The folly of 'line of business' restrictions for Big Tech
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Last fall, the Democratic majority staff of the House Subcommittee on Antitrust issued a 450-page report on “competition in digital markets.” The bulk of this Staff Report details allegedly anticompetitive conduct by Apple, Google, Facebook and Amazon. The Staff Report laments that because these firms “wield tremendous power,” Congress should consider legislation to impose stringent “line of business” restrictions to limit the markets in which these firms can participate.

While the Staff Report contends that legislative “line of business” restrictions are “mainstay tools of the antimonopoly toolkit”, it fails to recognize that the U.S. experience with “line of business” restrictions has not met with optimal results. In truth, all of the examples of “line of business” restrictions cited by the Staff Report (e.g., the Bank Holding Company Act of 1956, the Hepburn Act of 1906 for railroads and the Federal Communications Commission’s “financial syndication” rules) were repealed years ago because the costs far exceeded any benefit.

But line-of-business restriction failures are not just limited to the examples the Staff Report (incorrectly) cites; there are multiple other failed experiments with “line of business” restrictions the Staff Report conveniently omits to mention.

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To wit, we can look at the country’s experience with the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA was never intended to regulate the rates terms and conditions of utilities providing interstate electricity service; Congress assigned that task to the Federal Power Commission (which was eventually succeeded by the Federal Energy Regulatory Commission) under the Federal Power Act. Rather, PUHCA aimed to protect shareholders of electric utility holding companies from potential management malfeasance and, as such, was administered by the Securities and Exchange Commission (SEC). And in Congress’s view, the best way to protect those shareholders was to limit the activities of registered utility holding companies to “the operations of one or more integrated public-utility systems.”

Not all electric holding companies fell under PUHCA’s umbrella; only those holding companies that carried on business within multiple states had to register with the SEC and be subject to PUHCA’s severe “line of business” restrictions. Those holding companies who primarily conducted their business within a single state were exempt from PUHCA’s constraints and were thus free to enter ancillary businesses such as wholesale generation or even telecommunications if they liked.

This distinction made little sense, and over time the pointless regulatory asymmetry between registered and exempt electric holding companies became impossible to ignore. Yet instead of repealing PUHCA, a simple and sensible solution, Congress instead added to the confusion by creating the legislative constructs known as “Exempt Wholesale Generators” (“EWGs”) and “Exempt Telecommunications Companies” (ETCs). EWGs and ETCs were corporations that were approved by FERC and the FCC respectively through which registered electric utility holding companies could operate their ancillary businesses. Purposefully, the regulatory requirements to set up an EWG or an ETC were extremely low and mounted to little more than a ministerial process with pro forma approval.

The irony of this legislative construct should not be lost on the reader: rather than repeal a law that had clearly outlived its usefulness altogether (if ever useful), Congress instructed two other regulatory agencies (FERC and the FCC) to issue formal rules (completely with a Regulatory Flexibility Act and Paperwork Reduction Act analyses) in order to get the SEC out of the picture. In other words, Congress required more regulation just to achieve a de-regulatory outcome. Eventually, recognizing the futility of this whole charade, Congress repealed PUHCA altogether in 2005.

Another example can be found in the Telecommunications Act of 1996. Under that statute, the “Baby Bell” phone companies were prohibited from entering the long-distance market until they “unbundled” their local distribution networks. This paradigm was short-lived due to three underlying economic causes which policymakers failed to fully comprehend: (a) unrealistic expectations for competitive “green field” facilities-based entry into the local market at the time of the enactment of the 1996 Act; (b) that incumbent local phone companies had no incentive to surrender market shares to entrants at regulated prices without any permanent offsetting benefit; and (c) the rise of new alternative distribution technologies such as cable, wireless and over-the-top services that expanded the availability and quality of competing voice services. As a result of this innovation, 25 years the “local” and “long distance” distinction has vanished.

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Given this sordid history, “line of business” restrictions in industries diverse as banking, railroads, electricity and telecommunications have been consigned to the dustbin of history. Preventing firms from entering lawful businesses — particularly when they might be relatively efficient suppliers — can potentially foreclose welfare-enhancing transactions. Failing to study the past, the authors of the Staff Report resurrect the folly that “line of business” requirements serve as an effective tool to curtail the market power of “dominant” Internet firms.

There is also the question, left unanswered in the Staff Report, about what government agency oversees “line of business” restrictions in Internet firms. Our antitrust laws — unlike regulatory statutes such as the Communications Act, the Federal Power Act, the Staggers Act, etc. — are statutes of general applicability. To regulate Internet firms using such restrictions, the government needs to set up a digital regulator (which the Staff Report does not recommend) or expand the jurisdictional boundaries of an existing agency.

In choosing a regulator from existing agencies, some idea about the types of firms subject to such restrictions makes the job easier. The Staff Report is unhelpful in this regard, however. “Dominance” is the only listed qualifier for oversight, relying on the age-old but discredited belief that a high market share equates to market power.

To confuse matters further, the Staff Report claims that “market definition is not required,” which, by definition, makes market share indeterminate. And, in the absence of a defined market, there is no boundary on which firms might fall under these “line of business” restrictions and, in turn, what types of firms these restrictions block relationships.

All that may be said is that if enacted into law, the Staff Report’s open-ended standard of “dominance” would open the door to “line of business” restrictions for any firm, in any industry, across the American economy.

Lawrence J. Spiwak is the President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.