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Friday, January 20, 2006

Theoretically Speaking: Trinko and Broadband
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Debate lingers regarding the impact of the Supreme Court's decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP on the application of antitrust law to the highly-regulated communications industry. Some suggest Trinko virtually, if not categorically, displaces antitrust oversight of the industry, while others argue Trinko obviates antitrust oversight only where a court concludes that FCC and state regulators adequately police anticompetitive behavior.

Given this debate (and considerable dicta in Trinko), questions will remain regarding how the decision may affect government efforts to promote competition in communications, especially with respect to broadband services. Yet despite worries that most consumers will never enjoy competition much beyond cable and telephone company offerings, it seems unlikely that broadband providers will be found to violate antitrust laws in the near term, even if Trinko does nothing to curb the scope of such laws.

Antitrust law offers several possible theories regarding how owners of broadband networks might act anticompetitively. An examination of each theory illustrates why each is unlikely to satisfy a court.

Refusals to Deal and the "Essential Facilities" Doctrine

Courts have acknowledged that, in some cases, a company engages in anticompetitive conduct simply by refusing to cooperate with rivals. A broadband provider, for example, theoretically could prevent or hinder users on other networks from communicating with its own customers. Those "other users" could be consumers, or (as proponents of "network neutrality" mandates argue) firms offering applications or content over the Internet.

In the first place, broadband providers are likely to survive refusal to deal allegations because courts have found violations under this theory only in exceptional circumstances. Even dominant firms generally are free to decide how and with whom they deal. An illegal refusal to deal only arises when a single, dominant firm will cooperate with another party only on uneconomical or otherwise prohibitive terms or in a manner that denies competitors access to critical inputs or customers. In the broadband context, there is no single dominant firm and none seems likely to emerge in the immediate future. Instead, cable and phone companies vie to expand their respective, substantial market shares and to defend against wireless and other firms who hope to use less established technologies to expand their footholds in the market.

Nor does it seem likely that parties will be able to rely on broadband providers extracting prohibitive terms from other firms any time soon. Companies hoping to earn a return on the billions of dollars they have invested or hope to invest in broadband networks understand that consumers pay a premium over dial-up service so they can get access to the diverse and exciting content and applications that the Internet offers. Although network owners may wish to bargain with other companies to share the revenues generated by this increased consumer value, they are unlikely to draw hard lines in the sand that risk losing existing or future customers to other networks. Why kill the goose even before it's produced enough gold to recoup costs for upgrading cable plant or for laying "fiber to the home"?

These arguments suggest courts would be reluctant to conclude a broadband provider had illegally "refused to deal" without reference to how FCC regulation also might enhance broadband competition (e.g., unbundling of "last mile" wiring for use by telco competitors or the FCC's recent Policy Statement favoring "network neutrality"). If future courts follow Trinko's lead and consider FCC efforts to promote competition in broadband, however, they should be even less likely to conclude that a provider is empowered to deny critical inputs to rivals or otherwise "refuse to deal" with them.

Similarly, courts seem unlikely to find an antitrust violation based on the theory that a broadband network owner has withheld use of an "essential facility" without which rivals are effectively prohibited from entering the market. The factors considered under this theory are similar to those for refusals to deal; whether a facility denied to a competitor is "essential" largely turns on whether courts believe the competitor is unable, practically or reasonably, to duplicate the essential facility.

Rival network owners proffering such claims must contend with the reality that at least two firms already compete in the market, and that investment capital continues to flow to additional technologies, such as wireless. Moreover, consumers have accelerated their switch from dial-up to broadband, raising the possibility that network owners entering the market can gain customers without having to entice them away from other broadband providers. As with refusals to deal, the weakness of this theory as applied to broadband providers speaks for itself. And FCC regulation just adds to the difficulty of persuading courts the antitrust laws have been violated.

Short-Term Sacrifice of Profits and Prior Courses of Dealing

As Trinko acknowledges, courts may infer violations of antitrust law where a firm engages in conduct (including refusing to deal with certain customers or competitors) whereby it sacrifices short-term profits, purportedly for anticompetitive ends. Parties may base such claims on a defendant's prior dealings with customers and competitors, which courts may presume were profitable. The gist is that firms that cease profitable activities may do so for nefarious reasons. Under this theory, antitrust courts might raise an eyebrow if broadband providers were to screen their customers off from competing broadband providers or other third parties.

Yet Trinko also recognized that antitrust law safeguards vigorous competition that promotes consumer welfare. Specifically, the Court noted that forcing firms to share the source of their advantage with other firms may undermine incentives to invest in competing facilities. Courts thus must not be too quick to conclude that a firm's decision not to cooperate with other firms is anticompetitive, rather than procompetitive. Accordingly, some have suggested that courts should balance aggressiveness against laxity in antitrust enforcement by looking first to see whether there is any reasonable argument that a defendant's actions are economically efficient, i.e., consumer welfare-enhancing.

As explained above, broadband providers are not likely to deviate from their current practice of allowing access to their customers by other broadband providers or developers of content and applications. Consumers value such connectivity and thus providers risk losing customers if they don't give consumers what they want. It also seems unlikely that any broadband providers -- including cable and telco providers -- think they enjoy such strong network effects or other advantages that they will be rewarded with market dominance if they sacrifice profits temporarily. Providers will continue to sink billions into deploying broadband networks (often despite worries in the capital markets). Thus they have every reason to maintain, rather than sacrifice short-run profits.

Moreover, if providers begin to use their control over broadband networks to deny third parties access to their customers, courts still may conclude such behavior promotes competition. Suppose, for example, cable companies began charging Internet video services providers or their customers a premium to carry such services on cable modem platforms (e.g., restricting those services to more expensive, higher bandwidth tiers). If cable companies argued that such arrangements replaced cable service revenues that once supported cable modem investments, courts would need to consider those arguments carefully. As the FCC appears to have acknowledged in issuing its Policy Statement in favor of "network neutrality," affording providers the flexibility to earn a return on their investments may be critical to the deployment of competing broadband networks.

Monopoly Leveraging and Attempted Monopolization

Courts also may conclude that a firm violates antitrust, under certain circumstances, by attempting to leverage an existing monopoly or create a new one. But these theories, at a minimum, require that the defendant has a monopoly or is likely to be capable of acquiring one. Broadband providers probably will not satisfy this prerequisite anytime soon, for the reasons already stated here. And to the extent broadband providers take actions that arguably might fit this theory in the future, courts would need to make sure those actions were not justified as procompetitive. This seems especially true to the extent providers act to preserve incentives for them (and thus others) to invest in broadband infrastructure.


The weakness of these various theories in supporting antitrust claims against broadband network owners suggests that debate over the implications of Trinko has less to do with the manifest present than the imagined (and feared) future. Antitrust will remain a coherent benchmark for the type of objective competition policy that must steer government involvement with digital age communications. But it seems likely to take a back seat to the FCC's efforts to steward broadband deployment, at least until developments in technology and markets make the risk of antitrust violations more real than theoretical.

posted by Kyle Dixon @ 12:19 AM | Antitrust & Competition Policy , Broadband , Cable , Communications , Innovation , Internet , Net Neutrality , Supreme Court , The FCC , Wireless , Wireline

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