Uncreative Destruction: The Misguided War on Vertical Integration in the Information Economy

Article excerpt

TABLE OF CONTENTS

  I. INTRODUCTION
 II. THE SEPARATIONS PRINCIPLE
  A. The Proposal
  B. A New Spin on an Old Debate
III. COMPETITION AND VERTICAL INTEGRATION
  A. Benefits of Complements and Tying
  B. Efficiency Benefits
  C. Competition in the Information Economy: Case Studies
  1. AOL-Time Warner
  2. News Corp.-DirecTV
  3. Smartphone Sector
  D. Dynamic, Schumpeterian Change vs. Static Equilibrium
  Analysis
  E. Openness Concerns
 IV. REAL-WORLD APPLICATION OF THE SEPARATIONS PRINCIPLE ...
  A. Self-Regulation Norms
  B. Enforcement Challenges Associated with the Separations
  Principle
  C. Other Considerations Regarding the Wisdom of the
  Separations Principle
  1. Regulatory Capture
  2. Global Reach and International Competitiveness
  3. Agency Conflicts and Administrative and Due Process
     Issues
  4. Fifth Amendment Takings Issues
  5. First Amendment Considerations
  V. CONCLUSION

I. INTRODUCTION

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Professor Tim Wu responds in the affirmative in his book, The Master Switch." The Rise and Fall of Information Empires. (1) Having successfully pushed net-neutrality regulation into the policy spotlight, (2) Wu turned his attention to what he regards as excessive market concentration and threats to free speech throughout the information economy. (3)

To support his call for increased antitrust intervention, Wu provides a unique view of competition in the information economy that substantially deviates from mainstream antitrust theory. (4) First, Wu contends that "information monopolies" are pervasive in the information economy. (5) Wu's "monopolists" include Facebook, Apple, Google, and even Twitter. (6) In The Master Switch and an article entitled In the Grip of the New Monopolists, Wu argues that these so-called monopolies are increasing their market power; requiring more aggressive oversight and regulation. (7)

Second, Wu argues that traditional antitrust analysis is not sufficient for information systems because they carry speech. (8) He claims "[i]nformation industries ... can never be properly understood as 'normal' industries," and traditional forms of regulation, including antitrust enforcement, "are alone inadequate for the regulation of information industries." (9) Wu believes that because information industries "traffic in forms of individual expression" they are "fundamental to democracy," and should, therefore, be subject to greater regulatory treatment. (10)

Third, in contrast to current competition law's focus on horizontal agreements, Wu desires reinvigorated regulatory enforcement addressing "the corrupting effects of vertically integrated power" in the information sectors. (11) He is particularly concerned about private threats to free speech arising from such vertical integration. (12) Wu's solution is to prevent vertical mergers in the information economy and mandate divestitures of vertically integrated companies. (13) To implement this, Wu proposes a "Separations Principle" for the information economy which would place information providers into three buckets, which this article has categorized as: information creators, information distributors, and hardware makers. (14)

This article outlines Wu's "Separations Principle," explains why Wu's fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems Wu's proposed principle poses. This article also argues that there are widely accepted benefits of vertically integrated firms, and the antitrust harms Wu fears are not present. Further, this article shows that Wu's remedies are really policy preferences cloaked in the language of competition law. In fact, the information economy is largely competitive and does not warrant the interventionist enforcement approach Wu advocates. …