[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                      COMPETITION IN THE EVOLVING 
                          DIGITAL MARKETPLACE 

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON COURTS AND
                           COMPETITION POLICY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 16, 2010

                               __________

                           Serial No. 111-147

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee               STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
  Georgia                            LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               TED POE, Texas
JUDY CHU, California                 JASON CHAFFETZ, Utah
TED DEUTCH, Florida                  TOM ROONEY, Florida
LUIS V. GUTIERREZ, Illinois          GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DANIEL MAFFEI, New York
JARED POLIS, Colorado

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

             Subcommittee on Courts and Competition Policy

           HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman

JOHN CONYERS, Jr., Michigan          HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia               JASON CHAFFETZ, Utah
CHARLES A. GONZALEZ, Texas           F. JAMES SENSENBRENNER, Jr., 
SHEILA JACKSON LEE, Texas            Wisconsin
MELVIN L. WATT, North Carolina       BOB GOODLATTE, Virginia
MIKE QUIGLEY, Illinois               DARRELL ISSA, California
DANIEL MAFFEI, New York              GREGG HARPER, Mississippi
JARED POLIS, Colorado

                    Christal Sheppard, Chief Counsel

                    Blaine Merritt, Minority Counsel



















                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 16, 2010

                                                                   Page

                           OPENING STATEMENTS

The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Ranking Member, Subcommittee on 
  Courts and Competition Policy..................................     1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Chairman, Subcommittee 
  on Courts and Competition Policy...............................     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Member, Subcommittee on Courts and Competition 
  Policy.........................................................     3
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     4

                               WITNESSES

Mr. Richard Feinstein, Director, Bureau of Competition, Federal 
  Trade Commission, Washington, DC
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
Mr. Edward J. Black, President and CEO, Computer and 
  Communications Industry Association, Washington, DC
  Oral Testimony.................................................    17
  Prepared Statement.............................................    19
Mr. Morgan Reed, Executive Director, Association for Competitive 
  Technology, Washington, DC
  Oral Testimony.................................................    29
  Prepared Statement.............................................    31
Mr. Scott C. Cleland, President, Precursor, LLP, McLean, VA
  Oral Testimony.................................................    39
  Prepared Statement.............................................    41
Mr. Geoffrey A. Manne, Executive Director, International Center 
  for Law and Economics, Lewis and Clark Law School, Portland, OR
  Oral Testimony.................................................    94
  Prepared Statement.............................................    96
Mr. Mark N. Cooper, Ph.D., Consumer Federation of America, 
  Washington, DC
  Oral Testimony.................................................   105
  Prepared Statement.............................................   107

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Lamar Smith, a Representative 
  in Congress from the State of Texas, and Ranking Member, 
  Committee on the Judiciary.....................................   168
Prepared Statement of the Honorable Howard Coble, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Courts and Competition 
  Policy.........................................................   173
Material submitted by the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Courts and Competition Policy...............................   176
Response to Post-Hearing Questions from Richard Feinstein, 
  Director, Bureau of Competition, Federal Trade Commission, 
  Washington, DC.................................................   179


                      COMPETITION IN THE EVOLVING 
                          DIGITAL MARKETPLACE

                              ----------                              


                      THURSDAY, SEPTEMBER 16, 2010

              House of Representatives,    
                 Subcommittee on Courts and
                                 Competition Policy
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Henry 
C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee) 
presiding.
    Present: Representatives Johnson, Conyers, Gonzalez, Watt, 
Quigley, Maffei, Polis, Coble, Issa, Harper, and Smith.
    Staff present: (Majority) Christal Sheppard, Subcommittee 
Chief Counsel; Anant Raut, Counsel; Rosalind Jackson, 
Professional Staff Member; (Minority) Sean McLaughlin, Chief of 
Staff and General Counsel; Stewart Jeffries, Counsel; and John 
Mautz, Counsel.
    Mr. Johnson. This hearing of the Committee on the 
Judiciary, Subcommittee on Courts and Competition Policy will 
now come to order. Without objection, the Chair is authorized 
to declare a recess.
    Today's hearing is entitled ``An Antitrust System for the 
21st Century,'' and in today's hearing we will explore a number 
of competition issues in the digital marketplace. But first, I 
would like for us to kind of go out of order today as far as 
the Member opening statements are concerned. At the request of 
the Ranking Member Coble, he is going to give his statement 
first, and I will follow.
    Mr. Coble. Mr. Chairman, I thank you for that. I have a 
dermatology appointment, so I will go let him break out his 
blowtorch and submit to my face, and I will be back in due 
time. And I thank you, Mr. Chairman.
    Mr. Chairman, when we last met in July, I made the 
observation that given the impact of antitrust law on the 
American economy, it is vital that we examine how well these 
laws are working, particularly in light of the innovation that 
today's high-tech economy has brought.
    Today we have an opportunity to examine what level of 
antitrust enforcement is appropriate in the evolving digital 
marketplace. This evolving digital marketplace includes new 
products such as smartphones and the apps that run on them to 
new services such as mobile advertising.
    It includes old businesses such as publishing companies, 
which are trying to break into new platforms such as tablet 
computers like the iPad, and it includes new companies like 
many of the small software developers that are writing the apps 
for smartphones.
    These new technologies offer a wealth of opportunities both 
for individuals and for the economy as a whole; however, they 
also pose challenges. For this hearing the principal challenge 
is how to ensure that these companies are competing rigorously 
and fairly. Full and fair competition yields benefits for all 
consumers in the form of lower prices, higher quality and 
greater supply of goods.
    Our witnesses today will discuss the relative benefits of 
aggressive antitrust enforcement in these developing markets. 
They will also discuss whether some types of potentially 
anticompetitive conduct, such as vertical mergers, are 
particularly worrisome in this new marketplace.
    I am in favor of strong antitrust enforcement, Mr. 
Chairman, because I think it helps to ensure competitive 
markets. However, I am aware that some scholars are concerned 
and worry about the impact of aggressive enforcement on 
developing markets, particularly whether such enforcement slows 
new innovations.
    While this is an antitrust hearing, I would be remiss if I 
did not address some of the concerns that arise from these new 
digital markets and services. How, for example, do existing 
copyright holders ensure that their rights are protected in 
this new digital marketplace? How do companies use our private 
information, information, I might add, with which people 
willingly part with--with which they willingly part on social 
networking sites, to make a profit?
    These copyrighted privacy concerns may not be competition 
concerns per se, but they are important issues that we as 
policymakers need to be aware of. And for the purposes of this 
hearing, I am curious to what extent, if any, these other 
values could be or should be a part of our antitrust analysis.
    I look forward to hearing the witnesses today and yield 
back the balance of my time. And, Mr. Chairman, again I thank 
you for the courtesy, and I will return imminently.
    Mr. Johnson. Thank you, Representative Coble, and we look 
forward to your return. And you are taking the gift that you 
brought for me with you---- [Laughter.]
    And I guess that means that you shall return----
    Mr. Coble. I shall return.
    Mr. Johnson [continuing]. With a bigger gift. [Laughter.]
    First, ladies and gentlemen, thank you. We start this 
hearing on a fundamental question critical to this 
Subcommittee's jurisdiction, and that is what should be the 
role of antitrust law in emerging industries?
    The reason why we have antitrust laws in the first place is 
that competition without any restraints can harm consumers. 
When companies compete against each other for market share, 
they innovate, and that keeps prices low, and consumers win. 
When companies eliminate their competitors, consumers lose, 
because the companies use their dominance to fatten their 
bottom line.
    Now, we have heard a number of people argue that there 
should be less antitrust enforcement in emerging technologies. 
These markets are constantly changing, they argue. The company 
on top today may in fact be gone tomorrow. They say that 
enforcing the antitrust laws too strictly in these markets will 
only discourage innovation and new competitors. Then again, too 
little innovation could have just the opposite effect.
    Companies that jump out to an early lead in their fields 
could establish the default standards for their new 
technologies or become that go-to spot for both users and 
advertisers, making it more difficult for later entrants to 
crack into the market.
    The fact is you can't rely on industries to police 
themselves. Ten years ago Congress took the leash off of Wall 
Street. Everyone assumed that the banks would compete more 
vigorously with each other and wouldn't do anything to endanger 
themselves or the market.
    Just the opposite happened. The banks got so caught up in 
trying to beat the other banks that they ended up bringing down 
the whole system, wiping out hundreds of billions of dollars in 
the average person's savings retirement incomes and pensions.
    In my opinion antitrust enforcement needs the balance. It 
is like holding the reins of a horse. Hold them too tightly and 
the horse stops, or the horse may even buck. And if you hold 
those reins too loosely, then the horse goes out of control.
    This issue is at the heart of the markets that will be 
discussed today. Should antitrust enforcers stand back and let 
these markets play themselves out, or are these markets in 
danger of losing the spirit of competition that has marked 
their early stages?
    I, for one, don't want businesses to fear our actions 
today. The role of government should be to foster competition 
and drive economic growth, not stand in the way of business. We 
want to partner with businesses, not be their nanny. To that 
end if businesses are concerned about anticompetitive practices 
in their industries, I want them to know that my door is always 
open.
    Earlier this week, I heard from a constituent, Will 
Seippel, president of WorthPoint, an Internet startup at 
Georgia Tech located near my district. And Mr. Seippel is a 
resident of my district. He raised concerns with me about how 
his company's position has fallen in Google search results over 
time. But I don't want to turn today into a forum for Google 
bashing. I want to help Mr. Seippel and Google work together to 
resolve their differences, with Congress taking the least 
intrusive role possible.
    Just as importantly, we need businesses to come forward and 
help to shape good policy when we ask. I look forward to 
delving into these questions and many others over the course of 
this hearing.
    And I thank Mr. Coble for his statement.
    At this time I will recognize the Honorable Mr. Conyers, a 
distinguished Member of the Subcommittee and also the Chairman 
of the full Committee.
    Mr. Conyers. Thank you very much, Chairman.
    And I welcome all of the witnesses.
    The attendance here by our visitors indicates that they, 
too, recognize this is a very important hearing today, but it 
is also part of a continuing series of hearings that are going 
to occur on the subject. Would that one hearing could take care 
of a subject of this complexity.
    Well, this market is evolving so rapidly that what we say 
here today and what is said here today may in fact be obsolete 
at the close of the business day today. That can happen.
    We have got a number of interesting witnesses. I commend 
you on the diversity of the panelists that you have invited to 
join us for this hearing, and I look forward to their comments.
    The only thing I would add--and I will put my statement in 
the record--is that the online and mobile advertising space is 
too concentrated and is even getting more so as we speak. This 
is not an anti-Google remark that I am making.
    Secondly, antitrust law needs to evolve to fit the digital 
world, where vertical acquisitions are even more worrisome than 
before. And it is important to consumers that various products 
designed to access online content work together to the greatest 
extent possible.
    Now, somewhere along the line, maybe even starting today, 
we are going to begin to put together an encyclopedia of where 
all this digital computerized Web page, Web site, all of these 
things are going to have to come together with a little bit 
more--they will have to fit together more than they have in the 
past.
    Right now, and I think there is going to be a remark or two 
about this, but there are some unleashed forces running around 
in the subject matter that have to be acknowledged and 
determine how they are going to be controlled. And I am hoping 
that some parts of that issue will come out in the discussion 
that goes on today.
    And I thank again the Chairman and the Ranking Member for 
bringing us together in this way.
    Thank you, sir.
    Mr. Johnson. Thank you, Mr. Chairman.
    I will now recognize Mr. Lamar Smith, the distinguished 
Ranking Member of the full Committee and also a Member of this 
Subcommittee.
    Mr. Lamar Smith?
    Mr. Smith. Thank you, Mr. Chairman.
    America is undergoing a revolution in the way that it 
conducts business. In the late 1980's computers became 
commonplace office machinery. The late 1990's and early 2000's 
saw the explosion of the Internet and the growth of e-commerce.
    Today the revolution is fully mobile and has moved to the 
phones we carry everywhere. These phones, which are actually 
small computers, have the capability to send e-mails, play 
videos, surf the Internet, give directions and make purchases, 
all while the user is in motion.
    Indeed, smartphones have created a marketplace for 
software, the App Stores, which did not even exist 2 years ago. 
The app developers in turn are creating new and innovative ways 
to utilize smartphones far beyond what their creators imagined. 
They enhance consumer welfare, provide new markets for goods 
and services and ultimately, of course, could help create jobs.
    However, new markets and business models also raise 
questions about how companies are competing and whether their 
actions are pro-competitive or anticompetitive. This hearing is 
an excellent opportunity to take a high-level view of the 
developing industry still in its infancy and ask what level of 
antitrust enforcement is appropriate.
    I am a believer in vigorous antitrust enforcement. I 
believe it leads to more competition, lower prices, more 
choices and better products for consumers. However, antitrust 
enforcement is not without risk. Over enforcement, whether 
through the antitrust agencies or the private bar, can deter 
business practices that would ultimately help consumers. On the 
other hand, under enforcement could allow companies to become 
firmly entrenched through anticompetitive practices that hurt 
their rivals and ultimately hurt consumers.
    Today's hearing is for general oversight purposes, and the 
witnesses will discuss these issues in general terms. However, 
it would be ignoring the obvious if I didn't observe that this 
hearing appears to be intended to address the business 
practices of two companies, Google and Apple.
    Apple recently made headlines because it changed the rules 
it imposed on app developers to address concerns that the 
previous rules might diminish competition. Apple was able to 
resolve this issue without the parties resorting to litigation 
and without government intervention. Innovative products and 
services, after all, are rarely created in the courtroom.
    With respect to Google, much has been made about its recent 
acquisitions of a mobile advertising platform and a travel 
search platform. I think an antitrust review of these 
transactions by the agencies is appropriate. That is what 
antitrust laws are for.
    However, just because a company is big does not mean it is 
bad. Just because it enters into new lines of business does not 
mean it is going to dominate those new markets. And just 
because competitors complain about the practice does not mean 
that it is necessarily anticompetitive.
    However, it is equally important that antitrust enforcers 
and policymakers keep their eyes on these developments to 
ensure that they do in fact benefit consumers. So I think this 
hearing is a very useful beginning to that end and to help us 
gain a better understanding of that process.
    And with that, Mr. Chairman, I yield back.
    Mr. Johnson. Thank you, Congressman. I thank you for your 
statement.
    There being no other Members who have statements that they 
would like to give at this time, I will include statements in 
the record.
    I am now pleased to introduce the witnesses for today's 
hearing. Our first witness is Rich Feinstein, director--is it 
Feinstein or--okay. Rich Feinstein, director of the Bureau of 
Competition for the Federal Trade Commission.
    Welcome back, sir.
    Our next witness is Ed Black. Mr. Black has served as 
president and CEO of the Computer and Communications Industry 
Association since 1995.
    Welcome back, sir.
    Next we have Mr. Morgan Reed. Mr. Reed is the executive 
director of the Association of Competitive Technology.
    Welcome, Mr. Reed.
    Our next witness is Scott Cleland. Mr. Cleland is the 
president of Precursor, LLP and the operator of Googlopoly--
excuse me, Googlopoly--googlopoly.net, a blog.
    Welcome, Mr. Cleland.
    Next we have Mr. Geoff Manne. Professor Manne is the 
executive director of the International Center for Law and 
Economics at Lewis & Clark Law School.
    Welcome, Professor.
    And finally, we have Dr. Mark Cooper. Dr. Cooper is the 
director of research for the Consumer Federation of America and 
has appeared numerous times before the Congress to provide a 
consumer's perspective.
    Welcome back, Dr. Cooper.
    Thank you all for your willingness to participate in 
today's hearing. Without objection, your written statements 
will be placed into the record, and we would ask that you limit 
your oral remarks to 5 minutes. You will note that we have a 
lighting system that starts with a green light. At 4 minutes it 
turns yellow, then red at 5.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    Mr. Feinstein, please begin.

