[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 John Newman, Associate Professor, University of Miami School of Law; Advisory Board Member, American Antitrust Institute; Affiliated Fellow, Thurman Arnold Project, Yale; Former Trial Attorney, DOJ Antitrust Division.)]
Cooperation is the basis of productivity. The war of all against all is not a good model for any economy.
Who said it—a rose-emoji Twitter Marxist, or a card-carrying member of the laissez faire Chicago School of economics? If you guessed the latter, you’d be right. Frank Easterbrook penned these words in an antitrust decision written shortly after he left the University of Chicago to become a federal judge. Easterbrook’s opinion, now a textbook staple, wholeheartedly endorsed a cooperative agreement between two business owners not to compete with each another.
But other enforcers and judges have taken a far less favorable view of cooperation—particularly when workers are the ones cooperating. A few years ago, in an increasingly rare example of interagency agreement, the DOJ and FTC teamed up to argue against a Seattle ordinance that would have permitted drivers to cooperatively bargain with Uber and Lyft. Why the hostility from enforcers? “Competition is the lynchpin of the U.S. economy,” explained Acting FTC Chairman Maureen Ohlhausen.
Should workers be able to cooperate to counter concentrated corporate power? Or is bellum omnium contra omnes truly the “lynchpin” of our industrial policy?
The coronavirus pandemic has thrown this question into sharper relief than ever before. Low-income workers—many of them classified as independent contractors—have launched multiple coordinated boycotts in an effort to improve working conditions. The antitrust agencies, once quick to condemn similar actions by Uber and Lyft drivers, have fallen conspicuously silent.
Why? Why should workers be allowed to negotiate cooperatively for a healthier workplace, yet not for a living wage? In a society largely organized around paying for basic social services, money is health—and even life itself.
Unraveling the Double Standard
Antitrust law, like the rest of industrial policy, involves difficult questions over which members of society can cooperate with one another. These laws allocate “coordination rights”. Before the coronavirus pandemic, industrial policy seemed generally to favor allocating these rights to corporations, while simultaneously denying them to workers and class-action plaintiffs. But, as the antitrust agencies’ apparent about-face on workplace organizing suggests, the times may be a-changing.
Some of today’s most existential threats to societal welfare—pandemics, climate change, pollution—will best be addressed via cooperation, not atomistic rivalry. On-the-ground stakeholders certainly seem to think so. Absent a coherent, unified federal policy to deal with the coronavirus pandemic, state governors have reportedly begun to consider cooperating to provide a coordinated regional response. Last year, a group of auto manufacturers voluntarily agreed to increase fuel-efficiency standards and reduce emissions. They did attract an antitrust investigation, but it was subsequently dropped—a triumph for pro-social cooperation. It was perhaps also a reminder that corporations, each of which is itself a cooperative enterprise, can still play the role they were historically assigned: serving the public interest.
Going forward, policy-makers should give careful thought to how their actions and inactions encourage or stifle cooperation. Judge Easterbrook praised an agreement between business owners because it “promoted enterprise”. What counts as legitimate “enterprise”, though, is an eminently contestable proposition.
The federal antitrust agencies’ anti-worker stance in particular seems ripe for revisiting. Its modern origins date back to the 1980s, when President Reagan’s FTC challenged a coordinated boycott among D.C.-area criminal-defense attorneys. The boycott was a strike of sorts, intended to pressure the city into increasing court-appointed fees to a level that would allow for adequate representation. (The mayor’s office, despite being responsible for paying the fees, actually encouraged the boycott.) As the sole buyer of this particular type of service, the government wielded substantial power in the marketplace. A coordinated front was needed to counter it. Nonetheless, the FTC condemned the attorneys’ strike as per se illegal—a label supposedly reserved for the worst possible anticompetitive behavior—and the U.S. Supreme Court ultimately agreed.
In the short run, the federal antitrust agencies should formally reverse this anti-labor course. When workers cooperate in an attempt to counter employers’ power, antitrust intervention is, at best, a misallocation of scarce agency resources. Surely there are (much) bigger fish to fry. At worst, hostility to such cooperation directly contravenes Congress’ vision for the antitrust laws. These laws were intended to protect workers from concentrated downstream power, not to force their exposure to it—as the federal agencies themselves have recognized elsewhere.
In the longer run, congressional action may be needed. Supreme Court antitrust case law condemning worker coordination should be legislatively overruled. And, in a sharp departure from the current trend, we should be making it easier, not harder, for workers to form cooperative unions. Capital can be combined into a legal corporation in just a few hours, while it takes more than a month to create an effective labor union. None of this is to say that competition should be abandoned—much the opposite, in fact. A market that pits individual workers against highly concentrated cooperative entities is hardly “competitive”.
Thinking more broadly, antitrust and industrial policy may need to allow—or even encourage—cooperation in a number of sectors. Automakers’ and other manufacturers’ voluntary efforts to fight climate change should be lauded and protected, not investigated. Where cooperation is already shielded and even incentivized, as is the case with corporations, affirmative steps may be needed to ensure that the public interest is being furthered.
The current moment is without precedent. Industrial policy is destined, and has already begun, to change. Although competition has its place, it cannot serve as the sole lynchpin for a just economy. Now more than ever, a revival of cooperation is needed.
First, [my administration would restore competition to the tech sector] by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.
* * *
For smaller companies…, their platform utilities would be required to meet the same standard of fair, reasonable, and nondiscriminatory dealing with users, but would not be required to structurally separate….
