<?xml version="1.0" encoding="UTF-8"?><rss version="2.0" xmlns:content="http://purl.org/rss/1.0/modules/content/" xmlns:wfw="http://wellformedweb.org/CommentAPI/" xmlns:dc="http://purl.org/dc/elements/1.1/" xmlns:atom="http://www.w3.org/2005/Atom" xmlns:sy="http://purl.org/rss/1.0/modules/syndication/" xmlns:slash="http://purl.org/rss/1.0/modules/slash/" > <channel> <title>Fideres</title> <atom:link href="https://fideres.com/feed/" rel="self" type="application/rss+xml" /> <link>https://fideres.com/</link> <description></description> <lastBuildDate>Thu, 13 Mar 2025 16:30:38 +0000</lastBuildDate> <language>en-GB</language> <sy:updatePeriod> hourly </sy:updatePeriod> <sy:updateFrequency> 1 </sy:updateFrequency> <generator>https://wordpress.org/?v=6.7.2</generator> <image> <url>https://fideres.com/wp-content/uploads/2022/01/cropped-fav-1-32x32.png</url> <title>Fideres</title> <link>https://fideres.com/</link> <width>32</width> <height>32</height> </image> <item> <title>Bicycle Thieves: How Shimano Put the Brakes on SRAM</title> <link>https://fideres.com/bicycle-thieves-how-shimano-put-the-brakes-on-sram/</link> <comments>https://fideres.com/bicycle-thieves-how-shimano-put-the-brakes-on-sram/#respond</comments> <dc:creator><![CDATA[Jamal Dumas]]></dc:creator> <pubDate>Wed, 12 Mar 2025 13:53:29 +0000</pubDate> <category><![CDATA[Research]]></category> <category><![CDATA[Competition]]></category> <category><![CDATA[Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=39461</guid> <description><![CDATA[<p>Is Shimano’s exclusion of its closest rival, anticompetitive foreclosure or legitimate competition? Fideres explains.</p> <p>The post <a href="https://fideres.com/bicycle-thieves-how-shimano-put-the-brakes-on-sram/">Bicycle Thieves: How Shimano Put the Brakes on SRAM</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<h2>Key Points</h2> <ul> <li>Shimano, a manufacturer of bicycle components, controls around 70% of the market for mid-to-high end gearsets – bike components including gears, breaks, and shifters.</li> <li>Shimano may be engaging in anticompetitive conduct by restricting integration between its electronic groupsets and cycle computers owned by competitor SRAM, thereby weakening SRAM’s competitive position.</li> <li>Fideres estimates damages to SRAM in the form of lost profits to be in the region of $214 to $427 million between mid-2022 and 2027.</li> <li>Damages to US consumers who have been overcharged on Shimano groupsets are estimated to reach $64 to 127 million for the same period.</li> </ul> <h2>Background</h2> <p>In 1889, while climbing the steep col de la République near Saint-Étienne on a single-speed bike, Paul de Vivie was overtaken by a rider who was nonchalantly smoking a pipe. That experience made him realize that the fixed gearing left him powerless on steep climbs yet too sluggish on the flats. He began experimenting with multiple chain wheels, rigging two chain wheels on opposite sides of the rear hub so he could “flip” between gears, creating the first ever derailleur system.</p> <p>Bikes have evolved significantly since the late 19th century and now feature hundreds of components. Shimano, a Japanese company founded in 1921, was central to this evolution, contributing with innovations like indexed gear shifting and dual control levers.<a href="https://mrbikersaigon.com/post/shimano-pioneering-cycling-innovation" target="_blank" rel="noopener">²</a> Shimano is now valued at $12 billion and are leading producers of ‘groupsets’, which comprise the machinery that facilitates braking, changing gears, and running the bicycle’s drivetrain.</p> <p>After a first attempt by Mavic in 1992, Shimano started producing electronic groupsets, with the introduction of the Di2 shifting technology in 2009. Shimano’s primary competitor is SRAM, an American company founded in 1987, which produces rival bike components like the SRAM Rival 1.</p> <p>In 2021, SRAM acquired Hammerhead – a producer of cycle computers which it markets under the name ‘Karoo’.<a href="https://www.sram.com/en/life/stories/hammerhead-acquisition" target="_blank" rel="noopener">³</a> Cycle computers are accessories that are typically mounted on handlebars, that allow cyclists to access information about speed, distance, and gear shifting. The computer also enables more advanced functionality, including changing the way electronic shifting works in the groupset, by using Bluetooth to pair to the groupset.</p> <p>In May 2022, Shimano announced that it would no longer permit integration between its Di2 electronic groupset and Hammerhead cycle computers. Until then, Shimano had granted permission for Hammerhead devices to connect with its products through a license agreement. However, on June 2, 2022, Shimano introduced a software update, following which users lost wireless connection between their Hammerhead cycle computer and the Di2 system. This resulted in users losing access to several Di2 integration features, including the ability to see battery level, shifter mode, and front and rear derailleur indications.<a href="https://support.hammerhead.io/hc/en-us/articles/360051706614-Hammerhead-Shimano-Di2" target="_blank" rel="noopener">⁴</a> One article notes that while it is possible to avoid the firmware update, this “runs the risk of bugs and a loss of support for new features or maps.”<a href="https://www.cyclingnews.com/news/shimano-cuts-hammerhead-integrations-after-sram-acquisition/" target="_blank" rel="noopener">⁵</a> There is also a software-based workaround<a href="https://www.dcrainmaker.com/2022/12/hammerhead-karoo-2-shimano-di2-workaround.html" target="_blank" rel="noopener">⁶</a> to use a Hammerhead cycle computer on a Shimano electronic groupset however this is an unauthorized solution which requires technical skills to implement. Therefore, Shimano’s actions essentially removed the advanced functionality that the Karoo cycle computer was capable of.</p> <p>Shimano and SRAM have a history of bad blood between them as competitors. In the late 1980s SRAM filed an antitrust suit against Shimano, alleging a tying scheme that required manufacturers of bicycles to buy both derailleurs and shifters together from Shimano instead of sourcing them from a competitor like SRAM. The lawsuit ended in 1991, with an out-of-court settlement that was allegedly favorable to SRAM.<a href="https://www.lewisrice.com/our-clients/sram-llc/" target="_blank" rel="noopener">⁷</a> It therefore appears that new technology has reignited old battles.</p> <h2>Relevant Market</h2> <p>We consider there to be two relevant product markets: 1) electronic groupsets for bicycles; and 2) bicycle computers.</p> <h3>Electronic Groupset</h3> <p>Bicycles’ main components are the frame and groupset, and wheels. The groupset includes shifters, brake levers, cranksets, derailleurs, and cassettes. Electronic groupsets are the most advanced versions of these systems, and instead of mechanically shifting gears through wires, they wirelessly respond to the shift, making it much faster and precise.<a href="https://bikexchange.com/electronic-vs-mechanical-shifting-pros-and-cons/" target="_blank" rel="noopener">⁸</a> Cyclists can directly purchase groupsets, but they usually come integrated with a new bike. In the last decade, modern bicycles have undergone increasing electrification. In fact, the last Tour de France winner to use a mechanical groupset was Vincenzo Nibali in 2014; all Tour de France winners since have used an electronic groupset.<a href="https://rouvy.com/blog/mechanical-vs-electronic-groupsets-definitive-guide" target="_blank" rel="noopener">⁹</a></p> <p>Shimano and SRAM dominate the worldwide electronic groupset market, with Campagnolo, an Italian company, being a distant third. For example, Shimano reportedly holds around 70% of the mid-to-high end market for bike components.<a href="https://www.reuters.com/breakingviews/shimano-is-too-scared-going-too-fast-2021-05-17/" target="_blank" rel="noopener">¹⁰</a></p> <p>The market for electronic groupsets for bicycles should be considered distinct from the market for mechanical groupsets. Mechanical groupsets are intended more for casual cyclists, being much cheaper and easier to repair, at a bike shop or by the consumer directly. Electronic groupsets offer distinct advantages to more enthusiastic hobbyists such as easier, more consistent, and more customizable shifting.<a href="https://www.theproscloset.com/blogs/news/do-you-need-electronic-shifting" target="_blank" rel="noopener">¹¹</a> Given these significant differences it is unlikely that there would be a significant shift from electronic groupsets to manual groupsets in the event of a small but significant non-transitory (SSNIP) increase in price from a hypothetical monopolist.</p> <p>Shimano and SRAM dominate the worldwide electronic groupset market, with Campagnolo, an Italian company, being a distant third. For example, Shimano reportedly holds around 70% of the mid-to-high end market for bike components.<a href="https://www.reuters.com/breakingviews/shimano-is-too-scared-going-too-fast-2021-05-17/" target="_blank" rel="noopener">¹²</a> Looking at revenues directly, Shimano’s reported revenue from all bicycle components was $2.2 billion in 2024,<a href="https://contents.xj-storage.jp/xcontents/AS02673/b8c14aac/6ce8/47d2/8bec/5bfa3f41b8ff/20241029154741018s.pdf" target="_blank" rel="noopener">¹³</a> while SRAM’s revenue is reported to be $1 billion.<a href="https://escapecollective.com/who-will-sram-acquire-next/" target="_blank" rel="noopener">¹⁴</a> These numbers imply Shimano is more than twice as large in electronic groupsets as SRAM.</p> <p>To estimate the number of electronic groupsets sold in the US, we start from the global market size of $1.5 billion,<a href="https://dataintelo.com/report/electronic-bike-shifter-market" target="_blank" rel="noopener">¹⁵</a> and take 18% of that as the US market, based on Shimano’s geographic sales segments.<a href="https://web.archive.org/web/20201020120745/https://research-doc.credit-" target="_blank" rel="noopener">¹⁶</a> This leads to approximately $270 million in sales in the electronic groupset market in the US. Assuming the average price of an electronic groupset is approximately $1000,<a href="https://pedalforce.com/product/shimano-105-di2-r7170-2x12-speed-groupset/" target="_blank" rel="noopener">¹⁷</a> we estimate that there are around 270,000 electronic groupsets sold in the US per year.</p> <h3>Cycle Computers</h3> <p>The market for cycle computers is less concentrated, with prominent producers including Garmin, Wahoo, Bryton, Hammerhead (by SRAM), and Cateye. Garmin is the market leader, and Wahoo a close second.<a href="https://www.outdoorgearlab.com/topics/biking/best-bike-computer" target="_blank" rel="noopener">¹⁸</a> Shimano is not considered a major player but does produce some cycle computers with less advanced functionality than its peers and at a price point that reflects that differentiation.<a href="https://bike.shimano.com/en-SG/products/components/pdp.P-SC-EN610.html" target="_blank" rel="noopener">¹⁹</a></p> <p>The global sales of cycle computers were estimated at $607 million in 2023.<a href="https://www.marketresearchfuture.com/reports/cycle-computer-market-22196" target="_blank" rel="noopener">²⁰</a> North American sales are estimated to be 32% of that figure, or $194m.²¹ Since the average price of a bike computer is estimated it at $200, this suggests approximately 1 million cycle computers sold in North America each year.<a href="https://uk.wahoofitness.com/devices/bike-computers" target="_blank" rel="noopener">²²</a> Adjusting this value to the US, we estimate that around 900,000 cycle computers are sold in the US per year.²³ We expect that the 270,000 cyclists purchasing electronic groupsets will all require a computer,<a href="https://bettershifting.com/di2-wireless-module-bluetoothle-ant-troubleshooting-guide/" target="_blank" rel="noopener">²⁴</a> therefore about 30% of all bike computers are likely sold to these users, while the remainder are sold to mechanical groupset cyclists.²⁵</p> <h3>Geographic Markets</h3> <p>The relevant geographic markets are likely to be national or perhaps worldwide, as cycling enthusiasts buy specialized products online or go to specialist bicycle shops. None of SRAM, Shimano, or Campagnolo sell products directly to consumers so they must sell through intermediary retailers. The same goes for bicycles with groupsets already installed on them.