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Wednesday, August 14, 2024
Musk's Case Against Advertisers
Many people who strongly dislike Musk personally because of his politics or stance on free speech are overly dismissive of this case and are describing it in a tremendously overly simplistic way, which disregards strong arguments. Some are arguing that this lawsuit doesn't stand a chance because Musk is simply trying to punish companies for not advertising on X.
The reality is more complicated, and if you look at the specific arguments Musk is making and consider the economic principles in play, Musk has several strong and reasonable arguments.
Note, however, that the actions taken by GARM, the advertisers, and Musk himself, all have little to do with economics. It will help, when analyzing this situation, to consider whether the motivations are self-interested and pro-competitive, self-interested and anti-competitive, or just politics. Much of what is happening is driven more by politics and personalities than economics.
Still, the case will be considered as an economic one and legal one.
Background
Who is GARM
The Global Alliance for Responsible Media was created in ... to "accelerate and advance the role that advertisers can play in collectively pushing to improve the safety of online environments." They are an initiative of the World Federation of Advertisers.
GARM was formed after the New Zealand Christchurch mosque shootings where the attack was livestreamed on social media. GARM was formed to help coordinate advertisers and push social media companies to enact media safety standards. GARM's members represent 90% of global advertising spending.
What did GARM Do
On October 31st, 2022, GARM issued a public blog post calling on Twitter to "uphold existing commitments." Shortly after that, many of GARMs participants reduced their advertising on X, some to zero.
Musk's Case
In my view, Musk/X's case can be summed up in four points:
- GARM is an organization that includes multiple competing firms to coordinate their advertising.
- Being a member of GARM obligates a company to join a boycott of a platform if the platform doesn't adhere to GARM's standards for social media moderation.
- GARM issued a public pronouncement and provided other information that facilitated an advertising boycott.
- These actions were illegal because they were a variation of collusion, allowing advertisers, and competing firms to jointly decide not to advertise on a platform.
Economics
The core economic principle in play is collusion. Competing firms cannot coordinate their actions in ways that reduce competition and harm consumers. The prototypical example of this is if competitors agree to a price and that neither will lower it. Because competitors are expected to try to win customers by lowering their prices, an agreement to stay price competition violates the Sherman anti-trust act and is illegal.
While a written or spoken agreement is a stark manifestation of collusion, collusion can also be accomplished "tacitly." This is much more difficult to prove, but companies can signal their intention to maintain prices by being very forward about advertising their prices, or make public statements about how the price of their goods is a very beneficial one. This serves as a signal to competitors that if the competitors don't lower their price, then they won't either.
While the X/GARM case is not about prices, prices serve as a helpful analogy when considering GARM's actions. Specifically, the issues here revolve around a boycott of advertisers. This implicates two anti-trust provisions: group boycotts and agreements not to advertise. These are separate concepts in the economics of anti-trust and should be considered individually.
According to FTC, group boycotts can be, but aren't always illegal. If they are used to give the boycotting firms an advantage in some way, they can be anti-competitive. The examples on FTC's website include lawyers boycotting a county court to force higher payments for themselves, physicians boycotting a firm that threatens to open a site that will compete with them, and auto dealers boycotting a newspaper to prevent them from telling consumers how to price-shop.
What these cases have in common is that they are all exercises of power where competing firms work to either reduce competition directly (the physicians), to reduce competition indirectly (preventing consumers from comparing prices), or to effect an outcome of reduced competition (the lawyers extracting higher prices).
What might not qualify as an illegal boycott would be an effort among competitors to force a buyer or seller to improve their products without reducing their competition. If Pepsi and Coke jointly boycotted a sugar manufacturer to induce them to change suppliers of sugar away from a plantation that uses child labor, for example.
The legal and economic questions may not lead to the same answer. What's economically reasonable is sometimes illegal, and what's economically bad is sometimes legal. Group boycotts are an unusual occurrence because, if a transaction is harmful to both competitors, it will usually be in their interest to boycott individually, and an agreement would be unnecessary. The necessity of an agreement suggests that there is an extent incentive for the competitors to renege.
While a group boycott always requires a reduction in competition, it may not be economically harmful in the long run if it is temporary, isolated, and aimed at producing a result that benefits consumers.
The other economic activity in question is advertising. Advertising is a medium of competition. Companies advertise with each other to try to gain market share by informing customers about their product in some way. An agreement not to advertise is akin to an agreement not to lower prices or not to compete with each other in certain geographies. All three of these harm consumers because they are agreements not to attempt to attract more customers and would be unlawful.
Will Musk Win or Lose?
One hurdle Musk may face is arguing that a coalition of competing firms, like GARM, can be treated as sets of competing firms that are acting in concert. If I were a judge, I think I would quickly accept this.
GARM's participants include many sets of competing firms, and even if they're not talking to each other, the organization acts as a clearing house and facilitator for economic decisions. If the organization decided to divvy up geographic markets for its participants; this would certainly be as anti-competitive had they come to the agreements industry by industry.
Firstly, for the group boycott, while coordinated boycotts from competing firms will almost always merit a close and careful consideration, in this case, GARM will no doubt claim that the boycott was not to extract economic concessions but to ensure product safety and that the brands that were members were not associated with harmful content, which would be bad for business.
Safety was considered an extenuating circumstance in previous cases, enough to placate the court.
On advertising, similar to a group boycott, the existence of an agreement to not advertise is not automatically illegal. If it the agreement has reasonable business justifications, like ensuring safety, the courts will probably accept it.
Musk's best arguments are to focus on the information sharing among the competitors. According to the complaint, GARM circulated a survey of its participants on their thoughts on boycotting and whether they planned to reduce advertising dollars. From an anti-trust point of view, this is extremely problematic. Giving companies information on their competitors' advertising plans undoubtedly facilitates an anti-competitive action.
For companies out of favor, this would be an automatic lawsuit from regulators.
For companies out of favor, this would be an automatic lawsuit from regulators. There is no reason to do this, and it would not fall into GARM's argument that this was all about safety.
His argument about the GARM post providing a focusing point for competing companies to coordinate their boycott is probably correct, and if a group boycott was an expectation of the participants if social media companies didn't meet standards, that might have also been a problem, but these problems disappear if the boycott was in service of safety standards.
The other argument that works in his favor is that there's very little evidence that any of these companies were harmed by X's safety standards. That they needed an agreement and coordinated action and didn't withdraw unilaterally indicates it wasn't about safety and it wasn't a decision that would've benefitted them acting alone.
While this is by no means a frivolous case, and it touches on unlawful and extremely risky behavior, I think Musk will ultimately lose, unless he gets a very strictly pro-competition judge. I also believe that this case is strong enough that if Musk had spearheaded the boycott instead of him being the victim of it, the FTC would have brought it against him.