By Andrew Lippman
Why Antitrust Makes Me Dizzy
Two recent federal actions, each taken alone, are unhealthy prescriptions–but taken together they are fatal. Neither net neutrality nor the Time Warner/AT&T merger are good things, but how is it that no one has looked at what they mean as a pair? The merger decision allows content to be combined with carriage, which, along with the loss of net neutrality, opens the floodgates for delivery discrimination. Let’s consider each component in turn, then in ensemble.
The basis for antitrust law is prevention of harm to the consumer due to lack of competition.
The basis for antitrust law is prevention of harm to the consumer due to lack of competition. This dates from the Clayton Act, and as we all know, is written broadly and vaguely enough to be still useful 104 years after its passage. Most often, this is applied to horizontal mergers where direct competitors combine.
Vertical mergers are between different components of an industry. They are far less frequently contested, for several reasons: In some cases they improve efficiency and are therefore beneficial to the consumer. For example, Fruehauf (a trucking company) and Kelsey-Hayes (a brake company) combined in 1973, to make better trucks (or so we should believe). In other cases, it’s just a no-op—the impact on the market is assumed to be nil. Of course, there are also rare cases where they are simply prohibited; my favorite is the 1948 US Supreme Court opinion in Paramount v US that split movie theaters from movie-makers. It is instructive.
Before the Supreme Court decision, Paramount movie companies owned the theaters–and the actors, and the cameras, and the writers, and the directors. If you are old enough, you remember the elegant, Depression-era Fox or Paramount Theaters. Those palaces showed only Fox or Paramount movies, bought in bulk and with an allocation determining how much went to the property owner versus the company. The result was a steady stream of Hollywood movies released on schedules optimized for the studios, and predefined shorts that preceded them.
Onscreen was a Norman Rockwell America. Vertical ownership gave us a continuous stream of movies but only small art houses carried foreign fare. Godard, Mizoguchi, and Bresson were not available in Duluth. And the Hayes Commission’s censorship kept everyone sleeping in twin beds. No small-scale startup could upset the applecart, change the agenda, or challenge your thoughts, beliefs, or heroes. Panacea for an oligopoly: immunity from outside threats, with innovation strictly under control. A perfect example of the combination of content and delivery.
The principle of net neutrality is that the Internet should be regarded as a common carrier—open to all bits on a non-discriminatory basis.
The principle of net neutrality is that the Internet should be regarded as a common carrier—open to all bits on a non-discriminatory basis. There is a lot of smoke and mirrors about how that will stifle innovation and reduce investment, but there is no there there. It is speculation and innuendo, viz., the claim that common-carriage law (which is very old law) has no relevance to the modern Internet, or the vague threat that a carrier will not perform if hobbled by consumer-friendly restrictions.
Here the situation is a bit different from movie theaters. Because the carriers operate by dint of a public franchise, they have de facto monopolies. You can always buy real estate to open a new theater, but it is not feasible to dig up every street to become a new wired broadband provider, nor can you buy spectrum that is not for sale. The big players, a duopoly of Verizon and AT&T, own the airwaves with Sprint and T-Mobile struggling to stay alive. If you don’t believe this picture, consider that when financial manipulations like buyouts are the only path to survival, then you know the industry is immunized against technical or operational novelty. That’s the situation facing T-Mobile and Sprint.