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Ursula von der Leyen has just announced the composition of the next European Commission. For tech firms, the headline is that Margrethe Vestager will not only retain her job as the head of DG Competition, she will also oversee the EU’s entire digital markets policy in her new role as Vice-President in charge of digital policy. Her promotion within the Commission as well as her track record at DG Competition both suggest that the digital economy will continue to be the fulcrum of European competition and regulatory intervention for the next five years.

The regulation (or not) of digital markets is an extremely important topic. Not only do we spend vast swaths of both our professional and personal lives online, but firms operating in digital markets will likely employ an ever-increasing share of the labor force in the near future

Likely recognizing the growing importance of the digital economy, the previous EU Commission intervened heavily in the digital sphere over the past five years. This resulted in a series of high-profile regulations (including the GDPR, the platform-to-business regulation, and the reform of EU copyright) and competition law decisions (most notably the Google cases). 

Lauded by supporters of the administrative state, these interventions have drawn flak from numerous corners. This includes foreign politicians (especially  Americans) who see in these measures an attempt to protect the EU’s tech industry from its foreign rivals, as well as free market enthusiasts who argue that the old continent has moved further in the direction of digital paternalism. 

Vestager’s increased role within the new Commission, the EU’s heavy regulation of digital markets over the past five years, and early pronouncements from Ursula von der Leyen all suggest that the EU is in for five more years of significant government intervention in the digital sphere.

Vestager the slayer of Big Tech

During her five years as Commissioner for competition, Margrethe Vestager has repeatedly been called the most powerful woman in Brussels (see here and here), and it is easy to see why. Yielding the heavy hammer of European competition and state aid enforcement, she has relentlessly attacked the world’s largest firms, especially American’s so-called “Tech Giants”. 

The record-breaking fines imposed on Google were probably her most high-profile victory. When Vestager entered office, in 2014, the EU’s case against Google had all but stalled. The Commission and Google had spent the best part of four years haggling over a potential remedy that was ultimately thrown out. Grabbing the bull by the horns, Margrethe Vestager made the case her own. 

Five years, three infringement decisions, and 8.25 billion euros later, Google probably wishes it had managed to keep the 2014 settlement alive. While Vestager’s supporters claim that justice was served, Barack Obama and Donald Trump, among others, branded her a protectionist (although, as Geoffrey Manne and I have noted, the evidence for this is decidedly mixed). Critics also argued that her decisions would harm innovation and penalize consumers (see here and here). Regardless, the case propelled Vestager into the public eye. It turned her into one of the most important political forces in Brussels. Cynics might even suggest that this was her plan all along.

But Google is not the only tech firm to have squared off with Vestager. Under her watch, Qualcomm was slapped with a total of €1.239 Billion in fines. The Commission also opened an investigation into Amazon’s operation of its online marketplace. If previous cases are anything to go by, the probe will most probably end with a headline-grabbing fine. The Commission even launched a probe into Facebook’s planned Libra cryptocurrency, even though it has yet to be launched, and recent talk suggests it may never be. Finally, in the area of state aid enforcement, the Commission ordered Ireland to recover €13 Billion in allegedly undue tax benefits from Apple.   

Margrethe Vestager also initiated a large-scale consultation on competition in the digital economy. The ensuing report concluded that the answer was more competition enforcement. Its findings will likely be cited by the Commission as further justification to ramp up its already significant competition investigations in the digital sphere.

Outside of the tech sector, Vestager has shown that she is not afraid to adopt controversial decisions. Blocking the proposed merger between Siemens and Alstom notably drew the ire of Angela Merkel and Emmanuel Macron, as the deal would have created a European champion in the rail industry (a key political demand in Germany and France). 

These numerous interventions all but guarantee that Vestager will not be pushing for light touch regulation in her new role as Vice-President in charge of digital policy. Vestager is also unlikely to put a halt to some of the “Big Tech” investigations that she herself launched during her previous spell at DG Competition. Finally, given her evident political capital in Brussels, it’s a safe bet that she will be given significant leeway to push forward landmark initiatives of her choosing. 

Vestager the prophet

Beneath these attempts to rein-in “Big Tech” lies a deeper agenda that is symptomatic of the EU’s current zeitgeist. Over the past couple of years, the EU has been steadily blazing a trail in digital market regulation (although much less so in digital market entrepreneurship and innovation). Underlying this push is a worldview that sees consumers and small startups as the uninformed victims of gigantic tech firms. True to form, the EU’s solution to this problem is more regulation and government intervention. This is unlikely to change given the Commission’s new (old) leadership.

If digital paternalism is the dogma, then Margrethe Vestager is its prophet. As Thibault Schrepel has shown, her speeches routinely call for digital firms to act “fairly”, and for policymakers to curb their “power”. According to her, it is our democracy that is at stake. In her own words, “you can’t sensibly talk about democracy today, without appreciating the enormous power of digital technology”. And yet, if history tells us one thing, it is that heavy-handed government intervention is anathema to liberal democracy. 

