AT&T vs. The Department of Justice

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In October of 2016, telecommunications giant AT&T agreed to buy Time Warner for $85.4 billion. This merger would bring together a content distributor with a juggernaut of content production.

The deal was set to close by the end of 2017 until the Department of Justice stepped in. On November 20th, the Justice Department sued to block AT&T’s acquisition of Time Warner.

This case has the potential to be a landmark case and a sign of changing antitrust tides in the Justice Department. This result of this case could have implications beyond this one deal.

The Great Content Desire

AT&T is a multifaceted telecommunications company and Time Warner owns channels and produces originals TV shows and movies. Their businesses intersect but do not compete. AT&T wants to acquire Time Warner so it can pair its existing content distribution streams with Time Warner’s content production.

AT&T divides up its company into four operating segments:  business solutions, entertainment group, consumer mobility and international. Consumer mobility is the segment traditionally associated with AT&T and provides wireless service in the United States. The entertainment group, which includes recently acquired DirecTV, some content production, advertising and broadband internet, is at the heart of the conflict around the merger.

AT&T wants to acquire Time Warner so it can own its premium content produced by HBO and Warner Brothers and the content produced by the channels of Turner Broadcasting, which includes: CNN, TBS, TNT, TruTV, among others. The merger would also give AT&T the sport broadcasting licenses Turner Sports including the rights to NCAA march madness. It is this mass of content production that AT&T is craving.

Across the tech and telecommunications industries, there is a general hunger for content and content production, especially as there seems to be no slowing down of online streaming content. Everyone is trying to keep up with and compete with Netflix. For example, Apple recently invested $1 billion to produce original TV shows and movies. AT&T’s motivation behind the merger is its hunger for content.

Merging with Timer Warner would diversify AT&T’s entertainment portfolio and allow them to become a competitor of streaming giant Netflix. If the deal goes through AT&T would have a control over both premium content production and content distribution channels, like DirecTV and their wireless cell phone service.

Vertical Merger

There two main types of mergers: vertical and horizontal. Horizontal mergers, when direct competitors merge, raise more concerns of a reduction in competition. When two competitors merge they are directly reducing competition in a field.

The AT&T and Time Warner are not direct competitors; therefore, their merger is a vertical merger. In this vertical merger, it would be a unification of a distributor, content distribution platforms of AT&T, with a supplier of a product, the content produced by Time Warner. Technically, by merging there is not a removal of competition in the market. Before and after the merger there will be the same number of wireless service companies and TV cable and satellite companies.

While this merger is vertical, AT&T has also pursued horizontal mergers in the past. In 2011, they ended an effort to acquire T-Mobile. That merger would have directly decreased, already limited, competition in the wireless service market.

On a conference call with reporters in 2016, AT&T CEO Randall Stephenson reportedly said “This is not the T-Mobile deal; there is no competitor being removed from the marketplace…Time Warner is a supplier to AT&T. It’s a classic vertical merger.”

The goal of United States anti-trust law is to ensure competition and prevent the creation of monopolies. Since horizontal mergers directly reduce completion and could lead to monopolies the Justice Department and Federal Trade Commission (FTC) have historically been more vigilant in blocking and preventing horizontal mergers.

The government has only challenged 23 vertical mergers since 1979. Of those 23, three were abandoned by the companies and the other 20 were approved. The government has never won a vertical merger court case.

Effects of the Merger

AT&T’s argues that the goal of acquiring Time Warner is to “give customers unmatched choice, quality, value and experiences that will define the future of media and communications.” They say that the deal will lead to benefits for both investors and consumers.

Some of the possible consumer benefits that AT&T is promoting includes new video innovation and the potential alternative to cable. AT&T in a press release said that “the combined company will strive to become the first U.S. mobile provider to compete nationwide with cable companies… It will disrupt the traditional entertainment model and push the boundaries on mobile content availability for the benefit of customers.”

There is the rationale laid out by AT&T for why this deal should proceed, but there are also legal scholars who believe this deal should go through because if it is successfully blocked by the government there would further reaching consequences.

In the Harvard Business Review, Larry Downes argues that if this deal is challenged then “other pending or likely mergers,” like Disney and 21st Century Fox, “will be thrown into chaos—and the stock markets along with them.”

In addition to the possible positive effects of the merger that are possible negative consequences. Just because the merger technically would not directly reduce completion, it doesn’t mean there isn’t any risk of this merger resulting in anti-competitive practices.