      TESTIMONY OF RICHARD FEINSTEIN, DIRECTOR, BUREAU OF 
     COMPETITION, FEDERAL TRADE COMMISSION, WASHINGTON, DC

    Mr. Feinstein. Chairman Johnson and Members of the 
Subcommittee, I am Richard Feinstein, director of the Bureau of 
Competition at the FTC. I want to thank the Committee for this 
opportunity to talk about some of the commission's efforts to 
apply sound competition policy to dynamic markets. My comments 
today are my own and may not reflect the view of the commission 
or the views of any individual commissioner.
    Despite the profound changes in the American economy since 
the passing of the Sherman Act in 1890, our antitrust laws 
remain basically the same, and they have proven that they could 
still do the job. Some have argued that there should be 
different rules for markets characterized by rapid 
technological development.
    But Congress drafted the antitrust laws in general terms to 
accommodate changing markets and new products, and the laws are 
flexible enough to meet the challenges of the high-tech era. In 
fact, by keeping markets open to new products and to successive 
waves of innovation, the antitrust laws promote dynamic markets 
and contribute to the continued success of American businesses 
at home and around the world.
    Of course, the antitrust laws are not enforced in a vacuum. 
Congress created the FTC specifically to guide competition 
policy through changing competitive environments. To that end 
we hold public workshops, engage in economic research, and 
discuss competition issues with other policymakers like the 
Members of this Committee to develop and refine our 
understanding of established and developing markets.
    Today I am going to talk briefly about two of the areas in 
which the commission is applying the tried and true principles 
of competition to markets characterized by technological 
change--monopolies and mergers.
    Turning first to monopolies, broadly speaking, there is a 
fundamental tension when dealing with unilateral conduct by a 
firm that is trying to obtain or maintain monopoly power. On 
the one hand, it is not illegal to have a monopoly, and many 
monopolists obtain their status by inventing new and highly 
desired products. On the other hand, competition policy 
generally relies on rivalry to discipline the behavior of firms 
in the market.
    The challenge is to use the commission's antitrust 
authority to prevent unreasonable exclusionary and predatory 
conduct by firms with monopoly power by making sure not to 
limit their incentives to innovate and to compete aggressively.
    For example, last December the commission charged that 
Intel Corporation had engaged in various unfair methods of 
competition and unfair practices to block or slow the adoption 
of non-Intel products. By this conduct Intel illegally 
maintained its monopoly on computer chips or CPUs and sought to 
obtain a monopoly on graphic processing units.
    Intel recently agreed to settle the commission's charges 
and to propose settlement aims to prevent the recurrence of 
Intel's illegal conduct without stifling its ability to 
continue to innovate and compete fairly. It does not seek to 
strip Intel of its chip monopoly, but it does open the door to 
fair and vigorous competition in these markets. That way 
competition on the merits, not Intel's illegal practices, will 
determine the future path of competition in these markets.
    Turning to merger enforcement, as you know, Section VII of 
the Clayton Act outlaws mergers whose effect may be 
substantially to lessen competition or tend to create a 
monopoly. So merger analysis is by nature forward-looking. It 
focuses on what level of competition is likely to occur in the 
future in a post-merger world.
    One particular challenge when examining dynamic markets is 
that market facts can be hard to pin down. In markets with 
emerging technologies or rapidly changing product offerings or 
suppliers, there may not be a track record of past competition, 
or that track record may not be relevant to predicting future 
competition. Often there is greater uncertainty about the 
future path of competition, and market shares of leading 
companies may be less durable in these markets.
    A recent example of a merger investigation involving 
companies in a rapidly changing market is Google's acquisition 
of AdMob. Initially, we had concerns that the loss of head-to-
head competition between the two leading mobile advertising 
networks would harm competition. However, toward the end of our 
6-month investigation, those initial concerns were overshadowed 
by Apple's introduction of its own mobile advertising network, 
iAd, as part of its iPhone applications package.
    Because of these changing circumstances, the commission 
found reason to believe that Apple quickly would become a 
strong mobile advertising network. The timing and impact of 
Apple's entry into the market led the commission to conclude 
that AdMob's success to date on the iPhone platform was 
unlikely to be an accurate predictor of AdMob's competitive 
significance going forward, whether AdMob was owned by Google 
or not. After viewing all the evidence, the commission 
unanimously voted to close its investigation without taking 
action against the merger.
    In conclusion, our competition laws have served America 
well. They have proven adaptable to changes in markets and 
business models across a span of more than 100 years. The 
commission's work enforcing antitrust laws will continue to be 
an important part of our national success in preventing 
competitive harm in new and dynamic markets while fostering and 
rewarding innovation and entrepreneurship.
    Thank you very much. And I look forward to answering your 
questions.
    [The prepared statement of Mr. Feinstein follows:]
                Prepared Statement of Richard Feinstein

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________
    Mr. Johnson. Thank you, Mr. Feinstein.
    Mr. Black, please proceed.

 TESTIMONY OF EDWARD J. BLACK, PRESIDENT AND CEO, COMPUTER AND 
      COMMUNICATIONS INDUSTRY ASSOCIATION, WASHINGTON, DC

    Mr. Black. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to testify. Thank you for the 
opportunity to testify today on competition in the digital age. 
I ask that my written statement be included in the record, and 
I will summarize those remarks.
    CCIA has participated in many major antitrust cases in the 
high-tech era. I hope to offer some insights today from that 
experience. Let me begin by saying that our industry requires 
antitrust oversight like any other. Since the Sherman Act, 
antitrust skeptics have claimed that the law should not be 
applied to new industries because of new economic forces, that 
competition could be ruinous or was bad for consumers.
    In fact, antitrust enforcement helped pave the way for 
Silicon Valley as we now know it. History shows our industry is 
particularly susceptible to competitive abuses due to certain 
aspect of high-tech markets, including network effects, 
intellectual property thickets, lock-in and opportunism enabled 
by architecture. Let me focus on three of these three big red 
flags.
    First, lock-in. Consumers are locked in when the costs of 
switching from one vendor to another are prohibitively high. 
Currently, CCIA has filed a case against IBM for abusing 
locked-in customers in an attempt to maintain its mainframe 
monopoly. Legacy users of mainframe, who account for 80 percent 
of the world corporate and government data, face huge costs 
associated with moving their data and applications to other 
systems. Therefore, IBM has been able to keep prices 
artificially high.
    When a few companies pioneered methods to decrease the 
mainframe switching costs, IBM went on the attack to protect 
its monopoly using litigation, intimidation, and finally buying 
up pioneers and mothballing their technology.
    The flip side of lock-in is that low barriers to entry 
diminish competitive risks. In certain markets, especially 
Internet-centered markets, entry is easy and competition is 
just a click away. Thus, it is easy to lose market share 
quickly.
    A second red flag is chokepoints. Chokepoints are specific 
markets through which consumers must pass to access an 
ecosystem of related products and services. Two current 
examples are semiconductors and Internet access. The FTC's 
Intel investigation illustrates the presence of chokepoints in 
the semiconductor market. As the main brain of a computer, the 
semiconductor is a chokepoint of the computing industry.
    As the recent FTC investigation showed, Intel used this 
chokepoint to secretly harm its competitors' products when it 
began to view graphic processing units as a threat to its own 
position in the chip market. I commend the FTC for its recent 
settlement regarding Intel's anticompetitive conduct. It 
demonstrated its expertise in handling this case. Going 
forward, however, the FTC must aggressively enforce this 
decree.
    In addition to microprocessors, Internet access is another 
chokepoint. The content applications in Web sites that run on 
top of the transport layer of the telecommunications network 
represent an extremely competitive market or groupings of 
markets, perhaps the most competitive markets in history.
    However, the infrastructure that users need to access the 
Internet is not nearly as competitive. Most consumers face a 
duopoly of Internet access providers--their phone company and 
their cable company. The current network neutrality debate is 
really a byproduct of this largely noncompetitive market.
    A final red flag is architecture-driven opportunism, which 
we have seen in the Apple apps controversy. Without getting 
into too much detail, the problem was the potential bait and 
switch, as it appeared that Apple may have baited customers 
with an open platform, but then switched to a closed platform 
after consumers were locked in.
    Finally, I urge skepticism of special interest exemptions 
to the general rule in favor of free and open competition. The 
seminal 2007 Antitrust Modernization Commission report said 
that there must be continued, ``careful analysis and strong 
evidence for such exceptions'' when supporting them, and even 
then it said such exceptions should be granted rarely.
    And yet exceptions abound. The Supreme Court has created 
many, including for sports leagues and regulated industries, 
and there are calls for new exemptions such as for Internet 
news coverage. And, of course, we have long-standing exemptions 
for what the Supreme Court has repeatedly labeled monopolies of 
those government-granted entitlements to monopolize ideas that 
we call ``intellectual property.'' All of these antitrust 
exemptions must be consistently tested in a crucible of cost-
benefit analysis.
    In conclusion, it is critical for antitrust authorities to 
be watchdogs, because when you are being bullied, it can be 
risky to speak out. But remember also that big doesn't equal 
bad. We need innovative disruptive technologies to make it out 
of the garage and into the marketplace. Thank you.
    [The prepared statement of Mr. Black follows:]
                 Prepared Statement of Edward J. Black

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Mr. Black. And it is important to 
know that we here at the Subcommittee want to receive such 
information as you indicated may be available to those who feel 
threatened or put upon or challenged in any way. And we would 
love to have that kind of information trickling in or pouring 
in, whatever the case might be. Thank you.
    Mr. Reed, please begin.

 TESTIMONY OF MORGAN REED, EXECUTIVE DIRECTOR, ASSOCIATION FOR 
             COMPETITIVE TECHNOLOGY, WASHINGTON, DC

    Mr. Reed. Chairman Johnson, Ranking Member Coble and 
distinguished Members of the Committee, my name is Morgan Reed, 
and I would like to thank you for holding this important 
hearing on the evolving digital marketplace.
    I am the executive director of the Association for 
Competitive Technology, or ACT. ACT is an international 
advocacy and education organization for people who write 
software programs. We represent over 3,000 small and midsize IT 
firms throughout the world.
    For my members the smartphone market represents the single 
largest opportunity for growth in the next decade. As growth in 
the PC market slows, the mobile market is accelerating, even in 
today's slumping economy. And we are nowhere near the top. True 
smartphones have only 25 percent of the market in the U.S. and, 
more importantly, less than 7 percent in Asia.
    Given the importance of this market to my members, we 
appreciate that the Committee shares our concern about the 
continued competitiveness. Currently, however, we see the 
smartphone market as both dynamic and competitive. The latest 
market share numbers show that devices running Nokia's Symbian 
operation system are currently in the lead at 41 percent. 
Research in Motion's Blackberry, which all of you have, is at 
18. Google's Android is at 17, and Apple's iOS, which runs the 
iPAD and the iPhone, is at 15.
    So while Apple may be foremost in people's mind, it isn't 
the biggest player in the smartphone marketplace. In fact, 
industry analysts at Gartner suggest that Apple's market share 
is destined to continue falling as Google's Android grows to be 
the largest phone operating system by 2014.
    Now, despite Apple's modest share in the smartphone market, 
some have expressed grand conspiracy theories on why Apple's 
iOS does not support Mobile Flash Player from Adobe. The facts, 
however, suggest something much more simple. Apple wants to 
create the fastest, most efficient and most stable mobile 
platform on the planet. And the current version of Mobile Flash 
is not fast. It is hard on battery life, and it is not 
particularly stable.
    Every smartphone vendor, including Apple, Google and 
Microsoft, Nokia and others, have rejected Flash Player at one 
time or another for many of the same reasons.
    Additionally, our members don't believe the rules governing 
Apple's App Store are harming competition in the smartphone 
market today. With more than 80 percent of our developers 
creating applications on multiple platforms, developers are 
following opportunity, not fashion.
    And while some are concerned about the over broad nature of 
Apple's previous restrictions on third-party tools, Apple's 
recent update has removed those concerns for our members. And 
we look forward to developing more incredible applications on 
the platform.
    However, our members do have some concerns about the future 
of competition in the smartphone ecosystem. While the current 
competitive landscape offers our members bountiful 
opportunities to feed their families and create jobs, Google's 
march toward domination of the market presents two challenges 
for future growth.
    First, the Android platform does not offer the same kind of 
opportunities for software developers to get paid directly for 
their applications. Google makes 99 percent of its revenues 
from online advertising platforms, and therefore strongly 
pushes developers toward an advertising-funded model.
    And while Google can get fat in a world where all Android 
applications are advertising-funded, most small businesses will 
starve unless they can attract a massive user base like we see 
with what we all heard about Farmville.
    Second, if your application or service develops the scale 
necessary to survive on advertising alone, Google becomes very 
interested in you. For example, just a few short years ago 
MapQuest was a go-to Web site for online maps and directions. I 
am sure many of you used it. After MapQuest built an impressive 
market, Google bought a company called Where To and integrated 
its mapping software directly into its search results. MapQuest 
stopped showing up on the first page of a Google search and 
quickly became an also-ran.
    This experience illustrates why many of our members are 
concerned by Google's proposed acquisition of ITA, the search 
engine that powers nearly every travel booking app and Web 
site. Many of our members are worried that Google's plans 
``deep integration of ITA's technology could skew the results 
to favor Google, and Google may even cut off the ability to use 
ITA's patented technology in mobile applications.''
    Now, as veterans of several technology company antitrust 
cases, ACT can sympathize with Google's position here. It 
wasn't that long ago they were just two guys in a garage, like 
many of our members. But as the rest of the panel can attest, 
the rules change when you achieve a dominant market share, even 
when it is gained lawfully.
    The same transactions that were simply smart business as a 
startup can be found anticompetitive when you are that dominant 
company in a market. And the DOJ has already determined that 
Google has dominant market shares in both search and search 
advertising market. Therefore, we expect the DOJ to thoroughly 
review the acquisition of ITA and ensure that a competitive 
marketplace is preserved.
    In summary, our members are incredibly excited about the 
opportunities offered by the smartphone market. The market 
today is competitive and dynamic, but there are some challenges 
on the horizon, and we hope the Committee will continue to look 
closely at them. Thank you.
    [The prepared statement of Mr. Reed follows:]
                   Prepared Statement of Morgan Reed

