Antitrust for thee, profits for me

Billion-dollar companies are recruiting the government to fight multi-billion dollar companies

Hi, Alec here. I am taking over for Colin this week while he is in Guatemala.

Last Friday, the House Subcommittee on Antitrust, Commercial and Administrative Law held a hearing on “Online Platforms and Market Power.” Executives from Sonos, PopSockets, Basecamp, and Tile testified about the harms their companies have suffered at the hands of Big Tech. The event was abnormal. A congressional hearing being held away from Washington – in Boulder, CO – is a bit unusual. But Congress giving a platform for one set of companies to attack their competitors is something else entirely. Basecamp CTO & Cofounder David Heinemeier Hansson — known by his initials DHH — testified at the hearing, mentioning Kafka and Putin in the same breath as Apple and Google. His testimony concluded by saying, “Help us, Congress. You’re our only hope.” Notwithstanding these dramatic references, I was left with a few questions, the answers to which might cast doubt on the dominant narrative in the hearing.

Why are we hearing from corporate executives?

Antitrust law, whatever you think of its current state, is designed for consumers. As the DOJ says in its guidelines for policing monopolies,

The focus on protecting the competitive process has special significance in distinguishing between lawful and unlawful unilateral conduct. Competition produces injuries; an enterprising firm may negatively affect rivals' profits or drive them out of business. But competition also benefits consumers by spurring price reductions, better quality, and innovation. Accordingly, mere harm to competitors is not a basis for antitrust liability. "The purpose of the [Sherman] Act," the Supreme Court instructs, "is not to protect businesses from the working of the market; it is to protect the public from the failure of the market." Thus, preserving the rough-and-tumble of the marketplace ultimately "promotes the consumer interests that the Sherman Act aims to foster."

So, the decision for the House Subcommittee on Antitrust to hold a hearing that only included representatives from competing companies is a radical departure from past norms. Antitrust hearings, if they are needed, should be about, say, how Apple’s behavior potentially harms consumers in the relevant market (i.e., device-locating services), not how Tile is upset that they must compete with Apple for the same market. Rather than give a platform to the founder of PopSockets to rant, the subcommittee should be gathering data on prices, quality, and variety in the smartphone accessory market. If the subcommittee wants to learn about potential antitrust issues in the smart speaker market, then they should invite consumers of those products to testify. I doubt those consumers would complain about Amazon and Google pricing their smart speakers too low, as the Sonos CEO did multiple times.

Why shouldn’t the “best-performing” products win in the market?

When the most efficient competitor in a market captures the largest share of customers, that’s not a monopoly problem — that’s the natural result of a healthy competitive process. The witnesses seemed confused on this matter. Here’s DHH discussing the terror of relying on Facebook for distribution:

We ended up spending tens of thousands of dollars with Facebook, primarily on targeted ads using the audience look-alike matching feature. These ads performed better than any other type of internet advertisement we tried at the time. Facebook’s targeting capability is crushingly effective, and therefore truly terrifying.

As a society, we want the companies with the best products to succeed, not those that do the best job currying favor with the government. In effect, DHH is asking Congress to act against Facebook because it is too good at competing. That is not what antitrust is designed to prevent; in fact, that is what antitrust is designed to encourage. He explicitly states that Facebook’s ad product is better than all its competitors. If that’s the case, then why shouldn’t it be the market leader? In the rest of his comments, DHH expressed grave concern about what companies are doing with consumer data. But that is a problem for privacy regulation, not antitrust enforcement.  

IP & antitrust

Sonos is no small startup: the company was founded in 2002 and currently has a $1.6 billion market cap. In his written testimony for the hearing, the CEO of Sonos said the company has “more than 750 patents.” Those patents protect the company’s intellectual property, allowing it to take action against infringing competitors. The company is more than capable of defending itself without assistance from antitrust enforcers or members of Congress. Two weeks ago, Sonos did just that when it filed a lawsuit accusing Google of stealing its patented speaker technology.

In 2013-14, we gave access to our technology to Google as part of a partnership to provide Google’s music service to our customers. Then, in 2015 Google started producing more and more products that copy our key functionalities and infringe on our foundational intellectual property.

