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The Federal Trade Commission and 46 state attorneys general (along with the District of Columbia and the Territory of Guam) filed their long-awaited complaints against Facebook Dec. 9. The crux of the arguments in both lawsuits is that Facebook pursued a series of acquisitions over the past decade that aimed to cement its prominent position in the “personal social media networking” market. 

Make no mistake, if successfully prosecuted, these cases would represent one of the most fundamental shifts in antitrust law since passage of the Hart-Scott-Rodino Act in 1976. That law required antitrust authorities to be notified of proposed mergers and acquisitions that exceed certain value thresholds, essentially shifting the paradigm for merger enforcement from ex-post to ex-ante review.

While the prevailing paradigm does not explicitly preclude antitrust enforcers from taking a second bite of the apple via ex-post enforcement, it has created an assumption among that regulatory clearance of a merger makes subsequent antitrust proceedings extremely unlikely. 

Indeed, the very point of ex-ante merger regulations is that ex-post enforcement, notably in the form of breakups, has tremendous social costs. It can scupper economies of scale and network effects on which both consumers and firms have come to rely. Moreover, the threat of costly subsequent legal proceedings will hang over firms’ pre- and post-merger investment decisions, and may thus reduce incentives to invest.

With their complaints, the FTC and state AGs threaten to undo this status quo. Even if current antitrust law allows it, pursuing this course of action threatens to quash the implicit assumption that regulatory clearance generally shields a merger from future antitrust scrutiny. Ex-post review of mergers and acquisitions does also entail some positive features, but the Facebook complaints fail to consider these complicated trade-offs. This oversight could hamper tech and other U.S. industries.

Mergers and uncertainty

Merger decisions are probabilistic. Of the thousands of corporate acquisitions each year, only a handful end up deemed “successful.” These relatively few success stories have to pay for the duds in order to preserve the incentive to invest.

Switching from ex-ante to ex-post review enables authorities to focus their attention on the most lucrative deals. It stands to reason that they will not want to launch ex-post antitrust proceedings against bankrupt firms whose assets have already been stripped. Instead, as with the Facebook complaint, authorities are far more likely to pursue high-profile cases that boost their political capital.

This would be unproblematic if:

  1. Authorities would commit to ex-post prosecution only of anticompetitive mergers; and
  2. If parties could reasonably anticipate whether their deals would be deemed anticompetitive in the future. 

If those were the conditions, ex-post enforcement would merely reduce the incentive to partake in problematic mergers. It would leave welfare-enhancing deals unscathed. But where firms could not have ex-ante knowledge that a given deal would be deemed anticompetitive, the associated error-costs should weigh against prosecuting such mergers ex post, even if such enforcement might appear desirable. The deterrent effect that would arise from such prosecutions would be applied by the market to all mergers, including efficient ones. Put differently, authorities might get the ex-post assessment right in one case, such as the Facebook proceedings, but the bigger picture remains that they could be wrong in many other cases. Firms will perceive this threat and it may hinder their investments.

There is also reason to doubt that either of the ideal conditions for ex-post enforcement could realistically be met in practice.Ex-ante merger proceedings involve significant uncertainty. Indeed, antitrust-merger clearance decisions routinely have an impact on the merging parties’ stock prices. If management and investors knew whether their transactions would be cleared, those effects would be priced-in when a deal is announced, not when it is cleared or blocked. Indeed, if firms knew a given merger would be blocked, they would not waste their resources pursuing it. This demonstrates that ex-ante merger proceedings involve uncertainty for the merging parties.

Unless the answer is markedly different for ex-post merger reviews, authorities should proceed with caution. If parties cannot properly self-assess their deals, the threat of ex-post proceedings will weigh on pre- and post-merger investments (a breakup effectively amounts to expropriating investments that are dependent upon the divested assets). 

Furthermore, because authorities will likely focus ex-post reviews on the most lucrative deals, their incentive effects can be particularly pronounced. Parties may fear that the most successful mergers will be broken up. This could have wide-reaching effects for all merging firms that do not know whether they might become “the next Facebook.” 

Accordingly, for ex-post merger reviews to be justified, it is essential that:

  1. Their outcomes be predictable for the parties; and that 
  2. Analyzing the deals after the fact leads to better decision-making (fewer false acquittals and convictions) than ex-ante reviews would yield.

If these conditions are not in place, ex-post assessments will needlessly weigh down innovation, investment and procompetitive merger activity in the economy.

Hindsight does not disentangle efficiency from market power

So, could ex-post merger reviews be so predictable and effective as to alleviate the uncertainties described above, along with the costs they entail? 

Based on the recently filed Facebook complaints, the answer appears to be no. We simply do not know what the counterfactual to Facebook’s acquisitions of Instagram and WhatsApp would look like. Hindsight does not tell us whether Facebook’s acquisitions led to efficiencies that allowed it to thrive (a pro-competitive scenario), or whether Facebook merely used these deals to kill off competitors and maintain its monopoly (an anticompetitive scenario).

As Sam Bowman and I have argued elsewhere, when discussing the leaked emails that spurred the current proceedings and on which the complaints rely heavily:

These email exchanges may not paint a particularly positive picture of Zuckerberg’s intent in doing the merger, and it is possible that at the time they may have caused antitrust agencies to scrutinise the merger more carefully. But they do not tell us that the acquisition was ultimately harmful to consumers, or about the counterfactual of the merger being blocked. While we know that Instagram became enormously popular in the years following the merger, it is not clear that it would have been just as successful without the deal, or that Facebook and its other products would be less popular today. 

Moreover, it fails to account for the fact that Facebook had the resources to quickly scale Instagram up to a level that provided immediate benefits to an enormous number of users, instead of waiting for the app to potentially grow to such scale organically.

In fact, contrary to what some have argued, hindsight might even complicate matters (again from Sam and me):

Today’s commentators have the benefit of hindsight. This inherently biases contemporary takes on the Facebook/Instagram merger. For instance, it seems almost self-evident with hindsight that Facebook would succeed and that entry in the social media space would only occur at the fringes of existing platforms (the combined Facebook/Instagram platform) – think of the emergence of TikTok. However, at the time of the merger, such an outcome was anything but a foregone conclusion.

In other words, ex-post reviews will, by definition, focus on mergers where today’s outcomes seem preordained — when, in fact, they were probabilistic. This will skew decisions toward finding anticompetitive conduct. If authorities think that Instagram was destined to become great, they are more likely to find that Facebook’s acquisition was anticompetitive because they implicitly dismiss the idea that it was the merger itself that made Instagram great.

Authorities might also confuse correlation for causality. For instance, the state AGs’ complaint ties Facebook’s acquisitions of Instagram and WhatsApp to the degradation of these services, notably in terms of privacy and advertising loads. As the complaint lays out:

127. Following the acquisition, Facebook also degraded Instagram users’ privacy by matching Instagram and Facebook Blue accounts so that Facebook could use information that users had shared with Facebook Blue to serve ads to those users on Instagram. 

180. Facebook’s acquisition of WhatsApp thus substantially lessened competition […]. Moreover, Facebook’s subsequent degradation of the acquired firm’s privacy features reduced consumer choice by eliminating a viable, competitive, privacy-focused option

But these changes may have nothing to do with Facebook’s acquisition of these services. At the time, nearly all tech startups focused on growth over profits in their formative years. It should be no surprise that the platforms imposed higher “prices” to users after their acquisition by Facebook; they were maturing. Further monetizing their platform would have been the logical next step, even absent the mergers.

It is just as hard to determine whether post-merger developments actually harmed consumers. For example, the FTC complaint argues that Facebook stopped developing its own photo-sharing capabilities after the Instagram acquisition,which the commission cites as evidence that the deal neutralized a competitor:

98. Less than two weeks after the acquisition was announced, Mr. Zuckerberg suggested canceling or scaling back investment in Facebook’s own mobile photo app as a direct result of the Instagram deal.

But it is not obvious that Facebook or consumers would have gained anything from the duplication of R&D efforts if Facebook continued to develop its own photo-sharing app. More importantly, this discontinuation is not evidence that Instagram could have overthrown Facebook. In other words, the fact that Instagram provided better photo-sharing capabilities does necessarily imply that it could also provide a versatile platform that posed a threat to Facebook.

Finally, if Instagram’s stellar growth and photo-sharing capabilities were certain to overthrow Facebook’s monopoly, why do the plaintiffs ignore the competitive threat posed by the likes of TikTok today? Neither of the complaints makes any mention of TikTok,even though it currently has well over 1 billion monthly active users. The FTC and state AGs would have us believe that Instagram posed an existential threat to Facebook in 2012 but that Facebook faces no such threat from TikTok today. It is exceedingly unlikely that both these statements could be true, yet both are essential to the plaintiffs’ case.

Some appropriate responses

None of this is to say that ex-post review of mergers and acquisitions should be categorically out of the question. Rather, such proceedings should be initiated only with appropriate caution and consideration for their broader consequences.

When undertaking reviews of past mergers, authorities do  not necessarily need to impose remedies every time they find a merger was wrongly cleared. The findings of these ex-post reviews could simply be used to adjust existing merger thresholds and presumptions. This would effectively create a feedback loop where false acquittals lead to meaningful policy reforms in the future. 

At the very least, it may be appropriate for policymakers to set a higher bar for findings of anticompetitive harm and imposition of remedies in such cases. This would reduce the undesirable deterrent effects that such reviews may otherwise entail, while reserving ex-post remedies for the most problematic cases.

Finally, a tougher system of ex-post review could be used to allow authorities to take more risks during ex-ante proceedings. Indeed, when in doubt, they could effectively  experiment by allowing  marginal mergers to proceed, with the understanding that bad decisions could be clawed back afterwards. In that regard, it might also be useful to set precise deadlines for such reviews and to outline the types of concerns that might prompt scrutiny  or warrant divestitures.

In short, some form of ex-post review may well be desirable. It could help antitrust authorities to learn what works and subsequently to make useful changes to ex-ante merger-review systems. But this would necessitate deep reflection on the many ramifications of ex-post reassessments. Legislative reform or, at the least, publication of guidance documents by authorities, seem like essential first steps. 

Unfortunately, this is the exact opposite of what the Facebook proceedings would achieve. Plaintiffs have chosen to ignore these complex trade-offs in pursuit of a case with extremely dubious underlying merits. Success for the plaintiffs would thus prove a pyrrhic victory, destroying far more than it intends to achieve.

What is a search engine?

Dirk Auer —  21 October 2020

What is a search engine? This might seem like an innocuous question, but it lies at the heart of the US Department of Justice and state Attorneys’ General antitrust complaint against Google, as well as the European Commission’s Google Search and Android decisions. It is also central to a report published by the UK’s Competition & Markets Authority (“CMA”). To varying degrees, all of these proceedings are premised on the assumption that Google enjoys a monopoly/dominant position over online search. But things are not quite this simple. 

Despite years of competition decisions and policy discussions, there are still many unanswered questions concerning the operation of search markets. For example, it is still unclear exactly which services compete against Google Search, and how this might evolve in the near future. Likewise, there has only been limited scholarly discussion as to how a search engine monopoly would exert its market power. In other words, what does a restriction of output look like on a search platform — particularly on the user side

Answering these questions will be essential if authorities wish to successfully bring an antitrust suit against Google for conduct involving search. Indeed, as things stand, these uncertainties greatly complicate efforts (i) to rigorously define the relevant market(s) in which Google Search operates, (ii) to identify potential anticompetitive effects, and (iii) to apply the quantitative tools that usually underpin antitrust proceedings.

In short, as explained below, antitrust authorities and other plaintiffs have their work cut out if they are to prevail in court.

Consumers demand information 

For a start, identifying the competitive constraints faced by Google presents authorities and plaintiffs with an important challenge.

Even proponents of antitrust intervention recognize that the market for search is complex. For instance, the DOJ and state AGs argue that Google dominates a narrow market for “general search services” — as opposed to specialized search services, content sites, social networks, and online marketplaces, etc. The EU Commission reached the same conclusion in its Google Search decision. Finally, commenting on the CMA’s online advertising report, Fiona Scott Morton and David Dinielli argue that: 

General search is a relevant market […]

In this way, an individual specialized search engine competes with a small fraction of what the Google search engine does, because a user could employ either for one specific type of search. The CMA concludes that, from the consumer standpoint, a specialized search engine exerts only a limited competitive constraint on Google.

(Note that the CMA stressed that it did not perform a market definition exercise: “We have not carried out a formal market definition assessment, but have instead looked at competitive constraints across the sector…”).

In other words, the above critics recognize that search engines are merely tools that can serve multiple functions, and that competitive constraints may be different for some of these. But this has wider ramifications that policymakers have so far overlooked. 

When quizzed about his involvement with Neuralink (a company working on implantable brain–machine interfaces), Elon Musk famously argued that human beings already share a near-symbiotic relationship with machines (a point already made by others):

The purpose of Neuralink [is] to create a high-bandwidth interface to the brain such that we can be symbiotic with AI. […] Because we have a bandwidth problem. You just can’t communicate through your fingers. It’s just too slow.

Commentators were quick to spot this implications of this technology for the search industry:

Imagine a world when humans would no longer require a device to search for answers on the internet, you just have to think of something and you get the answer straight in your head from the internet.

As things stand, this example still belongs to the realm of sci-fi. But it neatly illustrates a critical feature of the search industry. 

Search engines are just the latest iteration (but certainly not the last) of technology that enables human beings to access specific pieces of information more rapidly. Before the advent of online search, consumers used phone directories, paper maps, encyclopedias, and other tools to find the information they were looking for. They would read newspapers and watch television to know the weather forecast. They went to public libraries to undertake research projects (some still do), etc.