* * * Second, my administration would appoint regulators committed to reversing illegal and anti-competitive tech mergers…. I will appoint regulators who are committed to… unwind[ing] anti-competitive mergers, including:
Let’s consider for a moment what this brave new world will look like — not the nirvana imagined by regulators and legislators who believe that decimating a company’s business model will deter only the “bad” aspects of the model while preserving the “good,” as if by magic, but the inevitable reality of antitrust populism.
Utilities? Are you kidding? For an overview of what the future of tech would look like under Warren’s “Platform Utility” policy, take a look at your water, electricity, and sewage service. Have you noticed any improvement (or reduction in cost) in those services over the past 10 or 15 years? How about the roads? Amtrak? Platform businesses operating under a similar regulatory regime would also similarly stagnate. Enforcing platform “neutrality” necessarily requires meddling in the most minute of business decisions, inevitably creating unintended and costly consequences along the way.
Network companies, like all businesses, differentiate themselves by offering unique bundles of services to customers. By definition, this means vertically integrating with some product markets and not others. Why are digital assistants like Siri bundled into mobile operating systems? Why aren’t the vast majority of third-party apps also bundled into the OS? If you want utilities regulators instead of Google or Apple engineers and designers making these decisions on the margin, then Warren’s “Platform Utility” policy is the way to go.
Grocery Stores. To take one specific case cited by Warren, how much innovation was there in the grocery store industry before Amazon bought Whole Foods? Since the acquisition, large grocery retailers, like Walmart and Kroger, have increased their investment in online services to better compete with the e-commerce champion. Many industry analysts expect grocery stores to use computer vision technology and artificial intelligence to improve the efficiency of check-out in the near future.
Smartphones. Imagine how forced neutrality would play out in the context of iPhones. If Apple can’t sell its own apps, it also can’t pre-install its own apps. A brand new iPhone with no apps — and even more importantly, no App Store — would be, well, just a phone, out of the box. How would users even access a site or app store from which to download independent apps? Would Apple be allowed to pre-install someone else’s apps? That’s discriminatory, too. Maybe it will be forced to offer a menu of all available apps in all categories (like the famously useless browser ballot screen demanded by the European Commission in its Microsoft antitrust case)? It’s hard to see how that benefits consumers — or even app developers.
Internet Search. Or take search. Calls for “search neutrality” have been bandied about for years. But most proponents of search neutrality fail to recognize that all Google’s search results entail bias in favor of its own offerings. As Geoff Manne and Josh Wright noted in 2011 at the height of the search neutrality debate:
[S]earch engines offer up results in the form not only of typical text results, but also maps, travel information, product pages, books, social media and more. To the extent that alleged bias turns on a search engine favoring its own maps, for example, over another firm’s, the allegation fails to appreciate that text results and maps are variants of the same thing, and efforts to restrain a search engine from offering its own maps is no different than preventing it from offering its own search results.
Nevermind that Google with forced non-discrimination likely means Google offering only the antiquated “ten blue links” search results page it started with in 1998 instead of the far more useful “rich” results it offers today; logically it would also mean Google somehow offering the set of links produced by any and all other search engines’ algorithms, in lieu of its own. If you think Google will continue to invest in and maintain the wealth of services it offers today on the strength of the profits derived from those search results, well, Elizabeth Warren is probably already your favorite politician.
And regulatory oversight of algorithmic content won’t just result in an impoverished digital experience; it will inevitably lead to an authoritarian one, as well:
Any agency granted a mandate to undertake such algorithmic oversight, and override or reconfigure the product of online services, thereby controls the content consumers may access…. This sort of control is deeply problematic… [because it saddles users] with a pervasive set of speech controls promulgated by the government. The history of such state censorship is one which has demonstrated strong harms to both social welfare and rule of law, and should not be emulated.
Digital Assistants. Consider also the veritable cage match among the tech giants to offer “digital assistants” and “smart home” devices with ever-more features at ever-lower prices. Today the allegedly non-existent competition among these companies is played out most visibly in this multi-featured market, comprising advanced devices tightly integrated with artificial intelligence, voice recognition, advanced algorithms, and a host of services. Under Warren’s nondiscrimination principle this market disappears. Each device can offer only a connectivity platform (if such a service is even permitted to be bundled with a physical device…) — and nothing more.
But such a world entails not only the end of an entire, promising avenue of consumer-benefiting innovation, it also entails the end of a promising avenue of consumer-benefiting competition. It beggars belief that anyone thinks consumers would benefit by forcing technology companies into their own silos, ensuring that the most powerful sources of competition for each other are confined to their own fiefdoms by order of law.
Breaking business models
Beyond the product-feature dimension, Sen. Warren’s proposal would be devastating for innovative business models. Why is Amazon Prime Video bundled with free shipping? Because the marginal cost of distribution for video is close to zero and bundling it with Amazon Prime increases the value proposition for customers. Why is almost every Google service free to users? Because Google’s business model is supported by ads, not monthly subscription fees. Each of the tech giants has carefully constructed an ecosystem in which every component reinforces the others. Sen. Warren’s plan would not only break up the companies, it would prohibit their business models — the ones that both created and continue to sustain these products. Such an outcome would manifestly harm consumers.
Both of Warren’s policy “solutions” are misguided and will lead to higher prices and less innovation. Her cause for alarm is built on a multitude of mistaken assumptions, but let’s address just a few (Warren in bold):
“Nearly half of all e-commerce goes through Amazon.” Yes, but it has only 5% of total retail in the United States. As my colleague Kristian Stout says, “the Internet is not a market; it’s a distribution channel.”
“Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate.” The real story, as the founders of Diapers.com freely admitted, is that they sold diapers as what they hoped would be a loss leader, intending to build out sales of other products once they had a base of loyal customers:
And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.
Like all entrepreneurs, Diapers.com’s founders took a calculated risk that didn’t pay off as hoped. Amazon subsequently acquired the company (after it had declined a similar buyout offer from Walmart). (Antitrust laws protect consumers, not inefficient competitors). And no, this was not a case of predatory pricing. After many years of trying to make the business profitable as a subsidiary, Amazon shut it down in 2017.
“In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government’s antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.” The government’s settlement with Microsoft is not the reason Google and Facebook were able to emerge. Neither company entered the browser market at launch. Instead, they leapfrogged the browser entirely and created new platforms for the web (only later did Google create Chrome).
Furthermore, if the Microsoft case is responsible for “clearing a path” for Google is it not also responsible for clearing a path for Google’s alleged depredations? If the answer is that antitrust enforcement should be consistently more aggressive in order to rein in Google, too, when it gets out of line, then how can we be sure that that same more-aggressive enforcement standard wouldn’t have curtailed the extent of the Microsoft ecosystem in which it was profitable for Google to become Google? Warren implicitly assumes that only the enforcement decision in Microsoft was relevant to Google’s rise. But Microsoft doesn’t exist in a vacuum. If Microsoft cleared a path for Google, so did every decision not to intervene, which, all combined, created the legal, business, and economic environment in which Google operates.
Warren characterizes Big Tech as a weight on the American economy. In fact, nothing could be further from the truth. These superstar companies are the drivers of productivity growth, all ranking at or near the top for most spending on research and development. And while data may not be the new oil, extracting value from it may require similar levels of capital expenditure. Last year, Big Tech spent as much or more on capex as the world’s largest oil companies:
The exact causes of the decline in business dynamism are still uncertain, but recent research points to a much more mundane explanation: demographics. Labor force growth has been declining, which has led to an increase in average firm age, nudging fewer workers to start their own businesses.
Furthermore, it’s not at all clear whether this is actually a decline in business dynamism, or merely a change in business model. We would expect to see the same pattern, for example, if would-be startup founders were designing their software for acquisition and further development within larger, better-funded enterprises.
Will Rinehart recently looked at the literature to determine whether there is indeed a “kill zone” for startups around Big Tech incumbents. One paper finds that “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.” Another shows an inverse correlation across 50 countries between GDP and entrepreneurship rates. Robert Lucas predicted these trends back in 1978, pointing out that productivity increases would lead to wage increases, pushing marginal entrepreneurs out of startups and into big companies.
It’s notable that many in the venture capital community would rather not have Sen. Warren’s “help”:
just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difﬁculty of ﬁnding new ideas.
If this assessment is correct, it may well be that coming up with productive and profitable innovations is simply becoming more expensive, and thus, at the margin, each dollar of venture capital can fund less of it. Ironically, this also implies that larger firms, which can better afford the additional resources required to sustain exponential growth, are a crucial part of the solution, not the problem.
Warren believes that Big Tech is the cause of our social ills. But Americans have more trust in Amazon, Facebook, and Google than in the political institutions that would break them up. It would be wise for her to reflect on why that might be the case. By punishing our most valuable companies for past successes, Warren would chill competition and decrease returns to innovation.
Finally, in what can only be described as tragic irony, the most prominent political figure who shares Warren’s feelings on Big Tech is President Trump. Confirming the horseshoe theory of politics, far-left populism and far-right populism seem less distinguishable by the day. As our colleague Gus Hurwitz put it, with this proposal Warren is explicitly endorsing the unitary executive theory and implicitly endorsing Trump’s authority to direct his DOJ to “investigate specific cases and reach specific outcomes.” Which cases will he want to have investigated and what outcomes will he be seeking? More good questions that Senator Warren should be asking. The notion that competition, consumer welfare, and growth are likely to increase in such an environment is farcical.
By Pinar Akman, Professor of Law, University of Leeds*
The European Commission’s decision in Google Android cuts a fine line between punishing a company for its success and punishing a company for falling afoul of the rules of the game. Which side of the line it actually falls on cannot be fully understood until the Commission publishes its full decision. Much depends on the intricate facts of the case. As the full decision may take months to come, this post offers merely the author’s initial thoughts on the decision on the basis of the publicly available information.
The eye-watering fine of $5.1 billion — which together with the fine of $2.7 billion in the Google Shopping decision from last year would (according to one estimate) suffice to fund for almost one year the additional yearly public spending necessary to eradicate world hunger by 2030 — will not be further discussed in this post. This is because the fine is assumed to have been duly calculated on the basis of the Commission’s relevant Guidelines, and, from a legal and commercial point of view, the absolute size of the fine is not as important as the infringing conduct and the remedy Google will need to adopt to comply with the decision.
First things first. This post proceeds on the premise that the aim of competition law is to prevent the exclusion of competitors that are (at least) as efficient as the dominant incumbent, whose exclusion would ultimately harm consumers.
Next, it needs to be noted that the Google Android case is a more conventional antitrust case than Google Shopping in the sense that one can at least envisage a potentially robust antitrust theory of harm in the former case. If a dominant undertaking ties its products together to exclude effective competition in some of these markets or if it pays off customers to exclude access by its efficient competitors to consumers, competition law intervention may be justified.