Time Warner owns three of the top basic cable channels, the top cable news network, and the top premium cable channel. AT&T, thanks to its acquisition of DirecTV, is one of the largest distributors of those channels and their content. When AT&T owns both the distribution network and the content, they have the ability to withhold or increase the price of the content from Time Warner.

For example, they can raise the price of HBO and CNN. This could, in turn, drive customers away from other cable companies and to AT&T owned distribution networks or just lead to a customer having to pay more for AT&T owned content. They would be able to use the leverage of Time Warner’s “must have programming” to restrict competition and give their platforms an advantage. The acquisition of Time Warner would give AT&T the opportunity to stifle its competition through its ownership of highly desired content.

However, Harvard Law School Professor Susan Crawford points out in a Wired article that AT&T’s response to this claim would be that they have “every reason to ensure that Turner content is seen as many places as possible.” She also notes that this argument is flawed as “the revenue AT&T loses by effectively locking competing providers out of its must-have content will be more than made up for by those new subscriptions—available nationwide through DirecTV.”

Possible Solutions

The case most similar to the AT&T Time Warner deal is Comcast’s acquisition of NBC Universal, but the Comcast merger never went as far as with DOJ as the AT&T case has. The Justice Department did not sue Comcast to stop the merger. The DOJ allowed Comcast to buy NBC Universal as long as they agreed to over 150 conditions meant to prevent Comcast from favoring NBC content.

Behavioral conditions, like the ones in the Comcast case, have been a common way the government has dealt with vertical mergers. These measures are harder to ensure are followed and not a foolproof way of preventing anti-competitive practices.

The current head of the antitrust division at the department of justice, Makan Delrahim, has spoken about his dislike of the behavioral remedies in merger cases. In a recent speech, he said that “our goal in remedying unlawful transactions should be to let the competitive process play out. Unfortunately, behavioral remedies often fail to do that. Instead of protecting the competition that might be lost in an unlawful merger, a behavioral remedy supplants competition with regulation.”

Delrahim’s aversion to behavioral conditions hints to an avoidance of this as the solution to the AT&T case.

The alternative to behavioral conditions is structural remedies. These structural solutions, also known as divestitures, force a company to sell off a part of their business.  Maurice Sucke, a professor of antitrust at the University of Tennessee College of Law said that structural remedies “are much easier than behavioral remedies to craft and enforce.”

Prior to the department of justice suing AT&T over the merger, it was reported that A

T&T met with lawyers from the DOJ to discuss possible divestitures. It has been reported that AT&T was urged to sell off either Turner Broadcasting, which includes CNN, or DirecTV for the deal to go through. AT&T showed no interest in these divestments.  In a news conference after the DOJ decision to sue, AT&T, Stephenson said that his company was not willing to give up any assets to get the deal approved.

In Variety, Jan Dawson argues at AT&T needs all parts of Time Warner in order to justify the merger. Turner, which CNN is under, is the most financially profitable segment of the Time Warner business. It has contributed half of its operating income in most recent years. So while, Turner is not the premium content contributor, like HBO or Warner Brothers, that AT&T was originally seeking it does provide its income is important. Dawson’s analysis helps to explain the rationale behind AT&T’s lack of interest in selling off any part of its existing company or Time Warner.

The Political Question

This proposed selling off of CNN has raised some political questions due to the President’s feud with the news network. It is not known if the President had any influence over the DOJ’s decisions in this case.

However, if he did exert influence on the DOJ, “Mr. Trump will become the first president since Richard Nixon to use the levers of executive power to threaten the economic interests of a news organization whose coverage he does not like,” wrote Jim Rutenberg in the New York Times.

Even if there was no specific intervention by the President, Daniel Lyons, a visiting fellow at the American Enterprise Institute, said that AT&T counsel could argue that “these divestiture requirements are not motivated by the fact that the Justice Department thinks that divestiture is necessary to prevent consumer harm but instead that this is motivated by a more political purpose”

What’s Next

Following the lack of agreement over divestments, the DOJ proceeded to file a case against AT&T. Cecilia Kanf and Micahel J. de la Merced wrote in the New York Times that the DOJ suing AT&T is “setting up a showdown over the first blockbuster acquisition to be considered by the Trump administration and drawing limits on corporate power in the fast-evolving media landscape.

In a statement on the decision to sue, Delrahim said that “this merger would greatly harm American consume it would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.”

