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I will be participating in a wide-ranging discussion of Google and antitrust issues at the upcoming AALS meeting in New Orleans in January. The Antitrust and Economic Regulation Section of the AALS is hosting the roundtable, organized by Mike Carrier. Mike and I will be joined by Marina Lao, Frank Pasquale, Pam Samuelson, and Mark Patterson, and the discussion will cover Google Book Search as well as the FTC investigations/possible cases against Google based on search and SEPs.

The session will be on Saturday, January 5, from 10:30 to 12:15 in the Hilton New Orleans Riverside (Newberry, Third Floor).

 Google and Antitrust

(Papers to be published in Harvard Journal of Law & Technology Digest)

Moderator:

Michael A. Carrier, Rutgers School of Law – Camden

Speakers:

Marina L. Lao, Seton Hall University School of Law

Geoffrey A. Manne, Lewis & Clark Law School

Frank A. Pasquale, Seton Hall University School of Law

Mark R. Patterson, Fordham University School of Law

Pamela Samuelson, University of California, Berkeley, School of Law

How should the antitrust laws apply to Google? Though the question is simple, the answer implicates an array of far-reaching issues related to how we access information and how we interact with others. This program will feature a distinguished panel engaging in a fastpaced discussion (no PowerPoints!) about these topics.

The panel will explore the Federal Trade Commission’s potential case against Google. It will discuss Google’s position in the search market and potential effects of its conduct on rivals. The panel also will explore the nuances of the Google Book Search settlement. What would – and should – antitrust law do about the project? How should the procompetitive justifications of the increased availability of books be weighed against the effects of the project on rivals?

Antitrust’s role in a 21st-century economy is frequently debated. Google provides a fruitful setting in which to discuss these important issues.

Co-authored with Berin Szoka

In the past two weeks, Members of Congress from both parties have penned scathing letters to the FTC warning of the consequences (both to consumers and the agency itself) if the Commission sues Google not under traditional antitrust law, but instead by alleging unfair competition under Section 5 of the FTC Act. The FTC is rumored to be considering such a suit, and FTC Chairman Jon Leibowitz and Republican Commissioner Tom Rosch have expressed a desire to litigate such a so-called “pure” Section 5 antitrust case — one not adjoining a cause of action under the Sherman Act. Unfortunately for the Commissioners, no appellate court has upheld such an action since the 1960s.

This brewing standoff is reminiscent of a similar contest between Congress and the FTC over the Commission’s aggressive use of Section 5 in consumer protection cases in the 1970s. As Howard Beales recounts, the FTC took an expansive view of its authority and failed to produce guidelines or limiting principles to guide its growing enforcement against “unfair” practices — just as today it offers no limiting principles or guidelines for antitrust enforcement under the Act. Only under heavy pressure from Congress, including a brief shutdown of the agency (and significant public criticism for becoming the “National Nanny“), did the agency finally produce a Policy Statement on Unfairness — which Congress eventually codified by statute.

Given the attention being paid to the FTC’s antitrust authority under Section 5, we thought it would be helpful to offer a brief primer on the topic, highlighting why we share the skepticism expressed by the letter-writing members of Congress (along with many other critics).

The topic has come up, of course, in the context of the FTC’s case against Google. The scuttlebut is that the Commission believes it may not be able to bring and win a traditional, Section 2 antitrust action, and so may resort to Section 5 to make its case — or simply force a settlement, as the FTC did against Intel in late 2010. While it may be Google’s head on the block today, it could be anyone’s tomorrow. This isn’t remotely just about Google; it’s about broader concerns over the Commission’s use of Section 5 to prosecute monopolization cases without being subject to the rigorous economic standards of traditional antitrust law.

Background on Section 5

Section 5 has two “prongs.” The first, reflected in its prohibition of “unfair acts or deceptive acts or practices” (UDAP) is meant (and has previously been used—until recently, as explained) as a consumer protection statute. The other, prohibiting “unfair methods of competition” (UMC) has, indeed, been interpreted to have relevance to competition cases.

Most commonly (and commonly-accepted), the UMC language has been viewed to authorize the agency to bring cases that fill the gaps between clearly anticompetitive conduct and the language of the Sherman Act. Principally, this has been invoked in “invitation to collude” cases, which raise the spectre of price-fixing but nevertheless do not meet the literal prohibition against “agreement in restraint of trade” under Section 1 of the Sherman Act.

Over strenuous objections from dissenting Commissioners (and only in consent decrees; not before courts), the FTC has more recently sought to expand the reach of the UDAP language beyond the consumer protection realm to address antitrust concerns that would likely be non-starters under the Sherman Act.

In N-Data, the Commission brought and settled a case invoking both the UDAP and UMC prongs of Section 5 to reach (alleged) conduct that amounted to breach of a licensing agreement without the requisite (Sherman Act) Section 2 claim of exclusionary conduct (which would have required that the FTC show that N-Data’s conducted had the effect of excluding its rivals without efficiency or welfare-enhancing properties). Although the FTC’s claims fall outside the ambit of Section 2, the Commission’s invocation of Section 5’s UDAP language was so broad that it could — quite improperly — be employed to encompass traditional Section 2 claims nonetheless, but without the rigor Section 2 requires (as the vigorous dissents by Commissioners Kovacic and Majoras discuss). As Commissioner Kovacic wrote in his dissent:

[T]he framework that the [FTC’s] Analysis presents for analyzing the challenged conduct as an unfair act or practice would appear to encompass all behavior that could be called a UMC or a violation of the Sherman or Clayton Acts. The Commission’s discussion of the UAP [sic] liability standard accepts the view that all business enterprises – including large companies – fall within the class of consumers whose injury is a worthy subject of unfairness scrutiny. If UAP coverage extends to the full range of business-to-business transactions, it would seem that the three-factor test prescribed for UAP analysis would capture all actionable conduct within the UMC prohibition and the proscriptions of the Sherman and Clayton Acts. Well-conceived antitrust cases (or UMC cases) typically address instances of substantial actual or likely harm to consumers. The FTC ordinarily would not prosecute behavior whose adverse effects could readily be avoided by the potential victims – either business entities or natural persons. And the balancing of harm against legitimate business justifications would encompass the assessment of procompetitive rationales that is a core element of a rule of reason analysis in cases arising under competition law.

In Intel, the most notorious of the recent FTC Section 5 antitrust actions, the Commission brought (and settled) a straightforward (if unwinnable) Section 2 case as a Section 5 case (with Section 2 “tag along” claims), using the justification that it simply couldn’t win a Section 2 case under current jurisprudence. Intel presumably settled the case because the absence of judicial limits under Section 5 made its outcome far less certain — and presumably the FTC brought the case under Section 5 for the same reason.

In Intel, there was no effort to distinguish Section 5 grounds from those under Section 2. Rather, the FTC claimed that the limiting jurisprudence under Section 2 wasn’t meant to rein in agencies, but merely private plaintiffs. This claim falls flat, as one of us (Geoff) has noted:

[Chairman] Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs—errors from which the FTC is not, unfortunately immune—seems ridiculous to me. To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain overzealous private enforcement (and thus not in a way that should apply to government enforcement). . . .

But the over-zealousness of private plaintiffs is not all [Twombly] was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market. Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct. Even when the FTC brings cases, it and the court deciding the case must make these determinations. And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive. Quite the opposite, in fact—the government has incentives to develop and bring suits proposing novel theories of anticompetitive conduct and of enforcement (as it is doing in the Intel case, for example).

Problems with Unleashing Section 5

It would be a serious problem — as the Members of Congress who’ve written letters seem to realize — if Section 5 were used to sidestep the important jurisprudential limitations on Section 2 by focusing on such unsupported theories as “reduction in consumer choice” instead of Section 2’s well-established consumer welfare standard. As Geoff has noted:

Following Sherman Act jurisprudence, traditionally the FTC has understood (and courts have demanded) that antitrust enforcement . . . requires demonstrable consumer harm to apply. But this latest effort reveals an agency pursuing an interpretation of Section 5 that would give it unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional antitrust measures — reduction in output or an output-reducing increase in price — but could expand to, well, just about whatever the agency deems improper.

