DKT/CASE NO.:P951201
TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
PLACE: Washington, D.C.
DATE: October 12, 1995
PAGES: 1 through 157
Meeting Before the Commission
Date: October 12, 1995
Docket No.:P951201
FEDERAL TRADE COMMISSION
I N D E X
WITNESS: EXAMINATION
None.
E X H I B I T S
FOR IDENTIFICATION
Commission's:
None.
FEDERAL TRADE COMMISSION
In the Matter of: )
)
) Docket No.: P951201
HEARINGS ON GLOBAL AND )
INNOVATION-BASED COMPETITION )
Thursday,
October 12, 1995
Federal Trade Commission
Sixth and Pennsylvania Avenues
Room 432
Washington, D.C. 20580
The above-entitled matter came on for hearing,
pursuant to notice, at 9:11 a.m.
SPEAKERS:
ROBERT PITOFSKY
Chairman, Federal Trade Commission
MARY L. AZCUENAGA
Commissioner, Federal Trade Commission
SUSAN S. DE SANTI
Commissioner, Federal Trade Commission
ROSCOE B. STAREK, III
Commissioner, Federal Trade Commission
JANET D. STEIGER
Commissioner, Federal Trade Commission
CHRISTINE A. VARNEY
Commissioner, Federal Trade Commission
SPEAKERS (Continued):
JOSEPH STIGLITZ
Chairman, Council of Economic Advisers
LEWIS E. PLATT
Chairman, President and CEO
Hewlett-Packard Co.
SANFORD M. LITVACK
Senior Executive Vice President and
Chief of Corporate Operations
The Walt Disney Co.
RYAL POPPA
Chairman, President and Chief Executive Officer
Storage Technology Corporation
PROFESSOR KENNETH W. DAM
University of Chicago Law School
JAMES F. RILL
Collier, Shannon, Rill & Scott
DEBRA VALENTINE
P R O C E E D I N G S
CHAIRMAN PITOFSKY: Good morning, everyone. Since these hearings beginning today are going to run on for almost three months, I think it's a good idea to get started.
I'm Bob Pitofsky, Chairman of the FTC, and it's a great pleasure for me to welcome you on behalf of my fellow Commissioners and myself to this first session of the FTC's hearings on Global Competition and Innovation-Based Competition.
The purpose of these hearings is to assess whether any adjustments to antitrust and consumer protection policy are necessary in light of changes in competition and the nature of competition, as we approach the 21st Century.
In a sense, we look to the temporary National Economic Committee as an historical antecedent for these proceedings. The TNEC was established by resolution of Congress in 1938 as a bipartisan committee with representatives from both political parties and from Congress and various federal agencies. President Roosevelt then asked the committee to do a comprehensive study of concentration in industry, of industrial price policies, and of existing government policies and their effect on trade and commerce.
Although our charter is not quite that broad, we do intend to look at the effective antitrust and consumer protection policies on consumers and on commerce, and we embark on this process in the same bipartisan spirit that informed the TNEC.
Before I begin my remarks, let me take care of a few administrative details. First, you should know that, not surprisingly, given the stature of today's speakers, some of them may have to leave after they finish their presentations or may be arriving after other speakers have started.
Second, if time is available, we hope to have an opportunity for questions, but we ask you please to write any questions that you have on cards that are available in the anteroom. You may give the questions to Ben Hadley, who will collect them for us, so that we may give them to the speakers.
Finally, the burden of putting these hearings together was enormous and if they are to be a success, credit goes to Susan DeSanti, to Debra Valentine and to the hardy band of lawyers and economists who have assisted them in this project. They have worked wonderfully together, and any success we have will be due to them.
Now, let me offer a few opening remarks about my view of these hearings. One of the principal responsibilities of government regulators is to ensure that the laws they enforce are regularly reviewed, and occasionally adjusted to take into account changing conditions in the world. Many recent challenges to what is called overly intrusive or burdensome regulatory activities really should be addressed to obsolete regulation, rather than regulation itself.
The responsibility to stay up to date is especially important in an area like antitrust and consumer protection. The statutes that government regulators enforce are broad and sweeping, leaving a great deal to prosecutorial discretion.
Many enforcement areas have become highly technical and specialized. Patterns of trade are changing rapidly as a result of global competition and the increased importance and pace of technological change, and the Courts have less time and less incentive to deal with the details of competition policy.
The result of all that is that enforcers have increasingly broad discretion, to impose rules often based on Court decisions from 30, 40 and 50 years ago, in a commercial world that has become a very different place. The hearings we initiate today are designed to address the responsibility of insuring that the competition and consumer protection policies we enforce continue to be relevant in the modern economy. These hearings are not designed as a wholesale review of antitrust policy. On the contrary, we assume that the core aspects of these enforcement regimes, hostility to monopoly power and cartels, concern for consumer protection against overreaching fraud and deception, have served the country well.
One of our premises is that the best way for American firms to succeed in global markets is to be forced by law to compete vigorously in domestic markets. These hearings, therefore, will not address the question of the fundamental validity of antitrust or consumer protection efforts, but rather whether there are adjustments that need to be made in substantive law and in procedure, to take into account the vast changes that have occurred in commercial markets in the second half of the 20th Century.
It's particularly appropriate that these hearings occur at the Federal Trade Commission. When established in 1914, its sponsors asserted that one purpose of the agency would be to gather for the use of Congress, accurate and complete information about industry and the nature of competition.
Some of the FTC's most constructive efforts have been in the nature of public hearings -- a study of radio broadcasting in 1927 eventually was converted into the Federal Communications Act of 1934. The Commission's investigation of the public utility industry influenced the Public Utility Holding Company Act of 1935. Its investigation of securities abuses led to security industry regulation and the Securities Act of 1933, and it's investigation of merger activity after World War II is relied upon by Congress and cited by the Courts as reasons for amending Section 7 of the Clayton Act, imposing far more stringent limitations on mergers.
In recent decades, the FTC's investigative and reporting function has not been as vigorously pursued. These hearings are designed to restore the tradition of linking law enforcement with a continuing review of economic conditions to ensure that the laws make sense in light of contemporary competitive conditions.
We do not initiate these hearings with any pre-established conclusions in mind. Our goal is to solicit the opinions of a wide variety of witnesses from government, business world and academia on issues of global competition and innovation.
Some of the questions we will address are, to what extent and how does antitrust affect important business decisions? Has antitrust or consumer protection enforcement impeded the ability of American firms to compete vigorously in global competition or to achieve success in global markets? What is the appropriate way to measure market power when competition is worldwide? Has American antitrust enforcement paid sufficient attention to claims of efficiency? Has American antitrust enforcement taken into account claims of failing company or distressed industry, especially when the claim is related to imports.
Are there forms of collaboration designed to improve firms' ability to compete abroad or R&D innovation that are needlessly inhibited in competition enforcement? Are consumers in need of different types or levels of government enforcement against fraud and deception, where new marketing techniques are involved, especially marketing by telephone or with televisions, particularly cable, and now on the Internet?
We look forward to an opportunity to discuss, to analyze and to learn. In the end, we intend to draft a report to the public and Congress on the status of United States competition and consumer protection enforcement policies on the eve of the 21st Century.
Let me now introduce our first and our keynote speaker. Joseph Stiglitz is chairman of the Council of Economic Advisers, appointed by President Clinton in June, 1995. He has served as a member of the council since July, 1993.
In the past two and a half years, Mr. Stiglitz has been an active member of President Clinton's economic team. He has written extensively on the important but limited role that the government should play in the economy. He's a leading advocate of market failure approach, which attempts to delineate those areas where the market by itself may lead to inefficient outcomes and where cost-effective government remedies may be developed.
Mr. Stiglitz currently is on leave from Stanford University, where he is a professor of economics. Before that, he was a professor of economics at Princeton University, and he was appointed professor of economics at Yale University in 1969 at the age of 26. It is a great pleasure for me to welcome Joseph Stiglitz.
(Applause.)
MR. STIGLITZ: Chairman Pitofsky, Commissioners and distinguished guests, we all know what happens in the game of Monopoly. If you own both Boardwalk and Park Place, you can raise what you charge anyone who lands on them. In the game, competition is something to avoid.
In our real world economy, we would want different players to build hotels on Boardwalk and Park Place, because competition is the key to increasing our society's wealth. With competition among hotels, room rates would fall to cost, not counting, of course, in the context of the game of Monopoly, but in the market economy, this is what we want. Over time, competition would lead the hotel owners to innovate. It would find ways of reducing operating costs without compromising service, leading prices to fall further, and they would compete to increase product variety.
One would add an indoor pool, another would upgrade its lobby, a third would add movies on demand. Through lower prices, competition would also guarantee that these benefits of good economic performance would be passed on widely to consumers, not concentrated in the hands of monopolistic interest.
In short, competition promotes efficiency, innovation and equity. Competition is the key to success for our market economy.
I'm delighted that the Federal Trade Commission is taking a fresh look at how competition works in our increasingly integrated global economy, in an innovation driven age, because the Clinton Administration has worked tirelessly to promote and protect competition.
Our strong and productive economy is a testament to the enormous potential of private enterprise. It is equally a testament to our ability to unleash that potential by safeguarding competition in the marketplace. Left alone, firms will seek and often find ways of stifling competition and so shafting our economic potential and the welfare of our consumers, individually through monopolies and collectively through cartels.
As Adam Smith, the patron saint of free enterprise observed, people of the same trade seldom meet together, even for merriment and diversion, where the conversation ends in a conspiracy against the public or in some other contrivance to raise prices.
To release the market from the chains of monopolies and cartels, the United States enacted the Sherman Act, our first national antitrust law, in 1890. The success of the U.S. antitrust law has caused our competition policy to be emulated by many other nations.
The Supreme Court has properly called the antitrust laws, "...a comprehensive charter of economic liberty, aimed at preserving free and unfettered competition as the rule of trade." We need vigorous antitrust enforcement, because market forces alone do not always prevent monopolies or cartels.
Firms have strong private incentives kept in check by antitrust enforcement, to create monopolies by merging with their competitors, collude with their rivals and to harm competition by unreasonably excluding competitors from the marketplace.
To protect and promote competition, this administration is strongly committed to vigorous antitrust enforcement, a commitment I strongly share. I therefore am delighted that the President has appointed to energetic champions of strong and responsible antitrust enforcement, Chairman Robert Pitofsky of the Federal Trade Commission and Assistant Attorney General Ann Bingamen. They, in turn, have attracted accomplished and industrious teams of lawyers and economists to lead the federal antitrust enforcement agencies.
I want to turn to two separate issues, the challenges we face as we attempt to replace regulation with competition, and the challenges we face as a result of globalization and innovation.
First, turning to the issues of replacing regulation with competition. Industries like telecommunication and electricity generation were, at one time, considered natural monopolies, able to support only one firm. But, with the growth of demand and the development of new technologies, we see the opportunity to develop competition. Some day, possibly by the turn of the century, your local telephone company will be able to provide telephone, cable television service and computer data services over one line, and so will your local cable television company and new firms using wireless technologies.
In such traditionally regulated natural monopolies as cable mobile telephone service, the administration's goal is to replace regulation with competition, as soon as competition can be viable.
But, we cannot simply deregulate local monopolies and wish for competition. That will be to the worst possible outcome. A monopoly is free to gouge consumers through high prices, without the discipline of either regulation or competition.
We must remove legal barriers to entry that insulate some firms from competition, but we must also insist on safeguards against abuse by monopolists that would and could slow down the transition to competition.
Let me emphasize that when I say competition, I mean actual competition and not merely potential competition. Competitors must already be established in the market with adequate assets and know-how to serve customers. Threat of competition is not enough.
This is an important distinction. Economic theory predicts, and experience for many industries, such as airlines, confirms that threat of entry is not enough to keep prices low. Significant actual entry must occur to ensure the emergence of vigorous competition.
When there is deregulation without competition, American consumers often pay the cost. In 1984, deregulation freed basic cable television rates in most metropolitan areas, but did not create competition for the local cable monopolies. The predictable result, the cable monopolies raised the rates substantially. So, in 1992, Congress was forced to step in to protect consumers from the result of the error of deregulating without replacing regulation with competition.
Today, we have an historic opportunity to enact communications legislation that would replace regulation with competition. Unfortunately, the pending telecom bills don't do that. They do deregulate, and in doing so, they would remove the legal barriers to entry that protect local telephone companies and local cable companies from competition. But, they could well harm consumers by unleashing cable and local telephone monopolies without safeguards, to protect consumers during the transition to competition.
Safeguards are missing in at least three places. First, the legislation would deregulate cable television rates prematurely. This repeats the error made in 1984, and will predictably lead to the same result, higher cable rates for consumers.
Second, the bills that allow local cable and local telephone companies in smaller markets to merge, subject only to time consuming, costly and uncertain antitrust challenge on a case by case basis. This would stifle the growth of competition between the existing cable and telephone networks, which is one of the most promising forces for keeping cable and phone rates low in the future, unregulated environment.
Finally, and most importantly, the legislation would harm consumers by permitting local telephone monopolists to enter into long distance services before they face any meaningful competition in local service, without sufficiently requiring them to cooperate in creating local competition. Without local competition, the Bell monopolists can entrench their position and distort long distance competition.
Deregulation without safeguards can actually delay the arrival of competition. The result will be telephone rates above what they would be with true competition and less innovation and choice for consumers.
Let me now turn to a number of problems of antitrust in a changing world. Even if traditionally regulated industries are deregulated in a timely and responsible manner to allow competition, antitrust will play a major role in ensuring the continued growth of competition in the face of attempts by entrenched, dominant firms to stifle its growth.
In traditionally unregulated markets, antitrust cases charging firms with monopolization have been fairly rare, primarily because firms in unregulated markets rarely have the degree of market dominance to satisfy a monopolization standard.
But, deregulization of previously regulated monopolies would often create firms that, at the outset, possess a dominant market position. Guarding against abuses by such firms raises new challenges for antitrust. Antitrust is ready for that challenge. One of the great virtues of relying on the antitrust laws to maintain competition is their ability to adapt over time to changing circumstances.
The flexibility of antitrust enforcement has been demonstrated most recently by the series of guidelines promulgated by the two federal antitrust enforcement agencies. The health care guidelines issued jointly by the Justice Department and Federal Trade Commission in 1993, and revised in 1994 represents a laudable effort to provide tailored advice to hospitals and doctors who are discovering that competition is increasingly replacing regulation.
The horizontal merger guidelines were last revised by the Justice Department and Federal Trade Commission in 1992 to incorporate up to date economic thinking about the ways mergers might harm competition and the possibility of the entry of new competitors might deter such harm.
Earlier this year, the Justice Department and Federal Trade Commission took the first steps towards adapting antitrust to the twin challenges of the globalization of competition and the importance of technological change, by issuing two sets of guidelines, one concerning the international enforcement of the U.S. antitrust laws, and the other treating the licensing of intellectual property.
Through these hearings, the Federal Trade Commission is embarking on the next step. Global competition and innovation, indeed, raise the antitrust issues of the future. But, while antitrust must adapt to these challenges, neither undermines the importance of maintaining competition through effective antitrust enforcement.
Let me turn now to the issues of antitrust and globalization. Increased openness of the U.S. economy makes foreign firms who export to the U.S. additional competitors in many U.S. markets. But, foreign export competition is not always sufficiently strong or reliable that we can abandon antitrust enforcement, for example, against domestic price fixing or mergers.
Rather, the discipline imposed by foreign competitors must be considered to be one of the many factors relevant to determining competitive conditions. Antitrust enforcement got this right in 1984, at least in basic outline, when the Justice Department issued revised major guidelines to codify the practice of the enforcement agencies.
Today, foreign competition is included in the relevant market, and thus considered in assessing market power in the market when evaluating the anticompetitive potential of mergers.
Several other challenges presented by globalization remain, and I will highlight two. The first is more of a challenge for international trade law than antitrust, and that is to revise the trade laws to make them consistent with the competition protection principles of antitrust.
Dumping law, for example, must be defined according to the same principles antitrust uses to identify predatory pricing, and not defined according to peculiar accounting principles that make it a disguised form of protectionism.
A second challenge of globalization is for antitrust policy. That challenge is to ensure that our energetic antitrust enforcement, the most effective and sensible in the world, does not place U.S. firms at a competitive disadvantage, relative to their foreign rivals. This challenge has already in large part been met. Our antitrust laws deter monopolies and cartels, and there is no compelling evidence that this deterrence comes at the price of forcing firms to forego important economies of scale or scope.
Far from creating competitive disadvantage for U.S. firms, antitrust enforcement is one of the most important reasons for the success of domestic producers in America in the global markets. Domestic competition makes U.S. firms leaner, more agile, more responsive and more innovative, and therefore, stronger global competitors.
My colleague at the Council of Economic Advisers, Martin Bailey, recently completed a study working with the consultants at McKinsey & Company. After in depth case analysis of global competition in a wide range of manufacturing and service industries, Martin and his co-authors concluded that vigorous competition plays a central role in making firms more productive.
Other leading business consultants have read the evidence in a similar way. Michael Porter has been struck by the same observation. Vigorous domestic competition makes firms stronger global competitors. For example, rivalry among Swiss pharmaceutical companies has contributed to their leading worldwide positions. The evidence emphatically does not demonstrate any widespread need to allow large consolidations or restrictive practices, in order to enhance the competitive success of domestic firms in the increasingly global marketplace.
I do not mean to argue, of course, that cooperation between domestic competitors can never be welfare enhancing. In limited circumstances, with proper antitrust safeguards, such cooperation can be beneficial. Congress recognized this over a decade ago when enacted legislation guaranteeing rule of recent treatment for research and development, joint ventures, to register with the antitrust enforcement agencies.
Now, let me turn to a set of issues concerning antitrust innovation. Innovation also presents challenges to antitrust policy, yet as with globalization, the importance of innovation confirms rather than undermines the importance of effective and responsible antitrust enforcement. Examples of how competition increases product variety and quality abound. Competition from foreign car makers arguably has had a positive effect on our auto industry. Some claim that it led Ford to build the Taurus and GM to create Saturn. It almost undoubtedly created part of the spur to innovate that led some of our auto companies to the preeminent position and productivity that they have today.
Similarly, competition from Apple is believed by many to have led Microsoft to develop Windows. I have heard the predictable criticism of antitrust enforcement in high technology industries. When enforcers find out a successful firm has harmed competition, they are accused of penalizing success. When enforcers find that an unsuccessful firm has harmed competition, they are told that a firm losing money cannot harm consumers.
