Why Antitrust Doesn't Cut It for NN (but why Google has to pretend)

By Harold Feld | July 05, 2006

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Antitrust has emerged as the great savior of the internet in the absence of Network Neutrality. Opponents of NN argue that antitrust remedies provide sufficient protection (just ask Netscape!). Recently, however, Google has engaged in a bit of preemptive sabre rattling. In a visit to Bulgaria, Vint Cerf remarked that if they don't get NN from Congress, Google will be vigilant to protect itself using the tools of antitrust. Anyone taking a serious look at the track record on antitrust in network environments understands why antitrust doesn't cut it. As I have observed before, Netscape _won_ its antitrust action against MS. While no doubt providing some moral satisfaction, it did little to restore Netscape's fortunes or restore the benefits of browser competition to consumers. More troubling, however, is the Supreme Court's decision to review whether the complete failure of telephone companies to compete with each other constitutes grounds for an antitrust trial. This case invovles "conscious parallelism," a term economists use in markets with limited competition. In such cases, firms don't need to sit in a room and actively conspire to avoid competing with each other. Instead, because these actors (here, the telcos) understand how the market works, and rationally recognize that competition would hurt them, they consciously avoid it. Note that the question is not whether the telcos actually violated the antitrust laws through such conduct. At the moment, the question is whether you can even state a case for an antitrust violation on the basis of such an economic theory. Given that the same conditions apply in the broadband duopoly that serves most of the United States residential market, whether antitrust will do ANY good absent the proverbial "smoking gun" remains in serious doubt. But even if the Supreme Court decides that conscious parallelism provides grounds for an antitrust complaint, it will still take years and massive resources to litigate such claims succesfully. It is also worth noting that the Administration's Office if the Solicitor General has sided with the phone companies. This does not exactly fill me with confidence for future enforcement. So why does Google (or at least, Vint) suggest that while NN is important, they can fall back on antitrust? Well, for one thing, they may disagree with me in my analysis. Silicon Valley companies, by their very nature, remain unbridled optimists that whatever happens they can adapt and thrive. (This is one of the reasons they keep getting spanked in Washington, unfortunately, since they continue to think that, at the end of the day, what happens in Washington amounts to a temporary inconvenience.) But there is another possible reason. No company can admit it is in a life-or-death struggle, particularly a company that trades at a price-to-earnings ratio (P/E) of 60 or more. For your average "old economy" stock, a P/E of 15 is considered appropriate, with a P/E of 30 being amazingly high. Google (and other Silicon Valley companies) trade at very high P/Es by old economy standards because investors believe that these companies will keep growing and finding new revenue streams at an astounding rate. Losing NN raises a big question mark on that. I have no doubt in my mind that, if NN goes away, the tech companies will take a serious hit on their stock values. How much I cannot predict. But if the telcos and cable cos have an ability to block the expansion of services companies like Google can offer -- or can demand a cut of any revenue -- investors will react. It doesn't matter that the current Google business model remains intact. The high stock price is based on the faith that today's great performance is a predictor for a fantastic tomorrow. If today's revenue is only a predictor of tomorrow's revenue, the stock price must adjust for this reality. Playing this out, I personally predict that if Congress doesn't create strong NN rules, we will see a significant decline in the NASDAQ over time. The Dow will probably also drag some, given the number of tech companies now included in the indicies. One might dispute this prediction, arguing that any loss in value by the tech companies gets transferred to the cable cos and telcos. But it doesn't work that way. While investors can predict that revenue growth for the tech companies has become uncertain, it also remains uncertain *how much* of that the telcos and cable cos get to pick up. Remember, P/E is based on predictions about the future. Uncertainty makes prediction harder, and thus drives down stock price. Since no one can predict (at least at the early stages) how much revenue the telcos and cable cos will capture, they are unlikely to appreciate in value (at least, not enough to offset the loss to the tech companies). So Google (and, I presume, the rest of the tech community eventually) needs to send assurances to investors that the end of a neutral, stable internet is not the end of future rapid expansion for Google. At the same time, they need to persuade Congress that NN is critical to maintaining a healthy tech sector. Happily, we in the public interest community don't have to manage such a balancing act. I have no problem warning the Senate that if they don't protect the internet with rigorous network neutrality rules, the NASDAQ (and tech companies in the Dow) will take a hit and drag down the indicies. Not all at once (investment has momentum of its own), but over time. While not a particularly strong reason for me to support NN from my perspective, I can hope it will resonate with some Republicans who prefer to put their trust in antitrust.