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________
    Mr. Johnson. Thank you, sir.
    Next, we will hear from Mr. Cleland.

           TESTIMONY OF SCOTT C. CLELAND, PRESIDENT, 
                   PRECURSOR, LLP, McLEAN, VA

    Mr. Cleland. Thank you, Mr. Chairman and Ranking Member, 
for the opportunity to testify. My testimony reflects my own 
personal views and not those of any of my clients in the 
communications or tech sector.
    I have two digital competition insights for you today. The 
first is a competition digital dichotomy, which is the 
competition is very different in the physical world of network 
and devices than it is in the virtual or online world of 
applications or information. And so the critical difference to 
finding difference here is in the last 15 years the evolution 
of competition in the physical world of networks and devices 
has evolved from monopoly toward competition, while the 
evolution of competition online and virtual has devolved from 
very competitive toward monopoly.
    And my second point today is the Googlopoly is the main 
antitrust event. Attached to my written testimony is a 40-page 
presentation. It is the sixth in my research on this topic. You 
can find them at googlopoly.net, the previous ones.
    Let me run through quickly some of my conclusions. Lax 
antitrust enforcement tipped Google to monopoly and facilitates 
Internet media monopolization. More is at stake than 
competition from an information access monopoly. Googlopoly 
threatens economic growth, jobs, privacy, intellectual 
property, a free press, fair elections and cyber security.
    There is no net economic growth or no net job creation in a 
free Internet sector model--only deflationary price spiral, net 
negative growth, property devaluation, job losses and 
monopolization. The consumer does not win from a monopoly 
control over free and full access to distribution.
    Google is a vastly more serious antitrust threat than 
Microsoft ever was. Google has unique total information 
awareness power, because it tracks most everything that happens 
on the Internet. Google's monopoly secret weapon is that it has 
deep tracking inspection of everything that passes through the 
Google cloud. And Google is not an honest broker in search. It 
hides multiple serious conflicts of interest.
    Now, let me elaborate on a couple of final insights. Lax 
antitrust enforcement allowed Google to buy its way to an 
Internet TV monopoly via YouTube, DoubleClick, AdMob, and to 
extend its search monopoly to Internet streaming video, soon to 
be rebranded as Google TV.
    Now, look at the vertical monopoly Google has bought and 
assembled right under antitrust authorities' knows--Google 
Search, effectively a billion-person audience with a uniquely 
comprehensive remote control and TV guide; YouTube, the 
dominant Internet video distribution network; DoubleClick, the 
dominant one-stop Internet advertising agency and Nielsen-like 
actual measurement mechanism; and then AdMob, the leading 
mobile advertising network.
    The result is a Google Internet TV monopoly, or what I call 
a monocaster, a billion viewers, that dominant Internet 
advertising and distribution network, the only comprehensive 
viewer measurement mechanism, and here no legal media ownership 
limitations at all, which effectively limit all of Google TV's 
competitors to a tenth of Google's viewing audience.
    It is stunning that Congress, which has long been obsessed 
with ensuring that no one entity controls the media and which 
is myopically worried right now about the Comcast-NBCU merger 
that would have about one-fourteenth of the audience that 
Google TV will have, has been totally asleep as Google has 
assembled a global Internet media monopoly right beneath our 
noses.
    And right now Google is at it again. It is trying to buy 
its way into an eventual monopoly in the travel vertical by 
buying ITA software. Now, ITA software is the underlying search 
engine or search software that virtually everybody in the 
online travel business uses. So DOJ must scrutinize this ITA 
transaction, because it is the current prime example of how 
Google buys something and then integrates it in, and because it 
buys something that is dominant, it adds that with its 
dominance, and it is largely game over in that new segment.
    So don't ignore the blue whale in the antitrust ruling, 
Googlopoly. I recommend this Subcommittee strongly urge the DOJ 
to prosecute Google for monopolization of Internet media. Thank 
you for the opportunity to testify.
    [The prepared statement of Mr. Cleland follows:]
                 Prepared Statement of Scott C. Cleland

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                               __________

    Mr. Johnson. Thank you for adding some passion into such a 
dry subject, if you will.
    Professor Manne--Manne, I am sorry.

      TESTIMONY OF GEOFFREY A. MANNE, EXECUTIVE DIRECTOR, 
INTERNATIONAL CENTER FOR LAW AND ECONOMICS, LEWIS AND CLARK LAW 
                      SCHOOL, PORTLAND, OR

    Mr. Manne. Thank you. And now for the dry academic 
viewpoint.
    I want to thank you, Mr. Chairman and Ranking Member Coble 
and the rest of the Members of the Committee for----
    It was. Is it? Yes.
    My name is Geoffrey Manne. I am the founder and executive 
director Of the International Center for Law and Economics. I 
also teach at Lewis & Clark Law school in Portland, Oregon. I 
just want to clarify that the International Center for Law and 
Economics is not affiliated with the school, and while I do 
speak on behalf of the ICLE, I do not speak on behalf of my 
colleagues at Lewis & Clark Law School. I would say that is 
probably true unanimously of my colleagues at Lewis & Clark Law 
School.
    I have written widely on the subject of competition policy 
and innovation and want to mention a forthcoming volume from 
the Cambridge University Press, for which I am a co-editor, on 
competition policy and intellectual property law under 
uncertainty regulating innovation. And I think it is the 
existence of uncertainty that animates my remarks today.
    What I want to talk about is what we do with all of the 
information that we have, sort of a meta question, how do we 
make a decision about what to do in a world in which things, 
actions, business actions could be anticompetitive and could be 
pro-competitive.
    It turns out that there is an enormous amount about the 
economic implications of business conduct that we still don't 
understand, and our antitrust laws nevertheless obligate us to 
soldier on, developing sound expectations about the anti-or 
pro-competitive implications of various forms of business 
conduct nonetheless. We would do well to recognize our 
ignorance.
    In brief, the essential antitrust analysis that I would 
recommend tends to counsel against rather than for enforcement 
in many circumstances, and this is particularly true in 
nascent, evolving and technologically innovative markets where 
ignorance about market structure, competition, technology and 
consumer demand is absolutely legion.
    As a result the appropriate approach to antitrust analysis 
is a cautious one that embraces the evidence-based approach to 
uncertainty, complexity and dynamic innovation contained within 
the well-established so-called error cost framework. The point 
is not that we know that any particular high-tech company's 
conduct is pro-competitive, but rather that the very 
uncertainty surrounding it counsels caution, not aggression.
    The error cost framework is built on two premises--first, 
that false positives are more costly than false negatives, 
because self-correction mechanisms mitigate the latter, but not 
the former; and second, that errors of both types are 
inevitable because distinguishing pro-competitive conduct from 
anticompetitive conduct is an inherently difficult task, 
especially in the face of innovation.
    Both product and business innovations involve novel 
practices, and it turns out that these practices generally 
result in monopoly explanations from the economics profession 
followed by hostility from the courts, although sometimes the 
process is reversed.
    In the words of Nobel economist Ronald Coase, if an 
economist finds something, a business practice of one sort or 
another that he does not understand, he looks for a monopoly 
explanation. As in this field we are rather ignorant, the 
number of un-understandable practices tends to be rather large, 
and the reliance on monopoly explanations frequent.
    The fundamental truth of antitrust analysis, as I said, is 
that the very same conduct--aggressive competition--that could 
be anticompetitive could also be pro-competitive. There is no 
easy way to assess out the differences on the basis of simple 
or even complex legislative or judicial language, and there are 
lots of incentives tending economist, competitors, regulators 
and others to Dean too far the wrong way.
    The cost of hasty intervention is the loss of the consumer 
benefits of aggressive competition both directly and, perhaps 
more importantly, by the deterrence of future actions that may 
likewise attract costly interventions and penalties.
    Caution is the watchword in these markets, and while some 
have suggested that our antitrust enforcers are asleep at the 
switch, I would suggest that, if anything, they may be too 
aggressive. From the investigations of Google ITA, AdMob and 
DoubleClick mergers to Intel, Microsoft, Qualcomm, Rambus and 
many others, activity here is hardly moribund.
    Mr. Coble mentioned the issue of privacy in this realm, and 
I think that the fact the agencies are thinking about and 
looking at and actively considering actions, antitrust actions, 
on the basis of privacy implications of mergers in particular 
is a particularly problematic development, because it turns out 
there is quite literally no antitrust relevant theory of 
privacy that would animate the determination that there is a 
privacy problem in these mergers.
    Like Rich here, these folks are well-intentioned, smart and 
as knowledgeable as anyone on the topics in which they truck. 
Unfortunately, it is the inherent limitations of the tools at 
their disposal and the unfortunate fact that prime is not 
simultaneous that impede them. It is on this assessment most 
enthusiastically that I would disagree with our antitrust 
enforcers and some courts for that matter. We are stuck with 
the limitations of our knowledge.
    [The prepared statement of Mr. Manne follows:]
                Prepared Statement of Geoffrey A. Manne

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                               __________
    Mr. Johnson. Thank you, sir. I think we could probably hold 
a 3- or 4-hour discussion with just you and Mr. Cleland. 
[Laughter.]
    And perhaps we shall do that one day.
    Now, Dr. Cooper?

  TESTIMONY OF MARK N. COOPER, Ph.D., CONSUMER FEDERATION OF 
                    AMERICA, WASHINGTON, DC

    Mr. Cooper. Thank you, Mr. Chairman.
    The Consumer Federation of America has long believed that 
digital industries would be an extremely consumer friendly and 
citizen friendly place, if allowed to develop to their full 
potential. Over the past two decades, it has become clear, 
however, that ensuring digital markets remain vigorously 
competitive and open is difficult, because these sectors have a 
tendency to be dominated by a very small number of platforms.
    The small numbers problem arises from supply-side demand 
and demand-side economies of scale that push these platforms 
toward something known as winner-take-most outcome. Once these 
markets tip, they tend not to flip.
    But experience shows that winners are not satisfied to 
allow the underlying economic fundamentals that created their 
advantage be the sole source of their continuing dominance. 
They immediately engage in conscious anticompetitive practice 
to reinforce and extend their market power.
    Their ability to do so in digital markets is greater than 
in traditional industries as a result of the strong 
technological complementarities between the platforms and the 
applications and services that ride on them. Because the 
dominant platform owner controls the functionalities on which 
complementary applications and services rely, they can easily 
foreclose or degrade the quality of the product that competes 
with the applications and services they provide.
    Dominant firms create barriers to entry through exclusive 
deals, price discrimination and rebating, manipulation of 
standards, refusal to deal with, withdrawal of support from, 
retaliation for dealing with complements and competitors.
    Demand for competing products can be reduced through lock-
in contracts for core products or complements, including long 
terms and minimum commitment, pre-announcement of features to 
freeze consumers and artificial bundling of products. Bundling 
can undermine competition, inducing exit, creating barriers to 
entry, relaxing price competition, distorting investment, 
retarding innovation, and expanding market power into new 
markets.
    I give three appendices that document these practices in 
three important digital industries.
    These anticompetitive practices preserve the dominant 
firm's market power by undermining potential entrants and 
increasing the applications barrier to entry. They slow and 
distort innovation by driving it toward applications, goods and 
services that fit into the business model of the incumbent 
platform. They provide for the platform owner with the ability 
and tools to extract surplus from consumers with price 
discrimination and bundling.
    One of the most powerful effects and benefits of the 
explosion of digital technologies is digital disintermediation. 
Digital technologies reduce, even eliminate the need for 
intermediaries, lowering transaction costs and allowing 
producers to sell directly to consumers or consumers to sell to 
each other, turning them into producers.
    The reduction in costs is a result of economic efficiency, 
and it triggers a battle royal over the rents that have existed 
in physical markets. Incumbent middlemen try to defend their 
brand, while dominant platform owners seek to capture the 
savings as excess profit. But the reduction in costs in a 
competitive market would and should be passed to the consumers.
    A number of recommendations flow from this analysis. 
Because the numbers are so small in these platforms, we must 
make sure that we get the maximum number of competitors 
possible, the maximum number that the minimum efficient scale 
will support.
    Antitrust and competition authorities must act swiftly 
against artificial barriers to entry. Make no mistake about it. 
These markets tend toward compatibility and interoperability, 
and it is only by building artificial barriers to 
interoperability that these markets can be segmented.
    We should value the potential of intermodal and potential 
competition. But we cannot assume that competition across modes 
will be effective. It has to be demonstrated. We certainly 
should not allow intermodal competitors to be gobbled up by 
intermodal incumbents. We should scrutinize the abuse of 
vertical leverage and focus on the key chokepoint in these 
industries where the flow of innovation, applications, goods 
and services can be controlled.
    Claims of technological innovation should be scrutinized. 
We should maximize consumer sovereignty and welfare again. We 
should act swiftly against artificial switching costs and 
support policies to lower switching costs. We should recognize 
the anticompetitive and anti-consumer arms of bundling.
    We should resist calls from disintermediated incumbents to 
save their antiquated oligopoly business model. We should 
promote transparency, but recognize that the extremely complex 
nature of digital technologies creates a severe problem of 
information asymmetry.
    Digital markets will be a powerful and consumer friendly 
space if we adhere to the principles of vigorous competition 
and openness that has been the cornerstone for antitrust and 
competition policy in this Nation for well over a century. 
Thank you.
    [The prepared statement of Mr. Cooper follows:]
                  Prepared Statement of Mark N. Cooper