These self-serving accusations by alleged law breakers miss the point. To tell whether antitrust enforcement is on the right track, whether it deters harmful conduct without impeding pro-competitive business activity, we must ask whether the enforcers got their economic analysis right in the cases they bring, not how profitable the defendant is.
When we turn to the economics, antitrust holds up well to scrutiny. Just as market definition expands to account for global competition when foreign firms provide competitive discipline for domestic producers, market definition expands when technological change blurs industry boundaries.
Innovation and high technology industries do present some important challenges to antitrust enforcement. One is the possibility that firms could come to control industry standards as a competitive strategy. Another is the possibility that firms might impede competition with the overbroad assertion of intellectual property rights. I hope that such questions will be considered in these hearings.
After a century of living under the Sherman Act, effective and sensible antitrust enforcement remains critical to our economic well being. Antitrust must flexibly address the challenges presented by globalization and innovation.
These hearings are taking a major step towards doing so by asking the right questions. I'm looking forward, Chairman Pitofsky, toward learning your answers.
CHAIRMAN PITOFSKY: Can we ask a few questions? Would that be all right?
MR. STIGLITZ: Sure.
CHAIRMAN PITOFSKY: Let me start. You've written in a very influential way about R&D and the fact that R&D is different than other aspects of the commercial world. What is there about R&D that, as antitrust people, what are the things we ought to keep our eye on?
MR. STIGLITZ: Well, I think a couple of the issues that I referred to in my remarks are probably the things that one ought to focus on particularly. One of them is the issue of the nature of the patent law. There's a famous story of in the early 1900's, where, I forget the name of the guy -- it may come to me in a minute -- asserted a patent right to all four wheeled vehicles that were self-propelled. And, he used this claimed patent, he got a patent, and he tried to use this as a vehicle to establish a cartel of all automobile manufacturers.
Not surprisingly, he was very clever about it. He didn't charge too high of a license fee, and most of the other participants in the market were willing to go along, willing to pay him a little bit of a royalty to act as the ringmaster to organize a cartel. There was only one firm that refused to go along, and that was a firm that wanted to hit another part of the market, namely Ford, who believed that automobiles ought to be made available at a widespread, at a low price.
Ford challenged the patent. It was very, very risky, because had he lost, he would have been out of business, and it was a very well known and contentious case, and he eventually prevailed. But, it shows you that issues of patent law have had a role in competition policy for a long time. Those issues that interface between patent law and innovation is one that I think has to be looked at. I don't know the exact answers, but I think it's one that one has to look at very carefully.
Secondly, R&D does raise issues about market definitions. I mean, obviously, the consequence of R&D means that the example I gave earlier in terms of technology in the telecommunications industry, as technology changes, what is the natural monopoly. What are the monopoly powers and relevant market definition that will be changing? This is more a consequence of R&D than the nature of the R&D market itself.
But, we have to be sensitive to how technology and R&D is going to be changing the nature of the marketplace.
I guess the third challenge that we have to worry about is in certain areas of R&D, our standard setting. Standards are very important, and standards can be used to leverage monopoly positions, and some firms have tried to use standard setting as a way of leveraging monopoly position, you know, claiming that, you know, a firm discovers that you type slash something Q is a patentable idea that means QUIP, and they ought to have a patent. Everybody uses a language and if you try to claim a patent to that, it can stifle competition. So, standards in an evolving market are going to be using standards as a way of stifling competition is a third example.
Let me step back and pose a question from a slightly different perspective. We often talk about how important patents are to promote innovation, because without patents, people don't appropriate the returns to their innovation activity, and I certainly very strongly subscribe to that. The key importance of intellectual property rights is part of the mechanism that the market economy has to stimulate motivation. It was so important that it was included in the Constitution, so it gives you a sense of how important that is.
On the other hand, some people jump from that to the conclusion that the broader the patents rights are, the better it is for innovation, and that isn't always correct, because we have an innovation system in which one innovation builds on another. If you get monopoly rights down at the bottom, you may stifle competition that uses those patents later on, and so the breadth of utilization, maybe I should say, in a broader sense, the breadth and utilization of patent rights can be used not only to stifle competition, but also have adverse effects in the long run on innovation. We have to strike a balance.
CHAIRMAN PITOFSKY: Any other questions?
MS. STEIGER: I'm particularly interested in the concern you raised about standard setting. Certainly I think of standard setting in the rather plebeian way, perhaps, in the goods markets, for example, associations of people expert in the development of, say, pipe, perhaps or some other ingredient, component of construction, will establish a standard. This agency is well aware of the potential of abuse there.
But, when you say standard setting, are you talking about a looser kind of routine that sets standards?
MR. STIGLITZ: Yes, I'm talking in a much broader sense. For instance, sometimes standards evolve in the marketplace without anybody getting together and doing it collectively. For instance, the English language, or language in general is a standard. We communicate, there's a standard of communication that we use in communication. Nobody got together and decided, this is how we're going to communicate. It just evolved.
And, the same thing occurs in, say, computers. Software standards get established by the marketplace, and the issue is, I think one of the subtler issues here is that because these standards have evolved out of market interactions, we might say, well, it's a marketplace, it's the most successful standard, let them get the credit for it.
Here again, one has to look at a balance. The point is that to the extent that there is an intellectual effort required to establish, to figure out what the best standard is, people ought to be rewarded for coming up with a form, and that's what intellectual property is.
On the other hand, sometimes just first entered in the market creates the language which is then used, and that gives them the monopoly power which they can then preserve. Let me give an example of this.
One standard that we use in typing is the QWERTY standard, where the keys on the typing board are. That evolved. You know, somebody actually did first put it there on the -- somebody put it in the keyboard, and I think actually there was some thought that went into it. The reason, at least the popular story, that they used that particular format is that that slowed down typing in the days when, if you were too fast of a typist, the keys would hit and jam. I don't know if you remember the old days, before electronic computers. So, you needed to make sure that your fingers didn't go too fast.
So, that was a standard which evolved, but somebody could have just taken any other standard and put it down on the keyboard without even thinking about it. The first guy who does that, then people get used to that. All other kinds of innovations might happen to computers, but the fact that people are used to having where their fingers are gives that guy enormous amount of power. Successors might come along and say, I want to have a keyboard that's the same. The guy didn't do any research to think about the keyboard, he just put it down, and yet, he can use that patent on that, or copyright, depending on which law it comes under, to exercise monopoly power. That's the kind of example that seems to me one has to guard against.
CHAIRMAN PITOFSKY: Any other questions?
MS. VARNEY: Thank you, Chairman. I have two thoughts this morning. I wanted to get your ideas on the first part of your remarks, you talked about market entry and the need to look for real and actual market entry, and I wondered if you'd just give us a moment of your thoughts on how you relate that when we're looking at R&D and the product is not a goods market, but maybe a patent asset? We have seen a couple of instances since I have been here where firms have attempted to create some kind of business combination where the assets involved are patented assets, and the innovation that would -- probably that's projected depends on one company getting a hold of another's patent that's currently blocking it.
Is your market analysis there as rigorous as it is for an existing goods market, or do you change analysis when you're looking at strictly R&D?
MR. STIGLITZ: Let me step back a minute, and first make a general remark, which is that the general theory of competition, which underlies you might say traditionally antitrust analysis, which doesn't include R&D, the older style, is based on -- there's a rigorous body of theory that says that -- going back to Adam Smith -- that competitive markets lead to efficient outcomes. And, you know, some general theorems about that, and a lot of evidence in support of that.
The theoretical foundations in the area of R&D are weaker. That is to say, there isn't a general theorem that says that markets, if left alone, lead to the same kind of ideal outcomes, partly because this is the sort of blend that the trade offs that I was hinting at before, in order to provide a spur for innovation, you have to have patents. Patents are, by their nature, a monopoly right, a temporary monopoly right, and you have to be able to give firms the right to appropriate returns through exercise. If yo didn't give them some ability to appropriate the return, they wouldn't have any incentive to innovate.
So, there's always a little bit of tension between competition, in some sense, and innovation.
What I think good antitrust law tries to balance that out and asks, what is the intent of what is going on here? Is this a part of an attempt to monopolize an industry, as in the case of the automobile industry that I gave before, where clearly, the guy was promoting innovation. He was actually interested in stifling innovation, and that may be the case for some of the examples that you described before, where people are trying to lock up a market and to appropriate returns or reduce competition. And, one of the cases where the patent laws and the property rights that are associated, intellectual property rights, are being used in a legitimate way to provide returns that provide incentives to entrepreneurs to engage in innovation.
So, I think that it will take a little bit more -- it makes your job more interesting, I think, in that you don't have as clear guidelines, you don't have clear -- you have to use judgement, and that's why antitrust, I think, is such an interesting area, because it is an elan in which you can say, this is what's going on. You can write clean precepts of what's going on.
I think if you have in mind, though, what are the basic principles and the teachings, then I think you can go forward and use judgement about how you balance these various concerns about promoting competition on the one hand and the abuse of these intellectual property rights and patents to stifle competition and to reduce innovation.
Oh, and let me make two more remarks about -- one I alluded to in my prepared remarks about potential competition in general versus actual competition.
There was, for awhile, a doctrine in economics that said that all you needed was potential competition. Even when that idea was widely discussed among the academics, among some academics, it did not have a good theoretical foundation, and was -- at the same time it was being attacked from a broader perspective within academic literature.
There's a certain lag always. Ideas, just as they become fairly thoroughly discredited in academia, become adopted in the public, and I think that's what's happening, unfortunately, within the judicial system right now, that ideas of potential competition, which are now fairly well discredited, are becoming widely embodied in some judicial decisions.
There's a paper that I wrote a number of years ago, I can't remember now how many, but in which I showed that, for instance, all you need is arbitrarily small some costs that if you enter an industry, and you leave it and you can't recover, they could be arbitrarily small, and the contestability or potential competition argument disappears, is not valid.
So, there was really no intellectual foundation for that theory, and the evidence supported that. You look at the airlines, which is sort of the example that they gave all the time. They said, you know, here is really mobile capital. There's no other capital that's more mobile. You have a market in which price goes up. You can take that airplane and move it into that capital. You can't take that electric power plant and lift it up. You see prices going up, you can't move -- electric power plants are really sunk. But, airplanes are really mobile.
And, yet, those of us who live in California know that between Los Angeles and San Francisco, we've been watching these prices go up and down. It's wonderful. You look at the paper one day, the fares -- when there's actual competition, the fares to Los Angeles are $29, so we go down and just land and all that becomes readily accessible.
A few weeks later, a couple of firms exit the market and the price is $279 one way. And, anybody that believes that potential competition is able to keep prices down just hasn't looked at the evidence.
Now, there are a whole set of issues turning to innovation and potential competition, there are a whole set of issues where leading the dominant firms can use their positions to deter entry into innovation. There has been concern, for instance, in one market, in which there's a firm that has a very large position in a particular market, that it might reach over into a closely related market, and leverage some of its dominant market position in one market to preempt competition in another market and establish a dominant position.
The real concern, I think, in these new markets, is that even the -- you know, that you can leverage dominant positions in an innovating market to deter entry into new markets and help leverage your position into that new market.
We have heard reports, for instance, in that case, where potential new entrants can't get capital to enter that market, because they say, we see this big guy around the corner. If we enter that market, he has a deeper pocket than we possibly can get. If he decides to enter that market, he will enter very forcibly and put you out of business, so we're not going to put the capital out.
Now, how do you deal with that problem? There isn't any easy answer. You know, there are some. One way of doing it is making very clear that you are going to have strong antitrust enforcement in these areas, but it is a real problem, potential problem.
CHAIRMAN PITOFSKY: Well, thank you so much for getting our hearings off in such a thoughtful way. We really appreciate it. Let's take about a ten minute break and then we'll resume.
(Whereupon, a short recess was taken.)
CHAIRMAN PITOFSKY: We're ready to continue. I would like to introduce at this time Lewis Platt of Hewlett-Packard, from the computer product sector. In 1990, he was named head of the computer systems organization. In 1992, Mr. Platt was elected president and CEO and a member of the board of directors. He succeeded David Packard as chairman in 1993.
Mr. Platt has served on the Advisory Committee of Trade Policy Negotiations for President Clinton. He currently serves as chairman of the Committee's World Trade Organization Task Force, is a director of several corporations and is a member of the Business Council, the Business Round Table and the California Business Round Table. We welcome him to these hearings.
(Applause.)
MR. PLATT: Chairman Pitofsky, Commissioners, fellow participants and distinguished guests, Hewlett-Packard welcomes the opportunity to participate in these hearings, and we appreciate your commitment to changes in antitrust policy that will lead to a level playing field for U.S. businesses in today's global environment.
HP is aware of the ongoing discussions and debate over the possibility of convergence of antitrust laws and policy across international jurisdictions. The concept is extremely complex, one filled with issues of both feasibility and desirability.
For today, we would like to discuss a more limited topic, U.S. antitrust policy. Now, in recent years, HP's experience with the FTC has been uniformly positive. When our plans have been reviewed, we found your staff knowledgeable, cooperative and receptive to our prospectus. We believe that both the FTC and the Justice Department are sensitive to the high technology sector and want to find solutions to the unique antitrust concerns the high tech industry presents. As a result, we feel quite comfortable on offering recommendations we think will help U.S. businesses compete in the worldwide marketplace of today.
Let me begin by describing very briefly the business environment in which we operate, then, how reforms or refinements in antitrust policy would be beneficial. First, high technology markets are growing and overlapping. In some cases, historically distinct markets are converging at now accelerating rates. The telecommunications, computation, information, financial and entertainment industries are invading traditionally separate marketplaces as technology becomes more powerful, and as collaboration among these players becomes increasingly more common. You read about this each day in the newspaper.
Second, product life cycles are shorter. Five years ago, the average product life cycle, that is, the time that the product is in the marketplace from the time we introduce it to the time we withdraw it from the marketplace was three to five years. Today, for many of our products, it is only six to 12 months.
So, we must continually invest in newer, cutting edge technology, always looking to the future while continually comparing ourselves to the competition.
Third, the marketplace has no geographic boundaries. It's really changed from the U.S. or a country based industry to a global based industry. Today, 58 percent of Hewlett-Packard's orders come from outside the United States. Likewise, some of our strongest competitors are no longer based in the United States, but rather are found in foreign countries.
One projection shows that by the year 2,000, 70 percent of the customer demand for information technology will come from outside the United States.
Then, of course, last but not least, today's costs and risks of research and development can be monumental. The scale of technology development sometimes -- in fact, I would say, often, exceeds what even a firm of our size can undertake on its own. Mergers, acquisitions, joint ventures and alliances are an essential feature of successful competition.
So, given this business environment today, I'd like to address four related topics of antitrust policy. Agency review of proposed transactions, open interface standards and interoperability, exposure to private litigation, and rules on pricing and distribution agreements.
As I've indicated, high technology enterprises require frequent collaboration with other firms and sometimes even competitors. Intellectual property, expertise and resources may need to come from multiple sources to develop a new product.
Agency review of proposed collaborations must be quick and incisive or valuable time to market advantages may be lost. As the number of collaborations increase, the agency will face increasing pressure to review more and more transactions.
Now, we appreciate that the agency often finds itself with a difficult balancing task. We know the reviewing agency must ascertain when the potential benefit of a transaction outweighs the potential risks of harm of competition. U.S. businesses would greatly benefit from more visibility in precise standards you will use.
We are particularly concerned about the current state of confusion and the lack of public understanding as to how the agencies will weigh efficiencies. This is an area where we, and I'm sure others in the business community, would welcome more clarity, particularly with regard to the treatment of efficiencies relating to the innovation process.
We further believe that efficiencies criteria should be the same whether the form of collaboration is a merger, joint venture, standard setting effort, or some other form of association.
The second topic I'd like to address today is open interface standards and interoperability. High tech products must increasingly adhere to these standards. These standards allow interoperability among products from many competitors that results in price competition to the benefit of consumers and to the development of new products and businesses based on those standards.
The U.S. benefits as the economy expands and new jobs are created. The standards selection process must be fair and open to insure selection of the best standard. I'm pleased to say that HP is a leading supporter of open standards, open systems and open access to critical specifications.
We are one of 13 members of the Computer Systems Policy Project, a group that published a report on this subject in 1994. We provided a copy of that report to your staff. The interoperability objective is one that should be industry led and industry driven, although through established standard making bodies, following approved ANC procedures.
However, we feel that there is a role for antitrust enforcement agencies in facilitating this process. I'm advised that at later stages of these FTC hearings, you will address in some depth various potential antitrust issues raised by standard making activities of the kind I've just described. From our standpoint, there is considerable controversy and confusion over how some aspects of antitrust law now apply to this area.
What should be a standard is debatable, and adopting a standard necessarily involves many trade offs. There are understandable tensions between those that want their proprietary technologies adopted as industry standards and the need for reasonable access by all competitors to those technologies.
Also, the terms for access to technology always are extremely sensitive and difficult to establish. Therefore, tensions sometimes surface in the context of disagreement over application of the antitrust essential facilities doctrine.
The FTC would perform a valuable service if the agency would clarify the scope and limits of that doctrine as applied to standards activities associated with the National Information Infrastructure Agenda. The right kinds of standards, those that result in truly open interface specifications, are crucial. An agreement to the rules of the road is essential to our nation's highway system. Open standards are equally important to the information highway.
Standards development processes should not stall because of antitrust uncertainty.
The third topic I'd like to address is the area of private litigation, the exposure to and the experience with it for U.S. firms. In our deliberations with other companies about technology projects of many kinds, exposure to private litigation can be of far greater concern than the prospect of undergoing government review.
Many of us know from first hand experience how even the most meritless claims can involve huge discovery burdens, legal fees and management time spent over a period of many, many years, always with a very uncertain outcome.
This is not a problem in Japan or Europe. It's unique to the U.S. President Clinton, when signing the Amended Cooperative Research and Production Act in 1993 said, in part, and I quote, "Clarifying and eliminating misapprehensions about antitrust risk, this legislation will allow joint ventures an increased sufficiency, facilitate entry into markets, and create new, productive capacity that otherwise would simply not be achieved."
The Act has failed. It covers only joint R&D and joint production. It does nothing for the broader array of cooperative activities that firms of our kind must pursue. Even for ventures within its scope, the legislation calls for the application of the antitrust rule of reason, without real guidance on how that standard should be applied. The law in this area remains confused and subject to divergent interpretations.
