Platforms and Networks Spring 2020 Review Slides Randal

Platforms and Networks Spring 2020 Review Slides Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2014 -20 Randal C. Picker. All Rights Reserved.

C 01: The Duties of the Public Enterprise n Key Questions u. Is it possible to identify a class of enterprises that we should consider to be “public corporations? u. What are the essential characteristics of these enterprises? u. Where should the authority to make this determination lie? February 23, 2021 2

C 01: The Duties of the Public Enterprise u. What does it mean for something to be a natural monopoly? u. What regulations should apply to natural monopolies? February 23, 2021 3

C 01: The Duties of the Public Enterprise n The Three Stages of Ice u. Stage 1: Natural Ice Harvesting and Distribution (see Thoreau in Walden) u. Stage 2: Artificial Ice Production and Distribution u. Stage 3: Mechanical home refrigeration and ice production n Oklahoma regs at stage 2 February 23, 2021 4

C 01: The Duties of the Public Enterprise New State Ice (US 1932) shows many of the characteristics of natural monopoly regulation n Classic Public Utility Regulation n u. Public commission u. Duties of nondiscrimination u. Universal service obligations u. Limits on entry February 23, 2021 5

C 01: The Duties of the Public Enterprise n Key Features of Regulating Ice in Oklahoma in the 1920 s u. Liebman was challenging entry limits u. We see these frequently in the form of certificates of convenience and necessity regulations u. Entry regulations can be part of a relatively standard package of coordinated regulations February 23, 2021 6

C 01: The Duties of the Public Enterprise n Standard Coordinated Public Utility Regulations u. Universal service obligation: the utility can’t just choose which customers to serve but has an obligation to serve even customers who won’t carry all of their own costs February 23, 2021 7

C 01: The Duties of the Public Enterprise u. Cross-subsidies among customers: some customers are being overcharged to pay for other customers who are being undercharged u. This drives entry restrictions: if entrant can avoid universal service, it will enter and target the overcharged customers (cream-skimming) u. Control this problem with CCN regs February 23, 2021 8

C 01: The Duties of the Public Enterprise n Brandeis dissent u. Raises issues regarding the scope of appropriate government control in regulating investments and controlling capacity so as to limit “ruinous” competition and “unnecessary” duplication of facilities February 23, 2021 9

C 01: The Duties of the Public Enterprise n Pritzker Illinois Exec Order u. There isn’t an obvious match between the core idea that animates this course—natural monopoly, or, slightly broader, natural small-N industries— and the essential businesses listed in the Pritzker order (pot dispensaries) February 23, 2021 10

C 02: The Post Office n The Problem of Communications Externalities u. Both parties to a communication benefit from it u. If one-side or the other pays for all of the costs of the communication, we will have too little communication February 23, 2021 11

C 02: The Post Office n First Look at Non-Neutralities in Running a Communications System u. Neutral Pricing w Key to distance and weight w Not type of content February 23, 2021 12

C 02: The Post Office u. Strong Non-Neutralities in 1845 Act w Newspapers completely free if within size and distance limit w Magazines have lower rates compared to letters for same weights; rates independent of distance February 23, 2021 13

C 02: The Post Office n Legal Monopoly as Regulatory Tool u. Limited private express services u. Makes it easier to support cross-subsidization across classes of users u. Control over mailbox (Greenburgh (US 1981)) has same result u. Mimics regulatory system seen in New State Ice February 23, 2021 14

C 02: The Telegraph n Lessons from Treaty of Six Nations u. Pre-Sherman Act contract to create unified telegraph system east of the Mississippi River u. Important to distinguish between substitutes and complements u. The concern with complements is that each system would set monopoly rates February 23, 2021 15

C 02: The Telegraph n Lessons from Treaty of Six Nations u. Separate monopoly rates create a worse result for complements compared to a more coordinated system (double marginalization) u. Telegraph lines should want to internalize those consequences even as they also try to reduce actual competition among their own lines February 23, 2021 16

C 03: Common Carrier/Interconnection n The Express Cases (US 1886) u. Emergence of express delivery service u. Each hand off puts at risk one of the key attributes of the service: allocation of responsibility for transport of high-value goods u. Emergence of regional networks, such as the Adams and the American February 23, 2021 17

