November 27, 2017 10:05 AM

Assumptions On Assumptions: The DoJ's Fatally Weak AT&T/TWX Complaint

Good things are even better when they keep coming. When a friend of mine would say, "let me tell you something...before I tell you something else," you knew you'd be laughing a lot. Likewise, who doesn't love Big Sean's "Blessings" (explicit lyrics) ("blessings on blessings on blessings...lessons on lessons on lessons")?  But, unlike Ferg's hilarious commentary, and Big Sean's blessings, some things-- assumptions--only get worse when piled on top of one another.

Last week, the Antitrust Division of the U.S. Department of Justice ("DoJ" or "the Government") filed a Complaint seeking to enjoin AT&T from acquiring Time Warner Entertainment ("TWX").  The DoJ argues that, post-merger, the combined firm will be able to unilaterally raise prices for rival multichannel TV distributors (like cable companies, phone companies, Dish, or over-the-top ("OTT") video providers) and/or retail consumers.  See, Complaint paras. 5-10. The problem with the Government's theory, though, is that even they know that it's a logical house of cards, with a foundation unsupported by any market evidence.    

Relevant Markets

The DoJ notes three kinds of video distributors: 1) traditional multi-channel video programming distributors ("MVPDs"), like cable, legacy phone, and satellite providers; 2) virtual MVPDs ("VMVPDs"), which are similar to MVPDs, but offered over the internet, and available nationally; and 3) subscription video on demand services ("SVODs"), like Amazon Prime and Netflix, who offer video on demand programming nationally, but do not offer live programming like news and sports. Complaint, paras 15-19.  

Based on these definitions, the Government asserts that  two relevant product markets exist: 1) the "All Video Distribution" market, which comprises all types of video distributors (MVPD, virtual MVPD, and SVOD), and 2) the "Multichannel Video Distribution" market, which includes MVPDs and virtual MVPDs (hereinafter, "MVPDs").  The relevant geographic markets, the DoJ argues, are local Designated Market Areas, which are defined by choices of supplier available to consumers (the wireline service providers of Multichannel Video Distribution vary according to their individual network coverage areas).  Complaint, paras 27-30.  

Competitive Effects

The DoJ contends that the merger will harm competition/raise prices in both the All Video Distribution and Multichannel Video Distribution markets throughout the country because it would give the post-merger firm the ability to unilaterally raise the price of wholesale programming (from Turner Broadcasting & HBO) to rival MVPDs.  The enhanced ability to raise prices to rivals is the DoJ's primary argument.

But, almost like the perfunctory "and stuff" ending that teenagers tack on to woefully incomplete answers, the DoJ also claims that the merger will "give the merged company the ability to impede and slow innovation by hindering emerging online competitors and would increase the likelihood of oligopolistic coordination." Complaint, paras. 31-41, generally; quote from Subsection V.B.  I quote the Complaint directly so that readers can see that this alleged harm is simply too general to merit analysis. The Government's main point, though, is not a huge improvement.

Assumptions Everywhere

Putting aside the Government's lack of factual support for its theory, let's look at all the assumptions (unsupported in the Complaint) that we have to accept in order for the Government's argument--that the post-merger firm can profitably raise prices (both for rivals and its retail customers) for TWX programming--to actually make sense.

Assumption: the premerger TWX was not already extracting the highest price that each distributor was willing to pay, i.e., it could have gotten higher prices if it pushed firms into "blackout."

Assumption on assumption *2: Retail MVPD customers are--per subscriber--more profitable than programming (which is also sold on a "per subscriber" basis).
 
Assumption * 3:. "Blackout" situations are always worse for the MVPD distributor than the programmer (i.e., the distributor always loses more customers/revenue from not carrying a channel at a higher price than the programmer forgoes from losing carriage). But see, below..

Assumption * 4: The post-merger TWX, as the owner of its own competitive MVPD, will be even more resistant to the threat of any given rival MVPD not carrying its content, because if some of the rival MVPDs customers defect to other MVPDs as a result of a blackout, at least some of those customers will become AT&T retail MVPD customers.

Assumption * 5: The acquisition of some of the retail customers that will leave an MVPD in response to a TWX programming blackout is at least as valuable as that MVPD was as a program distributor.

