Ecosystem Competition and the Antitrust Laws

• Publication year: 2021
• Citation: Vol. 98

98 Nebraska L. Rev. 412. Ecosystem Competition and the Antitrust Laws

Ecosystem Competition and the Antitrust Laws

Daniel A. Crane(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 412

II. Three Examples of Ecosystem Competition ............ 414
A. Middleware and Operating Systems ............... 414
B. EBooks and Tablets .............................. 415
C. Connected and Automated Vehicles ................ 418

III. How Ecosystem Competition Enhances Consumer Welfare ............................................... 420

IV. Implications for Antitrust Law and Policy ............. 422

I. INTRODUCTION

Conventional antitrust norms analyze market power-as a stepping stone to anticompetitive effects and, hence, prohibited conduct- from the perspective of product substitutability. Two goods or services are said to compete with one another when they are reasonably inter-changeable from the perspective of consumers, or to put it in more formal economic terms, when there is crosselasticity of demand between them. Conversely, when two goods or services are not reasonably interchangeable, they are not horizontally related and are said not to compete with one another. Since a concern over horizontal agreements and horizontal effects dominate antitrust-courts even analyze vertical agreement or merger cases in terms of their horizontal effects-proof of effects among substitutable goods or services is a crucial touchstone of antitrust analysis.

This "substitutability" approach to understanding competition and market power fails to capture important economic phenomena when applied to platform markets or other complex and technologically evolving economic sectors featuring multiple potential value propositions for consumers. In such sectors, firms may compete aggressively

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against each other without offering substitutable products or services for sale. The rival firms may be "frenemies," sharing simultaneously codependent and complementary but rivalrous goals,(fn1) but they are not traditional competitors seeking to earn rents from the same sectoral node. Tech and media giants compete to commoditize. Players create products and services that commoditize the nodes of rivals. In turn, these firms isolate their own value propositions by simply neutralizing the unique offerings of others.

Lest this jargon overly muddle the thesis, let me offer the short version of three examples at the outset, one from the somewhat distant past, one from the fairly recent past, and one that is just beginning to emerge:

* In the late 1990s, Microsoft Corporation competed with Java programmers and other technology companies over the future of middleware and operating systems. Middleware and operating systems were not substitutable products-a consumer would not choose to run a computer without an operating system and only use middleware-but middleware did threaten to commoditize operating systems and shift most differentiated value from operating systems to programs.

* In the early 2000s, Apple Inc. and Amazon.com, Inc. competed aggressively in an ecosystem that included e-books, tablets, and ereaders, and a host of related audio and visual products and services. Apple and Amazon did have some substitutable offerings-for example, both sold devices for reading books-but competition in substitutable products only begins to explain the companies' commercial antagonism. Amazon's gambit was to perpetuate its control over online retail; the Kindle was essentially a device to lock customers into Amazon's retail world. Apple, by contrast, sought to commoditize the retail function and created differentiated value in the physical device-the iPad.

* In the emerging ecosystem of connected and automated vehicles, there is intensive competition among a variety of different players to establish or disestablish nodes as value propositions. Traditional car companies wish to preserve the differentiated automobile as a value proposition sought by consumers. Robotic vehicle technology companies like Waymo LLC and some traditional OEMs like Robert Bosch GmbH (Bosch) seek to commoditize the car itself and shift the value proposition to AV systems that are vehiclebrandagnostic. Fleet operators like Uber Technologies, Inc. and Lyft, Inc. would prefer to commoditize the vehicle entirely and establish transportation services through

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robotaxi fleets as a value proposition. Finally, telecom or communications technology companies like Qualcomm Incorporated and Intel Corporation are pushing for the primary value node to reside not in either vehicles nor ride sharing services, but rather in the communications networks connecting vehicles to other vehicles, roadside infrastructure, or "the cloud."

While these examples differ in important regards, they demonstrate ways in which a sectoral ecosystem may exhibit intensive competition among firms that do not necessarily offer substitutable products or services and hence fall outside of antitrust law's preoccupation with horizontal competition. The question is whether antitrust policy should adjust its ordinary analytical framework when assessing competitive effects in such markets. In this Article, I will first flesh out each of the three examples of ecosystem competition, then discuss the effects of ecosystem competition on consumer welfare, and finally turn to legal questions concerning the potential relevance of ecosystem competition to antitrust law.

II. THREE EXAMPLES OF ECOSYSTEM COMPETITION

A. Middleware and Operating Systems

My opening example concerns a puzzle at the center of United States v. Microsoft Corp.: how Microsoft could have violated Section 2 of the Sherman Act by deceiving Java developers into creating Windows-dependent applications, when Java and other forms of "middleware"-such as Netscape Navigator-were held not to reside in the relevant product market.(fn2) Microsoft argued that its view that independent (i.e., platformagnostic) middleware was a competitive threat implied that middleware was in the same relevant market as the Windows operating system. Hence, Microsoft did not possess monopoly power in the relevant market.(fn3) The D.C. Circuit rejected this argument, finding that, although Microsoft neutered middleware as a competitive threat to the Window's monopoly, the relevant market should exclude middleware because consumers could not substitute mid-dleware for an operating system.(fn4)

The conventional reading of Microsoft is that the court excluded middleware from the market because it was not yet substitutable for an operating system from the perspective of customers even though

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Microsoft's anticompetitive conduct allowed for this eventual possibility. But a somewhat different explanation is also possible: the development of independent middleware could eventually commoditize the operating system by making software developers indifferent as to the operating system on which their programs would run, since all operating systems would equally function to expose the Application Programming Interfaces (APIs) chosen by the developers. In this story, middleware did not evolve to take the place of operating systems, it evolved toward commoditizing operating systems and transferring the differentiated value in computer programs to the programs (and programmers) themselves. Microsoft directed its allegedly anticompetitive scheme toward stifling a competitive threat that was not-and would not likely become-a substitute for what Microsoft produced, but nonetheless threatened to eliminate Microsoft's monopoly power by...