Moving forward the DOJ has indicated they would still be willing to negotiate a settlement with AT&T, however, if they cannot reach an agreement the case will go to court. There is very little precedent for a vertical merger antitrust case going all the way to court.

The result of this case could also signal a change in antitrust regulation enforcement in the United States. It could affect the result of other pending or proposed mergers. For example, it could have implications for Disney’s exploration of acquiring 21st Century Fox.

It could even have ramifications on verticals mergers in entirely different sectors. CVS recently announced its acquisition of insurance company Aetna, a healthcare vertical merger. The result of the AT&T Time Warner case could set precedent for the DOJ or FTC’s actions regarding the CVS merger.

In the end, the lack of precedent in cases like this leaves a lot of uncertainty of what happens next. The justice department could continue to be lenient on vertical mergers or change course entirely and affect all vertical mergers to come.

 

Sources 

https://www.bloomberg.com/news/articles/2017-11-20/at-t-is-said-to-face-u-s-antitrust-lawsuit-over-time-warner

https://www.cnbc.com/2017/11/21/dojs-lawsuit-to-sink-att-time-warner-deal-is-short-sighted.html

https://www.politico.com/agenda/story/2016/10/att-time-warner-merger-paper-000224

https://www.wired.com/2016/11/the-att-time-warner-merger-must-be-stopped/

https://www.npr.org/sections/alltechconsidered/2016/10/25/499185907/the-at-t-time-warner-merger-what-are-the-pros-and-cons-for-consumers

https://nypost.com/2017/11/30/why-consumers-should-fear-the-att-time-warner-merger/

The Economic Trickery of Black Friday

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Every year as Thanksgiving approaches, so does Black Friday. All of sudden our computer screens and TV commercial breaks are filled with exclamations of the best deals of the year. Even in researching this post. I got this black Friday Kohls ad:

Black Friday is more than the headlines and videos of people being trampled to get a cheap TV.

Black Friday tells an economic story of trickery.

A mystery to the average consumer is how stores are able to make money when everything is on sale. First, this idea of “everything” being on sale is false. Retailers in reality use “doorbusters,” like TV, to get you in the door. While the retailers may not make a profit on those items, but you usually don’t just buy that doorbuster. The hope is that when you come in to buy that TV you’ll also buy the full price HDMI cable, mounting bracket and maybe a pair of headphones. They will also hook you into buying a warranty you don’t really need and probably will never use. Retailers rely on you buying not just that tantalizing sale item to make Black Friday successful.

In a 2012 New York Magazine article,  Kevin Roose analyzed some of the behavioral economic theories behind Black Friday. In the article, he calls black Friday “a nationwide experiment in consumer irrationality, dressed up as a cheerful holiday add-on.”  We already discussed the use of doorbusters to get you in the door and ancillary items like a warranty which sound great. The also used implied scarcity to convince you that you of a limited quantity of an item, which makes the deal you are getting seem even more valuable.

Stores also capitalize on consumers irrational escalation. Black Friday is made up of a series of bad decisions on the part of the consumer, including going to the mall before the sun rises. Once a customer is at a store they don’t know when to stop spending. This is known as “sunk cost fallacy,” when people don’t know when to stop something that isn’t profitable. Retailers are using careful and subtle manipulation to make Black Friday a success for them.

Retailers’ behavioral economic magic works. In 2016, according to the National Retail Federation, 99.1 million people shopped in stores over Black Friday weekend and another 108.5 shopped online. They also found that the average person spent $289.19 over the weekend.

Sources: 

http://fortune.com/2016/11/29/cyber-monday-2016-sales/

https://www.theatlantic.com/business/archive/2014/11/11-economic-lessons-to-make-you-a-smarter-shopper-for-black-friday/383236/

https://www.thebalance.com/what-is-black-friday-3305710

http://nymag.com/daily/intelligencer/2012/11/black-friday-a-behavioral-economists-nightmare.html

The Dream of Being a Longshoreman

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The Port of Los Angeles is the largest port in the United States. In 2016, 2,050 ships brought $272 billion worth of cargo to Los Angeles. The Port of LA is a crucial piece of importing manufactured goods from China.

A critical piece of this massive operation is the longshoremen, the workers who handle the loading and unloading of the ships in the port. The longshoremen and their union are so critical to port and its trade that they have the power to disrupt an entire supply chain. In 2002, during contract negotiations, the union essentially shut down the west coast ports as a leverage in their negotiation. This caused disruptions not only on the west coast but across the country where goods couldn’t be delivered and across the Pacific where the goods are made. This relatively small union has immense power over the import of goods in the United States.