* * *

One of the most important shifts in antitrust over the past 30 years has been the move away from indirect and unreliable proxies of consumer harm toward a more direct, effects-based analysis. Like the now archaic focus on market concentration in the structure-conduct-performance framework at the core of “old” merger analysis, the consumer choice framework [proposed by Commissioner Rosch as a cause of action under Section 5] substitutes an indirect and deeply flawed proxy for consumer welfare for assessment of economically relevant economic effects. By focusing on the number of choices, the analysis shifts attention to the wrong question.

The fundamental question from an antitrust perspective is whether consumer choice is a better predictor of consumer outcomes than current tools allow. There doesn’t appear to be anything in economic theory to suggest that it would be. Instead, it reduces competitive analysis to a single attribute of market structure and appears susceptible to interpretations that would sacrifice a meaningful measure of consumer welfare (incorporating assessment of price, quality, variety, innovation and other amenities) on economically unsound grounds. It is also not the law.

Commissioner Kovacic echoed this in his dissent in N-Data:

More generally, it seems that the Commission’s view of unfairness would permit the FTC in the future to plead all of what would have been seen as competition-related infringements as constituting unfair acts or practices.

And the same concerns animate Kovacic’s belief (drawn from an article written with then-Attorney Advisor Mark Winerman) that courts will continue to look with disapproval on efforts by the FTC to expand its powers:

We believe that UMC should be a competition-based concept, in the modern sense of fostering improvements in economic performance rather than equating the health of the competitive process with the wellbeing of individual competitors, per se. It should not, moreover, rely on the assertion in [the Supreme Court’s 1972 Sperry & Hutchinson Trading Stamp case] that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws. We think the early history is now problematic, and we view the relevant language in [Sperry & Hutchinson] with skepticism.

Representatives Eshoo and Lofgren were even more direct in their letter:

Expanding the FTC’s Section 5 powers to include antitrust matters could lead to overbroad authority that amplifies uncertainty and stifles growth. . . . If the FTC intends to litigate under this interpretation of Section 5, we strongly urge the FTC to reconsider.

But it isn’t only commentators and Congressmen who point to this limitation. The FTC Act itself contains such a limitation. Section 5(n) of the Act, the provision added by Congress in 1994 to codify the core principles of the FTC’s 1980 Unfairness Policy Statement, says that:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. [Emphasis added].

In other words, Congress has already said, quite clearly, that Section 5 isn’t a blank check. Yet Chairman Leibowitz seems to be banking on the dearth of direct judicial precedent saying so to turn it into one — as do those who would cheer on a Section 5 antitrust case (against Google, Intel or anyone else). Given the unique breadth of the FTC’s jurisdiction over the entire economy, the agency would again threaten to become a second national legislature, capable of regulating nearly the entire economy.

The Commission has tried — and failed — to bring such cases before the courts in recent years. But the judiciary has not been receptive to an invigoration of Section 5 for several reasons. Chief among these is that the agency simply hasn’t defined the scope of its power over unfair competition under the Act, and the courts hesitate to let the Commission set the limits of its own authority. As Kovacic and Winerman have noted:

The first [reason for judicial reluctance in Section 5 cases] is judicial concern about the apparent absence of limiting principles. The tendency of the courts has been to endorse limiting principles that bear a strong resemblance to standards familiar to them from Sherman Act and Clayton Act cases. The cost-benefit concepts devised in rule of reason cases supply the courts with natural default rules in the absence of something better.

The Commission has done relatively little to inform judicial thinking, as the agency has not issued guidelines or policy statements that spell out its own view about the appropriate analytical framework. This inactivity contrasts with the FTC’s efforts to use policy statements to set boundaries for the application of its consumer protection powers under Section 5.

This concern was stressed in the letter sent by Senator DeMint and other Republican Senators to Chairman Leibowitz:

[W]e are concerned about the apparent eagerness of the Commission under your leadership to expand Section 5 actions without a clear indication of authority or a limiting principle. When a federal regulatory agency uses creative theories to expand its activities, entrepreneurs may be deterred from innovating and growing lest they be targeted by government action.

As we have explained many times (see, e.g., herehere and here), a Section 2 case against Google will be an uphill battle. As far as we have seen publicly, complainants have offered only harm to competitors — not harm to consumers — to justify such a case. It is little surprise, then, that the agency (or, more accurately, Chairman Leibowitz and Commissioner Rosch) may be seeking to use the less-limited power of Section 5 to mount such a case.

In a blog post in 2011, Geoff wrote:

Commissioner Rosch has claimed that Section Five could address conduct that has the effect of “reducing consumer choice” — an effect that a very few commentators support without requiring any evidence that the conduct actually reduces consumer welfare. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by competitive behavior.

The U.S. has a long tradition of resisting enforcement based on harm to competitors without requiring a commensurate, strong showing of harm to consumers — an economically-sensible tradition aimed squarely at minimizing the likelihood of erroneous enforcement. The FTC’s invigorated interest in Section Five contemplates just such wrong-headed enforcement, however, to the inevitable detriment of the very consumers the agency is tasked with protecting.

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of actual harm to consumers (and in the face of ample evidence of significant consumer benefits).

* * *

In each of [the complaints against Google], the problem is that the claimed harm to competitors does not demonstrably translate into harm to consumers.

For example, Google’s integration of maps into its search results unquestionably offers users an extremely helpful presentation of these results, particularly for users of mobile phones. That this integration might be harmful to MapQuest’s bottom line is not surprising — but nor is it a cause for concern if the harm flows from a strong consumer preference for Google’s improved, innovative product. The same is true of the other claims. . . .

To the extent that the FTC brings an antitrust case against Google under Section 5, using the Act to skirt the jurisprudential limitations (and associated economic rigor) that make a Section 2 case unwinnable, it would be contravening congressional intent, judicial precedent, the plain language of the FTC Act, and the collected wisdom of the antitrust commentariat that sees such an action as inappropriate. This includes not just traditional antitrust-skeptics like us, but even antitrust-enthusiasts like Allen Grunes, who has written:

The FTC, of course, has Section 5 authority. But there is well-developed case law on monopolization under Section 2 of the Sherman Act. There are no doctrinal “gaps” that need to be filled. For that reason it would be inappropriate, in my view, to use Section 5 as a crutch if the evidence is insufficient to support a case under Section 2.

As Geoff has said:

Modern antitrust analysis, both in scholarship and in the courts, quite properly rejects the reductive and unsupported sort of theories that would undergird a Section 5 case against Google. That the FTC might have a better chance of winning a Section 5 case, unmoored from the economically sound limitations of Section 2 jurisprudence, is no reason for it to pursue such a case. Quite the opposite: When consumer welfare is disregarded for the sake of the agency’s power, it ceases to further its mandate. . . . But economic substance, not self-aggrandizement by rhetoric, should guide the agency. Competition and consumers are dramatically ill-served by the latter.

Conclusion: What To Do About Unfairness?

So, what should the FTC do with Section 5? The right answer may be “nothing” (and probably is, in our opinion). But even those who think something should be done to apply the Act more broadly to allegedly anticompetitive conduct should be able to agree that the FTC ought not bring a case under Section 5’s UDAP language without first defining with analytical rigor what its limiting principles are.

Rather than attempting to do this in the course of a single litigation, the agency ought to heed Kovacic and Winerman’s advice and do more to “inform judicial thinking” such as by “issu[ing] guidelines or policy statements that spell out its own view about the appropriate analytical framework.” The best way to start that process would be for whoever succeeds Leibowitz as chairman to convene a workshop on the topic. (As one of us (Berin) has previously suggested, the FTC is long overdue on issuing guidelines to explain how it has applied its Unfairness and Deception Policy Statements in UDAP consumer protection cases. Such a workshop would dovetail nicely with this.)

The question posed should not presume that Section 5’s UDAP language ought to be used to reach conduct actionable under the antitrust statutes at all. Rather, the fundamental question to be asked is whether the use of Section 5 in antitrust cases is a relic of a bygone era before antitrust law was given analytical rigor by economics. If the FTC cannot rigorously define an interpretation of Section 5 that will actually serve consumer welfare — which the Supreme Court has defined as the proper aim of antitrust law — Congress should explicitly circumscribe it once and for all, limiting Section 5 to protecting consumers against unfair and deceptive acts and practices and, narrowly, prohibiting unfair competition in the form of invitations to collude. The FTC (along with the DOJ and the states) would still regulate competition through the existing antitrust laws. This might be the best outcome of all.