And, in some respects, the search engine is already obsolete for many of these uses. For instance, virtual assistants like Alexa, Siri, Cortana and Google’s own Google Assistant offering can perform many functions that were previously the preserve of search engines: checking the weather, finding addresses and asking for directions, looking up recipes, answering general knowledge questions, finding goods online, etc. Granted, these virtual assistants partly rely on existing search engines to complete tasks. However, Google is much less dominant in this space, and search engines are not the sole source on which virtual assistants rely to generate results. Amazon’s Alexa provides a fitting example (here and here).

Along similar lines, it has been widely reported that 60% of online shoppers start their search on Amazon, while only 26% opt for Google Search. In other words, Amazon’s ability to rapidly show users the product they are looking for somewhat alleviates the need for a general search engine. In turn, this certainly constrains Google’s behavior to some extent. And much of the same applies to other websites that provide a specific type of content (think of Twitter, LinkedIn, Tripadvisor, Booking.com, etc.)

Finally, it is also revealing that the most common searches on Google are, in all likelihood, made to reach other websites — a function for which competition is literally endless:

The upshot is that Google Search and other search engines perform a bundle of functions. Most of these can be done via alternative means, and this will increasingly be the case as technology continues to advance. 

This is all the more important given that the vast majority of search engine revenue derives from roughly 30 percent of search terms (notably those that are linked to product searches). The remaining search terms are effectively a loss leader. And these profitable searches also happen to be those where competition from alternative means is, in all likelihood, the strongest (this includes competition from online retail platforms, and online travel agents like Booking.com or Kayak, but also from referral sites, direct marketing, and offline sources). In turn, this undermines US plaintiffs’ claims that Google faces little competition from rivals like Amazon, because they don’t compete for the entirety of Google’s search results (in other words, Google might face strong competition for the most valuable ads):

108. […] This market share understates Google’s market power in search advertising because many search-advertising competitors offer only specialized search ads and thus compete with Google only in a limited portion of the market. 

Critics might mistakenly take the above for an argument that Google has no market power because competition is “just a click away”. But the point is more subtle, and has important implications as far as market definition is concerned.

Authorities should not define the search market by arguing that no other rival is quite like Google (or one if its rivals) — as the DOJ and state AGs did in their complaint:

90. Other search tools, platforms, and sources of information are not reasonable substitutes for general search services. Offline and online resources, such as books, publisher websites, social media platforms, and specialized search providers such as Amazon, Expedia, or Yelp, do not offer consumers the same breadth of information or convenience. These resources are not “one-stop shops” and cannot respond to all types of consumer queries, particularly navigational queries. Few consumers would find alternative sources a suitable substitute for general search services. Thus, there are no reasonable substitutes for general search services, and a general search service monopolist would be able to maintain quality below the level that would prevail in a competitive market. 

And as the EU Commission did in the Google Search decision:

(162) For the reasons set out below, there is, however, limited demand side substitutability between general search services and other online services. […]

(163) There is limited substitutability between general search services and content sites. […]

(166) There is also limited substitutability between general search services and specialised search services. […]

(178) There is also limited substitutability between general search services and social networking sites.

Ad absurdum, if consumers suddenly decided to access information via other means, Google could be the only firm to provide general search results and yet have absolutely no market power. 

Take the example of Yahoo: Despite arguably remaining the most successful “web directory”, it likely lost any market power that it had when Google launched a superior — and significantly more successful — type of search engine. Google Search may not have provided a complete, literal directory of the web (as did Yahoo), but it offered users faster access to the information they wanted. In short, the Yahoo example shows that being unique is not equivalent to having market power. Accordingly, any market definition exercise that merely focuses on the idiosyncrasies of firms is likely to overstate their actual market power. 

Given what precedes, the question that authorities should ask is thus whether Google Search (or another search engine) performs so many unique functions that it may be in a position to restrict output. So far, no one appears to have convincingly answered this question.

Similar uncertainties surround the question of how a search engine might restrict output, especially on the user side of the search market. Accordingly, authorities will struggle to produce evidence (i) the Google has market power, especially on the user side of the market, and (ii) that its behavior has anticompetitive effects.

Consider the following:

The SSNIP test (which is the standard method of defining markets in antitrust proceedings) is inapplicable to the consumer side of search platforms. Indeed, it is simply impossible to apply a hypothetical 10% price increase to goods that are given away for free.

This raises a deeper question: how would a search engine exercise its market power? 

For a start, it seems unlikely that it would start charging fees to its users. For instance, empirical research pertaining to the magazine industry (also an ad-based two-sided market) suggests that increased concentration does not lead to higher magazine prices. Minjae Song notably finds that:

Taking the advantage of having structural models for both sides, I calculate equilibrium outcomes for hypothetical ownership structures. Results show that when the market becomes more concentrated, copy prices do not necessarily increase as magazines try to attract more readers.

It is also far from certain that a dominant search engine would necessarily increase the amount of adverts it displays. To the contrary, market power on the advertising side of the platform might lead search engines to decrease the number of advertising slots that are available (i.e. reducing advertising output), thus showing less adverts to users. 

Finally, it is not obvious that market power would lead search engines to significantly degrade their product (as this could ultimately hurt ad revenue). For example, empirical research by Avi Goldfarb and Catherine Tucker suggests that there is some limit to the type of adverts that search engines could profitably impose upon consumers. They notably find that ads that are both obtrusive and targeted decrease subsequent purchases:

Ads that match both website content and are obtrusive do worse at increasing purchase intent than ads that do only one or the other. This failure appears to be related to privacy concerns: the negative effect of combining targeting with obtrusiveness is strongest for people who refuse to give their income and for categories where privacy matters most.

The preceding paragraphs find some support in the theoretical literature on two-sided markets literature, which suggests that competition on the user side of search engines is likely to be particularly intense and beneficial to consumers (because they are more likely to single-home than advertisers, and because each additional user creates a positive externality on the advertising side of the market). For instance, Jean Charles Rochet and Jean Tirole find that:

The single-homing side receives a large share of the joint surplus, while the multi-homing one receives a small share.

This is just a restatement of Mark Armstrong’s “competitive bottlenecks” theory:

Here, if it wishes to interact with an agent on the single-homing side, the multi-homing side has no choice but to deal with that agent’s chosen platform. Thus, platforms have monopoly power over providing access to their single-homing customers for the multi-homing side. This monopoly power naturally leads to high prices being charged to the multi-homing side, and there will be too few agents on this side being served from a social point of view (Proposition 4). By contrast, platforms do have to compete for the single-homing agents, and high profits generated from the multi-homing side are to a large extent passed on to the single-homing side in the form of low prices (or even zero prices).

All of this is not to suggest that Google Search has no market power, or that monopoly is necessarily less problematic in the search engine industry than in other markets. 

Instead, the argument is that analyzing competition on the user side of search platforms is unlikely to yield dispositive evidence of market power or anticompetitive effects. This is because market power is hard to measure on this side of the market, and because even a monopoly platform might not significantly restrict user output. 

That might explain why the DOJ and state AGs analysis of anticompetitive effects is so limited. Take the following paragraph (provided without further supporting evidence):

167. By restricting competition in general search services, Google’s conduct has harmed consumers by reducing the quality of general search services (including dimensions such as privacy, data protection, and use of consumer data), lessening choice in general search services, and impeding innovation. 

Given these inherent difficulties, antitrust investigators would do better to focus on the side of those platforms where mainstream IO tools are much easier to apply and where a dominant search engine would likely restrict output: the advertising market. Not only is it the market where search engines are most likely to exert their market power (thus creating a deadweight loss), but — because it involves monetary transactions — this side of the market lends itself to the application of traditional antitrust tools.  

Looking at the right side of the market

Finally, and unfortunately for Google’s critics, available evidence suggests that its position on the (online) advertising market might not meet the requirements necessary to bring a monopolization case (at least in the US).

For a start, online advertising appears to exhibit the prima facie signs of a competitive market. As Geoffrey Manne, Sam Bowman and Eric Fruits have argued:

Over the past decade, the price of advertising has fallen steadily while output has risen. Spending on digital advertising in the US grew from $26 billion in 2010 to nearly $130 billion in 2019, an average increase of 20% a year. Over the same period the Producer Price Index for Internet advertising sales declined by nearly 40%. The rising spending in the face of falling prices indicates the number of ads bought and sold increased by approximately 27% a year. Since 2000, advertising spending has been falling as a share of GDP, with online advertising growing as a share of that. The combination of increasing quantity, decreasing cost, and increasing total revenues are consistent with a growing and increasingly competitive market.

Second, empirical research suggests that the market might need to be widened to include offline advertising. For instance, Avi Goldfarb and Catherine Tucker show that there can be important substitution effects between online and offline advertising channels:

Using data on the advertising prices paid by lawyers for 139 Google search terms in 195 locations, we exploit a natural experiment in “ambulance-chaser” regulations across states. When lawyers cannot contact clients by mail, advertising prices per click for search engine advertisements are 5%–7% higher. Therefore, online advertising substitutes for offline advertising.

Of course, a careful examination of the advertising industry could also lead authorities to define a narrower relevant market. For example, the DOJ and state AG complaint argued that Google dominated the “search advertising” market:

97. Search advertising in the United States is a relevant antitrust market. The search advertising market consists of all types of ads generated in response to online search queries, including general search text ads (offered by general search engines such as Google and Bing) […] and other, specialized search ads (offered by general search engines and specialized search providers such as Amazon, Expedia, or Yelp). 

Likewise, the European Commission concluded that Google dominated the market for “online search advertising” in the AdSense case (though the full decision has not yet been made public). Finally, the CMA’s online platforms report found that display and search advertising belonged to separate markets. 

But these are empirical questions that could dispositively be answered by applying traditional antitrust tools, such as the SSNIP test. And yet, there is no indication that the authorities behind the US complaint undertook this type of empirical analysis (and until its AdSense decision is made public, it is not clear that the EU Commission did so either). Accordingly, there is no guarantee that US courts will go along with the DOJ and state AGs’ findings.

In short, it is far from certain that Google currently enjoys an advertising monopoly, especially if the market is defined more broadly than that for “search advertising” (or the even narrower market for “General Search Text Advertising”). 

Concluding remarks

The preceding paragraphs have argued that a successful antitrust case against Google is anything but a foregone conclusion. In order to successfully bring a suit, authorities would notably need to figure out just what market it is that Google is monopolizing. In turn, that would require a finer understanding of what competition, and monopoly, look like in the search and advertising industries.

The writing is on the wall for Big Tech: regulation is coming. At least, that is what the House Judiciary Committee’s report into competition in digital markets would like us to believe. 

The Subcommittee’s Majority members, led by Rhode Island’s Rep. David Cicilline, are calling for a complete overhaul of America’s antitrust and regulatory apparatus. This would notably entail a break up of America’s largest tech firms, by prohibiting them from operating digital platforms and competing on them at the same time. Unfortunately, the report ignores the tremendous costs that such proposals would impose upon consumers and companies alike. 

For several years now, there has been growing pushback against the perceived “unfairness” of America’s tech industry: of large tech platforms favoring their own products at the expense of entrepreneurs who use their platforms; of incumbents acquiring startups to quash competition; of platforms overcharging  companies like Epic Games, Spotify, and the media, just because they can; and of tech companies that spy on their users and use that data to sell them things they don’t need. 

But this portrayal of America’s tech industry obscures an inconvenient possibility: supposing that these perceived ills even occur, there is every chance that the House’s reforms would merely exacerbate the status quo. The House report gives short shrift to this eventuality, but it should not.

Over the last decade, the tech sector has been the crown jewel of America’s economy. And while firms like Amazon, Google, Facebook, and Apple, may have grown at a blistering pace, countless others have flourished in their wake.

Google and Apple’s app stores have given rise to a booming mobile software industry. Platforms like Youtube and Instagram have created new venues for advertisers and ushered in a new generation of entrepreneurs including influencers, podcasters, and marketing experts. Social media platforms like Facebook and Twitter have disintermediated the production of news media, allowing ever more people to share their ideas with the rest of the world (mostly for better, and sometimes for worse). Amazon has opened up new markets for thousands of retailers, some of which are now going public. The recent $3.4 billion Snowflake IPO may have been the biggest public offering of a tech firm no one has heard of.

The trillion dollar question is whether it is possible to regulate this thriving industry without stifling its unparalleled dynamism. If Rep. Cicilline’s House report is anything to go by, the answer is a resounding no.

Acquisition by a Big Tech firm is one way for startups to rapidly scale and reach a wider audience, while allowing early investors to make a quick exit. Self-preferencing can enable platforms to tailor their services to the needs and desires of users (Apple and Google’s pre-installed app suites are arguably what drive users to opt for their devices). Excluding bad apples from a platform is essential to gain users’ trust and build a strong reputation. Finally, in the online retail space, copying rival products via house brands provides consumers with competitively priced goods and helps new distributors enter the market. 

All of these practices would either be heavily scrutinized or outright banned under the Subcommittee ’s proposed reforms. Beyond its direct impact on the quality of online goods and services, this huge shift would threaten the climate of permissionless innovation that has arguably been key to Silicon Valley’s success. 

More fundamentally, these reforms would mostly protect certain privileged rivals at the expense of the wider industry. Take Apple’s App Store: Epic Games and others have complained about the 30% Commission charged by Apple for in-app purchases (as is standard throughout the industry). Yet, as things stand, roughly 80% of apps pay no commission at all. Tackling this 30% commission — for instance by allowing developers to bypass Apple’s in-app payment processing — would almost certainly result in larger fees for small developers. In short, regulation could significantly impede smaller firms.