Longshoreman jobs are coveted. Longshoreman can make more than $100,000 a year and receive free health care, but it is not easy to become a longshoreman. In order to get this dream of a blue collar job paying over $100k, you have to get into the dockworkers union, the Pacific Maritime Association (PMA).

The first step to becoming a fully-fledged member of the union is winning the lottery. In order to get in the union, you have to become a “casual” worker. Casual workers do the same work as union longshoremen for less pay and benefits. To become a casual part-time worker you have to win a literal lottery. The longshoreman union held the first lottery, since 2004, for casual worker spots. This year 80,000 people entered the drawing and only 2,300 will be eligible for part dock work. They all entered with the dream of having the modern day unicorn, a high paying blue collar job. Just because they won the lottery, they aren’t guaranteed elevation to be a full union member.

TraPac Automated Terminal

As the Port of LA and other west coast ports become more automated, the number of dockworker jobs available will not go up. But they also will not go away entirely. Even in the automated terminals at the Port of LA, PAC, humans still have the operate the massive cranes that lift the containers off the ships. The need for the dockworkers will not go away, the demand will just decrease.

The longshoremen in Los Angeles are at the front of the globalized economy acting as gatekeepers of trade. They also have a what can feel like is missing in this globalized world, a well paying middle-class job.

 

Sources: 

http://www.latimes.com/business/la-fi-dockworker-pay-20150301-story.html

http://www.latimes.com/business/la-fi-port-lottery-20170127-htmlstory.html

http://www.dailybreeze.com/2017/06/02/longshoreman-lottery-results-announced-for-long-beach-la-ports-find-out-if-youre-on-the-list/

http://www.scpr.org/news/2017/06/05/72573/why-80k-people-applied-for-2-400-positions-at-la-s/

Modern Monopolies

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Google and Amazon don’t look like traditional monopolies, but that doesn’t mean they don’t have monopoly power. Google dominates 80% of the online search market and Amazon 87% market share of the e-book market.

It is harder to recognize these tech giants as monopolies because they do not have a tangible product. Whereas, it is easier to notice how our choice of airline or cable company is limited.

A Brief History of Antitrust in the United States

The United States Congress passed the Sherman Antitrust Act in 1890 in an effort to prevent companies from having monopolies that stifle competition, harm consumers or raise prices. The Sherman Act, along with the subsequent Federal Trade Commission Act and the Clayton Act, is the core of American antitrust law.

These antitrust regulations were enforced aggressively by the Justice Department from the 1930s until the 1960s. Then came Robert Bork, the Yale Law professor and failed Supreme Court nominee. Bork argued that the only concern of regulators should be if prices for consumers were dropping. His ideas became the policy of the US Department of Justice when he became solicitor general under Richard Nixon and have remained the mindset of the government until today. Bork’s ideas on antitrust are at the center of modern American antitrust regulation enforcement.

In Move Fast and Break Things Jonathan Taplin argues that Amazon, Google, and Facebook would all be prosecuted under antitrust laws if it wasn’t for Bork.

Are Google and Amazon Monopolies?    

In the post-civil war era, John D. Rockefeller’s Standard Oil had a monopoly over the oil industry. Standard Oil controlled every stage of oil production and distribution. They did everything from own the refineries and pipes to building their own oil barrels and hiring scientists to discover new uses for oil products. Standard Oil’s monopoly ended when, in 1911, the relatively new Sherman Antitrust Act was used to break up Rockefeller’s monopoly into 30 individual companies.

Unlike the monopolies of the robber baron era, Google and Amazon lack a tangible product. They don’t have physical control over all production of steel or ownership of all phone lines. With Google or Amazon, there isn’t anyone or anything standing in the way of someone creating a new search engine or e-book market. However, their domination of their respective markets limits the ability for a new competitor to be successful.

The Supreme Court has defined monopoly power as “the power to control prices or exclude competition.” This definition also includes an assumption that the company has a majority market share. Using this legal definition as a guide, let’s see if Amazon and Google have monopoly power.

Source: Author Earnings

86% of all e-book sales in the United States occurred on Amazon in 2016, according to Authors Earnings’ February 2017 report. Amazon’s monopoly market power gives them the ability to control prices or even stop all books from a publisher from being sold on Amazon. Amazon’s ability to control prices makes them not only a monopoly but also a monopsony.