Previous commentary by us on Section 5:

As the Google antitrust discussion heats up on its way toward some culmination at the FTC, I thought it would be helpful to address some of the major issues raised in the case by taking a look at what’s going on in the market(s) in which Google operates. To this end, I have penned a lengthy document — The Market Realities that Undermine the Antitrust Case Against Google — highlighting some of the most salient aspects of current market conditions and explaining how they fit into the putative antitrust case against Google.

While not dispositive, these “realities on the ground” do strongly challenge the logic and thus the relevance of many of the claims put forth by Google’s critics. The case against Google rests on certain assumptions about how the markets in which it operates function. But these are tech markets, constantly evolving and complex; most assumptions (and even “conclusions” based on data) are imperfect at best. In this case, the conventional wisdom with respect to Google’s alleged exclusionary conduct, the market in which it operates (and allegedly monopolizes), and the claimed market characteristics that operate to protect its position (among other things) should be questioned.

The reality is far more complex, and, properly understood, paints a picture that undermines the basic, essential elements of an antitrust case against the company.

The document first assesses the implications for Market Definition and Monopoly Power of these competitive realities. Of note:

  • Users use Google because they are looking for information — but there are lots of ways to do that, and “search” is not so distinct that a “search market” instead of, say, an “online information market” (or something similar) makes sense.
  • Google competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search is important in this, but it is by no means alone, and there are myriad (and growing) other mechanisms to access consumers online.
  • To define the relevant market in terms of the particular mechanism that prevails to accomplish the matching of consumers and advertisers does not reflect the substitutability of other mechanisms that do the same thing but simply aren’t called “search.”
  • In a world where what prevails today won’t — not “might not,” but won’t — prevail tomorrow, it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market.
  • In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search” market looks far from unassailable.

Next I address Anticompetitive Harm — how the legal standard for antitrust harm is undermined by a proper understanding of market conditions:

  • Antitrust law doesn’t require that Google or any other large firm make life easier for competitors or others seeking to access resources owned by these firms.
  • Advertisers are increasingly targeting not paid search but rather social media to reach their target audiences.
  • But even for those firms that get much or most of their traffic from “organic” search, this fact isn’t an inevitable relic of a natural condition over which only the alleged monopolist has control; it’s a business decision, and neither sensible policy nor antitrust law is set up to protect the failed or faulty competitor from himself.
  • Although it often goes unremarked, paid search’s biggest competitor is almost certainly organic search (and vice versa). Nextag may complain about spending money on paid ads when it prefers organic, but the real lesson here is that the two are substitutes — along with social sites and good old-fashioned email, too.
  • It is incumbent upon critics to accurately assess the “but for” world without the access point in question. Here, Nextag can and does use paid ads to reach its audience (and, it is important to note, did so even before it claims it was foreclosed from Google’s users). But there are innumerable other avenues of access, as well. Some may be “better” than others; some that may be “better” now won’t be next year (think how links by friends on Facebook to price comparisons on Nextag pages could come to dominate its readership).
  • This is progress — creative destruction — not regress, and such changes should not be penalized.

Next I take on the perennial issue of Error Costs and the Risks of Erroneous Enforcement arising from an incomplete and inaccurate understanding of Google’s market:

  • Microsoft’s market position was unassailable . . . until it wasn’t — and even at the time, many could have told you that its perceived dominance was fleeting (and many did).
  • Apple’s success (and the consumer value it has created), while built in no small part on its direct competition with Microsoft and the desktop PCs which run it, was primarily built on a business model that deviated from its once-dominant rival’s — and not on a business model that the DOJ’s antitrust case against the company either facilitated or anticipated.
  • Microsoft and Google’s other critic-competitors have more avenues to access users than ever before. Who cares if users get to these Google-alternatives through their devices instead of a URL? Access is access.
  • It isn’t just monopolists who prefer not to innovate: their competitors do, too. To the extent that Nextag’s difficulties arise from Google innovating, it is Nextag, not Google, that’s working to thwart innovation and fighting against dynamism.
  • Recall the furor around Google’s purchase of ITA, a powerful cautionary tale. As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits. Residing at number one? FairSearch founding member, Kayak, with a whopping 61%. And how about FairSearch member Expedia? Currently, it’s the largest travel company in the world, and it has only grown in recent years.

The next section addresses the essential issue of Barriers to Entry and their absence:

  • One common refrain from Google’s critics is that Google’s access to immense amounts of data used to increase the quality of its targeting presents a barrier to competition that no one else can match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.
  • It’s never been the case that a firm has to generate its own inputs into every product it produces — and there is no reason to suggest search/advertising is any different.
  • Meanwhile, Google’s chief competitor, Microsoft, is hardly hurting for data (even, quite creatively, culling data directly from Google itself), despite its claims to the contrary. And while regulators and critics may be looking narrowly and statically at search data, Microsoft is meanwhile sitting on top of copious data from unorthodox — and possibly even more valuable — sources.
  • To defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged are illusory.

The next section takes on recent claims revolving around The Mobile Market and Google’s position (and conduct) there:

  • If obtaining or preserving dominance is simply a function of cash, Microsoft is sitting on some $58 billion of it that it can devote to that end. And JP Morgan Chase would be happy to help out if it could be guaranteed monopoly returns just by throwing its money at Bing. Like data, capital is widely available, and, also like data, it doesn’t matter if a company gets it from selling search advertising or from selling cars.
  • Advertisers don’t care whether the right (targeted) user sees their ads while playing Angry Birds or while surfing the web on their phone, and users can (and do) seek information online (and thus reveal their preferences) just as well (or perhaps better) through Wikipedia’s app as via a Google search in a mobile browser.
  • Moreover, mobile is already (and increasingly) a substitute for the desktop. Distinguishing mobile search from desktop search is meaningless when users use their tablets at home, perform activities that they would have performed at home away from home on mobile devices simply because they can, and where users sometimes search for places to go (for example) on mobile devices while out and sometimes on their computers before they leave.
  • Whatever gains Google may have made in search from its spread into the mobile world is likely to be undermined by the massive growth in social connectivity it has also wrought.
  • Mobile is part of the competitive landscape. All of the innovations in mobile present opportunities for Google and its competitors to best each other, and all present avenues of access for Google and its competitors to reach consumers.

The final section Concludes.

The lessons from all of this? There are two. First, these are dynamic markets, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each of these developments has presented different, novel and shifting opportunities and challenges for firms interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” misses the mark precisely because there is simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

Perhaps most important is this:

Competition with Google may not and need not look exactly like Google itself, and some of this competition will usher in innovations that Google itself won’t be able to replicate. But this doesn’t make it any less competitive.  

Competition need not look identical to be competitive — that’s what innovation is all about. Just ask those famous buggy whip manufacturers.

After more than a year of complaining about Google and being met with responses from me (see also here, here, here, here, and here, among others) and many others that these complaints have yet to offer up a rigorous theory of antitrust injury — let alone any evidence — FairSearch yesterday offered up its preferred remedies aimed at addressing, in its own words, “the fundamental conflict of interest driving Google’s incentive and ability to engage in anti-competitive conduct. . . . [by putting an] end [to] Google’s preferencing of its own products ahead of natural search results.”  Nothing in the post addresses the weakness of the organization’s underlying claims, and its proposed remedies would be damaging to consumers.

FairSearch’s first and core “abuse” is “[d]iscriminatory treatment favoring Google’s own vertical products in a manner that may harm competing vertical products.”  To address this it proposes prohibiting Google from preferencing its own content in search results and suggests as additional, “structural remedies” “[r]equiring Google to license data” and “[r]equiring Google to divest its vertical products that have benefited from Google’s abuses.”

