Digital platforms have become “economic toll bridges.” By treating them as essential facilities, we could help strengthen healthy competition online. It is high time to revive, renew, and expand the antitrust essential facilities doctrine.
A handful of large platforms control the gateways of the digital economy, which contributes more than $2 trillion per year to US GDP. If you are a small vendor and want to sell something online, there is Amazon—followed by a huge gap and not much else. For smartphone applications, there are two app stores, the Apple App Store and Google play store. Search is Google and Google is search, even linguistically. And when it comes to social media, nothing compares to Facebook. (Mistaking Twitter as a serious competitor might indicate exposure to a filter bubble.)
In a recent paper on “Essential Platforms,” I argue that we should treat these gatekeepers to the digital economy as essential facilities in antitrust law.
Imagine you own a company, and you see millions of potential customers for a new product. But there is a problem: all these customers live on the other side of a river and the only way to reach them leads over a privately owned bridge. The owner of that sole bridge either prevents you from passing altogether or charges excessive fees. Long story short, if that is the case, this product line and, potentially, your entire business are doomed.
Compare this fictional scenario to the situation of app developers: Apple and Google all but dominate the entire market to host smartphone applications. The app stores generally collect a 30 percent fee on in-app purchases—that is digital goods bought within an app. (Although, Apple has recently made some concessions and cut its fees for small developers and virtual events and classes.) This fee likely far exceeds competitive levels. And, both app stores prohibit app developers from offering direct payments in their apps or steering customers to their website for direct sales and subscriptions that could substitute in-app purchases.
“All of the big platforms have taken on dual roles as umpires of and players on the marketplace.”
This summer, Fortnite, a popular online game offered by Epic, provided an alternative, direct payment method with its then-latest update. Through that channel, gamers could purchase digital goods, such as armor and weapons for their online characters, at a discounted rate. In reaction to Epic’s violation of the terms of service, Apple and Google immediately delisted the game. Apple’s retaliation went even further. It also threatened to shut down Unreal Engine, a widely used developer tool provided by Epic, which is unrelated to the game Fortnite.
Epic depends on the App Stores to reach its customers. And many app developers (manufacturers of electric vehicle, for example) mainly rely on reaching customers that have exclusively bought into one of the two smart phone ecosystems (Apple, in that case). To paraphrase Franklin D. Roosevelt’s legendary antitrust enforcer, Thurman Arnold, digital platforms have become “economic toll bridges” that “levy what in fact are taxes.”
The app stores are by no means the sole predator platforms. Recent investigative reporting and the comprehensive House Report on Competition in Digital Markets provide countless further examples of abusive behavior and exclusionary conduct. All of the big platforms do not only provide infrastructure for others, but also directly compete with the independent businesses on their platforms. They have taken on dual roles as umpires of and players on the marketplace. As expected, they leverage their exclusive control over search engines, e-commerce platforms, app-stores, and social media to exclude rivals.
Digital platforms can behave in that manner because they do not face serious competition. The platforms’ monopoly power mainly stems from network effects—that means the participation of additional users almost exponentially increases the utility of the network and creates enormous market entry barriers for potential competitors. The characteristics of data and algorithms further foreclose the markets.
To define the suitable remedies and to open the digital economy for competition, we can learn from the past. In the early twentieth century, the railroads controlled critical infrastructure and excluded competitors from crucial markets. The railroad monopolies rested on enormous investments in physical infrastructure that could not be replicated. In St. Louis, then one of the nation’s critical freight hubs, a consortium of railroad companies bought up all connections across the Mississippi River—two bridges and a ferry company. The consortium then excluded its rivals from the crucial connection and foreclosed an important gateway to the American West.
In response, the Supreme Court imposed a then-novel remedy by granting competitors access to the critical infrastructure in application of the Sherman Act. That approach became known as the antitrust “essential facilities” doctrine.
Google, Amazon, Facebook, Apple, and others behave just like the railroads did 100 years ago. Instead of physical infrastructure, like bridges and tunnels, the digital platforms leverage network effects that shield them from effective competition. And instead of the American West, the platforms foreclose the Internet.