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                               __________

    Mr. Johnson. Thank you, Dr. Cooper.
    Now we will begin with questions. Wired magazine reported 
this summer in an article entitled ``The Web is Dead: Long Live 
the Internet.'' Two decades after its birth, the World Wide Web 
is in decline as simpler, sleeker services--think apps--are 
less about the searching and more about the getting.
    You wake up and you check your e-mail at your bedside with 
your iPad. That is one app. During breakfast you browse 
Facebook, Twitter and the New York Times--three more apps. On 
the way to the office you listen to a podcast on your 
smartphone--another app. At work you scroll through RSS feeds 
in a reader and have Skype and IM conversations--more apps.
    At the end of the day you come home, make dinner while 
listening to Pandora. You play some games on X-box Live and 
watch a movie on Netflix streaming video service. You spent the 
day on the Internet, but not on the Web.
    Mr. Feinstein, how do you antitrust regulators stay up to 
speed on the brisk pace of innovation when the consumers do not 
even realize that they are not actually on the Web most of the 
day. How do you rise to that technological challenge?
    Mr. Feinstein. You have correctly characterized it, of 
course, as a challenge. You know, the dynamism of these markets 
is often operating to the benefit of consumers, and it is the 
basis, I think, for us to try to find the right balance between 
appropriately aggressive antitrust enforcement and while 
remaining mindful of the benefits of innovation.
    And frankly, corporate antitrust enforcement is entirely 
consistent, I think, with vigorous innovation. And we try to 
take--we try to take all of that into account.
    One of the advantages, I suppose, to us of the explosion of 
the information economy, information-based marketplace that we 
are talking about, the technological, all the different ways of 
sending and receiving information, is that businesses and 
consumers who have concerns and who feel like they may be 
aggrieved or that they may be foreclosed from the market or 
their ability to compete may in some way be impaired, also are 
able to reach us in real time.
    So it is a constant challenge between wanting to find that 
balance between, frankly, astounding progress on the one hand, 
promoting innovation and ensuring that competition continues to 
serve the interests of consumers by promoting innovation and by 
promoting competition on the merits.
    Our case against Intel, for example, which I mentioned in 
my opening remarks, I think in some ways illustrates many of 
those principles, because our real concern there was a dominant 
firm--as we, at least as we alleged it, it was a dominant 
firm--that had had tremendous success and had been very 
innovative, but had also gotten to a point where it, in our 
view, was not necessarily confining itself to competition on 
the merits.
    And the consent order that is now being considered to be 
made final by the commission is intended to find the balance 
between prohibiting past conduct that we believe constituted 
something other than competition on the merits, while at the 
same time fostering innovation and full competitive conduct 
going forward.
    And interestingly, I mean, the very fact of the settlement 
of that case 6 or 7 months after it was voted out by the 
commission I think is a good illustration of our ability to be 
effective in real time, or at least what may constitute real 
time for antitrust enforcement.
    When the settlement was being discussed, you know, one of 
the issues was we could litigate this matter for 3 or 4 more 
years. By the time it had gone through Courts of Appeals, et 
cetera, it could easily have been 3 years before we had a final 
decision, and we might have one, but it also might have been 
the case that the market had in some sense moved on, and relief 
that was obtained 3 years from now when a final judgment might 
be an interesting legal precedent, but might not necessarily 
have had immediate impact in the markets.
    By settling the case when we did, I think we achieved the 
goals of obtaining relief in real time and promoting 
competition and innovation in a dynamic market. That is just an 
example.
    Mr. Johnson. Thank you.
    It is my understanding that one of the reasons that makes 
it so tough to challenge vertical mergers is the difficulty in 
predicting future harms. Does that leave the FTC and DOJ one 
step behind in preventing harmful monopolistic behavior? And 
this is a question for the panel, so anyone, feel free to----
    Mr. Cleland. The real reason vertical merger enforcement is 
difficult is there is no court case precedent that anybody can 
point to that says, okay, we have got the authority to do here, 
and we can win. So it is the absence of that. And so 
prosecutors are going, boy, you know, we don't have a 
precedent, so it tends to want them to settle.
    However, you know, what we have seen with, you know, 
vertical mergers is what is different about Google than 
Microsoft? The Department of Justice stopped the Intuit merger. 
They didn't allow them to get into finance, financial services. 
And then they sued Netscape when they tried to leverage into 
the Internet.
    What is different about Google is not only do they have a 
horizontal monopoly, but they are moving vertically in so many 
sectors, we can just run through them, you know, in video, in 
books, in news and in maps, and just on down the line, and 
travel. They are very rapidly going into the rest of the 
digital economy.
    And so what is different about Google on the vertical 
question is we have never seen anybody go from 0 to 60 into 
vertical from a horizontal monopoly. That is what is unique 
here and why it makes it so urgent for people to tune in and 
figure out the damage.
    Mr. Johnson. And court decisions being a guide in this kind 
of rapidly evolving market is certainly problematic. But then I 
think it goes into this ignorance Professor--excuse me--Mr. 
Manne, that you spoke of. And when I say ignorance, and I am 
sure when you say it, it is not derogatory. It is just a basic 
lack of knowledge, particularly when we are talking about 
future technology.
    Mr. Manne. Right.
    Mr. Johnson. Would you respond?
    Mr. Manne. Please--yes, thank you.
    Right. Precisely. It is the central problem is the fact 
that that would look--that aggressive competition that could 
potentially be anticompetitive could also be pro-competitive. 
And the state of economic science is such that we actually 
don't have great tools for determining what the future 
speculative anti-or pro-competitive consequences of a 
particular business conduct are going to be.
    And that is the reason why I focused in my original remarks 
on the decision-making process. Given that we have this 
dramatic amount of uncertainty, what we are forced to do is 
look at the potential cost of over enforcement multiplied by 
the likelihood of over enforcement times the potential compared 
to the potential costs of under enforcement and the likelihood 
of under enforcement and figure out where the advantages and 
disadvantages lie.
    And I think there is in fact a thumb on the scale in favor 
of what some would call under enforcement, because market 
competitive forces do have the mitigating effect on potentially 
anticompetitive outcome. I think when it comes to vertical 
integration in particular, we actually have an enormous----
    I don't mean to imply that economics hasn't made any 
progress. In fact, we have a lot of economic knowledge. Scott 
mentioned the dearth of court cases that would support the kind 
of vertical case that he might like to bring.
    The reason for that is because the economic literature is 
almost unanimous, and there are very few areas in economics 
that are set up as well settled--not to say completely settled, 
but is well settled--as the notion that vertical integration 
tends to be pro-competitive, and the anticompetitive complaints 
about vertical integration have tended not to materialize.
    I don't see any reason why that would be different here 
than it has been since the beginning of the Sherman Antitrust 
Act. And simply pointing out that the sky is falling, that 
there is vertical integration run rampant, that there are 
network effects, chokepoints, privacy fears, exclusive deals, 
standards, artificial bundling, leveraging dominance, vertical 
leverage, switching costs, information asymmetry--these are all 
slogans.
    Most of them have very little economic content that would 
support antitrust intervention on the basis of those concepts. 
That is unfortunately the state of our economic knowledge. 
Maybe we will find out in the future that these things really 
are as problematic as the people who throw those slogans around 
think they are. At the moment we don't have that knowledge.
    Mr. Cooper. Obviously, I have a rather different view. And 
those slogans in the documents I provided were footnotes from 
antitrust cases that the Department of Justice won. So let us 
be clear.
    The simple fact of the matter is that the Microsoft case 
was a slam dunk. They did all that stuff, and the courts could 
see it. The Intel case was a slam dunk. They did those things, 
and not only did the American antitrust authorities, but the 
Japanese and the Koreans and the Europeans found the same 
thing.
    The notion that antitrust can't identify anticompetitive 
practices is bunk. The notion that false positives are more 
costly than false negatives is a little bit silly in the light 
of the financial market meltdown, the salmonella egg problems, 
the oil leak in the Gulf, the brownouts in California, and the 
tech bust after the WorldCom fraud.
    The assumption that these corporations will behave 
themselves, and the admission of Alan Greenspan at the height 
of the financial crisis that his theory was flawed, simply 
reverses the assumption that we can trust the corporations to 
do the right thing, because their private interests are 
synonymous with the public interest.
    So the point of the antitrust laws are--and they carry a 
heavy burden, but they have been able to show in a series of 
landmark cases that all those practices I mentioned are in fact 
used and abused in the digital marketplace. And when they put 
together a good case, they win those cases. And they should not 
back off. They should use those principles and apply those 
principles to the digital industry just as vigorously as they 
have applied them to other sectors in the Industrial Age.
    Mr. Black. Mr. Chairman, if I could weigh in on this a 
little bit, first of all, there was some discussion of the 
courts. And I think one of the problems in antitrust law is the 
last couple of decades the courts have not been terribly 
friendly to antitrust. And it has hampered the ability, I 
think, of enforcers to use some of the tools that might be 
available and, frankly, created the climate that has in some 
cases encouraged anticompetitive behavior by the private 
sector.
    In terms of vertical and horizontal in the high-tech 
industry, however, I constantly am a little frustrated by the 
terminology, because the truth is if you look at the companies 
and the way they operate, it is not just horizontal and 
vertical, but the interconnections, the relationships, the 
dependencies they need to cooperate, collaborate, interoperate, 
it doesn't line up that simply at all.
    And aside from the Google paranoia issues that seem to have 
crowded in here, in general we have a hugely competitive 
marketplace in the Internet space.
    Now, I represent hardware, software, services, a lot of 
people in the high-tech world. The Internet space is the most 
competitive part. In some of the hardware areas, some of the 
software areas, you do have these chokepoints. You have locked-
in situations. One of the key ingredients in whether market 
share is something you worry about in the context of monopoly 
has to do with how embedded it is, how real market power it has 
in antitrust terminology.
    Market share is not the equivalent. I think my friend, 
Scott Cleland, talks about Google has 80 percent share in the 
video monopoly. Well, the data he cites, his comp score, using 
the same data, it shows that other competitors have 197 percent 
share. So the data in this world can be manipulated and 
misused, I think, inappropriately.
    I make one other last reference over to, again, Scott 
because I read his testimony before I came here, and I went on 
to Google Search the other day on Tuesday afternoon, and I put 
in ``mapping direction.'' And the results I got were one, 
number one, MapQuest; number two, Yahoo maps; and number three, 
Google. So if there is a biasing going on, it is hard to see it 
in that.
    So a lot of what we talk about in the Internet space--
remember, people are not exclusive users. So I can use a 
Blackberry and an iPhone. There is a lot of dynamic activity 
that is going on.
    We have been involved in IBM, Intel, AT&T, Microsoft 
antitrust cases--on the side of stopping major company 
anticompetitive behavior. If Google or other people become a 
threat, anticompetitive threats to what I think is a tremendous 
industry, I am going to be there. It is not there.
    I have had several presentations made to me when 
DoubleClick and AdMob, et cetera, and if you really get in and 
understand the nature of the industry and the ability of new 
entrants to come, the ability to click and get away from a 
Google or a Yahoo or a Microsoft or somebody else, it is not 
yet, and I am not sure it will be in a situation that you have 
a real stifling of any real competition.
    The barriers to entry just aren't there. They are too easy 
to have one new, dynamic company. Facebook has just taken over 
the leadership of the number of people who visit it over 
Google. I mean, that happened within a period over a year or 
two. So the dynamic of our part of the industry is great.
    But look for lock-in, look for chokepoint, look for people 
who undertake policies to try to prevent people from leaving 
the site, to block interoperability, to use intellectual 
property in an anticompetitive way. Those are the signposts, 
the signals that you have got a company who is thinking 
anticompetitively and probably will wind up acting that way.
    Mr. Johnson. Thank you, sir.
    Mr. Reed?
    Mr. Issa. Mr. Chairman, can I ask how long we are going to 
go on in one round of regular order? I appreciate everyone 
answering, but we have been almost 20 minutes on your time.
    Mr. Johnson. Well, I am going to have no further questions. 
I did think it was important enough to hear from the panelists 
who wanted to respond. And I do know we have got votes coming 
up in about 10 or 15 minutes or so, too, so I was thinking we 
would recess for our votes and then come back and resume the 
questioning.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Johnson. And certainly, when I eat, I like everyone 
else to eat, too--even as much as I do--will.
    Mr. Conyers. Mr. Chairman, I would recommend that our 
friend, Darrell Issa, be allowed, if he chooses, as much time 
as you have had. [Laughter.]
    Well, and then, Mr. Issa is usually quite economical with 
his time, being a great businessman. Actually, I am hoping that 
some of the questions, or the question that I have asked, will 
kind of narrow the field a little bit so that we won't have to 
have 20, 25 minutes of questions, but----
    Mr. Issa. Thank you both, Mr. Chairman.
    Mr. Johnson. Thank you.
    Mr. Reed. I promise to keep my comments very short. It was 
a great discussion here between the academic and the practical 
and the rest, and I learned a lot about antitrust there. But 
one of the things that I thought was interesting about Mr. 
Black's comments about the ability to innovate on the Internet, 
and I go back to the line from ``The President's Men''--follow 
the money.
    So as we have this discussion about all the slogans that we 
heard from Professor Manne and Mark Cooper's testimony about 
what it all means, I think when you ask the question of is the 
Internet dynamic, it certainly is. But you ought to look at how 
it is getting paid. And then that brings us to the interesting 
question about the MapQuest point.
    Mr. Black brought up the point that he searched for the 
words ``mapping direction.'' Now, I don't know if those were 
words that the first results he saw were they paid for words or 
they were the words that came in Search. It doesn't matter. But 