Tom Barnett, former AAG for antitrust, counsel to FairSearch member Expedia, and FairSearch’s de facto spokesman should be ashamed to be associated with claims and proposals like these.  He better than many others knows that harm to competitors is not the issue under US antitrust laws.  Rather, US antitrust law requires a demonstration that consumers — not just rivals — will be harmed by a challenged practice.  He also knows (as economists have known for a long time) that favoring one’s own content — i.e., “vertically integrating” to produce both inputs as well as finished products — is generally procompetitive.

In fact, Barnett has said as much before:

Because a Section 2 violation hurts competitors, they are often the focus of section 2 remedial efforts.  But competitor well-being, in itself, is not the purpose of our antitrust laws.

Access remedies also raise efficiency and innovation concerns.  By forcing a firm to share the benefits of its investments and relieving its rivals of the incentive to develop comparable assets of their own, access remedies can reduce the competitive vitality of an industry.

Not only has FairSearch not actually demonstrated that Google has preferenced its own products, the organization has also not demonstrated either harm to consumers arising from such conduct nor even antitrust-cognizable harm to competitors arising from it.

As an empirical study supported by the International Center for Law and Economics (itself, in turn, supported in part by Google, and of which I am the Executive Director) makes clear, search bias simply almost never occurs.  And when it does, it is the non-dominant Bing that more often practices it, not Google.  Moreover, and most important, the evidence marshaled in favor of the search bias claim (largely adduced by Harvard Business School professor, Ben Edelman (whose work is supported by Microsoft)) demonstrates that consumers do, indeed, have the ability to detect and counter allegedly biased results.

Recall what search bias means in this context.  According to Edelman, looking at the top three search results, Google links to its own content (think Gmail, Google Maps, etc.) in the first search result about twice as often as Yahoo! and Bing link to Google content in this position.  While the ICLE paper refutes even this finding, notice what it means:  “Biased” search results lead to a reshuffling of results among the top few results offered up; there is no evidence that Google simply drops users’ preferred results.  While it is true that the difference in click-through rates between the top and second results can be significant, Edelman’s own findings actually demonstrate that consumers are capable of finding what they want when their preferred (more relevant) results appears in the second or third slot.

Edelman notes that Google ranks Gmail first and Yahoo! Mail second in his study, even though users seem to think Yahoo! Mail is the more relevant result:  Gmail receives only 29% of clicks while Yahoo! Mail receives 54%.  According to Edelman, this is proof that Google’s conduct forecloses access by competitors and harms consumers under the antitrust laws.

But is it?  Note that users click on the second, apparently more-relevant result nearly twice as often as they click on the first.  This demonstrates that Yahoo! is not competitively foreclosed from access to users, and that users are perfectly capable of identifying their preferred results, even when they appear lower in the results page.  This is simply not foreclosure — in fact, if anything, it demonstrates the opposite.

Among other things, foreclosure — limiting access by a competitor to a necessary input — under the antitrust laws must be substantial enough to prevent a rival from reaching sufficient scale that it can effectively compete.  It is no more “foreclosure” for Google to “impair” traffic to Kayak’s site by offering its own Flight Search than it is for Safeway to refuse to allow Kroger to sell Safeway’s house brand.  Rather, actionable foreclosure requires that a firm “impair[s] the ability of rivals to grow into effective competitors that erode the firm’s position.”  Such quantifiable claims are noticeably absent from critic’s complaints against Google.

And what about those allegedly harmed competitors?  How are they faring?  As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits.  Residing at number one?  FairSearch founding member, Kayak, with a whopping 61% (up from 52% six months after Google entered the travel search business).  Nextag.com, another vocal Google critic, has complained that Google’s conduct has forced it to shift its strategy from attracting traffic through Google’s organic search results to other sources, including paid ads on Google.com.  And how has it fared?  It has parlayed its experience with new data sources into a successful new business model, Wize Commerce, showing exactly the sort of “incentive to develop comparable assets of their own” Barnett worries will be destroyed by aggressive antitrust enforcement.  And Barnett’s own Expedia.com?  Currently, it’s the largest travel company in the world, and it has only grown in recent years.

Meanwhile consumers’ interests have been absent from critics’ complaints since the beginning.  And not only do they fail to demonstrate any connection between harm to consumers and the claimed harms to competitors arising from Google’s conduct, but they also ignore the harm to consumers that may result from restricting potentially efficient business conduct — like the integration of Google Maps and other products into its search results.  That Google not only produces search results but also owns some of the content that generates those results is not a problem cognizable by modern antitrust.

FairSearch and other Google critics have utterly failed to make a compelling case, and their proposed remedies would serve only to harm, not help, consumers.

I will be speaking at a lunch debate in DC hosted by TechFreedom on Friday, September 28, 2012, to discuss the FTC’s antitrust investigation of Google. Details below.

TechFreedom will host a livestreamed, parliamentary-style lunch debate on Friday September 28, 2012, to discuss the FTC’s antitrust investigation of Google.   As the company has evolved, expanding outward from its core search engine product, it has come into competition with a range of other firms and established business models. This has, in turn, caused antitrust regulators to investigate Google’s conduct, essentially questioning whether the company’s success obligates it to treat competitors neutrally. James Cooper, Director of Research and Policy for the Law and Economics Center at George Mason University School of Law, will moderate a panel of four distinguished commenters to discuss the question, “Should the FTC Sue Google Over Search?”  

Arguing “Yes” will be:

Arguing “No” will be:

When:
Friday, September 28, 2012
12:00 p.m. – 2:00 p.m.

Where:
The Monocle Restaurant
107 D Street Northeast
Washington, DC 20002

RSVP here. The event will be livestreamed here and you can follow the conversation on Twitter at #GoogleFTC.

For those viewing by livestream, we will watch for questions posted to Twitter at the #GoogleFTC hashtag and endeavor, as possible, to incorporate them into the debate.

Questions?
Email contact@techfreedom.org

In the past weeks, the chatter surrounding a possible FTC antitrust case against Google has risen in volume, thanks largely to the FTC’s hiring of litigator Beth Wilkinson.  The question remains, however, what this aggressive move portends and, more importantly, why the FTC is taking it.

It is worth noting at the outset that, as far as I know, Wilkinson has no antitrust experience; she is a litigator.  Now, there’s nothing wrong with an agency enlisting a hired gun to help litigate its cases, but when the hired gun is not hired for her substantive expertise but rather her ability to persuade, it perhaps suggests something about the strength of the agency’s case.

It’s reading tea leaves (a time-honored, if flawed, DC practice), but Wilkinson’s hiring suggests to me that the FTC views its case as one that will require some serious rhetorical handling in order to win.  While on its Sherman Act Section 2 merits that would be true anyway, it also suggests to me that the FTC intends to use the case as an opportunity to push – and seek court approval for – the ambitious plans of some of the Commissioners to expand the agency’s powers under Section 5 of the FTC Act.  This would be a costly mistake for consumers.

Last year, in an interview with Global Competition Review, FTC Chairman Leibowitz was asked whether the agency was “investigating the online search market.”  He declined to answer directly but instead offered this suggestive comment:

What I can say is that one of the commission’s priorities is to find a pure Section Five case under unfair methods of competition.  Everyone acknowledges that Congress gave us much more jurisdiction than just antitrust.  And I go back to this because at some point if and when, say, a large technology company acknowledges an investigation by the FTC, we can use both our unfair or deceptive acts or practice authority and our unfair methods of competition authority to investigate the same or similar unfair competitive behavior . . . .

Commissioner Rosch has likewise suggested that Section 5 could and should be expanded, precisely to reach activity that would be unreachable under current Section 2 standards.  The effort to expand the FTC’s antitrust enforcement under Section 5, and to write out the jurisprudential standards of Section 2, is a troubling one.

Following Sherman Act jurisprudence, traditionally the FTC has understood (and courts have demanded) that antitrust enforcement under Section 5 (as a technical matter, the FTC does not directly enforce Section 2 of the Sherman Act but instead enforces the Act via its Section 5 authority) requires demonstrable consumer harm to apply.  But this latest effort reveals an agency pursuing an interpretation of Section 5 that would give it unprecedented and largely-unchecked authority.  In particular, the definition of “unfair” competition wouldn’t be confined to the traditional antitrust measures—reduction in output or an output-reducing increase in price—but could expand to, well, just about whatever the agency deems improper.

