ACT - Protecting Small Business Innovation

The Unfortunate Irony of Yesterday's FTC Lawsuit Against Intel

As most readers know by now, the Federal Trade Commission ignored the pleas of ACT and 37 member companies for caution, and filed a lawsuit against Intel yesterday charging that the company has abused its dominant position in the computer chip market.  What you may have missed yesterday, however, is the rather ironically timed announcement from the Obama administration that it is launching new policies to spur more manufacturing it the United States.  In a statement, Vice President Biden said:

"We need legal, tax and regulatory regimes that promote American manufacturing and do not place an undue burden on those who wish to manufacture products in America."

Why is the timing ironic? 

Intel is one of the last great American manufacturers.  While Intel does some manufacturing abroad, the vast majority of its chips are built by its 40,000 American workers.  Most of Intel’s fabrication facilities are in the United States, including Arizona, California, Colorado, Massachusetts and Oregon, and the company has announced that it will spend $7 billion to build more facilities here. 

The FTC filed its case on behalf of AMD and Nvidia, two companies who have decided to offshore nearly ALL of their manufacturing.  AMD's most advanced manufacturing facility is in Germany, and is "more of a German government fab than an AMD fab" after the German government invested more than $1.5 billion to build it.

When the European Competition Commissioner decided that Intel abused European antitrust law, she crowed that Intel should change its tagline from "Sponsors of Tomorrow" to "Sponsors of the European Taxpayer."  One would hope that the American government would not have similar designs on taking down a company that provides so many high paying American jobs.

What's the Rush to Sue Intel?

Clearly, the fact that Intel is one of the last great US manufacturers does not exempt it from the rules of fair competition.  Like all companies, however, Intel should be guaranteed a full, fair, and transparent investigation by the FTC.  However, that simply doesn't seem to be the case here.  As we said yesterday:

Following the settlement between Intel and AMD that resolved the core issues that the FTC has been investigating for more than two years, the FTC has slapped together a completely new set of allegations into this complaint. The result is a complaint reads like a late homework assignment, with little substance and lots of rhetoric . . . The real question is “why is the FTC rushing this case?” They took more than 2 years to investigate their concerns about Intel’s pricing programs without filing a case, but they are now pushing these new claims out the door without giving them more than a couple months of thought?"

A regulatory regime where the federal government rushes to sue one of its biggest manufacturers without bothering to collect evidence, and uses it as a guinea pig for inventive legal theories is probably NOT going to "promote" more US-based manufacturing.

From Pac-Man to Realistic Men: New ACT Paper on Software Creation Through Processor Innovation

ACT represents the interests of software companies, but today we've released a new paper trumpeting the virtues of hardware.

We highlight how software developers and computer chip makers increasingly depend on one another for better products. This symbiotic hardware/software relationship is crucial for the sort of exponential innovation we've grown accustomed to in the IT industry. And it is something ACT recently highlighted in a letter to the FTC signed by 37 software developers.

The old days of understanding computer processors and its effect on software was easy. Chips increased in clock speed (first in MHz, then in GHz) and this made software run faster. This worked well for years, but then it became apparent that high clock speed processors often ran idle because other system components couldn't keep up. These processors also ran very hot, consuming lots of power and creating heat problems.

Today's chips take a different approach. Chips now have processors with multiple cores (or CPUs) to separately but simultaneously handle independent tasks. In a survey of ACT members that we conducted for the paper, 58% of the respondents identified multicore technology as the processor advancement that has most improved their software products. One member said "multicore makes programming harder, but when my apps leverage it, they can do more."

But how do programmers know what to do so they can better leverage processor designs such as multicore? Every major chip manufacturer worth a grain of sand has established support programs and created tools for the developer community. Sun has its Sun Developer Network, Intel has a Software Partner Program (and just announced a new software development kit (SDK) for its mobile Atom processor), and AMD has the CodeAnalyst Performance Analyzer to analyze software performance and help developers optimize applications.

