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Policies to Make Markets Work - Community Broadband Bits Podcast 250
The larger focus of our work in the Community Broadband Networks Initiative is to ensure communities have the networks they need. Our guest for Community Broadband Bits episode 250 is an expert in how markets break and the policies that make them work.
Gary Reback is a well known Silicon Valley lawyer and Of Counsel at Carr Ferrell LLP. He also wrote an excellent book, Free the Market: Why Only Government Can Keep the Marketplace Competitive that I fully recommend. Reback has had a front-row seat to the failings of government policy that has allowed a few technology firms to garner so much market power today.
We talk broadly about markets and monopoly rather than focusing on broadband and telecommunications. This is a good introductory conversation for people unfamiliar with the real threat and harms of monopoly.
A related conversation is my interview with Barry Lynn in episode 83.
We want your feedback and suggestions for the show-please e-mail us or leave a comment below.
Listen to other episodes here or view all episodes in our index. See other podcasts from the Institute for Local Self-Reliance here.
Thanks to Arne Huseby for the music. The song is Warm Duck Shuffle and is licensed under a Creative Commons Attribution (3.0) license.
Christopher Mitchell: I think we have some consensus that maybe the lack of antitrust enforcement has been going on too long and we're beginning to have some problems that need to be addressed.
Lisa Gonzalez: This is episode 250 of the Community Broadband Bits Podcast. From the Institute for Local Self-Reliance, I'm Lisa Gonzalez. In this week's episode, Christoper talks with Gary Reback, attorney and author. Gary's been called the protector of the marketplace and the antitrust champion for his work representing some of Silicon Valley's best-known companies. Gary and Christopher talk about antitrust, concentration of power and the different ways shifts in antitrust enforcement negatively impact both consumers and the market as a whole. Let's get to it.
Christopher Mitchell: Welcome to another edition of the Community Broadband Bits Podcast. I'm Chris Mitchell. Today, I'm speaking with Gary Reback, a well-known Silicon Valley lawyer. Welcome to the show, Gary.
Gary Reback: Thank you.
Christopher Mitchell: I'm excited to have you on the show. You're well-known for being very involved in getting the government to sue Microsoft and for writing a book that actually came to me at a really good time about seven years ago called Free
the Market!: Why Only Government Can Keep the Marketplace Competitive. I really enjoyed that book, highly recommend it. For our audience's sake, we're not going to talk much about broadband in this conversation. But I think that many of these principles around competition in markets apply very strongly but it's something that will be sort of in the sideline. Gary, I'm curious if we can just start with a brief description of what you might describe as a working market before we spend the rest of our time talking about the markets that aren't working as well.
Gary Reback: So that's an important question and an important point, Chris. We live in a capitalist system and the whole theory of a capitalist system is that when markets are functioning properly, everybody's better off, not just a few people but everybody's better off and resources are allocated correctly and people will get what they want at the best available prices and so forth. So in a well functioning market, you have a bunch of buyers and they're all competing against each other. You have a bunch of sellers and the sellers are all competing against each other. Then you kind of have an interface between the two groups where transactions occur and the competition among the buyers and the competition among the sellers enables exactly the most efficient transactions to occur across that interface and that what makes a market very, very productive.
Christopher Mitchell: Well, with that in mind, I'm curious if you could just rattle off a couple of instances in which you've worked on areas in which those markets had broken down?
Gary Reback: A lot of the work I've done is in high technology or information technology and specifically in the software markets. There are some markets that are called network markets like the phone system for example where the normal rules of economics don't really apply as well. In these markets, whoever gets the lead tends to maintain that lead and dominate the market particularly if they exploit their position using anti-competitive practices. So for example, if you use a certain Word processor or if all your friends do, you really have to be on that same Word processor or something compatible. You might like a different Word processing program but if everybody else is on one you don't like, you still have to use that. That creates what called a network effect or a network externality. Those kinds of conditions make the efficient operation of markets more challenging. Markets can still operate efficiently but in those kinds of markets, we have to have good government oversight and appropriate intervention when bad things occur in order to maintain competition and to get the right allocation of resources.
Christopher Mitchell: Now, when you say that, I think what you're talking is smart policies, one of the things that I'm often criticized for by people who don't like my work as someone who I think of as arguing for smart government policies is a knee-jerk sense that government involvement will inevitably hurt the market and make the market less competitive. I'm curious how you respond and I'm sure you run across this idea all the time as well.