Most problematically, Commissioner Rosch has suggested that Section Five could address conduct that has the effect of “reducing consumer choice” without requiring any evidence that conduct actually reduces consumer welfare—a theory that only a vanishingly few commentators (essentially one law professor and one FTC lawyer have written the entire body of scholarship on this topic) support.  Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by a competitor’s conduct.

Under Section 2 standards, the FTC would have a tough time winning its case.  This is because the agency doesn’t seem to have a theory of harm that reaches consumers—and none of Google’s competitors that have been stoking the flames has offered one.  Instead, all of the propounded theories turn on harm to competitors.  But the U.S. has a long tradition of resisting enforcement based on harm to competitors without a showing of harm to consumers.  If all that were required were harm to competitors, then all pro-competitive conduct would be actionable under the antitrust laws; for what is the aim and effect of competition if not the besting of one’s competitors?  The competitive process is by definition one that can “reduce consumer choice.”  This is why the great economist Joseph Schumpeter famously called the competitive process one of “creative destruction.”

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of harm to consumer welfare.  For example, Google’s implementation and placement within its organic search results of its own shopping results is alleged to make it difficult for competing product-specific search sites (like Nextag or Amazon, for example) to reach Google’s users.  Leaving aside the weakness of the factual allegation (I challenge you to perform a search for a product on Google that doesn’t offer up a mix of retailers, manufacturers, review sites and multiple product search engine results on the first page), it is hard to see how consumers are harmed here.

On the one hand, users have easy access to competing sites directly from their browser’s address bar and, increasingly importantly, to more persuasive product reviews from friends and colleagues via social media.  In this way even the basic factual predicate is faulty, and it’s not even clear that consumer choice itself is reduced if Nextag is absent from Google searches, as the site can be reached by, among other things, links from reviews, links from friends on social media, other general search engines, and every browser address bar.

On the other hand, users are by no means foreclosed from access to actual products (and there is no evidence that I know of that consumer prices or supply are in any way affected) if any particular product search engine doesn’t appear in the top results.  Placement of Google’s own product search results in fact streamlines consumers’ access, and Google’s comprehensive and effective search engine ensures that its shopping results are probably better than anyone else’s anyway.  The same is true for travel searches, maps, and the range of other complained-of results.  Flight information and reservations, location information and maps are widely available online and off through myriad sources other than Google.

The bottom line is that harm to competitors is at least as consistent with pro-competitive as with anti-competitive conduct, and simply counting the number of firms offering competing choices to consumers that happen to appear in the top few Google search results is no way to infer actual consumer harm.

One of the most important shifts in antitrust over the past 30 years has been the move away from indirect and unreliable proxies of consumer harm toward a more direct, effects-based analysis.  Like the now archaic focus on market concentration in the structure-conduct-performance framework at the core of “old” merger analysis, the consumer choice framework substitutes an indirect and deeply flawed proxy for consumer welfare for assessment of economically relevant economic effects.  By focusing on the number of choices, the analysis shifts attention to the wrong question.

The fundamental question from an antitrust perspective is whether consumer choice is a better predictor of consumer outcomes than current tools allow.   There doesn’t appear to be anything in economic theory to suggest that it would be.  Instead, it reduces competitive analysis to a single attribute of market structure and appears susceptible to interpretations that would sacrifice a meaningful measure of consumer welfare (incorporating assessment of price, quality, variety, innovation and other amenities) on economically unsound grounds.  It is also not the law.

Commissioner Rosch has suggested that the Supreme Court in its 2007 Leegin decision provided a green light for consumer-choice-reducing antitrust theories without a showing of traditional (output-reducing) harm.  But as Josh pointed out, the Ninth Circuit has held (in last year’s Brantley v. NBC Universal decision, which Thom has also blogged about here and here) that Leegin more accurately holds precisely the opposite, and coupled with the Court’s 2006 Independent Ink decision, seems clearly to restrict, rather than authorize, a consumer choice claim:

The Supreme Court has noted that both [reduced choice and increased prices] are “fully consistent with a free, competitive market,” [citing Independent Ink] and are therefore insufficient to establish an injury to competition. Thus even vertical agreements that prohibit retail price reductions and result in higher consumer prices . . . are not unlawful absent a further showing of anticompetitive conduct [citing Leegin].

Modern antitrust analysis, both in scholarship and in the courts, quite properly rejects the reductive and unsupported sort of theories that would undergird a Section 5 case against Google.  That the FTC might have a better chance of winning a Section 5 case, unmoored from the economically sound limitations of Section 2 jurisprudence, is no reason for it to pursue such a case.  Quite the opposite:  When consumer welfare is disregarded for the sake of the agency’s power, it ceases to further its mandate.  No doubt Beth Wilkinson could help make the rhetorical argument for a Section 5 case against Google based on a tenuous consumer choice theory.  But economic substance, not self-aggrandizement by rhetoric, should guide the agency.  Competition and consumers are dramatically ill-served by the latter.

Full disclosure: I worked briefly with Beth Wilkinson at Latham and Watkins.  Further full disclosure: The International Center for Law and Economics, of which I am the Executive Director, has received support to make research grants from Google, among many other companies and individuals.

[Cross-posted at Forbes]

On Tuesday the European Commission opened formal proceedings against Motorola Mobility based on its patent licensing practices surrounding some of its core cellular telephony, Internet video and Wi-fi technology. The Commission’s concerns, echoing those raised by Microsoft and Apple, center on Motorola’s allegedly high royalty rates and its efforts to use injunctions to enforce the “standards-essential patents” at issue.

As it happens, this development is just the latest, like so many in the tech world these days, in Microsoft’s ongoing regulatory, policy and legal war against Google, which announced in August it was planning to buy Motorola.

Microsoft’s claim and the Commission’s concern that Motorola’s royalty offer was, in Microsoft’s colorful phrase, “so over-reaching that no rational company could ever have accepted it or even viewed it as a legitimate offer,” is misplaced. Motorola is seeking a royalty rate for its patents that is seemingly in line with customary rates.

In fact, Microsoft’s claim that Motorola’s royalty ask is extraordinary is refuted by its own conduct. As one commentator notes:

Microsoft complained that it might have to pay a tribute of up to $22.50 for every $1,000 laptop sold, and suggested that it might be fairer to pay just a few cents. This is the firm that is thought to make $10 to $15 from every $500 Android device that is sold, and for a raft of trivial software patents, not standard essential ones.

Seemingly forgetting this, Microsoft criticizes Motorola’s royalty ask on its 50 H.264 video codec patents by comparing it to the amount Microsoft pays for more than 2000 other patents in the video codec’s patent pool, claiming that the former would cost it $4 billion while the latter costs it only $6.5 million. But this is comparing apples and oranges. It is not surprising to find some patents worth orders of magnitude more than others and to find that license rates are a complicated function of the contracting parties’ particular negotiating positions and circumstances. It is no more inherently inappropriate for Microsoft to rake in 2-3% of the price of every Nook Barnes and Nobles sells than it is for Motorola to net 2.25% of the price of each Windows-operated computer sold – which is the royalty rate Motorola is seeking and which Microsoft wants declared anticompetitive out of hand.

It’s not clear how much negotiation, if any, has taken place between the companies over the terms of Microsoft’s licensing of Motorola’s patents, but what is clear is that Microsoft’s complaint, echoed by the EC, is based on the size of Motorola’s initial royalty demand and its use of a legal injunction to enforce its patent rights. Unfortunately, neither of these is particularly problematic, especially in an environment where companies like Microsoft and Apple aggressively wield exactly such tools to gain a competitive negotiating edge over their own competitors.

The court adjudicating this dispute in the ongoing litigation in U.S. district court in Washington has thus far agreed. The court denied Microsoft’s request for summary judgment that Motorola’s royalty demand violated its RAND commitment, noting its disagreement with Microsoft’s claim that “it is always facially unreasonable for a proposed royalty rate to result in a larger royalty payment for products that have higher end prices. Indeed, Motorola has previously entered into licensing agreements for its declared-essential patents at royalty rates similar to those offered to Microsoft and with royalty rates based on the price of the end product.”