C 03: Common Carrier/Interconnection u. Key question is right of access of express service to underlying railroad facility u. Practice emerged based on surprisingly shortterm contracts u. Court rejected general common carrier duty for railroads as to express services u. Express companies continued to grow; probably just paid more February 23, 2021 18

C 03: Common Carrier/Interconnection n Terminal Railroad (US 1912) u. Orders opportunity for equal ownership and equal say in key bottleneck railroad facility u. Given efficiencies of arrangement, don’t break it up, but ensure fully equal access February 23, 2021 19

C 03: Common Carrier/Interconnection n Limits on Common Carrier Idea u. Core notion is obligation to accept all Xs w. X might be communications, packages, something else w Post office doesn’t open letters and block some communications (but in truth it does a little) w But post office also can have different levels of service and that isn’t inconsistent with being a common carrier February 23, 2021 20

C 03: Common Carrier/Interconnection n Limits on Common Carrier Idea u. And I don’t know that the idea of a common carrier is inconsistent with some sort of filtering or algorithmic prioritization w “Google search ranks things” is different than “Google search won’t show things” February 23, 2021 21

C 03: Common Carrier/Interconnection n Limits on Common Carrier Idea u. I don’t think we really know whether a common carrier can have different levels of service/rankings based on ownership w Can a common carrier self-preference its complementary services/products? February 23, 2021 22

C 04: Building Infrastructure: Highways/REA/Rural BB n Allocating Projects Across Government Levels u. With multiple jurisdictions, any number of possible pathologies in selecting and paying for government projects u. But also opportunity to expressly coordinate in situations where across-jurisdiction benefits wouldn’t otherwise be internalized February 23, 2021 23

C 04: Building Infrastructure: Highways/REA/Rural BB n 1916 Highways Act u. Large rural subsidy: justified given the standard communications externalities? u 50/50 matching scheme places floor on extent to which local community will be willing to waste federal money February 23, 2021 24

C 04: Building Infrastructure: Highways/REA/Rural BB n 1956 Highways Act u. Puts dollars behind 1944 Act vision of network of interstate highways u 90 fed/10 state scheme and not 50/50 February 23, 2021 25

C 04: Building Infrastructure: Highways/REA/Rural BB n Rural Electrification Act of 1936 u. Federal dollars backing local projects w Local projects, often cooperatives, backed by federal lending at favorable rates u. Appears to have had a dramatic effect on extent of rural electrification (say 16% in 1935 to say 96% in 1955) with minimal loan losses by the federal government February 23, 2021 26

C 04: Building Infrastructure: Highways/REA/Rural BB n Rural Broadband u. This is an early replay of the post office discussion u. Do we think that the considerations that led us to make the post office universally available are meaningfully different when applied to broadband? w What does that mean for rural access? For access for poor people? February 23, 2021 27

C 05: The Constitutional Framework for RRR n Fixed Cost Allocation with Shared Facilities u. The setup for this is the inherent difficulties in allocating fixed costs among services sharing the same facilities u. A standalone facility analysis could suggest that intrastate traffic need not bear any of the fixed costs of the tracks, as the tracks would be built just for the interstate traffic February 23, 2021 28

C 05: The Constitutional Framework for RRR u. This would give state regulators much leeway in rate setting February 23, 2021 29

C 05: The Constitutional Framework for RRR n Key Risk for Investors u. These are single-use assets—railroad tracks and the like—that cannot be moved or put into alternative uses u. Investors cannot respond to threats of expropriation by moving the assets elsewhere u. These are natural monopolies, so rate regulation will be common February 23, 2021 30

C 05: The Constitutional Framework for RRR u. The political dilemma for the government is: How does the government commit to investors that it will not expropriate after the fact through rate setting? n Cases u. Smyth (US 1898) standard—a fair return on the fair value of the property being used by it for the convenience of the public—mimics a competitive market February 23, 2021 31

C 05: The Constitutional Framework for RRR u. Bad investments add no value, so no return on them; good investments create value and a high return for shareholders. u. Difficulties implementing Smyth led to its abandonment in Hope (US 1944), which makes clear that no particular test is required to meet the constitutional standard February 23, 2021 32

