for Pillsbury Madison & Sutro, Antitrust Program, Quadrus Conference Center
Menlo Park, California
My remarks today are my own and do not necessarily reflect the views of the Commission or any of my fellow Commissioners. Let me also note that I will not be discussing the Microsoft and Intel cases since they are pending law enforcement actions.
First, I would like to briefly share with you my view of what role government should play in our lives. This view tempers my approach to decision making on matters before the FTC, including high tech issues.
I believe Adam Smith, our Founding Fathers, Milton Friedman and Ronald Reagan had it right --- government should play only a minimal role in our lives and should not be intrusive nor unreasonably burdensome. Those of us serving in government should begin each day applying the Hippocratic oath, "do no harm." Personally, before making final decisions, I like to ask myself the question, "does this make sense?"
I believe limited government is the key to allowing Americans a fundamental right of free people: the right to make their own decisions, including economic decisions.
As Ronald Reagan said, "The ... inescapable truth is: government does not have all the answers. In too many instances, government does not solve problems; it subsidizes them."(1)
On another occasion he suggested that "... When government decides to solve something, we have learned to be wary. The cure may not always be worse than the disease, but it is usually bigger and it costs more."(2)
Unfortunately, not all in government have learned this lesson --- even within the FTC.
When private markets are permitted to operate without government intervention or control, they generally produce more and better products at lower prices for all Americans. The computer industry is a clear example of this principle at work. Our current national prosperity is no accident. For the most part, private markets should be left alone to work their magic. Nevertheless, there is a persistent temptation among some in government to think that the government can produce "better" outcomes if it controls, directs, regulates or otherwise alters decisions made in private markets.
The FTC is a law enforcement agency. For the most part, it is not tasked with nor should it be seeking to control, manage, or direct private decision making. Of course, there are limited circumstances, which can be called "market failures," where it may be necessary for the government to intervene in private markets. Intervention should be the exception, not the rule, however. I have seldom seen instances where government solutions were, in the long run, the best solutions. Given the enormous benefits that typically flow from private markets without government involvement, we should be significantly persuaded that government intervention is clearly requiredbefore we intervene in private decision making. I think this view is consistent with the FTC Act's requirement that the Commission proceed only when it has reason to believe that the law is being violated and that it is in the public interest to act.
Privacy and Electronic Commerce
As you can tell, I have tremendous faith that private business will, in its own enlightened self interest, provide consumers with what they need or want at the lowest price possible. The rapid advance in consumer technology has certainly borne out my faith as electronic commerce grows by leaps and bounds.
As with most progress in commerce, the path is not always smooth. While consumers flocked to the Internet in record numbers this past holiday buying season, lingering concerns about privacy and security in Internet transactions still exist and are attracting the attention of advocates of government regulation. Of course, privacy and security are not the only matters of concern to Internet shoppers. Consumers are also worried about product availability and quality, taxes, and shipping costs, for example. While privacy and security concerns reflected in consumer polls are real, the actual numbers show that on line spending tripled from $3 billion in 1997 to $9 billion in 1998. Spending in 1999 is projected to reach $30 billion. Consumers' confidence in this new medium is obviously growing.
As you are aware, personal privacy issues are very visible in government, industry and advocacy circles today -- and they should be. I believe worries about privacy are legitimate but, despite that legitimacy, can also be turned into political instruments to do more harm than good. Misdirected and excessive government imposition of privacy regulation could open the door to further and more extensive regulation of the Internet. Ignored or inadequately addressed by industry doing the responsible thing, the issues become the leverage for those who advocate more and more regulation of your industry and activities. I see the issues of privacy and electronic commerce as grand opportunities for industry to take a dynamic leadership role addressing consumers' concerns before government imposes its solutions. Believe me, the forces for more regulation are energetic and in action as we speak. So, I ask you, industry, are you listening?
The FTC's Involvement in Privacy and Electronic Commerce Issues
The FTC has conducted workshops to facilitate discussion among industry, consumer and privacy advocates, and government to encourage the development of effective self regulation so that e-commerce could flourish with consumer confidence. We will be holding another workshop on electronic commerce on June 8 and 9 this year, with a focus on U.S. Perspectives on Consumer Protection in the Global Electronic Marketplace. Your participation and input are encouraged.
I believe that the greatest degree of privacy protection will come from self-regulation. Not only is the private sector better equipped to do this, it has the incentive to do so because significant aspects of its commercial future may depend on it. As for the government "taking charge," imagine the herculean task of monitoring hundreds of thousands of web sites. Frankly, I find it difficult to imagine a government bureaucracy effectively monitoring, much less effectively enforcing, a new set of government regulations that cover such a huge and dynamic means of commerce.
There is an old saying still appropriate in this high tech era: build a better mousetrap and the world will beat a path to your door. I urge your industry to build that better mousetrap. Develop self-regulatory standards that will foster consumer confidence and attract new on-line consumers. Government can play a constructive role with you by educating consumers to look for sites that have privacy notices and protections and which guarantee consumers a satisfactory shopping experience. Through effective self regulation, industry may be able to avoid having a government-designed mousetrap imposed on it and on consumers.