Nor is the Act meeting its goals of limiting financial damages and reimbursements for the defendant's costs if a claim without merit. And, courts do not deem agency clearance as important to their consideration of private claims litigated before them.
Because of these problems, we respectfully suggest that the FTC consider developing recommendations to Congress for new, more effective legislation in this area. It may, for example, be appropriate to formulate a procedure in which agency clearance of a joint venture or other transaction would infer full scale antitrust immunity or closing concern over private claims altogether.
At a minimum, there should be clearer statutory direction with regard to what the rule of reason standard means and it should be the same in every court. Other legislative reforms the FTC might consider include more effective constraints on abusive discovery processes, requirements for more timely judicial rulings on the underlying merits of these suits, and an automatic loser pays rule for attorney fees and suits against the venture already reviewed by an enforcement agency.
The last topic I'll address concerns rules on pricing and distribution agreements. These are two areas of antitrust law that do not appear among headline issues giving rise to these hearings, but they do concern us at HP and I believe many others in our industry. As information technology becomes more pervasive, we at HP are increasingly a developer and marketer of varied consumer products, things like printers, computers, faxes, set top boxes, appliances and tools of all kind for home use.
These products, of course, move primarily through resellers such as the retail channel. Satisfaction of retailer requests and customer expectations are essential to our success. In our efforts to meet these challenges, we're impeded to a considerable degree by long standing prohibitions relating to pricing and promotional arrangements.
For example, the law prohibits resale price maintenance, and we fully endorse this philosophy, because it leads to lower prices for consumers. But, in recent years, enforcement agencies have publicly stated they would treat some forms of minimum advertised price programs as prohibited price fixing schemes. However, enforcement by the FTC has lagged far behind as public stance. As a result, some of our competitors engage in practices that our resellers ask us, also, to adopt. We feel caught between the adherence to the law as expressed by the agencies, and actual and unrestrained competitive practices.
We need FTC enforcement in line with its public position or a review of the FTC's position so that all competitors compete under the same set of rules. There's another troublesome antitrust law, the Robinson-Patman Act. We appreciate the fact that the FTC has not aggressively enforced it in recent years, however, we're still burdened by this law, because of exposure to private planes, and inordinate company resources are spent interpreting, training, counseling and adhering to a law whose efficacy has passed.
We frankly need more flexibility than existing law appears to allow. We need more control over how to price our products to resellers, and how they promote them. We need more discretion to vary our arrangements between and among different channels of distribution. And, we need to be better able to compete with other manufacturers for the benefit of consumers.
We urge the FTC to take a close look at this and perhaps recommend reform. Alternatively, revised and relaxed FTC guidelines may be appropriate.
Well, again, my thanks to you for giving HP the opportunity to present its prospectus. We very much appreciate the spirit and vision giving rise to your inquiry, and will study with great interest your analysis and recommendations. We believe that competition in a global economy, across jurisdictions, with significantly different antitrust laws, is a challenge for all of us. It is extremely complicated, legally, politically and even socially. A very careful and thorough analysis of our national objectives need to take place before we take a stand internationally.
But, we feel for now that development of U.S. antitrust law which seeks every turn to encourage competition and maintain a healthy, competitive climate, should be our highest priority, and could be our best chance to influence changes internationally. Thank you very much.
CHAIRMAN PITOFSKY: Well, thank you. Would it be all right if we addressed a few questions?
MR. PLATT: Sure.
MS. AZCUENAGA: Thank you, Mr. Chairman. I'm interested in what you have to say about efficiencies and I understand that there may be various legal questions about efficiencies. But, one of the things that is important when we're looking at a merger and acquisition under Section 7 of the Clayton Act is what efficiencies mean in the business sense. I would be interested to know what you, as a businessman would require if the people in your organization came to you and said, let's make this acquisition, because it's going to be efficient. What kind of information would you need, and what would be enough to satisfy you that that was a good basis for a business decision?
MR. PLATT: Well, I think the bottom line, without getting into all the details, I would like to look at the business case of the two companies separate, and I'd like to look at the business case of the two companies put together, and see something better.
Now, that something better can come from the ability to bring resources together to better address problems. Very often, I can think of acquisitions we made and very often we do them because we get access to pieces of technology that help fill out our portfolio and allow us to deliver a broader solution, and that's a sort of funny notion of efficiency, but a very important one in the markets we serve.
If you're able to come forward with a broad solution rather than a narrow one, that's often what it takes to win the business. So, we would look at those sorts of things as efficiency.
Obviously, we also look at the other business operating efficiencies, but I can tell you the examination is much broader than just looking at putting two marketing departments together and eliminating one secretary, do you get something which works better and costs less? It goes far beyond that, and often it -- particularly in our industry, I think, involves combining technology in new ways.
MS. STEIGER: I was interested in your comment on the Robinson-Patman Act and I understood you to say that, from a business perspective, as far as marketing distribution, pricing, you felt that business needed more ability to be flexible, as between, say, distributors or perhaps tiers of distribution.
Could you explain an example of that, for example, within a business perspective?
MR. PLATT: Yes, and naturally, I didn't say in tiers of distributors, but I think that's something I could have said that was a very good interpretation, actually, of what I did not say.
MS. STEIGER: I promise, we're not putting words in your mouth.
(Laughter.)
MR. PLATT: No, the good news is, you obviously understood what I was saying and interpreted it correctly. Today, many of our products actually go into the market through more than one tier of distribution. It used to be that we either sold them, and we had very simple arrangements. By and large, we sold the product directly using a Hewlett-Packard sales force. We then went to the point where we used a Hewlett-Packard sales force to sell directly to a dealer who then sold to the public.
Increasingly today, in order to reach a broader set of consumers, and today we have products where we want to reach all consumers, we find we sell to distributors who, in turn, serve large, I would call them dealer holding organizations, who, in turn, serve their franchisees. So, you find the product moving through two or three tiers of distribution.
I guess what we would like in the end is, we would like more flexibility in terms of how that, you know, in terms of actually enforcing how that product reaches the market. There are lots of things we'd like to be able to enforce. The quality of work that the people who actually distribute the product in the end, what kind of job do they do, how do they service consumers? We'd like to be able to go in and frankly remove the product if they're not doing a good job, but we'd like to be able to do that more easily.
I can tell you I get calls to my office everyday, where they call me, the chairman of the Hewlett-Packard Company, when there's been a breakdown three tiers down in the distribution system, and really, we've had a retailer who has not performed properly. We'd like to be able to go in and work on those things more easily. So, we'd like to be able to enforce sort of quality and integrity of our representatives through the system.
We do believe that there is something to be said for being able to have some control over prices. Particularly, I guess what we're looking for is uniformity in that area. We'd like to be able to do it, feel free to do it, feel that it's within the law, just the same as our competitors do, and we have many competitors who enforce indirectly that kind of price maintenance and so forth, through giving year end bonuses and things like that.
There are just lots of practices like that in the industry that we would like to see here brought to an end or we would like to have you say, we recognize those things are going on. That is now okay. It's operating in the delay area that's so uncomfortable for us.
MS. STEIGER: Thank you.
MS. VARNEY: I was also interested in your remarks on efficiency, and I think if I heard you, you said that there's a lot of uncertainty about efficiency, and what would be helpful is a clearer articulation of the standard. Then, what really caught my ear was your last sentence there, that the standard ought to be applied across the board, whether it is to acquisitions, mergers, joint ventures, I assume licensing agreements.
As you understand, we usually in a transaction, if it's not anti-competitive, we never get to the efficiencies, so if we get to the efficiencies, we're looking at something where we've got some competitive concerns. My background with the staff here has been that there seems to be a very strong preference in antitrust law to the least restrictive alternative when we're getting efficiencies, which makes we wonder what your thoughts are on why you want precisely the same efficiency standard across the board, regardless of the transaction.
It would seem to me if we're building on precedent, that perhaps we want to look at a different standard, when you're keeping a competitor in the marketplace and utilizing a licensing agreement or a joint venture, as opposed to when you're taking a competitor completely out of the marketplace through an acquisition or merger.
MR. PLATT: I think I want to start and enforce the point that knowing what case it is that we're going to have to prove or knowing what evidence we're going to have to bring forward is really the most critical thing. So, some sort of uniform application of the set of well established principles time to time, I think is the most important thing. That way, we know how to get prepared and come forward with a case that will allow us to proceed quickly.
I think that, you know, obviously the easiest thing is if we have a uniform set of standards that we apply to all these transactions. I suppose there are cases where it makes sense to look at some sort of business combination, you know, maybe as different from an informal association between two competitors to get something done. I honestly haven't thought that through. We'll think a little more about that and give a better response to it.
There may be times when different standards actually do make sense.
MS. AZCUENAGA: May I follow up on that again, the efficiencies? This might not be a conversation we would have if we were discussing a particular transaction that the FTC was investigating, but you would like to know what our standard is, what the evidence is.
Going back to my question as a follow up, what documentation would you require from the people in your company to establish efficiencies? How much, what kind, what level of evidence would you require to make it a business decision based on efficiency?
MR. PLATT: Well, I"m trying to think of a way to answer the question. Each case is taken up on its own merits, but I would always require that they come forward and show me that the combined organization for some reason has a better -- I'm looking for a better financial outcome in virtually all cases.
It happens in a lot of different ways. I can be through, again, expansion of market share, because we're bringing together two technologies, which gives us a more complete solution and makes us more effective, more competitive in the marketplace. Maybe it expands the market by bringing the other two technologies. That often happens in our market.
I think there's probably a tendency for you to think about trading business between one company and another. I happen to sit in the middle of an industry where there are many examples of doing something that literally creates a brand new market that didn't exist before. So, I'm looking for all those things, and I'm also looking for the standard business efficiencies.
If we have two Washington, D.C. offices, can we sit in one at the end and save the rent of an office? I'm looking for all those standard business efficiencies.
But, the thing that may be quite unique about our business is the combination of technologies that allows us to offer something different, which gives business a different characteristic. It's quite different from what I would say is the classical business efficiencies that you might learn about in business school, where you combine A and B and get C, which has less cost. That sometimes happens, but that is often not the driving force behind why we do things.
MS. AZCUENAGA: We look at, I guess, classical business efficiencies, too, and do our best to test some of the things. We look at financial projections, we test the numbers, we test the assumptions. We see when people come in, whether they've put a lot of work into those projections that stands up under scrutiny.
I guess, looking at new markets and the like, we would try to test that evidence as well, try to test the story, go out and check the facts and so on that underlie it. Is there anything you can suggest to us that we should do, that we should look for, in those situations, in addition to that very general rule that we would try to test the facts?
MR. PLATT: Well, I guess the only thing I would encourage you to do is to be open to this notion of literally, creation of new markets, expansion of the business, because certain things are brought together that will now enable a broader solution.
Let me use one example that might help, and this is a very current example. The various competitors in the UNIX marketplace, this is companies like IBM, Digital Equipment, Sun, Hewlett-Packard and others, are in the process of putting together some collaboration, a quite unusual collaboration among competitors. Why are we doing this?
We're doing this, really, for two reasons. Number one, none of us has enough resources to meet all the customer demands for UNIX going forward. There is simply, we simply are unable to spend enough research and development dollars to meet those demands. That's one reason.
Second, because we're all operating independently today, we have lots of little different flavors of UNIX, and if any of you have a UNIX computer, you will know what I mean. We talked about interoperability. The fact is, there are enough differences that it takes some work to interoperate an IBM to a Packard and Digital Equipment machine.
So, we would like to come together so that we can work on a more unified system, and also do a better job of meeting customer demands. It's important for us to do that, because we have a competitor with huge market volume, a Redmond, Washington, competitor, that will eventually take over the UNIX market, if we don't offer a more competitive product.
Yet, none of us alone has enough market volume to put the research and development dollars into building a system that we think will be long term competitive with the products offered by Microsoft.
So, there's an example of coming together. There will not be any cost savings. There won't be any normal efficiencies. What we will be able to do is meet customer demand by coming together, and, in fact, maintain a market, the UNIX market which exists today, which offers an alternative to Microsoft.
That would just encourage you to be open to that kind of argument and not ask that every case be based on what I would call normal business efficiencies.
MS. AZCUENAGA: Thank you.
MS. DE SANTI: I wanted to ask you to expand a little bit more on what you had talked about in terms of interoperability and standard setting. Could you give us some sense from your business experience of how the market operates in terms of the kinds of standard setting that you see, and how access to standards comes about?
MR. PLATT: Our market is very different today than it was just a decade ago. If you look back a decade, you can find near dominance of the computer market by IBM. I think you would have considered IBM a very dominant player at that point in time, with a lot of proprietary things.
I mean, they literally maintained customer account control through proprietary product positions. It was very hard for competitors to invade that space.
Somewhere about a decade ago, several companies, I would say, primarily Sun and Hewlett-Packard, outsiders needing to change the rules of the game, began working to kind of upset the apple cart, and create what we call an open systems arena.
An open systems arena is one when we started talking about it, we started selling consumers on the notion that you will be better off if you select from a range of suppliers, all of whom meet a particular standard, so that you can create a mix and match environment. You will be able to play off an IBM against a Digital Equipment against a Hewlett-Packard. You'll be able to, in some ways through that price competition that will now exist at the market, it will stimulate innovation. It will obviously lower prices, etc.
Consumers like that. You all have seen the result of it. In fact, the market has been turned upside down. Competitors who were sticking with proprietary systems ran into big trouble. Most of them have had major restructuring, and you would look today at their strategies and see that they have open system strategies.
Consumers have forced that. Frankly consumers in the open market had been much more effective than any standard setting body or much more effective than the FTC or anybody else has been at creating competition. Consumers have created competition.
So, the way things work in our business today is that if we develop a technology, we're just about forced to turn it into a standard and offer reasonable licensing conditions to our competitors. If we don't, our customers will look at it. If they can't find it from other competitors, they'll say, that's proprietary, that's bad, we won't buy it.
So, it's really forced some quite wonderful things to happen in our market, where innovation just about has to be offered into the standards arena. Innovation that's kept as proprietary advantage and proprietary product actually has little value in the marketplace today. And, it's that kind of wonderful example of the free market and consumer will forcing a bunch of competitors to do something they probably would not have done on their own, and probably don't enjoy doing all that much.
Certainly, it has changed profit margins in our industry quite dramatically, as you know.
CHAIRMAN PITOFSKY: Thank you very much for practical insight in some of the things that we're going to deal with over the next several months.
MR. PLATT: Thank you.
CHAIRMAN PITOFSKY: Now, a particular pleasure for me to welcome back to the Washington battle grounds an old friend and colleague, Sanford Litvack, senior executive vice president and chief of corporate operation of The Walt Disney Co., a position that he has held since August, 1994. He is responsible for the day to day supervision of internal matters and for Disney's dealings with the government, communities and other corporations.
He also works closely with the chairman on other corporate matters. Mr. Litvack joined Disney in April, 1991. In May, 1992, he assumed additional duties of executive in charge of human resources. From 1987 to 1991, Mr. Litvack was chairman of the litigation department of Dewey Ballantine in New York and from 1981 to 1986, he was a member of the law firm of Donovan Leisure, serving as chairman of the executive committee there.
Mr. Litvack was assistant attorney general for the antitrust division of the United States Department of Justice from January 1980 to March of 1981, chairman of the antitrust law section of the New York Bar, and a fellow of the American College of Trial Lawyers before that. A great pleasure to welcome Sandy Litvack.
(Applause.)
MR. LITVACK: Thank you, Chairman, members of the Federal Trade Commission. Let me just say that it really is a pleasure and a privilege to come back and appear before you today. Although, as I told the chairman when he asked me to appear, it is not without some apprehension, because this is the first time I've testified or appeared before a government agency, since I moved to the corporate America team or Team Disney, as we call it. I only did it because the chairman assured me that you would be kinder and gentler than he remembered me being when I was down the street.
(Laughter.)
MR. LITVACK: So, with that in mind, I decided, as the Nike ads say, to just do it. The chairman asked me to address myself to the question of what impact, if any, our antitrust laws have on the ability of U.S. companies to compete and to innovate.
In thinking about it, I decided to narrow the subject a little further and talk about something of great importance, and that is the chilling effect caused by the possibility of U.S. antitrust law enforcement against joint ventures, which are designed to provide services or products exclusively outside the United States.
Before I turn to that, I really ought to make a couple of comments, to put the thing in proper perspective. That is, very simply, that having moved from being an antitrust lawyer at one time, and a litigator at another time, to sort of the business side of life, two things tend to happen.
Number one, you're really not involved day to day with and don't keep track of the many developments in the antitrust law, and so I would not boast to anyone as an expert. If I had any questions in that regard, I should note that the letter inviting me to appear here today pointed out other questions would be addressed to the lawyers. You need not worry about them. That was comforting.
The second thing that I point out, which is probably fairly obvious, and that is, your perspective changes. My ex-partner, Joe Califano, used to say, where you stand depends on where you sit, and that is often the case, so my perspective is really from that of one engaged in the business exigencies and necessities and issues that arise, as distinct from the issues that are often involved in terms of balancing from an antitrust standpoint.
You well know that joint ventures have, to a large measure, become the corporate structure of choice, especially when one is looking at trying to mount a strong, competitive effort in foreign market, and perhaps, most importantly, where companies desire to open new markets in emerging areas of the world, including specifically Eastern Europe, Latin America and Asia.
Many of these markets, as you know, have been closed for years to American products and American companies, really, due to the absence of an infrastructure, and an infrastructure of two kinds. Physical, that is, in the sense of pipelines needed for the distribution and social infrastructure. A stable government and open government, laws which are fairly enforced, retrading so that American companies can compete.
These markets which are beginning to open, represent the greatest growth opportunities for American businesses. Unfortunately, they, at the same time, represent the greatest risks and challenges for American businesses, and they are really different challenges and different risks that are involved in competing domestically.
It is just that kind of business reality that causes American companies to look to the possibility of entering these markets only if they are able to share those risks in some way with other companies.
It's important to note when considering the issue, that many of the concerns that one has when looking domestic joint ventures between competitors are really not applicable in a foreign context. Specifically, when aligning two competitors here in the U.S. to provide a service or a product, there usually will be some elimination of competition, since one of the players is probably being taken out of the market. That's not often the case in foreign situations.
