Antitrust should police Internet hogs, not the FCC.

Antitrust should police Internet hogs, not the FCC.

Recently, the Washington Lawyer ran a great piece called Net Neutrality: Who Should Be Minding Online Traffic?   The article goes back and forth between the extremes of: (1) heavy handed Orwellian like regulation of the Internet by the Federal Communications Commission (“FCC”), and (2) self-regulation and content discrimination by greedy Internet Service Providers (“ISP”). This seems to be a false dichotomy. Even in the absence of heavy handed FCC regulation, which can crush innovation, the Sherman Act (“Act”) is an available tool to punish unlawful Internet hogging or collusion by ISPs.

The Internet is a public good.  It was created by the government.   Before, it was called ARPANET.   It was a tool of the military.    As a result, the Internet is akin to a public park.   At the same time, there are now Internet Service Providers (“ISP”) who provide Internet users with differentiated access to this public good.   Think of the ISPs as competing private tour guides in Central Park.   Some tours will be faster but more pricey than other slower tours.

The net neutrality debate wrongly omits how the Sherman Act can help police the ISP market without the need for heavy handed regulation by the FCC.   To the extent an ISP has market power and tries to keep competing companies out of the market, the essential facilities doctrine would likely apply.   To the extent that there is an oligopoly of price fixing ISPs, then there will be claims under Section 1 of the Act.   If an ISP tries to obtain too much market power through a merger, the government can oppose it.   The problem with too much regulation by the FCC is that it discourages technological innovation by ISPs who compete for customers by providing better service at a lower price.   If the FCC requires such companies to take a one size fits all approach to every customer, competitive innovation will likely suffer.  So, too, will consumers seeking faster rides through the Central Park that is the Internet.

Forget the market research, we’ll just hire an ex-CIA agent!

Forget the market research, we’ll just hire an ex-CIA agent!

As Inc. Magazine reports in Spy Games, companies are increasingly using stealth methods used by the likes of the Central Intelligence Agency (“CIA”) to conduct research on their competitors.    While aggressive competition is good for the market, the question remains whether such tactics end up in a race to the bottom.   Rather than focusing on improving product or service quality, these companies try to out sleuth one another, only to likely find out they are hiring the same former CIA talent.

The plot seems oddly similar to the Twilight Zone episode called Mr. Denton on Doomsday.    In the episode, gunslinger Al Denton is given another chance to be a top flight slinger by salesman Henry J. Fate.   Fate offers Dent a potion that will guarantee to make Dent the fastest gunslinger in the West, but only for ten seconds.   Denton swallows the potion when has to face Pete Grant, a younger gunslinger, in a duel.   Denton is the company who hires the ex-CIA agent.  But, to Denton’s surprise, the younger Grant is holding an empty bottle of the potion.   Grant is the competitor who has also hired the same ex-CIA agent.

In the end, each man has the same potion induced ability and shoots one another in the hand. The shots disable them both for the rest of their lives.   Fate, the salesman, rides off into the sunset. Perhaps those companies in the marketplace who are keen on regularly using sleuth tactics to get the upper hand on others will find that they are being played against one another by the former CIA agents the companies hire.  These ex-agents owe no fiduciary duties to their new employers and either go to the highest bidder, or service several at the same time, just like Fate.   In the end, these companies are left no better off than where they started, and sometimes worse off due to the opportunity costs.  They have may have expended valuable resources searching for the potion, rather than finding and practicing new gunslinging techniques or, failing that, hanging up the gun for another more prosperous service market.

Raj: the new Gordon Gekko?

Raj: the new Gordon Gekko?

Recently, Mr. Raj Rajaratnam was found guilty of violating insider trading laws, which seek to ensure that all members of the trading public, regardless if they are large or small, rich or poor, receive exactly the same information.   The goal is worthy, but is it realistic?    Whether we like it or not, connected people get better information, just as super connected legacy children get into Harvard.   At the very least, the government should make insider trading rules less ambiguous so as to not make every aggressive trader, like Mr. Rajaratnam, into a potential poster child of the new Gordon Gekko.

Various scholars, including Yale Law School’s Jonathan Macey in Deconstructing the Galleon Insider Trading Case, point out that the Securities Exchange Commission (“SEC”) has a more expansive and ambiguous view of insider trading than the U.S. Supreme Court. On the one hand, the SEC takes the view that everyone in the marketplace should have access to the same information, regardless of the effort they take to obtain it. As a result, non-public information should never be traded upon, regardless of how you get. On the other hand, the Supreme Court says having special access to non-public information is legal so long as you didn’t commit a crime to get it, such as when your lawyer steals your confidential information and trades on it. The SEC’s ambiguous insider trading rules have given it more unfettered discretion as to when to lower the gauntlet, and on whom. This is dangerous. As Mr. Macey points out in his article, much of what companies disclose in their filings is so watered down because of regulatory concerns that they leave you wanting to know the “real story” via other means. Like a good reporter, you may be able to get your hands on the scoop by interviews, or otherwise, whereas others are not. While the efficient market hypothesis posits market prices reflect all available material information, we all know this is not reality. Until that happens, which may be never, the SEC should develop a bright line rule more in accordance with the Court’s rulings so that folks can be aggressive in making good connections for much needed information without ending up in jail.