In some ways it seems like chip manufacturers are sucking up to software developers. We like this attention--after all, without software, silicon is just sand! Chip makers depend on software programmers to maximize new hardware features. For the development of Windows 7, Microsoft and Intel worked together to optimize the OS for multicore. Windows 7 divides tasks like video encoding over multiple cores and threads to run apps more quickly, and kernal changes improve power management. For example, DVD playback on a battery-powered Windows 7 laptop is 16 watts, compared to 20 watts on Windows Vista.

It's not just the OS that takes advantage of new processors. Software for gaming, HD video and video editing, cloud computing, database apps, mobile apps--it's enough to make my head spin. Just compare the drastic differences in levels of detail in Pac-man, which was introduced in 1980, with Uncharted 2 (the image to the right), which won the E3 2009 Video Games award for best graphics (it's cool stuff...see the game trailer here).

But my head is spinning even more with the thought that antitrust regulators are on the prowl. Intel is under the gun in the European Union and here in the U.S. I'm still trying to figure out...why? From 2000 to 2008, processor performance increased 28 times while prices fell by 50%. And according to the Department of Labor statistics, the quality-adjusted price of CPUs has declined more than any of the 1,200 products it has tracked (including software, storage devices, PCs). The real cost of processing power has dropped roughly 40% annually over the past 10 years.

The reason for increased power and decreased prices? AMD, IBM, Intel, Sun, Texas Instruments (among others) annually invest billions of dollars for R&D. And I'd expect this to be the case for a long time in the future, because competition is becoming fierce and is converging as smartphones become more PC-like and computers become more mobile. So watch out AMD and Intel...here comes ARM, Marvell, Qualcomm, Samsung and TI.

Innovation, R&D spending, increased competitive outlook...the processor market has all the hallmarks of a market working for consumers. Regulatory action is the wildcard here--let's hope it doesn't trump the benefits of the current ecosystem.

Thoughts on the CrunchPad Saga

Earlier this week, influential tech blogger and aspiring cool product entrepreneur Michael Arrington announced that the eagerly anticipated CrunchPad was stillborn.  Popular Mechanics prematurely heralded the planned low-cost tablet computer as one of the 10 Most Brilliant Products of 2009.  While we will have to wait for more information to know the real story behind the dispute behind Arrington's company TechCrunch and its partner in the venture, Fusion Garage, there are some interesting issues raised by what Arrington has so far revealed.  [Note: although Fusion Garage has removed much of the content from its website, for the time being, a cache of Fusion Garage's blog/PR announcements can be found here].

Arrington claims that because TechCrunch and Fusion Garage jointly own the intellectual property behind the CrunchPad, "it's legally impossible for [Fusion Garage] to simply build and sell the device without [TechCrunch's] agreement."  Now, we don't know what agreements there were between these two companies, but joint ownership of intellectual property would not by itself keep any joint owner from using that property.  The US Patent Office, for example says the following about joint ownership (emphasis added):

Patents may be owned jointly by two or more persons as in the case of a patent granted to joint inventors, or in the case of the assignment of a part interest in a patent. Any joint owner of a patent, no matter how small the part interest, may make, use, offer for sale and sell and import the invention for his or her own profit provided they do not infringe another’s patent rights, without regard to the other owners, and may sell the interest or any part of it, or grant licenses to others, without regard to the other joint owner, unless the joint owners have made a contract governing their relation to each other. It is accordingly dangerous to assign a part interest without a definite agreement between the parties as to the extent of their respective rights and their obligations to each other if the above result is to be avoided.

Under US Copyright law, the rights are a little different: a joint "copyright owner has the right to commercially exploit the copyright, provided that the other copyright owners get an equal share of the proceeds."  Stanford University Libraries, Copyright Ownership: Who Owns What?, Copyright FAQs. 

Therefore, unless there were some agreement between TechCrunch and Fusion Garage that requires both parties to agree on how their joint intellectual property is to be used or licensed, there is no restraint put on either party.  If Arrington sues Fusion Garage, as he has threatened, I will be interested to see the complaint - perhaps there was such an agreement.