C 05: The Constitutional Framework for RRR u. Instead, Duquesne (US 1989) suggests that we should look to instabilities in the rules or inability to pay debts or access the capital market as indicia of impermissible takings February 23, 2021 33

C 05: Rate of Return Formula February 23, 2021 34

62 -133(b)(3): “Ascertain such public utility’s reasonable operating expenses, including actual investment currently consumed through reasonable actual depreciation” 62 -133(a): “the Commission shall fix such rates as shall be fair both to the public utilities and to the consumer” Operating Expenses + ( Rate of x Rate Return Base ) Revenue = Requirements 62 -133(b)(1): “Ascertain the reasonable original cost of the public utility’s property used and useful, or to be used and useful within a reasonable time after the test period, in providing the service rendered to the public within the State, less that portion of the cost which has February 23, 2021 35 been consumed by previous use recovered by depreciation expense”

C 06: Managing Grid and Networks: Natural Gas Pipelines n Cost Sharing of Shared Facilities u. Cost sharing among coalitions using shared facilities. u. A proposed sharing of costs needs to be stable against possible defections of individuals or subcoalitions that can do better by going off on their own. u. We should also expect that individuals in the same position end up with roughly the same outcome. February 23, 2021 36

C 06: Managing Grid and Networks : Natural Gas Pipelines u. This imposes constraints on the way that shared costs can be divided. n Incremental vs. Rolled in Pricing u. The Sonat case (FERC 1996) addresses the circumstances under which a facility builder can externalize costs to the rest of its system through the use of rolled in rates. February 23, 2021 37

C 06: Managing Grid and Networks : Natural Gas Pipelines u. Pricing Mechanisms: Incremental Rates v. Rolled. In Rates w Incremental Rates: New users must bear all of the costs w Rolled-In Rates: Pre-existing users bear some of the costs February 23, 2021 38

C 06: Managing Grid and Networks : Natural Gas Pipelines u. This possibility puts the holder of a free-standing pipeline, such as the Alabama-Tennessee, at a severe disadvantage. February 23, 2021 39

C 06: Managing Grid and Networks: Natural Gas Pipelines n Institutional Features u. Open Season w Device to assess potential demand for project preinvestment u. Long-Term Contracts w Long-lived investment -> Long-lived commitments w Means locus of competition is changed from day by day to commitments made during open seasons February 23, 2021 40

C 06: Managing Grid and Networks : Natural Gas Pipelines n FERC Gas Pipeline Order (FERC 1999) u. Switches February 23, 2021 back to in incremental rates approach 41

C 07: Managing Grid and Networks: Electricity n Key Fed/State Division u. Interstate/wholesale to feds u. Intrastate/retail to states February 23, 2021 42

C 07: Managing Grid and Networks: Electricity n Shifting Regulatory Approach Pushes Effective Regulatory Power to Feds u. Less vertical integration means more wholesale transactions u. More chances for transactions to cross borders February 23, 2021 43

C 07: Managing Grid and Networks: Electricity n Standard Unbundling Approach in Order 888 u. The Energy Policy Act of 1992, as implemented in Order 888, unbundles electricity transmission and generation u. Changes in economies of scale in electricity generation have broken the traditional model of a local vertically-integrated natural monopoly February 23, 2021 44

C 07: Managing Grid and Networks: Electricity n Standard Unbundling Approach in Order 888 u. Treat generation as subject to competition, the transmission grid as being the natural monopoly u. Create access regime for grid with mandatory interface/access applied to all February 23, 2021 45

C 07: Managing Grid and Networks: Electricity n Midwest ISO (CADC 2004) & ICC (CA 7 2013) u. FERC has continued to evolve its regulatory structure for transmission u. Order 2000 (1999) pushed towards greater scale in transmission management with the formation of voluntary RTOs (regional transmission organizations) February 23, 2021 46

C 07: Managing Grid and Networks: Electricity n Midwest ISO & ICC u. This is important for coordinated planning of grid expansions u. Linked Networks and Double Marginalization w Pricing across networks (rate pancaking) matters as complementary monopolies are priced particularly inefficiently (double marginalization) February 23, 2021 47

C 07: Managing Grid and Networks: Electricity n Midwest ISO & ICC u. Coordinated pricing or greater integration in scope (an RTO) may help to reduce risk of pancaked prices n Ameren (CADC 2018) u. FERC Order 1000 pushes more across-region grid projects February 23, 2021 48