The central question in Google Android is whether on the available facts this appears to have happened.
What we know and market definition
The premise of the case is that Google used its dominance in the Google Play Store (which enables users to download apps onto their Android phones) to “cement Google’s dominant position in general internet search.”
It is interesting that the case appears to concern a dominant undertaking leveraging its dominance from a market in which it is dominant (Google Play Store) into another market in which it is also dominant (internet search). As far as this author is aware, most (if not all?) cases of tying in the EU to date concerned tying where the dominant undertaking leveraged its dominance in one market to distort or eliminate competition in an otherwise competitive market.
Thus, for example, in Microsoft (Windows Operating System —> media players), Hilti (patented cartridge strips —> nails), and Tetra Pak II (packaging machines —> non-aseptic cartons), the tied market was actually or potentially competitive, and this was why the tying was alleged to have eliminated competition. It will be interesting to see which case the Commission uses as precedent in its decision — more on that later.
Also noteworthy is that the Commission does not appear to have defined a separate mobile search market that would have been competitive but for Google’s alleged leveraging. The market has been defined as the general internet search market. So, according to the Commission, the Google Search App and Google Search engine appear to be one and the same thing, and desktop and mobile devices are equivalent (or substitutable).
Finding mobile and desktop devices to be equivalent to one another may have implications for other cases including the ongoing appeal in Google Shopping where, for example, the Commission found that “[m]obile [apps] are not a viable alternative for replacing generic search traffic from Google’s general search results pages” for comparison shopping services. The argument that mobile apps and mobile traffic are fundamental in Google Android but trivial in Google Shopping may not play out favourably for the Commission before the Court of Justice of the EU.
Another interesting market definition point is that the Commission has found Apple not to be a competitor to Google in the relevant market defined by the Commission: the market for “licensable smart mobile operating systems.” Apple does not fall within that market because Apple does not license its mobile operating system to anyone: Apple’s model eliminates all possibility of competition from the start and is by definition exclusive.
Although there is some internal logic in the Commission’s exclusion of Apple from the upstream market that it has defined, is this not a bit of a definitional stop? How can Apple compete with Google in the market as defined by the Commission when Apple allows only itself to use its operating system only on devices that Apple itself manufactures?
To be fair, the Commission does consider there to be some competition between Apple and Android devices at the level of consumers — just not sufficient to constrain Google at the upstream, manufacturer level.
Nevertheless, the implication of the Commission’s assessment that separates the upstream and downstream in this way is akin to saying that the world’s two largest corn producers that produce the corn used to make corn flakes do not compete with one another in the market for corn flakes because one of them uses its corn exclusively in its own-brand cereal.
Supply-side substitutability may also be taken into account when defining markets in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. This means that suppliers are able to switch production to the relevant products and market them in the short term….
Apple could — presumably — rather immediately and at minimal cost produce and market a version of iOS for use on third-party device makers’ devices. By the Commission’s own definition, it would seem to make sense to include Apple in the relevant market. Nevertheless, it has apparently not done so here.
The message that the Commission sends with the finding is that if Android had not been open source and freely available, and if Google competed with Apple with its own version of a walled-garden built around exclusivity, it is possible that none of its practices would have raised any concerns. Or, should Apple be expecting a Statement of Objections next from the EU Commission?
Is Microsoft really the relevant precedent?
Given that Google Android appears to revolve around the idea of tying and leveraging, the EU Commission’s infringement decision against Microsoft, which found an abusive tie in Microsoft’s tying of Windows Operating System with Windows Media Player, appears to be the most obvious precedent, at least for the tying part of the case.
There are, however, potentially important factual differences between the two cases. To take just a few examples:
Microsoft charged for the Windows Operating System, whereas Google does not;
Microsoft tied the setting of Windows Media Player as the default to OEMs’ licensing of the operating system (Windows), whereas Google ties the setting of Search as the default to device makers’ use of other Google apps, while allowing them to use the operating system (Android) without any Google apps; and
Downloading competing media players was difficult due to download speeds and lack of user familiarity, whereas it is trivial and commonplace for users to download apps that compete with Google’s.
Moreover, there are also some conceptual hurdles in finding the conduct to be that of tying.
First, the difference between “pre-installed,” “default,” and “exclusive” matters a lot in establishing whether effective competition has been foreclosed. The Commission’s Press Release notes that to pre-install Google Play, manufacturers have to also pre-install Google Search App and Google Chrome. It also states that Google Search is the default search engine on Google Chrome. The Press Release does not indicate that Google Search App has to be the exclusive or default search app. (It is worth noting, however, that the Statement of Objections in Google Android did allege that Google violated EU competition rules by requiring Search to be installed as the default. We will have to await the decision itself to see if this was dropped from the case or simply not mentioned in the Press Release).
In fact, the fact that the other infringement found is that of Google’s making payments to manufacturers in return for exclusively pre-installing the Google Search App indirectly suggests that not every manufacturer pre-installs Google Search App as the exclusive, pre-installed search app. This means that any other search app (provider) can also (request to) be pre-installed on these devices. The same goes for the browser app.
Of course, regardless, even if the manufacturer does not pre-install competing apps, the consumer is free to download any other app — for search or browsing — as they wish, and can do so in seconds.
In short, pre-installation on its own does not necessarily foreclose competition, and thus may not constitute an illegal tie under EU competition law. This is particularly so when download speeds are fast (unlike the case at the time of Microsoft) and consumers regularly do download numerous apps.