Another issue raised is that by sending an email with the following message to Fusion Garage CEO Chandra Rathakrishnan, an unnamed investor may have provided some of the evidence needed to pierce the corporate veil to make the investor liable if a court ultimately finds Fusion Garage wronged Arrington or TechCrunch in this dispute:

"We still acknowledge that Arrington and TechCrunch bring some value to your business endeavor…If he agrees to our terms, we would have Arrington assume the role of visionary/evangelist/marketing head and Fusion Garage would acquire the rights to use the Crunchpad brand and name. Personally, I don’t think the name is all that important but you seem to be somewhat attached to the name."

If this dispute ends up in court, the email to Fusion Garage would probably have been disclosed in discovery anyway, but Rathakrishnan unnecessarily highlighted the investor's direct involvement with the dispute by forwarding it to Arrington.  The limited liability provided by the corporate form is not absolute - investors who have sufficient ownership and control a corporation to such an extent that a court finds the corporation is a "mere instrumentality" of the investors may be liable for the corporation's acts.  See, e.g., Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc., 116 Cal.App.3d 111, 119 (1981); Standard Wire & Cable Co. v. AmeriTrust Corp., 697 F. Supp. 368, 374 (C. D. Cal. 1988).

Both issues should serve to remind entrepreneurs (and investors) to be careful about ownership of IP and to be careful about corporate control and the dangers of discussing sensitive issues over email.

In any event, I personally hope that TechCrunch and Fusion Garage resolve the situation, release an innovative product, and make scads of money. 

The Week in Antitrust - November 9th Edition

Intel - Last week’s news was dominated by New York Attorney General Andrew Cuomo’s decision to file an antitrust lawsuit against Intel. As one reporter noted, the lawsuit reads like a script from the Sopranos, alleging that Intel used "bribery and coercion to maintain a stranglehold on the market" as part of a "worldwide, systematic campaign of illegal conduct." The complaint is filled with similarly hyperbolic allegations of "robbery," "payoffs," and "cover ups" that make it a fun read by legal brief standards.

Yet, many experts, including us, are skeptical. While these charges are similar to the ones made by the European Commission, the New York Times reminds us that "Rebate payments and other incentives provided to customers fall into a murky area of the law, according to antitrust scholars. As John E. Lopatka, a professor and antitrust expert at Pennsylvania State University’s Dickinson School of Law, told the Times:

“A lot of what they are talking about here sounds nefarious, but others would look at it and say that is how markets work."

The Times also suggests there might be a political angle that may be driving this lawsuit:

Antitrust experts following Mr. Cuomo’s actions said that both A.M.D. and I.B.M. — which is based in Armonk, N.Y., and competes against Intel in the server chip market — have invested billions of dollars in chip manufacturing plants in New York.

Keith N. Hylton, a professor at the Boston University School of Law, said that Mr. Cuomo could benefit politically by taking such a prominent stand on behalf of local workers and consumers. “An attorney general is understood to be an aspiring governor,” he said. “They are politicians, and they want to be on the gravy train for big cases.”

One area where the lawsuit definitely fails to impress is in its effort to show any actual harm from the allegedly nefarious actions. As Jonathan Zuck wrote in his statement about the lawsuit:

"The fact that the chip industry has delivered exponential innovation while decreasing prices faster than any other technology industry seems to be a significant hole in the case. From 2000 to 2008, computer chips have gotten 28x faster at the same time real prices have dropped by nearly 60 percent."

Yet, Section IV.B. of the complaint, entitled "Harm to Consumers, Competition, and Innovation" offers a lot of broad assertions but no evidence to back them up. It will be interesting to see NY attempts to develop their theory of actual harm. Additionally, many experts are also interested to see what effect the NY AG's lawsuit has on the ongoing FTC investigation. According to Center for American Progress fellow David Balto, the FTC is looking a different kind of case:

"The New York case is a case about the past," Balto said. "The FTC case will be a case about the future. It will be focusing on dynamic competition, the impact on innovation, on how Intel's conduct ... is going to harm competition and consumers in the future, stifling the ability of new rivals to emerge...

