Self-Preferencing and the AICOA
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Our first deep dive focuses on competition policy. Check out last week’s clips here.
Senator Amy Klobuchar, Chair of the Senate Antitrust Subcommittee, announced the much-anticipated American Innovation and Choice Online Act on October 14 and introduced it in the Senate on October 18.
This bill would augment existing antitrust laws by introducing explicit prohibitions on self-preferencing, an online business practice in which a platform operator unfairly gives its own products and services preference over those of its competitors. These prohibitions would be enforced by the Federal Trade Commission, the Department of Justice, and state attorneys general.
Self-preferencing has become a touch point in recent antitrust hearings and in the antitrust-focused report published by the House in 2020. The regulatory momentum that is gathering has made it into one of the most important, least talked about tech policy issues this year.
What is Self-Preferencing?
Self-preferencing is not a new problem. A classic analog example of self-preferencing comes from grocery stores. A store might develop and sell its own brand of popular products (e.g. Costco’s Kirkland Signature brand). Often, they will promote those products, or give them preferential placement in the store. Consumers can choose a quality product at a lower price, and some argue that this is why self-preferencing is actually good for consumers.
A classic digital example comes from Microsoft. Throughout the 1990s Microsoft was accused of using its dominance as an operating system platform to unfairly compete against competing third-party developers who made software for Windows, like web browsers.
Microsoft's Internet Explorer browser was already installed on Windows out of the box, and by default it was the app of choice for doing anything on the web. The developers of competing web browsers, like Netscape, argued that this gave Microsoft an unfair advantage over the internet browser marketplace. In antitrust parlance, they contended that Internet Explorer was "bundled" with Windows. If you got one, you got the other, making it difficult for users to consider alternative web browsers. These claims became the basis of a Department of Justice antitrust lawsuit against Microsoft.
It was not an easy case for the DOJ. That was due in part to the awkwardness of applying antitrust laws built for an analog world to new businesses made possible by digital innovations.
After several years of protracted litigation, Microsoft settled the case in 2001. Microsoft agreed to open up APIs for third-party developers and give users the option to choose IE as the default app. As noted by Senator Blumenthal and Tim Wu in a 2018 NYT op-ed, imposing interoperability was a novel remedy in antitrust law at the time, and the appropriateness of using antitrust law for this purpose -- as well as the effectiveness of the remedy for the underlying problem -- are still points of debate.
Current Landscape
Twenty years on, today’s self-preferencing debate is more complicated. It’s no longer taking place within operating systems, but instead within online marketplaces, app ecosystems, ad networks, recommendation engines, and the like.
Examples1
Apple App Store -- Apple has been accused in recent lawsuits of abusing its power as the operator of the iOS AppStore. According to the allegations, Apple preferentially ranks its own apps higher than those of third party developers in AppStore search results, regardless of the popularity and ratings of the third party apps. Apple also conditions access to the AppStore on their use of Apple's payment service, which gives Apple a 30% cut when users purchase an app or conduct in-app transactions with users.
Amazon.com -- Amazon has been accused of a number of manipulative practices that make it difficult for third party sellers to compete with Amazon’s products on Amazon.com. This includes conditioning third party sellers ranking in search results on their use of Amazon's fulfillment systems. Amazon is also alleged to have weighted its search algorithms in ways that boost its own product labels over those of third party sellers when consumers are searching for products, and using data gleaned from third party sellers to create competing products under its own product labels, despite its statements to the contrary.
Facebook API -- Among other things, Facebook has been accused of making it difficult for third party app developers to create services that interoperate with Facebook by conditioning access to the Facebook APIs. It has also been accused of gathering usage data of third party apps from mobile platforms, allegedly for the purpose of monitoring competitors.
Google Play Store -- Google has been accused of preferencing its own services over those of competitors in search results. imposing competition-limiting restrictions on access to the Android app marketplace, Google Play. Similar to Apple, Google was sued in 2020 by Epic Games. And, it's been accused of preferencing its own results in Google Search for services like Maps, Travel, and others.
Although the Department of Justice arguably won the Microsoft case in 2001 by settlement, antitrust enforcement has largely been a non-issue for big technology companies in the intervening years.2 Even if the enforcement agencies had been more active, legal cases against technology platforms can be difficult to prove before a court.3 In order to show that the Sherman Act4 has been violated, antitrust enforcement agencies need to demonstrate that a tech platform has acquired monopoly power and show that it is abusing that power. This is a high threshold for action.5
Enter The American Innovation and Choice Online Act. It bypasses the portions of the Sherman Act that have been the most legally problematic for enforcement agencies. In particular, enforcement agencies would not need to demonstrate monopoly power or an act in restraint of trade, which would save them from time-consuming litigation.
Instead, the AICOA declares self-preferencing unlawful and defines three overlapping categories of behaviors that harm competition. Those include instances in which a platform unfairly:
Preferences its own products and services over competitors;
Restricts the ability of other businesses to compete with the products and services on the platform; and,
When the platform enforces its terms of service against a competitor in a discriminatory way.
