlets will also likely result in a decline in spending on films and television.

The Writer’s Guild West blasted the deal, and said that the rapid consolidation of control in the industry would come “at the expense of the creators who power their television and film operations.”

Sen. Amy Klobuchar (D-MN), the ranking Democrat on the Senate Antitrust Subcommittee requested a hearing on the deal, as did Senator Patrick Leahy (D-VT). Klobuchar expressed “concern about the impact of this transaction on the American consumer.”

It is unclear how the Justice Department will respond. In November, the DOJ sued to block AT&T’s planned takeover of Time Warner, based largely on concerns about vertical integration between the distribution and production of entertainment and news. Followed to its logical conclusion, this same reasoning would lead antitrust enforcers also to oppose a combination of Disney and Fox. After all, if one goal is to separate content and distribution, another should be the maintenance of real competition in the business of producing entertainment.

WHAT WE’VE BEEN UP TO:

  • Barry Lynn testified at a Senate hearing on the consumer welfare standard. In his testimony, he highlighted how “every sector of the American political economy is vastly more concentrated than a generation ago,” and that “citizens perceive monopolization as a loss of control over their own lives.” The hearing was the first discussion in Congress of antimonopoly philosophy in more than 35 years.
  • Open Markets submitted an amicus brief in Ohio v. American Express, an upcoming Supreme Court case. We argue that the Court should not endorse a new test involving the idea of a “two-sided market.” The implications? Tech companies like Google, Amazon, and Facebook could be immunized from antitrust scrutiny.
  • Lina Khan spoke about Amazon’s market power in an interview with Rep. Keith Ellison (D-MN). Khan said that “Amazon has gotten where it is because it has undertaken business practices…that previously used to be illegal.”
  • Matt Stoller published an op-ed in The Guardian about how the repeal of net neutrality will concentrate more power in the hands of telecommunications giants.
  • Kevin Carty, Leah Douglas, Lina Khan, and Matt Stoller contributed to a feature in New York Magazine entitled “6 Ideas to Rein in Silicon Valley, Open Up the Internet, and Make Tech Work for Everyone.”
  • Phillip Longman presented a lecture on the relationship between monopoly and regional inequality at the Summit on Technology and Jobs.

WHAT’S MISSING FROM THE PICTURE?

A recent NYT editorial decried the loss of “cherished local” retail shops across the city. Citing a report commissioned by a city council member, 12 percent of the 1,332 storefronts on Broadway, Amsterdam, and Columbus Avenues now sit unoccupied. The Times editorial board traced this decline to two factors—the Internet and high taxes.

“On one level, there’s just so much the city can do” about competition from Internet-based corporations like Amazon, the Times wrote. “Online shopping is here to stay, and it takes an inevitable toll on brick-and-mortar stores.”​

On the issue of “commercial rent” taxes, the Times was more hopeful that local officials might be able to help. As the Times explained, the tax means:

Business owners…must give the city 3.9 percent of what they pay in rent, with the bill rising as leases are renegotiated and fees to landlords go up. Often a tenant is paying this tax in addition to a real-estate tax already levied.

The Times argued that this practice encourages “speculative behavior” by landlords, who prefer to simply lock up retail space rather than make it available to small businesses.

closed

Unfortunately, the Times missed a number of important factors in the decline of retail in the city, most importantly the role of economic concentration.

For instance, the Times overlooked that the fact that many brick and mortar stores are doing just fine in the Internet era. Many physical retailers, especially home-improvement and dollar stores, actually have grown their retail footprint over the past year. The two big players in the dollar store industry, for instance, will have opened 1,650 new stores during the year ending on December 31, 2017. And that growth looks to continue in the future, according to Moody’s Investors Service. The industry is expected to see operating growth above 5% in 2018.

Even more telling, Amazon itself is fast expanding into physical retail, investing $1.3 billion this year alone in opening Amazon branded physical stores. Amazon’s $13.7 billion acquisition of Whole Foods will give the Internet giant control over 460 stores.

Similarly, the commercial tax burden decried by the Times has not prevented many chains from expanding in New York City. According to a report by the Center for an Urban Future, between 2008 to 2016, Dunkin Donuts grew the number of stores it runs in New York City by 75%, from 341 to 596.