Indeed, often quite the opposite is true, and that's because the venture that is proposing to go into a particular country is usually going where there has been an absence of many products from this country, or where only one or two firms have actually been present and have a dominant position.
In those instances, the introduction of the ventures product will only serve to increase competition or cause it to exist where none had before. Those are just the kind of situations, because of the risks involved, that people want to share those risks and want to do it on a joint venture basis.
I am not advocating, I ought to say at the outset, the proposition that companies wanting to engage in joint venture should be free to do so in any kind of conduct irrespective of how it would be to our antitrust laws, or where the likelihood for spill over effects in the domestic market is greater.
Collusive activity, which affect products sold, goods sold in the U.S. for U.S. consumers, obviously falls within the heart of the antitrust law. I am not suggesting any lessening of that. But, what I am saying is that our laws should provide a great deal of latitude to companies acting jointly, where the object of their conduct is to deliver products or service to foreign national.
In fact, I go further and say that the enforcement authorities should, I respectfully suggest, explicitly recognize the legitimacy of joint export activities designed to provide goods and services abroad, since to do so would improve the competitive position of U.S. companies without hurting real competition.
Now, that's true for a number of reasons. First of all, at the threshold, a joint effort is, as I indicated, often the only way that an American company can enter a market in the first place. Once the decision is made to enter a particular market, the companies can and do have legitimate operational concerns about the delivery of their product. That necessitates concerted action.
They have an interest in a legitimate return on their investment, especially taking into account the risks involved. They have concern about the qualities of the respective products, to be sure that the venture does not dilute or disparage in any way the product, or reduce its value in the future, and a whole host of other common interests that are going to require them to communicate and act jointly with respect to this foreign venture.
Concerted action in this regard is necessary and a legitimate by-product of partnering with another company to undertake a new business in a new market.
Secondly, in many cases, particularly in these emerging areas, the foreign countries have no antitrust law or regulation. While that might lead some to suggest all the more important that we apply ours, I would say to the contrary. In these countries, subjecting American companies to rules and regulations and not hampering their foreign counterparts, serves mostly to put Americans at a competitive disadvantage.
In those cases where the foreign countries have antitrust laws and authorities in place, they are best, I suggest, to evaluate what, if any, competitive harm results to the local economy.
In at least one instance that I'm aware of, a proposed joint venture for the creation of a music video programming business between and among Time Warner, Sony, Polygram, EMI, Hurdlesman, MCA and others, the European Commission was, in fact, investigating the venture at a time that our government decided to conduct its own investigation. So, the companies then had two investigations going, one by the EC and one by the Department of Justice.
The specter of having to undergo a full blown U.S. government investigation, to say nothing of actually being subjected to the suit or an investigation itself, could put American companies at a severe competitive disadvantage in relation to their foreign counterparts in several key ways.
First, it could yield potentially conflicting outcomes with the U.S. government condemning conduct that the foreign government would not.
Second, it singles out American companies as the ones who must be forced to incur the cost and expense associated with multiple investigations. That's an important point, because the cost of responding to one of these investigations, as you all well know, without regard to the outcome, is, in itself, inhibiting. And, more importantly in a sense than ultimately inhibiting, it's chilling in the first place. It leads you not to want to start down that path if you believe that that is a likely outcome.
Third, and perhaps most importantly, the possibility of an investigation hanging over ones head does, as I said, cause the company to act or delay acting, and in these situations, act with caution or delay acting, the whole opportunity could go by the board.
Often, the opportunity to enter a foreign market, and we've seen this in our business, really presents itself in a very small fine window. A group is getting together, something is going to happen shortly. You either act quickly, or you don't act. To make substantial commitment of energy and resources without knowing and with the possibility of a major investigation hanging over your head and a delay in the whole process is, itself, chilling.
The possibility of an adverse outcome is, of course, further dampening on the question. So, again, I say to you that this kind of chilling effect is a very serious problem to a U.S. company.
Now, I am aware, obviously, as an attorney and a former head of an enforcement agency, that legislative and administrative efforts designed to signal the encouragement of legitimate joint activity abroad have been made. The Foreign Trade Antitrust Improvement Act of 1982 bars U.S. jurisdiction absent a direct, substantial, and reasonably foreseeable effect on U.S. commerce. Obviously, that's a strong signal in the right direction.
So was the Export Trading Company Act, which codified that procedure by which companies seeking to undertake certain foreign activities can obtain governmental information affording certain protection.
Of course, there's always the business review procedure. But, the fact is, that while these rules and procedures were designed to remove some of the uncertainties, they don't go far enough and they are flawed in many important respects.
The standards set forth by the Foreign Trade Act is still sufficiently vague, and it leaves open the possibility of investigations and challenges, based on nothing more than an effect on the export business of a single, disgruntled American company. Such challenges can and perhaps should ultimately be repelled, if they're brought by a party seeking to vindicate simply that they alone were left out of the competitive situation.
But, the fact is that while the case may not succeed, the fact that it's there and costly and time consuming, presents a problem. As for the Export Trading Company Act and the business and review procedures, while they're designed to provide clarity, both suffer from the fact that they cause delay, delay which is undesirable.
Both schemes contemplate that no answer will be forthcoming in less than 90 days, which is often an eternity. While there is a provision in the Export Trading Company Act for expedited treatment within 30 days, this, too, can be too long, even assuming that you can get expedited treatment.
Further, of course, the immunity is only limited to that which is disclosed exactly at the time. That sounds good and I understand the purpose, but the reality is that the businesses are living, breathing things and so they develop. It's like having contracts. I often tell our people in the business, a contract, a business contract, is only a document that people go to look at when things go wrong. When things are right, no one looks at a contract. People just deal with each other.
It's like a pre-marital, like a pre-nup. People go look at it when things are going bad. That's the only time you go look at it. When things are going well, you don't have to do it.
So, too, the business is developing. It may not have the immunity that it initially had, unless you go back and amend the thing, which is, by itself, another cumbersome process. Probably the Export Trading Company Act contemplates that the proposed transaction is published in the Federal Register, ten days after the application is filed. That can pose a problem, because publication, especially in advance of the contemplated clearance, puts the company in an extreme competitive disadvantage.
I know we at Disney, and I think a lot of other companies, are particularly concerned about the security about what we do, and making sure we have the competitive edge when we can, and making sure that our plans are not known in advance. Indeed, that's the essence of what we do.
If I go tell everyone ten days in advance what my joint venture plan is, that's not very helpful. Also not good antitrust policy besides.
In closing, while I believe the Congress and the regulators have made great strides in trying to adapt the antitrust laws to the realities of the increasingly foreign nature of American business, there's still a lot more to do. Business and economic realities are such that joint ventures and joint conduct are going to become more and more important as these new markets are opened and explored.
If the effect of the conduct directed to foreign consumers, if that is the effect, and there's no evidence of an effect on domestic consumers, the U.S. antitrust laws and regulators should take a back seat to the foreign entities most concerned. Stated more simply and bluntly, if it affects foreign consumers, then it is the problem of the foreign country. They ought to be the ones concerned about it, not the United States, not this country. We have enough to do right here.
If there's a spill over effect, there's an effect in this country, to be sure. But, where you simply have a complaint that someone is left out of a joint venture, someone is not participating in a joint venture, that by itself, I respectfully submit, is not and should not be enough.
I will end up by saying, again, that the antitrust laws should not teach that joint activities undertaken with the provision of products or services in new foreign markets should be prohibited. In my view, the only way to remove the chill and thereby to keep American companies on an equal footing with their foreign counterparts, is to make that clear and make it clear to American business.
Mr. Chairman, Commissioners, I thank you.
CHAIRMAN PITOFSKY: A few questions?
MR. LITVACK: Yes, sir.
CHAIRMAN PITOFSKY: You have an extraordinary vantage point here as a former Assistant AG for antitrust and now an executive of a company that profits enormously from international trade.
We hear you about joint ventures that exhaust our facts abroad. Let me ask a question. Some of our advisors suggest that antitrust enforcers are missing the boat on joint venture busts, who don't appreciate the way in which the corporate form has changed. We're still looking at cases in which two people got together and built a factory.
But, what is suggested is that joint ventures, especially when we're talking about foreign distribution, are more flexible, less durable, more informal, more players, cutting across more functions, and that we really need to take a different sort of look at that kind of joint venture.
Hollywood and its distribution must be an example of that sort. Have you seen that, joint ventures that have an informality and a lack of permanence?
MR. LITVACK: Yes, and indeed, in some ways, most of those I've seen are of the kind that you describe. Rarely is it, let's go build a studio together or let's go build a factory together. It may happen, but I've not seen that. It's more of the nature that you described.
And, interestingly, and this was a surprise to me -- it's still a surprise to me -- people in our business, at least the people I deal with, often talk about things as being joint ventures that you wouldn't recognize as joint ventures. I can't explain it. They just use the term in it's very loosest -- I mean, they'll enter into a contract with talent and they'll call it a joint venture, because the talent has an ultimate profit interest in the back end of a movie or whatever. So, joint venture is really kind of a loosey goosey term.
To answer you more precisely, particularly in the international arena, although it's true here, too, these ventures are one shot type deals, usually designed -- I'll give you an example of something that might be called a joint venture.
Die Hard 3 -- Die Hard 3 was made by Fox, distributed domestically by Fox and distributed internationally by Disney. Clearly a joint venture with Fox? No, not a joint venture with Fox. You ask someone if that's a joint venture, well, they're distributing here, we're distributing there. Is there a division of markets? No, not really. The producer of the movie just decided they wanted to sell off the foreign distribution rights and not have to distribute it themselves.
It happens all the time. So, those kinds of things happen, often because in a given foreign market, for instance, we may have a better distribution system or not, in some cases. Often times, you can't get in.
Take China, for example. Henny Youngman used to say, please, take China. In any event, very difficult. Everyone is trying to figure out how to get in there. The hottest and latest thing is to say, well, you've got to be in China. What does that mean? How do you get in China? People aren't going to form lasting and enduring joint ventures to go into China. That's not the purpose, but they are going to try to figure out ways by combining, minimizing risk, for instance.
One of the risks you run in China, which is very hard and probably impossible to protect, is intellectual property risks, because they don't enforce their intellectual property laws. So, if there's some way of balancing that risk and sharing it with others and distributing jointly, you're going to do it.
CHAIRMAN PITOFSKY: Thank you. Questions?
MS. STEIGER: As you are no doubt all to aware, there's a great debate going on about the problems in the benefits of the so-called permanization of trade in antitrust laws globally, no doubt spawned by GATT and soon to be heard from again with the new trade ground.
Practitioners looking at the area of this interface or this hoped for interface, consistently suggest both here and abroad that one thing that should be done right away is to get rid of any and all exemptions for export joint ventures or cartels, depending upon the definition, as a means of simply improving that interface.
I hear you going in exactly the opposite direction, at the very least suggesting that such joint ventures, cartels as they may be called, depending on whether you're pejorative or not, should not only be protected to some degree, but perhaps protected to a larger degree than they are now in your view under Webb-Pomerene, which would be one of the suggested laws to go by the boards.
How would you respond to the critics who suggest that you're on the wrong path?
MR. LITVACK: Well, I think how I'd respond, I'd be interested in hearing what they site as examples or real life situations. To me, this is debate among academicians about what would be the nice way to do things.
I am telling you based on our experience, and I think virtually every other purchaser, every other major American business that's doing business abroad, would tell you that as to such conduct, as to the need for companies to get together and to basically put out American products and American services abroad, the plain fact is, the antitrust laws, our antitrust laws, should not be an inhibitor upon that.
The answer of exempting, exempting or removing all exemptions rather, and presumably thereby expanding antitrust enforcement, I don't know what the ultimate goal is. If the ultimate goal is to chill American competition in the foreign market, if the ultimate goal is to make it more difficult for American companies to compete abroad, if the ultimate goal is to increase our costs when we already suffer from cost disadvantages, then they will be successful. But, I don't get it and I don't know, other than perhaps -- and I don't know what the economic evidence is to support the theory, but I do know what the business reality is to support my point of view. I don't know what they have on the other side.
MS. STEIGER: Thank you.
CHAIRMAN PITOFSKY: Commissioner?
MS. VARNEY: To follow up on what Janet was saying, it seems to me that what you're saying in some regard is, look, if two American companies are going to engage in joint venture conduct to either produce or distribute a product abroad in an emerging market, it's really of no concern of the U.S. antitrust enforcement authorities what that behavior constitutes, unless there's a spill over effect to the U.S. consumer, more than one exporter being excluded or one producer being excluded.
In your opinion, is that very different from the current in practice enforcement standard in the U.S.?
MR. LITVACK: Good question. You stated exactly what my point is. Now you're saying, is it any different from the current practice. It comes back to something that was said a few moments ago.
I don't know that it's really any different from the current practice, in candor. I cannot say that it is. What it's different from, perhaps, is the feared perception -- let me state it slightly differently -- in other words, when Lew was talking about the Robinson-Patman Act and people's concerns, the lack of clarity or how it may be, I think I would apply the same thing here.
I think at the end of the day, the enforcement record would demonstrate that what you're suggesting and what I'm advocating is, in fact, what has happened. But, when American companies are sitting, and I can tell you this from personal experience -- it's not just hypothetical -- when we're sitting down and someone comes to us with one of these things, one of the things I have to take into effect or my people do, and I certainly do, to some extent, is what about the antitrust concerns?
When the Department of Justice goes ahead, and this is not the time or place, nor am I the person to criticize the Department of Justice, but when they go ahead and investigate the joint venture that's already being investigated by the European Union that is going to operate abroad, I say to you, yeah, I'm concerned. I'm concerned, because I don't want to have to undergo that, and I don't know why -- I don't know anything about the facts of that case and it didn't involve us at all, I don't know why they did that. There may have been great, great enforcement and policy reasons.
But, what I'm saying, and what I would say to them is, in so doing, you cast a long shadow, and it goes beyond this particular venture. It goes to Hewlett-Packard's venture or IBM's venture or Disney's venture or somebody else's venture. That's what I'm concerned about, and I would like a clear message -- I think it's important that there be one -- that says our goal is not to export our antitrust laws so as to disadvantage American companies.
MS. VARNEY: Just a follow up to your answer, if I may, what's interesting about the European Union or European Commission is my guess is they were investigating the activity only because it affected their economies or their consumers, or they had companies involved in it. As you know, it's a matter of great discussion whether or not we ought to be deferring to foreign investigations, but I think that's another matter.
There's another slight twist to this that bothers me somewhat, that I'd like to hear you address, and that is, presumably, the kind of conduct you're behaving in is companies in developed nations exporting to countries that are not developed, First World to Third World type transactions.
I'm a little struck that we could be accused of saying, well, we don't really care if they're engaging in anti-competitive behavior in the Third World. It doesn't make any difference to us.
MR. LITVACK: I know that saying that would sound offensive, but I say that. I say that unashamedly, because I say, if it is a concern, it's a concern to that country. We are not militarily or otherwise, the protectors of the entire world.
If there's a problem in Saudi Arabia because of anti-competitive activity, then Saudi Arabia, if they're concerned, ought to deal with it. I don't know that, with all due deference, that the Federal Trade Commission or Ann Bingaman has to sit and worry about that. We've got enough to do.
So, yes, I have gone the other way and I would tell you, it's none of our business.
MS. VARNEY: Well, thank you.
MS. VALENTINE: Can I ask one thing to try to tie this up and, in fact, Lew, I'd like to get you involved in this as well.
If I hear what you're saying, Sandy, what you're worried about are foreign enforcers -- two sovereigns, foreign and U.S., and the U.S. firms' disadvantage comes from the possibility of two sovereign enforcements. We could stay our hands without even exempting or worrying about Webb-Pomerene or harmonization or whatever.
I guess my question for you is, would you be happy to run the risk of a private suit as long as we get into the job of properly allocating jurisdictions between sovereigns and saying, this one is your interest, your contacts, your concern. That one's ours.
Whereas, Mr. Platt, what I'm hearing is, you're most worried about private litigation and private harassment of your collaborative activities, and what you're asking us for is some sort of protection or immunity from private suits. For you, I'd like to know a little bit more about what it is that you want to do beyond research and research or joint production? Do you want to go into commercialization?
If you do want the protection from the private cases, would you be willing to tell us a substantial amount about your joint venture in order to get some sort of blessing from an agency.
MR. LITVACK: Would you mind, Lew? Sort of -- not order of preference, but thoughts. One, my perfect world, I would want legislation that made it clear that neither the government nor private plaintiff is going to be able to pursue this. My perfect world.
In my real world, I would run the risk -- I'm mindful of losing points, and I've been through many private treble damage actions -- I'd still run the risk. I'd rather run that risk than the governmental risk of a private plaintiff.
Finally, just to stir the pot as I risked it earlier, something that has no chance whatsoever, when Lew suggested the Robinson-Patman Act had outlived its usefulness, I was reminded of the fact that the last assistant attorney general who suggested that was removed from office.
Since I neither hold an office nor aspire to an office, I'll make another suggestion, which is, and again, people say gosh, you know, you've change your stripes. It's not so much that I've changed my stripes, although probably I have, but it is -- time changes, and we shouldn't be rooted in things. So, I'll throw out one thought. I remember Bob Pitofsky throwing out a thought to me many years ago about retail price mandate, but that's another story for another day.
The thought is, query, have private treble damage actions outlived their usefulness? I know the private attorneys general, I know all the flowery phrases in the Supreme Court cases. I know the good intentions behind it. I also know what has happened, as do you, and while it's not the purview of this Commission, quite obviously, and it is the purview of the Congress, and I can't imagine you would get over ten votes to support the notion, I query while the time hasn't come in a perfect world, to just remove that. Leave it to the enforcement agencies, and let them decide, and then I won't have to deal with the question that you pose.
MR. PLATT: I don't think there's really any controversy or conflict between the two positions. I guess the point I was trying to make is that once we've undergone some kind of review, once we've been given the blessing for something that we're doing here, we would like that to mean something in these private suits.
That doesn't necessarily mean that we invite more inspection, that we invite more scrutiny of what we're doing, and I would agree that if we are doing some kind of a venture overseas that -- and particularly, if it's being looked at by an overseas agency, either the EC or a particular country's agency, that I think probably less scrutiny by the FTC, by the Justice Department here is in order.
So, I'm not inviting more scrutiny to protect myself from the civil suits. I'm willing to forego the scrutiny and defend myself in the civil suits.
