Government and the Tech World: Friends or Foes?

Prepared Remarks before the Federalist Society, North Carolina Research Triangle Chapter

Raleigh, North Carolina

Date:
By: 
Orson Swindle, Former Commissioner

Good evening. I'm glad to be here tonight to offer some thoughts as to whether government antitrust enforcement is the "friend or foe" of the tech world.

Is antitrust enforcement is a "friend" or "foe" of high-tech? Let's begin at the beginning. The proper goal of antitrust law should be to prevent acts and practices that are harmful to "consumer welfare."(2) Vigorous competition in the marketplace results in lower prices, higher output, and increased innovation, all of which confer tremendous benefits on consumers. Antitrust enforcement efforts should be focused on challenging and preventing acts and practices that hinder the process of competition, thereby decreasing the well-being of consumers. However laudable other policy objectives might be, the proper goal for antitrust enforcement is to preserve and protect the benefits that consumers derive from vigorous competition. Antitrust enforcement thus should be a "friend" of competition and a "foe" of anything that harms competition.

Some have advocated that the antitrust laws should not apply to high-tech industries.(3) I disagree. Regardless of whether an industry is high-tech, low-tech, or no-tech, acts and practices by firms in that industry can cause harm to the competitive process and consumers. The task of antitrust enforcement officials is to prevent these acts and practices regardless of the nature of the technology involved. Antitrust enforcement has an important role to play in preventing acts and practices in high-tech industries that harm consumer welfare.(4)

Nevertheless, it is often quite challenging to apply the antitrust laws to the acts and practices of those in high-tech industries.(5) These industries include such diverse products as computer hardware, computer software, pharmaceuticals, medical devices, biotechnology products, communication devices, international credit and finance goods and services, and many, many more. Unlike low-tech firms, which tend to compete on how effectively they employ their plant, equipment, and other physical assets, high-tech firms tend to compete much more on how effectively they make use of ideas to create goods and services for consumers. Because of their focus on intellectual capital, high-tech industries are characterized by the frequent appearance of new generations of products, often from sources that are hard to predict. High-tech's bubbling ferment is driving the New Economy.

I will focus my remarks tonight on three specific areas - - monopoly power, harm to competition and consumers, and remedies - - in which the application of antitrust principles is particularly difficult because of the characteristics of high-tech industries.

Monopoly Power

The first issue is determining whether a firm can exercise "monopoly power" in the market for a high-tech product.(6) Courts have defined monopoly power as "the power to control prices or exclude competition."(7) Because monopoly power is difficult to measure directly, courts often have used market share as indirect evidence of the existence of monopoly power. Courts typically have concluded that a 70% or more market share creates an inference of monopoly power absent persuasive evidence that overcomes that inference.(8)

It is particularly important in antitrust cases involving high-tech to look beyond mere market share to determine whether monopoly power can be exercised.(9) On the one hand, some argue that monopoly power may be durable in high-tech industries because of very high barriers to entry. Monopoly power purportedly can be exercised in high-tech industries because intellectual property rights - - patents and copyrights - - make it more difficult for potential competitors to come to market with new technologies. Monopoly power also supposedly can be exercised in high-tech industries because of so-called "network effects." The basic theory behind network effects is that if a technology - - like the telephone - - becomes more useful as more and more people use it, consumers will be reluctant to switch to a new technology because of the premium associated with the widespread use of a common technology. The reluctance to switch makes it easier for the seller of the current technology to exercise monopoly power.

On the other hand, experience teaches that the normal operation of economic incentives in dynamic high-tech markets generally will spur advances in technology that cause consumers to switch to a superior new technology. For example, in the early 1980s consumers were locked into the technology of vinyl records and turntables, but consumers rapidly switched technologies upon the introduction of compact disks. Perhaps the threat of similar technological switches explains why some of the titans of high-tech industry today do not appear to behave like the monopolists of old, for whom "unchallenged economic power deaden[ed] initiative . . . [and] immunity from competition [was] a narcotic."(10)

