A Tale of Rackets

Definition: racket
Traditionally, the word racket is used to describe a business that is based on the example of the "protection racket" and indicates that the speaker believes that the business is making money by selling a solution to a problem that the business itself created. (Wikipedia)

Recent corporate case - Intel
In May 2009, Intel was charged by the European Commission, which prosecutes crimes against the European Union, with antitrust violations. The civil penalty was set at $1.06 billion euros ($1.45 billion).

The charge was that Intel used its monopoly power against its much smaller rival AMD to continue to dominate the market. Intel CPUs are at the heart of many PCs these days – Dell, Acer, Lenovo, and Intel works hard to be sure it has the lion’s share of the market. It advertises directly to consumers (do I care which microprocessor runs my PC, as long as it doesn’t crash?). But the EU (maybe not as truly capitalist as we Americans) thought their tactics – such as giving rebates to PC manufacturers using Intel chips – amounted to a violation of antitrust laws. So – competition is good, and Intel was quashing AMD’s ability to compete fairly in the marketplace.

In the charge of illegal antitrust violations the EU found the actions to be not single acts, but sustained over many years, thereby harming AMD. Because of Intel’s dominant position in microprocessors, they were able to use this dominance to increase the price for other components needed in building a PC, for those manufacturers who did not sign on to Intel’s CPU rebate program.

Another charge was Intel making direct payments to PC manufacturers to prevent them from shipping PCs containing AMD processors. All’s fair in love and war? Well, there are laws, even on the European continent (especially?)

So another more streetwise version of saying this is that Intel was accused of coercion and bribery. In November 2009, in an effort to defuse the case, Intel unilaterally decided to pay $1.25 million to AMD to cover the antitrust allegations as well as other patent infringement suits. They have set up quarterly meetings to discuss areas of dispute, and would like to try mediation for other contentious issues.

This payment does Not however settle the legal challenge, which is due to be heard by a jury in a court in Delaware sometime in 2010. In December, in its quest to increase antitrust enforcement in the Obama administration, the Federal Trade Commission filed suit against Intel in the interest of protecting consumers (this new lawsuit is about Intel’s bundling of graphic coprocessors and shutting out competition – more along the lines of open architecture and trying to keep it so, to allow other vendors an entry). This FTC case is due to go to trial in Fall 2010.

Another corporate case – Microsoft
Similar to the graphic coprocessor “bundling” with PCs that Intel was charged with, but much more visible, was the charge against Microsoft for unfairly bundling its browser software with new PCs, thus shutting out third party vendors from new PC sales.

The tale of Microsoft goes back to the early 1980’s with complaints by Novell and then later Sun Microsystems of Microsoft unfairly requiring PC manufacturers to pay license fees to Microsoft, even for PC units that did not contain Windows. Similar to the Intel case, using its dominant market position to further consolidate its command position with PC manufacturers.

The licensing charges eventually gave way in the 2000 era to charges of unfairly bundling Windows and Windows Media Player with PCs, shutting out third party vendors from supplying alternative operating systems or media players.

If you go back to the MS-DOS days when PCs were in their infancy (some of us are really that old), it is easier to see how a graphical user interface such as Windows would sit “on top of” a command-line interface such as DOS. Since Microsoft controlled the guts underneath the pretty interface, they were able to closely tie, using clever programming and secret undocumented interfaces (also known as APIs, or application programming interfaces) to bind its user interface very closely to the underlying hardware. Thus giving it superior performance. Other purveyors of media players, operating systems, did not have this kind of advantage, so their product would run more slowly.

Ultimately products like Linux and other browsers would be relegated to the dustbin, since as the Internet took off (before it was a part of our 24x7 life even), no one would have the patience to sit and wait on a slow browser.

Along came the European Commission, which in March 2004 filed an antitrust charge against Microsoft of $493 million euros ($793 million).

Microsoft responded angrily, stating that its ability to innovate was being hampered, but did pay the fine in full in July 2004. The European Commission’s stance was that the marketplace is best served by open architecture and the ability for other software vendors to compete.