Fortunately, there is another way. For decades, antitrust law — guided by the judge-made consumer welfare standard — has been the cornerstone of economic policy in the US. During that time, America built a tech industry that is the envy of the world. This should give pause to would-be reformers. There is a real chance overbearing regulation will permanently hamper America’s tech industry. With competition from China more intense than ever, it is a risk that the US cannot afford to take.

Apple’s legal team will be relieved that “you reap what you sow” is just a proverb. After a long-running antitrust battle against Qualcomm unsurprisingly ended in failure, Apple now faces antitrust accusations of its own (most notably from Epic Games). Somewhat paradoxically, this turn of events might cause Apple to see its previous defeat in a new light. Indeed, the well-established antitrust principles that scuppered Apple’s challenge against Qualcomm will now be the rock upon which it builds its legal defense.

But while Apple’s reversal of fortunes might seem anecdotal, it neatly illustrates a fundamental – and often overlooked – principle of antitrust policy: Antitrust law is about maximizing consumer welfare. Accordingly, the allocation of surplus between two companies is only incidentally relevant to antitrust proceedings, and it certainly is not a goal in and of itself. In other words, antitrust law is not about protecting David from Goliath.

Jockeying over the distribution of surplus

Or at least that is the theory. In practice, however, most antitrust cases are but small parts of much wider battles where corporations use courts and regulators in order to jockey for market position and/or tilt the distribution of surplus in their favor. The Microsoft competition suits brought by the DOJ and the European commission (in the EU and US) partly originated from complaints, and lobbying, by Sun Microsystems, Novell, and Netscape. Likewise, the European Commission’s case against Google was prompted by accusations from Microsoft and Oracle, among others. The European Intel case was initiated following a complaint by AMD. The list goes on.

The last couple of years have witnessed a proliferation of antitrust suits that are emblematic of this type of power tussle. For instance, Apple has been notoriously industrious in using the court system to lower the royalties that it pays to Qualcomm for LTE chips. One of the focal points of Apple’s discontent was Qualcomm’s policy of basing royalties on the end-price of devices (Qualcomm charged iPhone manufacturers a 5% royalty rate on their handset sales – and Apple received further rebates):

“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” [Apple COO Jeff Williams] said. “It struck at our very core of fairness. At the time we were making something really really different.”

This pricing dispute not only gave rise to high-profile court cases, it also led Apple to lobby Standard Developing Organizations (“SDOs”) in a partly successful attempt to make them amend their patent policies, so as to prevent this type of pricing. 

However, in a highly ironic turn of events, Apple now finds itself on the receiving end of strikingly similar allegations. At issue is the 30% commission that Apple charges for in app purchases on the iPhone and iPad. These “high” commissions led several companies to lodge complaints with competition authorities (Spotify and Facebook, in the EU) and file antitrust suits against Apple (Epic Games, in the US).

Of course, these complaints are couched in more sophisticated, and antitrust-relevant, reasoning. But that doesn’t alter the fact that these disputes are ultimately driven by firms trying to tilt the allocation of surplus in their favor (for a more detailed explanation, see Apple and Qualcomm).

Pushback from courts: The Qualcomm case

Against this backdrop, a string of recent cases sends a clear message to would-be plaintiffs: antitrust courts will not be drawn into rent allocation disputes that have no bearing on consumer welfare. 

The best example of this judicial trend is Qualcomm’s victory before the United States Court of Appeal for the 9th Circuit. The case centered on the royalties that Qualcomm charged to OEMs for its Standard Essential Patents (SEPs). Both the district court and the FTC found that Qualcomm had deployed a series of tactics (rebates, refusals to deal, etc) that enabled it to circumvent its FRAND pledges. 

However, the Court of Appeal was not convinced. It failed to find any consumer harm, or recognizable antitrust infringement. Instead, it held that the dispute at hand was essentially a matter of contract law:

To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. 

This is not surprising. From the outset, numerous critics pointed that the case lied well beyond the narrow confines of antitrust law. The scathing dissenting statement written by Commissioner Maureen Olhaussen is revealing:

[I]n the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections. 

In reaching its conclusion, the Court notably rejected the notion that SEP royalties should be systematically based upon the “Smallest Saleable Patent Practicing Unit” (or SSPPU):

Even if we accept that the modem chip in a cellphone is the cellphone’s SSPPU, the district court’s analysis is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.

Similarly, it saw no objection to Qualcomm licensing its technology at the OEM level (rather than the component level):

Qualcomm’s rationale for “switching” to OEM-level licensing was not “to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition,” the second element of the Aspen Skiing exception. Aerotec Int’l, 836 F.3d at 1184 (internal quotation marks and citation omitted). Instead, Qualcomm responded to the change in patent-exhaustion law by choosing the path that was “far more lucrative,” both in the short term and the long term, regardless of any impacts on competition. 

Finally, the Court concluded that a firm breaching its FRAND pledges did not automatically amount to anticompetitive conduct: 

We decline to adopt a theory of antitrust liability that would presume anticompetitive conduct any time a company could not prove that the “fair value” of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.

Taken together, these findings paint a very clear picture. The Qualcomm Court repeatedly rejected the radical idea that US antitrust law should concern itself with the prices charged by monopolists — as opposed to practices that allow firms to illegally acquire or maintain a monopoly position. The words of Learned Hand and those of Antonin Scalia (respectively, below) loom large:

The successful competitor, having been urged to compete, must not be turned upon when he wins. 

And,

To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Other courts (both in the US and abroad) have reached similar conclusions

For instance, a district court in Texas dismissed a suit brought by Continental Automotive Systems (which supplies electronic systems to the automotive industry) against a group of SEP holders. 

Continental challenged the patent holders’ decision to license their technology at the vehicle rather than component level (the allegation is very similar to the FTC’s complaint that Qualcomm licensed its SEPs at the OEM, rather than chipset level). However, following a forceful intervention by the DOJ, the Court ultimately held that the facts alleged by Continental were not indicative of antitrust injury. It thus dismissed the case.

Likewise, within weeks of the Qualcomm and Continental decisions, the UK Supreme court also ruled in favor of SEP holders. In its Unwired Planet ruling, the Court concluded that discriminatory licenses did not automatically infringe competition law (even though they might breach a firm’s contractual obligations):

[I]t cannot be said that there is any general presumption that differential pricing for licensees is problematic in terms of the public or private interests at stake.

In reaching this conclusion, the UK Supreme Court emphasized that the determination of whether licenses were FRAND, or not, was first and foremost a matter of contract law. In the case at hand, the most important guide to making this determination were the internal rules of the relevant SDO (as opposed to competition case law):

Since price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare), it would have required far clearer language in the ETSI FRAND undertaking to indicate an intention to impose the more strict, “hard-edged” non-discrimination obligation for which Huawei contends. Further, in view of the prevalence of competition laws in the major economies around the world, it is to be expected that any anti-competitive effects from differential pricing would be most appropriately addressed by those laws

All of this ultimately led the Court to rule in favor of Unwired Planet, thus dismissing Huawei’s claims that it had infringed competition law by breaching its FRAND pledges. 

In short, courts and antitrust authorities on both sides of the Atlantic have repeatedly, and unambiguously, concluded that pricing disputes (albeit in the specific context of technological standards) are generally a matter of contract law. Antitrust/competition law intercedes only when unfair/excessive/discriminatory prices are both caused by anticompetitive behavior and result in anticompetitive injury.

Apple’s Loss is… Apple’s gain.

Readers might wonder how the above cases relate to Apple’s app store. But, on closer inspection the parallels are numerous. As explained above, courts have repeatedly stressed that antitrust enforcement should not concern itself with the allocation of surplus between commercial partners. Yet that is precisely what Epic Game’s suit against Apple is all about.

Indeed, Epic’s central claim is not that it is somehow foreclosed from Apple’s App Store (for example, because Apple might have agreed to exclusively distribute the games of one of Epic’s rivals). Instead, all of its objections are down to the fact that it would like to access Apple’s store under more favorable terms:

Apple’s conduct denies developers the choice of how best to distribute their apps. Developers are barred from reaching over one billion iOS users unless they go through Apple’s App Store, and on Apple’s terms. […]

Thus, developers are dependent on Apple’s noblesse oblige, as Apple may deny access to the App Store, change the terms of access, or alter the tax it imposes on developers, all in its sole discretion and on the commercially devastating threat of the developer losing access to the entire iOS userbase. […]

By imposing its 30% tax, Apple necessarily forces developers to suffer lower profits, reduce the quantity or quality of their apps, raise prices to consumers, or some combination of the three.

And the parallels with the Qualcomm litigation do not stop there. Epic is effectively asking courts to make Apple monetize its platform at a different level than the one that it chose to maximize its profits (no more monetization at the app store level). Similarly, Epic Games omits any suggestion of profit sacrifice on the part of Apple — even though it is a critical element of most unilateral conduct theories of harm. Finally, Epic is challenging conduct that is both the industry norm and emerged in a highly competitive setting.

In short, all of Epic’s allegations are about monopoly prices, not monopoly maintenance or monopolization. Accordingly, just as the SEP cases discussed above were plainly beyond the outer bounds of antitrust enforcement (something that the DOJ repeatedly stressed with regard to the Qualcomm case), so too is the current wave of antitrust litigation against Apple. When all is said and done, Apple might thus be relieved that Qualcomm was victorious in their antitrust confrontation. Indeed, the legal principles that caused its demise against Qualcomm are precisely the ones that will, likely, enable it to prevail against Epic Games.

Much has already been said about the twin antitrust suits filed by Epic Games against Apple and Google. For those who are not familiar with the cases, the game developer – most famous for its hit title Fortnite and the “Unreal Engine” that underpins much of the game (and movie) industry – is complaining that Apple and Google are thwarting competition from rival app stores and in-app payment processors. 

Supporters have been quick to see in these suits a long-overdue challenge against the 30% commissions that Apple and Google charge. Some have even portrayed Epic as a modern-day Robin Hood, leading the fight against Big Tech to the benefit of small app developers and consumers alike. Epic itself has been keen to stoke this image, comparing its litigation to a fight for basic freedoms in the face of Big Brother:

However, upon closer inspection, cracks rapidly appear in this rosy picture. What is left is a company partaking in blatant rent-seeking that threatens to harm the sprawling ecosystems that have emerged around both Apple and Google’s app stores.

Two issues are particularly salient. First, Epic is trying to protect its own interests at the expense of the broader industry. If successful, its suit would merely lead to alternative revenue schemes that – although more beneficial to itself – would leave smaller developers to shoulder higher fees. Second, the fees that Epic portrays as extortionate were in fact key to the emergence of mobile gaming.

Epic’s utopia is not an equilibrium

Central to Epic’s claims is the idea that both Apple and Google: (i) thwart competition from rival app stores, and implement a series of measures that prevent developers from reaching gamers through alternative means (such as pre-installing apps, or sideloading them in the case of Apple’s platforms); and (ii) tie their proprietary payment processing services to their app stores. According to Epic, this ultimately enables both Apple and Google to extract “extortionate” commissions (30%) from app developers.

But Epic’s whole case is based on the unrealistic assumption that both Apple and Google will sit idly by while rival play stores and payment systems take a free-ride on the vast investments they have ploughed into their respective smartphone platforms. In other words, removing Apple and Google’s ability to charge commissions on in-app purchases does not prevent them from monetizing their platforms elsewhere.

Indeed, economic and strategic management theory tells us that so long as Apple and Google single-handedly control one of the necessary points of access to their respective ecosystems, they should be able to extract a sizable share of the revenue generated on their platforms. One can only speculate, but it is easy to imagine Apple and Google charging rival app stores for access to their respective platforms, or charging developers for access to critical APIs.

Epic itself seems to concede this point. In a recent Verge article, it argued that Apple was threatening to cut off its access to iOS and Mac developer tools, which Apple currently offers at little to no cost:

Apple will terminate Epic’s inclusion in the Apple Developer Program, a membership that’s necessary to distribute apps on iOS devices or use Apple developer tools, if the company does not “cure your breaches” to the agreement within two weeks, according to a letter from Apple that was shared by Epic. Epic won’t be able to notarize Mac apps either, a process that could make installing Epic’s software more difficult or block it altogether. Apple requires that all apps are notarized before they can be run on newer versions of macOS, even if they’re distributed outside the App Store.

There is little to prevent Apple from more heavily monetizing these tools – should Epic’s antitrust case successfully prevent it from charging commissions via its app store.

All of this raises the question: why is Epic bringing a suit that, if successful, would merely result in the emergence of alternative fee schedules (as opposed to a significant reduction of the overall fees paid by developers).

One potential answer is that the current system is highly favorable to small apps that earn little to no revenue from purchases and who benefit most from the trust created by Apple and Google’s curation of their stores. It is, however, much less favorable to developers like Epic who no longer require any curation to garner the necessary trust from consumers and who earn a large share of their revenue from in-app purchases.

In more technical terms, the fact that all in-game payments are made through Apple and Google’s payment processing enables both platforms to more easily price-discriminate. Unlike fixed fees (but just like royalties), percentage commissions are necessarily state-contingent (i.e. the same commission will lead to vastly different revenue depending on an underlying app’s success). The most successful apps thus contribute far more to a platform’s fixed costs. For instance, it is estimated that mobile games account for 72% of all app store spend. Likewise, more than 80% of the apps on Apple’s store pay no commission at all.

This likely expands app store output by getting lower value developers on board. In that sense, it is akin to Ramsey pricing (where a firm/utility expands social welfare by allocating a higher share of fixed costs to the most inelastic consumers). Unfortunately, this would be much harder to accomplish if high value developers could easily bypass Apple or Google’s payment systems.