Oracle - Across the Pond, Oracle appears to be hunkering in for a serious battle with the European Commission over its proposed takeover of Sun Microsystems (and the MySQL open source database product that Sun currently owns). According to the Financial Times, the Commission is preparing to launch a formal complaint after Oracle refused to offer any concessions to the Commission. The Commission has been threatening to scuttle the deal unless Oracle spins out the MySQL division of Sun, which is a significant competitor to Oracle in several markets. Essentially, the Commission seems to believe that the fact MySQL is open source is enough to ensure its long term survival as a competitor to Oracle's database.

According to the New York Times, the Commission is now left its choice of bad options going forward.

By confronting Oracle, E.U. regulators risk ushering in a new era of trans-Atlantic tensions over antitrust law. Yet letting Oracle off the hook would smack of weakness after Neelie Kroes, the E.U.’s outgoing competition commissioner, spent the past weeks trying to goad some of Oracle’s top executives into making concessions.
The dilemma has prompted speculation that the best outcome for Ms. Kroes would be for Oracle to drop its interest in buying Sun, relieving the regulators of the need to make a choice.
“Neither path Ms. Kroes faces is a pretty one, and yet this is the decision she might end up being remembered by,” said Spyros Pappas of the law firm Pappas & Associates in Brussels. “Probably the best escape for her would be for Oracle to cancel the deal.”

Google - Last Thursday, Eric Schmidt sat down for an extensive interview with with Fox Business New's Neil Cavuto. About halfway through the interview, Cavuto asks Schmidt about his company's antitrust problems:

CAVUTO: Do you look at Google and what is happening right now? Everyone does mention the Microsoft comparison. They mention the IBM comparison, other behemoths in the day that got a little cocky, got a little super sure of themselves, and, then, boom, upstarts came along. And the reason why I mention it is, they say, people, kids today, they are on Twitter, they are on Facebook, and all, and that is their universe. And for many of them, you are not.

SCHMIDT: Well, everything we have seen indicates that Twitter and Facebook users are using Google even more, so we are very happy with that. But general question of leadership and sort of are you the next Microsoft is really a function of attitude. The companies that you mentioned made mistakes years ago that hopefully we are not making, and hopefully the mistakes we are making now won`t put us in those kinds of predicaments, that our sensitivity toward end users, our focus on consumers, our focuses on bringing costs down, not up, our focusing on letting people get out and take their information with them, is a much better model for the information age than these older models.

It is an interesting philosophy for Google to pursue, but it ignores the fundamental reality that Google is now a large company with a dominant market share, whose ambitions include rapid growth. Even moves that are clearly pro-competitive from Google's perspective can have devastating consequences for smaller firms in those markets. Just look at how Google's decision to offer its own satnav solution for free has affected firms like Tom Tom and Garmin.

New Processors in Mobile Market Helps Handsets, Helps Software Developers

As featured on Slashdot, competition among processors that power mobile handsets is heating up.

ARM--whose chips dominate the mobile phone market--announced its smallest, lowers power multicore chip yet. These chips are meant to compete against Intel's Atom processor (which powers many Netbooks) in the smartphone market.

As users look to their iPhone, Blackberry, Android or Windows Mobile device to do more, processors need to keep up. Faster processors allow software developers to create more useful applications. It's a sort of symbiotic relationship -- hardware advancements, driven by increased competition, means more software innovation!  

This Week In Antitrust

Today, we're kicking off a new feature on the blog, a weekly round up of the tech industry's various antitrust cases and "potential" antitrust concerns. While last week's antitrust news was dominated by competition concerns outside the technology industry (health insurers and the BCS), there were a few notable stories coming out of the world tech competition.

Amazon - Are Amazon, Wal-Mart, and Target Pricing Like Predators? | WSJ Blog

Apparently, the American Booksellers Association (representing small and independent booksellers) has written to the DOJ asking it to "investigate the book price war under way between those three retailing heavies to determine if it constitutes “illegal predatory pricing.”