I have no inside knowledge as to whether these claims are valid or not. But the merits of this particular case aside, this is a perfectly reasonable claim in theory: if patented technology has been stolen, then court-ordered damages are a fair result. But turning this patent dispute into an antitrust case is trying to fit a square peg in a round hole. Antitrust laws are about increasing competition for the benefit of consumers. IP laws are about decreasing competition (it’s a government-granted monopoly after all!) to increase the private returns to innovation to incentivize investment and risk-taking. If we think the IP system is too slow or too burdensome on rights holders, then we should reform the IP system — not use antitrust kludges.

How innovative is this product really?

The founder and CEO of PopSockets, a consumer-electronics accessory company that produces removable grips for smartphones, testified that his company has sold 165 million PopGrips since 2014. He testified that his product has a utility patent and that his company spends millions of dollars a year suing competitors for infringement. He also said that Amazon has “bullied” his company into accepting lower wholesale prices to allow Amazon to lower the retail price. Outside of a Congressional hearing, this “bullying” is known as “negotiating.” And the benefits of lower retail prices redound primarily to consumers, not Amazon.

This case also raises broader, more philosophical questions. We should ask ourselves what the purpose of the IP and antitrust laws are. Again, the purpose of the antitrust laws is to promote competition. The purpose of the IP laws is to restrict competition. As a society, we want to strike a balance between the two. On the one hand, we need to reward innovators and creators for their investments and risk-taking, with the ultimate goal of incentivizing the creation of more intellectual property in the future. On the other hand, we don’t want IP holders to hold veto power over other companies forever (they may not be the most efficient producer!)

What is the socially optimal level of profit for the inventor of the PopSocket? Seeing as how the answer hinges almost entirely on our patent system, we should ask ourselves whether the inventor of the PopSocket has been sufficiently compensated for his risk-taking and investment under the current set of rules. Considering the product is a piece of plastic that earns the company hundreds of millions in annual sales, I would guess the answer is “yes.” Allowing new companies to compete in the plastic phone holder market lowers prices for consumers and increases total output. To the CEO of PockSockets, these are “knockoffs” that Amazon should ban from its platform. To consumers, they’re much more affordable accessories that achieve the same function.  The benefits of allowing these competitors to enter the market very likely outweigh the costs in decreased incentives for plastic phone holder innovation. The fact that the founder of PopSockets is not a billionaire is not a policy failure.

Is this actually a better product?

The last company to testify in the hearing was Tile, the maker of software and hardware solutions for finding lost devices. Like the other companies at the hearing, Tile has numerous patents to protect its IP (“over one hundred and eighty patent assets”). As a private company that continues to raise funding while competing with Apple, Tile would fall squarely in what some call the “kill zone.” In his testimony, the Sonos CEO said, “Venture capital firms are well aware of the kill zone that surrounds startups that pass within striking distance of the dominant platforms — they stay away from those investments.” In other words, dominant incumbents can win without even needing to compete — so long as they scare off VC funding for startups.

But the facts in this particular case run counter to that narrative. Tile is well-capitalized and continues to find support for its business in the venture capital market. The company has raised $104 million in funding to date, including a $45 million round last summer. If there is a kill zone around Apple, then why are venture capitalists investing tens of millions of dollars in Tile?

The Tile executive who participated in the hearing accused Apple of using its control of the operating system to unfairly favor its own service — “Find My” — over third-party providers such as Tile. The larger question that arises, in this case, is who should make the decisions about what features are included or excluded in an operating system or platform: The owner of the operating system/platform or a government regulator? In this specific case, it is obvious why Apple might want to bundle this feature into the OS. Apple has increasingly positioned itself as the strongest tech company on privacy and security. “Find My” services are a natural extension of that unique selling proposition, allowing Apple users to find their lost or stolen phone and locate friends and family at the click of a button. Tile cannot match this level of integration without launching its own phone (no matter how generous Apple is with APIs). And of course, “Find My” is free to consumers and Tile is not. Why should consumers be forced by the government to pay more for worse device security?

Antitrust is likely to undergo major reforms should Bernie Sanders or Elizabeth Warren win the presidency. If changes are made, the goal shouldn’t be for the government to act on behalf of billion-dollar companies that want to bludgeon multi-billion-dollar companies. Members of Congress and the public should keep one thing in mind when companies advocate for antitrust action against their competitors: Are these companies advocating for antitrust intervention because it would help consumers — or because it would help their bottom line?