Assumption * 6: Post-merger, an MVPD with TWX programming also can profitably charge its own retail customers higher prices.

The Government Knows It's Wrong

Rather than go through every specious block/mistaken factual assumption in the DoJ's Jenga tower of dysfunctional logic, let's just analyze one--Assumption * 3.  This "assumption" (essentially, that the programmer will always get its price, no matter how uneconomic) seems to be something the Government actually believes is required by the antitrust laws; though principles of basic economics, and actual market conditions, say otherwise.  You see, a year ago (and only weeks after this merger was announced), the Government filed suit against AT&T and DirecTV, blaming AT&T's DirecTV unit for every other MVPD's refusal to carry the L.A. Dodgers for (at the time) the past 3 baseball seasons!

The Government filed its case--charging only DirecTV of wrongdoing--knowing full well that AT&T/DirecTV would have to settle prior to closing its merger (which it did in March of this year).  DirecTV's "crime," according to the DoJ, was publicly stating its refusal to accede to Time Warner Cable's (no affiliation w/TWX, and since then acquired by Charter Communications) "extravagant" demands of $5/subscriber simply to carry L.A. Dodgers baseball games, this particular "blackout" continues, and has lasted well over 4 seasons with MVPDs losing relatively few subscribers.

Notably, the Government did not accuse DirecTV, or any other MVPD, of participating in an illegal agreement to "boycott" TWC's regional sports network ("RSN").  Moreover, although AT&T settled the DoJ Complaint in March, Charter Communications (the successor to TWC) is still the only MVPD carrying the Dodgers' regular season games.  Thus, ironically, the DoJ, better than anyone, knows full well that the scheme it outlined in its Complaint has no basis in reality--as even the most "must have" sports content cannot be forced on competitors by a single vertically-integrated competitor (lCharter, which owns the programming (L.A. SportsNet) and serves about half of the L.A. area retail market).

Obviously

Likewise, the aggregate retail market conditions also clearly refute DoJ's assumption that price increases can be easily and profitably passed on to retail customers.  So far, as of the 3rd quarter, in 2017 the number of households, nationwide, subscribing to a MVPD service is down over 11% over the past 3 years. Leichtman Research Note, 3Q 2017 at pp. 2-3 (79% of American households subscribe to a pay TV package--down from 88% in 2014; a decline of over 11% in 3 years).  Moreover, satellite (like DirecTV) and telephone (AT&T's legacy U-Verse) MVPDs are losing customers at a much greater rate than cable. Id. at 6 (in Q3 2017 AT&T lost almost twice as many MVPD customers as all cable providers combined). Thus, any price increase--especially by a satellite or legacy telephone MVPD--would only accelerate customer loses!

The DoJ knows that the foundation of its case--assumptions on assumptions--is supported by nothing but mere speculation and out of context "hot docs." Soon enough, U.S. District Court Judge Richard Leon will know as well that the market realities in this case simply cannot support the Government's assumptions. 
 
November 13, 2017 11:22 AM

The Strange Case of the Inverted Vertical Merger

After a year of not really hearing anything about AT&T's proposed acquisition of Time Warner Entertainment ("TWX"), we learned last week that the deal could be in serious jeopardy from the Antitrust Division of the U.S. Department of Justice ("DoJ" or "Department").  Many of the stories earlier in the week, citing "DoJ sources," suggested that the Department wanted AT&T to sell CNN, in order to gain approval.  In an extensive interview at the New York Times DealBook Conference, AT&T's Chairman, Randall Stephenson put the rumor to rest that CNN was a divestiture the DoJ was seeking, or that AT&T had offered. (See video of the full interview).  
 
Stephenson also noted his "surprise" that the Department would have concerns serious enough to litigate; noting that a vertical merger had not been successfully challenged in court in over 40 years, and that Comcast's acquisition of NBCU had presented much more difficult content problems than AT&T's proposed TWX acquisition.  Stephenson is understandably surprised, because he's absolutely correct on the law.  Nonetheless, the DoJ must have some concern about the deal, so what's going on here?
 