The bottom line is that Epic appears to be fighting to change Apple and Google’s app store business models in order to obtain fee schedules that are better aligned with its own interests. This is all the more important for Epic Games, given that mobile gaming is becoming increasingly popular relative to other gaming mediums (also here).

The emergence of new gaming platforms

Up to this point, I have mostly presented a zero-sum view of Epic’s lawsuit – i.e. developers and platforms are fighting over the distribution app store profits (though some smaller developers may lose out). But this ignores what is likely the chief virtue of Apple and Google’s “closed” distribution model. Namely, that it has greatly expanded the market for mobile gaming (and other mobile software), and will likely continue to do so in the future.

Much has already been said about the significant security and trust benefits that Apple and Google’s curation of their app stores (including their control of in-app payments) provide to users. Benedict Evans and Ben Thompson have both written excellent pieces on this very topic. 

In a nutshell, the closed model allows previously unknown developers to rapidly expand because (i) users do not have to fear their apps contain some form of malware, and (ii) they greatly reduce payments frictions, most notably security related ones. But while these are indeed tremendous benefits, another important upside seems to have gone relatively unnoticed. 

The “closed” business model also gives Apple and Google (as well as other platforms) significant incentives to develop new distribution mediums (smart TVs spring to mind) and improve existing ones. In turn, this greatly expands the audience that software developers can reach. In short, developers get a smaller share of a much larger pie.

The economics of two-sided markets are enlightening in this respect. Apple and Google’s stores are what Armstrong and Wright (here and here) refer to as “competitive bottlenecks”. That is, they compete aggressively (amongst themselves, and with other gaming platforms) to attract exclusive users. They can then charge developers a premium to access those users (note, however, that in the case at hand the incidence of those platform fees is unclear).

This gives platforms significant incentives to continuously attract and retain new users. For instance, if Steve Jobs is to be believed, giving consumers better access to media such as eBooks, video and games was one of the driving forces behind the launch of the iPad

This model of innovation would be seriously undermined if developers and consumers could easily bypass platforms (as Epic games is seeking to do).

In response, some commentators have countered that platforms may use their strong market positions to squeeze developers, thereby undermining software investments. But such a course of action may ultimately be self-defeating. For instance, writing about retail platforms imitating third-party sellers, Anfrei Hagiu, Tat-How Teh and Julian Wright have argued that:

[T]he platform has an incentive to commit itself not to imitate highly innovative third-party products in order to preserve their incentives to innovate.

Seen in this light, Apple and Google’s 30% commissions can be seen as a soft commitment not to expropriate developers, thus leaving them with a sizable share of the revenue generated on each platform. This may explain why the 30% commission has become a standard in the games industry (and beyond). 

Furthermore, from an evolutionary perspective, it is hard to argue that the 30% commission is somehow extortionate. If game developers were systematically expropriated, then the gaming industry – in particular its mobile segment – would not have grown so drastically over the past years:

All of this this likely explains why a recent survey found that 81% of app developers believed regulatory intervention would be misguided:

81% of developers and publishers believe that the relationship between them and platforms is best handled within the industry, rather than through government intervention. Competition and choice mean that developers will use platforms that they work with best.

The upshot is that the “closed” model employed by Apple and Google has served the gaming industry well. There is little compelling reason to overhaul that model today.

Final thoughts

When all is said and done, there is no escaping the fact that Epic games is currently playing a high-stakes rent-seeking game. As Apple noted in its opposition to Epic’s motion for a temporary restraining order:

Epic did not, and has not, contested that it is in breach of the App Store Guidelines and the License Agreement. Epic’s plan was to violate the agreements intentionally in order to manufacture an emergency. The moment Fortnite was removed from the App Store, Epic launched an extensive PR smear campaign against Apple and a litigation plan was orchestrated to the minute; within hours, Epic had filed a 56-page complaint, and within a few days, filed nearly 200 pages with this Court in a pre-packaged “emergency” motion. And just yesterday, it even sought to leverage its request to this Court for a sales promotion, announcing a “#FreeFortniteCup” to take place on August 23, inviting players for one last “Battle Royale” across “all platforms” this Sunday, with prizes targeting Apple.

Epic is ultimately seeking to introduce its own app store on both Apple and Google’s platforms, or at least bypass their payment processing services (as Spotify is seeking to do in the EU).

Unfortunately, as this post has argued, condoning this type of free-riding could prove highly detrimental to the entire mobile software industry. Smaller companies would almost inevitably be left to foot a larger share of the bill, existing platforms would become less secure, and the development of new ones could be hindered. At the end of the day, 30% might actually be a small price to pay.

This blog post summarizes the findings of a paper published in Volume 21 of the Federalist Society Review. The paper was co-authored by Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout. It uses the analytical framework of law and economics to discuss recent patent law reforms in the US, and their negative ramifications for inventors. The full paper can be found on the Federalist Society’s website, here.

Property rights are a pillar of the free market. As Harold Demsetz famously argued, they spur specialization, investment and competition throughout the economy. And the same holds true for intellectual property rights (IPRs). 

However, despite the many social benefits that have been attributed to intellectual property protection, the past decades have witnessed the birth and growth of an powerful intellectual movement seeking to reduce the legal protections offered to inventors by patent law.

These critics argue that excessive patent protection is holding back western economies. For instance, they posit that the owners of the standard essential patents (“SEPs”) are charging their commercial partners too much for the rights to use their patents (this is referred to as patent holdup and royalty stacking). Furthermore, they argue that so-called patent trolls (“patent-assertion entities” or “PAEs”) are deterring innovation by small startups by employing “extortionate” litigation tactics.

Unfortunately, this movement has led to a deterioration of appropriate remedies in patent disputes.

The many benefits of patent protection

While patents likely play an important role in providing inventors with incentives to innovate, their role in enabling the commercialization of ideas is probably even more important.

By creating a system of clearly defined property rights, patents empower market players to coordinate their efforts in order to collectively produce innovations. In other words, patents greatly reduce the cost of concluding mutually-advantageous deals, whereby firms specialize in various aspects of the innovation process. Critically, these deals occur in the shadow of patent litigation and injunctive relief. The threat of these ensures that all parties have an incentive to take a seat at the negotiating table.

This is arguably nowhere more apparent than in the standardization space. Many of the most high-profile modern technologies are the fruit of large-scale collaboration coordinated through standards developing organizations (SDOs). These include technologies such as Wi-Fi, 3G, 4G, 5G, Blu-Ray, USB-C, and Thunderbolt 3. The coordination necessary to produce technologies of this sort is hard to imagine without some form of enforceable property right in the resulting inventions.

The shift away from injunctive relief

Of the many recent reforms to patent law, the most significant has arguably been a significant limitation of patent holders’ availability to obtain permanent injunctions. This is particularly true in the case of so-called standard essential patents (SEPs). 

However, intellectual property laws are meaningless without the ability to enforce them and remedy breaches. And injunctions are almost certainly the most powerful, and important, of these remedies.

The significance of injunctions is perhaps best understood by highlighting the weakness of damages awards when applied to intangible assets. Indeed, it is often difficult to establish the appropriate size of an award of damages when intangible property—such as invention and innovation in the case of patents—is the core property being protected. This is because these assets are almost always highly idiosyncratic. By blocking all infringing uses of an invention, injunctions thus prevent courts from having to act as price regulators. In doing so, they also ensure that innovators are adequately rewarded for their technological contributions.

Unfortunately, the Supreme Court’s 2006 ruling in eBay Inc. v. MercExchange, LLC significantly narrowed the circumstances under which patent holders could obtain permanent injunctions. This predictably led lower courts to grant fewer permanent injunctions in patent litigation suits. 

But while critics of injunctions had hoped that reducing their availability would spur innovation, empirical evidence suggests that this has not been the case so far. 

Other reforms

And injunctions are not the only area of patent law that have witnessed a gradual shift against the interests of patent holders. Much of the same could be said about damages awards, revised fee shifting standards, and the introduction of Inter Partes Review.

Critically, the intellectual movement to soften patent protection has also had ramifications outside of the judicial sphere. It is notably behind several legislative reforms, particularly the America Invents Act. Moreover, it has led numerous private parties – most notably Standard Developing Organizations (SDOs) – to adopt stances that have advanced the interests of technology implementers at the expense of inventors.

For instance, one of the most noteworthy reforms has been IEEE’s sweeping reforms to its IP policy, in 2015. The new rules notably prevented SEP holders from seeking permanent injunctions against so-called “willing licensees”. They also mandated that royalties pertaining to SEPs should be based upon the value of the smallest saleable component that practices the patented technology. Both of these measures ultimately sought to tilt the bargaining range in license negotiations in favor of implementers.

Concluding remarks

The developments discussed in this article might seem like small details, but they are part of a wider trend whereby U.S. patent law is becoming increasingly inhospitable for inventors. This is particularly true when it comes to the enforcement of SEPs by means of injunction.

While the short-term effect of these various reforms has yet to be quantified, there is a real risk that, by decreasing the value of patents and increasing transaction costs, these changes may ultimately limit the diffusion of innovations and harm incentives to invent.

This likely explains why some legislators have recently put forward bills that seek to reinforce the U.S. patent system (here and here).

Despite these initiatives, the fact remains that there is today a strong undercurrent pushing for weaker or less certain patent protection. If left unchecked, this threatens to undermine the utility of patents in facilitating the efficient allocation of resources for innovation and its commercialization. Policymakers should thus pay careful attention to the changes this trend may bring about and move swiftly to recalibrate the patent system where needed in order to better protect the property rights of inventors and yield more innovation overall.

Hardly a day goes by without news of further competition-related intervention in the digital economy. The past couple of weeks alone have seen the European Commission announce various investigations into Apple’s App Store (here and here), as well as reaffirming its desire to regulate so-called “gatekeeper” platforms. Not to mention the CMA issuing its final report regarding online platforms and digital advertising.

While the limits of these initiatives have already been thoroughly dissected (e.g. here, here, here), a fundamental question seems to have eluded discussions: What are authorities trying to achieve here?

At first sight, the answer might appear to be extremely simple. Authorities want to “bring more competition” to digital markets. Furthermore, they believe that this competition will not arise spontaneously because of the underlying characteristics of digital markets (network effects, economies of scale, tipping, etc). But while it may have some intuitive appeal, this answer misses the forest for the trees.

Let us take a step back. Digital markets could have taken a vast number of shapes, so why have they systematically gravitated towards those very characteristics that authorities condemn? For instance, if market tipping and consumer lock-in are so problematic, why is it that new corners of the digital economy continue to emerge via closed platforms, as opposed to collaborative ones? Indeed, if recent commentary is to be believed, it is the latter that should succeed because they purportedly produce greater gains from trade. And if consumers and platforms cannot realize these gains by themselves, then we should see intermediaries step into the breach – i.e. arbitrage. This does not seem to be happening in the digital economy. The naïve answer is to say that this is precisely the problem, the harder one is to actually understand why.

To draw a parallel with evolution, in the late 18th century, botanists discovered an orchid with an unusually long spur (above). This made its nectar incredibly hard to reach for insects. Rational observers at the time could be forgiven for thinking that this plant made no sense, that its design was suboptimal. And yet, decades later, Darwin conjectured that the plant could be explained by a (yet to be discovered) species of moth with a proboscis that was long enough to reach the orchid’s nectar. Decades after his death, the discovery of the xanthopan moth proved him right.

Returning to the digital economy, we thus need to ask why the platform business models that authorities desire are not the ones that emerge organically. Unfortunately, this complex question is mostly overlooked by policymakers and commentators alike.

Competition law on a spectrum

To understand the above point, let me start with an assumption: the digital platforms that have been subject to recent competition cases and investigations can all be classified along two (overlapping) dimensions: the extent to which they are open (or closed) to “rivals” and the extent to which their assets are propertized (as opposed to them being shared). This distinction borrows heavily from Jonathan Barnett’s work on the topic. I believe that by applying such a classification, we would obtain a graph that looks something like this:

While these classifications are certainly not airtight, this would be my reasoning:

In the top-left quadrant, Apple and Microsoft, both operate closed platforms that are highly propertized (Apple’s platform is likely even more closed than Microsoft’s Windows ever was). Both firms notably control who is allowed on their platform and how they can interact with users. Apple notably vets the apps that are available on its App Store and influences how payments can take place. Microsoft famously restricted OEMs freedom to distribute Windows PCs as they saw fit (notably by “imposing” certain default apps and, arguably, limiting the compatibility of Microsoft systems with servers running other OSs). 

In the top right quadrant, the business models of Amazon and Qualcomm are much more “open”, yet they remain highly propertized. Almost anyone is free to implement Qualcomm’s IP – so long as they conclude a license agreement to do so. Likewise, there are very few limits on the goods that can be sold on Amazon’s platform, but Amazon does, almost by definition, exert a significant control on the way in which the platform is monetized. Retailers can notably pay Amazon for product placement, fulfilment services, etc. 

Finally, Google Search and Android sit in the bottom left corner. Both of these services are weakly propertized. The Android source code is shared freely via an open source license, and Google’s apps can be preloaded by OEMs free of charge. The only limit is that Google partially closes its platform, notably by requiring that its own apps (if they are pre-installed) receive favorable placement. Likewise, Google’s search engine is only partially “open”. While any website can be listed on the search engine, Google selects a number of specialized results that are presented more prominently than organic search results (weather information, maps, etc). There is also some amount of propertization, namely that Google sells the best “real estate” via ad placement. 