Such growth illustrates how the odds are stacked against small businesses. Chain stores, instead of competing with smaller companies on price, convenience, or quality, can drive smaller stores out of business through anticompetitive tactics like loss-leading. In turn, these larger companies can buy back the former real estate space at cheaply discounted prices, further entrenching their dominant positions.

As Open Markets has reported in depth, one of the most significant reasons for the collapse of local retailing was the radical re-interpretation of anti-monopoly law in the early 1980s, in ways that made it far easier for chain stores to expand, and to use their power in ways that drive “cherished local shops” out of business.

The Times editorial board has identified an important problem, one that is pervasive across America. But fixing the problem involves digging deeper and addressing the concentration of power and control in the retail and real estate sectors. Turning a blind eye to industry concentration only guarantees that the problem will continue to get worse.

NY

ADDITIONAL READING:

ANTI-MONOPOLY RISING:

  • Rep. Frank Pallone (D-NJ) called for a hearing on the recently announced Disney-21st Century Fox deal, arguing there needs to be “appropriate oversight over the antitrust review process.” Rep. Emanuel Cleaver (D-NJ) also expressed concern about the merger. In a tweet he said the “mega-merger is a serious matter” and will have implications for “everyday Americans and those in marginalized communities.”
  • Rep. Keith Ellison (D-MN), Rep. Pramila Jayapal (D-WA), Rep. Mark Pocan (D-WI), and Rep. David N. Cicilline (D-RI) introduced the 21st Century Competition Commission Act (H.R. 4686). The bill would convene a congressional commission to study the effects of economic concentration. Modeled after FDR’s “Temporary National Economic Committee,” the information-gathering effort would serve as oversight with regards to the antitrust agencies, and facilitate greater public enforcement and private litigation.
  • Two European Union competition authorities filed complaints against Internet giants this week. Germany’s Federal Cartel Office said Facebook “is abusing this dominant position by making the use of its social network conditional on its being allowed to limitlessly amass every kind of data generated by using third-party websites.” France’s competition agency, DGCCRF, filed a complaint alleging Amazon “imposes unbalanced relations” with its commercial partners.
  • Former FCC Chairman Tom Wheeler published a blog post entitled “Taming Monopolies in the Digital Age.” “The current FCC,” Wheeler writes, “has walked away from its responsibility to oversee the behavior of the monopolies of ISPs and companies that deliver internet services to consumers.”

What we’re reading:

  • “How Widespread Is Labor Monopsony? Some New Results Suggest It’s Pervasive” (Roosevelt Institute): In an important new economics paper, José Azar, Ioana Marinescu, and Marshall Steinbaum conclude that market concentration is associated with a substantial decline in wages.
  • “What Happens When the Government Uses Facebook as a Weapon?” (Bloomberg Businessweek): How the Internet company is complicit in the Philippine government’s use of “patriotic trolling,” propaganda meant to give the impression of a groundswell of support for the Duterte administration.
  • “The Human Cost of the Ghost Economy” (Longreads): This piece provides an undercover look at the harms temp workers face in warehouse distribution facilities.”

Vital Stats

46.4%

Across 440 million page loads, the percentage of websites that rely on Google Analytics to track user data. Next year, a European privacy regulation, the General Data Protection Regulation, will require internet companies that use website trackers, like Google Analytics, to get permission from their customers to collect their data.

What we’re watching:

  • USDA Repeal Threatens Farmers: A lawsuit challenges the U.S. Department of Agriculture’s recent decision to roll back the Grain Inspection, Packers, and Stockyard Administration’s rules, regulations that enabled farmers to hold meatpackers accountable for abusive practices. Eliminating these rules will once again leave farmers subject to meatpacker abuses, without real recourse.
  • Cloud Seeding: Oracle has submitted a bid to acquire Aconex, a cloud-based project management company, for $1.19 billion. Why does it matter? The deal likely will set off increased merger activity among Internet software companies.
  • Right on Target: In a move to counter Amazon Prime Now’s same-day delivery, Target acquired Birmingham-based Shipt for $550 million. We’re watching to see if the merger will affect Alabama’s nascent startup scene and if the deal will involve layoffs.

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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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