In a letter dated Oct. 22, the ABA said it believes that the discount pricing—which has led to 10 of the most anticipated hardcover titles being priced as low as $8.98 on Walmart.com—amounts to such an act and that it is “damaging to the book industry and harmful to consumers.”

And a great quote from Gary Reback about why the case is unlikely to make it to court:

”Successful predatory-pricing cases are as rare as Bigfoot sightings."

IBM - IBM Facing Double Legal Trouble | San Francisco Chronicle
The San Francisco Chronicle and IDG ask which is worse for IBM, the fact that the head of Big Blue's Systems and Technology Group has been charged by the SEC with insider trading, or that the US Department of Justice is formally investigating alleged abuses of IBM's mainframe monopoly. One key quote:

"Djurdjevic writes that IBM is dealing with "triple trouble," referring to the two legal incidents and a beating taken by IBM stock. Out of the three, the insider trading allegation "probably hurt the most," he writes... Oct. 16 may go down as a "Black Friday" in IBM history, he says."

Google - Obama & Google (a love story) | Fortune

Fortune Deconstructs the Google Lobbying Strategy on Competition Issues and the Company's Relationship with the Obama Administration. This article has some great insights into Google's Washington operation and its strategy for overcoming potential competition issues. While it is clear that Google is trying to learn from Microsoft's mistakes in the antitrust world, it hasn't completely avoided them and is even creating some new problems. As the article suggests:

Google...likes to portray its Washington operation as a quasi-academic resource that's above the political fray. Politicians and their staffers "are sometimes taken aback by the fact that we don't always act the way that other companies act," says Bob Boorstin, a former Clinton White House speechwriter who works on freedom of expression issues in Google's Washington, D.C., office. "What we offer is technological expertise ... It's a company that's a think tank, or a think tank that's a company."

To which the author suggests:

Either Google is very naive about the way Washington works, or it thinks everyone else is.

Cloaking corporate interests in the "public interest" is a long-time lobbying tactic that we recently warned about in the tech sector. While the interests of corporations and the public often intersect, any company that suggests is policy interests are a mirror image of the public interests is overstating at best.

This is particularly problematics given what the article calls the "Orwellian nature of Google's power."

"Google is in a position to pick the winners in just about every web-based market," says antitrust lawyer Gary Reback, who is part of the charge against Google Book Search. And, he adds, "it can do it without anyone even knowing."

And this power is creating real concern in Washington. Google has to do a lot more than say "trust us" if it wants to quell the growing concerns about its dominance.

Eric Schmidt recently suggested to a group of reporters that Google's culture was the strong hand that kept it from engaging in anticompetitive behavior: "If somehow we went into a room with the evil light, and we announced an evil strategy, we would be destroyed," he said. "There is a fundamental trust relationship between Google and its users." He shared similar comments, according to Wired, with Varney's predecessor at the Justice Department, who apparently was floored that "trust" was Schmidt's legal justification for pushing through the Yahoo/Google deal.

Microsoft - Microsoft/ Yahoo! Search Deal Gets Support From Major US Advertising Agency Group | Marketwatch

The American Association of Advertising Agencies, representing some of the world's largest advertising firms, wrote the Department of Justice in support the proposed partnership between Microsoft and Yahoo! on Search and search-based advertising. The partnership is currently being reviewed by the DOJ for any potential competition issues.

"We believe that Yahoo and Microsoft's proposal to combine their technologies and search platforms is good for advertisers, marketing services agencies, Web site publishers and consumers," the American Association of Advertising Agencies said in a statement.

Oracle/Sun - Oracle Fails to Convince MySQL Doubters | The Register

It appears that Oracle has not convinced FSF founder Richard Stallman, MySQL founder Michael Widenius, or, most importantly, European antitrust commissioner Neelie Kroes that its acquisition of Sun and MySQL poses no competitive problems. This is a really fascinating case when you start to think about open source licensing and business models.