The staggering aggregate numbers touted by Microsoft in its complaint and repeated by bloggers and journalists the world over are not a function of Motorola seeking an exorbitant royalty but rather a function Microsoft’s selling a lot of operating systems and earning a lot of revenue doing it. While the aggregate number ($4 billion, according to Microsoft) is huge, it is, as the court notes, based on a royalty rate that is in line with similar agreements.

The court also takes issue with Microsoft’s contention that the mere offer of allegedly unreasonable terms constitutes a breach of Motorola’s RAND commitment to license its patents on commercially reasonable terms. Quite sensibly, the court notes:

[T]he court is mindful that at the time of an initial offer, it is difficult for the offeror to know what would in fact constitute RAND terms for the offeree. Thus, what may appear to be RAND terms from the offeror’s perspective may be rejected out-of-pocket as non-RAND terms by the offeree. Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties’ unique circumstances.

Resolution of such an impasse may ultimately fall to the courts. Thus the royalty rate issue is in fact closely related to the second issue raised by the EC’s investigation: the use or threat of injunction to enforce standards-essential patents.

While some scholars and many policy advocates claim that injunctions in the standards context raise the specter of costly hold-ups (patent holders extracting not only the market value of their patent, but also a portion of the costs that the infringer would incur if it had to implement its technology without the patent), there is no empirical evidence supporting the claim that patent holdup is a pervasive problem.

And the theory doesn’t comfortably support such a claim, either. Motorola, for example, has no interest in actually enforcing an injunction: Doing so is expensive and, notably, not nearly as good for the bottom line as actually receiving royalties from an agreed-upon contract. Instead, injunctions are, just like the more-attenuated liability suit for patent infringement, a central aspect of our intellectual property system, the means by which innovators and their financiers can reasonably expect a return on their substantial up-front investments in technology development.

Moreover, and apparently unbeknownst to those who claim that injunctions are the antithesis of negotiated solutions to licensing contests, the threat of injunction actually facilitates efficient transacting. Injunctions provide clearer penalties than damage awards for failing to reach consensus and are thus better at getting both parties on to the table with matched expectations. And this is especially true in the standards-setting context where the relevant parties are generally repeat players and where they very often have both patents to license and the need to license patents from the standard—both of which help to induce everyone to come to the table, lest they find themselves closed off from patents essential to their own products.

Antitrust intervention in standard setting negotiations based on an allegedly high initial royalty rate offer or the use of an injunction to enforce a patent is misdirected and costly. One of the clearest statements of the need for antitrust restraint in the standard setting context comes from a June 2011 comment filed with the FTC:

[T]he existence of a RAND commitment to offer patent licenses should not preclude a patent holder from seeking preliminary injunctive relief. . . . Any uniform declaration that such relief would not be available if the patent holder has made a commitment to offer a RAND license for its essential patent claims in connection with a standard may reduce any incentives that implementers might have to engage in good faith negotiations with the patent holder.

Most of the SSOs and their stakeholders that have considered these proposals over the years have determined that there are only a limited number of situations where patent hold-up takes place in the context of standards-setting. The industry has determined that those situations generally are best addressed through bi-lateral negotiation (and, in rare cases, litigation) as opposed to modifying the SSO’s IPR policy [by precluding injunctions or mandating a particular negotiation process].

The statement’s author? Why, Microsoft, of course.

Patents are an important tool for encouraging the development and commercialization of advanced technology, as are standard setting organizations. Antitrust authorities should exercise great restraint before intervening in the complex commercial negotiations over technology patents and standards. In Motorola’s case, the evidence of conduct that might harm competition is absent, and all that remains are, in essence, allegations that Motorola is bargaining hard and enforcing its property rights. The EC should let competition run its course.

Six months may not seem a great deal of time in the general business world, but in the Internet space it’s a lifetime as new websites, tools and features are introduced every day that change where and how users get and share information. The rise of Facebook is a great example: the social networking platform that didn’t exist in early 2004 filed paperwork last month to launch what is expected to be one of the largest IPOs in history. To put it in perspective, Ford Motor went public nearly forty years after it was founded.

This incredible pace of innovation is seen throughout the Internet, and since Google’s public disclosure of its Federal Trade Commission antitrust investigation just this past June, there have been many dynamic changes to the landscape of the Internet Search market. And as the needs and expectations of consumers continue to evolve, Internet search must adapt – and quickly – to shifting demand.

One noteworthy development was the release of Siri by Apple, which was introduced to the world in late 2011 on the most recent iPhone. Today, many consider it the best voice recognition application in history, but its potential really lies in its ability revolutionize the way we search the Internet, answer questions and consume information. As Eric Jackson of Forbes noted, in the future it may even be a “Google killer.”

Of this we can be certain: Siri is the latest (though certainly not the last) game changer in Internet search, and it has certainly begun to change people’s expectations about both the process and the results of search. The search box, once needed to connect us with information on the web, is dead or dying. In its place is an application that feels intuitive and personal. Siri has become a near-indispensible entry point, and search engines are merely the back-end. And while a new feature, Siri’s expansion is inevitable. In fact, it is rumored that Apple is diligently working on Siri-enabled televisions – an entirely new market for the company.

The past six months have also brought the convergence of social media and search engines, as first Bing and more recently Google have incorporated information from a social network into their search results. Again we see technology adapting and responding to the once-unimagined way individuals find, analyze and accept information. Instead of relying on traditional, mechanical search results and the opinions of strangers, this new convergence allows users to find data and receive input directly from people in their social world, offering results curated by friends and associates.

As Social networks become more integrated with the Internet at large, reviews from trusted contacts will continue to change the way that users search for information. As David Worlock put it in a post titled, “Decline and Fall of the Google Empire,” “Facebook and its successors become the consumer research environment. Search by asking someone you know, or at least have a connection with, and get recommendations and references which take you right to the place where you buy.” The addition of social data to search results lends a layer of novel, trusted data to users’ results. Search Engine Land’s Danny Sullivan agreed writing, “The new system will perhaps make life much easier for some people, allowing them to find both privately shared content from friends and family plus material from across the web through a single search, rather than having to search twice using two different systems.”It only makes sense, from a competition perspective, that Google followed suit and recently merged its social and search data in an effort to make search more relevant and personal.

Inevitably, a host of Google’s critics and competitors has cried foul. In fact, as Google has adapted and evolved from its original template to offer users not only links to URLs but also maps, flight information, product pages, videos and now social media inputs, it has met with a curious resistance at every turn. And, indeed, judged against a world in which Internet search is limited to “ten blue links,” with actual content – answers to questions – residing outside of Google’s purview, it has significantly expanded its reach and brought itself (and its large user base) into direct competition with a host of new entities.

But the worldview that judges these adaptations as unwarranted extensions of Google’s platform from its initial baseline, itself merely a function of the relatively limited technology and nascent consumer demand present at the firm’s inception, is dangerously crabbed. By challenging Google’s evolution as “leveraging its dominance” into new and distinct markets, rather than celebrating its efforts (and those of Apple, Bing and Facebook, for that matter) to offer richer, more-responsive and varied forms of information, this view denies the essential reality of technological evolution and exalts outdated technology and outmoded business practices.

And while Google’s forays into the protected realms of others’ business models grab the headlines, it is also feverishly working to adapt its core technology, as well, most recently (and ambitiously) with its “Google Knowledge Graph” project, aimed squarely at transforming the algorithmic guts of its core search function into something more intelligent and refined than its current word-based index permits. In concept, this is, in fact, no different than its efforts to bootstrap social network data into its current structure: Both are efforts to improve on the mechanical process built on Google’s PageRank technology to offer more relevant search results informed by a better understanding of the mercurial way people actually think.

Expanding consumer welfare requires that Google, like its ever-shifting roster of competitors, must be able to keep up with the pace and the unanticipated twists and turns of innovation. As The Economist recently said, “Kodak was the Google of its day,” and the analogy is decidedly apt. Without the drive or ability to evolve and reinvent itself, its products and its business model, Kodak has fallen to its competitors in the marketplace. Once revered as a powerhouse of technological innovation for most of its history, Kodak now faces bankruptcy because it failed to adapt to its own success. Having invented the digital camera, Kodak radically altered the very definition of its market. But by hewing to its own metaphorical ten blue links – traditional film – instead of understanding that consumer photography had come to mean something dramatically different, Kodak consigned itself to failure.