An example of Amazon’s monopsony power was evident in Amazon and Hachette Books’ 2014 pricing dispute. During their pricing dispute, Amazon stopped all presales of Hachette books and caused shipping delays. In this case, Amazon was exhibiting more monopsony qualities, when one buyer controls a market because through their control of the distribution of books they are the largest buyer of books. Since Amazon is the largest seller of books Hachette was forced to bend to Amazon’s will. Hachette was ultimately able to win a little and in the resulting deal with Amazon was able to gain more control over how their e-books are priced on Amazon. As a whole because Amazon occupies such a dominant share of the e-book market its sheer dominance allows it to set prices.

Source: Stat Counter

Google, like Amazon with their sector, has monopoly market share in search. According to Stats Counter, in September 2017 Google had an 85% market share of internet search in the United States.

Further proof of the market consolidation of the search market is the Herfindahl-Hirschman Index (HHI) score, which measures the concentration in a particular market. Antitrust agencies consider a market with a score of 2,500 to be highly concentrated. For example, after the American Airlines and US Airways merger, Reagan National Airport had an HHI score of 4,959. The search market has a score of 7,402.

 

Google’s monopolistic power goes beyond just its monopoly market power over search does. Google not only controls search, but they are also own the most popular created the modern version of horizontal integration.

Google, along with Facebook, dominates the online ad market. Google and Facebook essentially have a duopoly of all online advertisings with more the 60% of all internet ad revenue, according to an analysis by Reuters of their quarterly reports. Google controls everything from the service that hosts ads on websites to the service that buys ads to put on the website to the website user analytics to the web browser people use to access a website. John Marshall, the publisher and editor of Talking Points Memo (TPM), describes being a publisher that relies on Google’s suite of products as like being “a serf on Google’s Farm.” If Google changes how they distribute ads they can completely ruin someone’s livelihood. For example, earlier this year there was the YouTube “apocalypse.” Google changed its policies and algorithm for determining if a video on YouTube should not have ads. The result was some video creators losing 80% of their daily income.

Are These Monopolies Good?

For consumers, Amazon’s monopsony of the e-book market looks appears to be good because they get lower prices. Amazon has not done anything to harm customers. Their low prices are one reason why regulators have not come after Amazon.

Nobel Prize-winning economist Paul Krugman argues that one of the reasons why Amazon is able to control the market is its ability to kill buzz. Book sales rely on buzz from word of mouth. However, if Amazon does not carry a book you are less likely to buy a book and then the book will not be as widely read, have less buzz and not sell as many copies. Krugman asserts that “By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers. But there’s also the question of undue influence.”

Monopoly power can also lead to a stagnation in innovation. If a company does not have another company with the potential to compete with them there is no motivation to innovate. If you have such a large market share there is no incentive or need to innovate to get new users or to maintain your existing user base or its revenues.

Even if Bing had a substantially better product it would still struggle to make a dent in Google’s user base. It wouldn’t necessarily lead to Google to innovate as well because Google’s market power and horizontal integration make the switching costs high. These high switching costs reduce your likelihood of using a new search engine. Furthermore, even though the barrier of entry for creating a new search engine or website is low, but Google’s horizontal integration makes it difficult for any new company to break through.

Snapchat Story

Instagram Story

An example of competition and the potential for innovation is Facebook and Snapchat. In 2013, Facebook tried to buy Snapchat for $3 billion, but Snapchat turned them down. Snapchat and its growing user base remained a Facebook competitor. This competition should indeed push both platforms to innovate. However, instead, Facebook chose to essentially copy Snapchat’s features. Instagram introducing stories was an attempt to copy Snapchat stories. Facebook only tweeted Instagram stories a little to differentiate themselves from Snapchat, Facebook. Even though Instagram stories were not an innovation, they are still an example of completion producing new features for consumers. Facebook’s cloning of stories appears to be on track to both maintain and grow its user base. Currently, according to Jumpshot, Snapchat currently has the largest share of new users, but their share is shrinking and Instagram’s is growing.

How to Deal with These Monopolies

Those who align with Robert Bork would argue that there is no need to break up Amazon or Google because the prices for consumers are not being raised. In the case of Google, there was never even a price paid by the consumer.

But as we explored there are downsides to these monopolies, so what should we do about them? Are our antitrust laws from over a century ago built to regulate companies with products the bills’ author could have never imagined?