What an Anticompetitive Vertical Merger Looks Like
 
The words "vertical" and "horizontal" are used in antitrust to refer to firms' positions in the supply chain, from creating a product through to its delivery to consumers.  Firms at the same position in the supply chain are, of course, direct competitors, and a merger between them would be called a "horizontal" merger. On the other hand, the merger of a bakery with a grocery store would be an example of a vertical merger--the bakery produces products that are distributed to the public through grocery stores.
 
A vertical merger will rarely present an antitrust problem, unless one or both of the two merging partners has "market power." For example, if the distribution of a service is a monopoly (think local telecommunications services prior to the late 1990's) and a provider of a "competitive" service using this distribution network (like a long distance voice company) wanted to acquire the local telephone exchange, the antitrust agencies would likely be concerned that the acquiring firm may be able to foreclose other long distance companies from being able to continue to access the local distribution network to sell their services to end users, resulting in higher prices to consumers of long distance service.
 
AT&T and TWX

AT&T provides consumer fixed line voice, internet, and multi-channel television service throughout the service territories of its former incumbent local exchange providers. AT&T also provides nationwide mobile voice and internet service through AT&T Wireless, and nationwide multi-channel television service through its satellite (DirecTV) and streaming (DirecTV Now) services. All of the consumer services provided by AT&T are "competitive" services, available from multiple providers.
 
TWX is a worldwide entertainment conglomerate.  Its 3 major divisions are HBO (premium television/streaming entertainment), Turner Broadcasting (includes a number of popular cable channels, including CNN, TBS, and TNT), and Warner Bros. (primarily film and television production/distribution).  The Turner Broadcasting division, it should be noted, owns the rights to broadcast a number of basketball (NBA and NCAA Tournament) and MLB games, as well as assorted sports that no one watches, like golf and women's Irish curling [probably].
 
Nominal Overlap: While generally AT&T distributes the programming of others, it does own some regional sports networks under the "AT&T SportsNet" name. Although AT&T owns the exclusive rights to distribute the games of certain local teams (NBA/NHL/MLB/some NCAA) in Houston, Pittsburgh, Portland, OR, Seattle, and Utah, these regional sports properties do not "compete" with the games that Turner Broadcasting distributes nationally.
 
What Is Going On?
 
Adding to the confusion surrounding the Department's concerns, the reactions from even well-informed commenters have diverged greatly. Because this merger presents nothing exceptional from an antitrust perspective, some, like economist Hal Singer, have concluded that the only reason the DoJ is holding up the deal is to further prosecute President Trump's ongoing personal feud with CNN (owned by TWX).  However, others, like Harold Feld, argue that the DoJ is on the right track and that only large scale divestitures (like all of Turner Broadcasting, or DirecTV) could remedy the competitive problems with this merger.  
 
While Feld makes a compelling case to question the "spite" theory, and he offers the DoJ an ostensible case theory, it's not a convincing argument; as it ignores current market conditions, and relies on a lot of the same, now obsolete, market "assumptions" that the 1992 Cable Act is based on. Of course, this should come as no surprise, since Public Knowledge's current president--Gene Kimmelman--was one of the principle forces behind the Cable Act (on the side of broadcasters).  See, e.g., this NY Times article from 1992.  Note that the 1992 Cable Act continues to richly reward the broadcasters that these ("natural monopoly") arguments favored.  Consumer Reports notes that cable company "price hikes are mainly driven by the rising costs they face for carrying both traditional broadcast networks, such as CBS and Fox, and regional sports channels."
 
The Blind Men and the Elephant
 
Sometimes, as the old fable illustrates, you can't get an accurate picture by focusing on the smallest possible market that could (conceivably) be defined; and this is what I think is going on here.  In Feld's analysis, the post-merger firm is either a distribution colossus (why else would it need to divest DirecTV?), or a "must have" programming hoarder who may well put competitive video distributors (like Comcast?) out of business.  However, to have this opinion one has to explicitly disregard AT&T's stated reason for the deal--to build an advertising platform of the scale to offer competition to the Google/Facebook duopoly on mobile and desktop screens.
 
