Upon Reflection of the July 29th Hearing Conducted by the House Judiciary Antitrust Subcommittee on Online Platforms and Market Power.

Knowing full well that the politicians had their own self-interests to advance when they were on the clock during the Hearing, I had to remain attentive and patient.  In between the orchestrated political grandstanding and wonderment if there was a question embedded in a lengthy statement by a committee member, there were some meaningful, on the record, exchanges during the more than five hours of testimony that made it worthwhile to stay tuned-in.  Upon reflection, here are my takeaways for each firm in terms of antitrust exposure.

Facebook

In hindsight, maybe the FTC should not have approved, without any action, Facebook’s acquisitions of Instagram in 2012 for $1 billion and WhatsApp, two years later, for $19 billion.  After all, Section 7 of the Clayton Act states that regulators should prohibit mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly." In assessing market potential of the mobile photo app and messaging app, Facebook had the foresight to see the upsides to the acquisitions, achieving synergies while eliminating competitive threats.  Shame on regulators at the time for not evaluating fully the downside risks and challenging the mergers.  Hindsight is 2020.  Regulators should lick their wounds on this one and move on.    

Amazon

When a partner is a rival, business relationships get tricky.  Consider for a moment the streaming market.  Netflix, a platform owner, needs valued content to acquire and maintain subscriptions.  When Netflix started, all of the content it offered was licensed from third parties.  It spent a lot of money for that content from the likes of Disney, Comcast, and ViacomCBS.  Recognizing the potential risk of these business partners becoming streaming rivals one day, Netflix began creating its own content in 2012/2013.  It turns out it was a very good decision as these firms began going direct to consumers over the past few years and began pulling their content from Netflix.  Something they have every right to do. 

Where are the similarities with Amazon?  Amazon has partners too.  Lots of them. These partners sell their wares on the e-commerce platform.  Over 50 percent of sales volume is generated from third parties.  Ask yourself…If you developed a new product, would you look to sell it on Amazon in order to leverage the platform’s speed and scale?  It would be hard to say no, even when acknowledging the firm’s reputation for using the data on its partners to replicate successful product ideas.  While Amazon has policies against such behavior, there is strong evidence that it is happening.  Here is where external regulations are needed in place of internal guidelines. 

Amazon may also have some exposure in using predatory pricing on products like Echo to drive competitors out of the market. Bezos conceded that the firm uses promotional pricing on its smart speakers.  Legitimate pricing strategy?  Not when the below cost pricing is combined with monopoly power and has credibility because losses are financed or recouped from profits earned in other markets (e.g. AWS).

Google

Google is the firm most exposed just based of the actions already taken by the European Commission and what is anticipated from the DOJ by the end of the summer.  Google’s bottleneck and vertical soup-to-nuts control of search and display advertising was achieved largely through acquisitions of firms like DoubleClick and Applied Semantics (renamed AdSense).  The chokehold on serving, buying, and selling mobile and online advertising limits choice and unfairly advantages Google. 

Apple

Apple seemed to come out of the Hearings relatively unscathed.  Tim Cook did not get asked many questions, but, when he did, they were mostly centered on claims that the firm favored its own apps over those built by third parties.  The CEO was effective in deflecting any hint at favoritism by repeating that there were millions of third-party apps available on the Apple Store. 

Where I think there were missed opportunities to press Apple was on how it tied the launch of its new streaming service, Apple TV+, to purchases of its hardware.  Buyers of an iphone, ipad and other Apple devices got a free one-year subscription to Apple TV+.  It is why that one month after launch, Apple had amassed over 30 million subscribers on its platform.  Not bad!  When you consider the elements to support an antitrust violation of a tying claim, they are present here.  The biggest factor being that Apple has market power in the tying product (hardware) which it is extending into the tied service (streaming).  (Amazon has been doing the same things for years by bundling for free its Amazon prime video with its annual prime membership service.)

All Together

As operators of two-sided markets, these “new economy” firms incur high fixed-cost and low marginal cost with the development and sale of intellectual property.  They also benefit from network effects, collect and use big data, and have non-standard relationships between price and cost.  Dominance in each market came initially from signing up a critical mass of users on both sides of the market, and then maintained by continually innovating through growth and/or acquisitions.  