MS. STEIGER: One comment there, if I may. Our experience has been, without reference to any specific case, that there are legitimate reasons, perhaps for a dual look. It may very well be that where the EC sees a competitive problem, we have no problem, at all, but indeed, where the EC has no problem, we have found a competitive overlap that gave us concern in our markets. There are real world examples of this in very recent times.
MR. PLATT: I believe that, by the way. I can imagine things being done for the purpose of competing overseas that would have some impact on U.S. markets, and I think, you know, where that's the case, and I would assume you'd argue where that's the case, it's fine, then you have plenty of reason to look at that.
MR. LITVACK: I agree.
MS. AZCUENAGA: Going back to something you said, the lack of clarity in the agencies, first of all, I think there's a lot more of the good lawyer left in you than you, in your modesty, would admit, so I'm going to ask you a question that goes both to law and business.
Setting aside the Department of Justice's joint investigation -- I didn't follow that closely. I'm sure there was a good reason, but do you think that particularly large companies, but maybe even smaller companies, do you really think that they are terribly confused about the likelihood of a challenge to any particular antitrust conduct? I mean, they all come in here and they seem to be very well represented.
Sometimes in consumer protection cases, we have people who come in who are not so well represented, but I always have the feeling -- almost always have the feeling when outside counsel comes in that they have about as good an idea about the likelihood of challenge as I do.
MR. LITVACK: Yes, I think you're right, they probably do. But, there are two things I would point out to you. Number one, the concern -- let's take a joint venture you're going to do in China, making that up, obviously.
You decide that three companies are going to get together to do the joint venture, and that's the best way to do it. You put it together, you're in the process of putting it together, you know there's a fourth company out there that wants to join your joint venture, but you don't want them for whatever reason, just don't want them in, and you just stop there. Let's assume for a moment that this is strictly being acted abroad and what have you.
Two concerns. One, the concern I have in that regard when you say, am I confused, I know that that fourth company also has good lawyers and are going to go out and hire them and are going to come down here to the Federal Trade Commission and they're going to advocate to you this terrible thing is happening. I am being excluded from this venture which is going to China, and if I'm not included, the world is going to end, my business is going to go down and terrible things are going to happen.
I am concerned, I am concerned, how you all are going to react to that. That's number one.
Number two, even if it is true, as it often is, that my outside lawyer has as good a view as anybody as to what is likely to happen, one of the things you find, and this is -- again, probably Lew can speak to this better than I can, I find it myself, I certainly find it with my CEO, who is not a lawyer, and others, yes, it's nice to have your lawyers tell you what's going to happen. But, believe it or not, I've found them to be wrong. It has happened on occasion that the lawyers can't predict what's going to happen.
Usually most lawyers will tell you, even when they're obviously predicting, that well, you know, I think that this can get by and I don't think they're going to challenge that. But, of course, Commissioner So and So has this view and Commissioner So and So has that view. And, Ann Bingaman gave a speech three weeks ago that said X, Y, Z, so yeah, is there an uncertainty. There really is.
I always thought when I had the job, I was clear as a bell. I found out I wasn't.
CHAIRMAN PITOFSKY: Thank you very much. Our clean up speaker this morning and our final speaker in this part of the program is Ryal Poppa, chairman, president and chief executive officer of Storage Technology Corporation. Mr. Poppa brings an unusual and special perspective to these hearings. He joined Storage Tek in January, 1985 to rebuild a company that was undergoing a Chapter 11. With his leadership, the company achieved the fastest, largest turnaround in industry history, emerging from Chapter 11 in 1987.
Prior to joining Storage Tek, Mr. Poppa was a chief executive at several former computer companies. He currently serves on the executive committee of the American Electronics Association and is past chairman of the Computer and Communications Industry Association. In 1983, he was appointed to President Reagan's Committee on the National Medal of Science. It's a great pleasure to welcome you here.
(Applause.)
MR. POPPA: Good morning, Mr. Chairman, Commissioners, fellow invited participants, and ladies and gentlemen of the audience. I've chosen to focus my remarks on something that I believe is a key issue for our industry. The industry, in my case, is the high tech industry, and ordinarily focused on the computer industry.
I have spent now 44 years in that industry. I know I don't look it, or at least I hope I don't -- I often get kidded about that, where's your gray hair? But, nevertheless, I've been around for a long, long time, and I've seen the industry emerge from punch cards -- do any of you remember punch cards as a way of life years ago -- to today, where we have PC's and high speed printers and internets and worldwide webs and so forth.
A marvelous change, and that change has been innovated, created, if you will, by the ability of competition and the free access to markets that the United States has provided. That has not been a worldwide event.
Quite the contrary. It has been almost totally originated in the United States by two basic reasons. One, we have a great venture capital capability and secondly, we have had antitrust laws that circumvented the giant of years ago, one that Lew mentioned, IBM.
At one time, IBM was totally dominant in our industry. They precluded people from entering the industry and they did it consciously. Today, of course, they are still a vital force in the industry, but at the same time, they no longer dominate nor are they able to exclude frequently. Sometimes, they still can.
Antitrust law is an essential component of this trend we're pursuing, which is very broad competition, very rapid innovation within this industry and when Sandy mentioned the foreign side of antitrust, that has not been a big concern to this segment of the industry, primarily because our innovation rate is so fast, because of the venture capital and the exclusion of dominant powers within the industry, that we're able to run circles around most of the competition overseas.
As a consequence, we need to protect those two valid aspects. This organization, the FTC, cannot do much about the venture capital, nor does it need to, but clearly, it can help with the protection of the innovation aspects of our industry.
The singular most important task, one that I have protected now or attempted to protect for almost 35 years, is the open access to the interfaces that are available from the various manufacturers. Years ago, when IBM was truly an 80 to 85 percent dominant organization within the computer industry, they worked actively and on the legal fronts, on the intellectual property fronts, on the marketing fronts, to exclude people from entering their marketplace.
That clearly did not work, in part because of governmental action in terms of consent decrees, but also in part because of the rapid change of technology and the consumer reaction which is, I will take the best, even though it may not be from the biggest.
Clearly, we have as an organization, as an industry, grown to the point where there are literally thousands of competitors and the new ideas come from the small competitors generally. Not always, but generally. As a consequence, we really see a changing landscape.
In recent years, the marketplace has changed radically. In cases of technological change, the number of new players, new products, new application rises on almost a daily basis, have made it impossible for any one organization to control.
Let me illustrate. I'm going to harken back to some comments made by Lew regarding HP. They are the leader in the industry of high speed laser printers. They saw a marketplace, at that time, a niche, today a very important marketplace. They have expanded on it mightily, and today they are a very significant factor in that industry. But, that factor is not nearly as large or rather larger than the PC aspect of their business, the personal computer aspect for the business, in affecting an imbalance.
The reason is, there's an open attachment capability between PC's and HP's printers, and therefore, they can attach to the Dell's, the AST's, to the IBM's and so forth. It's the open attachment, using typically a standard protocol of some kind, that has allowed this to occur. If we are not careful, there are elements in our industry today who would try to limit open attachment and are actively pursuing it through intellectual property, through the change of legislation, and through their own personal action as corporate entities.
Another example, one of the largest manufacturers of disk drives, Seagate Technologies, headed by Alan Shugard, a long time friend of mine, years ago, he started out on a different course than the rest of the industry. It used to be that when a disk drive was mentioned in the high tech industry, they were about the size of a large refrigerator multiplied by two, and today you can hold it in your hand.
He miniaturized the disk drive and established an industry of massive proportion, and today they use pretty much a singular standard called SCSI, small computer system interface. That was a standard arrived at by ANSI back in the '80s. Today, all the small disk drive manufacturers use SCSI as the standard and it is an open standard, readily available. Everybody can design to it. There are multiple versions of SCSI, of course, but they are labeled and they are standard enough that we can design.
They're open and available to shape competition. It's been extremely important to us in terms of how we move forward.
I no longer feel as I did years ago, frankly, that size is a major strength. I think we have great illustrations in the recent, oh, say last ten years. AT&T and IBM were, at one time, essentially the same size, ten years ago, before the break up of AT&T.
If you look today at AT&T, what has happened? The net worth of the shareholder values, the penetration capability of the industry, the innovation capability of that industry has massively improved in the last ten years. But, prior to ten years ago, it was one of the great inhibitors to innovation in the world. I think we all recognize that today, and the fact we talk of internets and worldwide webs and so forth in part stemmed from or flowed from the fact that there was a break up.
In the case of IBM, they've gone through some very tough times. They did not elect to break themselves up, so to speak. They are recovering, of course. They still are a very powerful and capable organization, but at the same time, they have not opened up in the classic sense of that word. They still try to run a closed shop and as Lew defined open meaning everyone can mix and match, try anything you want in a very open menu of product, IBM has chosen not to do that. They are more so, but not really, in their accomplishments.
I think that size, per se, is not of great help. It can be an inhibitor, and in the case of some of our major industry factors, I think they are inhibitors. The real key is maintaining a competitive attitude within your organization, and being open, allowing other people to enter your markets to support the development of your markets, so that the user can mix and match. And, with mix and match, the industry grows, the consumer benefits, and the companies, as a whole, grow. Not all, if they fall behind in some of their key technologies.
Years ago, there was a software product developed by the name of Visicalc. Those of you in the modeling business know that well. Today, of course, there are many others, Visicalc being primarily archaic, and there's the Lotuses and the various kind of spreadsheets that are today more common.
We all use them, but they rely on something else to be fundamentally effective, and that is an operating system that runs within the computer, also, so that the Visicalc program has to attach to the operating system, and they do that with an open set of standards, often called application program interfaces, API's.
It is quite possible today and easily done that you can, through simple changes, eliminate the ability to talk between the operating system, the quarterback of the computer, to the various subprograms, like a Visicalc or a Lotus, whatever. It is something again we would like to see made into an environment where it is always open so new competitors can enter the marketplace, or they can not easily be closed off.
Today, I guess there's a massive amount being written on the Internet and the worldwide web and what's coming. There's much more. These are rudimentary type capabilities today, but they're the best example extent today of open systems.
There are approximately 25 million people on a worldwide basis now on the Internet. Even in my little shop in Louisville, Colorado, and mind you, this is a little country town which we are kind of a company town, because we employ almost everybody in the town and so forth, we have 850 people on the Internet of our roughly 5,000 people, and they're on the Internet daily. They have everything from Hewlett-Packard to IBM to AST to Dell and so forth kind of terminals.
We use the SysCos, the NSC's and so forth as our interface mechanisms, and they are all on a common standard. But, it's a very complex set of common standards, because there are literally dozens of them. But, they're all open, they're all known, we can all design to them, and the worldwide Internet, the worldwide Web, works because of open, common standards, open access. Very fundamental to the growth of our industry.
If you exert control, if you consciously as a company or an industry exert control and thereby close off these interfaces, what you do is eliminate the ability for competition with all its resulting benefits and lower price, improve service, and also you eliminate new companies entering in to innovate with new ideas, new ways of doing it, faster ways, cheaper ways, all those things working together to reduce the service to the consumer on a worldwide basis.
It's fundamental that we keep those access points open. It can be done in a number of ways, voluntary publication, really obvious. It's not been particularly beneficial, because voluntary means you can stop. You can be involuntary, also. You can have publications along the ANSI standards, which is that you must publish and you must make available, if you have an ANSI standard. That's been extremely helpful, and many of the standards of our industry, like the SCSI, were developed in that environment.
But, at the same time, that is something that can be withdrawn and frequently is when it's to the benefit of a given competitor. Voluntary licensing, the other way of doing it, I've always advocated for many, many years, some form of mandatory licensing, primarily because I want to see the industry wide open and open to any innovation and competition.
Always, the hitch is at what rate? Mandatory licensing is normally at some reasonable rate that has to be defined, of course, but that's where the businessmen get together and negotiate those issues, and as a consequence, it materially opens the marketplace.
Does that mean we would obviate the intellectual property side of this? Absolutely not. We want the people who innovate, who have the patent trademark rights or copyright rights to make money, but we do not wish to see it stop competition or stop growth of innovation. Therefore, we would suggest that mandatory in some form would be highly desirable.
Another issue that has served to rise in the last five years, maybe even in the last ten years -- it started about ten years ago -- is a concept called a licensed internal code. What that means is, some manufacturers say, yes, I've got this code. I know you can look at it and reverse engineer it, but if you do, you're violating my copyright rights or my patent rights, therefore, I don't want you to do it.
Well, the EC, the last seven years, has gone through country by country and then, as a European Union, has come to believe that if reverse engineering is required, it should be permitted, and we have supported that position for years, spent more money than I should have in lobbying activities overseas, being sure that openness was the key ingredient in the final resolution of those laws.
We had many corporations on the other side saying no, if I own that, I do not want anybody to reverse engineer it. Our position has been to say, well, if you own it and you don't want it reverse engineered, license it to us. There are alternatives that are reasonable, but if not, you must then reverse engineer, and we continue down that path.
The best recent example is Sega versus Accolade, Ninth Circuit. Sega is a big Japanese game company as I'm sure you're aware, very famous. If you have kids or grandkids, as I do, they have many Sega games of various kinds. There was a little outfit out on the West Coast called Accolade who wanted to make game cartridges to run on the Sega system, and they came to the conclusion they could do that. They implemented in the marketplace. Sega sued them, because to get the Accolade cartridge to run on the Sega game, they had to reverse engineer a simple set of restrictive codes, and Sega sued and said that was a violation of their copyright.
The Ninth Circuit looked at it and through a series of yeas and nays finally came to the conclusion that clearly there was a fair use doctrine extension that said it was necessary to reverse engineer, and what they did was legal. And, today, Accolade is selling those kind of products. Very fundamental change or at least decision in the way the law was moving, and it was basically pro-competition. When you need to reverse engineer, you may.
We have another illustration along those lines, and that's IBM with it's NBS, which is a very sophisticated, very capable operating system within a large scale IBM use, and for many years, this program has been around many years, in steadily improving versions, of course. They left much of it open so that people like Storage Tek could attach our peripherals. We make tape transports and disk drives and large scale libraries and so forth that are used in that environment, among others.
Today, starting in approximately 1985, they gradually implemented a program called OCO, object code only, which means you get code that you cannot decipher. You cannot do any reverse engineering on it, and in fairness to IBM, in many cases, they will allow API type activity, where a user can look at certain portions of the code and attach to it.
But, in some cases, and in our case, they have chosen not only not to do that, we've been negotiating for five and a half years with them, and in every case, we've come to a no action position, where they will not allow us access to that code, and the reason is, we have taken a large segment of their market with better product, innovative product, tape and library, and they're basically saying, I'm going to try to stop you by not letting you look at that code, and you're going to have to fight us for it.
Now, the fight, of course, is something we would do in the commercial marketplace. We've been good at it for 25 years. They're not going to stop us in that sense. They make it more difficult. I would rather have it open for everybody, as we make our products open to everybody else, because we literally work with everybody. Lew Platts, HP and our organization work together to make sure that we can trade products. I buy products from him, he buys products from me. We jointly market some. As an illustration, we have dozens of relationships like that, and yet, we cannot do that with certain organizations, IBM being one of them.
Another that is currently in the news is Unisys, as you may have read. They're breaking up their organization, primarily because their base is shrinking rather substantially, and it's become they've become very closed in their approach, and the user has basically turned their back on the organization and said, if we can't do it with an open organization, we're not going to do it with you, and therefore Unisys, which charges 15 percent royalty to attach to their machine, an exorbitant royalty, thereby people aren't attaching, is literally losing market share.
It seems to be an execution of a death wish.
We continue to push forward on the belief that open access is key to the future of our industry, key to the future of innovation, key to the future of taking care of the consumer, whether that be the corporate consumer or the end user consumer, and we believe that that is the final solution, so to speak, in terms of preserving the issue of open competition.
If we avoid allowing people to control those access points, we will continue our competition well. The United States will continue as a leader. We do not have to worry about foreign competition, because we are so far ahead of them, and our fast pace of innovation, as long as we don't slow it down, we can go right by them and therefore, we win the big war.
I thank the FTC for taking interest in this situation within our industry. The timing is superb, because we're in a very fast change right now on some product cycles. In our industry, a product cycle is still three to four years. I hope I never get to the position that Lew talked about of six to 12 months. I don't know what I would do with that, but clearly, I would rise to the occasion or at least Storage Tek would, to try to stay within the game.
We thank you for your assistance.
CHAIRMAN PITOFSKY: Thank you very much. That was very enlightening. Are there questions?
MS. VARNEY: I have a couple of questions. If you would give us the benefit of your thoughts and expertise on what exactly are the characteristics of an adequately open interface? It sounds like you don't think that the market provides, necessarily, an adequate basis on which to license, as you were advocating mandatory licensing in some situations.
MR. POPPA: The first part of your question, the characteristics, let me describe one. We recently brought out a new product, code name Redwood. It's an extremely large capacity tape transport. It's based on Helico recording, which is very much like the VCR's we all have at home, except it is extremely dense and very high speed, designed for very large scale computing.
We developed STK, developed that standard via ANSI. It took seven years, beginning to end. It is a 144 page document. It is a very thorough explanation of all the signal levels, of how the code interacts on the various channels, whether it be a fixed channel or an SCOM channel, etc., etc. These are all types of interfaces to computers, and it is carefully and thoroughly defined, such that if you were an engineer, I could hand it to you, and without further documentation, you could design a product to attach to this interface. So, it is very, very detailed.
Within that context, once that is available and we made it available universally, and we established a very low rate availability on the interface, so that anybody can use it at any time. Once we have done that, we believe that we've given it to the marketplace with the intent that it would be openly used.
In the case where people have something like that, and they choose not to allow anybody else to use it, they run a risk that nobody will use it, and therefore, they limit their size of market, or that even worse, the users will say, because there's a limitation, I will not use it. I will kill that market. It never gets off the ground.
If the product is so unique people need it and want it, then they will step up to it, pay their premium that is normally associated with that, and yet, ultimately what that does is close off innovation. Because if we're the only one innovating, if we're the only one providing that product, there will not be the competition to drive the cost down, to drive the innovation rate up, and therefore, I encourage people and hope other people will enter that marketplace.
CHAIRMAN PITOFSKY: Any other questions? Thank you very much, and I want to thank all our speakers this morning for helping us get this off to a splendid start. We'll resume at 2 p.m., 1:30, with Jim Rill and Ken Dam. Thank you.