A spokesman for Competition Commissioner 'Steelie' Neelie Kroes said the Commissioner had: "expressed disappointment that Oracle had failed to produce, despite repeated requests, either hard evidence that there were no competition problems or, alternatively, proposals for a remedy to the competition problems identified by the Commission", according to the Beeb.

Masnick's Interesting Take on Microsoft/Yahoo! and What He missed.

TechDirt's Mike Masnick has an interesting post over at Forbes that suggests the Microsoft/Yahoo deal is much ado about nothing:

Looking at Yahoo!'s new deal with Microsoft, it looks like it's still fighting that last battle. It's still playing catch-up. It's still looking for search market share, rather than relevance. The search battle is no longer a battle at all. Microsoft may have built a quality search engine in Bing (the reviews are lovely), but for most people, Google is good enough. The battle is over in search. There's no reason to shift to another player, because there's very little discontentment with what Google provides. Microsoft (and now Yahoo!) may pick up some users on the margin, but the market for search is no longer interesting or particularly important.

He argues persuasively that Microsoft, Yahoo!, and others should be looking elsewhere for internet "relevance." 

People are discovering that information finds them, rather than them going in search of information. Search already works. The next interesting challenge is in improving the way information finds you, rather than the way you find information.

It's a strong point that Chris Anderson also made in a recent Spiegel interview.  While I think Mike may be underestimating the potential for the new partnership to grow share, the argument that internet is moving beyond search is a powerful one.

MS/Yahoo! is NOT About Search.  It's About Search Advertising.

What Mike seems to miss is that this deal, however, is that it is not really about "search."  It's about Search Advertising, with a heavy emphasis on "advertising."  From a business perspective, Search is little more than a vehicle for advertising.  Search may not be the future of how people find information online, but it seems pretty clear that advertising will be a critical part of how the Internet funds itself for the foreseeable future.   

Will Bing/Yahoo dethrone Google as the world's most popular search engine?  Mike is right to suggest that's unlikely.

But that isn't the point of this partnership.  It seems more likely that this pact is designed to make both companies better online advertising competitors.  Search advertising is currently the largest and most profitable part of online advertising, so in order to be a credible contender for advertising dollars, Microsoft/Yahoo needs to be in the game here...and currently, they rarely are as AdAge explains:

While it decreases the number of players from three to two, advertisers said the impact will increase choice, because even some large agencies don't port their search campaigns to all three because of the complexity and cost of doing so.

This deal should give Microsoft and Yahoo the "foot in the door" they need for large advertisers.  While selling search ads is the primary focus of the deal, I doubt it is the end game.   In fact, that might be one of the reasons Yahoo! was willing to forgo "boatloads of cash" upfront in order to be the salesforce for Bing.  Having relationships, a serious salesforce, and powerful, integrated management tools will be just as necessary to sell the advertising through the new platforms that help information  "find you" too. 

MicroHoo! A Quick Regulatory Analysis

Our friend Andrew Noyes over at Tech Daily Dose is asking the most important DC question about today’s Microsoft/Yahoo search agreement: “Will the MicroHoo Raise Eyebrows on the Hill?” Not to mention the DOJ/FTC/European regulators/State AGs… 

As Andrew notes:

“More than eight months after abandoning its planned advertising partnership with Google amid intense scrutiny from Capitol Hill and the Justice Department, Yahoo is joining forces with Microsoft.”

Given that Yahoo’s deal with Google compelled the Justice Department to start drafting a lawsuit to block the arrangement, many are wondering if the Microsoft/Yahoo deal will get a warmer reception from DC (and state capitals and international regulators).

Definitely, and here’s why:

The Deal Between Google and Yahoo Raised More Regulatory Red Flags

ACT did not object to the Google/Yahoo deal because we believe regulators should be wary of manipulating competition in the fast moving sectors of the technology industry. 

However, it was clear from the beginning that Google and Yahoo would have to convince regulators why they shouldn’t step in.  As we explained when the deal was first announced:  

A move this aggressive will undoubtedly set off bells, whistles, and sirens in Washington and Brussels.  Deals like this between #1 and #2 players in a market are usually frowned upon…Both American and European regulators put Google on notice following its acquisition of DoubleClick.  They essentially said, “OK.  But we'll be watching you.”