Again, dominance is not bad in and of itself.  It is when it is abused, that there should be concerns, even if it is perpetuated by the very tech companies we love as consumers.  It is why changes to how our antitrust laws are written or interpreted for these “new economy” firms will be challenging.  Lawmakers and regulators will have to check the rhetoric at the door and walk a fine line between being too aggressive and too lenient.  What are the chances they will get it right?

Two Sides to a Market and an Argument

“The successful competitor, having been urged to compete, must not be turned upon when he wins.” Judge Learned Hand, United States v. Aluminum Company of America (1945).

On Monday, July 27^th, the House Judiciary Antitrust Subcommittee will be questioning the CEOs of Amazon, Facebook, Google, and Apple on their digital platform business practices.  The hearing is in addition to probes launched more than a year ago by the DOJ, FTC, and several state attorney generals that may eventually lead to lawsuits being filed.

A sub-plot to the Hearing (and possible lawsuits) is the interpretation and enforcement of the United States’ antitrust laws, specifically Section 2 of the Sherman Act.   The law makes it illegal to acquire, maintain, or enhance monopoly power through improper means.[i] To be found guilty of monopolization, a firm must have substantial, non-fleeting, market power in the defined relevant market AND be engaged in anticompetitive (e.g. exclusionary or predatory) conduct.[ii]  Simple enough.  But, when the Sherman Act was crafted in 1890 and applied by the Courts in the 130 years that followed, digital trade did not exist or had not reached maturity.

Competition remains the ideal, the poster child of how we would like markets to operate because of the existence of productive and allocative efficiency and a normal profit for numerous sellers.  Yet, under certain market conditions, such as when significant economies of scale exist, it may be most efficient to have a few large firms (or even just one) supply the lion’s share of the output.  This is the situation for many digital intermediaries who operate two-sided markets. 

A two-sided market is one in which two separate groups interact on a platform and the decisions of each group affect the outcomes of the other.[iii]  Netflix is a classic example.  On its digital streaming platform, it brings together consumers of video content and the creators of that content.  The more consumers who subscribe to be on the platform the more interest there is among producers of movies and television shows to supply content to Netflix.  The more content on the platform, the more interest there is among consumers to join the platform or maintain their subscription.  Netflix took advantage of being first and scaled its platform.  In a matter of twelve years, it grew its customer base from zero to over 167 million worldwide. It ended 2019 with over $20 billion in revenue, earned mostly from monthly streaming subscriptions.

Although part of FAANG, Reed Hastings, Netflix’s CEO, was not “invited” to speak at the July 27^th Congressional hearing.[iv]  Why not?  In spite of its long-standing dominance in streaming, Netflix’s pricing and non-pricing behavior do not appear to be anticompetitive. Its subscription prices cover its per unit costs (heavily weighed as fixed).  In spite of increasing the amount spent on original content over the years, it does not favor its own content over that supplied by others.  And, lately, its success has prompted others, including Disney and Apple, to enter the streaming market unopposed.

Unlike Netflix, Facebook, Amazon, Apple, and Google are not single-play businesses. With the exception of Facebook, their size and scope allow them to favor their own products, including bundling complementary products (as promotional or free add-ons), foreclosing rivals’ access to distribution, contractually requiring exclusive dealings with other business units, and/or extracting monopoly rents for use of their platforms.[v]  See Exhibit 1.

Size and the possibility of bad behavior, however, do not make a firm guilty.  Consider the flip side.  These firms are innovative, long-term focused, risk-takers, unconventional (Google) and customer obsessed (Amazon).  They warn of complacency and incremental thinking (Google).   They have grown organically and through [big and small] acquisitions, all along not afraid of failure.  They recognize the importance of scale, brand loyalty, and direct and indirect network externalities (e.g. Amazon’s flywheel).  These “successful competitors” have been rewarded for their efforts.