</p> <h2>Theory of Harm</h2> <p>We consider that electronic groupsets and cycle computers are complementary products. Consumers can still use either an electronic groupset or cycle computer alone, but the utility derived from using one is increased if they use the other. In this context, Shimano’s decision to remove compatibility with SRAM’s Hammerhead cycle computers has the potential to:</p> <ul> <li>restrict the sales of SRAM’s cycle computers, and</li> <li>reduce competitive pressure on Shimano and hence help to preserve its monopoly in the market for electronic groupsets.</li> </ul> <p>For example, cyclists purchasing electronic groupsets like Di2 are unlikely to purchase a cycle computer that is incompatible with Shimano’s products. Given that 30% of cycle computers are purchased by electronic groupset users,²⁶ Shimano’s conduct has the potential to deny SRAM/Hammerhead access to a significant portion of the market for cycle computers.</p> <p>Furthermore, by preventing SRAM from competing effectively in the cycle computer market, the conduct may also restrict SRAM’s ability to leverage its sales of cycle computers (and the relationships and data that come with that) as a means to compete in the complementary market for electronic groupsets. While the effect on competition in electronic groupsets might be insignificant if SRAM’s potential sales of cycle computers were tiny, the effect might be significant if the potential sales were large as a proportion of the electronic groupsets market (and purchasing that data from Garmin or others was expensive). In such circumstances this might help to maintain Shimano’s monopoly in the electronic groupsets market and hence protect its ability to overcharge cyclists in that market.²⁷</p> <p>For example, Shimano appears to have shown itself to be willing to sacrifice profit by applying new restrictions on integration between its groupset and SRAM’s bike computers, and thereby losing sales to those groupset consumers who wanted an integrated product. However, the removal of interoperability appears to have led most consumers to stick with Shimano groupsets, and to pair those with a rival cycle computer. This denies SRAM additional sales of bike computers, and reduces the data it can gather. It therefore denies SRAM the opportunity to build the consumer relationships and data that would allow it to expand its groupset sales to consumers that use its cycle computer.</p> <p><img fetchpriority="high" decoding="async" class="aligncenter size-full wp-image-39463" src="https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products.png" alt="complementary bicycle products - a bike chain and gears on a white background. To the right of the gears is a bike gps device." width="1539" height="481" srcset="https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products.png 1539w, https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products-300x94.png 300w, https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products-1024x320.png 1024w, https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products-768x240.png 768w, https://fideres.com/wp-content/uploads/2025/03/complementary-bicycle-products-1536x480.png 1536w" sizes="(max-width: 1539px) 100vw, 1539px" /></p> <h2>Damages</h2> <p>The conduct potentially reduces both SRAM’s profits and increases the prices that consumers pay for electronic groupsets.</p> <p>Firstly, Shimano’s conduct is likely to reduce SRAM’s profits from Hammerhead cycle computers. For a preliminary calculation of potential damages to SRAM, we assume the conduct started in June 2022,²⁸ when the firmware update was rolled out.<a href="https://www.cyclingweekly.com/products/hammerhead-forced-to-remove-shimano-di2-support-on-karoo-2-head-units" target="_blank" rel="noopener" name="_ftnref2">²⁹</a> The market for cycle computers was estimated at around $300 million in 2021,<a href="https://www.businessresearchinsights.com/market-reports/cycle-computer-market-103216" target="_blank" rel="noopener" name="_ftnref3">³⁰</a> with limited data available on market shares.</p> <p>We then calculate different scenarios for the amount of lost profit in the cycle computer market, using Garmin’s reported gross margins on cycle computers of 57%.<a href="#_ftn4" name="_ftnref4">³¹</a> These give an estimate of damages to SRAM in the range of $214 to $427 million between 2022 and 2027.</p> <p style="text-align: center;"><em>Table </em><em>1</em><em>: Global Damages to Foreclosed Cycle Computer Firm SRAM ($ million)</em></p> <table id="tablepress-69" class="tablepress tablepress-id-69"> <thead> <tr class="row-1 odd"> <th class="column-1">Year</th><th class="column-2">Global Market Size</th><th class="column-3">10% Lost Sales</th><th class="column-4">20% Lost Sales</th><th class="column-5">Lost Profits</th> </tr> </thead> <tbody class="row-hover"> <tr class="row-2 even"> <td class="column-1">2022 H2</td><td class="column-2">$ 335</td><td class="column-3">$ 33</td><td class="column-4">$ 67</td><td class="column-5">$ 19.1 M - $ 38.1 M</td> </tr> <tr class="row-3 odd"> <td class="column-1">2023</td><td class="column-2">$ 607</td><td class="column-3">$ 61</td><td class="column-4">$ 121</td><td class="column-5">$ 34.6 M - $ 69.2 M</td> </tr> <tr class="row-4 even"> <td class="column-1">2024</td><td class="column-2">$ 643</td><td class="column-3">$ 64</td><td class="column-4">$ 129</td><td class="column-5">$ 36.7 M - $ 73.3 M</td> </tr> <tr class="row-5 odd"> <td class="column-1">2025</td><td class="column-2">$ 681</td><td class="column-3">$ 68</td><td class="column-4">$ 136</td><td class="column-5">$ 38.8 M - $ 77.6 M</td> </tr> <tr class="row-6 even"> <td class="column-1">2026*</td><td class="column-2">$ 721</td><td class="column-3">$ 72</td><td class="column-4">$ 144</td><td class="column-5">$ 41.1 M - $ 82.2 M</td> </tr> <tr class="row-7 odd"> <td class="column-1">2027*</td><td class="column-2">$ 763</td><td class="column-3">$ 76</td><td class="column-4">$ 153</td><td class="column-5">$ 43.5 M - $ 87 M</td> </tr> <tr class="row-8 even"> <td class="column-1"></td><td class="column-2"></td><td class="column-3"></td><td class="column-4"></td><td class="column-5"></td> </tr> <tr class="row-9 odd"> <td class="column-1">Total</td><td class="column-2">$ 3,750</td><td class="column-3">$ 375</td><td class="column-4">$ 750</td><td class="column-5">$ 214 M - $ 427 M</td> </tr> </tbody> </table> <!-- #tablepress-69 from cache --> <p>Secondly, if the conduct has foreclosed such a significant proportion of the cycle computer market that it has not only harmed competitors, but has also damaged competition in the cycle computer market, then it may also have helped Shimano to maintain its monopoly position and overcharge US consumers in the electronic groupset market.</p> <p>In the event that the conduct allows Shimano to maintain prices at supracompetitive levels, two scenarios of overcharge at 5% and 10% would lead to damages to US electronic groupset buyers to be in in the region of $64 to 127 million between 2022 and 2027.³²</p> <p style="text-align: center;"><em>Table </em><em>2</em><em>: Damages to US Consumers in the Electronic Bicycle Component Market ($ million)</em></p> <table id="tablepress-70" class="tablepress tablepress-id-70"> <thead> <tr class="row-1 odd"> <th class="column-1">Year</th><th class="column-2">Shimano US Market Size ($M)</th><th class="column-3">5% Overcharge ($M)</th><th class="column-4">10% Overcharge ($M)</th> </tr> </thead> <tbody class="row-hover"> <tr class="row-2 even"> <td class="column-1">H2 2022</td><td class="column-2">$ 553</td><td class="column-3">$ 5</td><td class="column-4">$ 10</td> </tr> <tr class="row-3 odd"> <td class="column-1">2023</td><td class="column-2">$1,050</td><td class="column-3">$ 9</td><td class="column-4">$ 19</td> </tr> <tr class="row-4 even"> <td class="column-1">2024</td><td class="column-2">$ 1,163</td><td class="column-3">$ 10</td><td class="column-4">$ 21</td> </tr> <tr class="row-5 odd"> <td class="column-1">2025</td><td class="column-2">$ 1,289</td><td class="column-3">$ 12</td><td class="column-4">$ 23</td> </tr> <tr class="row-6 even"> <td class="column-1">2026*</td><td class="column-2">$ 1,428</td><td class="column-3">$ 13</td><td class="column-4">$ 26</td> </tr> <tr class="row-7 odd"> <td class="column-1">2027*</td><td class="column-2">$ 1,583</td><td class="column-3">$ 14</td><td class="column-4">$ 28</td> </tr> <tr class="row-8 even"> <td class="column-1"></td><td class="column-2"></td><td class="column-3"></td><td class="column-4"></td> </tr> <tr class="row-9 odd"> <td class="column-1">Total</td><td class="column-2">$ 7,066</td><td class="column-3">$ 64</td><td class="column-4">$ 127</td> </tr> </tbody> </table> <!-- #tablepress-70 from cache --> <p><a href="#_ftn1" name="_ftnref1"></a></p> <p style="text-align: center;"><em>Source: Fideres Analysis of Shimano’s Financial Statements</em></p> <p><a href="#_ftnref1" name="_ftn1"></a><a href="#_ftnref2" name="_ftn2"></a></p> <p>The post <a href="https://fideres.com/bicycle-thieves-how-shimano-put-the-brakes-on-sram/">Bicycle Thieves: How Shimano Put the Brakes on SRAM</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/bicycle-thieves-how-shimano-put-the-brakes-on-sram/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>A Metadata Monopoly &#8211; Unwrapping Gracenote&#8217;s Anticompetitive Clauses</title> <link>https://fideres.com/a-metadata-monopoly-unwrapping-gracenotes-anticompetitive-clauses/</link> <comments>https://fideres.com/a-metadata-monopoly-unwrapping-gracenotes-anticompetitive-clauses/#respond</comments> <dc:creator><![CDATA[Emily Hatchett]]></dc:creator> <pubDate>Mon, 16 Dec 2024 12:56:14 +0000</pubDate> <category><![CDATA[Research]]></category> <category><![CDATA[Competition]]></category> <category><![CDATA[Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=39314</guid> <description><![CDATA[<p>Gracenote, a provider of entertainment metadata to companies, may be engaging in anticompetitive conduct by imposing exclusivity requirements on customers to which it licenses data.</p> <p>The post <a href="https://fideres.com/a-metadata-monopoly-unwrapping-gracenotes-anticompetitive-clauses/">A Metadata Monopoly &#8211; Unwrapping Gracenote&#8217;s Anticompetitive Clauses</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<h2>Key Points</h2> <ul> <li>Gracenote – a provider of entertainment metadata to companies including streaming service providers and automakers – may be engaging in anticompetitive conduct by imposing exclusivity requirements on customers to which it licenses data.</li> <li>Gracenote has a dominant share of around 60% of the U.S. market for entertainment metadata services. We estimate a market size of $1.3 billion in 2021.</li> <li>A Licensed Data Agreement between Gracenote and FreeCast contains clauses that appear to limit licensees’ ability to combine their dataset with rivals’ datasets, hence excluding those rivals.</li> <li>Potential claimants include streaming services, car manufacturers, and competing metadata providers.</li> <li>Based on a preliminary analysis of limited data, we estimate an overcharge to licensees of approximately 33%. This would give annual estimated damages in the region of $260 million, or $1 billion for the 2020-2024 period.</li> </ul> <h2>Background</h2> <p>Gracenote, which was acquired by audience measurement firm Nielsen in 2017, is a provider of entertainment metadata. It maintains databases containing detailed information about TV shows, films, sports, and music tracks. A recent newsletter<a href="https://www.thebignewsletter.com/p/economic-termites-are-everywhere" target="_blank" rel="noopener">¹</a> reported that Gracenote may be engaging in anticompetitive conduct by imposing exclusivity requirements on customers to which it licenses data. Reports also suggest that Nielsen may be engaging in exclusionary conduct by refusing to provide Gracenote metadata to its competitors.<a href="https://adage.com/article/measurement/nielsen-pulls-gracenote-data-rival-videoamp-others-mull-alternatives/2518366" target="_blank" rel="noopener">²</a></p> <p>Gracenote provides program listings to nearly every major pay TV company in the U.S. and is rumored to have a market share of 60%.