The Commission’s Google decisions neatly illustrate this worldview. For instance, in Google Shopping, the Commission concluded that Google was coercing consumers into using its own services, to the detriment of competition. But the Google Shopping decision focused entirely on competitors, and offered no evidence showing actual harm to consumers (see here). Could it be that users choose Google’s products because they actually prefer them? Rightly or wrongly, the Commission went to great lengths to dismiss evidence that arguably pointed in this direction (see here, §506-538).

Other European forays into the digital space are similarly paternalistic. The General Data Protection Regulation (GDPR) assumes that consumers are ill-equipped to decide what personal information they share with online platforms. Queue a deluge of time-consuming consent forms and cookie-related pop-ups. The jury is still out on whether the GDPR has improved users’ privacy. But it has been extremely costly for businesses — American S&P 500 companies and UK FTSE 350 companies alone spent an estimated total of $9 billion to comply with the GDPR — and has at least temporarily slowed venture capital investment in Europe. 

Likewise, the recently adopted Regulation on platform-to-business relations operates under the assumption that small firms routinely fall prey to powerful digital platforms: 

Given that increasing dependence, the providers of those services [i.e. digital platforms] often have superior bargaining power, which enables them to, in effect, behave unilaterally in a way that can be unfair and that can be harmful to the legitimate interests of their businesses users and, indirectly, also of consumers in the Union. For instance, they might unilaterally impose on business users practices which grossly deviate from good commercial conduct, or are contrary to good faith and fair dealing. 

But the platform-to-business Regulation conveniently overlooks the fact that economic opportunism is a two-way street. Small startups are equally capable of behaving in ways that greatly harm the reputation and profitability of much larger platforms. The Cambridge Analytica leak springs to mind. And what’s “unfair” to one small business may offer massive benefits to other businesses and consumers

Make what you will about the underlying merits of these individual policies, we should at least recognize that they are part of a greater whole, where Brussels is regulating ever greater aspects of our online lives — and not clearly for the benefit of consumers. 

With Margrethe Vestager now overseeing even more of these regulatory initiatives, readers should expect more of the same. The Mission Letter she received from Ursula von der Leyen is particularly enlightening in that respect: 

I want you to coordinate the work on upgrading our liability and safety rules for digital platforms, services and products as part of a new Digital Services Act…. 

I want you to focus on strengthening competition enforcement in all sectors. 

A hard rain’s a gonna fall… on Big Tech

Today’s announcements all but confirm that the EU will stay its current course in digital markets. This is unfortunate.

Digital firms currently provide consumers with tremendous benefits at no direct charge. A recent study shows that median users would need to be paid €15,875 to give up search engines for a year. They would also require €536 in order to forgo WhatsApp for a month, €97 for Facebook, and €59 to drop digital maps for the same duration. 

By continuing to heap ever more regulations on successful firms, the EU risks killing the goose that laid the golden egg. This is not just a theoretical possibility. The EU’s policies have already put technology firms under huge stress, and it is not clear that this has always been outweighed by benefits to consumers. The GDPR has notably caused numerous foreign firms to stop offering their services in Europe. And the EU’s Google decisions have forced it to start charging manufacturers for some of its apps. Are these really victories for European consumers?

It is also worth asking why there are so few European leaders in the digital economy. Not so long ago, European firms such as Nokia and Ericsson were at the forefront of the digital revolution. Today, with the possible exception of Spotify, the EU has fallen further down the global pecking order in the digital economy. 

The EU knows this, and plans to invest €100 Billion in order to boost European tech startups. But these sums will be all but wasted if excessive regulation threatens the long-term competitiveness of European startups. 

So if more of the same government intervention isn’t the answer, then what is? Recognizing that consumers have agency and are responsible for their own decisions might be a start. If you don’t like Facebook, close your account. Want a search engine that protects your privacy? Try DuckDuckGo. If YouTube and Spotify’s suggestions don’t appeal to you, create your own playlists and turn off the autoplay functions. The digital world has given us more choice than we could ever have dreamt of; but this comes with responsibility. Both Margrethe Vestager and the European institutions have often seemed oblivious to this reality. 

If the EU wants to turn itself into a digital economy powerhouse, it will have to switch towards light-touch regulation that allows firms to experiment with disruptive services, flexible employment options, and novel monetization strategies. But getting there requires a fundamental rethink — one that the EU’s previous leadership refused to contemplate. Margrethe Vestager’s dual role within the next Commission suggests that change isn’t coming any time soon.