Public Knowledge, and the other opponents of AT&T's acquisition of DirecTV, ignored the company's stated purpose for that deal--that AT&T needed scale to be a more effective video distribution competitor. Instead, opponents preferred to focus only on the limited number of TV markets that would "lose" a multichannel competitor (those in which AT&T already provided U-verse TV).
 
Three years later, where are we?  Well, customers are continuing to "cut the cord" of traditional pay TV services, like the service offered over AT&T's U-verse.  However, by creating an entirely new video product--DirecTV Now--AT&T has, in less than a year, obtained 800,000 additional customers (a number that represents about 15% of AT&T's entire base of U-Verse TV customers at the time of its DirecTV merger announcement) and 60% of these customers are entirely new customers to AT&T

Said differently, in less than a year of marketing DirecTV Now, AT&T acquired 15% of the customers that took U-Verse TV 10 years to acquire. Rather than losing a choice in a few markets, consumers nationwide gained a choice and acted on it. Thus, consistent with its stated reasoning for acquiring DirecTV, the acquisition allowed it to stimulate output of multichannel video services. Opponents failed to realize the implications of AT&T's DirecTV purchase, in which a new nationwide competitor was created to challenge not only the traditional DirecTV satellite & U-Verse TV services, but also cable companies, other OTT providers, and may have even spurred the entry into the market of newer "large screen" players like Google, Hulu, others.
 
The Opportunity and the Danger
 
The AT&T/TWX merger, as noted by Mark Cuban at a Senate Judiciary Committee Hearing almost a year ago, gives AT&T a chance--and not a very good one, at that (according to Cuban)--to compete against the dominant new media ad giants.  To do this successfully, AT&T will have to, again, expand output of the firm it is acquiring; there simply are not any credible hypotheticals where AT&T "wins" anything by restricting TWX output. 
 
But, if the Department insists on defining the elephant as a snake, based on the shape of its trunk, there is a danger that it leaves existing markets worse off than when it found them.  If, for some crazy reason, AT&T actually agreed to sell off Turner Broadcasting, the only buyer would be another media conglomerate--further concentrating an already highly concentrated market (which is trending toward even greater concentration with Fox-Disney merger rumors) .  Similarly, if AT&T were required to sell off DirecTV, its entire ability to market to a nationwide base of potential video customers would be eliminated--practically guaranteeing that its only profitable strategy would be to restrict output to local market multichannel competitors!
 
October 31, 2017 11:58 AM

Note: Net Neutrality Zombie Apocalypse Has Not Hit Portugal

A few months ago, we debunked the "Internet Will Be Like Cable" myth that net neutrality "activists" (Google/FB funded 3d parties) have loved to spread since the beginning.  Yet, today being Halloween, the net neutrality crowd has been flooding Twitter with a "spooky" modern day fake news version of Orson Welles' "War of the Worlds" radio broadcast.  This time, though, instead of an alien landing, the "news" is that the "internet is already like cable...in Portugal!"


To support their claim they reference a Quartz Media article (though there is another on PC Gamer).  Digging deeper, however, the only citation in either that contains anything directly related to Portugal is a link to a tech website article (in Portuguese) from July.

The Portuguese article questions if Vodafone (another mobile telecom/ISP competing in Portugal) will offer "SmartNet" mobile packages like those launched by mobile operator MEO (the mobile unit of Portugal Telecom now owned by Altice) this past April.  Far from supporting the scare stories, this article notes that the new packages offered by MEO are a further attempt to tailor offerings to best meet consumer needs--and to "bet on" demand that has, so far, gone unmet and thereby reap the rewards.

Having apparently not read the source material, net neutrality advocates still jump to their usual conclusions that: 1) this is the only way consumers in Portugal can buy internet service, and that 2) it only "hurts" applications providers, like Google/Facebook.  In other words, they revert to the original "internet will be like cable" nightmare fantasy.

Only "Nightmare" Is Portuguese Consumers Getting Better Service through Competition

The actual facts reveal that mobile operators appear to be competing to give consumers more, not less, options.  And, of course, a quick perusal of the actual service offerings available to consumers confirms that this is exactly what is happening in Portugal.  Three facilities-based providers currently operate in Portugal (a country of 10 million people): MEO (a play on "meu" or "mine"), Vodafone, and NOS (a play on "nós" or "us/we"). 

