Speech by FTC Chairman Robert Pitofsky.
To: Federalist Society Convention, Washington, DC.
Re: Application of antitrust law to high tech.

Date: November 14, 1998.
Source:  This document was created by Tech Law Journal by transcribing from a poor quality audio recording, and from handwritten notes of the speech.

Notes: Pitofsky did not read a prepared text, and no effort has been made here to correct his grammar or usage.  Pitofsky spoke as part of a panel titled "Market Power and Competition in the Technology Age."  The other panelists were FCC Commissioner Harold Furchtgott-Roth,  Yale Law School Professor George Priest, and Irwin Selzer of the Hudson Institute.

Thank you very much.  Good afternoon everyone.  I am delighted to be here, and to discuss what I honestly believe is the most interesting, challenging question that has faced antitrust in a generation: application of antitrust to the high tech industries.  I am impressed that you, being here late in the afternoon on a Saturday after a long conference.  You must think that this is a subject that is worth discussing, as well as we do.

I was in Japan and Korea earlier this week, and uh, and both places I had the same question: "Why is it, the question was, that the American antitrust authorities have so aggressively targeted high tech industries in their enforcement efforts?"  That was a very polite way of saying "Why are you killing the golden goose that lays the egg for the United, the golden egg for the United States?" and "Why are you so cheerful about it?"

I answered there that we are not targeting high tech.  Rather, high tech, by the way, I don't think we are talking just about computers and software.  That is not true.  High tech is biotechnology.  It is international finance.  It is international credit.  It's an increasing proportion of the work that we do at the Federal Trade Commission.  That is where the action is.  That is were the dynamic growth is.  That is were the innovative transactions are occurring.   And therefore, it requires, it justifies a fairly careful oversight.

More important than that, application of antitrust to high tech is where the gray area is.  And that is a problem that all of us needs to address, regulators, business community, academic scholars, and so forth.  The law with respect to antitrust and intellectual property is not settled.  And I don't think that captains of high tech industry are less principled than captains of low tech industry.  But it is, we need to develop, we need to think through the way antitrust is going to be applied.  And that is the challenge that I think is the most interesting in a long time.

How do we do that?  The response to that is varied.  One possible position is that intellectual property is property. That is, (doesn't require ?) change in any fundamental way.  I am not entirely comfortable with that.

Another is that antitrust has little or no role to play in this area.  The argument is that the high tech industries are so dynamic, so changing, barriers for ideas are so low, that any problems are self correcting.  Certainly, they will be corrected faster than a bunch of bureaucrats can do.

Secondly, that the problems that arise are heavily complicated, and lawyers with, technology challenged are probably going to get it wrong.  More importantly, that innovation is the driving force in the economy of the 21st Century, and any efforts to apply antitrust diminishes the incentives for innovation, is going to do more harm than good.  The argument therefore is either stay out entirely, or intervene only when you are sure that there is a problem, and a remedy to make that will make that problem less serious.  I regard very little _______ (inaudible phase) as antitrust.  That is really another way of saying "stay out".

I do not agree with either position.  I, uh, do think that, um, the antitrust principles be sound, but they need to be adjusted, to take some special characteristics involved into account.

I do not think that, uh, the known problems of antitrust should not account or address.   Why, why is it that high tech is different?  It is more complicated.   It is more technologically complicated than otherwise.  But I think of that as a challenge rather than as a reason to opt out.  We must learn the technology, just as business people, and other __ (inaudible word).

The speed of transition is different when you are talking about ideas.  The chance of a company like Alcoa dominating the field for a half century, uh, are remote.  And yet, there may be reasons why transition is less likely to occur in high tech, than in ordinary industries, uh, network effects is the principle reason.  I want talk about that in just a minute.

Often, because of high tech's costs, high tech requires collaboration.  Antitrust is said to be, uh,  antithetical, it has a problem with collaboration among competitors.  But, I think that it is fair to say that collaboration does make, it is more justified at times in the high tech industries.  But I think antitrust has a good record with respect to sensitivity to terms about innovation.  The federal antitrust authorities have __________ in a joint venture case in one hundred and eight years.  It is hard to be any more cautious than that.

Uh. Low barriers to entry?  Yes, I think that is often true, although intellectual property, we often talk about patents, trademark, and copyright, so that there are barriers for substantial periods of time, and again you can have these network effects that promote barriers to entry.

One of the most interesting, arguments is that conventional antitrust fears monopoly, as Judge Hand said in the Alcoa case, because, monopoly is a narcotic.   Competition is a stimulant.  So often people that inherit, inherit a cheap monopoly often __________ high tech industries in this country.  It does not look that way to me.  On the contrary, they are aggressively innovative, and aggressive with respect to price.

But that does not answer the question whether, two companies are better than one, three companies are better than two, not just on a price plain, but on a, uh, innovation plain.  And certainly this country has, profited, by a active decentralized antitrust program compared to other countries in the world that are not doing as well.

Finally, and I think most challenging, is the question of whether or not network effects are something that antitrust can deal with intelligently.  By network effects, I mean situations in which the, the value of product or service is positively correlated with the number of people who use it.  It is better to have a telephone system that reaches everybody, than two telephone systems that each reaches only one half of the people in the country.  _____________ hubs in, hub airports, and a lot of other things in the U.S.  There are also indirect ways in which network efficiencies raise the barriers to entry.  Frequently, once a company has a dominant position, parties to manufacturer designed complimentary products, all of them designed to, to the dominant firm, with the result that a new company finds no complimentary products that are available.

Consumers are comfortable with a dominant network firm because they know that the new products will be supported.  With new innovations to complementary products and so forth

The reason network externalities are perplexing are, on the one hand, they usually, perhaps almost always raise the barriers to entry.  In a way, the barriers to entries of a high tech firm in a network bottleneck position, I would say, are something that John Rockefeller would envy __________ would get in a  traditional industry.  On the other hand, they do serve the consumer welfare, and the question is, whether or not the efficiencies counteract the barriers to entry effects.  Fortunately, it has not stopped me from speaking for over twelve minutes now, from answering that question. (Laughter.)  I hope that we will discuss it, maybe after.    

Maybe, I can suggest one answer that I think is wrong.  It is in the literature.  And I thought is was in the Court of Appeals Microsoft decision.  And that is the notion that once the Court finds any significant efficiencies, whether it is the integration of products, or network externalities, then the Court's job is over, having found some efficiency, it can go home, content that antitrust has no role to play.  That just can't be right.  It can't be right because suppose the efficiencies reduce the price to consumers by five percent, but the effect on barriers to entry raises the price to consumers by fifty percent.  It cannot be that a significant efficiency trumps the effect, the anti-competitive effect, on barriers to entry.  Also, quite often, um, the, uh, you might be able to achieve the efficiencies in a less restrictive way.  So, that, to me it must be a balancing process.  It must be more to it than simply finding a presence of some efficiency, and I believe that is what the law ought to be.

The next question, however, is whether there is a remedy to these bottleneck properties, that, uh, will, ___ effects, and whether that remedy is practicable, enforceable, and ____ coordinated ____.

That is a terribly important question, but I think that a balancing process has to proceed.

Let me stop there at this point.