The AICOA’s rules would prohibit specific conduct by platforms,6 including using interoperability restrictions, conditioning access or preferred placement on the purchase of other services, using non-public data about third parties to launch competing products, artificially boosting product placement over competitors using search or ranking algorithms. In other words, the AICOA would allow the FTC, DOJ, and state attorneys general to go after a broad range of alleged abuses of power by major tech companies.
Criticisms
A number of criticisms about the role of antitrust in addressing self-preferencing and the AICOA have surfaced. For example, some have cautioned that the bill goes after tech platforms without actually solving the biggest harms produced by them. Pro-business groups have pointed out that self-preferencing is sometimes necessary to give users the best and most accurate information. For example, the AICOA would prohibit Google from showing Google Maps results over a third party’s at the top of Google Search. In a somewhat similar vein, Bruce Hoffman, a former Antitrust Bureau chief at the FTC, has argued that self-preferencing benefits competition. Others have argued that the Sherman Act could be used without amendment to police self-preferencing.
Another concern is the effect of the AICOA on platform content moderation practices. Platform power has been a point of contention in debates around platforms’ ability to discriminate against particular viewpoints. Many Republican members of Congress have expressed concerns that platform policies and practices are biased against conservatives. Antitrust laws have also been invoked in disputes over content moderation. Earlier this year, for example, Parler unsuccessfully sued Amazon Web Services, alleging Amazon had violated antitrust laws, after its account was suspended on AWS. In the context of the AICOA, enforcement could potentially make it difficult for platforms to remove and reduce harmful speech or ban users that violate their community standards, insofar as content moderation can be understood as a form of self-preferencing within the parameters of the bill. That raises some questions about whether the broad prohibitions of the bill could be used in ways that go beyond the core problems of self-preferencing.
Looking Ahead
Although the AICOA would reinforce the existing authorities of antitrust agencies to police self-preferencing, it’s not an omnibus solution for online competition issues. For example, the bill would not introduce new rules for enforcement authorities around mergers and acquisitions, which has been another focal point in recent debates around antitrust.
Meanwhile, in the last two years the DOJ, FTC, and state attorneys general have significantly ramped up antitrust investigations against the major platforms for practices targeted by the AICOA. Since December 2020, the FTC and 45 state attorneys general have been pursuing antitrust claims against Facebook.7 In February 2020, the FTC commenced a review of acquisitions by technology platforms over the last decade.8 The Department of Justice has been investigating Apple’s exclusionary practices around the AppStore since June 2020, and is reportedly expected to file a lawsuit imminently. In October 2020, the DOJ sued Google for anticompetitive practices involving its search advertising business. And the Consumer Financial Protection Bureau announced in October that it is probing consumer data practices at Amazon, Apple, Google, Facebook, and others.
The political momentum for more aggressive enforcement of existing antitrust laws has been building for years. The AICOA would support that goal while also substantially expanding the scope for future antitrust actions, specifically against tech companies. Will regulation of self-preferencing achieve a more accountable tech industry? Ultimately, if the AICOA becomes law, it will be up to individual companies to figure out how to comply with it. There are certainly many unanswered questions about what that will look like.
Share Your Thoughts
Is there something important we missed? Are there other articles or news sources we should have included? Who else should we be following or talking to? Send us your thoughts at techpolicy@geer.com.
These practices are the current focus of policymakers today, there is a long list of product categories that may be the subject of global antitrust scrutiny in the future.
Rebecca Haw Allensworth captures much of this history in her essay on Antitrust’s High-Tech Exceptionalism in the Yale Law Journal.
There is an extensive amount of scholarship written about the doctrinal complexities of antitrust law as applied to big tech companies, including current FTC chairwoman Lina Khan’s note on Amazon’s Antitrust Paradox, Herbert Hovenkamp’s article on Antitrust and Platform Monopoly, Tim Wu’s Taking Innovation Seriously: Antitrust Enforcement If Innovation Mattered Most, to name but a few.
The Sherman Act of 1890, 15 U.S.C. §§ 1-7, is one of several U.S. antitrust laws. It broadly prohibits agreements and conspiracies in restraint of trade (Section 1), and attempts to monopolize through anticompetitive behavior and abuses of monopoly power (Section 2). The 1998 Department of case against Microsoft was based on violations of Section 2 of the Sherman Act.
By way of example, in July 2021 the US District Court for the District of Columbia dismissed two antitrust lawsuits -- one filed by the FTC, the other a multidistrict lawsuit filed by 45 state attorneys general -- ruling that both the FTC and state attorneys general had failed to demonstrate that Facebook possesses monopoly power, as required under the Sherman Act.
The bill’s rules would apply to any platform that has more than 50 million monthly active users or 100,000 business users, although the FTC and DOJ can also jointly designate a company to be subject to the law.
In June 2021, both lawsuits were dismissed by the D.C. District Court. The state attorneys appealed the dismissal in July 2021, and the FTC was able to reinstate its complaint against Facebook before the court in August 2021.
The results of this study were published by the FTC in a report on September 15, 2021, and this week announced the reinstatement of rules that bar future acquisitions for merging parties that pursue anticompetitive mergers.