The Justice Department lost another merger the other day. This one was their challenge to Sabre’s acquisition of Farelogix. Sabre aggregates air fares in a hosted environment and serves about 50 percent of the market. Farelogix developed, and then open sourced, a peer-to-peer solution for the airline/travel agent industry (the “new distribution capability”), and provides consulting and coding services to airlines who want to adopt it. The IATA owns and updates the P2P specification. Any entity can adopt the P2P solution and do so without paying a fee.
There was evidence in Sabre’s documents that it viewed the P2P solution as a threat to its business model. Airlines would be able to send not only fair data but their other offerings as well directly to traditional travel agents bypassing Sabre entirely. By buying Farelogix, the progenitor of the P2P solution and an expert in integrating the P2P solution into the back office systems of the airlines, Sabre would be able to reduce or eliminate the threat from the nascent technology. The problem is most travel agencies, including the largest ones, did not have the capacity to do the analyses their customers needed. Their customers want to see a list of comparable flights displayed in sub-second times. Anyone wanting to duplicate that service would have to create a massive internal analytic structure that would pull data from the airlines in real time, process it and spit it back to travel agents in a format their systems could read. Their systems don’t do that. They rely on Sabre to do that. Moreover, the cost of creating that internal analytic infrastructure is enormous. The entities that could benefit from a P2P connection to all of the airlines would be the online travel agents, the entities that already have a significant computing presence.
The real value of an open source P2P is that it harmonizes the language each of these entities speak. This means that airlines can code their content once and everyone with the P2P capability can read it, including integrated online travel agencies and other GDSs. In fact, with 50 percent of the market, the acquisition of Farelogix has likely tipped the market to the IATA open source standard. This improves efficiency for everyone. Ironically, the acquisition might actually make it easier for traditional travel agents to switch from Sabre because their plug and play reservation systems will be compatible with every GDS that adopts the P2P solution. And coders will write to the specification because Sabre uses it.
Interestingly, Judge Stark relies heavily on American Express to hold that Sabre and Farelogix do not compete. He claims that Amex stands for the proposition that, as a matter of law, two-sided markets compete only with two-sided markets. That is simply not true. A P2P solution could, if the hosted environment only offered transport, completely displace the hosted solution. Here, as a matter of fact, the hosted solution provided analytic services a P2P solution could not duplicate without great expense for a class of consumer, so the merger would not have affected them. The merger would similarly not affect those that had the computing capability because the solution was open sourced, and they could adopt it themselves or with the help of another computer services firm.
This case illustrates the fundamental problem with Amex. What constitutes a relevant market is an issue of fact not law. It is a fact whether you and your competitor agreed to the price you will charge your customers. It is a question of law whether that agreement violates Section 1’s prohibition on price fixing conspiracies. It is a question of fact whether a customer finds two products substitutes. If they are close substitutes and there are no competitors, it is a question of law whether the merger of their makers constitutes a substantial lessening of competition. The lower court in Amex determined that there were two markets—one for cardholders and one for merchants. That was an issue of fact. The economic evidence the defendant introduced were facts; they were not laws. The lower court chose not to credit the economic evidence. What the appellate court, and Justice Thomas did, was to substitute their view of the facts by claiming it was the law. In this regard, I think Amex will have little effect on antitrust jurisprudence because fundamentally market definition is an issue of fact and nothing in Amex changes that. It does, however, create an appellate vulnerability in Stark’s opinion. All he had to say was “I find that the relevant market consists of providing hosted environments to certain travel agents, and for those customers a P2P solution is not a viable alternative. I similarly find that for other classes of travel agents, a P2P solution is a viable alternative but because the P2P solution is open-sourced, there cannot be any substantial foreclosure.” By phrasing it as a matter of law, Stark opens himself to a conclusion that by ignoring the potential P2P has for some customers, he has made a mistake of law and not fact. Mistakes of law are much more easily overturned, except in the case of Amex, than mistakes of fact, which are given high deference.
What not to conclude from this case, however, is that it is the death of the Division’s challenges to acquisitions of mavericks. Farelogix was not a maverick. Sabre/Farelogix is more akin to IBM/Redhat. Redhat had expertise in an open source product that enhanced IBM’s consulting capabilities. It did not mean that IBM could dominate Linux operating systems by foreclosing competitors’ access to Linux.
[View source.]