However, if success came or was accelerated because of illegitimate acts that prevented “unfettered competition as the rule of trade,” then the firms have to answer for it.[vi]  It’s a big IF though.  Those trying to build a case against the firms, have to demonstrate that the firm have monopoly power in the relevant markets and their actions harmed the competitive process, not just a single competitor.[vii]  See Exhibit 2.

In the case where users are paying a price of zero for shopping online, searching, connecting with friends, or using smartphone apps, it is difficult to understand the source of the harm.  Consumers love the convenience, the ease of use, the connections, and the “value”.  They are locked into these services, yet they don’t realize it or don’t care – consider the tie-in of apps to smartphones, free shipping and video streaming with prime membership, and the time that would be needed to transfer personal data from one online platform to another.  Consumers do not [fully] consider the value of the personal and behavioral data they share with the intermediaries.  So, they stay.  Inadvertently, they make it difficult for new entrants to amass enough platform participants to gain traction.  Competition fizzles.  Is this the fault of the incumbent?   If competition was possible and was illegally stymied, then there was damage to the competitive process.  Consumers were harmed without realizing it.  Again, it’s a big IF.

IF any of the firms are found guilty, forcing the sale of a business unit or two is not the answer.[viii]  After all, size was never the issue.  Instead, require the firms to alter business practices by mandating conduct remedies (e.g. sharing data with others or placing restrictions on how used), and to pay fines, much like the $9.3 billion imposed by the European Commission against Google in three recent cases.[ix]

With all of this said, we are a long way away from seeing if Section 2 of the Sherman Act is robust enough to fully evaluate the conduct of these firms.  Let us see what unfolds in the weeks (and years) ahead.

Exhibit 1

	Amazon	Facebook	Google	Apple
Year Founded	1994	2004	1998	1976
Net Sales ($M)	280,522	70,697	161,857	260,174
Net Income ($M)	11,588	18,485	34,343	55,256
Market Leadership	e-commerce	social media	internet search	comm. electronics (iPhone)
Related Businesses
Cloud and/or network	AWS	XX	Android, Google cloud, Google Apps	iCloud, iOS, App Store
Devices	Kindle, Fire, Echo, Ring	XX	Chrome, Nest, Waze	AirPods, Apple TV, Apple Watch, Beats, HomePod
Other (among hundreds)	Whole Foods Video Prime	WhatsApp Instagram	YouTube Google Fiber	Apple Pay Apple TV+
Fiscal year ending 12/31/2019, except for Apple, Inc. which was 9/28/2019

Exhibit 2

In the January, the House Judiciary Antitrust Subcommittee heard from four small competitors.  A summary of some of their accusations is provided in the table below.[x]

Accuser	Line of Business	Accused	Claim
Sonos	Voice-controlled wireless speakers	Google (Home) Amazon (Echo)	Using dominance in one market, namely search (Google) and e-commerce (Amazon), to predatory price in another (speakers).
PopSockets	Online retailer – phone accessory	Amazon	Corporate bullying because of power asymmetry.  Pressured firm to lower price to keep product on platform.
Basecamp	Web-based project management tool	Google	Monopoly rent – allowing competitors to pay Google to appear as the first listing in search results.
Tile	Bluetooth trackers	Apple	Tile needs to be paired with an app on a smartphone or tablet.  Competing against Apple’s “Find My” tracking app which is given preferential treatment.

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[i] The United States Department of Justice, “Chapter 1 - Single-Firm Conduct and Section 2 of the Sherman Act: An Overview,” accessed July 20, 2020, https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1#:~:text=Section%202%20of%20the%20Sherman%20Act%20makes%20it%20unlawful%20for,foreign%20nations%20.%20.%20.%20.%22.

[ii] Ibid.

[iii] Marc Rysman, “The Economics of Two-Sided Markets,” Journal of Economic Perspectives, 23 (3), 125-143.

[iv] FAANG stands for Facebook, Apple, Amazon, Netflix, and Google.

[v] For example, Spotify and Microsoft have complained about the high revenue share percentage (“tax”) on in-app purchases and the forced tie-in to use Apple Pay.