(Whereupon, at 11:50 a.m., the hearing was recessed, to reconvene at 1:30 p.m. this same day, Thursday, October 12, 1995.)
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A F T E R N O O N S E S S I O N
1:43 p.m.
CHAIRMAN PITOFSKY: Good afternoon, everyone. We resume these proceedings with two people who have shown in their careers an unusually spacious view of what competition policy is and also what it ought to be.
Our first speaker is Ken Dam, Max Pam Professor of American and foreign law at the University of Chicago Law School. He is also director of the program in law and economics and co-director of the center for the study of constitutionalism in eastern and central Europe. He is also a counsel to the Chicago law firm of Kirkland & Ellis .
From 1985 to 1992 Professor Dam was corporate vice president for law and external relations at IBM, responsible for worldwide government regulations and intellectual property. He is also a member of the IBM corporate management board and the IBM world trade Asia Pacific board.
Prior to joining IBM Mr. Dam served from 1982 to 1985 as Deputy Secretary of State, the number two position in the State Department. He has also served as provost of the University of Chicago. He currently serves on the board of Alcoa and a number of other non-profit institutions. He has written many books and articles, one on GATT, another on the international monetary system.
It is a particular pleasure for me to welcome an old friend and colleague, Ken Dam.
MR. DAM: Thank you, Mr. Chairman. It is a delight to be able to call you that after our friendship of all these years and watching you work away at the field you are now responsible for here. Thank you for going through my biography. I am glad you did because what I am going to try to do here, as my testimony indicates, is to try to offer you an integrated view of international competition based upon the four kinds of experiences that I have had in practice, in academia, in government and industry, and I am going to, obviously, lead to later witnesses, as your schedule suggests, the question of what difference particular points of view might have on particular guideline provisions and other questions of doctrine, and I am going to focus on global competition, but depending on the time I have in my prepared testimony a few paragraphs on the question of innovation-based competition.
It is obvious to everyone that competitive conditions have greatly changed over the last several decades. Clearly, global competition has increased. It is sometimes said that globalization is partly miff because there was as much or more global integration before World War I as there is today.
That may be true -- and it is a view widely held in parts of the academic world -- but if so, it helps to explain why the United States in the half century before the first World War developed so rapidly, taking advantage of British capital markets and relatively free access to European markets for our exports.
What is also true, however, is that there was a great collapse of global integration after fourteen and especially in the Great Depression so that by the end of the second World War national markets were largely isolated, at least for manufactured goods and for services.
Global integration is once more being achieved as a result of many developments, especially successfully trade negotiations, technological advance and a better understanding around the world of the advantages of free markets. In the present international environment it seems to me that the pace of globalization is likely to continue and even accelerate.
Now, most of the talk about globalization in an anti-trust context has concerned how foreign competition should be factored into various U.S. anti-trust rules. Take one extreme, the question naturally arises whether we should consider for the purposes of rules the depend on market power and market share are worldwide market or only a production in the United States take some in between test. These are important questions whose answers may vary from practice to practice and even from industry to industry.
For example, the merger guidelines with their well-known five percent rule reflect what I would say is a reasonable approach for mergers within the United States, but would be harder to apply, for example, to various section one offenses.
There is another aspect of globalization which creates a rather new set of issues but is somewhat less obvious to the casual observer. While a more open international trade regime here and abroad has opened more national markets, including our own, to imports, the real driver of globalization has been a startling increase in private foreign investment, particularly since the 1980s.
In the last decade U.S. private foreign investment has more than doubled, and the rate of private investment by foreign firms in the United States has also more than doubled. I am speaking here of real investment -- plant and equipment -- rather than transport of portfolio investment, although that is obviously very important but it is less relevant for anti-trust policy.
The rapid increase of real investment has many implications, but two stand out in particular. One implication is that much of the increase in international trade has taken the form of shipments within enterprises rather than between unrelated enterprises.
I have some statistics here taken out of this year's studies in the survey of current business. In 1993 exports from American plants of U.S. companies to their foreign subsidiaries and branches constituted 24 percent of all U.S. exports, while imports by U.S. companies from foreign subsidiaries and branches constituted 18 percent of U.S. imports.
Meanwhile, U.S. affiliates of foreign multi-nationals accounted for another 23 percent of U.S. exports and another 34 percent of U.S. imports. You put that together and you get 47 percent of U.S. exports and 52 percent of U.S. imports taking place within single multi-national enterprises.
Since agreements within an enterprise do not under the cooper weld approach normally raise anti-trust problems, you can argue that the relevance of globalization for anti-trust policy has been overemphasized, but there are several offsetting considerations arising from foreign investment that create specific problems for anti-trust.
One such offsetting consideration is that as more American firms have established more subsidiaries and branches abroad, the possibility arises that they will enter into conspiracies with local firms concerning local markets. Since those conspiracies, even where they concern local production in that country, can be found to affect U.S. exports, there is a surface argument for sustaining a U.S. jurisdiction over them; but the question arises whether in those local conspiracies are worth the effort in these days of limited governmental resources, including enforcement sources.
A second offsetting consideration is that foreign investment today often does not take the simple form of establishing a subsidiary or branch in a particular country; rather, in order to gain foreign expertise and to achieve local market access, investments increasingly take the form of joint ventures, strategic alliances, intellectual property, licenses and the like. These increasingly popular forms of investments imply multiply the opportunities for anti-trust intervention for a simple reason -- the simple reason that the architecture of anti-trust under section one of the Sherman act makes every agreement between firms of potential enforcement interest especially where the U.S. and foreign firm are actual or potential competitors.
These legal problems also arise, it should be noted, in connection with foreign multi-nationals investments in the United States.
Another motivation for these complex inter-firm arrangements is that modern production -- aside from the desire to export -- is that modern production of manufactured products particularly in the advance technology sphere increasingly takes the form of components and subcomponents to be incorporated in machines.
One can analyze these supply arrangements as vertical in character and therefore under contemporary anti-trust doctrine as raising few anti-trust problems; however, if you look at the markets, you will see that the firms buying and selling components tend to produce some products in competition with each other -- it's intra-industry trade.
Indeed, when what is involved is outsourcing, the end product firm formerly made the component -- that's why you call it outsourcing -- in question and, indeed, may still do so preferring the security of a second source of supply and even the discipline of working with component manufacturers for part of their supply so that the spur of competition keeps in-house suppliers efficient and resourceful.
Furthermore, in the advance technology arena, a great deal of inter-firm planning between firms is required to make this kind of component specialization work well in practice, and components are often not off-the-shelf items but rather require extended joint planning and standardization, all of this between actual and potential competitors.
For all of these reasons, the architecture of section one casts a potential shadow over these agreements, depending, of course, on their details and the structure of the markets involved. Therefore, in the international sphere it is important that we continue as has been the general trend over the period since the Warren court to limit the category of per se offenses to price fixing and equivalent practices such as customer and territory allocation.
Further, we need to be sure that what appears to be price fixing is properly categorized as such and is not in fact some species of joint venture. Indeed, guidelines setting out safe harbors in the international sphere for complex inter-firm, intra-industry arrangements, might help promote the strength of American industry abroad, and the national cooperative research act of 1984 as amended provides a potential precedent, although it seems to me the same thing could be accomplished subject to things I am going to suggest later by guidelines.
One other preliminary point is there seems to be quite a considerable fear of globalization in our society, and I go into this partly because I am a little worried what might be coming down the road at us in terms of Congressional attitudes over the few years.
Globalization is increasingly blamed for everything from unemployment to declining real wages to a spread of tropical and other infectious diseases in the United States. No doubt there are major adjustments that globalization is causing for the U.S. economy and society, but it would be a mistake to conclude that these unpleasant and politically difficult side effects of globalization should lead us in some way either to use anti-trust to resist globalization or to handicap those firms, domestic and foreign, that are on the leading edge of globalization.
The fact of the matter is that most of what we see that we don't like -- like downsizing in large U.S. industry, the offloading of some jobs abroad and the difficulty of finding jobs for those of our citizens with low skill levels -- arises from developments other than globalization.
One such development lies in technology. Technology leads us to higher levels of income and creates many jobs, but it can do so only by displacing some people from the jobs they are currently in. Many of the displaced, as we all know, are hard pressed to find new jobs, at least with their current skills. In my opinion, we have not yet begun to see the full effects of currently available technology on corporate downsizing.
I would like to draw your attention to a new short book by Arnold Penzias, who is a Nobel laureate in physics and, at least until the last few weeks, was head of Bell Labs. There is some restructuring going on there now. He has written a new book called Harmony: Life After Paperwork, and he points out that millions of people in modern corporations from clerks to middle management earn their living moving information from one part of an organization to another, sometimes as part of traditional management techniques involving interfacing between employee levels and sometimes more routinely, such as by carrying paper to computer-attached printers to copying machine.
These jobs are disappearing fast because of what anti-trust stands for -- competition. No one firm can afford to retain jobs that can be replaced by modern information technology so long as other firms use the new technology.
The same principle, as we know, has long been a driving force in manufacturing, but now it's coming to the office; it is not globalization but old-fashioned competition at home that is leading to most corporate downsizing. It would, therefore, be a mistake to use anti-trust doctrine to try to hold in check the supposed social effects of globalization, and as I say, I mention that because I can foresee hearings and efforts to resist globalization coming along if we see the continuing pattern of flat real wages and continued downsizing.
If we may take as established, then, the globalization that is occurring, global integration is already well advanced and that it would be fruitless and probably downright harmful to attempt to resist it; then the policy question -- that is, I think, why we are here -- is what implications this trend toward increasing global integration has for anti-trust policy.
In addressing that question, it is important to distinguish at least three different parts of the economy -- manufacturers, services and non-traded goods. Globalization may have one set of implications for manufacturers which is, indeed, the economic sector where the pace of global integration has been the most pronounced.
It is also a sector, by the way, where we find some of our most productive firms -- in wide-bodied aircraft, in computers, in mass-market software. As for services, the pace of global integration has been picking up, especially in commercial and investment banking, but many kinds of services -- and you can think of insurance, utilities, telecommunications and so forth -- are heavily regulated by governments, and indeed, in many cases are still in government ownership having thus far escaped privatization.
Where government policy -- I am talking primarily now about foreign governments; government policy, whether through regulation or outright ownership plays a strong role, markets are likely to be much less integrated globally; however, the very existence of strong and intrusive government policies abroad raise some of the most difficult issues of conflicting policies among governments, which in anti-trust we normally discuss under the heading of globalization.
Now, beyond manufacturers and services, we have a sector economists often call non-traded goods. In fact, the most important of these are, in fact, not goods in the popular sense at all but rather local services. Think of laundry services or motel rooms where globalization is certainly unlikely to be a factor. Non-traded goods constitute a quite large fraction of the economy, and the possibility of collusion and monopoly naturally exists but has not often been the focus of national anti-trust authorities because non-traded goods are usually not provided on a nationwide basis but rather locally, and certainly that is a good reason for the state anti-trust enforcement that we have, and that seems to be quite useful for this purpose. But whether the enforcement is by national or state authorities or by private citizens through private actions globalization is of little significance for anti-trust policy, and this is a quite substantial sector of the economy.
Even where markets are global, the United States has certain industries where U.S. firms face extensive import competition and are not strong exporters. These are industries in which the United States, let's face it, does not have a comparative advantage. We have a long tradition in this country of resisting cartelization in so-called rationalization agreements, whether we call them capacity reduction agreements or production allocation agreements or whatever, in industries that face overcapacity.
Now, in my view, the fact that the overcapacity arises from foreign competition or that an industry used to be national and has now become global, which means they are now global competitors, should make no difference for our anti-trust policy. Indeed, it is the hot breath of foreign competition that is most likely to bring innovation to industries that have fallen behind their foreign rivals in technology and consumer satisfaction.
To say that anti-trust doctrine enforcement policy should not change to address the problems of our internationally weaker industries does not mean that we should ignore the competition questions inherent in international trade policy issues which often arise with regard to these very industries.
In the U.S. executive branch we have, of course, specialization in which those issues are dealt with in the U.S. trade representative's office, in the Commerce Department, and frankly, too often in the White House because they often present difficult political issues arising out of the demand for protection.
The anti-trust agencies have traditionally stood aside from these issues even though they go to the essence of global competition. The reasons are understandable. Still, as we go beyond the Uruguay Round toward an increased focus on making global competition effective, the U.S. anti-trust authorities would be under growing pressure to get involved. We already see this trend in trade negotiations to encourage Japan to enforce more vigorously its own anti-trust rules. But the sauce for the goose principle operates here, and there will be continuing pressures coming from abroad as well as from our stronger exporting industries to re-examine, to take just one instance, our own anti-dumping rules from the standpoint of their competitive impact. Now, this is more likely to be a question for the anti-trust division than for the Federal Trade Commission, but it would be unfortunate parochialism to deforce anti-trust from competition policy in general when one is discussing globalization.
Now, if I may turn to industries in which we are strong exporters and therefore compete in international markets, the question becomes somewhat more complicated. There has been a strong emphasis in recent years in U.S. trade policy described open foreign markets for U.S. exports. Most of the attention in that respect has been on the Japanese market. Certainly, the international trade regime, in which there is equal access to the major national markets, is not only likely to be more economically efficient but also more equitable, and therefore, from a foreign policy point of view less likely to lead to international disputes, the threat of other important aspects of U.S. foreign policy, especially national security policy.
A point for discussion here, however, is what role anti-trust might have in opening foreign markets. It is important to recognize two points. First, most barriers to equal access abroad are regulatory and do not arrive from purely private conspiracies. Indeed, if it were not for foreign government policies, private conspiracies would be unlikely to last for long in globalized industries, even in Japan.
Second, we should not forget that many U.S. markets are not fully open to foreign competition, again, because of regulatory restraints. In this case, legislation and regulations, not just of the federal government, but in too many cases of state and local governments. Thus it would be a mistake for anti-trust policy to take on the job of opening foreign markets as if it were some holy mission.
The United States, one judges if you read the documents published by the European union and the Japanese government, is nearly as often a sinner as sinned against. If the barrier to U.S. exports is a result of foreign government regulation, we should view the problem as one of extra territoriality.
Still, if the barrier to U.S. exports is purely a result of a private conspiracy, then we should have no more hesitation in attacking that foreign conspiracy than if it were a conspiracy aimed directly at U.S. consumers. To be sure one can argue that a consumer-oriented anti-trust policy with services resources for conspiracies that impact U.S. consumers directly but consumers are benefitted indirectly by more vigorous international competition.
Mr. Chairman, I am coming close to the 20 minutes that I was asked to speak on. I have two other topics. One is extra territoriality, which I would like to have an opportunity to discuss, and one is innovation-based competition, which I think I have less to say about, and we can talk about --
CHAIRMAN PITOFSKY: Please continue.
MR. DAM: All right. Let me come, then, to the question of extra territoriality, which, I must say, I found that the questions that were addressed to the witnesses tend to gloss over this issue somewhat, and that is why I wanted to bring it forward because it seems to me it has a lot to do with international competition.
I can understand why it is important to focus on the substantive rules of U.S. anti-trust law, but I believe it is a mistake to ignore what I call the extra territoriality puzzle if our goal is to protect and indeed spur competition in increasingly globalized economy.
Let me put the problem directly and in a simplified way. We live in a global economy with separate nation states, each of which has legislative and enforcement power of its own territory and each of which pursues its own interests as it sees it. If it is the goal of the United States to introduce the maximum degree of competition into the global economy, then the policy question is how best to deal with that simple problem.
Again, to put the issue in its most simplified terms, should we try to force our will on the rest of the world by applying our own anti-trust rules to the full extent of the constitution, or should we try to use our considerable leverage as a still powerful and still admired member of the international community to induce other countries to enforce their own anti-trust rules and to limit their own anti-competitive regulatory regimes. In short, will we get further by providing leadership or should we just try to apply the U.S. anti-trust laws unilaterally.
This problem of foreign laws and regulations that constrain competition rarely involve what has been called a true conflict. That is to say, a situation where comply in with U.S. law will cause a firm to violate foreign law. Rather, the problem almost always arises today in a context where foreign law creates a regulatory regime at odds with the pro-competitive thrust of the U.S. anti-trust laws. The effort to impose our laws on firms and their activities in the foreign country naturally gives rise to foreign policy problems and various kinds of foreign blocking legislation and court orders, especially where the firms are incorporated or headquartered in the country in question. These kinds of conflicts of sovereignty, if you will, have gotten most of the attention in the voluminous literature on extra territoriality.
My concern is a bit different from the concern in that literature. I am doubtful that simply applying our own anti-trust rules, though permitted by our Constitution and approved by the Supreme Court in the Hartford case, is a solution that will maximize the competitiveness of the world economy. What we should be trying to do is to change the foreign law to make it more pro-competitive. That is the approach that has been used successfully in many rounds of trade negotiations, including the recently concluded Uruguay Round. Surely, some kind of less unilateral, more cooperative approach has a good chance of working in some of the areas that are the most promising. I would mention especially large-scale service industries that have been prone in the past and still are to a great extent to stultifying national regulation but that are becoming increasingly internationalized.
In addressing anti-trust extra territoriality, it is useful to look at the problem, therefore, not as a specialized problem of anti-trust doctrine or even anti-trust policy, but rather as one of a large class of problems where foreign substantive law differs from our own in ways that we regard as detrimental to the U.S. economy or the U.S. national interest. In such cases, our government can, I think we will see on reflection, in principle follow one of three strategies. First is unilateral action, simply applying our own law. The problem with that approach is simply that it leaves the foreign anti-competitive law or regulatory regime in place while generating all kinds of problems for U.S. foreign policy, for our other interests abroad and for the firms caught in the middle.
Second approach is to seek to change the foreign law by what you can widely think of is diplomacy. I am not talking just about foreign service; I am talking about contacts for all agencies abroad. I have in mind persuasion, not leverage or quid pro quo concessions which, in fact, can work in many foreign policy areas but are unlikely to be effective in the competition sphere.
Diplomatic persuasion alone rarely works in most international economic policy areas. Economic reforms now sweeping the world suggest that persuasion can work in some situation, especially in those developing countries that are trying to reform their economic policies in any event. The failure of socialism and the rise of privatization reveal that many governments have turned their backs on the governmental control and regulation philosophies of earlier decades.