C 08: Breaking Up AT&T n The 1974 Antitrust Suit u. Section 2 monopolization case but really reflected the idea that regulators (FCC and state level) were struggling to regulate prices given interactions among local, long distance and Western Electric equipment u. In that sense, a revival of the 1949 suit that created the 1956 Final Judgment February 23, 2021 49

C 08: Breaking Up AT&T n The Break Up Deal (DCDC 1982) u. Separate natural monopoly components from facilities where competition seemed to be possible w Old AT&T loses control over local phone service and the seven RBOCs were created w New AT&T plunged into newly competitive long distance market February 23, 2021 50

C 08: Breaking Up AT&T n The Break Up Deal u. Old AT&T would free itself of almost all of the business-line restrictions from the 1956 Final Judgment w Critically meant that new AT&T could enter computer market and compete in coming market of converged computers and telcom February 23, 2021 51

C 08: Breaking Up AT&T n Quarantines u. New RBOCs, as natural monopolies, were generally limited to local telcom business and barred from other businesses to control possible cross-subsidization concerns u. New AT&T faced new time-limited bar on electronic publishing February 23, 2021 52

C 08: Breaking Up AT&T n Nondiscrimination Obligations u. Both the RBOCs and AT&T faced nondiscrimination obligations w RBOCs would complete long-distance calls and had to treat entrants and new AT&T on par w AT&T had the only comprehensive long distance network and had to interconnect with entrants February 23, 2021 53

C 08: Breaking Up AT&T n No Wireless u. Quite interesting that wireless played no obvious role in the break up; no real fight between new AT&T and the RBOCs over the existing wireless licenses February 23, 2021 54

C 09: Unbundling Telcos n Telecommunications Act of 1996 u. It unbundles the local telco grid and allocates interconnection property rights to new entrants. u. In concept, unbundling and resale obligations make it possible for entrants to target particular areas of competitive advantage, while still offering a full range of services. February 23, 2021 55

C 09: Unbundling Telcos n Reality Much Messier u. Uncertainty associated with key terms (necessary and impair) led to a decade of litigation, including Sup Ct’s decision in Iowa Utilities (US 1999) u. Post-Iowa Utilities, FCC pushed for simplicity in regulatory structure but courts have demanded more results tied to actual market conditions February 23, 2021 56

C 09: Unbundling Telcos n n Action moved elsewhere in the form of intermodal competition (cable and wireless) TELRIC Pricing u. Verizon (US 2002) decision concludes that FCC interpretation of “cost” in 252(d)(1) as forwardlooking cost implemented through TELRIC is within zone of Chevron discretion February 23, 2021 57

C 10: Internet: Origins n ARPA/NSF/CERN/NCSA u. Be sure to see origins of commercial internet er in work of federal gov’t and research agencies n Brand X (US 2005) u. Captures nicely the posture of the FCC regarding encouraging of broadband build out February 23, 2021 58

C 10: Internet: Origins n Brand X (US 2005) u. Broadband was slow and not widely accessed u. FCC very much wanted to change and thought that reducing regulation was one way to do that u. Classifying cable modem service as an information service took it out of Title II full-blown common carriage regulation February 23, 2021 59

C 11: Network Neutrality n Broadband Competition and Net Neutrality u. Less concerned about possible discrimination when customers have many choices u. How many choices do broadband customers actually have? February 23, 2021 60

C 11: Network Neutrality n Intensely political process u. Compare n FCC (2015) with FCC (2017) Comcast (CADC 2010) u. FCC’s attempt to tie authority to 230(b) policy statement and ancillary jurisdiction provision (154(i)) would give FCC almost unlimited jurisdictional authority u. Not surprising that DC Circuit blocked this February 23, 2021 61

C 11: Network Neutrality n FCC Open Internet Rulemaking (2015) u. Key Rules w Transparency w No blocking of lawful, content, applications, services or non-harmful devices, subject to reasonable network management w No throttling February 23, 2021 62

C 11: Network Neutrality w No paid prioritization w Reasonable network management allowed u. Done n via Title II reclassification FCC (2017) u. Re-reclassifies: back to information service status and undoes 2015 order u. Mainly validated in Mozilla (CADC 2019) February 23, 2021 63