[vi] DOJ, Chapter 1, op. cit.

[vii] A finding of monopoly power is consistent with possession of a large share in the relevant market and protection by entry barriers.  All else equal, the narrower the market definition (e.g. online market for diapers) the greater the shares of the included firms.

[viii] Elizabeth Warren proposed that the big tech firms who participate on their own platforms should be forced to spin off those platforms (e.g. Google Search and Amazon’s Marketplace).  She also called for the reversal of mergers, such as Whole Foods by Amazon, WhatsApp and Instagram by Facebook, and Waze and Nest by Google.

[ix] Adam Satariano, “Google Fined $1.7 Billion by E.U. for Unfair Advertising Rules,” New York Times, March 20, 2019, https://www.nytimes.com/2019/03/20/business/google-fine-advertising.html.

[x] Jason Del Rey, “6 Reasons Smaller Companies Want to Break Up Big Tech,” Vox, January 22, 2020, https://www.vox.com/recode/2020/1/22/21070898/big-tech-antitrust-amazon-apple-google-facebook-house-hearing-congress-break-up.

Without a merger, T-Mobile, Sprint, and Dish will fare very differently

On January 15, closing arguments will be heard in the lawsuit brought by Attorney Generals from 15 states and the District of Columbia to block the T-Mobile-Sprint merger.  In early February, we can expect to learn Judge Victor Marrero’s decision in the case.  While it seems like everyone these days is giving new odds on the likelihood the merger will go through, with and without additional conditions attached, are the three firms with the most to gain from the merger, T-Mobile, Sprint, and Dish, likely to feel the loss equally if the merger does not go through?  I don’t think so. 

While T-Mobile has spent a tremendous amount of money and manpower to get the $26 billion deal approved by all regulators, its business is thriving as it reported a gain of 1 million post-paid subscribers in each of the last two quarters.  And, although John Legere will be out as CEO effective April 30^th, the firm’s “uncarrier” approach to the market and its multiple content and wholesale distribution partnership deals will continue to serve it well as it acquires the additional spectrum it needs to accelerate 5G deployment.

The same cannot be said for Sprint and Dish.  These companies need this deal or another to be financially viable in the years ahead.  Both firms reported subscriber losses in the third quarter of 2019 (4Q2019 #s are not available yet) in their most profitable business segments.  According to the Leichtman Research Group, Dish lost 66K subscribers.  During the same period, Sprint shed 26,000 post-paid subscribers, while its competitors all added subscribers.  (Sprint also just announced plans to discontinue its Virgin Mobile service; rolling customers over to its Boost Mobile service.)  If the merger does not go through, look for these two firms to quickly seek out other media firms to merge with or sell assets to.  First on the list for both may very well be the payTV providers, Comcast and Charter.

Netflix: The Best of the Decade

On November 24^th, Taylor Swift was recognized as the Artist of the Decade by the American Music Awards.  If a similar award was given to a firm in the video streaming industry it would have to go to its pioneer, Netflix.  At the start of the last decade, Netflix had 12 million subscribers, all in the U.S., and most of them consuming video content on DVDs received in the mail.  Just one year into the decade, Netflix had expanded into Canada, grew its subscriber base to 20 million, and began delivering a majority of its licensed content over the internet instead of through the postal system. 

With the floodgates opened, Netflix would spend the rest of the decade adding award-winning content to its platform and scaling across the globe.  It will end the decade with nearly 160 million subscribers in over 190 countries.  It will end the decade with more of its content being created exclusively for Netflix viewers.  It will end the decade being ten-times more profitable than what it was at the start.  It will end the decade, however, with having to face new competitive threats from former business partners. 

While sticking to its core competency proved to be the right strategic move for Netflix over the past ten years, will it continue to be going forward?  Afterall, the market entrants are no small fries.  They are legends that spent most of the last decade a bit complacent and unwilling to adapt to changing consumer taste preferences   But, that is now a thing of the past.  The disruption to Netflix and the broader industry is coming from content providers going direct to consumer with their own offerings, bypassing content aggregators like cable and satellite providers.  Leading the charge is a re-energized, re-focused Disney.