I am probably more inclined than some other antitrust enforcement officials to conclude that monopoly power in the market for a particular high-tech product is likely either not to exist or not to endure for long, given the stunning pace of change in the New Economy. For example, in the Commission's Intel case, I expressed uncertainty as to whether Intel, despite its extremely large market share in general purpose microprocessors, had monopoly power in the face of aggressive competition from innovative firms, especially those that were supplying general purpose microprocessors for PCs costing less than $1,000.(11) But the ultimate determination of whether monopoly power exists in the market for a high-tech product requires a difficult assessment in light of the facts concerning the particular product market at issue. Indeed, what may be true for general purpose microprocessors may well prove not to be true for personal computer operating systems or communications satellites or Internet appliances or medical devices or some other high-tech products. In antitrust enforcement, there is simply no substitute for compiling and analyzing all of the facts.

Harm to Competition and Consumers

The second issue that I want to discuss is under what circumstances does conduct cause harm or is it likely to cause harm to competition and consumers, not just to competitors. Antitrust law traditionally evaluates whether the conduct at issue has caused or is likely to cause harm to consumer welfare in the form of higher prices, reduced output, and decreased innovation. But markets for many high-tech products have been and continue to be characterized by decreasing prices, increasing output, and robust innovation, often stemming from massive spending on research and development. These characteristics transform the relevant question into whether prices would have fallen even more, output would have increased even more, and innovation would have been even more vibrant in the absence of the conduct at issue.

While there certainly are circumstances under which such harm to competition and consumers can be proven, we should be wary of reaching the conclusion that markets that are already creating tremendous benefits would have done better. In the FTC's Intel case, for example, the Commission alleged that, in the wake of intellectual property disputes between Intel and three computer manufacturers that purchased Intel microprocessors, Intel decided to curtail the supply of technical information and prototypes to those three firms. The complaint alleged that Intel's actions entrenched its monopoly position in general purpose microprocessors and diminished the incentives of firms commercially dependent on Intel to develop innovations relating to microprocessor technology. I was unwilling to support the Commission's case against Intel because "[w]hatever injury Intel might have visited on [the three computer manufacturers], I [could not] accept that it could appreciably affect -- much less stem -- the immense tide of invention and improvement that continuously drives this industry."(12)

I also want to emphasize that antitrust enforcers should be particularly careful before condemning or challenging novel acts or practices in high-tech industries. As then-Professor Easterbrook explained:

[T]he economic system corrects monopoly more readily than it corrects judicial errors. There is no automatic way to expunge mistaken decisions of the Supreme Court. A practice once condemned is likely to stay condemned, no matter its benefits.(13)

Because of the difficulty of reassessing the legality of an act or practice after the courts have declared it unlawful, the prudent course for antitrust enforcers is to proceed with caution and a certain amount of humility in evaluating an act or practice for the first time - - a relatively common occurrence when dealing with high-tech industries.

Let me give you a concrete example. Business-to-business electronic marketplaces, in which firms form a joint venture to collectively buy or sell goods and services online, are growing rapidly. Such "B2B" electronic marketplaces have the potential to enable businesses to operate much more efficiently and to provide lower prices for consumers on a vast array of products. But B2B electronic marketplaces also raise some antitrust concerns because they may involve information exchanges and other collaborations among competitors. Faced with the dilemma of how to respond to this new development, the Commission recently held a public workshop to learn about these arrangements from high-tech entrepreneurs, the business community, the antitrust bar, economists, and consumers. The Commission is considering how to proceed in light of the information that we received at the workshop. Where possible, antitrust enforcers should not take action before they have learned what they can about the implications of a novel act or practice in high-tech industries.(14) Given the importance of high-tech industries in the New Economy, antitrust enforcers must be fully informed about these implications, because otherwise they could do terrible harm.(15)

Remedies

The third issue is what remedies should be imposed in antitrust cases involving high-tech industries. As I mentioned earlier, many high-tech markets are characterized by decreasing prices, increasing output, and robust innovation -- certainly characteristics that yield tremendous benefits to consumers. Even if an antitrust violation is established, remedies in the high-tech field should be very carefully calibrated to address consumer harm and to prevent violations that are the same as (or similar to) the violations that caused that harm. We do not want to kill the goose that is laying the golden eggs.(16)

