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Today I’m going to write about Debbie Feinstein, the Obama-era head of antitrust enforcement at the Federal Trade Commission responsible for our current monopoly crisis in everything from cheerleading to drug stores to pharmaceuticals. And through Feinstein, I’m going to show that monopolies are not natural, but are a result of conscious policy choices.
First, I was on Al Jazeera’s The Bottom Line with Steve Clemons to talk about Mike Bloomberg and billionaires in politics. Watch if you’d like. I also replied to Senator Marco Rubio’s industrial policy plan on China in The American Mind.
How an AT&T Lawyer Created a Cheerleading Monopoly
I’ve been doing a lot of research on cheerleading, as readers of this newsletter know, and it’s beginning to hit two different audiences. One group are people involved in cheerleading, gym owners, coaches, Varsity Brand ex-employees, and so forth. The second are antitrust experts and reporters; Emily Stewart at Vox noted the cheer monopoly yesterday in a piece not on cheerleading, but on the relationship of monopolies to the economy.
These two audience are linked, because how the business of cheerleading is structured, like how our pharmaceutical or technology industry is structured, is a function of law. I’m going to try to bring these two groups together by showing how Debbie Feinstein, a powerful lawyer in D.C., helped to concentrate the cheerleading industry as part of her career concentrating a whole series of other industries.
The basic story of the cheerleading monopoly is as follows. Decades ago, a corporation called Varsity Brands began buying up its competitors in cheer competitions and apparel. It used its control over competitions to give itself an advantage in selling cheerleading apparel. In addition, Varsity also financed governing bodies for cheerleading, and gained control over distribution with exclusive deals to gym owners for its products.
The key moment for Varsity was in 2015, when it bought its last and largest competitor, Jam Brands. Jam Brands had its own competitions, and it served as a place where competitors to Varsity, like Rebel Athletics, could market clothing. Once Jam Brands came under Varsity’s control, it ended the marketing arrangement with Rebel. After this merger, Varsity essentially had total power over the sport, including setting terms and conditions over pricing for competitions and compensation for judges.
A Merge to Monopoly
Varsity should not exist in its current form; many of its mergers, and certainly that of Jam Brands, were likely illegal. We have a law designed to stop anti-competitive mergers. It’s called the Clayton Act, and it is enforced by the Department of Justice Antitrust Division and/or the Federal Trade Commission (FTC). Such investigations usually involve soliciting feedback from industry and asking questions of the merging parties. Most mergers are cleared, while a few, particularly in concentrated industries, are challenged.
In the case of the Varsity-Jam Brand merger, the transaction reduced the number of players in a market from two to one, a ‘merge to monopoly,’ so it should have received real attention. And there were at least rudimentary investigations. I got ahold of a complaint from 2015 by a former gym owner and Varsity ex-employee explaining, in detail, to the DOJ and FTC, what Varsity was doing. The complainant predicted *exactly* what would happen, and noted that Varsity had bought dozens of event producing and uniform production companies as part of its plan to monopolize the industry. (You can read the complaint here).
The key for today’s merger analysis is consumer price, so the crux of the complaint were these sentences: “Cheerleading uniform prices have gone through the roof due to Varsity forcing their company on to unsuspecting gym owners…. Competition costs are so high that many athletes have to quit the sport due to the cost. (Competitions and Uniforms are the largest fees any athlete pays in respect to being on a team.)” Enforcers should have recognized that higher consumer prices was a signal of market power, and so this merger was worth blocking. But they did not. Why? Who received the complaint, and who was in charge of the bureau of enforcement when Varsity formed its monopoly?
The answer, as far as I can tell, is a lawyer named Debbie Feinstein, who DOJ Antitrust was telling complainants to contact about the case. At the time of the merger, Feinstein was the head of enforcement for the FTC, and she has exactly the personality of the kind of person you want as an enforcer. She’s a very hands-on manager, with a forceful personality, deep knowledge of the law, and an aggressive advocate for her clients. She is a respected in the community; trade publication Global Competition Review called her “lawyer of the year,” and Obama DOJ Antitrust chief Bill Bauer said she is “one of the leading antitrust lawyers in the country.”