C 11: Section 230 n 47 USC 230(c) u“No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider. ” u. Implemented as part of 1996 CDA, most of which was found to be unconstitutional February 23, 2021 64

C 12: Section 230 n Analysis u. Zeran (CA 4 1997) w Classic early case involving AOL and shows core operation of 230 immunity w AOL isn’t on the hook for what is users said February 23, 2021 65

C 12: Section 230 n Analysis u. Homeway. com w 230 (CA 9 2019) doesn’t immunize separate activities of platform like Airbnb even if website was involved in the stream of activities w Online broker gets no special immunities compared to offline brokers when they are completing transactions and taking a cut; not acting as a publisher when doing that February 23, 2021 66

C 13: Video Platforms: HDTVs and DVD n Why was the DTV transition (managed by the FCC) different than the creation of DVDs (a private standards transition)? u. Perceived universal service obligation u. Mixed public/private status of spectrum February 23, 2021 67

C 13: Video Platforms: HDTVs and DVD n Interesting Questions re Scope of Gov’t Standard Setting u. Just define the DTV standard? u. Mandate HDTV broadcasting? w Progressive v. interlaced? 720 v. 1080? w Require minimum number of hours per day? u. Mandate tuners ala 1962 All-Channel Receiver Act for UHF stations? February 23, 2021 68

C 13: Video Platforms: HDTVs and DVDs n Patent Pool Advantages: Lower Transaction Costs (DOJ 1998) u. Single Stop Shopping, Sort Of w Unite complementary patents into single package to lower the cost of negotiating individual licenses. w But not patents that might be needed as to which there are substitutes February 23, 2021 69

C 13: Video Platforms: HDTVs and DVD u. Mitigate threat of infringement litigation by assembling essential patents. w Compare land assembly problem of real estate developer u. Concerted royalty setting for complementary patents mitigates double-marginalization problem February 23, 2021 70

C 14: Video Platforms: Content and Carriage Conflicts n Comcast, AT&T/Time Warner u. Two different runs at the same issue u. The concern is that a cable firm acquiring content will raise the price on that content to its carriage competitors because it knows that some consumers might switch to its carriage service in response u. How to police that possible problem? February 23, 2021 71

C 14: Video Platforms: Content and Carriage Conflicts n Comcast, AT&T/Time Warner u. Comcast puts in place a kind of situation-specific net neutrality regime to try to prevent discrimination as to the acquired content u. AT&T was a choice by the gov’t not to do that, but to instead litigate to block the merger; gov’t lost given facts of case which showed benefits of merger and little likelihood of harm February 23, 2021 72

C 15: Smartphones: Wireless Infrastructure n Framing u. Lots of TV spectrum and it is underutilized u. Given desire to repurpose 500 MHz of spectrum, natural target u. FCC’s early (1991) moves into allocating spectrum for personal communications services (PCS) key to creating the coming future February 23, 2021 73

C 15: Smartphones: Wireless Infrastructure n How do we get there? u. DTV transition (FCC (1996, 1997)) provided opportunities for some spectrum recapture given that digital transmissions were more efficient u. But ultimately get over-the-air TV incumbents to give up spectrum by paying them February 23, 2021 74

C 15: Smartphones: Wireless Infrastructure n Three Steps (FCC 2014) u 1. Reverse auction to identify spectrum available w Who will take the least amount of money to give up spectrum u 2. Repacking of returned auction spectrum u 3. Forward Auction to reallocate recovered spectrum February 23, 2021 75

16: Smartphones: Devices and Platforms n Analysis u. Dramatic change in market shares with arrival of modern smartphone—the i. Phone—in 2007 u. Business model competition at that point w Apple: Vertically-integrated hardware and software w Microsoft: Free-standing, fee-based mobile OS w Google Android: Ad-supported licensable OS February 23, 2021 76

C 16: Smartphones: Devices and Platforms n Apple u. Apple v Pepper (US 2019) w Finds that app users have standing to brink antitrust claims against Apple February 23, 2021 77

C 16: Smartphones: Devices and Platforms n Apple u. Apple v. Spotify w No direct information yet on possible EC action w Spotify wants to frame this as discrimination with Apple in dual ref/player role on the platform w Apple in turn sees Spotify as trying to avoid payment after it has received all of the benefits of free distribution through the app store February 23, 2021 78