Although the scope of remedies in high-tech cases clearly raises its own concerns, I think that the duration of orders raise special challenges. Commission orders usually sunset after twenty years. In the high-tech world, where Moore's Law applies, two decades can be eons. Twenty years ago, for example, the first personal computers for consumers were being introduced into the marketplace and there was no Internet. Some even claim that antitrust enforcement is inherently unable to keep pace with high-tech because the relief imposed will rapidly become ineffective, irrelevant, or even harmful to competition and consumers.

I disagree with these critics of high-tech antitrust enforcement for three reasons. First, only rarely do so-called "core" order provisions (prohibiting a recurrence of the conduct found unlawful) bar conduct that could become lawful with the passage of time. Second, the Commission often imposes shorter limits on so-called "fencing-in" relief, i.e., order provisions designed to prevent a firm from engaging in similar law violations in the future.(17) For instance, some of the fencing-in relief included in the Intel order lasts for seven years, which makes it somewhat less likely that it will become ineffective, irrelevant, or harmful as a result of the passage of time. Third, the Commission is required to reopen and consider modifying an order within 120 days upon a "satisfactory showing" that "changed conditions of law or fact" or the "public interest" require such a modification.(18) Order modification interjects needed flexibility into the system, which is especially important for those in dynamic industries.

The Commission recently clarified the standards that apply to requests to reopen and modify orders based on public interest grounds to make the process less confusing.(19) For those with a good and substantiated argument that an order no longer makes sense, I encourage you to file a petition asking for a modification. Ultimately, although the pace of high-tech makes crafting effective orders extremely difficult, this concern can be alleviated if orders are limited in scope and duration and if the Commission remains open to modifying orders that no longer make sense.

The Microsoft Case

In any assessment of whether antitrust enforcement is the "friend" or "foe"of high-tech, it is impossible to ignore the recent district court decisions in the Microsoft case, concluding that the company had violated the antitrust laws and ordering, among other things, that a break up of Microsoft to remedy those violations.(20) Many of the issues that I have mentioned concerning the application of traditional antitrust principles to high-tech are front-and-center in the Microsoft case - - specifically, (1) does Microsoft have monopoly power in the personal computer operating system market, (2) do network effects make its monopoly power more durable, (3) were competition and consumers (not just Microsoft's competitors) harmed by its conduct, and (4) was breaking up the company necessary to restore competition and protect consumers? I think that these are the right questions to ask, but I will defer to others on the panel who may have a fuller and deeper understanding of the facts of the case to answer these questions.

I do want to offer a couple of observations about the Microsoft case, however. As I mentioned earlier, there has been a lot of talk about whether the antitrust laws apply to high-tech industries. This issue provides interesting fodder for conferences, workshops, and classrooms. But the most important real-world lessons from the Microsoft case are that: (1) the antitrust laws do apply to high-tech industries, and (2) courts may impose severe remedies - - including breaking up companies - - on those who violate the antitrust laws, especially those whom the court perceives as reluctant to obey the law.

Some high-tech companies may not fully appreciate the risk associated with not being sufficiently attuned to antitrust issues. This attitude increases not only the likelihood that they will violate the law, but also the prospect that government antitrust enforcers will seek a severe remedy and that such a remedy will be imposed. If the adverse impact of these remedies were limited to the high-tech companies involved and their shareholders, the remedies would be of limited public concern. But severe remedies can have unintended, adverse consequences for the entire high-tech industry, which has been such a driving force in creating extraordinary wealth in our current economic expansion.(21) I hope that the importance of maintaining a thriving high-tech sector prompts both high-tech companies and antitrust enforcement officials to undertake a sober and careful assessment of the application of antitrust laws to high-tech in light of the Microsoft case.

In the end, I am not so naive as to believe that government antitrust enforcers and high-tech companies will ever be "friends." But I see no reason why they need to be "foes."

Thank you, and I look forward to a lively discussion.