Cultural differences - Europe and the U.S.
I have to wonder if there are cultural differences, which then become actual legal differences, between life in the European Union and life in the U.S. It would be easy to say we are far more ruthless capitalists in the U.S., but I have no basis for saying this, it just feels that way.

Given that the EU has chosen to be a “union”, forces a certain amount of cooperation among its members. That cooperation is being sorely tested as we speak, as Germany and other more-successful parts of the EU come to terms with bailing out their more profligate spending partners such as Greece. The cost of maintaining the union, or will this be its undoing?

Fairness vs. market dominance. Its also possible that different values are at play, and EU may value “fairness” more strongly, whereas we Americans may value that old pioneer spirit and give industry every possible advantage. We do this till it hits the extreme level then the feds may step in (as they did when busting up the ATT monopoly back in 1984, when alas, I was an internal mail carrier at substation 223 in the Basking Ridge headquarters. An interesting time..)

Personal charges
OK so when corporations are involved, it somehow seems less personal, less direct. Its easy to paint a corporation as acting in its best interest (its prime directive is maximizing value for its shareholders, Business 101, so how can that be bad?). But taken to extreme we have the impersonal bully that is the Evil Corporation Goliath trying to squash the smaller innovative Davids with their tiny little slingshots – they don’t have a chance in the marketplace unless the court sticks up for their ability to compete.

But take it to a personal level – are some more “equal” than others? Each individual has rights under our Constitution – free speech, right to assembly, freedom from unreasonable search and seizure. When is free speech not free, and when do charges levied against an individual become more like libel, that is, unfair attacks meant to really keep someone out of the marketplace of ideas? And who is there to protect individuals attacked in this manner?

A charge of racketeering – what does this mean exactly? It sounds ugly and is meant to sound ugly and paint the person so accused of acting in an unlawful way. Almost to paint them as acting in a conspiracy, to get their way using money and influence.

Racketeering charges against Bill Sizemore
In 2000, two powerful unions in Oregon, the Oregon Education Association (OEA) and the American Federation of Teachers (AFT) filed suit to challenge Sizemore’s two ballot initiatives, stating that they would have to spend an equal and counter amount to challenge the ballot initiatives. The two initiatives were Measure 92 and Measure 98.

Measure 92 would have prohibited payroll deductions for political purposes without specific written authorization; it failed with 815,338 “no” votes, to 656,250 “yes” votes. How this impacts unions: as a union member, you automatically have payroll deductions of union dues. There are separate optional “CAPE” (political action) donations a member can make, but the union dues are mandatory if you are in a represented position. That alone does not make you a union member, you have to sign up for that. But if you are in a represented position, the dues are mandatory (if you don’t sign up, you are considered a “fair share” member, but you can’t vote in union activities).

Sizemore’s position was that since unions used their leverage and considerable financial resources (the average public sector worker may pay $50 per month in union dues, which is also a tax deduction, and the more you make the higher the dues contribution) to influence elections, this amounted to a political contribution. His stance was that the individual should have a choice. What if you are a registered Republican, and your union always backed Democratic candidates? Your option would be to sign up as a member, go to your local union meeting, and speak up to try to influence their endorsements. Not an easy road in a heavily blue state such as Oregon, and the Republicans I know in state ranks are not too happy paying their union dues as a result.

Measure 98, which, like Measure 92, would have been a change to the State Constitution, was similar. It would have prohibited public resources from being used to help raise political funds. “Public resources” in this context refer to public buildings, public employee time, and public money. Hence enforcing a separation of state-funded resources intended for public, non-partisan purposes, from political activities which should be outside.

If you perceive that public unions are no longer strictly the collective bargaining units they were set up to be, but actually wield significant political power, in part due to the funds available to them through non-elective union dues, and in part due to their ability to leverage public employees, buildings, and spaces, then it might seem to an outsider that a third party would have no chance. Hence seeking to restore balance, and remove the dominance of unions and the political parties they tend to represent.

Measure 92 also failed, by a vote of 776,489 “no” votes, to 678,024 “yes” votes.