What may, however, potentially foreclose effective competition is where a dominant undertaking makes payments to stop its customers, as a practical matter, from selling its rivals’ products. Intel, for example, was found to have abused its dominant position through payments to a computer retailer in return for its not selling computers with its competitor AMD’s chips, and to computer manufacturers in return for delaying the launch of computers with AMD chips.
In Google Android, the exclusivity provision that would require manufacturers to pre-install Google Search App exclusively in return for financial incentives may be deemed to be similar to this.
Having said that, unlike in Intel where a given computer can have a CPU from only one given manufacturer, even the exclusive pre-installation of the Google Search App would not have prevented consumers from downloading competing apps. So, again, in theory effective competition from other search apps need not have been foreclosed.
It must also be noted that just because a Google app is pre-installed does not mean that it generates any revenue to Google — consumers have to actually choose to use that app as opposed to another one that they might prefer in order for Google to earn any revenue from it. The Commission seems to place substantial weight on pre-installation which it alleges to create “a status quo bias.”
The concern with this approach is that it is not possible to know whether those consumers who do not download competing apps do so out of a preference for Google’s apps or, instead, for other reasons that might indicate competition not to be working. Indeed, one hurdle as regards conceptualising the infringement as tying is that it would require establishing that a significant number of phone users would actually prefer to use Google Play Store (the tying product) without Google Search App (the tied product).
This is because, according to the Commission’s Guidance Paper, establishing tying starts with identifying two distinct products, and
[t]wo products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier.
Thus, if a substantial number of customers would not want to use Google Play Store without also preferring to use Google Search App, this would cause a conceptual problem for making out a tying claim.
In fact, the conduct at issue in Google Android may be closer to a refusal to supply type of abuse.
Refusal to supply also seems to make more sense regarding the prevention of the development of Android forks being found to be an abuse. In this context, it will be interesting to see how the Commission overcomes the argument that Android forks can be developed freely and Google may have legitimate business reasons in wanting to associate its own, proprietary apps only with a certain, standardised-quality version of the operating system.
More importantly, the possible underlying theory in this part of the case is that the Google apps — and perhaps even the licensed version of Android — are a “must-have,” which is close to an argument that they are an essential facility in the context of Android phones. But that would indeed require a refusal to supply type of abuse to be established, which does not appear to be the case.
What will happen next?
To answer the question raised in the title of this post — whether the Google Android decision will benefit consumers — one needs to consider what Google may do in order to terminate the infringing conduct as required by the Commission, whilst also still generating revenue from Android.
This is because unbundling Google Play Store, Google Search App and Google Chrome (to allow manufacturers to pre-install Google Play Store without the latter two) will disrupt Google’s main revenue stream (i.e., ad revenue generated through the use of Google Search App or Google Search within the Chrome app) which funds the free operating system. This could lead Google to start charging for the operating system, and limiting to whom it licenses the operating system under the Commission’s required, less-restrictive terms.
As the Commission does not seem to think that Apple constrains Google when it comes to dealings with device manufacturers, in theory, Google should be able to charge up to the monopoly level licensing fee to device manufacturers. If that happens, the price of Android smartphones may go up. It is possible that there is a new competitor lurking in the woods that will grow and constrain that exercise of market power, but how this will all play out for consumers — as well as app developers who may face increasing costs due to the forking of Android — really remains to be seen.
* Pinar Akman is Professor of Law, Director of Centre for Business Law and Practice, University of Leeds, UK. This piece has not been commissioned or funded by any entity. The author has not been involved in the Google Android case in any capacity. In the past, the author wrote a piece on the Commission’s Google Shopping case, ‘The Theory of Abuse in Google Search: A Positive and Normative Assessment under EU Competition Law,’ supported by a research grant from Google. The author would like to thank Peter Whelan, Konstantinos Stylianou, and Geoffrey Manne for helpful comments. All errors remain her own. The author can be contacted here.
Today the European Commission launched its latest salvo against Google, issuing a decision in its three-year antitrust investigation into the company’s agreements for distribution of the Android mobile operating system. The massive fine levied by the Commission will dominate the headlines, but the underlying legal theory and proposed remedies are just as notable — and just as problematic.
The nirvana fallacy
It is sometimes said that the most important question in all of economics is “compared to what?” UCLA economist Harold Demsetz — one of the most important regulatory economists of the past century — coined the term “nirvana fallacy” to critique would-be regulators’ tendency to compare messy, real-world economic circumstances to idealized alternatives, and to justify policies on the basis of the discrepancy between them. Wishful thinking, in other words.
The Commission’s Android decision falls prey to the nirvana fallacy. It conjures a world in which Google offers its Android operating system on unrealistic terms, prohibits it from doing otherwise, and neglects the actual consequences of such a demand.
The idea at the core of the Commission’s decision is that by making its own services (especially Google Search and Google Play Store) easier to access than competing services on Android devices, Google has effectively foreclosed rivals from effective competition. In order to correct that claimed defect, the Commission demands that Google refrain from engaging in practices that favor its own products in its Android licensing agreements:
At a minimum, Google has to stop and to not re-engage in any of the three types of practices. The decision also requires Google to refrain from any measure that has the same or an equivalent object or effect as these practices.
The basic theory is straightforward enough, but its application here reflects a troubling departure from the underlying economics and a romanticized embrace of industrial policy that is unsupported by the realities of the market.