most of us when we search, we actually search for the address 
we are going for. And the interesting about the ad word is that 
is what gets us into how do we pay for the Internet.
    So I certainly don't have the expertise of the antitrust 
lawyers here at the table, but I do know that my members, the 
development community, we follow the money.
    Mr. Johnson. Thank you.
    Now I will turn to Mr. Coble for questions.
    Mr. Coble. Mr. Chairman, thank you again for your earlier 
courtesy to permit me to go to the dermatologist. When I got 
over there, I was sort of hoping you had declined my request, 
but it worked out okay.
    Mr. Johnson. Well, I am hoping that my graciousness to you 
will inure to my benefit in the eyes of Mr. Issa as well. 
[Laughter.]
    Mr. Coble. Yes, I don't want to be in Mr. Issa's doghouse.
    But it is good to have the panel of witnesses before us as 
well.
    Mr. Feinstein, to what extent, if any, do the antitrust 
agencies take into account patents, trademarks and copyright 
claims into their antitrust analysis of transactions and 
conduct (a), and do privacy concerns ever factor into an 
antitrust analysis, or does the agency look at IP and privacy 
concerns as distinct issues separate and apart from their 
antitrust analysis?
    Mr. Feinstein. Let me address that in two parts, since the 
question was posed in two parts.
    Mr. Coble. Sure.
    Mr. Feinstein. Focusing first on patents and intellectual 
property, that portion of the question, we absolutely take that 
into account in our antitrust analysis, and it cuts across a 
great deal of what we do. It is obviously paramount in the 
pharmaceutical sector, and it is very important in this sector 
as well.
    And as I mentioned in my earlier remarks, you know, we 
perceive--I perceive, and I am only speaking for myself here, I 
guess, but I perceive the goals of, you know, the patent laws 
and the goals of the antitrust laws to be fundamentally 
consistent, which is to stimulate innovation and to stimulate 
competition.
    And one of the ways that the patent laws do that, of 
course, is to provide a period of exclusivity. That doesn't 
necessarily equate to a monopoly in antitrust terms, because 
there can be another patented product or process that competes. 
But there is also an endpoint to that exclusivity, and that in 
itself stimulates further innovation, if the system is working 
properly. But we definitely take those things into account.
    Mr. Coble. Okay, right.
    Mr. Feinstein. Now, with respect to privacy, I am going to 
focus on that really from the antitrust perspective rather than 
from the consumer protection perspective. That is a different 
bureau of our commission, and, you know, there are a lot of 
initiatives under way regarding the general question of 
privacy, particularly with respect to the Internet, but I am 
going to give a narrower response, which is the relationship 
between privacy and antitrust.
    And candidly, I think it is a relatively limited 
relationship. It is certainly not--it is important, but if 
there were, for example, in a proposed merger between two firms 
that competed on a number of levels, and one of the levels in 
which they competed were their approaches to privacy--Firm A 
offered certain safeguards regarding consumer privacy; Firm B 
offered a different set of safeguards, and they were competing 
with each other not just in terms of price but this sort of 
non-price competition regarding their approach to privacy--if 
they were merging, and that degree of competition were being 
eliminated, I think it would be relevant for us to consider 
that.
    Mr. Coble. Okay. Thank you, sir.
    Mr. Manne, the pace of innovation is rapidly accelerating. 
Companies that invest in innovation succeed; those that do not 
often fall behind. Is it a disincentive to innovation if 
government legal systems, particularly in Europe, force 
companies that make often risky initial investments to hand 
over their innovations to competitors, who oftentimes choose 
not to invest?
    Mr. Manne. I think the short answer is yes. I think that 
the risk of compulsory licensing and other sorts of activities 
that might force companies that have innovated and invested 
enormous amounts in developing intellectual capital to share 
that intellectual capital with their competitors is--does an 
enormous disservice to innovation. I think we have seen that 
with respect to Microsoft and other companies in Europe, as you 
pointed out.
    I think that this follows on your question to Rich--to Mr. 
Feinstein about the consideration of intellectual property in 
antitrust. Fundamentally, the area in which this problem arises 
is where there is intellectual property and as a remedy or 
through the course of some sort of enforcement action, the 
company is required to share its intellectual property with 
another company.
    And I think that it is probably a core problem that 
intellectual property is an essential part of the incentivizing 
of innovation, and the forced sharing of that with competitors 
can only diminish that incentive.
    Mr. Coble. Thank you, sir.
    Mr. Chairman, I see the red light, but I have one brief 
question additionally.
    Mr. Johnson. Certainly.
    Mr. Coble. Mr. Reed, is ACT supportive of quality control 
measures in app stores like Apple's that can be used to 
eliminate applications that use pirated intellectual property?
    Mr. Reed. I think I got the last of it, but absolutely our 
membership has no problem with quality controls in application 
stores that help provide a better platform.
    For those of you who have played with an iPhone or have 
seen the Droid or some of the new technologies, the user 
interface, how you interact with it is key. I mean, let us face 
it. It has got a huge cool factor. We have all seen it on the 
television ads. The way that they reach out to people is about 
saying, look, this is a product that you integrate into your 
life.
    What you don't want to integrate into your life is 
something that loses its battery, breaks, crashes, won't make a 
phone call. So absolutely our membership understands that there 
is some benefit, some huge benefit for their ability to reach 
customers, if the customers have a sense of comfort that the 
machine will continue to provide great things you can integrate 
into your life, but also can make a phone call.
    Mr. Coble. I thank you.
    Thank you, Mr. Chairman. I yield back.
    Mr. Johnson. Thank you.
    And I will now turn to the speaker--excuse me, the Chairman 
of the Committee, Mr. John Conyers.
    Mr. Conyers. Thank you.
    Mr. Morgan Reed, you told us that there were several 
critical issues on the horizon and that you hope the Committee 
would attend to them. What are they?
    Mr. Reed. Well, as we talked, the big issue of the table, 
of course, is a question about what will happen with Google's 
purchase of ITA. There are some smaller companies that are 
involved--Kayak. Although it has some risk-taking backers, it 
is a small company based in Connecticut with about, I think, 90 
employees. It is small. There is Mobissimo.
    So there are several mobile apps makers, who are concerned 
about what the outcome of the ITA merger means for them. Kayak 
has been incredibly successful and growing fast, so obviously 
they have some concerns.
    I think the other areas that we touched on a little bit 
with Mr. Coble is making sure that we have protection for 
intellectual property as we move forward. Even within the 
antitrust realm, IP is absolutely essential to small tech 
companies.
    One of the best ways that IP is valuable to us is we get 
bought. I mean, in one sense I am happy for the ITA folks, 
because they have a chance to get money and buy themselves a 
sailboat. And unfortunately, most entrepreneurs don't retire. 
But on the other hand, that only floats from the patents and 
intellectual property that they have. So as we move forward, I 
think we need to remember that IP protection is critical. And 
so we are concerned about that.
    And then last, but not least, we do worry a little bit 
about copyright in the sense that for our membership, 
especially those who do paid applications, copyright is their 
stock in trade--that plus trade secrets. But a lot of times we 
are writing applications for others, who create their own 
content--the New York Times, Washington Post or HufPo, Wall 
Street Journal. They all have content on the Web.
    Now, they are brilliant reporters, but I have yet to meet a 
reporter who is an amazing programmer. So the programmers hire 
us to write the applications for them. So long as the content 
industry is able to make a living and so long as their content 
is protected, I have an opportunity to get a job to write the 
application that goes on the iPhone or the Android or the 
Windows Phone 7.
    So absolutely, we have a symbiotic relationship with the 
copyright industry, because we want to facilitate their access 
to users.
    Mr. Conyers. Do others have----
    Mr. Black, you wanted to add to this discussion.
    Mr. Black. Yes, I would love to weigh in on that, because 
intellectual property for all my members, from hardware, 
software, services, is something they all value--patents, 
copyright, trademark. At the same time, we have come to 
understand that as important as IP is, when we deal in the 
competition space, it is very critical to respect the 
boundaries of IP.
    IP does not--should not trump competition policy, as I 
think the FTC made clear. The goal of both is to help promote 
innovation, so it is worth doing an analysis of the way in 
which in the modern, very changing and dynamic Internet space, 
the way in which copyrights and patents are in fact being used.
    The Congress has, and your Committee last Congress passed 
an excellent patent reform legislation, which I think 
recognized that as important as patents are, the system can 
nevertheless malfunction. We have similar malfunctions going on 
with the way the copyright system operates.
    So it is very important to respect IP, but we need to 
recalibrate how it operates in a very dynamic, changing space. 
And I think that is actually--and many of those issues really 
do touch on the borderline of competition policy. And we 
haven't, I don't think, frankly, grappled with it very well at 
all.
    Mr. Conyers. Scott Cleland?
    Mr. Cleland. Markets--free markets--can't operate without 
really good property rights. And, you know, competition needs 
property rights and people respecting them for it to work. And 
every now and then a bad actor comes along and uses innovation 
as a shield. Google says innovation without permission.
    Well, what you have got is let us do a real quick review. 
Twelve million books were copied illegally in the Google book 
settlement, and they are being sued by the publisher. Viacom 
sued Google YouTube for hundreds of thousands of videos that 
were copyright violations. Apple is suing HTC Google over the 
iPhone. Oracle is suing Google over their patents for the 
Android. Rosetta Stone is soothing them over trademark.
    There is a bad actor out there that is looking and not 
using intellectual property rights like other people, just like 
they do in privacy. So privacy and intellectual property can be 
anticompetitive in the hands of a bad actor, who is a serial 
offender of intellectual property rights or privacy.
    Mr. Conyers. Mark Cooper?
    Mr. Cooper. Mr. Conyers, I want to go to an example that 
has been mentioned three or four times, which is the newspaper 
industry. And this is why you really do have to look hard at 
the facts as opposed to the slogan.
    If you look at the newspaper industry, 60 percent of their 
lost revenue is in classified--that is, Craigslist, 
monster.com, E-bay as a two-sided market where people sell used 
things. Another 20 percent of their revenue has been lost to 
cable operators and to weekly journals.
    The overwhelming majority of their lost revenue is to more 
efficient advertisers, more efficient people who create 
audiences more efficiently than the newspapers do. It has 
nothing to do with the stealing or of copyrighted content. It 
has to do with the creation in digital space of entities that 
can more efficiently aggregate audiences.
    And so I agree that we need a balanced view of copyright 
and intellectual property, but to suggest that copyright cannot 
get out of hand, that patents cannot become anticompetitive 
goes too far in the wrong direction. And if we look at each of 
these industries, look at the facts, and newspapers is the most 
important one, we will discover a much more complex and nuanced 
reality.
    Mr. Conyers. Edward Black, is there any therapy for this 
anti-Google sentiment that we are hearing so much about this 
morning?
    Mr. Black. Well, the world that is created by the Google--I 
mean, I just wish there--I mean, if Google came up with a cure 
for cancer, I am sure Scott would find a reason that that is 
bad for society.
    Mr. Conyers. He shook his head. He would not.
    Mr. Black. Yes. It is just our world is so much more 
complex. We have so many competitors, so many companies. The 
kind of behavior, again, that we have seen in all of the major 
antitrust cases that were important to our industry showed an 
inclination to lock people in, to block interoperability, to 
prevent openness. Those are all things that are, frankly, 
contrary to the way Google is operated.
    Do they have a presence that is big? Do they have a great 
reputation that people would love to tear down? Yes. And that 
gives them some real presence. But I consider it very fragile 
and in that sense is not established and locked in the way that 
IBM hardware, the way Intel on chips, the way Microsoft in 
operating systems have built that strength. It just does not 
present the image that--I mean, I feel like I am Lewis Carroll, 
Alice in Wonderland when I hear the Internet described by some 
people. It just isn't the way the Internet is operated.
    Mr. Conyers. Well, Director Feinstein, Scott Cleland has 
called off several lists of offenses and invited us to consider 
prosecuting. Doesn't this have any effect on the way you look 
at the situation with Google?
    Mr. Feinstein. Well, we are certainly very much aware of 
Google's presence in many markets that are the subject of this 
hearing today. With respect to the ITA matter in particular, 
that is the one that I think it is a matter of public record 
that is being looked at by the Justice Department, so it 
wouldn't be appropriate for me to get into that specifically.
    I did, of course, touch on our investigation and ultimate 
decision not to challenge the Google-AdMob transaction earlier 
this year. But so just taking a step back, and I don't view it 
as, frankly, our role to sort of be focused on bashing any 
particular company; our role is to promote competition for the 
benefit of consumers and to address clogs on competition where 
we find them, but, you know, if you sort of take a step back, 
for better or for worse, you know, what we have seen with 
Google over the last decade is, you know, kind of a textbook 
example of what this whole hearing is about.
    You know, we have gone from a couple of guys in a garage, 
so to speak, which somebody alluded to earlier, to, you know, a 
firm that is now the target of a lot of challenges and a lot of 
investigations. And that is perhaps, you know, a very 
compelling example of how things can change quickly.
    Now, when we are doing an investigation, you know, we 
have--and, of course, we try to act quickly, because things 
develop in, you know, almost literally in real time; that 
happened in our Google-AdMob matter--but we do have the 
advantage of not just sort of observing from the outside.
    We have the ability to get into the company's internal 
decision-making. We have the ability to review their documents 
and to put their people under oath and try to understand what 
their incentives are, what their ability to act on those 
incentives may be to the extent that they may have 
anticompetitive goals in mind.
    And that doesn't mean we are always right 100 percent of 
the time, but we do have at least the ability, I think, to as 
quickly as we can come up to speed from a variety of 
viewpoints.
    Mr. Conyers. Well, Mr. Chairman, this is the first of a 
series of hearings. Somewhere along the line we are going to 
have to consider the wave of mergers that have become a pattern 
in our economy for the last two decades at least. And that has 
some significance and importance about it. I want to put that 
on the table.
    And don't you feel, Mr. Director, that the loss of 