And yet, despite her eminent qualifications and personal grit, Feinstein comes from a world where enforcing the antitrust laws doesn’t mean protecting competition in markets. For her, it means protecting a specific pro-monopoly vision of the law.
Before she was at the Obama FTC, Feinstein was the head of antitrust at a firm called Arnold and Porter, where she represented clients in the “retail, food, consumer products, healthcare, medical devices, chemicals, industrial equipment and services, and automotive parts” industries, like GE, NBC, Unilever, and Pepsi. Arnold and Porter is, like several of the big law firms in New York and D.C., part of the world of biglaw, the repository of legal and governing expertise upon which both parties draw. It’s a shadow government, with people out of power working in biglaw, and then returning to public service to punch their ticket.
The philosophy of much of the biglaw antitrust world is that technocrats should be in charge of our industries, and antitrust law should be narrowly constrained. When in doubt, defer to merging parties, because in their view it is inappropriate for government to interfere with the liberty to monopolize. Biglaw types work for monopolies, structure monopolies, and tend to believe that monopolists deliver better prices and quality for consumers. Feinstein is part of this world, she largely agrees with the philosophical underpinnings of it, and when she was in public service, she believes in concentration as a social virtue. While at the FTC, for instance, Feinstein oversaw one of the key mergers allowing CVS to become even more dominant in health care.
At roughly the same Feinstein helped allow Varsity’s merge to monopoly, reporter Dave Dayen wrote a profile on her, noting that “during Feinstein’s tenure, the FTC has largely abandoned its attempts to block mergers.” Dayen didn’t mention Varsity-Jam Brands, instead focusing on drug prices and mergers. Here’s the story:
Earlier this month, the FTC let Dyax’s $6 billion acquisition by Shire Pharmaceuticals go through, choosing to take no action before the antitrust waiting period lapsed. Even Wall Street expected a challenge; when it didn’t transpire, Dyax’s stock jumped 13 percent.
It was the latest in a rush of mergers and acquisitions in the industry. There were $221 billion in pharma mergers in just the first half of 2015, even more than the $162 billion for the entire previous year.
And consider what these giant companies do: Valeant Pharmaceuticals has acquired, licensed, or agreed to co-promote over 140 drugs since 2008, and as part of its strategy it buys the rights to rival drugs and increases the prices overnight by as much as 525 percent.
Horizon, another drugmaker, sells a medication called Duexis, which costs $1,500 a month, even though its component drugs cost no more than $40 a month. In 2013, Horizon acquired Deuxis’ main competitor, called Vimovo, and raised the price 600 percent.
Questcor performed the same trick by buying the main rival to its immune-deficiency drug. The FTC never challenged any of these purchase agreements.
People complain a lot about high drug prices, and rightfully so. But there are now even more serious issues. I wrote about supply chains and China last week, in particular medical shortages. This problem has been with us for over twenty years, despite Congressional action. Why? “Drug shortages exploded in 2001” because of mergers, according to pharmacist Erin Fox. Consolidation in this space has led to less production, and to the elimination of niche production and/or the offshoring of production to China. To the elite antitrust bar, being concerned that concentration might reduce resiliency of a supply chain sounds like the irrelevant whining of a non-expert, much like the arguments from a cheer industry participant observing problems with a merge to monopoly.
Today, Feinstein is once again a partner at the biglaw firm Arnold and Porter, and the marketing materials on the site show that she’s been key in host of mergers. She was an architect in helping AT&T buy Time Warner, as well as in the rolling up of the dialysis industry in the sale of NxStage Medical to Fresenius Medical Care Holdings. She’s been part of a host of other mergers, but the gist is that Feinstein basically encourages consolidation whether she is in or out of government.
The biglaw world of antitrust lawyers try to stay out of the limelight, but it’s important to locate accountability in any political system. The reason Varsity overcharges parents and coerces gym owners is also the reason our drug supply chain is brittle and weak, and it’s the same reason we have systemic problems throughout the economy, from Boeing to Disney to CVS. The philosophy of our enforcers, even when they are talented and driven like Feinstein, is pro-concentration.