“Google, Amazon, Facebook, Apple, and others behave just like the railroads did 100 years ago.”
The clear remedy, once again, is to grant competitors fair and equal access to essential digital platforms. The problem is that, over the past thirty-five years, the essential facilities doctrine has fallen prey to excessive judicial trust in self-correcting markets. Starting in the late 1980s and following the shifts in politics and legal academia, the courts piece by piece chipped away from the essential facilities doctrine. Finally, in 2004, the Supreme Court in Trinko all but disowned any notion of access rights in antitrust. The court, in fact, even embraced enduring market monopolization as key to innovation. Based on this decision and the following antitrust jurisprudence, it became common belief that claims based on the essential facilities doctrine were dead on arrival in court.
It is high time to revive, renew, and expand the essential facilities doctrine in the digital economy, as a crucial element of a comprehensive toolkit to strengthen competition and spur innovation.
To revive and renew the essential facilities doctrine, we can build on decades of jurisprudence. Courts have applied the notion of access rights to various markets. The existing test for liability under essential facility doctrine can easily be applied to digital platforms: 1) an essential platform is controlled by a monopolist; 2) a competitor is unable to reasonably duplicate the platform; 3) the owner of the platform denies competitors access to the platform 4) it is feasible for the owner to grant competitors access.
To define the scope of an expanded essential facilities doctrine for the digital economy, we can build on insights into the optimal design of intellectual property rights. At a very basic level, IP law grants exclusive rights as an incentive for innovation. In economic terms, these exclusive rights often amount to monopolies, which allow the owner to collect monopoly rents.
However, whether it concerns copyrights or patents, these exclusive rights and thus the resulting monopolies have been limited in scope and, most importantly, in duration. The time limitations enable follow-on innovation. The bridges and railroad tracks enabled new modes of transportation. And opening up the crossing over the Mississippi river created the space for the free flow of goods into and from the West. Apps follow the creation of app stores; vendors innovate based on Amazon. We should embrace this basic notion of ending monopolies to enable follow-on innovation in antitrust law as well. EU competition law already includes aspects of this notion.
Together, this leads to a two-tiered remedy for digital platforms: At its first level, regulators and courts must bar platforms from discriminating and self-preferencing. They must ensure that platforms enable developers to build on their infrastructure. That requires standard setting and the exchange of information. At its second level, after an appropriate amortization period, antitrust enforcers must upend platform-monopolies entirely, by forcing horizontal interoperability between platforms.
Horizontal interoperability would allow competing e-commerce platforms to reach vendors and customers on Amazon, competing social media platforms to reach Facebook users, and competing app stores to cater to Apple iOS and Android users. All this would work like the interoperability between telephone networks, where we take it for granted, that an AT&T customer can reach users on the T-Mobile network. In short, it would significantly reduce the market entry barriers from network effects.
No doubt, the essential facilities doctrine does not provide a cure-all. Rather, it should be understood as a crucial element of a comprehensive toolkit to strengthen healthy competition online—along with sector specific regulation, horizontal breakups, functional separations, where appropriate, and reforms to the privacy frameworks.
Courts have not applied the essential facilities doctrine to digital platforms, and the federal judiciary will likely not reverse course in the short term. Though, there is reason to hope that the doctrine will become 2021’s comeback kid. The recent House report on Competition in Digital Markets endorses the essential facilities doctrine, and so does the Republican minority report. As many small and medium-sized enterprises find themselves shut out of the digital economy, even within the traditional business community a political opening is slowly emerging. Finally, should Congress generally remain gridlocked, the states might follow the example of privacy legislation and take matters in their own hands.
Overall, a renewed and expanded version of the essential facilities doctrine, whether implemented by the courts or the legislature, will contribute to strengthening competition and spurring innovation online.
Disclosure: Nikolas Guggenberger is the Executive Director of the Information Society Project at Yale Law School, which is supported a range of sponsors, including foundations, corporations, and private donors. Google is one of its sponsors.