privacy--we are now subject to an incredible array of invasions 
of everybody, not just citizens, but government alike. Does 
this present some new challenge that we have got to get our 
arms around?
    Mr. Feinstein. I absolutely agree with you that the value 
of privacy is paramount, and it is an issue that the commission 
is grappling with as we speak.
    But it is being done primarily from a consumer protection 
standpoint rather than specifically the antitrust perspective. 
They are not mutually exclusive, as I explained in one of my 
earlier answers, but that is an issue that the commission as a 
whole and certainly the director Of the Bureau of Consumer 
Protection are thinking about very hard.
    And they have also brought a number of actions, I think, to 
challenge the misuse of information that was supposed to be 
kept private. But it absolutely is a very important issue for 
the FTC.
    Mr. Conyers. Mark Cooper?
    Mr. Cooper. Mr. Chairman, I want to reinforce the two 
points that the director has made. First, privacy is a 
tremendously important issue, very much a digital age issue, 
because digital technologies allow for gathering, aggregation 
and processing of a massive amount of information.
    But second of all, it really isn't an antitrust issue. And 
there are differences of opinion about this, but if you try and 
do privacy in these merger cases as an antitrust issue, you 
confront the problem that the natural solution to a competitive 
advantage gained by having a lot of personal information would 
be to share it. I mean, that is the solution we frequently give 
about most favored nation access to whatever asset is--we think 
is--rendering a competitive advantage to a dominant firm.
    And so the simple fact of the matter is that when you play 
out the remedy for privacy problems in the context of mergers 
and antitrust, I think you end up in the wrong place. So that 
means it is even more important for the agency to deal with 
privacy as a consumer protection issue. And it has been 
languishing for a decade, and it is now clear the public want 
it. It is time to do it, and now is the time to move forward on 
the privacy issue.
    Mr. Johnson. Thank you.
    Mr. Issa. Mr. Chairman, due to the hour, I would ask that I 
tee up a thought and then we set a time to come back, if that 
is okay with the Chairman.
    Mr. Johnson. Mr. Issa is normally not high maintenance. 
[Laughter.]
    Mr. Issa. I will be incredibly low maintenance.
    Mr. Chairman, I would only say that when we return, my line 
of questioning will beg all these witnesses--will they tell us 
not that we should have inaction, but among the various actions 
we could take on antitrust, intellectual property reform and 
the like, which ones we should begin looking at on a bipartisan 
basis? Because I think we all recognize that they disagree 
maybe on some parts of the problem, but our jurisdiction is not 
to second-guess antitrust. Our jurisdiction is to write 
antitrust law. Our jurisdiction is to write IP law.
    So I am hoping that becomes the subject that they are 
prepared to answer when we get back--and after you have enjoyed 
your lunch.
    Mr. Johnson. Well, your segue is quite creative.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Johnson. No need for an opening statement, then, for 
you. [Laughter.]
    You will just come back and ask questions.
    Mr. Issa. You got it.
    Mr. Johnson. All right. Thank you, sir.
    We have got three votes, and it will take us about 15, 20 
minutes to go vote, come back over.
    Mr. Issa. 12:30?
    Mr. Johnson. And Mr. Issa is trying to take a lunch break 
on us. [Laughter.]
    I don't think we are going to----
    Mr. Issa. I will come sooner, if you do, Mr. Chairman.
    Mr. Johnson. Yes, I think we will come right back after 
votes and let the witnesses--they don't need that much time to 
respond. I think we can----
    Mr. Issa. Mr. Chairman, you don't know how long the lunch 
hour wait is when they try to get something in our cafeteria.
    Mr. Johnson. Well, we want to try to get them out before 
the cafeteria closes. [Laughter.]
    Thank you. We will recess and be right back.
    [Recess.]
    Mr. Johnson. All right. We will go back into session now.
    And, Mr. Issa?
    Mr. Issa. Thank you, Mr. Chairman.
    I hope my questions were worth waiting for. Or as Henry 
Kissinger said during the height of Watergate, I hope you have 
questions for my answers. As I go down the list, let us start 
with our regulator here.
    Mr. Feinstein, do you today believe you have the tools you 
need, no matter what the market unfairness is. In other words 
do you have solutions for each problem? Even if you don't 
accept some of the problems here today, if they become 
problems, do you have the tools?
    Mr. Feinstein. The short answer to that question, sir, is 
yes, we believe we do. The thrust of the commission's testimony 
today is that the antitrust laws are written sufficiently 
flexibly to enable us to address competitive problems in 
dynamic markets, and we think that our track record is 
consistent with that.
    Mr. Issa. Is the Hart-Scott-Rodino process broad enough in 
what it envisions and what you get to interpret to deal with 
some of the problems here today, if you believed in the future, 
let us say based on various experience, we allow something 
through and then in retrospect say that wasn't a good idea? 
Will you have the flexibility to make those decisions 
differently than the past? Because for a long time, I think we 
all agree it has been fairly pro forma unless a company was 
sort of on the front page and another company on the front page 
were suing them.
    Mr. Feinstein. Are you asking if the Hart-Scott-Rodino 
process itself is sufficient? I just want to make sure I am 
clear on the question.
    Mr. Issa. You know, as I said before the break, I want to 
talk about statutory tools that we are giving you, the things 
that are purely within this Committee, not the judgment of 
whether you all are doing a good job or whether there is an 
emerging, but do you have the tools? So that was why I chose 
that, having gone through the process in my own company several 
times.
    Mr. Feinstein. Sure. Well, as you know, that process is a 
pre-merger notification obligation with respect to deals of a 
certain size between parties of a certain size. And, you know, 
from time to time there have been adjustments to some of the 
thresholds of reportability. But as a general proposition, I 
think that system is working pretty well.
    We are in the process right now of making some adjustments 
to sort of--we propose some adjustments to the types of 
information that would be produced, and we are trying to in 
some respects streamline the reporting process and also make 
sure that we are getting what we need.
    Now, there are, of course, transactions that for one reason 
or another aren't reportable, and sometimes those are 
investigated and challenged after they have been consummated.
    And then, of course, there is the whole body of antitrust 
law that applies to conduct matters rather than mergers at all, 
such as the Intel case, which is necessarily somewhat less 
forward-looking, because the conduct has already occurred.
    With mergers, of course, if it is a non-consummated merger, 
you are trying to make a prediction about the likely 
competitive effects.
    Mr. Issa. Okay. And I would say that organic growth, nobody 
in the dais is going to fault you for the fact that it is a 
slow process to determine the threshold where mergers--it is a 
pending question, and hopefully, it is answered in a timely 
fashion.
    Let me go through the intellectual property, which all of 
you touched on to a greater or lesser extent. This body sets 
not just what is protectable, but we set timelines. A few years 
before I came, the wisdom of this organization was to 
retroactively extend both patents that were in process when 
they went from 17 to 20. They actually added a year, year and a 
half to some patents retroactively, and people had to pay for 
them.
    We made Mickey Mouse not expire, even though it was decades 
old--black-and-white Mickey Mouse, by the way, not expire. So 
we have retroactively given value by lengthening IP. Do you 
today, as my core question for all of you--which won't take 
more than 20 minutes, Mr. Chairman, to answer----
    Do you believe that we should look at----
    Mr. Johnson. So noted.
    Mr. Issa. Thank you, Mr. Chairman.
    Do you think we should change or consider changing, on a 
very strategic, well-thought-out basis, certain IP expirations? 
And a good example would be when should DOS 3.0 lose its 
exclusivity of copyright? When should the Linux people be able 
to look at a portfolio of no longer used or abandoned software 
and bring it into their consideration? When should an Apple app 
stop being--the code being pretty to understand, but when in 
fact could you should be able to just grab that code like an 
icon and throw it into something?
    That is my real question, because I am looking at 
innovation and barriers to entry. And sometimes copyright with 
a very long time to run is one of those barriers that we have 
the authority to change and perhaps speed up innovation.
    I will go right down the list as you see fit.
    Mr. Johnson. And, Mr. Issa, you said that the answers would 
not take 20 minutes, but you did not say your question would 
not take 20 minutes.
    Mr. Issa. Yes, more or less, Mr. Chairman. But that is all 
for my question.
    Mr. Johnson. All right. Thank you.
    Mr. Feinstein. I guess I will take the first shot at that, 
and I can promise that this answer will not be 20 minutes. It 
might not even be 20 seconds.
    That strikes me as an area that would be well worth 
consideration, but I don't know the answer. And it is not one 
that the commission certainly has taken a position on 
formally--that is, whether some of these timeframes should be 
adjusted.
    But I think you are exactly right that we want to find the 
right balance between stimulating innovation and minimizing 
entry barriers that stifle future innovation in some sense and 
also stifle competition. But what the right number might be I 
don't know.
    Mr. Issa. Thank you.
    And, Mr. Black, as I said, I will allow you to say some of 
your members are on one side and some are on another side of 
the answer.
    Mr. Black. Well, in fact, I think there is a pretty broad 
consensus that the IP laws, which, you know, the same copyright 
laws will cover a song by Lady Gaga and a critically 
important----
    Mr. Issa. Please, use Frank Sinatra. [Laughter.]
    Mr. Black [continuing]. Software that runs a--or industry, 
and, yes, so I think some differential treatment.
    And I think when in my testimony I talked about cost-
benefit analysis of IP, it is exactly that. There is certainly 
some benefit that can come from giving IP rights to promote a 
certain category innovation, but it is somewhat of a zero-sum 
game. You interfere with the market and you interfere, if you 
will, with free speech on the other side when you take a 
certain kind of activity and say now it is protected by IP.
    The copyright terms are frankly, you know, can be over 100 
years easily, which in a world of Internet with documents and 
things going around, it creates litigation tales that can tie 
up the Internet. So I think looking at that is very important.
    Patents same issue--and in patent legislation we have 
actually said that different industries may well need some 
differential treatment, because the way the system works in the 
real world with different industries, for the pharmaceuticals, 
is very different than the way it works for hardware industry.
    So a review of IP law--not to eliminate IP law; it is 
critical we have IP--but to recognize that in a complex world 
we have made one suit try to fit many, many different players. 
And it is not working well. It is having a lot of anti-
innovation and anticompetitive impacts.
    Mr. Issa. Thank you.
    Mr. Reed?
    Mr. Reed. Interestingly enough, I think that the question 
of copyright as it applies to software in this instance is a 
little bit of a misnomer because of something that you said. 
You said when should DOS--when should that copyright come up? 
When is the last time anyone has actually used DOS? I mean, 
that is the interesting part of this question and why patents 
become very important, but----
    Mr. Issa. But my question was not using DOS. A hundred 
percent of the lines of code, the thought, every part of that, 
if it were open source, any portion of it could be used.
    Mr. Reed. Sure. And as somebody who has actually developed 
on some of the--some Linux applications, what is interesting 
about it is what protects you as a developer of software that 
is not open source is actually more of trade secret than true 
copyright, because as we have seen time and time again, you 
have to do a little bit more than change the name of the 
variable.
    But realistically, you can make something that works alike, 
run alike, functions alike. Anyone who looks at the iPhone apps 
know that there are hundreds of apps that are essentially 
identical to each other. There are so many that in fact it is 
becoming an area of debate.
    So copyright in and of itself is not the strong arm of 
pushing innovation forward. In fact, it is one of the reasons 
why we looked at----
    Mr. Issa [continuing]. The case, then why protect it for 75 
years beyond the life of the author?
    Mr. Reed. I think that the rest of the fundamental 
structure of the copyright industry, and I use the term broadly 
because it covers so many things----
    Mr. Issa. Now, Mr. Black was very quick to say we would 
have to parse it by industries and types of use, which we can 
do. We are funny like that. We have the authority.
    Mr. Reed. I am well aware of the jurisdiction of the 
Committee. I think at this point in time I would reserve 
judgment, because I would have to see what the legislation 
looks like. It is easy to be glib and say, ``Sure, we should 
just chop up the pie in all these pieces.'' But I think we all 
know the devil will be in the details, just as it was in the 
Mickey Mouse decision, which was an interesting--which is an 
interesting come about.
    But I think the more important question is something that 
you know a lot about--is that we need to improve the quality of 
software patents and patents in general for a major reason.
    We know copyright isn't the strong arm to help us get 
innovation. But what we know from it is the more that I am 
protected by a quality software patent, the more I can share, 
the less I have to depend on trade secret--and frankly, the 
less I have to depend on the 75-year extension on my copyright.
    So in that sense I think we need to look--we need to look 
at other ways to make sure that software is encouraging----
    Mr. Issa. Thank you.
    Mr. Cleland?
    Mr. Cleland. Yes, I have a very, very strong bias for the 
Constitution, and the Constitution gives property rights, you 
know, constitutional basis. And so, you know, my view is, you 
know, respect property rights. And if you are in a gray area, 
side with property right. That is where the Constitution is, 
and that has proven to work real well.
    I also will add a comment that there are many out there 
that have taken the word ``innovation'' to mean let us not look 
at property right. It is a way of kind of getting around 
property right.
    And there is, you know, the free culture movement of 
Lawrence Lessig and many others, the open source movement, who 
basically think ``I don't think it should be copyrighted 
software.'' I strongly disagree with that, because what you are 
doing is you are creating what they say--isn't information 
common?
    And that is, you know, as I said in my testimony, that is 
death long-term for economic growth or real innovation, for 
jobs, for the economy, for property. If people go around and 
say, ``Well, we don't like the Constitution, because it 
protects property. You know, this tech stuff changes 
everything, and we should just mash it all up and remix it and 
innovate like they do in, you know, in Silicon Valley and those 
people who have that view.''
    So I am very, very suspicious of people that say there 
shouldn't be any property rights in technology, because it has 
proven to work very, very well.
    Mr. Issa. As a holder of 37 patents, trust me, I will 
debate the time. I will not debate the right under the 
Constitution, except on your side.
    Mr. Manne?
    Mr. Manne. Remarkably, I think I agree with everything that 