Endnotes

1. The views that I will express are my own and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner.

2. R. Bork, The Antitrust Paradox 89 (1978) ("the case is overwhelming for judicial adherence to the single goal of consumer welfare in the interpretation of the antitrust laws").

3. See, e.g., R. Levy, "Rewriting the Rules for High-tech Antitrust," CATO Today's Commentary at 1 (Nov. 3, 1999) ("Antitrust, if it ever were needed, is as obsolete as Windows will soon be."); R. Barro, "Why the Antitrust Cops Should Lay Off High Tech," Business Week at 20 (Aug. 17, 1998).

4. See, e.g., Prepared Remarks by Chairman Robert Pitofsky, Federal Trade Commission, "Antitrust Analysis in High-Tech Industries: A 19th Century Discipline Addresses 21st Century Problems, American Bar Association, Section of Antitrust Law at 3 (Feb. 25-26, 1999), at 3 ("antitrust should - indeed must - continue to apply [to high tech industries]"); Prepared Remarks by Commissioner Thomas B. Leary, Federal Trade Commission, "Antitrust Law As A Balancing Act," The Tenth Annual Seattle Computer Law Conference at 1 (Dec. 17, 1999) ("it is not necessary to develop new antitrust principles to deal with so-called high tech industries . . .") (emphasis in original) (hereinafter "Antitrust Law As A Balancing Act").

5. See Leary, "Antitrust Law As A Balancing Act," at 1 ("what is required is a discriminating application of familiar [antitrust] principles to the special facts of a high tech environment").

6. The acquisition or exercise of monopoly power is not necessarily a violation of the antitrust laws. A company is legally entitled to acquire and maintain monopoly power "as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

7. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).

8. ABA Section of Antitrust Law, Antitrust Law Developments 235 (4th ed. 1997).

9. Similarly, antitrust enforcers should look beyond market share and market concentration calculations in assessing whether mergers, including high-tech mergers, will create or enhance market power or facilitate its exercise. See, e.g., FTC v. H.J. Heinz Co., Civ. No. 1:00CV01688 JR (D. D.C.) (Commission seeking preliminary injunction against merger that allegedly would substantially increase concentration in highly concentrated baby food market) (Commissioners Anthony and Swindle, dissenting).

10. United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945).

11. Intel Corporation, FTC Dkt. No. 9288 (1999).

12. Intel Corp., Statement of Commissioner Swindle at 3 (available at <www.ftc.gov/os/1999/9908/swindleintel.htm>.

13. F. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 15 (1984).

14. The Commission is uniquely qualified to perform this role because of its traditional emphasis on studying the legal and economic implications of various business practices.

15. See Commissioner Orson Swindle, Outline of Comments Before the FTC's B2B Workshop at 1 (June 29, 2000).

16. J. Freedman, Why We Don't Want Net Regulation, Tech Central Station Policy Tracks at 1 (July 31, 2000) ( "A major reason that America's high-tech industry has been so good for consumers and investors is that, for most of its history, Silicon Valley has benefitted from Washington's neglect.").

17. See FTC v. National Lead Co., 352 U.S. 419, 429 (1957); Jacob Siegel Co. v. FTC, 327 U.S. 608, 611-13 (1946).

18. Section 5(b) of the FTC Act, 15 U.S.C. § 45(b); 16 C.F.R. § 2.51(b).

19. Federal Trade Commission, Final Rule on Requests to Reopen, 65 Fed. Reg. 50636 (Aug. 21, 2000).

20. United States v. Microsoft Corporation, Civ. Act. No. 98-1232 (D. D.C. Apr. 3, 2000) (Conclusions of Law and Order); United States v. Microsoft Corporation, Civ Act. No. 98-1232 (D. D.C. Nov. 5, 1999) (Findings of Fact).

21. See D. Mitchell, "Microsoft Ruling An Inept Stab at Industrial Policy," Heritage Foundation News & Views at 1 (July 21, 2000) (breakup of Microsoft was a "loss for the American economy, including a record $450 billion nose-dive for the Nasdaq stock market"; "Microsoft alone lost just about $80 billion of value in just one day").