Jonathan Taplin has purposed a series of possible ways to break up or regulate digital monopolies like Amazon and Google. In a New York Times opinion piece, he laid out three possible regulatory options: option one is to block the major digital players from acquiring each other. Another possibility is to treat them like public utilities—which would require them to license out their patents. Or a third option would be to remove the “safe harbor” clause from the 1998 Digital Millennium Copyright Act, which according to Taplin allows companies “to free ride on the content produced by others.”

Actually, breaking portions of these new monopolies would require the Justice Department to return to its pre-Bork hardline position on antitrust. So maybe the best way to deal with these tech monopolies is to institute some creative regulations to curtail some of the more negative effects of their monopoly power.

 Sources:

http://www.history.com/topics/john-d-rockefeller

https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amazons-monopsony-is-not-ok.html?_r=0 

https://www.nytimes.com/2014/11/14/technology/amazon-hachette-ebook-dispute.html

http://fortune.com/2017/07/28/google-facebook-digital-advertising/

https://www.forbes.com/sites/jeffbercovici/2013/11/13/facebook-wouldve-bought-snapchat-for-3-billion-in-cash-heres-why/#45529df343de

https://www.recode.net/2017/9/19/16308788/snapchat-instagram-sign-ups-new-users-us-global

 

The New American Monopolies

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When was the last time you used a search engine other than Google? When was the last time you bought a book online from somewhere other than Amazon?

You probably can’t think of a time because Amazon and Google essentially have monopolies over their respective corners of the internet. While we might notice how are choice of airline or cable company is extremely limited, we recognize less the monopolistic qualities of these internet giants.

Just because Google and Amazon don’t look like what we picture a monopoly to be it doesn’t mean they don’t have monopoly power.

A Brief History of Antitrust in the United States

In order to look at whether these tech giants have monopoly power we need to look historically at the laws designed to prevent this kind of power.

The United States Congress passed the Sherman Antitrust Act in 1980 in an effort to prevent companies from having monopolies that stifle competition, harm consumers or raise prices. The Sherman Act along with the subsequent Federal Trade Commission Act and Clayton Act are the core of American antitrust law.

These antitrust regulations were enforced fairly aggressively by the Justice Department from the 1930s until the 1960s. Then came Robert Bork, the Yale Law professor and supreme court nominee. Bork argued that the main concern of regulator should be solely if prices for the consumer were dropping. His ideas became the policy of the US Department of Justice when he became solicitor general under Richard Nixon and they have remained the mindset of the government until today. Bork’s ideas on antitrust are at the center of American antirust regulation enforcement. His influence is the reason why there has been a decline in antitrust regulation enforcement over the last 50 years.

In Move Fast and Break Things Jonathan Taplin argues that Amazon, Google and Facebook would all be prosecuted under antitrust laws if it weren’t for Bork.

Are Google and Amazon Monopolies?   

When you think of a monopoly Google or Amazon are probably not what you picture. You might think of the oil and steel barons of the late 19th and early 20th century or the telecomm monopoly AT&T once had. Or you might even think of the board game Monopoly.

Unlike the traditional monopolies, Google and Amazon lack a tangible product. They don’t have physical control over all production of steel or ownership of all phone lines. With Google or Amazon there isn’t anyone and anything standing in the way of someone creating a new search engine or e-book market. Their businesses lie within cyberspace they aren’t necessarily tangible. In a way, they have a monopoly of eyes. They have majority control over the platforms people use to consumer information of buy things online. They have a monopoly of users.

Legally, The Supreme Court of the United States has defined monopoly power as “the power to control prices or exclude competition,” this definition also includes an assumption that the company has a majority market share. Using this legal definition as a guide let’s see if Amazon and Google have monopoly power.

Amazon and Alphabet, Google’s parent company, have many different aspects of their businesses. Therefore, we will only look at one part of each of company. For Google, we will look at search and search for advertising. For Amazon, we will be analyzing the e-book market.

86% of all e-book sales in the United States occurred on Amazon in 2016, according to Authors Earnings’ February 2017 report. Amazon clearly has majority market power. They have the ability to control prices or even stop all books from a publisher from being sold on Amazon. Since they are the largest marketplace for e-books it would be detrimental for a publisher if their books were not sold on Amazon.

In 2014, Amazon and Hachette, a publisher, were in a dispute over pricing Amazon stopped all presales of Hachette books and caused shipping delays. In this case Amazon was exhibiting more monopsony qualities, when one buyer controls a market, because through their control of the distribution of books they are the largest buyer of books. Since Amazon is the largest book, online and print, seller Hachette was forced to bend to Amazon’s will. Hachette was ultimately able to win a little and in the resulting deal with Amazon was able to gain more control over how their e-books are priced on Amazon. As a whole because Amazon occupies such a dominant share of the e-book market its sheer dominance allows it to set prices.