Like Kodak and every other technology company before it, Google must be willing and able to adapt and evolve; just as for Lewis Carol’s Red Queen, “here it takes all the running you can do, to keep in the same place.” Neither consumers nor firms are well served by regulatory policy informed by nostalgia. Even more so than Kodak, Google confronts a near-constantly evolving marketplace and fierce competition from unanticipated quarters. If regulators force it to stop running, the market will simply pass it by.

[Cross posted at Forbes]

By Berin Szoka, Geoffrey Manne & Ryan Radia

As has become customary with just about every new product announcement by Google these days, the company’s introduction on Tuesday of its new “Search, plus Your World” (SPYW) program, which aims to incorporate a user’s Google+ content into her organic search results, has met with cries of antitrust foul play. All the usual blustering and speculation in the latest Google antitrust debate has obscured what should, however, be the two key prior questions: (1) Did Google violate the antitrust laws by not including data from Facebook, Twitter and other social networks in its new SPYW program alongside Google+ content; and (2) How might antitrust restrain Google in conditioning participation in this program in the future?

The answer to the first is a clear no. The second is more complicated—but also purely speculative at this point, especially because it’s not even clear Facebook and Twitter really want to be included or what their price and conditions for doing so would be. So in short, it’s hard to see what there is to argue about yet.

Let’s consider both questions in turn.

Should Google Have Included Other Services Prior to SPYW’s Launch?

Google says it’s happy to add non-Google content to SPYW but, as Google fellow Amit Singhal told Danny Sullivan, a leading search engine journalist:

Facebook and Twitter and other services, basically, their terms of service don’t allow us to crawl them deeply and store things. Google+ is the only [network] that provides such a persistent service,… Of course, going forward, if others were willing to change, we’d look at designing things to see how it would work.

In a follow-up story, Sullivan quotes his interview with Google executive chairman Eric Schmidt about how this would work:

“To start with, we would have a conversation with them,” Schmidt said, about settling any differences.

I replied that with the Google+ suggestions now hitting Google, there was no need to have any discussions or formal deals. Google’s regular crawling, allowed by both Twitter and Facebook, was a form of “automated conversation” giving Google material it could use.

“Anything we do with companies like that, it’s always better to have a conversion,” Schmidt said.

MG Siegler calls this “doublespeak” and seems to think Google violated the antitrust laws by not making SPYW more inclusive right out of the gate. He insists Google didn’t need permission to include public data in SPYW:

Both Twitter and Facebook have data that is available to the public. It’s data that Google crawls. It’s data that Google even has some social context for thanks to older Google Profile features, as Sullivan points out.

It’s not all the data inside the walls of Twitter and Facebook — hence the need for firehose deals. But the data Google can get is more than enough for many of the high level features of Search+ — like the “People and Places” box, for example.

It’s certainly true that if you search Google for “site:twitter.com” or “site:facebook.com,” you’ll get billions of search results from publicly-available Facebook and Twitter pages, and that Google already has some friend connection data via social accounts you might have linked to your Google profile (check out this dashboard), as Sullivan notes. But the public data isn’t available in real-time, and the private, social connection data is limited and available only for users who link their accounts. For Google to access real-time results and full social connection data would require… you guessed it… permission from Twitter (or Facebook)! As it happens, Twitter and Google had a deal for a “data firehose” so that Google could display tweets in real-time under the “personalized search” program for public social information that SPYW builds on top of. But Twitter ended the deal last May for reasons neither company has explained.

At best, therefore, Google might have included public, relatively stale social information from Twitter and Facebook in SPYW—content that is, in any case, already included in basic search results and remains available there. The real question, however, isn’t could Google have included this data in SPYW, but rather need they have? If Google’s engineers and executives decided that the incorporation of this limited data would present an inconsistent user experience or otherwise diminish its uniquely new social search experience, it’s hard to fault the company for deciding to exclude it. Moreover, as an antitrust matter, both the economics and the law of anticompetitive product design are uncertain. In general, as with issues surrounding the vertical integration claims against Google, product design that hurts rivals can (it should be self-evident) be quite beneficial for consumers. Here, it’s difficult to see how the exclusion of non-Google+ social media from SPYW could raise the costs of Google’s rivals, result in anticompetitive foreclosure, retard rivals’ incentives for innovation, or otherwise result in anticompetitive effects (as required to establish an antitrust claim).

Further, it’s easy to see why Google’s lawyers would prefer express permission from competitors before using their content in this way. After all, Google was denounced last year for “scraping” a different type of social content, user reviews, most notably by Yelp’s CEO at the contentious Senate antitrust hearing in September. Perhaps one could distinguish that situation from this one, but it’s not obvious where to draw the line between content Google has a duty to include without “making excuses” about needing permission and content Google has a duty not to include without express permission. Indeed, this seems like a case of “damned if you do, damned if you don’t.” It seems only natural for Google to be gun-shy about “scraping” other services’ public content for use in its latest search innovation without at least first conducting, as Eric Schmidt puts it, a “conversation.”

And as we noted, integrating non-public content would require not just permission but active coordination about implementation. SPYW displays Google+ content only to users who are logged into their Google+ account. Similarly, to display content shared with a user’s friends (but not the world) on Facebook, or protected tweets, Google would need a feed of that private data and a way of logging the user into his or her account on those sites.

Now, if Twitter truly wants Google to feature tweets in Google’s personalized search results, why did Twitter end its agreement with Google last year? Google responded to Twitter’s criticism of its SPYW launch last night with a short Google+ statement:

We are a bit surprised by Twitter’s comments about Search plus Your World, because they chose not to renew their agreement with us last summer, and since then we have observed their rel=nofollow instructions [by removing Twitter content results from “personalized search” results].

Perhaps Twitter simply got a better deal: Microsoft may have paid Twitter $30 million last year for a similar deal allowing Bing users to receive Twitter results. If Twitter really is playing hardball, Google is not guilty of discriminating against Facebook and Twitter in favor of its own social platform. Rather, it’s simply unwilling to pony up the cash that Facebook and Twitter are demanding—and there’s nothing illegal about that.

Indeed, the issue may go beyond a simple pricing dispute. If you were CEO of Twitter or Facebook, would you really think it was a net-win if your users could use Google search as an interface for your site? After all, these social networking sites are in an intense war for eyeballs: the more time users spend on Google, the more ads Google can sell, to the detriment of Facebook or Twitter. Facebook probably sees itself increasingly in direct competition with Google as a tool for finding information. Its social network has vastly more users than Google+ (800 million v 62 million, but even larger lead in active users), and, in most respects, more social functionality. The one area where Facebook lags is search functionality. Would Facebook really want to let Google become the tool for searching social networks—one social search engine “to rule them all“? Or would Facebook prefer to continue developing “social search” in partnership with Bing? On Bing, it can control how its content appears—and Facebook sees Microsoft as a partner, not a rival (at least until it can build its own search functionality inside the web’s hottest property).

Adding to this dynamic, and perhaps ultimately fueling some of the fire against SPYW, is the fact that many Google+ users seem to be multi-homing, using both Facebook and Google+ (and other social networks) at the same time, and even using various aggregators and syncing tools (Start Google+, for example) to unify social media streams and share content among them. Before SPYW, this might have seemed like a boon to Facebook, staunching any potential defectors from its network onto Google+ by keeping them engaged with both, with a kind of “Facebook primacy” ensuring continued eyeball time on its site. But Facebook might see SPYW as a threat to this primacy—in effect, reversing users’ primary “home” as they effectively import their Facebook data into SPYW via their Google+ accounts (such as through Start Google+). If SPYW can effectively facilitate indirect Google searching of private Facebook content, the fears we suggest above may be realized, and more users may forego vistiing Facebook.com (and seeing its advertisers), accessing much of their Facebook content elsewhere—where Facebook cannot monetize their attention.