Gary Reback: Sure. One way to think about this is the difference between antitrust enforcement, enforcement of the antitrust where laws and regulation. Now, we do need regulation in some cases which we can talk about. But generally speaking, antitrust lawyers think that regulation really is not quite a good approach and it tends to have some of these bad effects that you've eluded to but antitrust enforcement, we sometimes call it the free market approach to regulation. Let me just explain the difference for a second.
Christopher Mitchell: Please do.
Gary Reback: Yeah, in a regulation situation, a group of people are chosen in fact to micromanage the industry and they're not industry managers from the industry. They're chosen not by the shareholders. They're chosen generally by political figures. They get together and manage the industry, sometimes it's a single company that dominates an industry and they manage in a rather intrusive way. They tell the industry who it can sell to and at what prices, where it has to invest more resources and so forth. Now, in that kind of situation, the people who criticize regulation sometimes, not always, but sometimes have a good point. Antitrust works on a different principle. The principle is this, the government sets the basic rules of competition. Then the government steps back and it lets the competitors in the market duke it out under those rules of competition as long as everybody obeys those rules, the government really doesn't have much of a role to play but if somebody breaks the rules, the government doesn't try to regulate them, the government sues them and they bring them before a court and they present evidence and the judge makes a decision just as a judge would in any other prosecution of one kind or another. We find over the years that in most cases, that works the best. Now, there are some cases where the market won't support more than one company like the municipal water and sewage facility or something like that and there you do need regulation. You want to make sure that pharmaceuticals are safe and so you need regulation there and air traffic controllers for example. But in a lot of other industries, antitrust enforcement and free market competition would work a lot better than regulation would.
Christopher Mitchell: Well, and I think there's an interesting point in terms to that. In many ways, we'd like to see, many of us would like to see government breaking up big companies. For instance, I might name Comcast or those other companies that people have suggested breaking up. In your book, at one point, you had mentioned that there was if the government's not able to break them up then almost perpetual lawsuits might be preferable. Is that kind of a middle ground or is that actually just a second option that you described?
Gary Reback: Yeah, I almost described that humorously. I mean, obviously the best thing to happen is to maintain competition in the market. Now, you can generally maintain competition if you block anti-competitive mergers. A lot of big companies have acquired or because the government has let them acquire competitors or in the case of certain broadband companies, to acquire content providers for example and use that as a market advantage that excludes competitors at both levels of competition. I don't know that I go the perpetual lawsuit route until I'd exhausted other things but you don't have to start at breaking up the company, where you need to start is not letting the company acquire market power either through anti-competitive things that it does like exclusionary contracts or something like that or through mergers that increases market power in a way that consumers don't benefit.
Christopher Mitchell: You labeled both horizontal and vertical mergers in that case which you would see as both being potentially damaging and letting a company perhaps gain too much power.
Gary Reback: Well, I certainly would. Now, traditionally, antitrust look at horizontal mergers with greater scrutiny than vertical mergers. As the conservatives began to take power in the antitrust area through what's called the Chicago school that I think your listeners have heard about before, they de-emphasized antitrust scrutiny of vertical mergers and just focused on horizontal mergers. So the consequence is that I thin most people would agree that too much horizontal power through mergers is a very bad thing. We've come to understand through better research though that these vertical acquisitions can also create enormous problems. It's a bigger push though to get a conservative administration to take action in the vertical arena because generally speaking they don't quite understand how the market mechanisms are being affected because if it's a vertical acquisition, you're affecting several different markets in the same supply chain and the analysis becomes more complicated. Nevertheless, I think these days, that these people on the cutting edge of antitrust would say we haven't paid nearly enough attention to vertical mergers.
Christopher Mitchell: Well, I think it's interesting you mentioned sort of the present day where we are seeing a lot more attention. You had mentioned in our previous discussion as you're preparing for this that Elizabeth Warren and others are getting very involved. You also, I know, have a deep sense of the history behind anti-monopoly movements and my impression is is that this is not something that we would expect to come from one party but rather kind of a piece of each party working together to try and decentralize the power ultimately.