Last week, in preparing this piece, I asked Feinstein about the Varsity merger, since she received the complaint. She responded, “I cannot comment.” People like her rarely do. They are not on the ballot, no one will ask about them on Presidential debate stages, they are not in the spotlight, and yet their decisions reshape American industries and American communities, in everything from pharmaceuticals to drug stores to technology to cheerleading.
And that is probably one reason Americans are so frustrated with politics.
Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. Last week I asked for people to send stories of chokepoints emerging from China’s shutdown over the Coronavirus. Here’s an email from a manufacturer’s rep with experience selling in various industries on the impact of China’s shutdown. Everything from printed circuit boards to garden hoses to plastic molding is being delayed.
Garden Hoses. I no longer supply this industry but I know that an intractable percentage of hose making comes out of China. First the tariffs forced a hunt for non-China makers. Only a trickle of the production could move. Now with extended plant shutdowns, the spring watering season may be hurt. Should a region have a warm, dry spring, the hoses needed will not be there. An opportunity lost in-season usually does not come back later that year. Several makers have US plants for high end hoses. The cheaper inner layers of hose sandwiched between vibrant green skin and the purest plastics touching the water use recycled content, often from China.
Plastic molding choke point: A big (now much bigger) consumer product maker closed a huge plastic injection molding plant in PA in ’98 and moved all the components to China. Much lower tooling prices saved capital expenditures. Low unit cost and subassembly labor trimmed top-line costs. I molded millions of parts for 20 years. The tariff-by-tweet precipitated a massive migration, pulling hundreds of tools from China at a significant cost (One-time costs to pack, ship, re-validate tools, etc.). Labor costs are up. Resin prices too. Factory productivity lags the generational improvements developed in China since the 90s. The new choke point seems to be the other SE Asia countries flooded with transferred capacities. Getting local supply chain up and things like port capacity and even traffic jams delaying shipments all disrupt these moves in the short term – and perhaps longer. China had a well oiled machine building roads, ports, hotels and all kinds infrastructure fueled by the central government’s coffers. It will take a long time for Thailand, Vietnam, Cambodia etc. to digest the force-fed move. And anecdotally, India may take years to get to the urgency and skill levels and may never get to the level of business travel western visitors have come to expect. A billion people, English common law, a democracy, education: All the ingredients but none of the cooks.
Printed Circuit Boards Assemblies choke point. Tons of work migrating from China as noted above. But all the diodes and doodads soldered on top come from china. During the post-tweet resourcing efforts, component suppliers were swamped with quote requests. Multinational A wanted to move 10 products. They quoted 5 firms. Those firms have three options in places as disparate as Mexico, Taiwan or Asia. 10 x 5 x 3 makes for 45 RFQs to the component suppliers, an inundating choke point on normal response times while inflating the perceived demand. In the time of Coronavirus, a similar push for needed answers while suppliers and sub-tier suppliers are shorthanded or working from home or waiting authorization to re-open. The choke point includes basic data like on-hand inventory and a reliable ship date. Those answers usually take less than a day. We have 14-21 day lags this week.
General Labor choke point: I am told in Dongguan City that companies cannot hire new workers. In the weeks after the Lunar New Year worker mobility peaks. Job hopping for better pay or working conditions happens every year. With worker return rates below 50% in the first few days after opening on Monday, one would hope to scoop up warm bodies to man the equipment and assembly lines. But government has banned new hires to keep job seekers from traveling to the manufacturing centers in the cities. A zombie-like cohort of walking dead coronavirus carriers milling about the train station or industrial parks could spike infection rates and multiply hot zones. The factory owners are crying for workers but government has choked them off.
Travel Choke Points: One great strength in Southern China comes from a class of professional managers commuting weekly from the first world city of Hong Kong. Hong Kong will now enforce a 14 day home quarantine for residents coming out of China. So the go-up-on-Tuesday/come-home-on-Friday routine will only work once. The managerial staff runs well down the ladder to programmers and operations teams. This goes well beyond the corner office and constricts every level of hands-on management. I kind of imagine the factories as a cross between a snow delay and a substitute teacher: nowhere near enough will get done…for weeks. Similarly, Vietnam will not issue Visas to HK or China residents. All those Trump-driven migrations to Vietnam will not have managers from the home office on-site until the virus scare ends. Good luck getting that new plant running without on-site decision making.