MEO offers 4 basic mobile plans with some amount of "unlimited" calling, SMS, and/or data use, ranging from the cheapest (about $13/month) to the most expensive ($57/month).  The cheapest plan (with voice/SMS) comes with 500mbs of mobile internet service and the most expensive plan offers 30gbs--with which the consumer can use to access the whole internet.  But, if a customer only wants mobile internet service, she has the option to purchase 10gbs of service (to the "whole" internet) for about $18.00/month (offer here).    

MEO also offers consumers--with any mobile internet plan--the ability to get "SmartNet" packages with an additional 10gbs of the applications they use most (e.g., video or social networks) for an additional €4.99 ($5.80)/month. In other words, the "tiered" graphic that "scary news" articles are using to show the "cable" apocalypse was finally upon us, is in fact merely a bunch of mini "binging" packages (similar to T-Mobile's popular "binge on" promotion). 

What about the other providers?  Although none of the other operators offers anything like the "SmartNet" mini-binging tiers, if a customer only wants mobile Internet service (& no calling/SMS), NOS offers an unlimited data package for €15/month ($17.40), with a 12 month contract (€25 ($29) w/no contract).  Likewise, Vodafone offers mobile internet packages of 5GB/10GB/30GB for €10/12.50/15/month (w/12 month contract). 

The obvious conclusion is that--without net neutrality--Portuguese consumers have plenty of options for plenty of bandwidth (at very attractive price points) with which to access the "whole" Internet.  The inclusion of limited "binging" bundles of applications is hardly the scary nightmare being peddled by net neutrality activists.  Instead, it's a rather natural competitive response to attract consumer interest, which we should expect more of, in a market not weighed down by unnecessary regulation.

The Final Irony

The scary fake news stories circulating about MEO's "SmartNet" packages would have you believe that offers like these are only possible without net neutrality rules--like the ones adopted by the Wheeler FCC in 2015.   However, had the net neutrality advocates (again) checked the source material, they would see that the FCC's current definition of broadband internet access service ("BIAS") does not prohibit carriers from offering curated internet service packages.  

If this story makes your Halloween less fun because it's less scary, I apologize. However, I do wish all of you a happy and safe Halloween...boo!
  

 
September 26, 2017 10:15 AM

Section 230: Google's Shield and Its Sword

The irony of Google's riskless "net neutrality" campaign to impose competitive restrictions on other companies, we've noted here and here, is its claims that rules are necessary to prevent ISPs from engaging in the types of monopoly abuse that only it and a few other privileged platforms can profitably employ.  Google's current fight--against lawmakers' efforts to impose responsibility on websites that actively facilitate, promote, and profit from sex trafficking--contains a similar element of hypocrisy.  The principle that Google is fighting against--that websites should bear responsibility for the activities they promote/knowingly tolerate from 3rd parties--is a principle that Google itself has used to exclude competitors from its monopoly Android platform


Section 230 and SESTA

Section 230 of the Communications Decency Act ("Sect. 230") was passed to limit the potentially devastating effect on the Internet development resulting from potential liability of  Internet service providers held responsible for defamatory statements made by their users.  Sect. 230 states that no provider/user of an "interactive computer service" (i.e., a website that provides access to third party content) shall be "treated as the publisher or speaker of any information provided by [a third party]." 47 U.S.C. Sect. 230.  The scope of Sect. 230, as applied by the courts, is so vast as to be virtually unlimited; shielding websites, no matter how complicit they were in the content they distributed, from virtually any tort or state criminal law liability. See, e.g., criticisms here, here, and here.

The Stop Enabling Sex Traffickers Act of 2017 ("SESTA"), introduced by Sens. Rob Portman (R-OH) and Claire McCaskill this past summer, has nearly 30 bipartisan co-sponsors. Earlier this year, the two released a Staff Report of the Senate Permanent Subcommittee on Investigations describing the extent to which the website Backpage.com was actively involved in, and profiting from, the sexual exploitation of children throughout the world--all without any fear of legal consequences.  The proposed legislation would chip away--ever so slightly--at the broad immunity conferred on "information service providers" for the content of third party speakers under Section 230 of the Communications Decency Act.       