In a recent interview, European Commission competition chief, Margrethe Vestager, offered a revealing insight into her thinking about her oversight of digital platforms, and perhaps the economy in general: “My concern is more about whether we get the right choices,” she said. Asked about Facebook, for example, she specified exactly what she thinks the “right” choice looks like: “I would like to have a Facebook in which I pay a fee each month, but I would have no tracking and advertising and the full benefits of privacy.”
Some consumers may well be sympathetic with her preference (and even share her specific vision of what Facebook should offer them). But what if competition doesn’t result in our — or, more to the point, Margrethe Vestager’s — prefered outcomes? Should competition policy nevertheless enact the idiosyncratic consumer preferences of a particular regulator? What if offering consumers the “right” choices comes at the expense of other things they value, like innovation, product quality, or price? And, if so, can antitrust enforcers actually engineer a better world built around these preferences?
Android’s alleged foreclosure… that doesn’t really foreclose anything
The Commission’s primary concern is with the terms of Google’s deal: In exchange for royalty-free access to Android and a set of core, Android-specific applications and services (like Google Search and Google Maps) Google imposes a few contractual conditions.
Google allows manufacturers to use the Android platform — in which the company has invested (and continues to invest) billions of dollars — for free. It does not require device makers to include any of its core, Google-branded features. But if a manufacturer does decide to use any of them, it must include all of them, and make Google Search the device default. In another (much smaller) set of agreements, Google also offers device makers a small share of its revenue from Search if they agree to pre-install only Google Search on their devices (although users remain free to download and install any competing services they wish).
Essentially, that’s it. Google doesn’t allow device makers to pick and choose between parts of the ecosystem of Google products, free-riding on Google’s brand and investments. But manufacturers are free to use the Android platform and to develop their own competing brand built upon Google’s technology.
Other apps may be installed in addition to Google’s core apps. Google Search need not be the exclusive search service, but it must be offered out of the box as the default. Google Play and Chrome must be made available to users, but other app stores and browsers may be pre-installed and even offered as the default. And device makers who choose to do so may share in Search revenue by pre-installing Google Search exclusively — but users can and do install a different search service.
Alternatives to all of Google’s services (including Search) abound on the Android platform. It’s trivial both to install them and to set them as the default. Meanwhile, device makers regularly choose to offer these apps alongside Google’s services, and some, like Samsung, have developed entire customized app suites of their own. Still others, like Amazon, pre-install no Google apps and use Android without any of these constraints (and whose Google-free tablets are regularly ranked as the best-rated and most popular in Europe).
By contrast, Apple bundles its operating system with its devices, bypasses third-party device makers entirely, and offers consumers access to its operating system only if they pay (lavishly) for one of the very limited number of devices the company offers, as well. It is perhaps not surprising — although it is enlightening — that Apple earns more revenue in an average quarter from iPhone sales than Google is reported to have earnedin total from Android since it began offering it in 2008.
Reality — and the limits it imposes on efforts to manufacture nirvana
The logic behind Google’s approach to Android is obvious: It is the extension of Google’s “advertisers pay” platform strategy to mobile. Rather than charging device makers (and thus consumers) directly for its services, Google earns its revenue by charging advertisers for targeted access to users via Search. Remove Search from mobile devices and you remove the mechanism by which Google gets paid.
It’s true that most device makers opt to offer Google’s suite of services to European users, and that most users opt to keep Google Search as the default on their devices — that is, indeed, the hoped-for effect, and necessary to ensure that Google earns a return on its investment.
That users often choose to keep using Google services instead of installing alternatives, and that device makers typically choose to engineer their products around the Google ecosystem, isn’t primarily the result of a Google-imposed mandate; it’s the result of consumer preferences for Google’s offerings in lieu of readily available alternatives.
The EU decision against Google appears to imagine a world in which Google will continue to develop Android and allow device makers to use the platform and Google’s services for free, even if the likelihood of recouping its investment is diminished.
The Commission also assessed in detail Google’s arguments that the tying of the Google Search app and Chrome browser were necessary, in particular to allow Google to monetise its investment in Android, and concluded that these arguments were not well founded. Google achieves billions of dollars in annual revenues with the Google Play Store alone, it collects a lot of data that is valuable to Google’s search and advertising business from Android devices, and it would still have benefitted from a significant stream of revenue from search advertising without the restrictions.
But that world in which Google won’t alter its investment decisions based on a government-mandated reduction in its allowable return on investment doesn’t exist; it’s a fanciful Nirvana.
Google’s real alternatives to the status quo are charging for the use of Android, closing the Android platform and distributing it (like Apple) only on a fully integrated basis, or discontinuing Android.
In reality, and compared to these actual alternatives, Google’s restrictions are trivial. Remember, Google doesn’t insist that Google Search be exclusive, only that it benefit from a “leg up” by being pre-installed as the default. And on this thin reed Google finances the development and maintenance of the (free) Android operating system and all of the other (free) apps from which Google otherwise earns little or no revenue.
It’s hard to see how consumers, device makers, or app developers would be made better off without Google’s restrictions, but in the real world in which the alternative is one of the three manifestly less desirable options mentioned above.
Missing the real competition for the trees
What’s more, while ostensibly aimed at increasing competition, the Commission’s proposed remedy — like the conduct it addresses — doesn’t relate to Google’s most significant competitors at all.
Facebook, Instagram, Firefox, Amazon, Spotify, Yelp, and Yahoo, among many others, are some of the most popular apps on Android phones, including in Europe. They aren’t foreclosed by Google’s Android distribution terms, and it’s even hard to imagine that they would be more popular if only Android phones didn’t come with, say, Google Search pre-installed.