Source: Stat Counter

Google, like Amazon with their sector, holds a large majority of the search market. According to Stats Counter, in September 2017 Google had an 85% market share of internet search in the United States. Google overwhelming dominates the search market This means they are also able to have market power over search advertising. Alphabet and Facebook essentially have a duopoly over all online advertisings with more the 60% of all internet ad revenue, according to an analysis by Reuters of their quarterly reports.

Google has such control over the search market that it excludes all other competitors. Even if some other search engine all of a sudden became a better search engine they wouldn’t be able to succeed because Google has control over the search engine market.

Further proof of the market consolidation of the search market is the Hergindhal-Hirschman Index (HHI) score, which measures the concentration in a particular market. Antirust agencies consider a market with a score of 2,500 to be highly concentrated. The search market has a score of 7,402, off the charts.

While Google and Amazon may not look like what we picture a monopoly to be the exemplify all the qualities of monopoly power.

Are These Monopolies Good?

Google and Amazon essentially have monopoly power over their respective corners of the internet market, but is this power a bad thing?

For the consumer Amazon’s immense control over the e-book market looks like a good thing because it produces lower prices. Bork would argue that Amazon’s monopoly power is a good thing because it lowers prices for consumers. However, the Bork line of thought fails to consider is possible effects of a monopoly power beyond the price consumers pay. As we saw with the Amazon-Hatchett dispute of 2014, Amazon has the ability to undermine the supply chain of e-books. There might be positive effects for the consumer, but Amazon’s power can harm publishers and authors.

Monopoly power can also lead to a stagnation in innovation. If a company does not have another company with the potential to compete with them there is no motivation to innovate. If you have such a large market share there is no incentive or need to innovate to get new users or to maintain your exciting user base.

For example, even if Bing had a substantially better product it would still barley make a dent in Google’s user base. It wouldn’t lead to Google to innovate as well, because their market power is so large and strong. Without competition, users lose out on getting better products and futures.

An example of the positive results of having a competition can be seen with Facebook and Snapchat. Facebook is the most successful and popular social media platform, but Snapchat has had a growing user base and also the love of investors. Facebook tried to buy Snapchat for $3 Billion, but Snapchat turned them down. By not consolidating Facebook and its subsidiaries, including Instagram, became a competitor of Snapchat. Facebook felt like it had to compete. This has led to each company having to innovate.

Instagram Story

Snapchat Story

Facebook chose to basically copy Snapchat’s features as their method of innovation to try and protect their existing user base. Meanwhile, Snapchat is trying to develop new features to draw more users in. An example of this is Snapchat and Instagram stories. Instagram introducing stories was clearly an attempt to copy Snapchat stories, but in order differentiate themselves from Snapchat Instagram had to try and create a better version of stories. While Instagram stories was more of a cloning than an innovation it was still Instagram having to develop new features to be competitive. In the end though, it seems like Facebook’s cloning of Snapchat features has just allowed them to gain more market power. Currently Snapchat has the largest share of new users, but their share of new users is shrinking and Instagram’s is growing. Overall, this competition between Facebook and Snapchat benefits the consumer.

How to Deal with These Monopolies

Those who align with Robert Bork would argue that there is no need to break up Amazon or Google, because the prices for consumers are not being raised. In the case of Google there was never even a price paid by consumer.

But as we explored there are downsides to these monopolies, so what should we do about them? Are our antitrust laws from over a century ago built to regulate companies with products the bills’ author could have never imagined?

Jonathan Taplin has purposed a series of possible ways to break up or regulate digital monopolies like Amazon and Google. In a New York Times opinion piece, he laid out three possible regulatory options: option one is to block the major digital players from acquiring each other. Another possibility is to treat them like public utilities—which would require them to license out their patents. Or a third option would be to remove the “safe harbor” clause from the 1998 Digital Millennium Copyright Act, which according to Taplin allows companies “to free ride on the content produced by others.”

Actually, breaking portions of these new monopolies would require the Justice Department to return to its pre-Bork hardline position on antitrust. So maybe the best way to deal with these tech monopolies is to institute some creative regulations to curtail some of the more negative effects of their monopoly power.