<a href="https://www.streamtvinsider.com/cable/comcast-replaces-tivo-rovi-gracenote-for-metadata" target="_blank" rel="noopener">³</a> This aligns with our preliminary analysis, in addition to an article which references Nielsen’s “market dominance” in content metadata.<a href="https://adage.com/article/measurement/nielsen-pulls-gracenote-data-rival-videoamp-others-mull-alternatives/2518366" target="_blank" rel="noopener">⁴</a></p> <h6 style="text-align: center;"><img decoding="async" class="aligncenter wp-image-39317 size-large" src="https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share-1024x699.png" alt="A pie chart showing the entertainment metadata market shares of the United States in 2021. Gracenote (Nielsen) takes up 60% of the market shares, TiVo (Xperi) 15% and Others make up 25% of the market shares." width="1024" height="699" srcset="https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share-1024x699.png 1024w, https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share-300x205.png 300w, https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share-768x524.png 768w, https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share-1536x1048.png 1536w, https://fideres.com/wp-content/uploads/2024/12/entertainment-metadata-market-share.png 1739w" sizes="(max-width: 1024px) 100vw, 1024px" />Source: Fideres analysis</h6> <h2>Entertainment Metadata</h2> <p>Gracenote licenses its data to customers which include streaming service providers, automakers, and consumer electronics manufacturers. The data is used to enhance user interfaces for platforms and devices. For example, in the context of in-car entertainment, Gracenote uses automatic content recognition (ACR) technology to identify music playing from sources such as radio or streaming services. It detects the “fingerprint” of the audio and matches it with the corresponding song in its database. Music-related information such as song title, artist name and album art are then displayed on the car’s infotainment screen.<a href="https://gearshifters.org/toyota/recognition/what-is-toyota-gracenote/">⁵</a></p> <p>Metadata is essentially “data about data.”<a href="https://guides.library.cmu.edu/Metadata" target="_blank" rel="noopener">⁶</a> In the context of music, there are three types of metadata: descriptive metadata (e.g. song title, release date, artist name and album art); ownership metadata (detailing contractual arrangements between artists, songwriters and producers for purposes of royalty calculation); and recommendation metadata (mood labels describing how the music sounds that can be used to enhance music discovery).<a href="https://soundcharts.com/blog/music-metadata" target="_blank" rel="noopener">⁷</a> Metadata can be used to deliver personalized content experiences. For example, TV show metadata can include “descriptors” (e.g., “Friendship”, “Cafes”) which can be used to recommend similar programs that audiences might be interested in.<a href="https://www.nielsen.com/insights/2023/media-metadata-success-in-streaming/" target="_blank" rel="noopener">⁸</a> In the context of TV shows and movies, metadata can include episode titles, names of actors, episode descriptions, and banner images for programs.<a href="https://contracts.justia.com/companies/freecast-inc-10029/contract/111196/?utm_source=substack&amp;utm_medium=email" target="_blank" rel="noopener">⁹</a></p> <h2>Relevant Market</h2> <p>Companies providing entertainment metadata services may have different areas of focus within entertainment metadata (e.g., music, sport, video). Likewise, licensees have different data requirements. For example, an auto manufacturer that requires music metadata for its in-car entertainment system would likely not consider TV and movie metadata to be a viable substitute. Similarly, a streaming service provider that requires TV and movie metadata would likely not consider music metadata to be a suitable alternative.</p> <p>Consumer-facing products such as Shazam (an app which allows consumers to identify music) are also unlikely to constrain Gracenote and hence to be part of the relevant market. Shazam instead operates in the “market for music recognition apps”.<a href="https://ec.europa.eu/competition/mergers/cases/decisions/m8788_1279_3.pdf" target="_blank" rel="noopener">¹⁰</a><a href="#_ftn1" name="_ftnref1"></a> Gracenote, in contrast, does not offer apps or software solutions for consumers.<a href="https://ec.europa.eu/competition/mergers/cases/decisions/m8788_1279_3.pdf" target="_blank" rel="noopener">¹¹</a> Crucially, it does not appear that Shazam licenses its data, which we consider to be key to the market definition. With this in mind, and adopting the standard hypothetical monopolist test, we therefore consider the relevant market to be the market for entertainment metadata services, with different sub-segments for different areas of focus (e.g. music, TV, movie and sport).</p> <h2>Theory of Harm &#8211; De Facto Exclusive Dealing</h2> <p>As one forum user notes, “the results from four databases are much better than one.”<a href="https://www.thebignewsletter.com/p/economic-termites-are-everywhere" target="_blank" rel="noopener">¹²</a> However Gracenote appears to impose exclusivity requirements on licensees through restrictive contractual obligations, which prevent licensees from:</p> <ul> <li>purchasing only specific types of metadata (such as images or text);</li> <li>splitting the metadata; and</li> <li>combining their datasets with those of third parties.</li> </ul> <p>These restrictions are applied through a Licensed Data Agreement, such as that between Gracenote and FreeCast, which prohibits “splitting up” the Gracenote data by separating images from their accompanying editorial text:</p> <p><em>“Licensee shall not… use any image or photograph contained within the Licensed Data outside or independent of the accompanying editorial text and program information with which it is provided.”</em><a href="https://contracts.justia.com/companies/freecast-inc-10029/contract/111196/" target="_blank" rel="noopener">¹³</a></p> <p>In theory, purchasers might license Gracenote while also licensing additional metadata providers.  However, in practice, this restriction can prohibit the integration of Gracenote metadata with metadata from other databases that purchasers might license, with the effect that licensees cannot use data from other vendors and Gracenote at the same time. These restrictions therefore indirectly amount to an exclusive dealing clause that allows Gracenote to maintain its monopoly power by foreclosing competition.</p> <p>For example, in video entertainment, a streaming platform with a Gracenote license might use the Gracenote metadata to improve their recommendation algorithm. However, the platform would not be able to combine this with enhanced metadata (e.g. cast demographics or expanded synopsis) from a provider like TiVo (Gracenote’s main competitor), since this would require the Gracenote metadata to be used outside of the accompanying text they supply. This inability to combine the Gracenote metadata with the metadata from TiVo would then foreclose the opportunity for the latter to compete.</p> <p>This impact is recognized by users who report that “Gracenote will only license if we drop all the other databases, they will not allow to be combined with others.”<a href="https://www.thebignewsletter.com/p/economic-termites-are-everywhere" target="_blank" rel="noopener">¹⁴</a> This appears to allow Gracenote to sustain supra-competitive prices for its metadata licenses (while also suppressing quality and innovation).</p> <p>Indeed, Gracenote has previously attempted to exclude rivals by suing clients who switched to competing providers. In 2001, Gracenote filed a lawsuit against Roxio, a DVD burning software, for switching to Freedb.<a href="https://web.archive.org/web/20010604032116/https://gracenote.com/press/2001051000.html" target="_blank" rel="noopener">¹⁵</a> The lawsuit ended in an agreement for Roxio to return to Gracenote.<a href="https://www.theregister.com/2002/01/15/roxio_mulls_easy_litigation/" target="_blank" rel="noopener">¹⁶</a></p> <h2>Harmed Classes</h2> <p>Gracenote’s conduct has implications across a range of purchasers in the digital entertainment industry. Potential plaintiffs might include the following categories:</p> <h3>Auto Manufacturers</h3> <p>Around 300 million cars worldwide are powered by Gracenote’s music recognition technology.<a href="https://gracenote.com/about-us/" target="_blank" rel="noopener">¹⁷</a><a href="#_ftn1" name="_ftnref1"></a> Gracenote’s technology has been used by several car makers including Volvo, Land Rover, Toyota, Audi, and Hyundai.<a href="https://www.volvocars.com/en-om/support/car/xc40-recharge-plug-in-hybrid/article/9b62c5b79dd1be94c0a801515d3ff34a" target="_blank" rel="noopener">¹⁸</a> Car manufacturers may have been harmed if Gracenote’s pricing is higher due to its dominant market position. Moreover, if manufacturers were able to source metadata from multiple providers, they may be able to achieve enhanced functionality at lower costs. According to one article, adding Gracenote can cost auto manufacturers $20 per car.<a href="https://www.treehugger.com/why-your-car-cant-read-your-cd-tracks-4868632" target="_blank" rel="noopener">¹⁹</a></p> <h3>Streaming Services</h3> <p>Gracenote licenses its data to streaming service providers such as: Spotify, Apple Music, and Prime Music, (music); Comcast, Disney, Tubi, Roku, and DirecTV (TV / Video); and DAZN (sports).<a href="https://gracenote.com/segments/streaming-platform/">²⁰</a> Competition to offer metadata to streaming services would reduce prices and improve dataset quality.</p> <h3>Competitors in the Metadata and Audience Measurement Markets</h3> <p>Metadata providers competing with Gracenote, such as Reelgood, are harmed by its exclusionary conduct. Gracenote’s conduct results in competitors being unable to effectively contest Gracenote&#8217;s monopoly and deprives them of potential revenue they could gain in a competitive market.</p> <h2>Damages</h2> <p>Based on Gracenote’s U.S. revenue ($787 million in 2021)²¹ and estimated market share of at least 60%, we infer a market size of around $1.3 billion.</p> <p>It appears that the conduct goes back to at least early 2019, given the date of the Licensed Data Agreement (March 2019).<a href="https://contracts.justia.com/companies/freecast-inc-10029/contract/111196/?utm_source=substack&amp;utm_medium=email" target="_blank" rel="noopener">²²</a></p> <p>As a result of Gracenote’s business-to-business pricing model, pricing data is very limited. Under the Licensed Data Agreement, FreeCast pays Gracenote a monthly license fee of $5,210, which increases to $7,500 for over 750,000 monthly active users, and by 5% every year. This is higher than the fee that FreeCast pays to Reelgood (a minimum monthly fee of $5,000, which fluctuates depending on data requested).<a href="https://www.sec.gov/Archives/edgar/data/1633369/000101376224000771/ea0209834-s1a3_freecast.htm" target="_blank" rel="noopener">²³</a></p> <p>According to one source, FreeCast had 436,028 subscribers in 2021.<a href="https://expandedramblings.com/index.php/freecast/?utm_content=cmp-true" target="_blank" rel="noopener">²⁴</a> Based on this, we can estimate that Gracenote’s fees are at least 4% more expensive than competitors’ fees. However the overcharge is likely closer to 33% as when the active user threshold is crossed Gracenote charges $7,500 per month. If we consider the 5% annual increase, the overcharge might reach 50% for clients with licenses for around 5 years. Indeed, the threshold is likely to have been exceeded for most licensees, as many of Gracenote’s major clients have over 750,000 monthly users. For example, Spotify has over 100 million users in the U.S.,<a href="https://www.businessofapps.com/data/spotify-statistics/" target="_blank" rel="noopener">²⁵</a> Apple Music has over 30 million U.S. listeners,<a href="https://www.emarketer.com/content/apple-music-continues-to-grow-should-marketers-be-worried" target="_blank" rel="noopener">²⁶</a> and DirecTV has around 11 million subscribers in the U.S.