Enforcement

Readers might ask what is the point of this classification? The answer is that in each of the above cases, competition intervention attempted (or is attempting) to move firms/platforms towards more openness and less propertization – the opposite of their original design.

The Microsoft cases and the Apple investigation, both sought/seek to bring more openness and less propetization to these respective platforms. Microsoft was made to share proprietary data with third parties (less propertization) and open up its platform to rival media players and web browsers (more openness). The same applies to Apple. Available information suggests that the Commission is seeking to limit the fees that Apple can extract from downstream rivals (less propertization), as well as ensuring that it cannot exclude rival mobile payment solutions from its platform (more openness).

The various cases that were brought by EU and US authorities against Qualcomm broadly sought to limit the extent to which it was monetizing its intellectual property. The European Amazon investigation centers on the way in which the company uses data from third-party sellers (and ultimately the distribution of revenue between them and Amazon). In both of these cases, authorities are ultimately trying to limit the extent to which these firms propertize their assets.

Finally, both of the Google cases, in the EU, sought to bring more openness to the company’s main platform. The Google Shopping decision sanctioned Google for purportedly placing its services more favorably than those of its rivals. And the Android decision notably sought to facilitate rival search engines’ and browsers’ access to the Android ecosystem. The same appears to be true of ongoing investigations in the US.

What is striking about these decisions/investigations is that authorities are pushing back against the distinguishing features of the platforms they are investigating. Closed -or relatively closed- platforms are being opened-up, and firms with highly propertized assets are made to share them (or, at the very least, monetize them less aggressively).

The empty quadrant

All of this would not be very interesting if it weren’t for a final piece of the puzzle: the model of open and shared platforms that authorities apparently favor has traditionally struggled to gain traction with consumers. Indeed, there seem to be very few successful consumer-oriented products and services in this space.

There have been numerous attempts to introduce truly open consumer-oriented operating systems – both in the mobile and desktop segments. For the most part, these have ended in failure. Ubuntu and other Linux distributions remain fringe products. There have been attempts to create open-source search engines, again they have not been met with success. The picture is similar in the online retail space. Amazon appears to have beaten eBay despite the latter being more open and less propertized – Amazon has historically charged higher fees than eBay and offers sellers much less freedom in the way they sell their goods. This theme is repeated in the standardization space. There have been innumerable attempts to impose open royalty-free standards. At least in the mobile internet industry, few if any of these have taken off (5G and WiFi are the best examples of this trend). That pattern is repeated in other highly-standardized industries, like digital video formats. Most recently, the proprietary Dolby Vision format seems to be winning the war against the open HDR10+ format. 

This is not to say there haven’t been any successful ventures in this space – the internet, blockchain and Wikipedia all spring to mind – or that we will not see more decentralized goods in the future. But by and large firms and consumers have not yet taken to the idea of open and shared platforms. And while some “open” projects have achieved tremendous scale, the consumer-facing side of these platforms is often dominated by intermediaries that opt for much more traditional business models (think of Coinbase and Blockchain, or Android and Linux).

An evolutionary explanation?

The preceding paragraphs have posited a recurring reality: the digital platforms that competition authorities are trying to to bring about are fundamentally different from those that emerge organically. This begs the question: why have authorities’ ideal platforms, so far, failed to achieve truly meaningful success at consumers’ end of the market? 

I can see at least three potential explanations:

  1. Closed/propertized platforms have systematically -and perhaps anticompetitively- thwarted their open/shared rivals;
  2. Shared platforms have failed to emerge because they are much harder to monetize (and there is thus less incentive to invest in them);
  3. Consumers have opted for closed systems precisely because they are closed.

I will not go into details over the merits of the first conjecture. Current antitrust debates have endlessly rehashed this proposition. However, it is worth mentioning that many of today’s dominant platforms overcame open/shared rivals well before they achieved their current size (Unix is older than Windows, Linux is older than iOs, eBay and Amazon are basically the same age, etc). It is thus difficult to make the case that the early success of their business models was down to anticompetitive behavior.

Much more interesting is the fact that options (2) and (3) are almost systematically overlooked – especially by antitrust authorities. And yet, if true, both of them would strongly cut against current efforts to regulate digital platforms and ramp-up antitrust enforcement against them. 

For a start, it is not unreasonable to suggest that highly propertized platforms are generally easier to monetize than shared ones (2). For example, open-source platforms often rely on complementarities for monetization, but this tends to be vulnerable to outside competition and free-riding. If this is true, then there is a natural incentive for firms to invest and innovate in more propertized environments. In turn, competition enforcement that limits a platforms’ ability to propertize their assets may harm innovation.

Similarly, authorities should at the very least reflect on whether consumers really want the more “competitive” ecosystems that they are trying to design (3)

For instance, it is striking that the European Commission has a long track record of seeking to open-up digital platforms (the Microsoft decisions are perhaps the most salient example). And yet, even after these interventions, new firms have kept on using the very business model that the Commission reprimanded. Apple tied the Safari browser to its iPhones, Google went to some length to ensure that Chrome was preloaded on devices, Samsung phones come with Samsung Internet as default. But this has not deterred consumers. A sizable share of them notably opted for Apple’s iPhone, which is even more centrally curated than Microsoft Windows ever was (and the same is true of Apple’s MacOS). 

Finally, it is worth noting that the remedies imposed by competition authorities are anything but unmitigated successes. Windows XP N (the version of Windows that came without Windows Media Player) was an unprecedented flop – it sold a paltry 1,787 copies. Likewise, the internet browser ballot box imposed by the Commission was so irrelevant to consumers that it took months for authorities to notice that Microsoft had removed it, in violation of the Commission’s decision. 

There are many reasons why consumers might prefer “closed” systems – even when they have to pay a premium for them. Take the example of app stores. Maintaining some control over the apps that can access the store notably enables platforms to easily weed out bad players. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. In other words, centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and consumers. This is especially true when consumers struggle to attribute dips in performance to an individual app, rather than the overall platform. 

It is also conceivable that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision. They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Furthermore, forcing too many “within-platform” choices upon users may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different. In short, contrary to what antitrust authorities seem to believe, closed platforms might be giving most users exactly what they desire. 

To conclude, consumers and firms appear to gravitate towards both closed and highly propertized platforms, the opposite of what the Commission and many other competition authorities favor. The reasons for this trend are still misunderstood, and mostly ignored. Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. This post certainly does not purport to answer the complex question of “the origin of platforms”, but it does suggest that what some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said this best when he quipped that economists always find a monopoly explanation for things that they fail to understand. The digital economy might just be the latest in this unfortunate trend.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Privacy absolutism is the misguided belief that protecting citizens’ privacy supersedes all other policy goals, especially economic ones. This is a mistake. Privacy is one value among many, not an end in itself. Unfortunately, the absolutist worldview has filtered into policymaking and is beginning to have very real consequences. Readers need look no further than contact tracing applications and the fight against Covid-19.

Covid-19 has presented the world with a privacy conundrum worthy of the big screen. In fact, it’s a plotline we’ve seen before. Moviegoers will recall that, in the wildly popular film “The Dark Knight”, Batman has to decide between preserving the privacy of Gotham’s citizens or resorting to mass surveillance in order to defeat the Joker. Ultimately, the caped crusader begrudgingly chooses the latter. Before the Covid-19 outbreak, this might have seemed like an unrealistic plot twist. Fast forward a couple of months, and it neatly illustrates the difficult decision that most western societies urgently need to make as they consider the use of contract tracing apps to fight Covid-19.

Contact tracing is often cited as one of the most promising tools to safely reopen Covid-19-hit economies. Unfortunately, its adoption has been severely undermined by a barrage of overblown privacy fears.

Take the contact tracing API and App co-developed by Apple and Google. While these firms’ efforts to rapidly introduce contact tracing tools are laudable, it is hard to shake the feeling that they have been holding back slightly. 

In an overt attempt to protect users’ privacy, Apple and Google’s joint offering does not collect any location data (a move that has irked some states). Similarly, both firms have repeatedly stressed that users will have to opt-in to their contact tracing solution (as opposed to the API functioning by default). And, of course, all the data will be anonymous – even for healthcare authorities. 

This is a missed opportunity. Google and Apple’s networks include billions of devices. That puts them in a unique position to rapidly achieve the scale required to successfully enable the tracing of Covid-19 infections. Contact tracing applications need to reach a critical mass of users to be effective. For instance, some experts have argued that an adoption rate of at least 60% is necessary. Unfortunately, existing apps – notably in Singapore, Australia, Norway and Iceland – have struggled to get anywhere near this number. Forcing users to opt-out of Google and Apple’s services could go a long way towards inverting this trend. Businesses could also boost these numbers by making them mandatory for their employees and consumers.

However, it is hard to blame Google or Apple for not pushing the envelope a little bit further. For the best part of a decade, they and other firms have repeatedly faced specious accusations of “surveillance capitalism”. This has notably resulted in heavy-handed regulation (including the GDPR, in the EU, and the CCPA, in California), as well as significant fines and settlements

Those chickens have now come home to roost. The firms that are probably best-placed to implement an effective contact tracing solution simply cannot afford the privacy-related risks. This includes the risk associated with violating existing privacy law, but also potential reputational consequences. 

Matters have also been exacerbated by the overly cautious stance of many western governments, as well as their citizens: 

  • The European Data Protection Board cautioned governments and private sector actors to anonymize location data collected via contact tracing apps. The European Parliament made similar pronouncements.
  • A group of Democratic Senators pushed back against Apple and Google’s contact tracing solution, notably due to privacy considerations.
  • And public support for contact tracing is also critically low. Surveys in the US show that contact tracing is significantly less popular than more restrictive policies, such as business and school closures. Similarly, polls in the UK suggest that between 52% and 62% of Britons would consider using contact tracing applications.
  • Belgium’s initial plans for a contact tracing application were struck down by its data protection authority on account that they did not comply with the GDPR.
  • Finally, across the globe, there has been pushback against so-called “centralized” tracing apps, notably due to privacy fears.

In short, the West’s insistence on maximizing privacy protection is holding back its efforts to combat the joint threats posed by Covid-19 and the unfolding economic recession. 

But contrary to the mass surveillance portrayed in the Dark Knight, the privacy risks entailed by contact tracing are for the most part negligible. State surveillance is hardly a prospect in western democracies. And the risk of data breaches is no greater here than with many other apps and services that we all use daily. To wit, password, email, and identity theft are still, by far, the most common targets for cyber attackers. Put differently, cyber criminals appear to be more interested in stealing assets that can be readily monetized, rather than location data that is almost worthless. This suggests that contact tracing applications, whether centralized or not, are unlikely to be an important target for cyberattackers.

The meagre risks entailed by contact tracing – regardless of how it is ultimately implemented – are thus a tiny price to pay if they enable some return to normalcy. At the time of writing, at least 5,8 million human beings have been infected with Covid-19, causing an estimated 358,000 deaths worldwide. Both Covid-19 and the measures destined to combat it have resulted in a collapse of the global economy – what the IMF has called “the worst economic downturn since the great depression”. Freedoms that the west had taken for granted have suddenly evaporated: the freedom to work, to travel, to see loved ones, etc. Can anyone honestly claim that is not worth temporarily sacrificing some privacy to partially regain these liberties?

More generally, it is not just contact tracing applications and the fight against Covid-19 that have suffered because of excessive privacy fears. The European GDPR offers another salient example. Whatever one thinks about the merits of privacy regulation, it is becoming increasingly clear that the EU overstepped the mark. For instance, an early empirical study found that the entry into force of the GDPR markedly decreased venture capital investments in Europe. Michal Gal aptly summarizes the implications of this emerging body of literature:

The price of data protection through the GDPR is much higher than previously recognized. The GDPR creates two main harmful effects on competition and innovation: it limits competition in data markets, creating more concentrated market structures and entrenching the market power of those who are already strong; and it limits data sharing between different data collectors, thereby preventing the realization of some data synergies which may lead to better data-based knowledge. […] The effects on competition and innovation identified may justify a reevaluation of the balance reached to ensure that overall welfare is increased. 

In short, just like the Dark Knight, policymakers, firms and citizens around the world need to think carefully about the tradeoff that exists between protecting privacy and other objectives, such as saving lives, promoting competition, and increasing innovation. As things stand, however, it seems that many have veered too far on the privacy end of the scale.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Researcher, Liege Competition & Innovation Institute; Senior Fellow, ICLE).]

Across the globe, millions of people are rapidly coming to terms with the harsh realities of life under lockdown. As governments impose ever-greater social distancing measures, many of the daily comforts we took for granted are no longer available to us. 

And yet, we can all take solace in the knowledge that our current predicament would have been far less tolerable if the COVID-19 outbreak had hit us twenty years ago. Among others, we have Big Tech firms to thank for this silver lining. 

Contrary to the claims of critics, such as Senator Josh Hawley, Big Tech has produced game-changing innovations that dramatically improve our ability to fight COVID-19. 

The previous post in this series showed that innovations produced by Big Tech provide us with critical information, allow us to maintain some level of social interactions (despite living under lockdown), and have enabled companies, universities and schools to continue functioning (albeit at a severely reduced pace).

But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

One of the most underappreciated ways in which technology (mostly pioneered by Big Tech firms) is helping the world deal with COVID-19 has been a rapid shift towards contactless economic transactions. Not only are consumers turning towards digital goods to fill their spare time, but physical goods (most notably food) are increasingly being exchanged without any direct contact.

These ongoing changes would be impossible without the innovations and infrastructure that have emerged from tech and telecommunications companies over the last couple of decades. 