C 16: Smartphones: Devices and Platforms n EC Android (EC 2018) u. Finds Google imposed illegal tying to protect position in general search market u. Google required handset makers to preinstall Google search and Chrome as condition of getting Google play February 23, 2021 79

C 16: Smartphones: Devices and Platforms u. Shocking how important preinstallation remains (see Google payments to Apple) but says something powerful about human behavior u. That said, EC remedy rejects model chosen by market and may just push Euros around with little net change (charge for Google play and pay for preinstallation) February 23, 2021 80

C 17/18: Amazon n Sears u. Note the historic comparison of the Sears catalogue and then stores with Amazon’s path n Amazon Classic: Books and then More u. Important to see Amazon as entering with a business model in books that was different than traditional physical bookstores; shaped costs February 23, 2021 81

C 17/18: Amazon n Amazon As a Platform uz. Shops launches Oct 1999 u 2018 ann report puts third-party sales at 58% u. What rules control relationship between Amazon as inventory seller or inventory producer and Amazon as platform? Can Amazon be a player and a referee? February 23, 2021 82

C 17/18: Amazon n Amazon as a Conglomerate u. Oct 2006: Amazon launches web services forming the basis for AWS u 2018 Ann report profits w AWS: $7. 29 B; North America sales: $7. 26 B; Int’l sales: -$2. 14 B u. What is Amazon doing with AWS profits? How would we tell? February 23, 2021 83

C 19: Facebook n Analysis u. Most privacy/data focused discussion in the course u. FB 2007 platform move is the type of voluntary interconnection regime we frequently applaud but it also creates risks (see Cambridge Analytica) February 23, 2021 84

C 19: Facebook n Analysis u. FTC action u. Given frequent gaps between privacy policy statements and implementation of privacy by firms using data, FTC could bring a complaint, I assume, against almost any firm using data w Again, February 23, 2021 what are we trying to accomplish here? 85

C 19: Facebook n Analysis u. German Cartel Office (2019) w GDPR and German constitutional concerns are not traditional antitrust causes of action w This seems like an effort to backtrack on the approvals of the Instagram and Whats. App mergers though what the cartel calls an internal divestiture w On appeal in German courts February 23, 2021 86

C 20: The Microsoft (Non) Break Up n Analysis (DDC (2000) and Massachusetts (CADC 2004)) u. Important rejected break up u. Original break up would have split MS into OS Co. and Apps Co. and would have put IE into the hands of the Apps Co February 23, 2021 87

C 20: The Microsoft (Non) Break Up n Analysis u. Procedural problems led CADC to reject it and then dropped by DOJ on remand u. Massachusetts appeal showed alternative remedies w Open source IE w Must carry Java (or navigator) February 23, 2021 88

C 21: Regulating Big Tech: A Comparative Perspective n ACCC Digital Platforms Report u. Core focus is on consequences of G/FB advertising revenues for traditional media u. Certainly possible to see this as a social problem even if not necessarily a competition problem (open question on that) u. Forced negotiations are ongoing with outcome to be determined February 23, 2021 89

C 22/23: Regulating Big Tech: Current Situations n Try Three Cases and Assess Possible Responses u 1. Video meeting competition and recent G/FB steps to compete with Zoo u 2. Apple purchase of Dark Sky u 3. Pending FB purchase of Giphy February 23, 2021 90

C 24: Government Production: The Covid-19 Crisis n Statutory History u. Defense Production Act of 1950 as response to Korean War concerns u 2002 Bioterrorism Act (and follow ons) as response to 9/11 February 23, 2021 91

C 24: Government Production: The Covid-19 Crisis n Key Steps u. Creation of pretty extensive preparedness infrastructure coupled with ability to exert power to shift production in emergency situations w Strategic Stockpile, new subagencies and actors, especially BARDA February 23, 2021 92

C 24: Government Production: The Covid-19 Crisis n Assessing This u. What are the right metrics for assessing how the U. S. has done here? u. Do you see differences on PPE/ventilators v. potential new vaccines? u. Are differences related to these steps or other aspects of the response? February 23, 2021 93