Phil Weiser Univ. of Colorado April 19, 2008 The Enduring Tension Between Platforms and Applications: Lessons From AT&T and Microsoft Phil Weiser Univ. of Colorado April 19, 2008

Applications and Platforms The antitrust oversight of both AT&T and Microsoft represent a longstanding policy challenge related to the relationship between platforms and the applications that ride on them. Both platform providers and applications developers face existential threats— Platform providers incur substantial sunk costs that must be recovered. Applications developers live in fear of ex ante restrictions on innovation and ex post opportunistic behavior.

The AT&T Legacy Over the course of the 20th Century, AT&T faced a variety of common carrier and antitrust regimes: Kingsbury Commitment—limit on mergers and interconnection mandate. 1956 Consent Decree—quarantine on entry into data processing (and de facto compulsory licensing requirement). Modified Final Judgment—quarantine on BOC LD entry; equal access requirements. Computer Inquiry rules—initially imposed a quarantine; later imposed equal access rules

The MSFT Legacy The litigation against Microsoft in the U.S. and Europe has either suggested or imposed a variety of measures to restrict MSFT’s ability to exercise its market power based on its OS platform— Breakup of Company Into Platform and Applications Company (Judge Jackson 2000 decision). Transparency, Disclosure, and Non-Discrimination (2002 U.S. Consent Decree). Requirement to Make Available Unbundled OS to facilitate applications (e.g., media player) competition (EU Requirement).

The Critiques of Antitrust Oversight Less is more, Epstein. Administrability concerns and the KISS Principle. Leave it to regulators, Epstein; Trinko. Leave it to private ordering, Easterbrook, Limits of Antitrust Leave it to technological dynamism, Schumpeter; Schmalensee.

The Core Challenges Jim Delong: “The fears of both [platform providers and applications developers] are well founded, and, for reasons explored below, neither a “let the free market do it” nor a “regulate” solution provides a totally satisfactory resolution.” Richard Posner: “The real problem lies on the institutional side: the enforcement agencies and the courts do not have adequate technical resources, and do not move fast enough, to cope effectively with a very complex business sector that changes very rapidly.”

Platform Providers Have A Credible Commitment Problem DeLong: “these are long-term investments under conditions of great uncertainty, and it is difficult to write the contracts that would be required. A significant problem with the mantra of ‘do it by contract’ is that it requires contract writers with an unlimited legal budget and a level of foresight that would be the envy of a psychic.” Gawer & Henderson: If a platform owner’s “incentive to engage in ex post price ‘squeezes’ is sufficiently strong, complementors may have no ex ante incentive to engage in innovation at all.”

Platform Providers Recognize The Need to Support Applications Microsoft has responded to the consent decree by adopting its own Windows Principles and New Interoperability Principles. Standard setting bodies attempt to play a governance role that develops and, in some cases, enforces official standards. Development of norms and culture may play a role here, too.

. . . Except When They Don’t. ICE and Its Exceptions. Farrell & Weiser (2003). In each AT&T and MSFT, two important exceptions were evident—Baxter’s Law and The Applications As Competitor to the Platform. (Two level entry would be another one.) The stakes of allowing battles over access, pricing, and safeguards again opportunistic behavior to bar cooperation are high and impose social costs. Limit innovation. See, e.g., Richard N. Langlois, Technological Standards, Innovation, and Essential Facilities: Towards a Schumpeterian Post-Chicago Approach, (“[I]nnovation normally proceeds fastest when a large number of distinct participants are trying multiple approaches simultaneously.”) In games of chicken, there are sometimes messy accidents.

Are There Alternative Strategies and Clear Lessons For Today’s Issues? [S]ome form of government intervention, to set the rules, is inevitable. . . Society needs basic rules to operate by, and modern technology creates potential scenarios that old rules did not cover. But we need to remember that it is not easy to regulate markets, especially ones in cyberspace, and especially when policy makers labor under the burden of many false myths. Andrew Odlyzko, Network Neutrality, Search Neutrality, and the Never-Ending Conflict Between Efficiency and Fairness in Markets Disclosure, Transparency, Non-Discrimination Norms (allowing reasonable discrimination) All Hold Up Relatively Well. Efforts to restrict integration appear question and, outside the rare context of Baxter’s Law, very difficult to justify.

Conclusion: Strategies for Institutional Oversight Standard Setting Organizations Deserve More Attention (and are receiving more antitrust scrutiny). Antitrust-like regulation—i.e., that evaluates behavior after-the-fact, if only the FCC could handle adjudications. Self-regulation, norms, and contractual commitments, if only a credible regime were in place. Antitrust may be most effective as a backstop, a model for regulation, and a means of keeping the above approaches honest (i.e., guarding against cartel-like behavior).