In the relevant market of search advertising, Google would have been adding Yahoo’s 20 percent market share to its already dominant 60+ percent market share. To get the DOJ to support a move that would give them 80+ percent of this market, Google needed to make a strong argument about how this would benefit customers and users. 

The bar is simply not that high for this agreement, which will only give the combined Microsoft/Yahoo search partnership a meager 25 percent share of the market, still less than half of Google’s total. Additionally, concerns about email and IM that applied to Microsoft’s previously proposed merger with Yahoo do not apply to this search-only deal.

Microsoft and Yahoo’s Advertising Customers Will Likely Support the Deal

Google’s attempts to demonstrate the value of its agreement with Yahoo were undercut by opposition from advertising customers and content partners.  The International Advertising Association, World Federation of Advertisers, the World Association of Advertisers, and the World Association of Newspapers all asked the DOJ to block that deal.  Yet, many advertisers are already on the record supporting the concept of a Microsoft/Yahoo deal.  Search Engine Watch outlines why this deal is "Win for Advertisers:"

Many search marketers agree that Microsoft's technology combined with Yahoo's traffic will make this a good deal for advertisers.

"While Yahoo has always had decent traffic volume, their PPC tools have been sub-par. A clunky interface combined with the lack of an offline editor have resulted in a huge barrier to entry for those wanting to do PPC with Yahoo," said Melissa Mackey, online marketing manager at Fluency Media. "On the other hand, Microsoft's PPC tools are extremely robust – more so than even Google's in many ways. However, the lack of traffic volume has historically meant that relatively few advertisers choose to bother with adCenter."

Department of Justice Already Wary of Google's Dominance

“For me, Microsoft is so last century. They are not the problem. I think we are going to continually see a problem, potentially, with Google.”

- Christine Varney, now lead antitrust enforcer at the U.S. Department of Justice

As a recent Wired story reminded us, Google's dominance of the search advertising market is clearly on Varney's mind:

The company is currently under investigation by the DOJ for its ambitious book-scanning project, which aims to make every book ever published searchable on Google. And the Federal Trade Commission is looking into whether the Apple board seats held by Google CEO Eric Schmidt and board member Arthur Levinson violate federal antitrust law.

The Department of Justice is clearly interested in ensuring the continued competitiveness of the search advertising market.  The fact that a combined Microsoft/Yahoo search will be a more powerful competitor to Google will weigh heavily in its favor.

It Will Get Scrutinized, But Will Likely Pass the Test

Anything Microsoft does results in significant scrutiny by antitrust regulators these days, and this will be no exception.  However, there seems to be little reason that American or international regulators will make a bid to stop the deal.  As mentioned above, scale is important to competitiveness in the search advertising market, and this gives MicroHoo the scale it needs to compete more effectively with Google.

From the perspective of ACT's primary constituency, IT entrepreneurs, there is a lot to like about this partnership.  Search-based online advertising is becoming a critical component of any small firm’s marketing strategy, and this deal should make the market more competitive, innovative, and cost effective.

Microsoft Proposal to the EC Seems to Protect Developers

In May, we submitted our official response to the European Commission’s Statement of Objections regarding Microsoft’s integration of Internet Explorer into the Windows operating system.  Our submission focused on the collateral damage that would be inflicted on software developers if Internet Explorer's underlying technology was torn out of Windows. In fact, 74 SMEs from throughout Europe signed onto our submission.

On Friday, Microsoft released the details of a proposal it has made the European Commission to resolve issues in the Statement of Objections to relative applause by the EC.

While we are still reviewing the proposal internally and with our membership, it appears that it will not adversely affect developers who rely on Internet Explorer API's.  According to Annex A-1:

When Internet Explorer is turned off using this feature there is minimal impact on third-part programs (and other parts of Windows itself) that call upon Internet Explorer APIs.This is because the Internet Explorer files that provide functionality to third parties and other parts of Windows through APIs are left intact when Internet Explorer is turned off.