It’s a strange anticompetitive story that has Google allegedly foreclosing insignificant competitors while apparently ignoring its most substantial threats.
The primary challenges Google now faces are from Facebook drawing away the most valuable advertising and Amazon drawing away the most valuable product searches (and increasingly advertising, as well). The fact that Google’s challenged conduct has never shifted in order to target these competitors as their threat emerged, and has had no apparent effect on these competitive dynamics, says all one needs to know about the merits of the Commission’s decision and the value of its proposed remedy.
In reality, as Demsetz suggested, Nirvana cannot be designed by politicians, especially in complex, modern technology markets. Consumers’ best hope for something close — continued innovation, low prices, and voluminous choice — lies in the evolution of markets spurred by consumer demand, not regulators’ efforts to engineer them.
Regardless of which standard you want to apply to competition law – consumer welfare, total welfare, hipster, or redneck antitrust – it’s never good when competition/antitrust agencies are undermining innovation. Yet, this is precisely what the European Commission is doing.
Today, the agency announced a €4.34 billion fine against Alphabet (Google). It represents more than 30% of what the company invests annually in R&D (based on 2017 figures). This is more than likely to force Google to cut its R&D investments, or, at least, to slow them down.
In fact, the company says in a recent 10-K filing with the SEC that it is uncertain as to the impact of these sanctions on its financial stability. It follows that the European Commission necessarily is ignorant of such concerns, as well, which is thus clearly not reflected in the calculation of its fine.
One thing is for sure, however: In the end, consumers will suffer if the failure to account for the fine’s effect on innovation will lead to less of it from Google.
And Google is not alone in this situation. In a paper just posted by the International Center for Law & Economics, I conduct an empirical study comparing all the fines imposed by the European Commission on the basis of Article 102 TFEU over the period 2004 to 2018 (Android included) with the annual R&D investments by the targeted companies.
The results are indisputable: The European Commission’s fines are disproportionate in this regard and have the probable effect of slowing down the innovation of numerous sanctioned companies.
For this reason, an innovation protection mechanism should be incorporated into the calculation of the EU’s Article 102 fines. I propose doing so by introducing a new limit that caps Article 102 fines at a certain percentage of companies’ investment in R&D.
Our story begins on the morning of January 9, 2007. Few people knew it at the time, but the world of wireless communications was about to change forever. Steve Jobs walked on stage wearing his usual turtleneck, and proceeded to reveal the iPhone. The rest, as they say, is history. The iPhone moved the wireless communications industry towards a new paradigm. No more physical keyboards, clamshell bodies, and protruding antennae. All of these were replaced by a beautiful black design, a huge touchscreen (3.5” was big for that time), a rear-facing camera, and (a little bit later) a revolutionary new way to consume applications: the App Store. Sales soared and Apple’s stock started an upward trajectory that would see it become one of the world’s most valuable companies.
The story could very well have ended there. If it had, we might all be using iPhones today. However, years before, Google had commenced its own march into the wireless communications space by purchasing a small startup called Android. A first phone had initially been slated for release in late 2007. But Apple’s iPhone announcement sent Google back to the drawing board. It took Google and its partners until 2010 to come up with a competitive answer – the Google Nexus One produced by HTC.
Understanding the strategy that Google put in place during this three year timespan is essential to understanding the European Commission’s Google Android decision.
How to beat one of the great innovations?
In order to overthrow — or even merely just compete with — the iPhone, Google faced the same dilemma that most second-movers have to contend with: imitate or differentiate. Its solution was a mix of both. It took the touchscreen, camera, and applications, but departed on one key aspect. Whereas Apple controls the iPhone from end-to-end, Google opted for a licensed, open-source operating system that substitutes a more-decentralized approach for Apple’s so-called “walled garden.”
Google and a number of partners founded the Open Handset Alliance (“OHA”) in November 2007. This loose association of network operators, software companies and handset manufacturers became the driving force behind the Android OS. Through the OHA, Google and its partners have worked to develop minimal specifications for OHA-compliant Android devices in order to ensure that all levels of the device ecosystem — from device makers to app developers — function well together. As its initial press release boasts, through the OHA:
Handset manufacturers and wireless operators will be free to customize Android in order to bring to market innovative new products faster and at a much lower cost. Developers will have complete access to handset capabilities and tools that will enable them to build more compelling and user-friendly services, bringing the Internet developer model to the mobile space. And consumers worldwide will have access to less expensive mobile devices that feature more compelling services, rich Internet applications and easier-to-use interfaces — ultimately creating a superior mobile experience.
The open source route has a number of advantages — notably the improved division of labor — but it is not without challenges. One key difficulty lies in coordinating and incentivizing the dozens of firms that make up the alliance. Google must not only keep the diverse Android ecosystem directed toward a common, compatible goal, it also has to monetize a product that, by its very nature, is given away free of charge. It is Google’s answers to these two problems that set off the Commission’s investigation.
The first problem is a direct consequence of Android’s decentralization. Whereas there are only a small number of iPhones (the couple of models which Apple markets at any given time) running the same operating system, Android comes in a jaw-dropping array of flavors. Some devices are produced by Google itself, others are the fruit of high-end manufacturers such as Samsung and LG, there are also so-called “flagship killers” like OnePlus, and budget phones from the likes of Motorola and Honor (one of Huawei’s brands). The differences don’t stop there. Manufacturers, like Samsung, Xiaomi and LG (to name but a few) have tinkered with the basic Android setup. Samsung phones heavily incorporate its Bixby virtual assistant, while Xiaomi packs in a novel user interface. The upshot is that the Android marketplace is tremendously diverse.