The prospect of losing any of its immunity has led Google to mobilize its academics and third parties to fight tooth-and-nail in its defense of Backpage.comYet, though it understands the importance of a website being able to distance itself from the speech of its users, Google recently removed another app, Gab.ai, ("Gab") from its Play Store because, Google claimed, the site did not display the ability to sufficiently control the speech of its users. 

Tolerance for Intolerance

Upstart social media site Gab.ai ("Gab") was founded in 2016 by a vocal Trump supporter and a Turkish Muslim who ardently opposed Trump's candidacy.  See, Complaint of Gab Ai Inc., v. Google, LLC, E.D. Pa. (filed Sept 14, 2017) ("Complaint") at paras. 7-17.  Concerned that Twitter seemed to be excluding speakers based on socially unpopular points of view, the two friends sought to create a more libertarian social media network.   

Gab's platform was made available to beta users on a private invitation basis in the second half of 2016, and was publicly released in May 2017.  Complaint para 10.  Gab "does not sell access to or otherwise 'monetize' its users' personal information."  Complaint 48.  Rather than selling advertising, Gab plans to support the service through paid "GabPro" premium memberships.

Gab is modeled off of Twitter, though it allows its users 300 characters, but Gab also includes some functions from Reddit, and unique features that "'provide people with the tools they need to create and shape their own experience.'" Complaint paras 19-29.  Thus, although Gab has developed a reputation as being more welcoming of "far right" and "conspiracy theory" types, its users can choose to exclude content that they do not wish to see.

Gab maintains community guidelines which prohibit "illegal pornography and terrorism; the posting of confidential information of others; communications calling for acts of violence; promotion of acts of self-harm or cruelty; the use of threatening language; and any other behavior that clearly infringes on the safety of another user or individual." Complaint at 31 (emphasis added).  Moreover, users must abide by its terms of service and privacy policy.  Gab's policies meet all formal requirements for distribution through the two leading app stores.

Gab's app was approved for distribution to Android users through Google's Play Store since its public launch in May. Gab quickly surpassed its founders' expectations and now has 268,000 users, including 3,000 paid accounts, and reached the $1.07 million SEC limit on "crowdfunded" offerings in only 38 days. Complaint 10, 53,and 55.

Intolerance for Tolerance

In the week following the recent Charlottesville tragedy, on August 17th, Google notified Gab that it had "'suspended and removed [Gab's app] from Google Play as a policy strike because it violates the hate speech policy.'" Complaint 138.  Gab contends that Google's purported justification was a cynical attempt to avoid press scrutiny at a time of national concern over extremist groups; and a mere pretext to eliminate a competitor with a business plan (no advertising, no sharing of user's personal information) that could only threaten, and never benefit, Google's advertising business.

Instead, Gab notes that Google well knew that Gab's app does not advocate "hate" (or any other) speech, but consists entirely of user-generated content ("UCG").  To the contrary Gab explains that it has always been compliant with Google's only formal policy for UCG-oriented apps: that such apps must "take additional precautions in order to provide a policy compliant app experience, requiring apps to define and prohibit objectionable content via terms of service, implement a system to report content, and block users." Complaint para 144.

Later, Google offered further justification (not provided to Gab) for its decision in an email to Ars Technica:

In order to be on the Play Store, social networking apps need to demonstrate a sufficient level of moderation, including for content that encourages violence and advocates hate against groups of people. This is a long-standing rule and clearly stated in our developer policies.

Complaint 140.  Gab notes, however, that this "moderation" requirement cannot be found anywhere in Google's developer policies. Gab also notes that Google would not, and does not, place any such requirement on other "social news" apps like Google+, YouTube, or its commercial partner, Twitter.  The only purpose of Google's arguing for such a requirement, Gab argues, is to raise the costs of entry, and to subject competitors to the risk of losing their Section 230 immunity.  

Policies Are Made for Exclusion Exceptions

Gab's contention that Google's policies are being unevenly applied is beyond dispute.  The most cursory search (via Bing) reveals that not only do other social news sites (e.g., Google's partner Twitter) not filter hate speech or pornography, but they actually sell access to the "hate speakers" to their advertisers.