Of course, the overall picture is still bleak. The shift to contactless transactions has only slightly softened the tremendous blow suffered by the retail and restaurant industries – some predictions suggest their overall revenue could fall by at least 50% in the second quarter of 2020. Nevertheless, as explained below, this situation would likely be significantly worse without the many innovations produced by Big Tech companies. For that we would be thankful.

1. Food and other goods

For a start, the COVID-19 outbreak (and government measures to combat it) has caused many brick & mortar stores and restaurants to shut down. These closures would have been far harder to implement before the advent of online retail and food delivery platforms.

At the time of writing, e-commerce websites already appear to have witnessed a 20-30% increase in sales (other sources report 52% increase, compared to the same time last year). This increase will likely continue in the coming months.

The Amazon Retail platform has been at the forefront of this online shift.

  • Having witnessed a surge in online shopping, Amazon announced that it would be hiring 100.000 distribution workers to cope with the increased demand. Amazon’s staff have also been asked to work overtime in order to meet increased demand (in exchange, Amazon has doubled their pay for overtime hours).
  • To attract these new hires and ensure that existing ones continue working, Amazon simultaneously announced that it would be increasing wages in virus-hit countries (from $15 to $17, in the US) .
  • Amazon also stopped accepting “non-essential” goods in its warehouses, in order to prioritize the sale of household essentials and medical goods that are in high demand.
  • Finally, in Italy, Amazon decided not to stop its operations, despite some employees testing positive for COVID-19. Controversial as this move may be, Amazon’s private interests are aligned with those of society – maintaining the supply of essential goods is now more important than ever. 

And it is not just Amazon that is seeking to fill the breach left temporarily by brick & mortar retail. Other retailers are also stepping up efforts to distribute their goods online.

  • The apps of traditional retail chains have witnessed record daily downloads (thus relying on the smartphone platforms pioneered by Google and Apple).
  •  Walmart has become the go-to choice for online food purchases:

(Source: Bloomberg)

The shift to online shopping mimics what occurred in China, during its own COVID-19 lockdown. 

  • According to an article published in HBR, e-commerce penetration reached 36.6% of retail sales in China (compared to 29.7% in 2019). The same article explains how Alibaba’s technology is enabling traditional retailers to better manage their supply chains, ultimately helping them to sell their goods online.
  • A study by Nielsen ratings found that 67% of retailers would expand online channels. 
  • One large retailer shut many of its physical stores and redeployed many of its employees to serve as online influencers on WeChat, thus attempting to boost online sales.
  • Spurred by compassion and/or a desire to boost its brand abroad, Alibaba and its founder, Jack Ma, have made large efforts to provide critical medical supplies (notably tests kits and surgical masks) to COVID-hit countries such as the US and Belgium.

And it is not just retail that is adapting to the outbreak. Many restaurants are trying to stay afloat by shifting from in-house dining to deliveries. These attempts have been made possible by the emergence of food delivery platforms, such as UberEats and Deliveroo. 

These platforms have taken several steps to facilitate food deliveries during the outbreak.

  • UberEats announced that it would be waiving delivery fees for independent restaurants.
  • Both UberEats and Deliveroo have put in place systems for deliveries to take place without direct physical contact. While not entirely risk-free, meal delivery can provide welcome relief to people experiencing stressful lockdown conditions.

Similarly, the shares of Blue Apron – an online meal-kit delivery service – have surged more than 600% since the start of the outbreak.

In short, COVID-19 has caused a drastic shift towards contactless retail and food delivery services. It is an open question how much of this shift would have been possible without the pioneering business model innovations brought about by Amazon and its online retail platform, as well as modern food delivery platforms, such as UberEats and Deliveroo. At the very least, it seems unlikely that it would have happened as fast.

The entertainment industry is another area where increasing digitization has made lockdowns more bearable. The reason is obvious: locked-down consumers still require some form of amusement. With physical supply chains under tremendous strain, and social gatherings no longer an option, digital media has thus become the default choice for many.

Data published by Verizon shows a sharp increase (in the week running from March 9 to March 16) in the consumption of digital entertainment, especially gaming:

This echoes other sources, which also report that the use of traditional streaming platforms has surged in areas hit by COVID-19.

  • Netflix subscriptions are said to be spiking in locked-down communities. During the first week of March, Netflix installations increased by 77% in Italy and 33% in Spain, compared to the February average. Netflix app downloads increased by 33% in Hong kong and South Korea. The Amazon Prime app saw a similar increase.
  • YouTube has also witnessed a surge in usage. 
  • Live streaming (on platforms such as Periscope, Twitch, YouTube, Facebook, Instagram, etc) has also increased in popularity. It is notably being used for everything from concerts and comedy clubs to religious services, and even zoo visits.
  • Disney Plus has also been highly popular. According to one source, half of US homes with children under the age of 10 purchased a Disney Plus subscription. This trend is expected to continue during the COVID-19 outbreak. Disney even released Frozen II three months ahead of schedule in order to boost new subscriptions.
  • Hollywood studios have started releasing some of their lower-profile titles directly on streaming services.

Traffic has also increased significantly on popular gaming platforms.

These are just a tiny sample of the many ways in which digital entertainment is filling the void left by social gatherings. It is thus central to the lives of people under lockdown.

2. Cashless payments

But all of the services that are listed above rely on cashless payments – be it to limit the risk or contagion or because these transactions take place remotely. Fintech innovations have thus turned out to be one of the foundations that make social distancing policies viable. 

This is particularly evident in the food industry. 

  • Food delivery platforms, like UberEats and Deliveroo, already relied on mobile payments.
  • Costa coffee (a UK equivalent to starbucks) went cashless in an attempt to limit the spread of COVID-19.
  • Domino’s Pizza, among other franchises, announced that it would move to contactless deliveries.
  • President Donald Trump is said to have discussed plans to keep drive-thru restaurants open during the outbreak. This would also certainly imply exclusively digital payments.
  • And although doubts remain concerning the extent to which the SARS-CoV-2 virus may, or may not, be transmitted via banknotes and coins, many other businesses have preemptively ceased to accept cash payments

As the Jodie Kelley – the CEO of the Electronic Transactions Association – put it, in a CNBC interview:

Contactless payments have come up as a new option for consumers who are much more conscious of what they touch. 

This increased demand for cashless payments has been a blessing for Fintech firms. 

  • Though it is too early to gage the magnitude of this shift, early signs – notably from China – suggest that mobile payments have become more common during the outbreak.
  • In China, Alipay announced that it expected to radically expand its services to new sectors – restaurants, cinema bookings, real estate purchases – in an attempt to compete with WeChat.
  • PayPal has also witnessed an uptick in transactions, though this growth might ultimately be weighed-down by declining economic activity.
  • In the past, Facebook had revealed plans to offer mobile payments across its platforms – Facebook, WhatsApp, Instagram & Libra. Those plans may not have been politically viable at the time. The COVID-19 could conceivably change this.

In short, the COVID-19 outbreak has increased our reliance on digital payments, as these can both take place remotely and, potentially, limit contamination via banknotes. None of this would have been possible twenty years ago when industry pioneers, such as PayPal, were in their infancy. 

3. High speed internet access

Similarly, it goes without saying that none of the above would be possible without the tremendous investments that have been made in broadband infrastructure, most notably by internet service providers. Though these companies have often faced strong criticism from the public, they provide the backbone upon which outbreak-stricken economies can function.

By causing so many activities to move online, the COVID-19 outbreak has put broadband networks to the test. So for, broadband infrastructure around the world has been up to the task. This is partly because the spike in usage has occurred in daytime hours (where network’s capacity is less straine), but also because ISPs traditionally rely on a number of tools to limit peak-time usage.

The biggest increases in usage seem to have occurred in daytime hours. As data from OpenVault illustrates:

According to BT, one of the UK’s largest telecoms operators, daytime internet usage is up by 50%, but peaks are still well within record levels (and other UK operators have made similar claims):

Anecdotal data also suggests that, so far, fixed internet providers have not significantly struggled to handle this increased traffic (the same goes for Content Delivery Networks). Not only were these networks already designed to withstand high peaks in demand, but ISPs have, such as Verizon, increased their  capacity to avoid potential issues.

For instance, internet speed tests performed using Ookla suggest that average download speeds only marginally decreased, it at all, in locked-down regions, compared to previous levels:

However, the same data suggests that mobile networks have faced slightly larger decreases in performance, though these do not appear to be severe. For instance, contrary to contemporaneous reports, a mobile network outage that occurred in the UK is unlikely to have been caused by a COVID-related surge. 

The robustness exhibited by broadband networks is notably due to long-running efforts by ISPs (spurred by competition) to improve download speeds and latency. As one article put it:

For now, cable operators’ and telco providers’ networks are seemingly withstanding the increased demands, which is largely due to the upgrades that they’ve done over the past 10 or so years using technologies such as DOCSIS 3.1 or PON.

Pushed in part by Google Fiber’s launch back in 2012, the large cable operators and telcos, such as AT&T, Verizon, Comcast and Charter Communications, have spent years upgrading their networks to 1-Gig speeds. Prior to those upgrades, cable operators in particular struggled with faster upload speeds, and the slowdown of broadband services during peak usage times, such as after school and in the evenings, as neighborhood nodes became overwhelmed.

This is not without policy ramifications.

For a start, these developments might vindicate antitrust enforcers that allowed mergers that led to higher investments, sometimes at the expense of slight reductions in price competition. This is notably the case for so-called 4 to 3 mergers in the wireless telecommunications industry. As an in-depth literature review by ICLE scholars concludes:

Studies of investment also found that markets with three facilities-based operators had significantly higher levels of investment by individual firms.

Similarly, the COVID-19 outbreak has also cast further doubts over the appropriateness of net neutrality regulations. Indeed, an important criticism of such regulations is that they prevent ISPs from using the price mechanism to manage congestion

It is these fears of congestion, likely unfounded (see above), that led the European Union to urge streaming companies to voluntarily reduce the quality of their products. To date, Netflix, Youtube, Amazon Prime, Apple, Facebook and Disney have complied with the EU’s request. 

This may seem like a trivial problem, but it was totally avoidable. As a result of net neutrality regulation, European authorities and content providers have been forced into an awkward position (likely unfounded) that unnecessarily penalizes those consumers and ISPs who do not face congestion issues (conversely, it lets failing ISPs off the hook and disincentivizes further investments on their part). This is all the more unfortunate that, as argued above, streaming services are essential to locked-down consumers. 

Critics may retort that small quality decreases hardly have any impact on consumers. But, if this is indeed the case, then content providers were using up unnecessary amounts of bandwidth before the COVID-19 outbreak (something that is less likely to occur without net neutrality obligations). And if not, then European consumers have indeed been deprived of something they valued. The shoe is thus on the other foot.

These normative considerations aside, the big point is that we can all be thankful to live in an era of high-speed internet.

 4. Concluding remarks 

Big Tech is rapidly emerging as one of the heroes of the COVID-19 crisis. Companies that were once on the receiving end of daily reproaches – by the press, enforcers, and scholars alike – are gaining renewed appreciation from the public. Times have changed since the early days of these companies – where consumers marvelled at the endless possibilities that their technologies offered. Today we are coming to realize how essential tech companies have become to our daily lives, and how they make society more resilient in the face of fat-tailed events, like pandemics.

The move to a contactless, digital, economy is a critical part of what makes contemporary societies better-equipped to deal with COVID-19. As this post has argued, online delivery, digital entertainment, contactless payments and high speed internet all play a critical role. 

To think that we receive some of these services for free…

Last year, Erik Brynjolfsson, Avinash Collins and Felix Eggers published a paper in PNAS, showing that consumers were willing to pay significant sums for online goods they currently receive free of charge. One can only imagine how much larger those sums would be if that same experiment were repeated today.

Even Big Tech’s critics are willing to recognize the huge debt we owe to these companies. As Stephen Levy wrote, in an article titled “Has the Coronavirus Killed the Techlash?”:

Who knew the techlash was susceptible to a virus?

The pandemic does not make any of the complaints about the tech giants less valid. They are still drivers of surveillance capitalism who duck their fair share of taxes and abuse their power in the marketplace. We in the press must still cover them aggressively and skeptically. And we still need a reckoning that protects the privacy of citizens, levels the competitive playing field, and holds these giants to account. But the momentum for that reckoning doesn’t seem sustainable at a moment when, to prop up our diminished lives, we are desperately dependent on what they’ve built. And glad that they built it.

While it is still early to draw policy lessons from the outbreak, one thing seems clear: the COVID-19 pandemic provides yet further evidence that tech policymakers should be extremely careful not to kill the goose that laid the golden egg, by promoting regulations that may thwart innovation (or the opposite).

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Fellow of Law & Economics, International Center for Law & Economics).]

Republican Senator Josh Hawley infamously argued that Big Tech is overrated. In his words:

My biggest critique of big tech is: what big innovation have they really given us? What is it now that in the last 15, 20 years that people who say they are the brightest minds in the country have given this country? What are their great innovations?

To Senator Hawley these questions seemed rhetorical. Big Tech’s innovations were trivial gadgets: “autoplay” and “snap streaks”, to quote him once more.

But, as any Monty Python connoisseur will tell you, rhetorical questions have a way of being … not so rhetorical. In one of Python’s most famous jokes, members of the “People’s Front of Judea” ask “what have the Romans ever done for us”? To their own surprise, the answer turns out to be a great deal:

This post is the first in a series examining some of the many ways in which Big Tech is making Coronavirus-related lockdowns and social distancing more bearable, and how Big Tech is enabling our economies to continue functioning (albeit at a severely reduced pace) throughout the outbreak. 