Managing this variety is challenging, to say the least (preventing projects from unravelling into a myriad of forks is always an issue for open source projects). Google and the OHA have come up with an elegant solution. The alliance penalizes so-called “incompatible” devices — that is, handsets whose software or hardware stray too far from a predetermined series of specifications. When this is the case, Google may refuse to license its proprietary applications (most notably the Play Store). This minimum level of uniformity ensures that apps will run smoothly on all devices. It also provides users with a consistent experience (thereby protecting the Android brand) and reduces the cost of developing applications for Android. Unsurprisingly, Android developers have lauded these “anti-fragmentation” measures, branding the Commission’s case a disaster.
A second important problem stems from the fact that the Android OS is an open source project. Device manufacturers can thus license the software free of charge. This is no small advantage. It shaves precious dollars from the price of Android smartphones, thus opening-up the budget end of the market. Although there are numerous factors at play, it should be noted that a top of the range Samsung Galaxy S9+ is roughly 30% cheaper ($819) than its Apple counterpart, the iPhone X ($1165).
Offering a competitive operating system free of charge might provide a fantastic deal for consumers, but it poses obvious business challenges. How can Google and other members of the OHA earn a return on the significant amounts of money poured into developing, improving, and marketing and Android devices? As is often the case with open source projects, they essentially rely on complementarities. Google produces the Android OS in the hope that it will boost users’ consumption of its profitable, ad-supported services (Google Search in particular). This is sometimes referred to as a loss leader or complementary goods strategy.
Google uses two important sets of contractual provisions to cement this loss leader strategy. First, it seemingly bundles a number of proprietary applications together. Manufacturers must pre-load the Google Search and Chrome apps in order to obtain the Play Store app (the lynchpin on which the Android ecosystem sits). Second, Google has concluded a number of “revenue sharing” deals with manufacturers and network operators. These companies receive monetary compensation when the Google Search is displayed prominently on a user’s home screen. In effect, they are receiving a cut of the marginal revenue that the use of this search bar generates for Google. Both of these measures ultimately nudge users — but do not force them, as neither prevents users from installing competing apps — into using Google’s most profitable services.
Readers would be forgiven for thinking that this is a win-win situation. Users get a competitive product free of charge, while Google and other members of the OHA earn enough money to compete against Apple.
The Commission is of another mind, however.
The European Commission believes that Google is hurting competition. Though the text of the decision is not yet available, the thrust of its argument is that Google’s anti-fragmentation measures prevent software developers from launching competing OSs, while the bundling and revenue sharing both thwart rival search engines.
This analysis runs counter to some rather obvious facts:
For a start, the Android ecosystem is vibrant. Numerous firms have launched forked versions of Android, both with and without Google’s apps. Amazon’s Fire line of devices is a notable example.
Second, although Google’s behavior does have an effect on the search engine market, there is nothing anticompetitive about it. Yahoo could very well have avoided its high-profile failure if, way back in 2005, it had understood the importance of the mobile internet. At the time, it still had a 30% market share, compared to Google’s 36%. Firms that fail to seize upon business opportunities will fall out of the market. This is not a bug; it is possibly the most important feature of market economies. It reveals the products that consumers prefer and stops resources from being allocated to less valuable propositions.
Last but not least, Google’s behavior does not prevent other search engines from placing their own search bars or virtual assistants on smartphones. This is essentially what Samsung has done by ditching Google’s assistant in favor of its Bixby service. In other words, Google is merely competing with other firms to place key apps on or near the home screen of devices.
Even if the Commission’s reasoning where somehow correct, the competition watchdog is using a sledgehammer to crack a nut. The potential repercussions for Android, the software industry, and European competition law are great:
For a start, the Commission risks significantly weakening Android’s competitive position relative to Apple. Android is a complex ecosystem. The idea that it is possible to bring incremental changes to its strategy without threatening the viability of the whole is a sign of the Commission’s hubris.
More broadly, the harsh treatment of Google could have significant incentive effects for other tech platforms. As others have already pointed out, the Commission’s decision rests on the idea that dominant firms should not be allowed to favor their own services compared to those of rivals. Taken a face value, this anti-discrimination policy will push firms to design closed platforms. If rivals are excluded from the very start, there is no one against whom to discriminate. Antitrust watchdogs are thus kept at bay (and thus the Commission is acting against Google’s marginal preference for its own services, rather than Apple’s far-more-substantial preferencing of its own services). Moving to a world of only walled gardens might harm users and innovators alike.
Over the next couple of days and weeks, many will jump to the Commission’s defense. They will see its action as a necessary step against the abstract “power” of Silicon Valley’s tech giants. Rivals will feel vindicated. But when all is done and dusted, there seems to be little doubt that the decision is misguided. The Commission will have struck a blow to the heart of the most competitive offering in the smartphone space. And consumers will be the biggest losers.
This is not what the competition laws were intended to achieve.
The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.
The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy. With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance. (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.) The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics. In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft. The July 9 Comment provides a helpful summary of its analysis:
We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law. In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.
We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty. As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines. When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine. If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.
Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation. When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation. This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation. To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data. When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.
The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers. In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here). Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here). The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.
More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts). Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms. Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.