The gut is sometimes more reliable than the mind.

The gut is sometimes more reliable than the mind.

As reported in U.S. Rolled Dice in Bin Laden Raid, the green light to eliminate Mr. Osama Bin Laden eventually came down to “gut instinct.” While we all understand the role of numbers and rational thought in business decision making, we think that the West sometimes places too little emphasis on what can oftentimes be your best friend in uncertain times: your gut.

As we all know, there are times in business when the numbers tell the whole story. There is no gray area. There is no need to use your intuition to make a decision. And yet many decisions in business are not so black and white. For one thing, the numbers may be cooked by the seller of the stock you are thinking about buying. You may not know this by looking at the numbers, but may intuit it by feeling out the underwriter or broker. Like the Navy SEALS in the picture to the left, your eyes may not see anything behind those trees in your midst, but sometimes your intuition will tell you something is lurking there. Unfortunately, the West sometimes places too much emphasis on rational thought, and not enough on the value of intuition, a point that Mr. Nassim Nicholas Taleb makes in The Black Swan: The Impact of the Highly Improbable. Perhaps this is because of a reductionistic approach to studying decision making taught by many schools in the West, including the Economics Department at the University of Chicago, which oftentimes attempts to reduce the complexity of human decision making into mathematical equations. While this may be a helpful crude tool to understand a complex system, it is is not sufficient. Due consideration also needs to be placed on the role of intuition — the gut — in making good decisions.

Why not just distribute content online?

Why not just distribute content online?

Last week, we attended the opening night of the Tribeca Film Festival and thought an apt question to address is: why not just distribute content online?   Recent press shows that independent authors and filmmakers are now choosing to bypass traditional offline distribution middlemen by distributing online.   While this is a good thing for independents and for consumers, there may be some unwanted collateral damage.

We recently read in Cheapest E-Books Upend the Charts that independent writers like Louisville businessman John Locke were able to penetrate Amazon’s top 50 digital best seller list with books that are priced sometimes as low as 99 cents, as opposed to the $9.99 normally charged by other successful authors. By self-publishing and distributing online, authors like Mr. Locke are able to reduce publishing costs and directly reach readers with lower priced content. Now more highly priced authors that distribute through traditional publishers have to show that their content is ten times more valuable than the books that Mr. Locke writes. The same is true in the film world. IMDB reports that the biggest names in Hollywood have been protesting Video on Demand (“VOD”), which has placed major films online in but weeks after they appear in brick and mortar theaters. The theaters are fighting back by taking distribution into their own hands. The Los Angeles Times reports that AMC and Regal recently unveiled a new distribution company called Open Road Films, which will focus on developing and distributing independent films, presumably both on and offline. Any author or filmmaker now has to seriously consider self-publishing or independent distributing online, respectively, as an alternative to traditional distributorship. At the same time, the collateral damage may very well be the disappearance of traditional book stores and movie theaters, which is traditionally where people took their dates or socialized with their fellow neighbors. The disappearance of these fixtures may tend to further erode our social fabric.

To be an employer, or not to be an employer?

To be an employer, or not to be an employer?

To be an employer, or not to be an employer?   You would think that you could decide your company’s identity as an employer — or not — by entering into a proper independent contractor agreement with folks you bring on board.   Not true.   While there are certain measures you can take to protect your business form meritless unemployment filings, there is no bright line rule and the Department of Labor (“DOL”) has the final word.  This, in our view, is not good.

We should know. We recently had the pleasure of defending a start up ad agency against a meritless unemployment claim in front of New York DOL Insurance Appeal Board. In the case, the agency had: entered into an independent contractor arrangement with the claimant, paid the claimant as a 1099 contractor, and did not require the claimant to come into the office. The claimant even admitted on the record that he agreed to be an independent contractor, and that he understood what that meant. Slam dunk case, right? Wrong. The DOL initially found the agency to be an employer. We had to appeal the finding and are now awaiting the decision. There is no bright line rule here because neither the contract you sign with an independent contractor, or the contractor’s use of a 1099 to file taxes, are dispositive in the DOL’s eyes. As such, you need to ensure that you don’t control the “means used to achieve the results,” which means many things under the case law, including that you: don’t require the independent contractor to come into the office, allow the contractor to hold other jobs, don’t provide any benefits (including free use of the office printer and other machinery), and that you pay by fixed fee. Even then, the DOL can find that you are an employer. We think that this is precisely why many companies are concerned about bringing on independent contractors in this tight economy — they are afraid that the independent contractor will go to the DOL for unemployment. In so doing, these folks abuse the system, give a bad name to unemployment, and stifle the economic recovery by creating uncertainty.

The Sox spent less improving Fenway and beat the Yanks, too.

The Sox spent less improving Fenway and beat the Yanks, too.