Although Big Tech’s contributions are just a small part of a much wider battle, they suggest that the world is drastically better situated to deal with COVID-19 than it would have been twenty years ago – and this is in no small part thanks to Big Tech’s numerous innovations.

Of course, some will say that the world would be even better equipped to handle COVID-19, if Big Tech had only been subject to more (or less) regulation. Whether these critiques are correct, or not, they are not the point of this post. For many, like Senator Hawley, it is apparently undeniable that tech does more harm than good. But, as this post suggests, that is surely not the case. And before we do decide whether and how we want to regulate it in the future, we should be particularly mindful of what aspects of “Big Tech” seem particularly suited to dealing with the current crisis, and ensure that we don’t adopt regulations that thoughtlessly undermine these.

1. Priceless information 

One of the most important ways in which Big Tech firms have supported international attempts to COVID-19 has been their role as  information intermediaries. 

As the title of a New York Times article put it:

When Facebook Is More Trustworthy Than the President: Social media companies are delivering reliable information in the coronavirus crisis. Why can’t they do that all the time?

The author is at least correct on the first part. Big Tech has become a cornucopia of reliable information about the virus:

  • Big Tech firms are partnering with the White House and other agencies to analyze massive COVID-19 datasets in order to help discover novel answers to questions about transmission, medical care, and other interventions. This partnership is possible thanks to the massive investments in AI infrastructure that the leading tech firms have made. 
  • Google Scholar has partnered with renowned medical journals (as well as public authorities) to guide citizens towards cutting edge scholarship relating to COVID-19. This a transformative ressource in a world of lockdows and overburdened healthcare providers.
  • Google has added a number of features to its main search engine – such as a “Coronavirus Knowledge Panel” and SOS alerts – in order to help users deal with the spread of the virus.
  • On Twitter, information and insights about COVID-19 compete in the market for ideas. Numerous news outlets have published lists of recommended people to follow (Fortune, Forbes). 

    Furthermore – to curb some of the unwanted effects of an unrestrained market for ideas – Twitter (and most other digital platforms) links to the websites of public authorities when users search for COVID-related hashtags.
  • This flow of information is a two-way street: Twitter, Facebook and Reddit, among others, enable citizens and experts to weigh in on the right policy approach to COVID-19. 

    Though the results are sometimes far from perfect, these exchanges may prove invaluable in critical times where usual methods of policy-making (such as hearings and conferences) are mostly off the table.
  • Perhaps most importantly, the Internet is a precious source of knowledge about how to deal with an emerging virus, as well as life under lockdown. We often take for granted how much of our lives benefit from extreme specialization. These exchanges are severely restricted under lockdown conditions. Luckily, with the internet and modern search engines (pioneered by Google), most of the world’s information is but a click away.

    For example, Facebook Groups have been employed by users of the social media platform in order to better coordinate necessary activity among community members — like giving blood — while still engaging in social distancing.

In short, search engines and social networks have been beacons of information regarding COVID-19. Their mostly bottom-up approach to knowledge generation (i.e. popular topics emerge organically) is essential in a world of extreme uncertainty. This has ultimately enabled these players to stay ahead of the curve in bringing valuable information to citizens around the world.

2. Social interactions

This is probably the most obvious way in which Big Tech is making life under lockdown more bearable for everyone. 

  • In Italy, Whatsapp messages and calls jumped by 20% following the outbreak of COVID-19. And Microsoft claims that the use of Skype jumped by 100%.
  • Younger users are turning to social networks, like TikTok, to deal with the harsh realities of the pandemic.
  • Strangers are using Facebook groups to support each other through difficult times.
  • And institutions, like the WHO, are piggybacking on this popularity to further raise awareness about COVID-19 via social media. 
  • In South Africa, health authorities even created a whatsapp contact to answer users questions about the virus.
  • Most importantly, social media is a godsend for senior citizens and anyone else who may have to live in almost total isolation for the foreseeable future. For instance, nursing homes are putting communications apps, like Skype and WhatsApp, in the hands of their patients, to keep up their morale (here and here).

And with the economic effects of COVID-19 starting to gather speed, users will more than ever be grateful to receive these services free of charge. Sharing data – often very limited amounts – with a platform is an insignificant price to pay in times of economic hardship. 

3. Working & Learning

It will also be impossible to effectively fight COVID-19 if we cannot maintain the economy afloat. Stock markets have already plunged by record amounts. Surely, these losses would be unfathomably worse if many of us were not lucky enough to be able to work, and from the safety of our own homes. And for those individuals who are unable to work from home, their own exposure is dramatically reduced thanks to a significant proportion of the population that can stay out of public.

Once again, we largely have Big Tech to thank for this. 

  • Downloads of Microsoft Teams and Zoom are surging on both Google and Apple’s app stores. This is hardly surprising. With much of the workforce staying at home, these video-conference applications have become essential. The increased load generated by people working online might even have caused Microsoft Teams to crash in Europe.
  • According to Microsoft, the number of Microsoft Teams meetings increased by 500 percent in China.
  • Sensing that the current crisis may last for a while, some firms have also started to conduct job interviews online; populars apps for doing so include Skype, Zoom and Whatsapp. 
  • Slack has also seen a surge in usage, as firms set themselves up to work remotely. It has started offering free training, to help firms move online.
  • Along similar lines, Google recently announced that its G suite of office applications – which enables users to share and work on documents online – had recently passed 2 Billion users.
  • Some tech firms (including Google, Microsoft and Zoom) have gone a step further and started giving away some of their enterprise productivity software, in order to help businesses move their workflows online.

And Big Tech is also helping universities, schools and parents to continue providing coursework and lectures to their students/children.

  • Zoom and Microsoft Teams have been popular choices for online learning. To facilitate the transition to online learning, Zoom has notably lifted time limits relating to the free version of its app (for schools in the most affected areas).
  • Even in the US, where the virus outbreak is currently smaller than in Europe, thousands of students are already being taught online.
  • Much of the online learning being conducted for primary school children is being done with affordable Chromebooks. And some of these Chromebooks are distributed to underserved schools through grant programs administered by Google.
  • Moreover, at the time of writing, most of the best selling books on Amazon.com are pre-school learning books:

Finally, the advent of online storage services, such as Dropbox and Google Drive, has largely alleviated the need for physical copies of files. In turn, this enables employees to remotely access all the files they need to stay productive. While this may be convenient under normal circumstances, it becomes critical when retrieving a binder in the office is no longer an option.

4. So what has Big Tech ever done for us?

With millions of families around the world currently under forced lockdown, it is becoming increasingly evident that Big Tech’s innovations are anything but trivial. Innovations that seemed like convenient tools only a couple of days ago, are now becoming essential parts of our daily lives (or, at least, we are finally realizing how powerful they truly are). 

The fight against COVID-19 will be hard. We can at least be thankful that we have Big Tech by our side. Paraphrasing the Monty Python crew: 

Q: What has Big Tech ever done for us? 

A: Abundant, free, and easily accessible information. Precious social interactions. Online working and learning.

Q: But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

For the answer to this question, I invite you to stay tuned for the next post in this series.

This is the fourth, and last, in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision (the first post can be found here, and the second here, and the third here). It draws on research from a soon-to-be published ICLE white paper.

The previous parts of this series have mostly focused on the Commission’s factual and legal conclusions. However, as this blog post points out, the case’s economic underpinnings also suffer from important weaknesses.

Two problems are particularly salient: First, the economic models cited by the Commission (discussed in an official paper, but not directly in the decision) poorly match the underlying facts. Second, the Commission’s conclusions on innovation harms are out of touch with the abundant economic literature regarding the potential link between market structure and innovation.

The wrong economic models

The Commission’s Chief Economist team outlined its economic reasoning in an article published shortly after the Android decision was published. The article reveals that the Commission relied upon three economic papers to support its conclusion that Google’s tying harmed consumer welfare.

Each of these three papers attempts to address the same basic problem. Ever since the rise of the Chicago-School, it is widely accepted that a monopolist cannot automatically raise its profits by entering an adjacent market (i.e. leveraging its monopoly position), for instance through tying. This has sometimes been called the single-monopoly-profit theory. In more recent years, various scholars have refined this Chicago-School intuition, and identified instances where the theory fails.

While the single monopoly profit theory has been criticized in academic circles, it is important to note that the three papers cited by the Commission accept its basic premise. They thus attempt to show why the theory fails in the context of the Google Android case. 

Unfortunately, the assumptions upon which they rely to reach this conclusion markedly differ from the case’s fact pattern. These papers thus offer little support to the Commission’s economic conclusions.

For a start, the authors of the first paper cited by the Commission concede that their own model does not apply to the Google case:

Actual antitrust cases are fact-intensive and our model does not perfectly fit with the current Google case in one important aspect.

The authors thus rely on important modifications, lifted from a paper by Frederico Etro and Cristina Caffara (the second paper cited by the Commission), to support their conclusion that Google’s tying was anticompetitive. 

The second paper cited by the Commission, however, is equally problematic

The authors’ underlying intuition is relatively straightforward: because Google bundles its suite of Google Apps (including Search) with the Play Store, a rival search engine would have to pay a premium in order to be pre-installed and placed on the home screen, because OEMs would have to entirely forgo Google’s suite of applications. The key assumption here is that OEMs cannot obtain the Google Play app and pre-install and place favorably a rival search app

But this is simply not true of Google’s contractual terms. The best evidence is that rivals search apps have indeed concluded deals with OEMs to pre-install their search apps, without these OEMs losing access to Google’s suite of proprietary apps. Google’s contractual terms simply do not force OEMs to choose between the Google Play app and the pre-installation of a rival search app. Etro and Caffara’s model thus falls flat.

More fundamentally, even if Google’s contractual terms did prevent OEMs from pre-loading rival apps, the paper’s conclusions would still be deeply flawed. The authors essentially assume that the only way for consumers to obtain a rival app is through pre-installation. But this is a severe misreading of the prevailing market conditions. 

Users remain free to independently download rival search apps. If Google did indeed purchase exclusive pre-installation, users would not have to choose between a “full Android” device and one with a rival search app but none of Google’s apps. Instead, they could download the rival app and place it alongside Google’s applications. 

A more efficient rival could even provide side payments, of some sort, to encourage consumers to download its app. Exclusive pre-installation thus generates a much smaller advantage than Etro and Caffara assume, and their model fails to reflect this.

Finally, the third paper by Alexandre de Cornière and Greg Taylor, suffers from the exact same problem. The authors clearly acknowledge that their findings only hold if OEMs (and consumers) are effectively prevented from (pre-)installing applications that compete with Google’s apps. In their own words:

Upstream firms offer contracts to the downstream firm, who chooses which component(s) to use and then sells to consumers. For our theory to apply, the following three conditions need to hold: (i) substitutability between the two versions of B leads the downstream firm to install at most one version.

The upshot is that all three of the economic models cited by the Commission cease to be relevant in the specific context of the Google Android decision. The Commission is thus left with little to no economic evidence to support its finding of anticompetitive effects.

Critics might argue that direct downloads by consumers are but a theoretical possibility. Yet nothing could be further from the truth. Take the web browser market: The Samsung Internet Browser has more than 1 Billion downloads on Google’s Play Store. The Opera, Opera Mini and Firefox browsers each have over a 100 million downloads. The Brave browser has more than 10 million downloads, but is growing rapidly.

In short the economic papers on which the Commission relies are based on a world that does not exist. They thus fail to support the Commission’s economic findings.

An incorrect view of innovation

In its decision, the Commission repeatedly claimed that Google’s behavior stifled innovation because it prevented rivals from entering the market. However, the Commission offered no evidence to support its assumption that reduced market entry on would lead to a decrease in innovation:

(858) For the reasons set out in this Section, the Commission concludes that the tying of the Play Store and the Google Search app helps Google to maintain and strengthen its dominant position in each national market for general search services, increases barriers to entry, deters innovation and tends to harm, directly or indirectly, consumers.

(859) First, Google’s conduct makes it harder for competing general search services to gain search queries and the respective revenues and data needed to improve their services.

(861) Second, Google’s conduct increases barriers to entry by shielding Google from competition from general search services that could challenge its dominant position in the national markets for general search services:

(862) Third, by making it harder for competing general search services to gain search queries including the respective revenues and data needed to improve their services, Google’s conduct reduces the incentives of competing general search services to invest in developing innovative features, such as innovation in algorithm and user experience design.

In a nutshell, the Commission’s findings rest on the assumption that barriers to entry and more concentrated market structures necessarily reduce innovation. But this assertion is not supported by the empirical economic literature on the topic.

For example, a 2006 paper published by Richard Gilbert surveys 24 empirical studies on the topic. These studies examine the link between market structure (or firm size) and innovation. Though earlier studies tended to identify a positive relationship between concentration, as well as firm size, and innovation, more recent empirical techniques found no significant relationship. Gilbert thus suggests that:

These econometric studies suggest that whatever relationship exists at a general economy-wide level between industry structure and R&D is masked by differences across industries in technological opportunities, demand, and the appropriability of inventions.

This intuition is confirmed by another high-profile empirical paper by Aghion, Bloom, Blundell, Griffith, and Howitt. The authors identify an inverted-U relationship between competition and innovation. Perhaps more importantly, they point out that this relationship is affected by a number of sector-specific factors.

Finally, reviewing fifty years of research on innovation and market structure, Wesley Cohen concludes that:

Even before one controls for industry effects, the variance in R&D intensity explained by market concentration is small. Moreover, whatever relationship that exists in cross sections becomes imperceptible with the inclusion of controls for industry characteristics, whether expressed as industry fixed effects or in the form of survey-based and other measures of industry characteristics such as technological opportunity, appropriability conditions, and demand. In parallel to a decades-long accumulation of mixed results, theorists have also spawned an almost equally voluminous and equivocal literature on the link between market structure and innovation.[16]

The Commission’s stance is further weakened by the fact that investments in the Android operating system are likely affected by a weak appropriability regime. In other words, because of its open source nature, it is hard for Google to earn a return on investments in the Android OS (anyone can copy, modify and offer their own version of the OS). 