However, it is still unclear exactly what is meant by "minimal impact" based on the other commitments Microsoft is making.  We will hopefully learn more over the coming weeks.

In the meantime, however, it is promising that the Commission is praising a proposal which appears to be designed to protect the interests of independent software developers from around the world.

Does the European Commission's DG Comp Violate Human Rights?

“Neelie Kroes violated our human rights!” 

That is the curious claim being made by Intel in its appeal of the European Commission’s ruling that the company had violated European antitrust laws and the concomitant record breaking 1.06 billion euro fine, according to the Wall Street Journal Europe’s Charles Forelle.

While Forelle calls the argument a bit of a “Hail Mary,” he also explains that Intel is just one of many companies that are making it.

Intel isn't alone. A growing list of companies are raising the charge that the EU's vigorous antitrust watchdog is running afoul of protections afforded by European human-rights law. The companies argue they have a right to have their case heard in a court instead of an administrative body.

In fact, the more I read, the more interesting this line of reasoning gets.

At the center of this argument is the peculiar structure of the European antitrust apparatus, one that most people (especially in the US) do not fully grasp.  In Europe, the Competition Commissioner and her staff play the role of prosecutor, judge, and jury.  As Forelle explains:

The issue calls into question the EU's practice of having a political appointee -- the current antitrust commissioner is Neelie Kroes of the Netherlands -- who supervises investigations, and then decides whether the company is guilty and what the punishment should be. Her decisions are formally approved by all the 27 EU commissioners, but in practice they are rarely questioned. That kind of administrative procedure was appropriate four decades ago, when the EU began handing out relatively small fines, defense lawyers say, but outmoded in an era in which nine-figure penalties are common.

It’s a system that is certainly weighted against companies, but where do Intel’s “human rights” come into the picture? 

It appears that the Global Competition Law Centre (GCLC) at the College of Europe has been raising concerns for the past couple years about how the EC antitrust body violates the European Convention of Human Rights. In a white paper released in April 2008, the GCLC argued that:

“…from a strictly legal point of view, the combination of all powers within one institution raises the question of the compatibility of competition law proceedings led by the European Commission ("the Commission") with the fundamental right to a fair trial as enshrined in Article 6 of the European Convention of Human Rights ("ECHR").”

The traditional view has been that the Commission does NOT need to have an impartial tribunal because the EC classifies antitrust as “minor offences”  (not criminal) and, as EC spokesperson Jonathan Todd argued, "Each and every decision can be appealed" to the Court of First Instance in Luxembourg, which is independent.  The GCLC paper refutes these ideas by arguing that:

1. “Although fines imposed by the Commission are explicitly classified as non-criminal, this does not necessarily imply that proceedings relating to EC competition law infringements are inherently non-criminal in nature" and references efforts by the EC to heavily stigmatize "violations of EC competition law, and indeed the current Competition Commissioner has explicitly equated cartel activity to theft.”
2. “The current system also leads to the accumulation of investigative, prosecutorial and adjudicative powers by the Commission during the whole proceedings in antitrust cases leads naturally to what is called "prosecutorial bias"
3. Review by the CFI is limited to merely reviewing what the Commission has already decided for "manifest errors" in law.  The CFI cannot “rehear the case” or “substitute its own opinion for that of the Commission.”

A Positive Reason, Or Just Excuses?

As Forelle noted, this is still not an easy legal case to make (companies also need to convince the CFI that the EC is actually bound by the ECHR), but it is a compelling idea. 

Regardless of whether you believe the Commission generally arrives at the right conclusions, it is essentially uncontested that the European antitrust apparatus does not meet the requirement of a fair criminal trial as enshrined in the ECHR (and most international ideals). Yet, the only defense for this system seems to be, “It doesn’t NEED to meet that bar.” 

As the ECHR declares, fair trials are a fundamental human right.  In order for a society to deny that right, even in the case of a “civil penalty,” should it not have a positive reason for why it must…not just an excuse for why it can?”