Gary Reback: I think so. Of course our problem, Chris, is that the two parties don't seem to be able to work on much of anything these days in Washington. They won't work together on much of anything. But what we've seen over the last several years is people on both the left and the right, political figures beginning to ask hard questions whether US industries have become too concentrated and not just the industries that I work in but industries more generally. Is there too much market power in just a few companies? Certainly a lot of that is focused on the high tech industries. It's not just Elizabeth Warren, senator Elizabeth Warren who would be left off center but it's also some of the conservatives from places like Utah are also focused on these kinds of questions. So for the first time in a long time, I think we have some consensus at least among people who are looking at this area that maybe the lack of antitrust enforcement has been going on too long and we're beginning to have some problems that need to be addressed.
Christopher Mitchell: Well, I think that's where we'd like to push toward the end of the show is most people think of monopoly and they think, "Oh, I'm going to have to pay more when I buy something," but that's not even the worst problem, is it?
Gary Reback: Oh, I think it's not even close to the worst problem. Let me give you several other problems that I think your listeners would consider far more important that too much industry concentration creates. So from an economic perspective, in order to raise prices, when a monopolist or a duopolist, what a concentrated industry does is it restricts output. If you want a present day example of that, think about these big airline mergers that have gone on in the last several years. United Continental and American US Airways, I mean, we're down to the point that there are only a few major airlines in the United States. Now, the consequence of that is of course higher prices in terms of all the fees they can impose but a bigger consequence is that you can't get a seat on a flight when you need it anymore. This has particularly affected small to mid-sized cities across the country and certainly on the West Coast, we have this problem in spades. In order to keep the high prices, the few companies in the market simply restrict the availability of their service. So that to me is a bigger problem than the fact that you may have to pay more. You just can't get it at all. So that's one problem. We'll call that output. The second problem is that the effect of monopoly on innovation. We all benefit from lower prices but we benefit a lot more when there's some breakthrough innovation in high tech or in pharmaceuticals or something like that. So our antitrust policy really ought to be directed at protecting innovation. Now, the problem is the monopolists would use some of its market power to maintain its monopoly, to keep itself from being displaced by some new technology. It would do things to try to restrict a challenger's ability to get to market by engaging in exclusive contracts or by denying access in one way or another. So the net result of all that is that we're denied the new technology that the challenger would bring to the market. Let me give you a couple of examples, so back a couple of decades ago, Microsoft used anti-competitive practices against the company called Netscape that had invented the browser and actually ended up putting Netscape out of business. So that's an example where they tried not just to hurt the competitor but to coop the technology so that they would own the browser market.
Christopher Mitchell: You actually in your book described how Microsoft went to Netscape and basically made them an offer that said basically we won't kill you if you don't compete with us, if you only put your browser on other platforms that are non-PCs, we'll have the PCs you'll have everything else and everyone will be happy. I mean, so they were very deliberate and open about it.
Gary Reback: Yes and obviously, some of the Microsoft people contest the facts in terms of exactly what they said and so forth but from the perspective of the government's case, that's right, the monopolist came in and said, look, you can live on an island and you can have whatever that island brings to you and we'll just have the rest of the world and won't that be fine. Of course, that won't be fine. So if you think back 10 or 15 years ago, Microsoft owned the browser market. The only way you could get to Google for example is by going through Microsoft. 98% of Google's traffic came from Microsoft. If you type www.google.com on the browser line, Microsoft didn't have to send you to Google. It could have put up a big red warning and say, "Hey, this site has been reported as stealing your personal information. Don't go there." Of course, no one would have gone there and they would have killed Google in the cradle. They would have suppressed search technology which all of used everyday, why didn't they do that? They were already being fined billions of dollars by the European Commission. They ran the risk of reigniting the antitrust scrutiny in the United States so they didn't do it. As a result, we all benefited by this new technology.
Christopher Mitchell: I just found this really worth noting. The compulsory licensing response, another way in which I think people might not necessarily immediately think of that as a response to these antitrust problems but you talked about the history of compulsory licensing particularly around patents and things like that to basically make markets work to solve this problem, I think.