While we were rooting for the Yankees this past weekend, we were nonetheless impressed with how the victorious Red Sox (“Sox”) improved Fenway (the “Green Monster”) instead of destroying it, as the Yankees did with the old Yankee stadium.    In so doing, the Sox saved taxpayer money, as Mr. Mark Yost rightly points out in The Green Monster Goes it Alone.    Yankee fans (and businesses) can learn from Boston’s conservative approach to growth and, obviously, from their playing.

At times, a business will need to increase capacity in order to satisfy growing demand. This can be done in many ways. The most cost efficient way is often to improve existing facilities rather than reinvent them from scratch. Of course, technological advances can shift the supply curve so much that existing facilities become obsolete. However, that was not the case with the Green Monster. And so the Sox improved the small stadium rather than demolishing it. Their revenues weren’t hurt: the Sox, whose players include Mr. Dustin Pedroia, pictured left, are the third highest revenue generating team in baseball. Other teams often demand taxpayer financed loans or incentives from their local municipalities, and often threaten to leave if they don’t get what they ask for. For example, Los Angeles did not give into Raider demands and, as a result, the team relocated to Oakland. While we appreciate the new Yankee stadium, we also think that the Sox more conservative approach to growth is apt, especially in these tight economic times where states and municipalities are scarce on funds.

Google can learn from Mr. Jeff Spicoli.

Google can learn from Mr. Jeff Spicoli.

“Luckily for us, surfing isn’t an organized sport,” Travis Ferre explains in the May 2011 issue of Surfing Magazine. That is a good thing because it has kept the surfing industry diverse and authentic. Google, which has gotten so bureaucratic that good ideas come to market too slowly, can learn from the surfing industry’s more disorganized and yet innovative ethos.

As Mr. Ferre explains in his article, surfing is not an “Ocean Pacific ad anymore,” since the waves are now full of “tight denim modsters, dreadlocked carvers, trained competitors, soloists who wander alone, flannel-clad grizzly bears that love the cold, sandy groms, ex-cons, teachers, chicks.” There has been press lately that Google has gotten so big and organized that it now takes too long to innovate. A good idea has to be passed through several layers of committees, like in the picture to the left, before the idea comes to market. The problem is, by the time the idea comes to market, a competitor has already beaten Google to the punch. Of course, Google, and others companies like it, are too big to be as disorganized as the surfing industry — or Mr. Jeff Spicoli, the surfer played by Mr. Sean Penn in Fast Times at Ridgemont High. But being too organized can be maladaptive, too. As evidence: Larry Page, one of Google’s founders, has taken the reins from former CEO Eric Schmidt in order to “streamline decision making.” In so doing, Mr. Page wants to bring some cutting edge ethos back to the spirit of the giant company. As such, Google can learn from Mr. Spicoli. Because he didn’t have a committee to govern each step of his behavior, he was the only student to think of having a pizza delivered to class.

Too big to fail, too small to succeed.

Too big to fail, too small to succeed.

Peter J. Wallison, a scholar at the American Enterprise Institute, wrote Dodd-Frank’s Threat to Financial Stability, in which he argues that the Financial Stability Oversight Council (“FSOC”) ruins the competitive landscape by picking those companies that are too big too fail. In so doing, the FSOC also picks those that are too small to succeed. Adam Smith would also not likely approve.

Under Mr. Smith’s theory, a highly competitive marketplace is more or less atomistic — small players with no monopoly power compete against one another. The FSOC ruins this picture. By picking certain companies that are too big to fail, the government is essentially underwriting some businesses over others. To make matters worse, these businesses likely already had market power in the first place. The FSOC only increases this power. As Mr. Wallison points out in his article, this gives unfair competitive advantage to those companies who receive the government’s blessing. And those that are too small to succeed? Well, the FSOC is apparently not to concerned with those companies. The marketplace can afford to lose them, in the FSOC’s view. At the same time, such companies are often the lead innovators because they are quicker to respond to marketplace currents. What is more, small businesses are the largest employer in the country, employing 53% of the American workforce. But even if such companies were objectively worthless, which they are not, is it the proper place of the government to pick winners and losers? Mr. Smith would likely say no. Leave that to the marketplace, not elected officials.

If it ain’t broke, don’t fix it?

If it ain’t broke, don’t fix it?

There is the old saying that, “if it ain’t broke, don’t fix it.”    But Harvard Business School (“HBS”) professors Francesca Gino and Gary P. Pisano rightly point out in their article, Why Leaders Don’t Learn From Success, that successful businesses often appear not to be broken, only to find out that they are when it is too late.

When things are going well with your business, you often let your guard down. You think that things are going well because you are doing something right. But the HBS professors explain in their article that your success may be due to factors including fortuitous market conditions or beginner’s luck, as was the case with the rookie Ducati Corse racing team who won third place in the Grand Prix in 2003. You don’t question your strategy as much when things are going well. The Ducati team changed the design of their racing bike thinking it would improve performance in 2004, but the hasty changes left them in third place. It was only then that they realized the errors of their ways. Like with others, the authors write, the team learned only went things bad. The problem is that when things go bad, it may be too late. Another competitor may have already wooed your major client away. In short, its good to take the time to learn from your successes rather than waiting for a crushing defeat to wake up from what you realize was a slumbering false sense of security.