The FTC's Traditional Role
It is important for you to appreciate the FTC's traditional roles and how they apply to the high tech environment. We will continue to exercise our law enforcement roles, in particular our authority over deceptive practices. For example, failure to follow self-imposed and publicly advertised privacy policies is considered a deceptive practice by the FTC, as demonstrated by the recent FTC settlement withGeoCities, one of the most popular sites on the Web. GeoCities agreed to settle FTC charges that it misrepresented the purposes for which it was collecting personal identifying information from children and adults. Moreover, as evidenced by our recent settlements withGateway 2000 and Iomega, the FTC will continue with our garden variety ad cases to ensure that all consumers, including those buying high tech products, get the services and options promised to them.
Electronic commerce is an exciting new world for your industry and consumers. However, it is also a target rich environment for those choosing to engage in deception and unethical practices. The potential to do harm to consumers as well as inhibit the potential growth of this new method of commerce is great. The optimum solution is one that will allow the free market to operate as it does so well by permitting consumers to make informed choices rewarding companies that best meet their needs. If industry steps up and "makes a better mousetrap" by adopting sound self-regulatory standards, practices and policies that satisfy consumers' concerns about privacy and electronic commerce, I believe you can blunt the drive for increased government regulation of the Internet.
Mergers and Joint Ventures
Another aspect of the FTC's law enforcement responsibilities that is important to your industry involves competition practices including mergers, joint ventures and anticompetitive conduct. In recent years, there has been a huge wave of mergers, more than 4,700 merger filings in Fiscal Year 1998, involving assets of about $1.5 trillion -- both record numbers. As evidenced by weekly news accounts, there appears no noticeable letup.
Mergers create a wide variety of economic benefits and can place the assets of the acquired firm into the hands of those who have powerful incentives to use them to their best economic advantage. Mergers can allow the new entity to lower costs and compete more effectively by taking advantage of economies of scale or scope in production, research, distribution, and cost of capital resulting in greater output, lower costs, and, most important, increased consumer choice.
The FTC is concerned with mergers that create or enhance market power or that facilitate the exercise of market power so that the merged firm or the remaining firms in a market can maintain or raise prices above competitive levels for a significant period of time. The exercise of market power can lead to other anticompetitive effects, such as the slowing of innovation.
In Congressional testimony last June, the Commission identified technological change as one of the factors driving the current merger boom. As I stated above, private markets should operate without government intervention unless it is clear that such intervention is needed to prevent or remedy likely harm to consumers.
The speed of technological change, driven by your industry, presents great challenges to those who must determine whether a given merger is likely to harm consumers or must weigh whether the "cure" imposed by government intervention is worse than the disease. Federal Reserve Chairman Greenspan expressed caution about the government's ability to predict a merger's anticompetitive effects, and he singled out high tech mergers as an area of special concern. Concerning the uncertainties created by rapidly developing technology, he commented:
Forecasting how technology, in particular, will evolve has been especially daunting. The problem is that various synergies of existing technologies that account for much of our innovation have been exceptionally difficult to discern in advance. For example, . . . the attorneys for Bell Labs initially refused, in the 1960s, to patent the laser because they believed that it had no applications in the field of telecommunications. Only in the 1980s, after extensive improvements in fiber optics technology, did the laser's importance for telecommunications become important.
I share Chairman Greenspan's concern that it can be extremely difficult to predict which high tech mergers are likely to cause anticompetitive effects, especially since the industry characteristics of creativity, rapid change and growth may make it less likely that a merged firm could exercise market power.
Despite uncertainties, I believe that it is possible to discern a rough, common sense test for evaluating a merger with a few simple questions: Is it good for consumers? Will prices, output, and innovation be affected in a way that will benefit competition? If so, then the merger is probably OK. If, on the other hand, the merger will have harmful effects on consumers by increasing prices, decreasing output, or restricting innovation, you have a much harder sell ahead of you.
This test also applies to joint ventures, which are on the rise in high tech industries as global and innovation-based competition spurs firms to form complex collaborative agreements to achieve goals such as expanding into foreign markets, funding expensive research, and lowering production and other costs. Most of these collaborations are good for consumers and the antitrust enforcement agencies have brought few cases challenging such arrangements.
The FTC and the Antitrust Division of the Department of Justice have issued two sets of guidelines to address special circumstances in which antitrust issues may arise in connection with competitor collaborations. You may be familiar with one of these, the Antitrust Guidelines for the Licensing of Intellectual Property, which sets forth the antitrust enforcement agencies' policy on intellectual property licensing agreements among competitors. The other set of guidelines covers health care provider collaborations.
Because of the increasing popularity and complexity of joint ventures, some antitrust practitioners have asked the FTC and the Antitrust Division to clarify the treatment of these collaborations under the antitrust laws. Accordingly, we are working on drafting Antitrust Guidelines for Collaborations Among Competitors, which will clarify, but not change, how we analyze antitrust issues raised by competitor collaborations.