<a href="https://www.statista.com/statistics/497288/directv-number-video-subscribers-usa/" target="_blank" rel="noopener">²⁷</a></p> <p>Therefore, applying the overcharge percentages of 33% to Gracenote’s U.S. Impact / Content revenue of $787 million gives an estimated aggregate overcharge in the region of $260 million in 2021. Total damages for a class of licensees for the 2020 to 2024 period are in the region of $1 billion.</p> <p>The post <a href="https://fideres.com/a-metadata-monopoly-unwrapping-gracenotes-anticompetitive-clauses/">A Metadata Monopoly &#8211; Unwrapping Gracenote&#8217;s Anticompetitive Clauses</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/a-metadata-monopoly-unwrapping-gracenotes-anticompetitive-clauses/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Fideres Co-Founder, Alberto Thomas, Speaks At the Presse Et Media Futur In Paris</title> <link>https://fideres.com/fideres-co-founder-alberto-thomas-speaks-at-the-presse-et-media-futur-in-paris/</link> <comments>https://fideres.com/fideres-co-founder-alberto-thomas-speaks-at-the-presse-et-media-futur-in-paris/#respond</comments> <dc:creator><![CDATA[Julia Gillman]]></dc:creator> <pubDate>Wed, 04 Dec 2024 12:37:44 +0000</pubDate> <category><![CDATA[News]]></category> <guid isPermaLink="false">https://fideres.com/?p=39285</guid> <description><![CDATA[<p>Fideres’s Co-Founder, Alberto Thomas, contributes to The Presse et Media Futur Conference in Paris. He participates in a roundtable titled &#8220;ÉDITEURS ET PLATEFORMES IA : ENTRE IMPÉRATIF DE COLLABORATION ET TENSIONS PERSISTANTES&#8221; discussing fair and equitable remuneration for French media and publishers from AI. &#160;</p> <p>The post <a href="https://fideres.com/fideres-co-founder-alberto-thomas-speaks-at-the-presse-et-media-futur-in-paris/">Fideres Co-Founder, Alberto Thomas, Speaks At the Presse Et Media Futur In Paris</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<p><span data-teams="true">Fideres’s Co-Founder, Alberto Thomas, contributes to <a id="menurcrq" class="fui-Link ___1q1shib f2hkw1w f3rmtva f1ewtqcl fyind8e f1k6fduh f1w7gpdv fk6fouc fjoy568 figsok6 f1s184ao f1mk8lai fnbmjn9 f1o700av f13mvf36 f1cmlufx f9n3di6 f1ids18y f1tx3yz7 f1deo86v f1eh06m1 f1iescvh fhgqx19 f1olyrje f1p93eir f1nev41a f1h8hb77 f1lqvz6u f10aw75t fsle3fq f17ae5zn" title="https://www.presseetmediasaufutur.com/" href="https://www.presseetmediasaufutur.com/" target="_blank" rel="noreferrer noopener" aria-label="Link The Presse et Media Futur Conference in Paris">The Presse et Media Futur Conference in Paris</a>. He participates in a roundtable titled &#8220;ÉDITEURS ET PLATEFORMES IA : ENTRE IMPÉRATIF DE COLLABORATION ET TENSIONS PERSISTANTES&#8221; discussing fair and equitable remuneration for French media and publishers from AI.</span></p> <p><img decoding="async" class="aligncenter wp-image-39295 size-large" src="https://fideres.com/wp-content/uploads/2024/12/Presse-et-Media-Futur-1-e1733314822178-1024x576.jpg" alt="Fideres Co-Founder Alberto Thomas speaks on a roundtable at the Presse et media conference in Paris." width="1024" height="576" srcset="https://fideres.com/wp-content/uploads/2024/12/Presse-et-Media-Futur-1-e1733314822178-1024x576.jpg 1024w, https://fideres.com/wp-content/uploads/2024/12/Presse-et-Media-Futur-1-e1733314822178-300x169.jpg 300w, https://fideres.com/wp-content/uploads/2024/12/Presse-et-Media-Futur-1-e1733314822178-768x432.jpg 768w, https://fideres.com/wp-content/uploads/2024/12/Presse-et-Media-Futur-1-e1733314822178.jpg 1244w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <p>&nbsp;</p> <p>The post <a href="https://fideres.com/fideres-co-founder-alberto-thomas-speaks-at-the-presse-et-media-futur-in-paris/">Fideres Co-Founder, Alberto Thomas, Speaks At the Presse Et Media Futur In Paris</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/fideres-co-founder-alberto-thomas-speaks-at-the-presse-et-media-futur-in-paris/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Fideres Advises in Billion-Pound UK Class Action Against Microsoft Azure</title> <link>https://fideres.com/fideres-advises-in-billion-pound-uk-class-action-against-microsoft-azure/</link> <comments>https://fideres.com/fideres-advises-in-billion-pound-uk-class-action-against-microsoft-azure/#respond</comments> <dc:creator><![CDATA[Julia Gillman]]></dc:creator> <pubDate>Tue, 03 Dec 2024 17:51:02 +0000</pubDate> <category><![CDATA[News]]></category> <category><![CDATA[Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=39279</guid> <description><![CDATA[<p>Today Dr Maria Luisa Stasi filed UK legal proceedings against Microsoft on the basis of its conduct in the cloud computing services. Fideres has worked with Professor Abraham Wickelgren to provide the proposed class representative Dr Stasi with an expert report on Microsoft’s conduct in relation to its cloud computing service Azure. This claim follows [&#8230;]</p> <p>The post <a href="https://fideres.com/fideres-advises-in-billion-pound-uk-class-action-against-microsoft-azure/">Fideres Advises in Billion-Pound UK Class Action Against Microsoft Azure</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<p>Today Dr Maria Luisa Stasi filed UK legal proceedings against Microsoft on the basis of its conduct in the cloud computing services.</p> <p>Fideres has worked with Professor Abraham Wickelgren to provide the proposed class representative Dr Stasi with an expert report on Microsoft’s conduct in relation to its cloud computing service Azure.</p> <p>This claim follows our work on other ongoing UK class action cases, including:</p> <ul> <li><a href="https://www.catribunal.org.uk/cases/16737724-professor-barry-rodger" target="_blank" rel="noopener">Google Play store</a></li> <li><a href="https://www.catribunal.org.uk/cases/15957723-robert-hammond" target="_blank" rel="noopener">Amazon BuyBox</a></li> <li><a href="https://www.catribunal.org.uk/cases/16027723-christine-riefa-class-representative-limited" target="_blank" rel="noopener">Apple-Amazon</a></li> <li><a href="https://www.catribunal.org.uk/cases/14337722-dr-liza-lovdahl-gormsen" target="_blank" rel="noopener">Meta</a></li> </ul> <p><a href="https://ukcloudclaim.com/" target="_blank" rel="noopener">Click here to find out more about the claim.</a></p> <p>The post <a href="https://fideres.com/fideres-advises-in-billion-pound-uk-class-action-against-microsoft-azure/">Fideres Advises in Billion-Pound UK Class Action Against Microsoft Azure</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/fideres-advises-in-billion-pound-uk-class-action-against-microsoft-azure/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>DoorDash&#8217;s Algorithm: A Recipe for Higher Prices</title> <link>https://fideres.com/doordashs-algorithm-a-recipe-for-higher-prices/</link> <comments>https://fideres.com/doordashs-algorithm-a-recipe-for-higher-prices/#respond</comments> <dc:creator><![CDATA[Wanyi Wang]]></dc:creator> <pubDate>Thu, 14 Nov 2024 16:14:05 +0000</pubDate> <category><![CDATA[Research]]></category> <category><![CDATA[Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=39219</guid> <description><![CDATA[<p>Fideres examines the hidden price of dining out.</p> <p>The post <a href="https://fideres.com/doordashs-algorithm-a-recipe-for-higher-prices/">DoorDash&#8217;s Algorithm: A Recipe for Higher Prices</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<h2>Key Points</h2> <ul> <li>In this Research Alert, Fideres examines the anti-competitive effects of DoorDash&#8217;s de facto Most Favored Nation (MFN) clauses.</li> <li>DoorDash has achieved a dominant position in the U.S. meal delivery market, holding a 67% market share as of 2023.</li> <li>Instead of directly applying No Price Competition Clauses (NPCC), which prohibit restaurants from offering lower prices to consumers who order directly from them, DoorDash penalizes restaurants for discounting their offerings outside of the platform.</li> <li>These de facto NPCC clauses, implemented through DoorDash&#8217;s restaurant ranking algorithm, limit the ability of restaurants to offer lower prices to dine-in customers or on competing platforms, harming both consumers and restaurants.</li> <li>Fideres examines how dine-in customers who have eaten at restaurants that are listed on DoorDash in the U.S might have been overcharged as a result of such behavior.</li> </ul> <h2>Background</h2> <p>After a long day, many Americans turn to an online food delivery app to order dinner, with DoorDash—a platform controlling over 67% of the U.S. market—often being the app of choice.<a href="https://www.businessofapps.com/data/food-delivery-app-market/" target="_blank" rel="noopener">¹</a> As users browse for restaurants, they are naturally drawn to those with higher rankings and the “Most Loved” label.<a href="https://get.doordash.com/en-us/about/most-loved" target="_blank" rel="noopener">²</a> However, these consumer-steering features are linked to DoorDash&#8217;s de facto NPCC, which effectively shapes pricing strategies across the restaurant industry.</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-39221 size-large" src="https://fideres.com/wp-content/uploads/2024/11/Picture2-1024x649.png" alt="" width="1024" height="649" srcset="https://fideres.com/wp-content/uploads/2024/11/Picture2-1024x649.png 1024w, https://fideres.com/wp-content/uploads/2024/11/Picture2-300x190.png 300w, https://fideres.com/wp-content/uploads/2024/11/Picture2-768x486.png 768w, https://fideres.com/wp-content/uploads/2024/11/Picture2-1536x973.png 1536w, https://fideres.com/wp-content/uploads/2024/11/Picture2.png 1650w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></p> <h6 style="text-align: center;"><em>Source: <a href="https://secondmeasure.com/datapoints/food-delivery-services-grubhub-uber-eats-doordash-postmates/" target="_blank" rel="noopener">Bloomberg Second Measure³</a></em></h6> <p>With DoorDash&#8217;s commission fees ranging from 15% to 30%,<a href="https://get.doordash.com/en-us/products/marketplace" target="_blank" rel="noopener">⁴</a> many restaurants are forced to raise their prices to avoid incurring a loss. The platform’s algorithm penalizes restaurants that list menu prices on DoorDash higher than their in-store prices, effectively pushing restaurants to keep prices consistent across channels.<a href="https://www.restaurantbusinessonline.com/technology/doordash-pushes-back-against-inflated-delivery-prices" target="_blank" rel="noopener">⁵</a></p> <p>This policy may appear to protect consumers from price hikes, but the reality is more complex. To maintain visibility on DoorDash, restaurants are compelled to align their DoorDash menu prices with in-store pricing, often resulting in supra-competitive prices.</p> <p>Restaurants normally would not match their original in-store prices to DoorDash menu prices, since they would make a loss after accounting for the high commission fees.⁶ As a result, the only viable way to maintain parity between DoorDash menu and in-store prices is to raise in-store prices, ensuring takeaway orders remain profitable. This de facto NPCC harms all consumers who use restaurants listed on food delivery platforms, whether they dine-in or order food for delivery. These consumers face elevated prices as a consequence.<a href="#_ftnref1" name="_ftn1"></a></p> <h2>Classical Most Favored Nation Clauses</h2> <p>Imposing MFN clauses is common in the food delivery market. Grubhub and Uber Eats adopt a wide MFN clause, which stops restaurants from offering lower prices elsewhere, including to their dine-in customers.⁷</p> <p>This mechanism ensures the price listing on their platform is the lowest among all sales channels, regardless of the commission fee they impose to the restaurants. Without the pressure to compete horizontally, platforms can charge supra-competitive commissions without worrying about losing business to more efficient rivals with lower commission fees. These clauses stifle competition on fees and deter new platforms from entering the market with better rates, since restaurants cannot pass those savings on to customers.</p> <p>In the absence of MFN clauses, we would expect to see competition on commissions between platforms. Rival platforms would be incentivized to offer lower commissions, and monopoly platforms would have an incentive to cut their own commissions in order to match those offers and retain restaurants on their platforms. As a result, commissions across all restaurant platforms would fall and consumers would pay lower prices.