Scott just said. [Laughter.]
    Mr. Issa. We can move on to Mr. Cooper. [Laughter.]
    Mr. Manne. I would say in response to your suggestion about 
the possible tailoring of the length of patents and copyrights 
in particular industries, please don't micromanage like that. I 
think it is a political can of worms. Industrial policy rarely 
worked. I think it would be almost inevitably a--a process that 
would result in an outcome that is far worse than intended and 
far worse than what we have now.
    That doesn't mean that I think that the specific term of 
patents that we have today in copyright is somehow optimal and 
absolute. And it is always worth considering whether we can do 
better, but doing better by tailoring those--those lengths and 
the various terms that go along with them to particular 
industries, I cannot imagine that functioning in the way that 
we would like to see it functioning, if we tried it.
    If you want, you know, a couple of suggestions that I think 
would be feasible to do, that I think would be helpful----
    Mr. Issa. Just bear in mind that if you design an original 
dress, you are not even entitled to a patent in America. So we 
do tailor by industries. The French give 3 years. We give zero.
    So one of the challenges is we start off on this side of 
the dais knowing that we have already picked winners and losers 
in lengths. The only question really is are they somehow 
inherently flawed? And if not, we would love to leave them 
alone as much as you would like to.
    Mr. Cooper, you get the last of my 20 minutes.
    Mr. Cooper. Interestingly, the founding fathers hated 
monopoly, and they only granted the Congress the right to 
create an intellectual property monopoly grudgingly and for a 
specific purpose. And the purpose was intellectual property was 
supposed to be an incentive to create. It was not supposed to 
create a monopoly of indolence. And that is the balance that I 
think you are concerned about.
    I would suggest that given the immense fluidity, the huge 
market created in the digital space, you could be shortening 
these copyrights. If you have an idea and you cannot produce a 
stream of income in a shorter period of time, then given this 
immense opportunity, maybe it is time to put it into the public 
domain, as Jefferson thought. That is a general idea.
    On the other hand, picking winners and losers and picking 
timeframes requires a fairly sophisticated analysis of how long 
it takes to invent and recover. I would suggest you might look 
at other issues and help the antitrust authorities by looking 
at things like the holdup problem, the harm and intent of the 
copyright, how it is being used. Author and work--we are 
struggling to figure out author and work in books, and you have 
made a point that there is a----
    Mr. Issa. Mr. Cleland noted a rather large lawsuit related 
to one man's interpretation of author and work.
    Mr. Cooper. Yes, no, and frankly, my suggestion was that 
the folks who were scanning those should have held them back 
for 5 years to put pressure on you folks to deal with it, to 
give the authors time to come out of the woodwork.
    So I would look to ways to sharpen the tool that the 
antitrust authorities have. Of course, we know that mucking 
with monopoly privilege is a very, very dicey business. And the 
founding fathers really did not want to go there.
    Mr. Issa. Thank you.
    Thank you for your courtesy, Mr. Chairman. This was 
insightful for me, and I hope for the rest of you. Yield back.
    Mr. Johnson. Well, thank you, Mr. Issa. And I think it is a 
intriguing issue that you have raised. Perhaps some would argue 
that it is outside of the scope of competition policy, but I 
think it could be argued that this issue could have some 
bearing on competition policy.
    Mr. Issa. Mr. Chairman, if I can note, many years ago I had 
an IndyCar team for my Viper security product, and at that time 
Penske was dominating the field. And the one thing we knew 
about Roger Penske is he sat on the board that did the rules. 
And whatever gave him an advantage seemed to be within the 
rules, but not evident. And the next year when it was evident, 
we had a change of rules.
    Now, ``majority'' rules is said a lot around here but, 
trust me, he who writes the rules also rules. So I view 
competition as are the rules understandable? Are they fair? Are 
they consistent? Can they be predicted? And that is why I asked 
the question.
    My theory is, yes, we may have to change the rules, but if 
we don't change the rules, then inherently the Federal Trade 
Commission and the courts will constantly be dealing with how 
do they deal with the side effects if the rules are not 
promoting innovation and limiting monopolistic power 
inherently?
    All companies, including my own, will seek to be monopoly. 
They will seek to get that premium. They can't help themselves, 
because it is more profitable to be a monopoly.
    So although you are right, it is outside the general scope 
of what was on today, it is exactly where I think we have to 
chase the rabbit down the hole to get to the real problem that 
monopoly building is because of the system that allows monopoly 
building and a profit margin that encourages it. And that is 
where I think you and I can really work together in the coming 
Congress.
    Mr. Johnson. Well, I don't think that we should be afraid 
to go down the hole, as you say, if you are likening it to 
going down a hole. I don't think we should be afraid of that, 
and I do think there are so many views and so many ways to 
slice that loaf of bread in an intellectual fashion that 
perhaps we could see value in moving forward in that way. So we 
will take a look at it.
    Of course, the overall issue is probably outside of the 
scope of this Subcommittee, but we butt up against these kinds 
of intellectual property issues so much in competition policy.
    And so having said that, I will ask for questions now from, 
if there are any, from my colleague, Mr. Gonzalez, from Texas.
    Mr. Gonzalez. Thank you very much, Mr. Chairman. My 
apologies to you, my colleagues and to the witnesses.
    Obviously, there is more than just one thing occurring at 
any one time on the Hill, and I was not here for the benefit of 
your testimony, and so if I cover something that has already 
been asked or you covered in your testimony, again, I 
apologize. I know my staff is here, and they are going to be 
happy to point that out later after my questioning and such.
    But there were some comments made when I was in attendance. 
One of them was, and I am trying--economic content or I don't 
know if that was economic impact or whatever. Has it reached a 
certain point? What is going on out there in this new world of 
commerce?
    But it all comes down to the sale of a product or a service 
and innovation and how we do things and how the innovation and 
technology impact this. My own belief is that we don't abandon 
the established principles that have been there for a very, 
very long time and have served us well.
    There are those that believe that technology, today's 
technology, presents us with a different set of facts that 
allows us to abandon those particular principles. It wasn't 
that long ago, as I remember, that Microsoft was in fact 
saying, ``Look, technology as such--let the market forces go 
forward. They are little different than they used to be. And 
you have to accommodate temporary monopolies.''
    And that was actually adopted by many individuals. They 
just figured that technology is moving forward at such a pace 
that that would normally happen. Now, I did not subscribe to 
that--and then we have a settlement.
    Let me read you from a New York Times article by Paul 
Krugman, June 6, 2008, in his column, ``In 1994 one of those 
gurus''--making reference to someone that saw what was 
developing--``Esther Dyson, made a striking prediction that the 
ease with which digital content can be copied and disseminated 
would eventually force businesses to sell the result of 
creative activity cheaply or even give it away. Whatever the 
product--software, books, music, movies, the cost of creation 
would have to be recouped indirectly. Business would have to 
distribute intellectual property free in order to sell services 
and relationships''--and the most striking sentence--``and we 
will have to find business and economic models that take this 
reality into account.''
    I think that is what all of us are trying to do, and that 
is to accommodate the changes and such. The interesting thing 
is, you know, where are we? Who are the gatekeepers? How does 
modern commerce really conduct it? And you may say, ``Well, all 
this is developing. We don't know exactly.'' But, I mean, 
Barnes & Noble will tell you. Borders will tell you. 
Blockbuster will tell you.
    So there has to be something, and it is called profit, and 
there is going to be different ways of being able to do what we 
always did with intellectual property, products, services and 
such that had value. But in this environment it is a little 
different.
    What will be the economic generators that will represent 
the profit? It is going to be subscriptions. That is one way of 
doing it. But not everyone can plug into a subscription model, 
where someone basically pays for whatever they are receiving. 
The other will be ad revenue. Ad revenue. And this is not going 
to be a big thing--Google is big and bad and all that thing; 
they do no evil; they do little evil, or whatever.
    The question is why shouldn't the old principles still 
apply regardless of innovation and such? And haven't we already 
reached that critical point where this technology has totally 
changed the way we do business in America? I mean, I know how I 
shop. It is so different. And I am 65, so you can imagine 
everybody that is younger.
    Anybody believe that technology somehow will force us today 
to adopt business models that will abandon the traditional 
principles of monopoly and antitrust? And I want to start with 
Dr. Cooper.
    Mr. Cooper. There are two pieces to that answer. One piece 
is the business practices that we have observed in a series of 
cases like Microsoft and Intel are the same old nasty business 
practices that Rockefeller and the robber barons were dinged 
for. The anticompetitive business practices have not changed.
    The new element in a digital industry, and I talk about it 
in my testimony, is the technological lever, that a key 
platform owner has, to undermine potential competitors. That is 
a new one. Rockefeller could make a deal about rates and 
disadvantage his competitors, but he couldn't muck with the 
track so his competitors' cars wouldn't roll.
    Microsoft was able to make using Navigator a jolting 
experience. Comcast was able to undermine the quality of 
BitTorrent. That technological lever requires closer scrutiny.
    But I agree entirely with your basic premise that we have 
simply entered a new age. Old business models--subscription, a 
la carte sales--you did mention the most basic one is one off 
sale. Most of the things in America are bought by a first sale. 
We buy it and we have it. We have got that in music singles 
these days. We didn't have that 15 years ago. The music 
industry sold 1.6 billion singles last year--humongous 
potential. So that hasn't changed.
    What has changed is tremendous reduction in transaction 
costs, tremendous transformation of the possibility of 
production. So I agree exactly. The traditional values I call 
them. Some people say old values. I like to use traditional 
values. The traditional values that got us from the pre-
Industrial Age into the Industrial Age that made the American 
century in the economy will work just fine in the digital.
    Mr. Gonzalez. Thank you.
    And I know my time is up, but I want to give each member of 
the panel just a minute to just comment. I mean, it is a simple 
question. I mean, there are really people that believe that we 
cannot continue as we have since time immemorial with certain 
legal principles that have assured competition.
    Mr. Manne?
    Mr. Manne. Thank you. The distinction that Mark identified 
between the ability to foreclose competition through non-
technological means and technological means is a distinction 
without a difference. Whether you can foreclose access to the 
railroad by fiddling with the technology of the railroad or 
whether you can do it through contracts and pricing doesn't 
change, in my mind, anything about the way we understand 
foreclosure and the way our laws of developing economics have 
developed to understand whether those kinds of practices are 
pro-or anti-competitive.
    Mr. Cleland. I don't think that, you know, technology 
should change laws or ethical practices or what is right. I 
mean, what you are describing is technology determinant, which 
is if technology enables it, it should happen, it should be 
allowed.
    And there is a lot of things that can be done with 
innovations that are unethical, illegal or disastrous. And so, 
you know, innovation--there can be good innovation; there can 
be bad innovation. And the problem with where the Internet is 
gone, and that example you said about it allows content to be 
out there very free--there is an inherent bias for an 
advertising model.
    We would not have a problem in the Internet with 
advertising right now, had the FTC enforced antitrust law and 
not allowed Google-DoubleClick to get through. Basically, the 
FTC tipped Google to a monopoly. They gave them all the users 
they didn't have, all the advertisers they didn't have, and all 
the publishers they didn't have. And no one else is even close.
    I testified before the Senate on this. All the things I 
predicted on that of how that would tip them have occurred. 
That was a seminal decision, and the FTC blew it. I was in. I 
talked to all the commissioners on that. They had a choice to 
make, and they made it wrong.
    And now we are living with the ramifications of that 
terrible decision, because basically, we aren't having a 
subscription model and an ad model. What we have right now is a 
monopoly ad model that is predatorily going after subscription 
model.
    Mr. Gonzalez. Mr. Reed?
    Mr. Reed. I would actually agree with Mr. Manne about the 
difference without a distinction. I think the one change or the 
one reality we have to recognize in the high-tech era, if we 
call it anything like that, is that the rules need to be 
applied equally.
    You mentioned earlier cases, and I think what we have to 
understand is since the door has been opened, since the 
invitation has been extended for antitrust to be in the 
business of high-tech, what this Committee and the Justice 
Department and others need to do is make sure they are applied 
equally and so that it is not strictly applied to one company 
with greater force than to another.
    Other than that, I think we have to take a very cautious 
approach to it, but as long as the rules are applied equally, 
businesses can make intelligent decisions, the FTC can make 
intelligent decisions about the direction it goes. I think that 
it is core. It is more about the fairness part of it.
    Mr. Gonzalez. Mr. Black?
    Mr. Black. Very briefly, fundamentally, antitrust is really 
about power and the ability to deal with abuse of power by the 
people who have power. The desire to dominate is human nature. 
We understand that. We have simply concluded that from a 
societal standpoint, we want to curb that to some extent, and 
yet not kill the energy that goes behind the drive to succeed.
    But what we face in the high-tech world in many parts of it 
is that technology has challenged old business models, and we 
have seen a counter attack by the business models trying to 
preserve in some cases really obsolete ways of doing business. 
And a lot of intermediary players, frankly, have been made 
obsolete, and they are trying to fight back and attack to do 
it.
    And it is a little bit like the horse and buggy makers who 
tried to stop paved roads from coming in the way. It doesn't 
mean the new way is necessarily better. I think maybe it is, 
but it really is inevitable that we will have a digital and 
global marketplace, and we have got to deal with it in a 
realistic way.
    And old models may have made certain players happy, but we 
need to find new business models, and they are being created. 
And it is not as simple as subscription versus, you know, ad. I 
think there are going to be a lot of hybrid variations of how 
to do business here, and we do want to let experimentation take 
place.