In suggesting diplomatic persuasion, I have to say that I do not believe much can be accomplished by simply trying to harmonize different national anti-trust laws, although little is lost in trying. The fact is the differences in the substance of national anti-trust laws are relatively rarely the problem, especially in the developed world. Aside from persuading some governments to enforce the anti-trust laws they have, which is best accomplished through diplomacy, the central problem is that in so many sectors, especially services, that so many of these sectors have to be freed from present-day anti-competitive regulations in many countries.
A third possible strategy is negotiation. That is, of course, the strategy that we have used so successfully in reducing anti-competitive trade barriers. This approach has rarely been tried in anti-trust, so perhaps some of our bilateral agreements involving cooperation of the enforcement provide a precedent. This is a big topic that needs to be analyzed, but I believe the most promising approach -- I am going to just one approach. The most promising approach would be for the United States to negotiate agreements involving allocation of jurisdiction. We would agree to restrain the extra territorial enforcement of our anti-trust laws in return for foreign agreements to phase out anti-competitive regulation.
To make this approach work, we would probably have to kick off the effort with legislation comparable to the path breaking reciprocal trade agreements act of 1933 which paved the way first for bilateral and then later for multi-lateral reductions in trade barriers; but to be effective we would, no doubt, have to proceed bilaterally country by country and then industry by industry.
The formula that I have come to -- and it's just one formula -- is that we would agree to limit extra territorial enforcement of the U.S. anti-trust laws with respect to each country that agreed to enforce its own anti-trust laws vigorously, but then only with respect to each industry in that country that was mutually agreed to be free of anti-competitive regulation.
One important aspect of these negotiations is that they would have to bind not just the anti-trust division and the Federal Trade Commission as well as state governments, but they would have to exclude private actions as well. There is no problem with that approach under the treaty clause of the Constitution. Aside from the fact that most of the judicial extra territoriality decisions have involved private actions, in fact, the announced approach of the guidelines involving the power to withhold government action as a matter of accommodating is, frankly, of little use in most situations because private trouble damage actions remain a threat. For that reason alone we are unlikely to gain foreign government agreement to the pro-competitive action we are seeking from them unless we can deliver immunity from private anti-trust actions under U.S. law.
Now, I raise this issue of extra territoriality both because I think it's very important but also because I have noted that U.S. anti-trust authorities traditionally have been too compartmentalized, in my view, in their thinking. Too often the attitude has been our job is to enforce the law, period, and please don't bother us with these other concerns about foreign economic and security policy.
That response might have been understandable in earlier decades when the anti-trust subcommittees on the Hill were populaced in their thinking and we did not live in an age of globalization. I welcome these hearings because they recognize that anti-trust policy has to be re-thought as global integration, technological change and other rapidly changing conditions of the economic environment transform the world in which economic policy must function.
Now, I have a few more pages on innovation-based competition, but you have another witness and you, no doubt, have questions, so I think I should stop now.
CHAIRMAN PITOFSKY: Let me start off, and then others can add questions. Let me hark back to your years at IBM when you were very much involved in IBM's international operations and at a time when that market was going global as rapidly as any other industry.
Can you think of a situation -- an actual situation -- in which even because of what the anti-trust laws said or didn't say or because they were unclear IBM backed away or shied away or modified its behavior in an international context?
MR. DAM: Mr. Chairman, I have to be clear about the fact that while I had a lot of international responsibilities I was not in charge of the general counsel's office, and therefore I was not deeply involved in giving anti-trust advice; so even if I felt I could speak for IBM, which I can't because I am not there, I am not able to give direct testimony on that. But things have changed somewhat, not just for IBM but particularly for IBM because traditionally it always insisted on operating abroad through wholly owned subsidiaries. It withdrew from India at one point fairly early on because it wasn't permitted to have that kind of relationship, and there was a huge diplomatic fight with Mexico in the early eighties over that issue; but today, that's not the pattern by which American industry goes abroad. It goes abroad in areas that raise all kinds of section one problems, and so I don't -- I am not one to claim that the anti-trust laws are keeping American industry at home, but I also think that we have a new situation.
CHAIRMAN PITOFSKY: One more question. You mentioned that you didn't think the fact that a firm that operated in international markets should make a difference in the way that we look at chronic overcapacity. Forgetting about international markets, the United States probably less than many other countries -- certainly Germany and probably EC and certainly Canada -- doesn't take distressed industry conditions, chronic overcapacity, very much into account. Is that something we should rethink?
MR. DAM: Well, I think the failing company defense might well be broadened somewhat, but in general -- and I know that you may have different views on this from things that I have read, but I believe that we shouldn't go very far in that direction. There, I base it on my industrial experience. To be sure I was in a strong industry. But frankly, the one thing that really made American-established firms adjust over the last ten years was foreign competition. If there were another route, I'm not sure that the economy and the American people are better off.
MS. STEIGER: I want to take you to the last page of your prepared remarks which, of course, you did not cover with the time constraints. It seems to me you ask a very provocative question and a question that could be seen as one of the basic premises of the hearing, and that is whether innovation markets is a necessary or even desirable construct anti-trust policy. You go on to say that one can argue that an innovation markets concept may be needed to prevent further downstream effects, but to you it seems dangerously like a discredited incipiency policy.
Would you expand on that a little bit and explain it?
MR. DAM: Well, I will explain what I am saying. I had not looked at all of the cases closely that have been before you, and I am not privy to all of the discussions, so that is one of the reasons I focus more on globalization which I feel I know more about; but it is very simple. I am concerned about the rate of possible future horribles that one can see if one looks at something other than a market that you can observe and measure because you can upset efficient mergers, you can prevent official licensing arrangements, you can do all kinds of things because of some concern that something may happen without any evidence that that is going to happen, without any documentary evidence, if that's what's involved, and I think that the competition level in the United States, in the high innovation industries, is at such an extraordinary level today that the very process of upsetting many of these transactions on concerns about what might happen is just not worth it. It is potentially counterproductive. That is just a hunch I have, frankly. I can't prove it any more, I think, than people who favor the innovation market approach can prove that it really does something beneficial except, perhaps, in some constructed back-board type case or in some case that we've seen.
Now, I don't believe -- I am not for treating intellectual property as some kind of blanket under which you can do all kinds of things that you couldn't otherwise do. To be sure, you can have contractual constraints that do no more than make sure the property right can be enforced, but I say it's like the incipiency doctrine which I think people now see probably led to a lot of sluggishness in the development of American industry because mergers that should have occurred didn't occur. Partly that was a regulatory system at the time. I am thinking of the Philadelphia National Bank case being sort of ludicrous, given the interstate banking we now have and the fact that the number of banks is going down very rapidly through competition. But in any event, that is my general mindset on this issue.
CHAIRMAN PITOFSKY: Thank you. Question?
MS. DE SANTI: Yes. I would like to follow up on that and ask you in a situation where you have ongoing competition to develop a product but the product is not on the market yet is it your sense that competition matters -- does it matter whether there is one R&D track versus having two efforts to develop the product?
MR. DAM: Well, obviously I think the more competition there is in innovation the better. The question is whether anti-trust policy can play a role which is a net benefit role in facilitating multiple path.
Now, if you have a situation where you have two firms in an industry, then there are all kinds of other reasons why they shouldn't be able to merge or even enter into certain kinds of exclusive license arrangements, but I would do that on a basis of the industry they're in. Very seldom are firms developing a product that is not in their industry, especially today. There was a certain tendency to do that, but competition is so intense today that firms are concentrating their focus, staying with their highest priority areas and spinning off of selling their other industries, so that is why I say it is more theoretical and hypothetical than actual. So no doubt there are cases you could point to, and I think that's a useful thing to do because I would base policy not on what one can imagine but what one actually sees in actual cases, and I know to a certain extent you have done that here.
MS. DE SANTI: We have a question from the audience as well. How would the proposed bilateral negotiations that you were talking about on opening regulated sectors in exchange for us declining to extend extra territorial jurisdiction, how would such negotiations potentially fit with multi-lateral world trade organization negotiations, e.g., the current talks on telecoms or other ongoing negotiations?
MR. DAM: Well, I think ideally we would like to do it multi-laterally, but we have to take a little step and then another little step and so forth before we can get there. The fact of the matter is that U.S. policy in these areas has not been constrained by the GATT, for example. We have proceeded with the SII talks on competition policy with the Japanese on a bilateral basis, and I don't think it had any deleterious impact on the Uruguay round of negotiations.
What I am suggesting, however, is that we need a better probably to do it successfully some sort of statutory authority. You know your own statutory authorities better than I do, but I think even the more political -- the political arms of the executive branch would find it difficult to give exemption -- find a way to give it exemption without either going the full trudy route or having some kind of statutory authority exemption from private actions, which I think is very, very important to make a difference.
If you look at the cases that have gone to the Supreme Court on extra territoriality or even the important court of appeals cases, they have been heavily private actions because U.S. government agencies are responsible and they don't go after problems that can be handled by comity and exchange of information.
So we are not going to get probably in my lifetime, certainly my active lifetime, authority from the Congress to enter into worldwide competition negotiations to do this kind of thing, so I suggest that we ought to start with a few countries where there are clear issues and see what we can do.
MS. VARNEY: One quick question. You noted that a safe harbor of some sort for complex inter-firm intra-industry arrangements would be helpful. Do you have any recommendations for what such a safe harbor might be? Should it be similar to what one uses in mergers? And you also, I guess, suggested that one could do that by guidelines rather than through NCRPA.
MR. DAM: Right. Well, no, I think this is something that needs to be worked on. You do have a safe harbor in the R&D guidelines with regard to four firms -- that is one factor. It seems to me that -- I am really serious about this problem in modern manufacturing in order to get the costs down and be efficient using components made by specialized component firms which happen to be in many countries vertically and horizontally integrated. Look at the big Japanese firms.
In the industry I know something about -- computers -- there are a great number of supply arrangements between competitors. They supply all of the innards to each other of computers, and that could potentially be a problem -- could even be a problem under innovation markets approach because if one firm is going to do most of the supplying of a particular component, does that in effect narrow the incentive to innovate by the firm that's buying, given the fact they are both in the same industry? But in any event, putting that aside, I don't have a lot of precise recommendations, but I do believe that that is the -- isn't so much the fact of globalization but it is the industry structure that is arising out of globalization that creates the most section one problems.
CHAIRMAN PITOFSKY: Thank you.
MR. DAM: Thank you.
CHAIRMAN PITOFSKY: Thank you in particular for a truly comprehensive view of what these hearings are supposed to be about.
Our next speaker is Jim Rill who needs no introduction to any group discussing competition policy, but I will provide an extensive one, anyway. Jim is a partner at the law firm of Collier, Shannon, Rill & Scott. He joined the firm in 1959 and has been a partner there since 1963. He is heavily involved in domestic and international merger work.
Jim Rill was appointed Assistant Attorney General for the Anti-Trust Division of the Department of Justice by President Bush in 1989 and served until May 1992. While at the Department, Mr. Rill was the architect of the 1992 merger guidelines that have been so influential in developing policy in this country, and they were the first that were issued jointly by the FTC and the Department of Justice.
From 1987 to 1988 Mr. Rill was chairman of the American Bar Association section of anti-trust law and founder of the section special committee to study the Federal Trade Commission, a group that I was on as well.
Currently, he is co-chairman of the American Bar Association section of anti-trust law, anti-trust, and of the global economy task force. Jim Rill.
MR. RILL: That's better than a recent introduction I had where I was introduced as the former Jim Rill.
(Laughter.)
MR. RILL: I was a little worried when Bob started, he talked about our spacious knowledge of global competition issues, and I thought he was talking about me and I thought he said species, but Mr. Chairman, members of the Commission, it is genuinely a pleasure to participate in these hearings. They address particularly important questions of competition policy, the rate growth in global competition issues, the ever-increasing prevalence of innovation markets. The list of the specific topics that are contained in your handouts and the roster of at least the other presenters, including Secretary Dam, is really singularly impressive.
The Commission has designed and is implementing what promises to be a very, very effective mechanism for obtaining the very best advice of the business, economic and legal community. These proceedings are entirely in harmony with the role that Congress envisioned for the Federal Trade Commission when it was established in 1914, so you, Mr. Chairman, the staff, the commissioners, everyone who had anything to do with establishing this proceeding should be very greatly complimented.
The issues particularly of globalization and, to a great extent, of innovation which itself may be an outgrowth of the globalization of our economy and the world economies, pose very interesting, important and often difficult questions for anti-trust enforcement policy.
I would underscore that they also maximize a need for a strong position, a central role, of the Federal Trade Commission and the Department of Justice with respect to global competition issues. These issues that go to the heart of our economy, the heart of consumer welfare, simply cannot be left to other agencies of our government or, for that matter, any other. That's yet another reason to commend the Commission for having these proceedings.
In the past ,our anti-trust laws have supported innovation and progress, and they have been a very, very important factor in stimulating economic industry to produce better products to innovate more greatly and to be more effective in efficiency.
There is a national consensus for anti-trust, and effective anti-trust enforcement is a broadly shared bipartisan goal within this country. It benefits our nation's consumers, it benefits our nation's businesses. And as a result of strong rational anti-trust enforcement, U.S. companies have been better situated for the increased competition that flows naturally from the globalization of world economies.
Moreover, I am not aware of any credible empirical study that shows that the vitality of U.S. firms in general or in specific industries have been hurt by rational anti-trust enforcement that prevails in this country.
On the other hand, enforcement of the anti-trust laws in a manner that does not focus on consumer welfare or on conduct having a direct substantial and reasonably foreseeable effect on the foreign commerce of the United States would be costly. Blocking transactions and commercial practices that are efficiency enhancing is likely to lead both to increased prices to consumers and the loss of advantage for our domestic industries.
Accordingly, enforcement agencies need to be careful so that U.S. anti-trust enforcement, which has created advantages for our companies vis-a-vis foreign competitors, is and remains up to date and is itself competitive in the best sense of the word with the competition policy regimes of the major industrial nations of the world.
There is, thus, nothing fundamentally incompatible between our anti-trust laws and the efficient operation of American business. Thus, the temptation to propose piecemeal legislation carving out broad-scale exemptions to the anti-trust laws should be avoided and should be opposed by this agency. I include within that rubric legislation that was introduced in 1990 that would have created a whole new anti-trust regime for cooperative innovation and production joint ventures subject to regulatory approval by the Department of Commerce in consultation with the Department of Justice; presumably the legislation did not encompass the Federal Trade Commission. Its enactment would have been bad and still is ill-advised.
Rather, what we need, I think, is a reevaluation of anti-trust principles applied to new circumstances with which we are now confronted and not a rejection of these principles. I think a reevaluation of the application of merger and, more broadly speaking, rule of reason analysis would be entirely appropriate.
The Federal Trade Commission and Department of Justice 1992 horizontal merger guidelines, I think, provide an altogether appropriate paradigm for both analytical paths. That is, both rule of reason and merger analysis analytical paths.
In this context, the Commission, together with the Department of Justice, may wish to consider a broader perspective with respect to geographic market definition efficiencies and markets for research and development. I will address each of these in turn within the time that I have available, but I am confident they will receive much more detailed and erudite treatment from some of the subsequent speakers of this panel provided they don't speak in advanced calculus, in which case it may be more difficult.
Actually, I am going to leave to my prepared statement and possible questions the part on research and development because I was prompted to make the comment on extra territoriality by the remarks of Secretary Dam.
Market definition. The globalization of the economy raises an obvious issue with respect to geographic market definition. Should there be a presumption of world markets? This conclusion has been suggested in the same legislation that I referred to and by others, some of whom will be speaking to you as the proceedings unfold. This approach should be rejected. No more than we can listen to economists assuming a can open can we reach assumptions that world markets exist as a general proposition.
Although imports have certainly -- and exports -- increased dramatically over the past two decades, presuming from a generalized approach that markets are worldwide would be a mistake would be counterfactual.
Some industries have no imports at all, as Professor Dam indicated; others depend almost entirely on foreign markets. The fact remains that what is needed is a sophisticated sensible case-by-case approach with, I think, greater hospitality being given to arguments that favor, perhaps, more broad appreciation of world markets than I think we see in every instance -- we see at least in some instances from the enforcement agencies.
Often, we see arguments that would support global markets are viewed with skepticism, and I would submit to you that much of the skepticism that we see is based on arguments that would apply equally to the definition of domestic market.
For example, some U.S. buyers may be reluctant to deal with foreign suppliers. Some U.S. buyers may be reluctant to deal -- east coast buyers may be reluctant to deal with west coast buyers for reasons of difficulty of transportation costs and other factors. Does that stop the anti-trust enforcement agencies from identifying a national market? No. Would it stop them from identifying a world market? No. It should require a hard-nosed factual analysis of what the incentives are, what the costs are, what the trading patterns are, and not be based on assumptions -- negative assumptions -- based on theoretical preferences.
Another rationale for skepticism toward the development of world markets that I have heard is that exchange rates are uncertain, and often enforcement staffs and others -- those who have argued the negative side of world markets -- will say when there have been exchange rate fluctuations, when the dollar value has declined we haven't seen a flood of imports; that means that it's not likely that imports would come in with a five percent -- the famous five percent small, significant, non-transitory increase in price, actually known as a SNIP.
The fact is, it's a superficial argument. It fails to account, on the one hand, for the fact that foreign firms may well acquire inputs from the U.S., the U.S. firms may acquire inputs from overseas. The effect of a fluctuation in exchange rates can be a mixed sign as to what might happen if there were a five percent increase in price not related to the exchange rate.
Similarly, exchange rate fluctuations can be -- and often are -- volatile and unpredictable, whereas the guidelines speak in terms of a non-transitory increase in price which is by definition held up for a period of time to permit planning for those who would penetrate the market. I don't think the exchange rate argument against world markets is really plausible on in-depth analysis.
Another argument is that well, a foreign producer is not going to divert all of his production to the U.S. in the event of the five percent price upset. Only the amount that's currently imported would be taken into account, they say. This same argument could just as easily be made about the east coast/west coast buyer/seller hypothetical that I presented to you. If there is evidence that a global market can be sustained by reason of the likely diversion of supply to the U.S. market, then that foreign producer should be in the market to the very same extent if there is a global market that my hypothetical west coast producer would be in a national market.
To do otherwise and to retain the skepticism towards global markets that we've run into in the past, it seems to me, artificially constrains the impact of imports and analytically tilts against possibly efficient mergers, joint ventures and other rule of reason analyzed transactions that could very well be efficiency producing.