Gab alleges that Google's "policies" exist only to be strategically applied to apps that compete with/offer little value to Google's other monopoly services.  Twitter's value to Google is obvious by virtue of the parties' relationship predicated on advertising-search "cooperation" (non-competition).  Gab, on the other hand, seems valuable only for features Google/Twitter want to copy--like the higher character limit (280) Twitter announced yesterday. Google--by virtue of its access to Twitter's "Firehose" of user data--knows that its partner either fails to moderate, or actively exploits, the hate speech of its own users. If this were really a concern for Google, Twitter would have been out of the Play Store long ago.

The most interesting thing is not that Google opportunistically applies its "social concerns" to exclude rivals.  Google is nothing if not brazen.  After all, this is the company that has its chief lobbyist blog about how much it cares about sex trafficking victims (in fairness, Google was recognized for a $3 million donation in 2013 to help NGO's better share information), while spending twice that much this summer fighting SESTA. 

Google Lobbying 2Q 17 v2.jpg


What is surprising, though (even for Google), is that Google would use the exact same justification to exclude a competitive app--moderation of speech--that it is telling Congress would ruin the Internet if it were applied to known bad actors.  The thing that hurt Gab the most may not have been so much the speech of its users, but the fact that that speech is unlikely to generate any profit for Google. After all, the Play Store is a business and curates its content accordingly.

google play v2.png

August 2, 2017 9:44 AM

Deconstructing the Internet Giant Myths On Net Neutrality

In the last post, we noted that the Internet giants' arguments, advocating for regulation of ISPs, best describe the only market power they know--their own.  According to the Internet giants, ISPs must be regulated even though the "harms" they identify are all things that Internet giants do with their market power.

On a daily basis, we now witness numerous examples of the Internet platform giants doing the exact thing that they consistently point to as "destroying the Internet" if performed by an ISP, e.g., blocking/throttling/discriminating against content.  When Twitter was recently admonished by members of Congress for openly blocking a link to AT&T's public policy website, it was hardly a "man bites dog" story.  

Previously, we looked at the "fast lane/slow lane" argument--and made clear that this has not, nor has ever been, a practice of ISPs, but is not only the underlying business model for Google and Facebook, it is also what allowed Google to dominate the search engine market. 
In this post, we're going to look at another common "hysterical doom" prophecy advanced by the tech giants' advocacy groups.  

"The Internet Will Become Like Cable TV & Squeeze Out New Content"

In this classic argument from the net neutrality crowd, they paint a scary future world where consumers pay for Internet access the same way that they select cable channel packages today.  They claim that, not only will consumers have to pay for existing free sites, but content from new entrants will not be easy to see unless the entrant also pays for placement.  Here's a common visual aid:
net neutrality cable2.jpg
 This alleged nightmare scenario requires the usual implicit convictions that: 1) ISPs are monopolies, and 2) "[t]hey're destined to screw up the internet."  This specific scenario, however, hinges on a contradictory, yet fundamental, belief unique to Silicon Valley: no one should pay for content, yet we can sell other people's content to advertisers at significant margins.

Other People's Content

The New York Times recently published an in-depth look at Yelp's 6 year fight against Google's search discrimination activities.  In addition to its claim that Google search put Yelp's competing local review service in the "slow lane" (often pushing Yelp off the customer's screen entirely), Yelp maintains that Google "scraped" (stole) its content to post at the top of the search results.   

Google's action against Yelp provides a sense of its dominant power in the market. Yelp, itself, is a huge Internet platform, the 33rd most visited web site in the U.S. and one of the top 200 in the world.  This demonstration of Google's Internet superiority, however, is not limited to large competitors  A recent article on Outline revealed the experience of CelebrityNetWorth.com, and how Google's practice of taking other people's content has far reaching consequences for smaller content creators. 

As the Outline article explains, CelebrityNetWorth.com was an advertiser on Google and paid the firm to be placed highly in response to search queries.  Despite this--and even denying Google permission to use its content in Google's Snippets program--Google, in 2016, started scraping the company's content to post above the search results.  Immediately, traffic to CelebrityNetWorth crashed by 65% and the site's owner had to fire half of his staff of 12. Google, though, isn't alone in the way that it parasitically preys on its own content suppliers.
 