    We don't want to say right off the bat--I mean, advertising 
on the Internet as a very active part of funding is relatively 
new. We are not talking about decades. We are talking about a 
much smaller timeframe. So we need to let things play out.
    At the same time we have always been committed that when we 
see a real chokepoint, when we see artificial barriers being 
created, when we see players who have a lot of power making 
conscious efforts to in effect block people, then that takes 
some extra scrutiny, if not real action.
    Mr. Gonzalez. Thank you.
    Mr. Feinstein? If you can get a little closer----
    Mr. Feinstein. I am going to decline Mr. Cleland's implicit 
invitation to revisit the DoubleClick decision, which in any 
event preceded my time at the FTC.
    But I do want to answer your question by saying that there 
is no question that business models are evolving. There is no 
question that technology is evolving very rapidly. And our 
challenge is to make sure that we understand these 
developments.
    You know, we have very talented people, both lawyers and 
economists, and who specialize to some degree across the bureau 
of competition and in high-tech markets. And so we are, you 
know, we are--and there is a sense in which we are all playing 
catch-up ball in terms of the facts and understanding the 
models.
    But I don't think we need to change the legal mechanism 
that exists under the antitrust laws to address problems that 
the new models or the new technology may bring to bear.
    Mr. Gonzalez. Thank you very much.
    Thank you for your patience, Mr. Chairman.
    Mr. Johnson. Thank you.
    Next we will hear from Mr. Polis.
    Mr. Polis. Thank you so much, Mr. Chairman, and what an 
important panel, and a fascinating panel as well.
    I will have a few comments to start. There is a couple of 
areas I want to get into. During the earlier part of the panel, 
I was trying to look up some viewership figures. There was some 
testimony, I think, from the panel, and Mr. Cleland was 
somewhat alarming about this television aggregation that was 
being lobbed toward Google.
    And I looked at the World Cup viewership figures, about 715 
million viewers worldwide. Of those, on YouTube were about 
239,000. So that was a market share of--the little calculator 
on my laptop had a negative four exponent, which was I couldn't 
figure out what that meant. Then I went on Excel and put out 
the--I am not a math guy--so it is actually .0003 or .03 
percent of the World Cup viewers viewed it on YouTube.
    So now maybe that is due to a marketing failure of World 
Cup to look at some of those new media outlets, but I think 
what it shows is that much of the viewership and much of the 
media content is still delivered over legacy mechanisms. And 
obviously, this hearing is not about ABC, which broadcast the 
final game of the World Cup in the United States, which 
attracted some major subset of those 715 million viewers, but 
it is about in part the company that owns the venue that 
allowed for 239,000 people to view it.
    One of the critical components of all the content, the 
content that is on YouTube and other user generated sites, is 
that the copyright is retained by the creator of the content, 
and it is very simple for the creator of the content to take it 
off of YouTube and put it somewhere else. Insofar as YouTube 
has a business model, it generally is aligned with working out 
some type of revenue share with regard to the rights that may 
or may not involve exclusivity.
    Certainly, if looking down the road we saw some 
monopolization of content right with one particular outlet, I 
think that would be of antitrust concern. But I am not so sure 
that with regard to the delivery mechanism separated from the 
content rights, there is nearly as much concern.
    Before I get to the next question, I would like Mr. Black 
specifically to comment on that, as well as comment on the 
switching costs, which I think could very well be in this 
equation as well, if somehow an outlet made it more difficult 
to switch your content that you own to another outlet or for a 
user to switch to another outlet. That also could be of issue.
    But I would like to see if Mr. Black would like to address 
that. I will give Mr. Cleland a chance as well.
    Mr. Black. Well, the whole concept of switching costs is a 
very important, I think, consideration in antitrust law in 
general and deserves a lot of scrutiny. Keep in mind that 
antitrust cases, the real major cases that have been brought, 
and the Supreme Court has repeatedly said are fact-based, and 
the facts of really getting into deep analysis of what is 
involved, what are the barriers to entry, what are the 
obstacles for switching become a critical part.
    In my testimony I talked about the IBM case and the deep 
integration into an enterprise's operations of the mainframe 
and the problems that caused in terms of the ability to switch. 
The use of intellectual property----
    Mr. Polis. On that real quickly with the gray--do you see 
any of those warning signs about the strategic direction of 
Google causing difficulty to switch among their users, or do 
you think those warning signs are absent?
    Mr. Black. No, I really see--frankly, of pending cases, I 
see the Comcast merger--a much greater focus should be given to 
that and a concern than I do with other things going on on the 
Web.
    There you have established entity, which has a major, you 
know, dominant duopoly role in terms of audience united in 
general, the commercial content industry is fairly 
concentrated. And so that merger, although we have not yet--
yet--directly involved ourselves in that proceeding, we have a 
lot of questions that are being asked, among our membership 
about whether or not--how that would play out.
    I think it raises very serious questions, and that merger 
would clearly have impact in consolidation and choice of 
content programming. It is hard to predict all the 
implications, but it raises the possibility of abuse in a 
variety of ways.
    Mr. Polis. Before I actually get to Mr. Cleland, just a 
quick question for Mr. Feinstein on this.
    Is your ability to look at switching costs--is that 
something that you sufficiently have, feel you have, under 
statute with regard to analyzing the competitive situation in 
various industries?
    Mr. Feinstein. I believe that it is, and it is absolutely 
something that we look at very closely when we are conducting 
investigations.
    Mr. Polis. Great.
    Let me give Mr. Cleland a quick chance to respond, and then 
I want to get onto----
    Mr. Cleland. Yes, to personally address your World Cup 
point, thank goodness we do have copyright, and people do 
respect it. And the only way to produce something like the 
World Cup or produce high-quality content is to have a business 
model that can reap the benefits.
    I did an interesting math on on my blog last night. Google 
sent 16,425,000,000 ads a year, according to their 
calculations. They make one-sixth of one penny per ad. So no 
one else is going to make much money other than Google in that 
model, when you do the math.
    Now, to get to your question, I most respectfully disagree 
with the one click away view about the user and there is no 
sticky. That is a false direction of the way that they try and 
frame it. Consumers are not the consumer here. Users are not. 
Users are the product. The consumer or customer that pays all 
of the freight for Google, all of the freight, the $26 billion 
a year, are advertisers and publishers. They are the consumer. 
They are the customer.
    The problem--and I came up with a term to explain this in 
the Senate--is there is an Internet content paradox. Users, who 
are the consumer here, have almost infinite choice to get the 
content. However, on the other side, suppliers, in reaching all 
users, have a bottleneck. If you are an advertiser and you want 
to reach the Internet audience, you have got Google and then 
you have got Microsoft and Yahoo. And, you know, it is 75 
percent of the audience versus the rest.
    And every advertiser has decided with their feet. They are 
going, ``Well, I want to get to all the customers. I want to 
get all the people who will pay me so that I can produce 
content.'' So the switching cost, in order to do it fairly and 
accurately in this business model, you must look at the 
switching cost for a consumer advertiser, a consumer publisher. 
And those switching costs are extraordinarily high.
    Mr. Polis. If I can just real briefly follow up with that, 
Mr. Chairman, can I have about 2 more minutes or so? Oh, thank 
you so much.
    The most popular YouTube video is a Justin Bieber video--I 
don't know why it is the most popular, but it is--about 310 
million views. Now, alternate models--if for some reason Justin 
Bieber or his guardians didn't want that information on 
YouTube, they could make that available on a justinbieber.com 
site. They might not have the full 310 million viewers. Some of 
them might come with the platform, but I probably believe that 
in its own right that would garner hundreds of millions of 
views from teenage girls across the country regardless of how 
it was placed on the Web or where.
    Now, there is the business model element as well, and 
obviously Justin Bieber's business managers have chosen to 
outsource to YouTube the monetization of that specific content, 
but he could have done that in-house as well, had they decided 
to. It is a very simple technology, very easy to implement. He 
could have sold it through sponsorships or anything else. Any 
content provider is in that same situation.
    But I do want to get on to the Apple and iPhone discussion 
as well. I talked to a app maker in Colorado about this, and 
this is actually in reference to, I think, Mr. Reed's 
testimony. Of course, a brief history lesson--we all know the 
story, of course, the proprietary Apple operating system that 
led to them having a declining share, of course, on the 
hardware market, the computer market, with PCs and the Windows 
operating system generally conceding as winning that war.
    And to a certain respect I think, Mr. Reed, you would 
argue, and I would tend to agree, that that is a kind of 
natural guardian to this. To the extent any operating system 
becomes too proprietary, it loses a competitive advantage. So 
it is a very fine balancing issue that any owner of a 
proprietary system might be able to engage in.
    So the question is--again, this is from one of the app 
makers in my district, who says the real problem here is 
Apple's ability to prevent the consumer from choosing what 
applications are allowed on their device.
    Now, that may very well be an issue, but my question is to 
what extent is it an antitrust issue and to what extent is it a 
competitive issue of Apple stabbing their own foot, as they did 
with regard to operating systems, if they create too 
proprietary a standard that will reduce, I think you said, a 15 
percent market share that iPhones or iPads have today to 
perhaps an even lower market share?
    Mr. Reed. Congressman Polis, I think you just answered my 
question. The reality is is that the only way developers are 
interested in developing for the iPhone is that they get 
something back from it--either fame, recognition, money, 
advertising sales.
    And what is interesting is I am a licensed Apple developer. 
I have signed the NDA. But I will tell you the interesting part 
of all that is of my friends who are developers, they are 
constantly, constantly looking at other platforms as an 
opportunity.
    If the restrictions are too tight, a perfect example is 
Unity, and I mentioned this in my testimony. Unity makes tools 
that make cool games. They have 25 percent of the iPhone app 
development market. But they also have a huge chunk of the Xbox 
360 market. People are porting it to Android. They have 200,000 
developers just for Unity alone.
    So our folks are a roving band of professionals, who are 
looking for the best place to get either the coolest 
technology, the most money, or the most opportunity for fame.
    Mr. Polis. So in the public policy context, and maybe Mr. 
Feinstein can add his two cents to close off on this, I mean, 
to a certain extent it is a discussion between to what extent 
is this a public policy issue or an antitrust issue and to what 
extent is it an issue of a system becoming so proprietary that 
it reduces its own capacitive ability to function in the 
marketplace?
    And I wonder if Mr. Feinstein has anything to close on 
that.
    Mr. Feinstein. Of course. And once again I forgot to turn 
on the mic. I will answer this hypothetically rather than with 
respect to any particular company. But I think the answer that 
you just heard is, and which I think Mr. Reed indicated was an 
answer you had already given in a prior question to your own 
question, is absolutely right.
    I mean, if you have a proprietary system that becomes 
dominant, that can be problematic if it has an exclusionary 
effect on the ability of rivals to come into the market. If, on 
the other hand, there is a proprietary system that has a 
relatively small market share and it is just one of a number of 
models and people have the ability to vote with their feet by 
moving to other alternatives, that suggests the absence of that 
hypothetical of an antitrust problem.
    Mr. Polis. Thank you.
    And I yield back the remainder of my time. Somebody turned 
up my microphone in the interim, but thank you, and I yield 
back.
    Mr. Johnson. Thank you. It wasn't I, but perhaps staff.
    But anyway, this has been a very intriguing calendar--oh, 
excuse me--panel discussion, many different issues that we just 
really nicked at. Many of these issues can be taken separately 
and delved into in great detail, and prioritizing them would be 
a problem, at least for a guy like me. But I will tell you I 
look forward to us delving into each one of these issues and 
continuing also to just look at the broad marketplace.
    And I would like to thank all of the witnesses for their 
testimony today. And without objection----
    Mr. Gonzalez. Mr. Chairman? May I make a unanimous consent 
request? And that would simply be to submit to the 
representative of FTC, Mr. Feinstein, a written question 
regarding the attorney general of Texas' investigation that 
they have announced regarding the ranking by Google and such.
    I didn't want to touch on it today, because there was a 
more important question, but nevertheless, this is of some 
import and curiosity, so I would like to submit it in writing 
with your consent.
    Mr. Johnson. Without objection, Members will have 5 
legislative days to submit any additional written questions, 
which we will forward to the witnesses and ask that you answer 
them as promptly as you can to be made a part of the record. 
And without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials.
    Once again, I would like to thank this distinguished panel 
for your insight and for your time. I am sure that every 
industry can argue why it deserves to be treated differently 
under the antitrust laws, but competition left unattended can 
die just as easily as it can flourish. In the current economic 
climate, it is more important than ever that we do everything 
we can to nurture competition without crushing the engines of 
commerce that drive our economy.
    It is important that we remember that we will always be 
ignorant as far as the future is concerned. We can speculate, 
but we never know what will happen, and we certainly don't want 
to restrain what could happen that would be good for mankind. 
But at the same time, we don't want to fall into a situation 
where we have got a clamp on creativity and in the marketplace, 
which translates then into life itself. We want to keep this a 
vibrant area, always shedding and growing.
    With that, this hearing of the Subcommittee on Courts and 
Competition Policy is adjourned.
    [Whereupon, at 1:07 p.m., the Subcommittee was adjourned.]


















                            A P P E N D I X

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               Material Submitted for the Hearing Record

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Material submitted by the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Member, Subcommittee on Courts and Competition Policy

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 Response to Post-Hearing Questions from Richard Feinstein, Director, 
    Bureau of Competition, Federal Trade Commission, Washington, DC

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