</p> <p>MFN clauses therefore create barriers to entry, discouraging competition from new or smaller players.<a href="https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=2144&amp;context=facsch_lawrev">⁸</a> This leads to increased marginal costs for restaurants and customers that use the platform, while imposing higher prices on those that do not use the platform.</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-39227 size-large" src="https://fideres.com/wp-content/uploads/2024/11/Restaurant-flow-chart-1024x575.png" alt="A flow chart highlighting the impact of prices with and without MFN clauses. With MFN clauses, high dine-in prices have to match platform prices which are already elevated to account for high commissioning fees. Prices without MFN clauses mean restaurants are free to set lower dine-in prices and listed prices on platforms with low commissioning fees will be cheaper which in turn incentivizes the first food delivery platform which has MFN clauses and high commissioning fees to lower the commissioning fees so more people would use the platform." width="1024" height="575" srcset="https://fideres.com/wp-content/uploads/2024/11/Restaurant-flow-chart-1024x575.png 1024w, https://fideres.com/wp-content/uploads/2024/11/Restaurant-flow-chart-300x169.png 300w, https://fideres.com/wp-content/uploads/2024/11/Restaurant-flow-chart-768x431.png 768w, https://fideres.com/wp-content/uploads/2024/11/Restaurant-flow-chart.png 1499w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></p> <h2>DoorDash’s De Facto MFN Clauses</h2> <p>Instead of directly including the MFN clauses in the contracts signed with restaurants, DoorDash is imposing de facto MFN clauses tied to restaurant ranking on the platform. DoorDash does this in the following ways:</p> <ul> <li>Restaurant Ranking: DoorDash gives priority ranking in its app to restaurants that list their menu items on DoorDash at the same price as their dine-in menu.</li> <li>Menu Price Labels: it uses labels – such as “Menu Matches In-Store Prices: Get the same prices you would in-store on DoorDash” – to identify when a restaurant matches prices on the DoorDash app with those on its dine-in menu.<a href="https://www.restaurantbusinessonline.com/technology/doordash-pushes-back-against-inflated-delivery-prices" target="_blank" rel="noopener">⁹</a></li> <li>Most Loved Labels: Price parity is a condition to qualify for Most Loved, a category of restaurants that are more visible on the platform.<a href="https://get.doordash.com/en-us/about/most-loved" target="_blank" rel="noopener">¹⁰</a></li> </ul> <p>DoorDash explicitly states on their merchant support webpage that marking up menu prices on DoorDash can result in “up to 37% fewer sales and up to 78% lower reorder rates.”<a href="https://help.doordash.com/merchants/s/article/How-to-Maximize-Visibility-and-Order-Volume-on-DoorDash?language=en_US" target="_blank" rel="noopener">¹¹</a> With these preferential algorithm measures, although not compulsory, restaurants are effectively induced to match their DoorDash menu prices to their dine-in prices. Otherwise, they risk gaining very little visibility on the platform.</p> <p>Through this price-matching mechanism, DoorDash has monopolized the meal delivery market by imposing de facto MFN clauses tied to restaurant ranking on the platform.</p> <h2>Why Are Dine-in Consumers Harmed?</h2> <p>DoorDash charges restaurants a commission fee based on the selected plan, ranging from 15% for the Basic Plan, 25% for the Plus Plan, and 30% for the Premier Plan.<a href="https://get.doordash.com/en-us/products/marketplace" target="_blank" rel="noopener">¹²</a> The Plus and Premier Plans include access to DashPass, which offers customers free delivery through their subscription. Additionally, the Premier Plan comes with a Growth Guarantee, promising higher visibility and more bookings for the restaurant.</p> <p>Restaurants typically incur three major expenses: food (28-32%), labor (28-32%), and rent (22-29%). This means that operating costs generally fall between 78% and 93%, leaving a profit margin of only 7% to 22%.<a href="https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/ordering-in-the-rapid-evolution-of-food-delivery" target="_blank" rel="noopener">¹³</a> With the added commission fees charged by food delivery platforms, restaurants face additional costs to serve their customers. Given commission rates ranging from 15% to 30%, restaurants are often forced to raise their menu prices in order to avoid operating at a loss.</p> <p>However, because of the de facto MFN clauses imposed by DoorDash, restaurants will simultaneously increase their in-store prices to ensure visibility on the platform, causing dine-in consumers to pay higher prices. Given the widespread use of MFN clauses—both implicit and explicit—by DoorDash and other platforms, most restaurants face similar pressures. As a result, inter-restaurant competition is unlikely to constrain the upward pressure on prices.</p> <p>In theory, restaurants could threaten to delist from a platform to avoid the impact of MFN clauses, which would likely reduce the anti-competitive effect. In practice, however, this is often an irrational choice, as delisting would lead to a substantial loss in sales. Without MFN clauses constraining pricing, restaurants could freely set lower prices for dine-in customers, who would therefore benefit from more competitive prices.<a href="#_ftnref1" name="_ftn1"></a></p> <h2>Conclusion</h2> <p>DoorDash’s de facto MFN clauses pressure restaurants to set higher prices for both delivery and dine-in services to offset the 15-30% commission fees, creating a spillover effect that impacts all parties in the market, including those not using the delivery service. If restaurants had the freedom to offer lower prices outside of DoorDash, these additional costs could be significantly reduced, benefiting both consumers and the restaurant industry as a whole.</p> <p>Sales from full-service restaurants in the U.S. are estimated at USD 513 billion in 2023, up from USD 470 billion in 2022.<a href="https://www.ers.usda.gov/data-products/food-expenditure-series/" target="_blank" rel="noopener">¹⁴</a> Even isolating the 30% attributable to dine-in customers,<a href="https://www.pymnts.com/restaurant-technology/2022/41-pct-of-restaurant-revenue-now-comes-through-digital-channels/" target="_blank" rel="noopener">¹⁵</a> and adjusting for restaurants listed on a food-delivery platform and customers who are not DoorDash users,¹⁶ the economic impact remains substantial. A potential class action on behalf of dine-in consumers would therefore be economically viable, aiming to address the higher prices driven by DoorDash&#8217;s de facto MFN clauses and restore fair competition in the food delivery market.<a href="#_ftnref1" name="_ftn1"></a></p> <p>The post <a href="https://fideres.com/doordashs-algorithm-a-recipe-for-higher-prices/">DoorDash&#8217;s Algorithm: A Recipe for Higher Prices</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/doordashs-algorithm-a-recipe-for-higher-prices/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Fideres Has Submitted Comments To The European Commission On Its Proposed Guidelines For Applying Article 102 TFEU To Exclusionary Conduct</title> <link>https://fideres.com/fideres-has-submitted-comments-to-the-european-commission-on-its-proposed-guidelines-for-applying-article-102-tfeu-to-exclusionary-conduct/</link> <comments>https://fideres.com/fideres-has-submitted-comments-to-the-european-commission-on-its-proposed-guidelines-for-applying-article-102-tfeu-to-exclusionary-conduct/#respond</comments> <dc:creator><![CDATA[Julia Gillman]]></dc:creator> <pubDate>Fri, 01 Nov 2024 15:52:23 +0000</pubDate> <category><![CDATA[News]]></category> <guid isPermaLink="false">https://fideres.com/?p=39194</guid> <description><![CDATA[<p>Fideres has submitted comments to the European Commission on Section 4.2.5 of its proposed guidelines for applying article 102 TFEU to abusive exclusionary conduct &#8211; we believe the proposed guidelines&#8217; approach to margin squeeze cases risks protecting competitors while failing consumers. Fideres’s letter to the European Commission is available to read here.</p> <p>The post <a href="https://fideres.com/fideres-has-submitted-comments-to-the-european-commission-on-its-proposed-guidelines-for-applying-article-102-tfeu-to-exclusionary-conduct/">Fideres Has Submitted Comments To The European Commission On Its Proposed Guidelines For Applying Article 102 TFEU To Exclusionary Conduct</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<p>Fideres has submitted comments to the European Commission on Section 4.2.5 of its proposed guidelines for applying article 102 TFEU to abusive exclusionary conduct &#8211; we believe the proposed guidelines&#8217; approach to margin squeeze cases risks protecting competitors while failing consumers.</p> <p><a href="https://fideres.com/wp-content/uploads/2024/11/2024-10-31_EC-Letter_Fideres_102_Exclusionary_Guidelines_Submission_.pdf" target="_blank" rel="noopener">Fideres’s letter to the European Commission is available to read here.</a></p> <p>The post <a href="https://fideres.com/fideres-has-submitted-comments-to-the-european-commission-on-its-proposed-guidelines-for-applying-article-102-tfeu-to-exclusionary-conduct/">Fideres Has Submitted Comments To The European Commission On Its Proposed Guidelines For Applying Article 102 TFEU To Exclusionary Conduct</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/fideres-has-submitted-comments-to-the-european-commission-on-its-proposed-guidelines-for-applying-article-102-tfeu-to-exclusionary-conduct/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Crypto ETFs: Simple Concept, Big Issues</title> <link>https://fideres.com/crypto-etfs-simple-concept-big-issues/</link> <comments>https://fideres.com/crypto-etfs-simple-concept-big-issues/#respond</comments> <dc:creator><![CDATA[Robert Chang]]></dc:creator> <pubDate>Thu, 17 Oct 2024 13:36:00 +0000</pubDate> <category><![CDATA[Research]]></category> <category><![CDATA[Financial Litigation]]></category> <guid isPermaLink="false">https://fideres.com/?p=38890</guid> <description><![CDATA[<p>Crypto ETFs present unique risks to investors. Reliance on risky liquidity providers and market concentration could trigger instability, price distortions, and investor vulnerability.</p> <p>The post <a href="https://fideres.com/crypto-etfs-simple-concept-big-issues/">Crypto ETFs: Simple Concept, Big Issues</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<h2>Key Points</h2> <ul> <li>In January 2024, the SEC approved Bitcoin and Ethereum ETFs, opening the door to broader crypto investing with a combined market cap now exceeding $60 billion.</li> <li>Despite this milestone, crypto ETFs bring their own set of risks. Unlike traditional ETFs, which rely on established authorized participants (APs), these funds depend on liquidity providers (LPs) with lower credit ratings and reserves, raising concerns about potential disruptions to share creation and redemption processes if LPs encounter instability.</li> <li>Market concentration is another red flag, with just three LPs controlling over 70% of the crypto ETF market. This dominance not only stifles competition but also raises the risk of price distortions, which could impede the ETF’s ability to accurately reflect the underlying assets’ value.</li> <li>Most crypto ETF LPs are linked to proprietary trading firms, raising concerns about market manipulation or front-running, especially given the limited competition and the lack of robust ethics walls in the industry.</li> <li>Crypto ETFs’ reliance on a single custodian is a source of additional risk for investors: any major issues, such as a security breach, could have widespread consequences for investors.</li> <li>Crypto ETFs may face increased litigation risk if they fail to fully disclose these distinct risks.</li> </ul> <h2>Background On Bitcoin Investment Vehicles</h2> <h3>Overview</h3> <p>Interest in cryptocurrencies has exploded over the years, attracting a wide range of investors. Yet, many institutional investors have been hamstrung by restrictions preventing direct investments in digital assets. In response, a wave of cryptocurrency-based investment vehicles, primarily private trusts, emerged to offer exposure to the crypto market.