Sources:

https://www.nytimes.com/2014/11/14/technology/amazon-hachette-ebook-dispute.html

http://fortune.com/2017/07/28/google-facebook-digital-advertising/

https://www.forbes.com/sites/jeffbercovici/2013/11/13/facebook-wouldve-bought-snapchat-for-3-billion-in-cash-heres-why/#45529df343de

https://www.recode.net/2017/9/19/16308788/snapchat-instagram-sign-ups-new-users-us-global

The Economic Impact of Repealing DACA

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On Sept. 5th, the Trump administration announced the repeal of DACA. As a part of the announcement Attorney General Jeff Sessions claimed that DACA has had a negative impact on the American economy, that is not correct. Rather, repealing DACA would hurt the economy.

Repealing this Executive order will not only lead to almost 800,000 undocumented immigrants who came to the united states as kids not being able to work legally and being at risk for deportation, but it will also have a negative impact on the size and growth of United States economy.

First, the actual act of repealing the excretive order will be expensive. The Cato Institute estimates that it will cost the federal government at least $60 billion over the next ten years to execute the repeal of DACA.

By rescinding DACA, the GDP would both shrink in size and growth. A Center for American Progress study estimates that the repeal of DACA would cause US GDP would shrink by $433 Billion over 10 years. The Cato Institute estimates that in that same time frame US economic growth would be reduced by $280 Billion. Both these studies show a dramatic negative impact on the American Economy.

The GDP would not be the only thing to suffer. A CAP study approximates that the contributions to entitlement would drop by $24.6 Billion.

DACA recipients are a key working age population, the average age of a DACA recipient is 22. As the overall American population ages and there are more people dependent on Medicare and social security we will need more people to pay into these programs. By eliminating DACA we are also eliminating a group that

helps keeps entitlements funded.

In general, the United States needs immigration in order to keep our

population pyramid in check. DACA has helped increased that vital working age population to help hold up our increasing top-heavy pyramid.

DACA will not only have a negative impact on national economy, but some states with large populations of DACA recipients will face even greater economic consequence.

California, the state with largest number of DACA recipients, would face an estimated $11.3 Billion annual GDP loss. Texas would also face approximately a $6.1 Billion GDP loss per year.

The Economic Resilience of the Movies

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In 2008 when much of the economy was in decline and unemployment was on the rise, the movie industry had a happier story to tell.

In during the great recession in 2007 and 2008, instead of seeing a sharp decline in movie ticket purchases there was instead there was minimal change. Movie ticket sales and the health of our economy are not correlated and therefore box office performance is not a good indicator of the state of our economy.

The box offices’ struggles are not aligned with the rest of the economy. In away they are immune from traditional market down turns.

At first glance, the film industry doing well doing a recession seems counterintuitive. Entertainment is generally seen as an extra budget item that would be cut when money is tighter. However, the movies are like an escape from the real world. When times are tough people can take refuge in the world of the movies. Therefore, the film industry instead of experiencing a slump during the recession it continued to succeed.

The top grossing films of 2007 and 2008 were Spider-Man 3 and The Dark Knight respectively. Both films provide an element of fantasy and heroism. They have the ability to transport the viewer to a different world, one that isn’t their economically dim reality. They gave an escape people craved.

Box office sales did not take a major hit during the great recession, however, they have been hit with a subtle decline in recent history. According to The Numbers, the peak of movie ticket sales was 2002 when approximately 1.5 billion tickets were sold. That is almost 200 million more tickets sold than in 2016.

The decline in box office sales could be a reflection of the changing economy of how we watch movies. There has been a trend towards watching movies at home rather than in theaters. A 2006 Pew Research study found that 75% of Americans would rather watch a movie at home than in a theater up from 67% in 1995. The Pew study is supported by a 2015 CBS News poll which found that a majority of Americans preferred watching movies at home and 84% of Americans watch more movies at home than in theaters

One of the factors in declining movie theater ticket sales is online streaming, with Netflix being the biggest player in the streaming field. In the same time period where movie ticket sales have been declining Netflix has been expanding its subscriber base. Netflix has gone from almost 7.5million subscribers in 2007 to almost 100 million domestic and international subscribers, according to Business Insider and Statista.

The movie industry has been for the most part immune to the ups and downs of the economy. Box office sales are not the key to unlocking the health of the economy, rather they tell us something about the psyche of the nation. Even when times are tough we crave the escapism that the movies provide. Through the ups and downs of the economy, the movies have proved to be resilient.

 

Sources: 

The Numbers 

Business Insider 

Fortune 

Pew Research

CBS News