Since the inception of cable TV, the success of broadcasters (e.g. ABC, CBS, NBC) and cable networks (e.g. ESPN, HBO, Discovery) was tethered to the rise in popularity among households to pay for a bundle of channels delivered to their television set via a cable box or satellite transmission. At its peak in 2009, 100 million households subscribed.  However, fed-up with rising prices for these fat channel bundles, households began cutting the cord early in the decade.  As broadband technology improved and more streaming services (e.g. Hulu, Amazon Prime) became available, cord-cutting accelerated.  The decade will end with less than 88 million U.S. households subscribing to payTV.

For Disney and the other content owners, the challenge is and will continue to be how to hold onto their lucrative relationships with payTV operators (for now) while building out their own competing platforms.  While it is uncertain how consumers will respond to unbundled, somewhat customizable choices for how they allocate their screen time, Disney is primed to be a favorite among consumers and the “one to beat” among its competitors in the decade ahead.  Its success will derive from its extensive content library and theatrical dominance combined with recent acquisitions (e.g. BAMTech and Fox) and product launches (ESPN+ and Disney+).  Its success, however, won’t come easy and cheap.  Disney will have to fiercely compete with the likes of Comcast, ViacomCBS, AT&T (Time Warner), and, yes, Netflix to attract and maintain subscribers.  It will have to spend a lot of money on content creation.  It will have to/want to acquire content by scooping up smaller, fringe firms that have found it difficult to sustain profitability on their own with insufficient scale and consumer loyalty.  In ten years, expect that the video streaming market is much bigger and dominated by the same handful of giant firms (including Netflix) that control the big screen.  Stay tuned!

Update: Legere staying on at T-Mobile until end of April

Thank goodness for T-Mobile employees, customers, and shareholders, Legere is staying put until his contract expires at the end of April.  Although I think more time at the helm would have been better, Mike Sievert, current President, COO, and Board Member at T-Mobile is the natural succession choice.

Legere Needs to Stay at T-Mobile

In other news this week, WeWorks, controlled by SoftBank, was rumored to be courting T-Mobile’s CEO, John Legere, to be its new CEO.  SoftBank currently is the majority shareholder in Sprint, the company merging with T-Mobile in early 2020, if a settlement with 15 states trying to block the merger is reached.  In the twists and turns of the T-Mobile-Sprint merger, Marcelo Claure, who is the executive chairman of Sprint, is also the COO of SoftBank.

 

The attractiveness of Legere to be the savior of WeWorks makes sense.  His success in elevating T-Mobile to the 3^rd largest wireless carrier in the U.S. with his eccentric and “make it happen approach” is undisputable.  But, if T-Mobile is going to get through the court case with the states AND live up to all its promises to the federal and state agencies, it needs Legere at the helm.  No ands, ifs, or buts.

What a Week It Was For Disney

Last week, Disney introduced Disney+, its new streaming service.  The price is $6.99/month as a standalone product or $12.99/month when bundled with Hulu and ESPN+.  The bundle price is the same as what Netflix charges for its most popular offering.  Within the first day, 10 million households had subscribed. 

With full operational control of Hulu since the spring, Disney also announced that effective December 18, the price of its Hulu+Live service will go from $45/month to $55/month, a 22% increase.  The price increase comes 6-months after a 12.5% increase in January (from $40 to $45). 

If you had any doubt, the two announcements “define” what market power looks like!  While Netflix had the first mover advantage and has grown to over 150 million global subscribers in a dozen years of streaming , Disney’s huge brand identity and intellectual property assets (which it no longer licenses to Netflix), makes its “late” entry into the market a huge concern for Netflix.  

For now, Disney can enjoy the fanfare and the excitement around the launch.  But, in 2020, the market is going to get more crowded with other media giants (e.g. NBC Peacock and AT&T’s HBO Max) entering with their own direct-to-consumer entertainment choices that will be priced to attract and retain subscribers.  While it is not a zero-sum game or an "everyone will be a winner” situation, expect that, when all is said and done, Disney will be one of the major players in this space.