Facebook, likewise, has profited handsomely from the content of others.  In 2015, the company launched its "Instant Articles" program, which was designed to keep readers on Facebook's site for longer.  According to the New York Times, many large publishers, by then dependent on Facebook for referrals to their sites, "agreed to the deal, despite concerns that their participation could eventually undermine their own businesses."

These concerns were not misplaced.  A year later, traffic to the news sites from Facebook had seen double digit declines of as much as 50%.  Recently, Inc. noted that Google and Facebook now have more ad revenue than every newspaper, magazine, and radio station combined.  In response to the rapid growth by these two Silicon Valley behemoths, news content creators recently banded together to seek an antitrust exemption in a last-ditch effort to fight the platform companies' predation with market power of their own. 

Could ISPs Make the Internet Like Cable TV?

It's worth noting that proponents of this dystopia never explain, step-by-step, how the ISP would be able to offer/sell such a service, much less--given the likely market responses--how this service could ever be profitable.  To better understand the likely consumer response, here is a quick review of virtual private network ("VPN") services.

A VPN service allows users to route their traffic, via a private, secure "tunnel" to a 3rd party server. The ISP does not know, nor can it control, the destination of a user's traffic after it is sent to a VPN.  Likewise, the user's destination point can only "see" the IP address of the VPN's server--which makes VPNs very popular among certain Internet users, such as those of Netflix
 
Although the best VPN services are used to protect user privacy, they are not usually free.   But, if you care more about avoiding the "net neutrality nightmares," than you do for your own privacy, Google's got your solution--because of course they always do.

In addition to the world's dominant search engine, the world's dominant mobile operating system, and the world's dominant online translation service, Google also has a dominant position in the web browser market--with its Chrome browser having a desktop share more than 4x higher than its closest competitor (Mozilla).   
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If you need verification of Google's dominance, go ahead and ask one of your kids what web browser their school computer must use.And, it just so happens that Google offers, as a Chrome browser extension, a "free" VPN service to Chrome users.    

What does that mean?  Well, any attempt by an ISP to adopt the "Internet access as cable TV strategy" would only succeed in making its Internet access even less profitable than its real cable TV service.  Keep in mind that while a D.C. Circuit decision makes clear an ISPs ability to offer a "curated" service under Title II regulation, no ISP has yet to offer such a service. 

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While the Internet giants continue to actively promote an outdated myth, they know the truth;  consumers' should actually fear should the tech giants given that they have already turned the Internet into something a lot more like cable than cable.  While, the average cable customer watches just 17 channels; of the top 50 U.S. websites, almost none offer content and an advertising platform not already owned by an existing Silicon Valley Internet platform giant.  

These Internet platform owners are also some of the very richest people on the planet (#2 (but #1 last week) Jeff Bezos of Amazon, #5 Mark Zuckerberg of Facebook, and #'s 11/12 Larry Page and Sergey Brin of Google).  In terms of financial clout (market capitalization), the 4 largest tech giants are more than 3x larger than the 4 largest ISPs.

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This dominant economic power over Internet media has spillover effects in traditional media.  Last week, the media bias watchdog group FAIR reported that its "review of 190 articles from the New York Times, Wall Street Journal and the Bezos-owned Washington Post over the past year paints a picture of almost uniformly uncritical-ofttimes boosterish-coverage." The same article notes that none of the largest papers has written any critical, investigative pieces on Amazon/Bezos in almost 2 years.

Thankfully, though this general lack of scrutiny--by journalists employed by papers dependent on the biggest platforms--is not complete, even at the organizations criticized by FAIR.  Just this past weekend, the Post ran an excellent piece, asking if Amazon was not becoming "too big?"  Likewise, the editorial page of the Wall Street Journal--a publication not known for its skepticism toward big business--recently asked if it was not too late to control Google, Facebook, and Amazon?     

The evolution of the Internet and the ubiquity of VPN service have rendered the "Internet will be like cable" nightmare as about as scary as "the call is coming from inside the house" line sounds to anyone who came of age after 2000.  No, the scary story is not the one the Internet platform giants are shoving down your throat; it's the one they are hiding from the Internet consuming public.