</p> <p>However, these private vehicles lacked the key mechanisms for efficient fund creation and redemption, prompting issuers to file numerous ETF conversion applications with the SEC as early as 2013. For years, the SEC rejected these proposals, citing concerns over market manipulation and investor protection until January 10, 2024, when it adopted rule changes permitting the creation of Bitcoin ETFs on major exchanges.<a href="https://www.sec.gov/files/rules/sro/nysearca/2024/34-99306.pdf">¹</a> The first ten Bitcoin ETFs began trading the following day.²Subsequently, the SEC approved Ethereum (ETH) spot ETFs on May 23, 2024, after which nine ETH ETFs began trading on July 23, 2024.³</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-38894 size-2048x2048" src="https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-2048x990.png" alt="A line graph depicting the timeline of Crypto ETFs. The X axis charts years from 2013 to 2024. The Y axis covers BiTC Price starting at $0k going up in increments of $50k to $200k. The line graph starts with the first spot of BTC ETF application being submitted to the SEC in January 2013, other key dates are also highlighted between this point and the FCA approves the first BTC and ETH spot ETPs in the UK. The following day on 22 May 2024, the SEC approved the first RTH ETF." width="2048" height="990" srcset="https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-2048x990.png 2048w, https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-300x145.png 300w, https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-1024x495.png 1024w, https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-768x371.png 768w, https://fideres.com/wp-content/uploads/2024/10/Timeline-of-Crypto-ETFs-e1729268823726-1536x742.png 1536w" sizes="auto, (max-width: 2048px) 100vw, 2048px" /></p> <h6 style="text-align: center;"><em>Figure 1 Timeline of Crypto ETFs</em></h6> <p>As of September 30, 2024, these newly created crypto ETFs had a total market capitalization of over $68bn. In the case of Bitcoin, Blackrock and Grayscale’s ETFs hold roughly 3% of all coins outstanding.</p> <h3>Significant Price Distortions Before ETF Conversions</h3> <p>Prior to their transition into publicly traded ETFs, the pain point of private crypto investment vehicles was the significant and persistent disparity between their share price and net asset value (NAV) per share. This discrepancy meant that investors in these vehicles often saw returns that diverged sharply from those of the underlying assets.</p> <p>Take Grayscale’s Bitcoin Trust (GBTC) as a prime example (Figure 2). As Bitcoin surged to nearly $60,000 in March 2021, GBTC investors endured steep discounts, with the trust trading as much as 50% below its NAV. Not only did investors suffer from the broader decline in Bitcoin’s price, but they were also stuck with the inability to redeem their GBTC shares for actual Bitcoin, further exacerbating their losses.⁴</p> <p>This prompted GBTC and other funds to seek ETF conversion, using creation and redemption mechanisms to align NAV with the traded share price.</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-38986 size-2048x2048" src="https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-2048x986.png" alt="" width="2048" height="986" srcset="https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-2048x986.png 2048w, https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-300x144.png 300w, https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-1024x493.png 1024w, https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-768x370.png 768w, https://fideres.com/wp-content/uploads/2024/10/GBTC-Premium-and-Discount-Source-Bloomberg-Fideres-e1729268860810-1536x739.png 1536w" sizes="auto, (max-width: 2048px) 100vw, 2048px" /></p> <h6 style="text-align: center;"><em>Figure 2 GBTC Premium and Discount; Source: Bloomberg, Fideres</em></h6> <h2>The Mechanics Of ETF Creation And Redemption</h2> <h3>Typical ETF Creation And Redemption Structure</h3> <p>ETFs maintain alignment between their net asset value (NAV) per share and the traded share price through a creation/redemption mechanism, overseen by Authorized Participants (APs), who are typically large financial institutions. APs leverage arbitrage opportunities for risk-free profits, helping keep the ETF’s share price close to its NAV. When the share price falls below NAV, APs buy shares at the lower price, redeem them for underlying assets at NAV, and pocket the difference, pushing the price up. Conversely, when the share price exceeds NAV, APs buy underlying assets, create new shares, and sell them at the higher price, driving the price down. This continuous AP activity is key to maintaining price-NAV alignment (Figure 3).</p> <p>&nbsp;</p> <p><img loading="lazy" decoding="async" class="alignnone wp-image-38989 size-full" src="https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664.png" alt="" width="2728" height="1345" srcset="https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664.png 2728w, https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664-300x148.png 300w, https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664-1024x505.png 1024w, https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664-768x379.png 768w, https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664-1536x757.png 1536w, https://fideres.com/wp-content/uploads/2024/10/ETF-Creation-and-Redemption-Process-1-e1729268939664-2048x1010.png 2048w" sizes="auto, (max-width: 2728px) 100vw, 2728px" /></p> <h6 style="text-align: center;"><em>Figure 3 ETF Creation and Redemption Process</em></h6> <h3>Bitcoin ETFs&#8217; Creation And Redemption Structure</h3> <p>The SEC mandates Bitcoin spot ETFs to use a cash-only creation and redemption process, meaning APs can only exchange cash for shares, not Bitcoin directly. This necessitates fund providers to work with a newly introduced Bitcoin trading counterparty, or Liquidity Provider (LP), to convert between cash and Bitcoin.</p> <p>While the SEC has not explicitly detailed the rationale behind this requirement, it may aim to reduce risks related to money laundering or prevent self-dealing by market makers. As highlighted in Grayscale’s own presentation to the SEC, many traditional bank APs lack the ability to transact in BTC, giving an advantage to those that can.<a href="https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-318679-829963.pdf">⁵</a></p> <h2>Concerns For Crypto ETFs</h2> <h3>Potential For Market Manipulation</h3> <p>Before approving the first spot crypto ETF, the SEC had already approved Bitcoin Futures ETFs, trusting the CME&#8217;s surveillance system to curb manipulation risks in the futures market. Spot crypto ETF applicants argued that this system should extend to the spot market, pointing to the strong correlation between Bitcoin futures and spot Bitcoin. However, even in its approval, the SEC did not find or provide quantitative evidence proving that Bitcoin and Bitcoin futures are “functionally identical.”⁶</p> <p>The SEC’s analysis, based on a limited number of platforms, instead showed an intraday correlation as low as 67.9%, suggesting significant differences between the futures and spot markets. This implies that some of the possible sources for manipulation identified by the SEC still exist and that CME’s futures market surveillance may not catch all manipulations in spot cryptos. Specifically, the SEC listed the following types of potential spot bitcoin price manipulation:⁷</p> <ul> <li><strong>Wash trading</strong>: engaging in simultaneous buying and selling of Bitcoin to create a misleading impression of market activity.</li> <li><strong>Price manipulation:</strong> individuals with dominant positions in the Bitcoin spot market influencing prices.</li> <li><strong>Network hacking:</strong> unauthorized intrusions into the Bitcoin network or trading platforms.</li> <li><strong>Malicious network control:</strong> actions aimed at exerting harmful control over the Bitcoin network.</li> <li><strong>Insider trading:</strong> trading based on material, non-public information, or spreading false and misleading information.</li> <li><strong>Stablecoin manipulation:</strong> manipulative activities involving purported “stablecoins,” such as Tether (USDT).</li> <li><strong>Trading platform fraud</strong>: fraud and manipulation occurring on Bitcoin trading platforms.⁸</li> </ul> <h3>Market Concentration</h3> <p>As detailed above, the stability and tradability of an ETF’s price hinge on the ongoing creation and redemption of fund shares. Simply labeling a fund as an “ETF” does not ensure it will be actively tradable at all times. For this to happen, the fund must actively collaborate with APs and have agreements in place that require APs or other third parties to provide ongoing creation and redemption services, thereby maintaining the ETF’s price stability.</p> <p>For stock ETFs, this process typically involves a large number of APs, which helps to prevent any single entity from exploiting long-term, risk-free arbitrage opportunities. However, crypto ETFs face distinct restrictions — they are not allowed to trade cryptocurrencies . Like the AP market for stock ETFs, the crypto ETF market similarly needs competition among LPs to ensure accurate price tracking and prevent opportunities for long-term, risk-free gains. Currently, the $68 billion crypto ETF market is characterized by significant concentration among a few LPs, which raises concerns about failure/reduced efficiency in the fund creation/redemption process.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-38987 size-large" src="https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Liquidity-Provider-Market-Share-as-of-Q2-2024-2-e1729268970369-1024x626.png" alt="" width="1024" height="626" srcset="https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Liquidity-Provider-Market-Share-as-of-Q2-2024-2-e1729268970369-1024x626.png 1024w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Liquidity-Provider-Market-Share-as-of-Q2-2024-2-e1729268970369-300x183.png 300w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Liquidity-Provider-Market-Share-as-of-Q2-2024-2-e1729268970369-768x469.png 768w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Liquidity-Provider-Market-Share-as-of-Q2-2024-2-e1729268970369.png 1522w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></p> <h6 style="text-align: center;"><em>Figure 4 Crypto ETF Liquidity Provider Market Share as of Q2 2024; Source: SEC, Fideres</em></h6> <h3>Credit Risk</h3> <p>These LPs also play a significant role as market makers in the cryptocurrency space. Unlike heavily regulated traditional bank APs, these trading firms carry elevated credit risk (Figure 5). This is due to their primary focus on the highly volatile crypto market and their relatively smaller capital reserves which may not be enough to mitigate the impact of extreme events like the situation witnessed in FTX’s bankruptcy. Consequently, investors in crypto ETFs are likely to see higher average premiums or discounts compared to traditional equity ETFs.</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-38898 size-large" src="https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-1024x415.png" alt="Figure 5 is entitled 'AP/LP Long-term Credit Ratings" width="1024" height="415" srcset="https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-1024x415.png 1024w, https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-300x121.png 300w, https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-768x311.png 768w, https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-1536x622.png 1536w, https://fideres.com/wp-content/uploads/2024/10/APLP-Long-term-Credit-Ratings-e1729268992981-2048x829.png 2048w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></p> <h6 style="text-align: center;"><em>Figure 5 AP/LP Long-term Credit Ratings</em></h6> <p>Many of these entities also face legal actions and government investigations for issues like selling unregistered securities,<a href="https://www.sec.gov/news/press-release/2023-7">⁹</a> receiving preferential treatment on exchanges<a href="https://www.bloomberg.com/news/articles/2023-04-05/jane-street-tower-and-radix-are-unnamed-vips-in-binance-case">¹⁰</a>, and engaging in market manipulation.