Let me get to efficiencies. Quite frankly, efficiencies, as I believe you, Mr. Chairman, acknowledged in your 1992 landmark Georgetown Law Review article treated with quite more generosity than industrial advanced foreign anti-trust regimes than they are in the United States, and I think this differential in treatment can cause serious disadvantage to the attainment of efficiencies by United States firms.
The failure to accord deficiencies the difference that they should enjoy risk putting U.S. firms at the disadvantage. I suggest that there has been movement in the right direction, I suggest that it has not gone far enough. The movement signified, for example, in the 1968 merger guidelines, they were explicitly hostile to efficiencies, picking up on the Supreme Court decision in Browns, Philadelphia Bank, which I must confess are still on the books, that suggested that efficiencies in an of themselves could be anti-competitive. I don't know of any serious scholar or, for that matter, any anti-trust enforcement official that would take that position today, although I do remember some of the earlier arguments of the Department of Justice in the Archer Daniel/Midlands merger case that as I learned about them somewhat later coming aboard gave me some pause, but that was some time ago.
The 1982, 1984 guidelines suggested that efficiencies could be recognized by the Department of Justice but purely as a matter of prosecutorial discretion, and they established that efficiencies had to be demonstrated to the department by clear and convincing evidence, and even then there was no suggestion that proof of efficiencies could under any circumstance that might be another questionable transaction. They were only evidence that might be used to determine whether the transaction had a legal or illegal or pro-competitive purpose.
In 1992 the Federal Trade Commission/Department of Justice horizontal merger guidelines eliminated the clear and convincing evidence test, pending what we hoped was a signal that would be more hospitable towards efficiencies. It was made to allay concern that the government maintained any hostility towards efficiency-enhancing mergers and to make clear that each of the five building blocks in the merger guidelines -- market definition and concentration, competitive effects, entry efficiencies -- were to be subject to the same level of proof in the analysis, tied very definitely to efficiencies.
Nevertheless, there was no suggestion in the guidelines that efficiencies could trump what might be conclusions to be drawn that a merger would be otherwise unlawful, and more importantly, the 1992 guidelines really did not undertake to articulate how efficiencies might be identified and weighed, somewhat unlike the treatment in the guidelines that mark the definition competitive effect and entry were quite detailed. Efficiencies, other than as I mentioned, were very little changed from the 1984 guidelines.
There is, nonetheless, substantial support for the notion that even in concentrated industries efficiencies will enhance welfare as long as they're accompanied by overall market-based cost reductions or prospect for overall market cost reductions be substantial.
And now, I think, in the context of these hearings, particularly with the expansion of global competition, the time is ripe to address that which was not addressed as fully as you had the time or the opportunity to do in 1992 to re-evaluate the role of efficiencies in merger, joint venture and rule of reason analysis generally.
I might interpose that the gap in the guidelines on this issue is rather well illuminated by an article that Dennis Yao and Susan DeSanti did in 1993 -- I get no royalties for this.
What suggestions do I have in this area? First, I would not require proof that efficiencies be passed directly on to consumers, at least in the short run. This approach that I am suggesting could imply a greater reliance on a general welfare rather than a narrowly defined consumer welfare standard.
I think there are several good reasons why that might be entirely appropriate. First of all, the 1992 merger guidelines do suggest that passing on of efficiency cost savings to consumers over time might be appropriate, which gives some suggestion as to how an efficiency analysis might proceed.
Secondly, consistent with the 1984 guidelines, the 1992 guidelines also indicate that scale economy that can be treated through a merger are cognizable in an efficiency analysis. Scale economies, of course, are the types of production economies that would be entirely appropriate to be considered in a long-term general cost reduction campaign, not ordinarily the sort of variable cost by realization that some people think -- cost savings realization some people think should be the only cognizable efficiency.
Secondly, I think that the agencies should be more hospitable to the types of efficiencies that are cognizable. Too often companies will come into at least the agency's staff with the substantial showing of savings that are not necessarily production efficiencies but can be skill efficiencies, can be administrative efficiencies, can be distribution efficiencies, and the immediate reaction, at least in some instances, is always well, those aren't the sorts of efficiencies that we can look at. What have you really got on the quick variable cost savings efficiencies. I think that is facile, and I think that a broader view on the types of efficiencies to be considered is entirely appropriate.
I think another issue -- and one that probably would be much more controversial and related to efficiencies -- is one that suggests that we take another look at the concentration thresholds. The current thresholds were established in 1982. The lower range closely approximates the CR-4 concentration ratio thresholds, poor firm ratios of 1968. After 1968 a lot of empirical work was done notably by Dempsis & Rosen questioning the welfare effects, the performance effects of conservation at that level and the assumptions that they would adversely affect performance. I think that needs to be reconsidered. I think it at least needs to be reconsidered. This is not inconsistent, again, Mr. Chairman, with your suggestion in the 1992 Georgetown article -- needs to be reconsidered where there are substantial real efficiencies specifically related to a given transaction -- merger, joint venture, other cooperative activity -- and in that case it might be worthwhile, at least, to look at the place where the European union commission seems to be coming out and questioning whether that is an appropriate standard to adopt, and that is where real efficiencies exist and two-firm concentration ratio post-transaction does not exceed 35 percent, should not the transaction avoid challenge.
There may be a variety of other ways, as will be illuminated later in these hearings at the conclusion of these hearings you may wish to obviously discuss the input of the experts who will testify down the road. I think that it would be very worthwhile, though, after that has been done to establish either with the Department of Justice an internal or perhaps external and internal task force with a short-term fuse to come up with articulate guidelines for the consideration of efficiencies that would expand on and improve, I think, very importantly the framework of the merger guidelines as they exist today.
So just one word about R&D and then if I may, I would like to talk for just a minute or two about extra territoriality. My statement deals with R&D in some detail; I am sure you are going to hear a lot about it from witnesses down the road. I would make only three points.
One, R&D markets are very difficult to identify for a lot of reasons, because R&D is not always single-product specific, we don't always know who is out there doing R&D that would relate to the particular target, research area, research product area involved. Anti-trust work tends to be hard work. That may not be enough reason to say let's not do it, but it does enhance the danger of making a wrong mistake. As I said before, I am not one who thinks that -- I think it's type one error condemning something that should go forward is necessarily akin to the opening the box to the onset of the bubonic plague, but I think in this particular area one has to be particularly concerned because of the indefiniteness of market definition.
Secondly, it seems to me that the empirical work which supports concentration and performance relationships in product and service industries, which is quite strong, doesn't exist with respect to R&D industries. There is not that wealth, that rich body of empirical work which suggests that a certain level of concentration in R&D is going to necessarily mean less R&D. I think that when you jump to conclusions about those R&D circumstances, we create dangers, perhaps, of having the adverse effect of that which we're looking for.
Finally, I think it's important to be cautious in this area because many, many authorities suggest that efficiency opportunities may be greater in R&D than there are in other areas such as production. Again, I have no basis for that other than what I have read, but it seems to me intuitively to make a lot of sense.
So absent a product in an industry -- and I think I agree with Professor Dam on this -- and absent the proper application of potential competition doctrine, I would say it would be the rare case where a pure R&D merger or joint venture or other cooperative arrangements could be challenged.
This is just a word -- not in my prepared statement -- that I am prompted to make on extra territoriality. As far as unilateral enforcement is concerned, I don't think it's necessarily something that would occur to the exclusion of attempting overseas enforcement. I think the whole notion of positive comity embraced in first the U.S./European union anti-trust cooperation agreement, FTC, Department of Justice, Commission of the European Union, signed that agreement suggests that the agencies should cooperate in enforcing the anti-trust laws but implicit in that cooperation should it fail, the country where conduct is occurring that adversely affects the interests of the business firms from the other country in having a free market, then the nation whose trade is being injured should retain the right to bring its action, having given positive comity full opportunity to -- this is not only a U.S. view. The view recently expressed, for example, by Frederick Genny who is the vice-chairman of the -- France, and the chairman of the competition law and policy. I think that bilateral agreements of the sort I ?have just mentioned -- the USEU agreement, the new revised U.S. Canadian agreement, again constructed by FTC, DOJ and the Bureau of Competition Policy in Canada -- are the way to go. I agree that small steps are better than multi-lateral steps.
I think that it is going to be a long time before two-thirds of the Senate would approve an agreement for swearing the jurisdiction of the United States to enforce its anti-trust laws, perhaps not in any of our professional lives.
I think, though, that to come back to my starting point and to extol again what I think are the very great potential benefits of these proceedings, it is critically important that the Federal Trade Commission and the Department of Justice assume the leadership role that they have by statute and tradition and expertise in the area of global competition policy and not let that role go to people with less tradition, expertise, and perhaps both. Thank you, Mr. Chairman.
CHAIRMAN PITOFSKY: Thank you very much. Question?
MS. AZCUENAGA: I have some questions. I would like to go back to your suggestion about changing HHI threshold because I believe it has been well established, and I still know of nothing that would suggest that those thresholds are anything but arbitrary and, in fact, that is what I understood you to say again. Why would you change them?
MR. RILL: Well, I think that fortunately the approach to the thresholds itself has changed somewhat. I think we no longer talk in terms of guideline violations, or at least I hope we no longer talk in terms of guideline violations. And there is a flexible standard adopted; Commission decisions, I think have been Chairman Steiger's decision in Owens-Illinois -- Commission decisions look beyond the Herfindahls.
On the other hand, I think at a certain point within the range, even in the higher concentration ranges, there is, as the guidelines suggest, a presumption of illegality, and there may be a tendency not to look beyond that presumption to adopt a sliding scale, which I think any of us thought was not something that was in the guidelines.
I limit my approach now to suggesting that where there are real substantial efficiencies it may be well to change the threshold -- I advance this very tentatively -- may be better to change the threshold than attempt to balance through some econometric analysis that could be very elusive the welfare lost from a potential price increase, should it occur, from the efficiencies -- substantial though they may be -- and their likely affect on overall cost savings resulting from the transaction.
It may be well to be in that particular circumstance, let's say, where savings equal to five percent, ten percent of total cost can be realized by a transaction simply to say rather than attempt an arcane balancing effort, let's just raise the threshold of that if the two firms don't exceed 35 percent of the market, we're going to let it go.
Let me amend that to say where no two firms exceed 35 percent of the market. I think some empirical work in that area would be desirable. It certainly would be an approach taken by the EEU commission. That doesn't make it right, but I think it makes it worthy of some respect and analysis.
MS. AZCUENAGA: I think that is an interesting idea and, really, I am just reacting to it at this point very initially because I hadn't given it any thought.
The sliding scale, you and I have spoken about many times, and there is disagreement about that, but you and I both agree that there should be no sliding scale because the attempt of the guidelines was to move away from numbers and analysis on numbers is easy, but perhaps inaccurate surrogates the power and the likelihood of anti- competitive effects; so I guess one of my reactions is yes, that's an intriguing, perhaps a good idea, and another reaction is that's just another sliding scale.
MR. RILL: It is susceptible to that criticism, but in this particular instance at least initially, given I think the rather unusual difficulties -- lots of stuff in the merger guidelines is difficult, but I think it is particularly difficult to have an intricate weighing of the cost savings from an efficiency and the offset to a price increase that might occur out of a particular merger; so it might be better -- you are right; it is something of a sliding scale. It might be better in that limited area as one possible approach to a more hospitable view of efficiencies to do that.
MS. AZCUENAGA: One of the things that you said, that there had been a failure to accord efficiencies deferential treatment, that is one statement that I can't agree with based on my own experience, but I am interested to know based on your experience both as Assistant Attorney General and private counsel in many cases, what the basis of that view is, because it's my view that we at the Commission -- I don't speak for anyone else -- accord efficiencies highly deferential treatment. Our economists go over all efficiency claims very carefully, and unfortunately what they find is that they very rarely are substantiated with any sort of solid business documentation or financial projections.
So I guess my next question would simply be is there some other reason to think that we don't accord them deferential treatment?
MR. RILL: I have found that in my experience the staff in the division was highly skeptical of efficiencies and often with some justification because, as you imply, not every efficiency argument that is presented to the agencies is perhaps the most substantial argument that we might hope for to understate the problem somewhat. But the fact is that I think there is a built-in -- my experience is that there is a built-in resistance, at least, to accepting efficiencies other than those efficiencies -- and I am not speaking to any member of the Commission, and certainly not to you, Commissioner Azcuenaga -- but there is a built-in resistance to accepting efficiencies that are not readily immediately at least susceptible to being passed onto the consumer then and there. I think those efficiencies tend to be rejected.
Secondly, I think there is an undue propensity to reject efficiencies even though they may be substantial, and even though they may be merger specific. And I think that's it. So I think those are built-in negative signs that could well be re-addressed, and I think that would be something where the Commission could serve a very, very great service.
MS. AZCUENAGA: It is my observation that the commission has backed off very quickly against any even slightly well-substantiated efficiency argument, but I think your points are very well taken, that even if I am correct in that observation, or I am not, apparently we have not communicated that to the world at large, and your suggestions about the sorts of things we might communicate better, I think, are extremely well taken.
MR. RILL: Thank you. This was an area, quite frankly, that we did not address perhaps as fully as we should have, speaking from my former life, in the 1992 merger guidelines, and these hearings present, I think, a wonderful opportunity to take that into account because you are going to really be hearing people who are much more erudite and articulate than I discuss this issue, and you will have a wealth of a record to draw from for that kind of re-analysis. Thank you.
MR. STAREK: Jim, did your thinking on possible revisions and analysis on efficiencies include any thought given to the treatment of merger-specific efficiencies versus efficiencies that would come due to virtually any combination?
MR. RILL: I think that's a good point. I think that we should be reluctant to eliminate the requirement that an efficiency should be merger specific, not necessarily only achievable by this merger; I think that's much too high a burden, but the efficiency to be cognizable in connection with determining whether the merger is either pro-welfare or anti-welfare certainly should be tied to a result that would be achieved reasonably through this merger and not reasonably achieved through some other course of action.
MR. STAREK: Well, see, some view it the way you just articulated it -- that it has to be specific only to this combination of these two -- and let's talk about a merger - of these two entities. Let's take a hospital merger. Some would have us discount the fact that if Hospital A and Hospital B merge, well, obviously we are going to save in billings and the administrative costs, which of course, would happen if Hospital A and Hospital C merged, you see.
MR. RILL: Okay. I see what you are saying, Ross, and I think it has a lot of merit to it, and one thing that occurs to me as we look at it is, why not look at it as though we are talking about the test that should apply in a rule of reason analysis to some kind of marketing transaction, institution transaction, that the efficiency, if it's reasonably related to the result of the merger doesn't have to be the only way that that efficiency could be achieved. I think we have gotten away from the least restrictive alternative in distribution cases and maybe in efficiency analysis in the merger context we should look at whether or not the efficiency is itself reasonably related, technically related, to the merger. I think you make a good point.
CHAIRMAN PITOFSKY: I would like to ask a related question, I think. First of all, I hear your thought about a joint task force on the efficiency question that I had not heard suggested before, and I think that's an intriguing possibility. We don't have to settle every problem in these hearings, but perhaps we could at least tend to issues that have progressed.
We heard this morning from two CEO's of very large companies in international trade, and I would like to address this to both of our witnesses. They said that one of the most serious problems is the lack of clarity about what the law is as it applies to joint ventures, and especially joint ventures operating markets.
Now, you have had as much experience with guidelines as anybody I know --
MR. RILL: Not quantitatively speaking.
(Laughter.)
CHAIRMAN PITOFSKY: Did you consider joint venture guidelines? We know what happened in Europe -- they put out joint venture guidelines, and I think many people think they did as much harm as good by using the -- what do you think about joint venture guidelines, especially as they relate to international trade?
MR. RILL: I think there is something to be said for it. We were actually -- actually, as Chairman Steiger -- I can't get out of that habit, so I'll just do it -- and I both remember there were suggestions from business and, indeed, from the executive branch that joint venture guidelines might be something that we would consider. At least one of us was sufficiently exhausted, and on the way out the door -- I think it's fairly apparent which one --
MS. STEIGER: Two of us.
MR. RILL: But a lot of the analysis that goes into the joint venture review is embraced in the merger guidelines.
Bill Baxter said -- and I think he is correct; he actually said it after 1992 -- that the merger guidelines provide a good paradigm for the review of any rule of reason based analysis, but I think simply taking those guidelines and saying that joint ventures may be tweaking them a little bit if it's necessary would be as much of an advancement that you would want to make right now rather than develop guidelines around joint ventures. I'm sure you wouldn't run into the problem that the European commission did resulting in confusing people with definitional issues between whatever it was, consultative and something else joint ventures, but I think making clear that an analytical track embodied in the merger guidelines if appropriate for all rule of reason analysis, I think, would eliminate a lot of the confusion that may exist perhaps unnecessarily out there.
MR. DAM: Well, my reaction would be that it would be very difficult to do guidelines if guidelines set out to be comprehensive 'cause one tends to depart from the notion that a joint venture is a situation where two companies put in each 50 percent and they build a plant and then that plant produces something; that's not, in fact, statistically what the universe is like any more out there; and it never was, in a way.
If you go into some of the leading case books on anti-trust law, you will find cases like Chicago Board of Trade and BMI and all these kinds of cases; they are a different kind of cooperative working together, and I mentioned the strategic alliances we have today and the mutual supply contracts and so forth. That's why I suggested that maybe another way to approach it is to take some typical cases and to think in terms of safe harbors without trying to build an apparatus that's going to cover the field.
MR. RILL: That is a very interesting question. It could work within the framework of existing guidelines.
CHAIRMAN PITOFSKY: We heard something of exactly what Professor Dam was saying this morning. Variety of strategic alliances much surpass those of some of the cases.
All right. Well, thank you very much. You have lived up to my billing as people who were not necessarily tied to conventional thinking about global markets, and we appreciate your appearing today.
(Whereupon, at 3:15 p.m., the hearing was concluded.)
C E R T I F I C A T E
DOCKET/CASE NUMBER: P951201
CASE TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
HEARING DATE: October 12, 1995
I HEREBY CERTIFY that the transcript contained herein is a full and accurate transcript of the notes taken by me at the hearing on the above cause before the FEDERAL TRADE COMMISSION to the best of my knowledge and belief.
DATED: October 12, 1995
SIGNATURE OF REPORTER
Bonnie Niemann
(NAME OF REPORTER - TYPED)