Generally, the agencies will look at the potential procompetitive benefits of the collaboration, such as enabling the firms to offer goods or services that are cheaper or more valuable to consumers or that can be brought to the market more quickly. The collaboration may let the firms use their existing assets better or provide incentives to make output-enhancing investments. On the flip side, the antitrust agencies would be concerned about joint ventures that could harm competition by increasing the ability or incentive of the participants to raise price or reduce output, quality, or service, or to slow innovation for goods that are either currently or potentially available.
International Cooperation and Agreements
The growth of the high tech industry has gone hand in hand with the rapid globalization of business and, not surprisingly, the FTC's antitrust work today has a scope far beyond our national geographic boundaries and often extends beyond the North American continent.
Of course, this does not mean that our antitrust cases always have such a broad focus. The FTC alleges North America -- or the United States, or even a region or a city within the U.S. -- as a relevant antitrust market when the economic evidence justifies it, as a number of recent FTC merger cases demonstrate. Somewhat less often, however, the product at issue in an FTC investigation may be economically available to U.S. consumers from sources in numerous countries, and this may justify alleging a world market. For example, the FTC has issued complaints alleging a world market for vacation timeshare exchange services, general-purpose microprocessors, and lead antiknock compounds for gasoline.
Even in cases involving a U.S. (or narrower) market, however, we may find it useful to cooperate with our antitrust enforcement counterparts in other countries. We have worked closely with European Commission antitrust experts in a number of such cases when important evidence is located both in the U.S. and in Europe, and when a transaction is likely to have effects in both markets.
We do not always reach the same conclusion as our European colleagues about a merger's likely consequences, a result probably affected more by differences in market conditions between the U.S. and Europe than by conflicting analytical approaches. For example, we diverged from our European counterparts in connection with the Lockheed Martin/Loral merger case. In March 1996, the EC announced that it had cleared that transaction, but later that year the FTC issued a consent order to settle charges that the acquisition would lessen competition in several markets, including air traffic control systems and certain commercial satellites. And many of you are probably familiar with the Boeing/McDonnell Douglas case -- one of our more visible disagreements with our EC colleagues. Nevertheless, even when we end up disagreeing, this process of close consultation at least increases the chances that U.S. and EC officials will look at the same set of facts and apply similar analyses, and international cooperation has enabled us to get a clearer understanding of why we differed.
This climate of growing cooperation among national competition authorities has had an effect on the private sector in many countries. For example, firms in the United States are increasingly attuned not only to our own antitrust laws but also to the antitrust policies and enforcement practices of the other nations where they operate. Many of the United States' trading partners have either enacted new antitrust laws or strengthened their old laws and enforcement programs over the last few years. For example, a new Swiss competition law went into effect in 1996; the Dutch enacted a new Economic Competition Act (with a new merger control regulation that took effect in 1998); and Germany, the United Kingdom, and South Korea enacted revisions to their competition laws that took effect last month. The FTC and the U.S. Department of Justice, with funding from the U.S. Agency for International Development, have furnished advice on antitrust issues to a number of nations in eastern Europe, the Confederation of Independent States, and our own hemisphere. It becomes more and more apparent that any firm engaged in international transactions ignores these developments at its peril.
Trade and Antitrust Policy
I'd like to close by widening the focus a bit more and addressing briefly the relationship between trade policy and antitrust policy. There seems to be a growing consensus that there are benefits to be gained from reducing tariffs, quotas, and other barriers to international trade. One of the widely acknowledged benefits is that goods, services, and financing will flow more efficiently among nations if these obstacles are reduced, and consumers will have a better chance of getting access to competitively priced goods and services.
At the same time that trade barriers are falling, nations are also recognizing the value of international cooperation and compatibility in their antitrust enforcement programs. As I see it, this trend toward greater antitrust harmonization flows from the same impetus that drives the elimination of trade barriers: to maximize the welfare of consumers.
As an enforcer of my country's antitrust laws, I am heartened that pro-consumer, pro-competition, free enterprise philosophy not only seems to be growing throughout the world, but also appears to be driving developments on both the trade and antitrust fronts. There are numerous challenges before us in the expanding global marketplace, and those challenges will confront us with greater and greater speed, frequency, and complexity. Leadership by those of you in the high tech world will bring us the marvels of tomorrow's economy.
I urge you to lead also in the development of solutions to privacy and security concerns so that consumer confidence in the new economy will keep up with your technology. If you do so successfully, sometimes even in partnership with the law enforcers, we will see a win-win result.
Despite the demands these complex matters pose for us, I am convinced that the world will be a better place for our efforts, and business and consumers alike will be the beneficiaries.
1. Remarks to the US League of Savings Associations, San Francisco, Nov. 14, 1974 (Peter Hannaford, "The Quotable Reagan").
2. Remarks to the American Dental Association, San Francisco, Oct. 29, 1972 (Peter Hannaford, "The Quotable Reagan").