<a href="https://decrypt.co/news-explorer?pinned=131875&amp;title=authorities-investigate-jane-street-jump-trading-for-potential-market-manipulation-in-terrausd-collapse">¹¹</a> Without compelling evidence showing that these new crypto ETF LPs have implemented a robust ethics wall for their newly created roles in the ETF market, the probability of misconduct, such as market manipulation or frontrunning, may be notably higher compared to traditional stock ETFs.</p> <h3>Market Manipulation Risk</h3> <p>The substantial trading volume driven by crypto ETFs also grants these LPs access to a considerable amount of trading data. This information is highly valuable, as significant creation or redemption activity in crypto ETFs can impact the prices of the underlying cryptocurrencies, and trading on such confidential insider information can lead to significant profits.</p> <p>Without robust information barriers, LPs or their affiliated entities might be tempted to breach federal securities laws, leading to potential legal actions from ETF or crypto investors (for example, under Section 10(b) of the Exchange Act and rule 10b-5 thereunder).</p> <p>Similar violations recently led to Morgan Stanley being fined over $249 million for leaking and misusing confidential block trade information.<a href="https://www.sec.gov/newsroom/press-releases/2024-6">¹²</a></p> <h3>Custodians Concentration Risk</h3> <p>Finally, Crypto ETFs rely on nontraditional custodians to safeguard their assets. As of 2024 Q2, Coinbase held 85% of all Bitcoins owned by Bitcoin ETFs. This heavy concentration is concerning, particularly given historical precedents like the Mt. Gox security breach in 2014, where the world’s largest Bitcoin exchange lost approximately 850,000 Bitcoins. If Coinbase were to encounter major operational issues, security breaches, or insolvency, the fallout for crypto ETFs and their investors could be disastrous. This dependence on a single custodian amplifies these vulnerabilities and underscores the potential risks involved.</p> <p><img loading="lazy" decoding="async" class="aligncenter wp-image-38988 size-large" src="https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397-1024x576.png" alt="" width="1024" height="576" srcset="https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397-1024x576.png 1024w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397-300x169.png 300w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397-768x432.png 768w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397-1536x864.png 1536w, https://fideres.com/wp-content/uploads/2024/10/Crypto-ETF-Custodian-Market-Share-as-of-Q2-2024-2-e1729269032397.png 1631w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></p> <h6 style="text-align: center;"><em>Figure 6 Crypto ETF Custodian Market Share as of Q2 2024; Source: SEC, Fideres</em></h6> <h2>Conclusions</h2> <p>In summary, the SEC’s approval of crypto ETFs was predicated on the assumption that the CME’s surveillance system for futures would also address manipulation risks in the spot market. However, the SEC’s own findings instead reveal significant disparities between these markets, suggesting that manipulation risks—such as wash trading and price manipulation—can persist unnoticed in the spot market.</p> <p>While ETF price stability relies on the efficient creation and redemption of shares, crypto ETFs face distinct challenges due to their dependence on LPs with lower creditworthiness and higher market concentration compared to traditional APs.</p> <p>The heavy reliance on a single custodian, like Coinbase, further compounds these risks, as any major issue could have severe repercussions for both the ETFs and their investors.</p> <p>As a result, spot crypto ETFs may face heightened litigation risks if they fail to adequately disclose these distinct risks, and investors suffer losses from market manipulation or failures in the fund creation and redemption process.</p> <p><a href="#_ftnref1" name="_ftn1"></a></p> <p><a href="#_ftnref1" name="_ftn1"></a></p> <p>The post <a href="https://fideres.com/crypto-etfs-simple-concept-big-issues/">Crypto ETFs: Simple Concept, Big Issues</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/crypto-etfs-simple-concept-big-issues/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Skipping The Flight Fantastic</title> <link>https://fideres.com/skipping-the-flight-fantastic/</link> <comments>https://fideres.com/skipping-the-flight-fantastic/#respond</comments> <dc:creator><![CDATA[Emily Hatchett]]></dc:creator> <pubDate>Fri, 04 Oct 2024 12:14:07 +0000</pubDate> <category><![CDATA[Research]]></category> <category><![CDATA[Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=38833</guid> <description><![CDATA[<p>How US airlines abuse their market power around airport hubs to overcharge consumers. </p> <p>The post <a href="https://fideres.com/skipping-the-flight-fantastic/">Skipping The Flight Fantastic</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<h2><span style="font-family: proxima-nova-light;">Key Points</span></h2> <ul> <li>In this note we consider the anti-competitive effects of restrictions by US airlines on &#8216;skiplagging’ and the potential for them to breach section 2 of the Sherman Act.</li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">It is often cheaper to book a multi-stop flight with a layover, without boarding the second flight. Many airlines prohibit this &#8211; known as skiplagging &#8211; increasing prices for consumers on routes where there is a lack of competition.</span></span></li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">Skiplagging occurs on approximately 15% of flights and predominantly on flights operated by the “big four” airlines – American, Delta, United and Southwest, which together control 80% of flights in the United States.</span></span></li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">The use of market power to apply restrictions on consumer skiplagging has two effects, each of which results in consumers paying higher prices. Firstly, it allows the airlines to exclude Skiplagged – a website that allows customers to locate and book cheaper “skiplag” tickets.  Secondly, it forces consumers to purchase a product that delivers negative utility (a ‘bad’) in order to obtain the product that they want.</span></span></li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">The use of market power around airline hubs to apply restrictions on skiplagging has two effects. Firstly, it allows airlines to exclude Skiplagged – a website that assists customers to locate and book cheaper “skiplag” tickets. Secondly, it ties consumers to purchase an unwanted product in order to obtain the product that they want, thereby allowing airlines to maintain supra-competitive prices.</span></span></li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">Imposing this penalty, and excluding intermediaries, allows the airlines to set supra-competitive prices on direct routes in which they hold a monopoly.</span></span></li> <li><span data-teams="true"><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">If customers skiplagged wherever feasible, the total damages would be in the order of $2 billion per year.</span></span></li> </ul> <h2><span style="font-family: proxima-nova-light;">Skiplagging</span></h2> <p>Skiplagging occurs when a consumer purchases a multi-stop flight and disembarks at the stopping point instead of completing the entire journey, to save money.</p> <p>For example, suppose a passenger would like to travel from New York City to Austin. A non-stop flight from New York City to Austin might cost $400. However, a flight from New York City to Denver with a layover in Austin might cost $200. The passenger may be motivated to book the cheaper flight and disembark at Austin, saving $200.</p> <p><img loading="lazy" decoding="async" class="size-full wp-image-38838 aligncenter" src="https://fideres.com/wp-content/uploads/2024/10/graph.png" alt="A graph depicting skiplagging, indicating that a flight from New York City to Denver with a layover in Austin is cheaper than a direct flight from New York City to Austin." width="841" height="372" srcset="https://fideres.com/wp-content/uploads/2024/10/graph.png 841w, https://fideres.com/wp-content/uploads/2024/10/graph-300x133.png 300w, https://fideres.com/wp-content/uploads/2024/10/graph-768x340.png 768w" sizes="auto, (max-width: 841px) 100vw, 841px" /></p> <h3>What Restrictions Are There?</h3> <p>Skiplagging is prohibited by most airlines in the U.S. For example, American Airlines’ Conditions of Carriage prohibit “purchasing a ticket without intending to fly all flights to gain lower fares (hidden city ticketing).”<a href="http://www.aa.com/i18n/customer-service/support/conditions-of-carriage.jsp">¹</a> Many airlines impose penalties for engaging in skiplagging, which include banning the customer from the airline, canceling the rest of the roundtrip ticket, refusing to let the passenger fly and check bags, and charging the passenger for what the ticket would have cost if they hadn’t skiplagged. Airlines argue that they lose revenue when passengers skiplag. If a passenger does not board the connecting flight, there will be an empty seat on the second leg of the trip, which the airline could otherwise have sold (albeit for the second time).<a href="http://www.npr.org/2023/08/23/1194998452/skiplagging-airfare-flying-skiplagged-american-airlines">²</a></p> <p>In the U.S., airlines have objected to an innovative intermediary service called Skiplagged – a flight search engine that uses an algorithm to allow users to locate and book cheaper ‘skiplag’ tickets. Skiplagged explains that “Our goal is to empower consumers to use their buying power however they please. We exist to just find the best prices for you.”<a href="https://skiplagged.com/about">³</a> This intermediary therefore assists customers to purchase better value tickets. It plays the same role as rail ticket intermediaries such as Trainline that invest in algorithms that discover and sell cheaper split-fare tickets that are sold by rail companies in the UK and Europe. In response, some airlines – including American Airlines – have filed lawsuits against Skiplagged, alleging that it employs “unauthorized and deceptive” ticketing practices.<a href="http://www.documentcloud.org/documents/23923387-american-airlines-v-skiplagged">⁴</a> In Europe, by contrast – many low-cost airlines (such as Ryanair for example) do not prohibit skiplagging.</p> <p><a href="#_ftnref1" name="_ftn1"></a></p> <h3>How Common Is Skiplagging?</h3> <p>Academics estimate that HCT opportunities arise on approximately 15% of US flights.<a href="https://mpra.ub.uni-muenchen.de/113960/1/MPRA_paper_113960.pdf"><span style="font-size: 10pt;">⁵</span></a> This is consistent with a 2001 report from the U.S. Government Accountability Office, which found that HCT opportunities arise 17% of the time.<a href="http://www.gao.gov/assets/gao-01-831.pdf">⁶</a></p> <p>The extent to which passengers exploit HCT opportunities when they arise is, however, unclear. Researchers found that some passengers <em>are</em> taking advantage of skiplagging opportunities, but noted that this usually involves purchasing two separate one-way tickets, given the risk that “failure to show up for the second leg of the outbound portion of the trip typically results in cancellation of the rest of the roundtrip ticket.”⁷ Other consumers may end up spending more by purchasing the higher-priced non-stop flight, so as not to violate the conditions of carriage.</p> <p>Skiplagging also depends on route competition and primarily occurs on full-service carriers that operate large hub-and-spoke networks (American, Delta, and United).⁸ These airlines account for the majority of HCT.⁹ A study found that “an additional nonstop carrier on route A-C increases the likelihood of HCT by 1.6%-3.6% while an additional nonstop carrier on route A-B decreases the likelihood of HCT by 3.5%.”¹⁰ The study describes how, “by controlling a large fraction of flights and gates at their hubs, carriers are also able to exercise market power and charge a “hub premium” to passengers who originate or terminate their trips at the hub.”