The labor organizations charged that the initiatives’ placements on the ballot were achieved through false signature gathering, charging fraudulent signatures and false statements regarding paid signature gathering. Other issues included commingling of funds across Sizemore’s organizations – one which was a straight PAC (political action committee), and hence permitted to raise money for political purposes, the other a 501 ( c) (3) organization – according to IRS code a tax-exempt charitable organization. Commingling of funds across these types of organizations is not permitted, if someone wants to maintain their tax-exempt status of the group organized for that purpose.

Money to influence elections
Bottom line – the charges were aimed at the initiative gathering process, seeking to show that the initiatives themselves should not have made it to the ballot, since signatures were invalid.

It is interesting that the “yes” side received over half a million votes on each measure. So, however the source of the signatures and process to gather them (which was decided later in court), the voters did speak and many of them did want these changes to their state constitution.

The theme tying these cases to the corporate cases above is again all about money (large organizations and their considerable resources trying to quash the individual’s right to have their third party browser, or to elect a third party candidate).

Money to influence policy
We live in the U.S. so it is not secret that lobbyists are quite busy these days protecting corporate interests. The list is long, from oil/gas industry lobbyists, to pharmaceutical lobbyists. Environmental groups have lobbyists as well, as do organizations concerned with the rights of the less fortunate (though I would imagine their resources are less).

Many are the charges that have been raised regarding corporate lobbyists “paying to play” by donating large campaign contributions to their U.S. legislators in order to be “heard”.

What else does money buy you – exposure
Lets go back to Psych 101 and advertising. When someone is repeatedly exposed to something, it infiltrates their mind (ok I am not a social scientist and not explaining this well). If I continue to see those commercials for red shoes, I will eventually succumb and say “hey, I want some red shoes”.

Much as we don’t like to admit it, advertising does work. For a great example I refer readers to the movie “Josie and the Pussycats”, and the message about subliminal advertising. Its ok to watch this even if you don’t have kids.

On the political front, what does money buy you? Exposure through expensive TV ads; direct mailing to residents, other media buys where you can “show up” in people’s daily reading and, as with continued advertising, convince the populace you are worthy to represent them. Does this exposure work?

We like to think of ourselves as independent voters, and hey – voting is not like buying red shoes anyhow. So maybe I like to look fashionable and not like a geek, so I chose to buy red shoes. But when it comes to voting I would like to think I take a sincere look at the candidates, their issues, especially their integrity. Cause the issues today may not be the issues they face tomorrow, so I want someone who I think will make the right decision (in line with my sentiments and positions) down the line. And someone to hold it all together since there are myriad and diverse issues with respect to running a state, or a regional government, or a county government.

These forms of advertising are all legal.

Money and free speech
Somehow, raising money to present an opposing view – to the dominant political forces in Oregon politics – is under scrutiny. Lets set the record straight. Bill Sizemore has been sued in a civil lawsuit for racketeering. A lawsuit is not a conviction, it is a charge. It is telling that the unions who levied the most recent racketeering charge against him were willing to drop the $18 million lawsuit if he was willing to never initiate any new initiatives (basically, give up his right to free speech). Does this sound like a tactic from an organization that sincerely feels they are in the right in prosecuting a guilty person? Or does it sound like a coercive tactic of a dominant organization seeking to protect its dominant status?

Intel was willing to settle. Microsoft was certainly willing to settle and forked over the entire settlement $$ amount rather than have things drag on in court. We do not know if the charges levied against them are proven.

When it comes to consumers’ right to chose, and how much they pay for a PC, that is quite interesting and may impact the competitiveness of our kids, since we have to buy them all laptops these days.

But isn’t it more important that minority views can be heard? Would a “settlement” by keeping Sizemore forevermore quiet really be in the interest of minority views?

A lawsuit presents an accusation and is not a conviction. The press seems to conveniently forget this each time they state it, and each time they print letters from individuals who get this wrong. In my country, people are innocent until proven guilty.


You have been reading Part 2 of the series – Why Bill Sizemore Makes Sense