Loosely tying Google’s proprietary applications to the OS is arguably one way to solve this appropriability problem. Unfortunately, the Commission brushed these considerations aside. It argued that Google could earn some revenue from the Google Play app, as well as other potential venues. However, the Commission did not question whether these sources of income were even comparable to the sums invested by Google in the Android OS. It is thus possible that the Commission’s decision will prevent Google from earning a positive return on some future investments in the Android OS, ultimately causing it to cut back its investments and slowing innovation.

The upshot is that the Commission was simply wrong to assume that barriers to entry and more concentrated market structures would necessarily reduce innovation. This is especially true, given that Google may struggle to earn a return on its investments, absent the contractual provisions challenged by the Commission.

Conclusion

In short, the Commission’s economic analysis was severely lacking. It relied on economic models that had little to say about the market it which Google and its rivals operated. Its decisions thus reveals the inherent risk of basing antitrust decisions upon overfitted economic models. 

As if that were not enough, the Android decision also misrepresents the economic literature concerning the link (or absence thereof) between market structure and innovation. As a result, there is no reason to believe that Google’s behavior reduced innovation.

This is the third in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision (the first post can be found here, and the second here). It draws on research from a soon-to-be published ICLE white paper.

(Comparison of Google and Apple’s smartphone business models. Red $ symbols represent money invested; Green $ symbols represent sources of revenue; Black lines show the extent of Google and Apple’s control over their respective platforms)

For the third in my series of posts about the Google Android decision, I will delve into the theories of harm identified by the Commission. 

The big picture is that the Commission’s analysis was particularly one-sided. The Commission failed to adequately account for the complex business challenges that Google faced – such as monetizing the Android platform and shielding it from fragmentation. To make matters worse, its decision rests on dubious factual conclusions and extrapolations. The result is a highly unbalanced assessment that could ultimately hamstring Google and prevent it from effectively competing with its smartphone rivals, Apple in particular.

1. Tying without foreclosure

The first theory of harm identified by the Commission concerned the tying of Google’s Search app with the Google Play app, and of Google’s Chrome app with both the Google Play and Google Search apps.

Oversimplifying, Google required its OEMs to choose between either pre-installing a bundle of Google applications, or forgoing some of the most important ones (notably Google Play). The Commission argued that this gave Google a competitive advantage that rivals could not emulate (even though Google’s terms did not preclude OEMs from simultaneously pre-installing rival web browsers and search apps). 

To support this conclusion, the Commission notably asserted that no alternative distribution channel would enable rivals to offset the competitive advantage that Google obtained from tying. This finding is, at best, dubious. 

For a start, the Commission claimed that user downloads were not a viable alternative distribution channel, even though roughly 250 million apps are downloaded on Google’s Play store every day.

The Commission sought to overcome this inconvenient statistic by arguing that Android users were unlikely to download apps that duplicated the functionalities of a pre-installed app – why download a new browser if there is already one on the user’s phone?

But this reasoning is far from watertight. For instance, the 17th most-downloaded Android app, the “Super-Bright Led Flashlight” (with more than 587million downloads), mostly replicates a feature that is pre-installed on all Android devices. Moreover, the five most downloaded Android apps (Facebook, Facebook Messenger, Whatsapp, Instagram and Skype) provide functionalities that are, to some extent at least, offered by apps that have, at some point or another, been preinstalled on many Android devices (notably Google Hangouts, Google Photos and Google+).

The Commission countered that communications apps were not appropriate counterexamples, because they benefit from network effects. But this overlooks the fact that the most successful communications and social media apps benefited from very limited network effects when they were launched, and that they succeeded despite the presence of competing pre-installed apps. Direct user downloads are thus a far more powerful vector of competition than the Commission cared to admit.

Similarly concerning is the Commission’s contention that paying OEMs or Mobile Network Operators (“MNOs”) to pre-install their search apps was not a viable alternative for Google’s rivals. Some of the reasons cited by the Commission to support this finding are particularly troubling.

For instance, the Commission claimed that high transaction costs prevented parties from concluding these pre installation deals. 

But pre-installation agreements are common in the smartphone industry. In recent years, Microsoft struck a deal with Samsung to pre-install some of its office apps on the Galaxy Note 10. It also paid Verizon to pre-install the Bing search app on a number of Samsung phones, in 2010. Likewise, a number of Russian internet companies have been in talks with Huawei to pre-install their apps on its devices. And Yahoo reached an agreement with Mozilla to make it the default search engine for its web browser. Transaction costs do not appear to  have been an obstacle in any of these cases.

The Commission also claimed that duplicating too many apps would cause storage space issues on devices. 

And yet, a back-of-the-envelope calculation suggests that storage space is unlikely to be a major issue. For instance, the Bing Search app has a download size of 24MB, whereas typical entry-level smartphones generally have an internal memory of at least 64GB (that can often be extended to more than 1TB with the addition of an SD card). The Bing Search app thus takes up less than one-thousandth of these devices’ internal storage. Granted, the Yahoo search app is slightly larger than Microsoft’s, weighing almost 100MB. But this is still insignificant compared to a modern device’s storage space.

Finally, the Commission claimed that rivals were contractually prevented from concluding exclusive pre-installation deals because Google’s own apps would also be pre-installed on devices.

However, while it is true that Google’s apps would still be present on a device, rivals could still pay for their applications to be set as default. Even Yandex – a plaintiff – recognized that this would be a valuable solution. In its own words (taken from the Commission’s decision):

Pre-installation alongside Google would be of some benefit to an alternative general search provider such as Yandex […] given the importance of default status and pre-installation on home screen, a level playing field will not be established unless there is a meaningful competition for default status instead of Google.

In short, the Commission failed to convincingly establish that Google’s contractual terms prevented as-efficient rivals from effectively distributing their applications on Android smartphones. The evidence it adduced was simply too thin to support anything close to that conclusion.

2. The threat of fragmentation

The Commission’s second theory of harm concerned the so-called “antifragmentation” agreements concluded between Google and OEMs. In a nutshell, Google only agreed to license the Google Search and Google Play apps to OEMs that sold “Android Compatible” devices (i.e. devices sold with a version of Android did not stray too far from Google’s most recent version).

According to Google, this requirement was necessary to limit the number of Android forks that were present on the market (as well as older versions of the standard Android). This, in turn, reduced development costs and prevented the Android platform from unraveling.

The Commission disagreed, arguing that Google’s anti-fragmentation provisions thwarted competition from potential Android forks (i.e. modified versions of the Android OS).

This conclusion raises at least two critical questions: The first is whether these agreements were necessary to ensure the survival and competitiveness of the Android platform, and the second is why “open” platforms should be precluded from partly replicating a feature that is essential to rival “closed” platforms, such as Apple’s iOS.

Let us start with the necessity, or not, of Google’s contractual terms. If fragmentation did indeed pose an existential threat to the Android ecosystem, and anti-fragmentation agreements averted this threat, then it is hard to make a case that they thwarted competition. The Android platform would simply not have been as viable without them.

The Commission dismissed this possibility, relying largely on statements made by Google’s rivals (many of whom likely stood to benefit from the suppression of these agreements). For instance, the Commission cited comments that it received from Yandex – one of the plaintiffs in the case:

(1166) The fact that fragmentation can bring significant benefits is also confirmed by third-party respondents to requests for information:

[…]

(2) Yandex, which stated: “Whilst the development of Android forks certainly has an impact on the fragmentation of the Android ecosystem in terms of additional development being required to adapt applications for various versions of the OS, the benefits of fragmentation outweigh the downsides…”

Ironically, the Commission relied on Yandex’s statements while, at the same time, it dismissed arguments made by Android app developers, on account that they were conflicted. In its own words:

Google attached to its Response to the Statement of Objections 36 letters from OEMs and app developers supporting Google’s views about the dangers of fragmentation […] It appears likely that the authors of the 36 letters were influenced by Google when drafting or signing those letters.

More fundamentally, the Commission’s claim that fragmentation was not a significant threat is at odds with an almost unanimous agreement among industry insiders.

For example, while it is not dispositive, a rapid search for the terms “Google Android fragmentation”, using the DuckDuckGo search engine, leads to results that cut strongly against the Commission’s conclusions. Of the ten first results, only one could remotely be construed as claiming that fragmentation was not an issue. The others paint a very different picture (below are some of the most salient excerpts):

“There’s a fairly universal perception that Android fragmentation is a barrier to a consistent user experience, a security risk, and a challenge for app developers.” (here)

“Android fragmentation, a problem with the operating system from its inception, has only become more acute an issue over time, as more users clamor for the latest and greatest software to arrive on their phones.” (here)

“Android Fragmentation a Huge Problem: Study.” (here)

“Google’s Android fragmentation fix still isn’t working at all.” (here)

“Does Google care about Android fragmentation? Not now—but it should.” (here).

“This is very frustrating to users and a major headache for Google… and a challenge for corporate IT,” Gold said, explaining that there are a large number of older, not fully compatible devices running various versions of Android.” (here)

Perhaps more importantly, one might question why Google should be treated differently than rivals that operate closed platforms, such as Apple, Microsoft and Blackberry (before the last two mostly exited the Mobile OS market). By definition, these platforms limit all potential forks (because they are based on proprietary software).

The Commission argued that Apple, Microsoft and Blackberry had opted to run “closed” platforms, which gave them the right to prevent rivals from copying their software.

While this answer has some superficial appeal, it is incomplete. Android may be an open source project, but this is not true of Google’s proprietary apps. Why should it be forced to offer them to rivals who would use them to undermine its platform? The Commission did not meaningfully consider this question.

And yet, industry insiders routinely compare the fragmentation of Apple’s iOS and Google’s Android OS, in order to gage the state of competition between both firms. For instance, one commentator noted:

[T]he gap between iOS and Android users running the latest major versions of their operating systems has never looked worse for Google.

Likewise, an article published in Forbes concluded that Google’s OEMs were slow at providing users with updates, and that this might drive users and developers away from the Android platform:

For many users the Android experience isn’t as up-to-date as Apple’s iOS. Users could buy the latest Android phone now and they may see one major OS update and nothing else. […] Apple users can be pretty sure that they’ll get at least two years of updates, although the company never states how long it intends to support devices.

However this problem, in general, makes it harder for developers and will almost certainly have some inherent security problems. Developers, for example, will need to keep pushing updates – particularly for security issues – to many different versions. This is likely a time-consuming and expensive process.

To recap, the Commission’s decision paints a world that is either black or white: either firms operate closed platforms, and they are then free to limit fragmentation as they see fit, or they create open platforms, in which case they are deemed to have accepted much higher levels of fragmentation.

This stands in stark contrast to industry coverage, which suggests that users and developers of both closed and open platforms care a great deal about fragmentation, and demand that measures be put in place to address it. If this is true, then the relative fragmentation of open and closed platforms has an important impact on their competitive performance, and the Commission was wrong to reject comparisons between Google and its closed ecosystem rivals. 

3. Google’s revenue sharing agreements

The last part of the Commission’s case centered on revenue sharing agreements between Google and its OEMs/MNOs. Google paid these parties to exclusively place its search app on the homescreen of their devices. According to the Commission, these payments reduced OEMs and MNOs’ incentives to pre-install competing general search apps.

However, to reach this conclusion, the Commission had to make the critical (and highly dubious) assumption that rivals could not match Google’s payments.

To get to that point, it notably assumed that rival search engines would be unable to increase their share of mobile search results beyond their share of desktop search results. The underlying intuition appears to be that users who freely chose Google Search on desktop (Google Search & Chrome are not set as default on desktop PCs) could not be convinced to opt for a rival search engine on mobile.

But this ignores the possibility that rivals might offer an innovative app that swayed users away from their preferred desktop search engine. 

More importantly, this reasoning cuts against the Commission’s own claim that pre-installation and default placement were critical. If most users, dismiss their device’s default search app and search engine in favor of their preferred ones, then pre-installation and default placement are largely immaterial, and Google’s revenue sharing agreements could not possibly have thwarted competition (because they did not prevent users from independently installing their preferred search app). On the other hand, if users are easily swayed by default placement, then there is no reason to believe that rivals could not exceed their desktop market share on mobile phones.

The Commission was also wrong when it claimed that rival search engines were at a disadvantage because of the structure of Google’s revenue sharing payments. OEMs and MNOs allegedly lost all of their payments from Google if they exclusively placed a rival’s search app on the home screen of a single line of handsets.

The key question is the following: could Google automatically tilt the scales to its advantage by structuring the revenue sharing payments in this way? The answer appears to be no. 

For instance, it has been argued that exclusivity may intensify competition for distribution. Conversely, other scholars have claimed that exclusivity may deter entry in network industries. Unfortunately, the Commission did not examine whether Google’s revenue sharing agreements fell within this category. 

It thus provided insufficient evidence to support its conclusion that the revenue sharing agreements reduced OEMs’ (and MNOs’) incentives to pre-install competing general search apps, rather than merely increasing competition “for the market”.

4. Conclusion

To summarize, the Commission overestimated the effect that Google’s behavior might have on its rivals. It almost entirely ignored the justifications that Google put forward and relied heavily on statements made by its rivals. The result is a one-sided decision that puts undue strain on the Android Business model, while providing few, if any, benefits in return.