¹¹</p> <h2>Anticompetitive Harm</h2> <p>We examine two possible theories of harm in relation to skiplagging: (1) exclusion of a market intermediary; and (2) an unusual tying claim.</p> <h3>Exclusion Of A Rival</h3> <p>By banning skiplagging and seeking to exclude through legal action the intermediary Skiplagged, airlines are excluding a rival ticket retailer that imposes a constraint on their price setting. Skiplagged’s purpose is to increase transparency in the market and help consumers to locate the “best prices”. Therefore, using monopoly power to exclude it can be expected to lead to higher prices for consumers. Given the restrictions it faces, Skiplagged is not yet widely used. But if it were not suppressed by the airlines, the service it offers is an innovation that should incentivize rival intermediaries to invest in similar algorithms to improve their price competitiveness.</p> <p>Notably, there have been parallels to this conduct outside the United States. In 2023, the German Competition Authority found that Deutsche Bahn – Germany’s largest rail company &#8211; abused its market power by withholding information, such as traffic data, from rival websites including Trainline.<a href="http://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2023/28_06_2023_DB_Mobilitaet.html">¹²</a> The same year, the European Commission commenced an investigation into Renfe – Spain’s state-owned rail operator – over concerns that it restricted competition by withholding information, including real-time passenger data, to third-party ticketing platforms.<a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3455">¹³</a></p> <h3>Tying A ‘Bad’ To Protect Monopoly Pricing</h3> <p>As a consequence of skiplagging restrictions, consumers who want flight A-B (e.g. New York to Austin) at a competitive price are forced to also purchase <em>and use</em> flight B-C (Austin to Denver). Here, the tied product is the B-C flight (Austin to Denver) which has no additional financial cost, but which creates no utility. In fact, it creates a considerable utility cost to the customer. This product (B-C) is therefore – for this customer – an economic “bad” with a negative value.¹⁴</p> <p>Absent market power, an airline would be expected to price A-B at more competitive prices and would be unable to enforce a boilerplate skiplagging clause.¹⁵ The tie here therefore leverages market power in the A-B route to force unwanted purchases in the A-B-C route, the prospect of which prevents consumers buying cheaper A-B tickets from third party retailers. This helps to maintain the airline’s monopoly pricing in A-B. In these circumstances, the use of market power to impose the tie (and to suppress output of A-B-C tickets) serves to protect and maintain the ability to use that market power to overcharge in the direct A-B market. The restriction therefore acts to prevent arbitrage that would otherwise benefit consumers.</p> <h3>Is There An Efficiency Defense?</h3> <p>It might be argued that skiplagging restrictions facilitate a kind of price discrimination that improves consumer welfare. Airlines already price-discriminate through their dynamic pricing, selling tickets at different prices in order to efficiently use their capacity. To do so they apply restrictions to prevent consumers reselling their tickets (intermediaries like Skiplagged can resell but at live rates, not via advance purchases). Such price discrimination helps to expand output by ensuring that flights are operated that otherwise may not be.</p> <p>However, banning skiplagging does not contribute in the same way. This is because – when the airline sells a seat, it receives whichever ‘price’ it puts on that seat – regardless of whether or not the seat is actually used. Therefore, while the restriction on skiplagging may increase prices and revenues overall, it does not change the incentive to run the flight in question, nor the incentive to run unprofitable flights.</p> <p>A different pro-competitive argument for this pricing practice might be that absent the skiplagging restriction, an airline would have increased the price of indirect A-B-C routes in order to reduce arbitrage incentives and to protect its ability to charge higher prices on A-B tickets. However, this argument relies on out-of-market efficiencies in the A-C market being weighed against consumer harm that is incurred in the A-B market.¹⁶ Such out-of-market efficiencies are not generally considered relevant by the courts (since distortionary cross-subsidization of another market by A-B purchasers is not a recognized goal of antitrust law).</p> <p>Moreover, it is far from clear that A-C prices would actually increase absent the restriction. Direct A-C prices face little or no constraint from indirect A-B-C prices. This means that withdrawing A-B-C offers would not reduce the constraints on direct A-C prices. Furthermore, indirect A-B-C prices can also be assembled by consumers or intermediaries who would be paying less on the A-B leg even if the B-C price were to increase. This would suggest that the net price on A-B-C tickets may not be reduced.</p> <p>Finally, the airline might, absent the skiplagging restriction, increase B-C prices to reduce the possibility of arbitrage by customers building their own A-B-C routes. This however would be an out-of-market efficiency claim, and not relevant to competition on the B-C route. Moreover, it is unclear that there would be any benefit to consumers in terms of lower B-C prices.¹⁷ Ultimately, the airline’s ability and incentive to increase direct B-C prices will depend on direct B-C competition and demand. The case for an efficiency defense therefore appears a weak one.</p> <h2>Quantifying Harm</h2> <p>Given that the U.S. airline industry generated $179 billion in revenue from passenger fares, and around 15% to 17% of flights are affected by HCT, we estimate that the volume of affected commerce was around $30 billion in 2023. HCT saves an average of around $24 per ticket,¹⁸ and U.S. airlines carried 658 million passengers in 2021.<a href="http://www.bts.gov/newsroom/full-year-2022-us-airline-traffic-data">¹⁹</a> Therefore if consumers skiplagged where feasible they would make savings in the order of $2 billion per year.²⁰<a href="#_ftnref1" name="_ftn1"></a></p> <p>The post <a href="https://fideres.com/skipping-the-flight-fantastic/">Skipping The Flight Fantastic</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/skipping-the-flight-fantastic/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Matt Stoller newsletter reports on Fideres&#8217;s original investigation into Steinway</title> <link>https://fideres.com/matt-stoller-newsletter-reports-on-fideress-original-investigation-into-steinway/</link> <comments>https://fideres.com/matt-stoller-newsletter-reports-on-fideress-original-investigation-into-steinway/#respond</comments> <dc:creator><![CDATA[Fideres]]></dc:creator> <pubDate>Mon, 29 Jul 2024 09:36:26 +0000</pubDate> <category><![CDATA[News]]></category> <category><![CDATA[News Competition Economics]]></category> <guid isPermaLink="false">https://fideres.com/?p=38693</guid> <description><![CDATA[<p>In his weekly BIG Newsletter, Matt Stoller reported on Fideres&#8217;s &#8220;fascinating report&#8221; into Steinway&#8217;s monopolization of the grand piano market resulting in overpriced instruments. Read the full article here.</p> <p>The post <a href="https://fideres.com/matt-stoller-newsletter-reports-on-fideress-original-investigation-into-steinway/">Matt Stoller newsletter reports on Fideres&#8217;s original investigation into Steinway</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<p><span class="ui-provider a b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">In his weekly BIG Newsletter, Matt Stoller reported on Fideres&#8217;s &#8220;fascinating report&#8221; into Steinway&#8217;s monopolization of the grand piano market resulting in overpriced instruments.</span></p> <p>Read the full article <a href="https://www.thebignewsletter.com/p/monopoly-round-up-price-fixing-in?utm_campaign=email-post&amp;utm_source=substack" target="_blank" rel="noopener">here</a>.</p> <p>The post <a href="https://fideres.com/matt-stoller-newsletter-reports-on-fideress-original-investigation-into-steinway/">Matt Stoller newsletter reports on Fideres&#8217;s original investigation into Steinway</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/matt-stoller-newsletter-reports-on-fideress-original-investigation-into-steinway/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> <item> <title>Exploring Aspects Of The State Of Competition In The EU</title> <link>https://fideres.com/exploring_aspects_of_the_state_of_competition_in_the_eu/</link> <comments>https://fideres.com/exploring_aspects_of_the_state_of_competition_in_the_eu/#respond</comments> <dc:creator><![CDATA[Fideres]]></dc:creator> <pubDate>Thu, 27 Jun 2024 11:50:07 +0000</pubDate> <category><![CDATA[News]]></category> <guid isPermaLink="false">https://fideres.com/?p=38640</guid> <description><![CDATA[<p>We at Fideres are happy to see the European Commission publish &#8220;Exploring Aspect of the State of Competition in the EU&#8221;.   This overarching report is the product of our work alongside colleagues at Lear, UEA/CCP, E.CA, DIW, Prometeia and Verian, and sits alongside a parallel report by the OECD. The overarching report provides original evidence [&#8230;]</p> <p>The post <a href="https://fideres.com/exploring_aspects_of_the_state_of_competition_in_the_eu/">Exploring Aspects Of The State Of Competition In The EU</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></description> <content:encoded><![CDATA[<p>We at Fideres are happy to see the European Commission publish <strong>&#8220;Exploring Aspect of the State of Competition in the EU&#8221;</strong>.   This overarching report is the product of our work alongside colleagues at Lear, UEA/CCP, E.CA, DIW, Prometeia and Verian, and sits alongside a parallel report by the OECD.</p> <p>The overarching report provides original evidence of the multifaceted benefits of effective competition, which has been shown to deliver improved outcomes for customers, to boost the competitiveness of domestic companies in international markets and, more generally, to contribute to economic growth and societal well-being. However, the report also identifies worrying signs that competition has weakened across markets in the EU.</p> <p>In particular the <strong>Fideres-CCP Report</strong> on <strong>Price-Concentration Analysis</strong> provides both quantitative and qualitative evidence of the link between higher concentration and higher prices in six sectors: airlines, beer, cement, mobile telecom, modern consumer retail and mortgages. For mobile telecom and airline pricing, we performed detailed empirical analyses confirming a causal link between prices and concentration. We also found higher concentration associated with lower investment, based on the example of mobile telephony.</p> <p>Our findings, alongside those of the wider project, speak to the vital importance of protecting competition to build an economy that works for everyone</p> <p>Read the report <a href="https://bit.ly/4cC8dmE" target="_blank" rel="noopener">here</a>, the EC report <a href="https://bit.ly/3L1Dbch" target="_blank" rel="noopener">here</a>, and watch the conference <a href="https://bit.ly/3XDCKw9" target="_blank" rel="noopener">here</a>.</p> <p>For more information on Fideres’s work to protect competition in Europe and the US, see <a href="https://fideres.com/expertise/competition-economics/" target="_blank" rel="noopener">here</a>.</p> <p>The post <a href="https://fideres.com/exploring_aspects_of_the_state_of_competition_in_the_eu/">Exploring Aspects Of The State Of Competition In The EU</a> appeared first on <a href="https://fideres.com">Fideres</a>.</p> ]]></content:encoded> <wfw:commentRss>https://fideres.com/exploring_aspects_of_the_state_of_competition_in_the_eu/feed/</wfw:commentRss> <slash:comments>0</slash:comments> </item> </channel> </rss> <!-- plugin=object-cache-pro client=phpredis metric#hits=2666 metric#misses=125 metric#hit-ratio=95.5 metric#bytes=3671485 metric#prefetches=321 metric#store-reads=107 metric#store-writes=2 metric#store-hits=330 metric#store-misses=121 metric#sql-queries=8 metric#ms-total=1248.69 metric#ms-cache=44.87 metric#ms-cache-avg=0.4155 metric#ms-cache-ratio=3.6 -->