Amidst all the antitrust hand-wringing over SPYW and Google’s decision to “go it alone” for now, it’s worth noting that Facebook has remained silent. Even Twitter has said little more than a tweet’s worth about the issue. It’s simply not clear that Google’s rivals would even want to participate in SPYW. This could still be bad for consumers, but in that case, the source of the harm, if any, wouldn’t be Google. If this all sounds speculative, it is—and that’s precisely the point. No one really knows. So, again, what’s to argue about on Day 3 of the new social search paradigm?

The Debate to Come: Conditioning Access to SPYW

While Twitter and Facebook may well prefer that Google not index their content on SPYW—at least, not unless Google is willing to pay up—suppose the social networking firms took Google up on its offer to have a “conversation” about greater cooperation. Google hasn’t made clear on what terms it would include content from other social media platforms. So it’s at least conceivable that, when pressed to make good on its lofty-but-vague offer to include other platforms, Google might insist on unacceptable terms. In principle, there are essentially three possibilities here:

  1. Antitrust law requires nothing because there are pro-consumer benefits for Google to make SPYW exclusive and no clear harm to competition (as distinct from harm to competitors) for doing so, as our colleague Josh Wright argues.
  2. Antitrust law requires Google to grant competitors access to SPYW on commercially reasonable terms.
  3. Antitrust law requires Google to grant such access on terms dictated by its competitors, even if unreasonable to Google.

Door #3 is a legal non-starter. In Aspen Skiing v. Aspen Highlands (1985), the Supreme Court came the closest it has ever come to endorsing the “essential facilities” doctrine by which a competitor has a duty to offer its facilities to competitors. But in Verizon Communications v. Trinko (2004), the Court made clear that even Aspen Skiing is “at or near the outer boundary of § 2 liability.” Part of the basis for the decision in Aspen Skiing was the existence of a prior, profitable relationship between the “essential facility” in question and the competitor seeking access. Although the assumption is neither warranted nor sufficient (circumstances change, of course, and merely “profitable” is not the same thing as “best available use of a resource”), the Court in Aspen Skiing seems to have been swayed by the view that the access in question was otherwise profitable for the company that was denying it. Trinko limited the reach of the doctrine to the extraordinary circumstances of Aspen Skiing, and thus, as the Court affirmed in Pacific Bell v. LinkLine (2008), it seems there is no antitrust duty for a firm to offer access to a competitor on commercially unreasonable terms (as Geoff Manne discusses at greater length in his chapter on search bias in TechFreedom’s free ebook, The Next Digital Decade).

So Google either has no duty to deal at all, or a duty to deal only on reasonable terms. But what would a competitor have to show to establish such a duty? And how would “reasonableness” be defined?

First, this issue parallels claims made more generally about Google’s supposed “search bias.” As Josh Wright has said about those claims, “[p]roperly articulated vertical foreclosure theories proffer both that bias is (1) sufficient in magnitude to exclude Google’s rivals from achieving efficient scale, and (2) actually directed at Google’s rivals.” Supposing (for the moment) that the second point could be established, it’s hard to see how Facebook or Twitter could really show that being excluded from SPYW—while still having their available content show up as it always has in Google’s “organic” search results—would actually “render their efforts to compete for distribution uneconomical,” which, as Josh explains, antitrust law would require them to show. Google+ is a tiny service compared to Google or Facebook. And even Google itself, for all the awe and loathing it inspires, lags in the critical metric of user engagement, keeping the average user on site for only a quarter as much time as Facebook.

Moreover, by these same measures, it’s clear that Facebook and Twitter don’t need access to Google search results at all, much less its relatively trivial SPYW results, in order find, and be found by, users; it’s difficult to know from what even vaguely relevant market they could possibly be foreclosed by their absence from SPYW results. Does SPYW potentially help Google+, to Facebook’s detriment? Yes. Just as Facebook’s deal with Microsoft hurts Google. But this is called competition. The world would be a desolate place if antitrust laws effectively prohibited firms from making decisions that helped themselves at their competitors’ expense.

After all, no one seems to be suggesting that Microsoft should be forced to include Google+ results in Bing—and rightly so. Microsoft’s exclusive partnership with Facebook is an important example of how a market leader in one area (Facebook in social) can help a market laggard in another (Microsoft in search) compete more effectively with a common rival (Google). In other words, banning exclusive deals can actually make it more difficult to unseat an incumbent (like Google), especially where the technologies involved are constantly evolving, as here.

Antitrust meddling in such arrangements, particularly in high-risk, dynamic markets where large up-front investments are frequently required (and lost), risks deterring innovation and reducing the very dynamism from which consumers reap such incredible rewards. “Reasonable” is a dangerously slippery concept in such markets, and a recipe for costly errors by the courts asked to define the concept. We suspect that disputes arising out of these sorts of deals will largely boil down to skirmishes over pricing, financing and marketing—the essential dilemma of new media services whose business models are as much the object of innovation as their technologies. Turning these, by little more than innuendo, into nefarious anticompetitive schemes is extremely—and unnecessarily—risky. Continue Reading…

By Geoffrey Manne and Berin Szoka

[Cross posted at TechFreedom.org]

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That’s disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There’s something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.

Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).

The five page letter concludes with, literally, three sentences presenting Google’s case, one of which reads, in its entirety, “Google strongly denies the arguments of its critics.” The derision is palpable—as if only a craven monopolist would deign to actually deny the iron-clad arguments of Google’s competitors so painstakingly reproduced by Senators Kohl and Lee in the preceding four pages. This is neither rigorous analysis nor objective reporting on the contents of the Senate’s hearing.

While we worry about particularly successful companies being singled out for punishment, we hold no brief for Google in this debate. Instead, in all our writings, we’ve tried to present a consistently skeptical view about a worrisome trend in antitrust enforcement in high tech markets: error-prone and costly intervention in markets that are ill-understood and fast-moving, to the great detriment of consumers and progress generally. Although our institutions have received financial support from Google among a range of other companies, organizations and individuals, our work is focused on this broad mission; we have no obligation or intention to support any company simply because it finds value in supporting our mission.

We’ve defended (and one of us has even worked for) Microsoft in the past, and just yesterday, we lamented the fact that the Obama Justice Department and the FCC have effectively blocked Google’s arch-rival, AT&T, from buying T-Mobile. Rather than defend any particular company, our goal, to paraphrase Hayek, is to “demonstrate to [regulators] how little they really know about what they imagine they can design”—lest they undermine how competition actually works in the name of defending outdated models of how they think it should work. Unfortunately, the letter from Senators Kohl and Lee does nothing to assuage our concern and suggests instead that crass politics, rather than sensible economics, could determine the outcome of cases like this one—if not in a court of law, then in the court of public opinion and extra-legal intimidation.

To begin with, the letter asserts that “Google faces competition from only one general search engine, Bing,” suggesting that only Bing (and it, only ineffectively) could keep Google in check. In essence, the Senators are prejudging an essential question on which any case against Google would turn: market definition. But why would the market not include other tools for information retrieval? Is it not at least worth mentioning that more and more Internet users are finding information and spending time on social networks like Facebook and Twitter, while more and more advertisers are spending their money on these Google competitors? Isn’t it clear that search itself is evolving from “ten blue links” into something more social, multi-faceted and interactive?

In a remarkable leap, the senators then identify the specific alleged abuse that Google’s alleged market power leads to: search bias. That’s remarkable because, other than the breathless claims of disgruntled competitors (given plenty of air time at the September hearing), there is actually no evidence that search bias is, in fact, harmful to consumers—which is what antitrust is concerned with. (Read both sides of this debate in TechFreedom’s free ebook, The Next Digital Decade: Essays on the Future of the Internet.)

As our colleague, Josh Wright, has thoroughly demonstrated, this “own-content” bias is actually an infrequent phenomenon and is simply not consistent with an actionable claim of anticompetitive foreclosure. Moreover, among search engines, Google references its own content far less frequently than does Bing (which favors Microsoft content in the first search result when no other search engine does so more than twice as often as Google favors its own content).

Of course, none of this is even hinted at in the Senators’ letter, which seems intended to condemn Google for “preferencing” its own content (under the pretense of withholding judgment). It’s a little like condemning Target for deigning to use its trucks to supply inventory only to its own stores instead of Wal-Mart’s, or, say, condemning a congressman for targeting earmarks for his own state or district. Earmark bias! Continue Reading…