Gary Reback: We have a long history of compulsory licensing in the United States. They was compulsory licensing of a lot of the patents that the phone monopoly had. We have to be careful obviously because you want people to innovate and patent technology but when big companies use patents as a wall against market entry, that becomes a problem. From time to time, in past history as you mentioned, the government's come in and ordered compulsory licensing. You don't see that much anymore because patents have become so much more prominent and the conservatives in particular are reluctant to intervene in the patent market but that would be an effective way to deal with some problems as well. In software, generally speaking, the problem isn't patents. But in other places, yes, that's something really people should look at. Modern monopolies in the high tech area take all your data and prepare dossiers on you which are, I don't know, from my perspective very troublesome. I mean, I think most people understand that when they buy something online, whoever they're buying from has a record and will use that record to help them find other things and that's I think most people would accept that. But when you have a search engine that keeps track of your searches for many, many years and combines that information with what you buy and so forth, they get begin to get at what your political orientation is, where you live on the street, what your religion is, all kinds of things that becomes very, very problematic. We have a problem with privacy in the United States largely because we have several big companies that collect data across the board and that's a problem that Europe is beginning to address but in the United States, really not so much. Finally, Chris, just let me say, one of the other things we have found historically that industry concentration and monopoly does is it puts political power into the hands of monopolists because they can make political contributions and under our law there's a case citizens united, the supreme court case from seven or eight years ago that gives big corporations the right to make unlimited political contributions. So some of the things that big tech companies want to lobby for are more or less okay by me. But other things they want to lobby for bother me a whole lot like the lack of privacy protection. So using monopoly to further political power is something that's also very concerning.
Christopher Mitchell: That's one that I long find very frustrating in part because it's not just at the federal level. That money allows them to basically own state legislatures. They can be powerful at the local level. It's corrupting everywhere.
Gary Reback: Yes, in fact, it's much worst, I think. At least there's some visibility, a bit of visibility at the federal level. At the state level, their projects which have sprung up in various places trying to get some daylight as to what's going on but with the demise of local newspapers for example, we just don't get the kind of coverage we used to. I agree with you, the effect of that kind of conduct at the state and local level is even more disturbing than at the national level.
Christopher Mitchell: So speaking of the state and local level, do you have any recommendations for what could be done at the state and local level to try and strike back at antitrust even though they don't have the power to break them and things like that?
Gary Reback: Yeah, this is a tough question, Chris, because on one hand, these big tech companies have gotten so big, they're multinational and so powerful, I'm not even sure a national government has the power to do much about them. I mean, I've always favored the United States working with Europe to have enough power to try to restrain these big companies. However, with the new administration, a number of people have now been looking to states to try to exercise some antitrust authority over these companies. Then there are states, many of the bigger states have their own antitrust enforcement mechanisms and they have their own antitrust laws. Now, they got to be careful because they have smaller budgets than the national government does. But they might well be able to go after specific anti-competitive practices. So they wouldn't have the wherewithal to do a 10-year case and break up one of these companies but they might be able to go into court and stop one of the big companies from doing something that's anti-competitive that squelches new technology or that hurts consumers. Certainly, a lot of people are looking at that now because we don't think we're going to get much in the way of antitrust enforcement over the next few years.
Christopher Mitchell: Great. Well, thank you for taking the time and sharing some of your experiences and thoughts with us on antitrust.
Gary Reback: I appreciate you asking me and I hope your listeners and others continue the new interest in antitrust. It's time we renewed its effectiveness.
Lisa Gonzalez: That was Christopher visiting with Gary Reback, a well-known Silicon Valley attorney and author.
Christopher Mitchell: They everyone, I just wanted to thank you for listening and helping out to create a stronger Internet ecosystem, making sure everyone has high quality access. Please tell your friends, tell others who might be interested about this show. If you have a chance to rate us on iTunes, please do. Several people already have. We really appreciate all of the comments and we really appreciate you taking the time to listen to us.
Lisa Gonzalez: We have transcripts for this and other Community Broadband Bits Podcast available at MuniNetworks.org/BroadbandBits. Email us at podcast@MuniNetworks.org with your ideas for the show. Follow Chris on Twitter. His handle is @CommunityNets. Follow MuniNetworks.org stories on Twitter where the handle is @MuniNetworks. Subscribe to this podcast and all of the other podcasts in the ILSR family on iTunes, Stitcher or wherever else you get your podcast. Never miss out on our original research. Subscribe to our monthly newsletter at ILSR.org. Thank you to Arne Huseby for the song, Warm Duck Shuffle, licensed through Creative Commons. Thanks for listening to episode 250 of the Community Broadband Bits Podcast.