(The following is adapted from a recent ICLE Issue Brief on the flawed essential facilities arguments undergirding the EU competition investigations into Amazon’s marketplace that I wrote with Geoffrey Manne.  The full brief is available here. )

Amazon has largely avoided the crosshairs of antitrust enforcers to date. The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares worldwide), and it consistently provides access to a wide array of affordable goods. Yet, even with Amazon’s obvious lack of dominance in the general retail market, the EU and some of its member states are opening investigations.

Commissioner Margarethe Vestager’s probe into Amazon, which came to light in September, centers on whether Amazon is illegally using its dominant position vis-á-vis third party merchants on its platforms in order to obtain data that it then uses either to promote its own direct sales, or else to develop competing products under its private label brands. More recently, Austria and Germany have launched separate investigations of Amazon rooted in many of the same concerns as those of the European Commission. The German investigation also focuses on whether the contractual relationships that third party sellers enter into with Amazon are unfair because these sellers are “dependent” on the platform.

One of the fundamental, erroneous assumptions upon which these cases are built is the alleged “essentiality” of the underlying platform or input. In truth, these sorts of cases are more often based on stories of firms that chose to build their businesses in a way that relies on a specific platform. In other words, their own decisions — from which they substantially benefited, of course — made their investments highly “asset specific” and thus vulnerable to otherwise avoidable risks. When a platform on which these businesses rely makes a disruptive move, the third parties cry foul, even though the platform was not — nor should have been — under any obligation to preserve the status quo on behalf of third parties.

Essential or not, that is the question

All three investigations are effectively premised on a version of an “essential facilities” theory — the claim that Amazon is essential to these companies’ ability to do business.

There are good reasons that the US has tightly circumscribed the scope of permissible claims invoking the essential facilities doctrine. Such “duty to deal” claims are “at or near the outer boundary” of US antitrust law. And there are good reasons why the EU and its member states should be similarly skeptical.

Characterizing one firm as essential to the operation of other firms is tricky because “[c]ompelling [innovative] firms to share the source of their advantage… may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” Further, the classification requires “courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.”

The key difficulty is that alleged “essentiality” actually falls on a spectrum. On one end is something like a true monopoly utility that is actually essential to all firms that use its service as a necessary input; on the other is a firm that offers highly convenient services that make it much easier for firms to operate. This latter definition of “essentiality” describes firms like Google and Amazon, but it is not accurate to characterize such highly efficient and effective firms as truly “essential.” Instead, companies that choose to take advantage of the benefits such platforms offer, and to tailor their business models around them, suffer from an asset specificity problem.

Geoffrey Manne noted this problem in the context of the EU’s Google Shopping case:

A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control.

Third-party sellers that rely upon Amazon without a contingency plan are engaging in a calculated risk that, as business owners, they would typically be expected to manage.  The investigations by European authorities are based on the notion that antitrust law might require Amazon to remove that risk by prohibiting it from undertaking certain conduct that might raise costs for its third-party sellers.

Implications and extensions

In the full issue brief, we consider the tensions in EU law between seeking to promote innovation and protect the competitive process, on the one hand, and the propensity of EU enforcers to rely on essential facilities-style arguments on the other. One of the fundamental errors that leads EU enforcers in this direction is that they confuse the distribution channel of the Internet with an antitrust-relevant market definition.

A claim based on some flavor of Amazon-as-essential-facility should be untenable given today’s market realities because Amazon is, in fact, just one mode of distribution among many. Commerce on the Internet is still just commerce. The only thing preventing a merchant from operating a viable business using any of a number of different mechanisms is the transaction costs it would incur adjusting to a different mode of doing business. Casting Amazon’s marketplace as an essential facility insulates third-party firms from the consequences of their own decisions — from business model selection to marketing and distribution choices. Commerce is nothing new and offline distribution channels and retail outlets — which compete perfectly capably with online — are well developed. Granting retailers access to Amazon’s platform on artificially favorable terms is no more justifiable than granting them access to a supermarket end cap, or a particular unit at a shopping mall. There is, in other words, no business or economic justification for granting retailers in the time-tested and massive retail market an entitlement to use a particular mode of marketing and distribution just because they find it more convenient.

The German Bundeskartellamt’s Facebook decision is unsound from either a competition or privacy policy perspective, and will only make the fraught privacy/antitrust relationship worse.

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The dust has barely settled on the European Commission’s record-breaking €4.3 Billion Google Android fine, but already the European Commission is gearing up for its next high-profile case. Last month, Margrethe Vestager dropped a competition bombshell: the European watchdog is looking into the behavior of Amazon. Should the Commission decide to move further with the investigation, Amazon will likely join other US tech firms such as Microsoft, Intel, Qualcomm and, of course, Google, who have all been on the receiving end of European competition enforcement.

The Commission’s move – though informal at this stage – is not surprising. Over the last couples of years, Amazon has become one of the world’s largest and most controversial companies. The animosity against it is exemplified in a paper by Lina Khan, which uses the example of Amazon to highlight the numerous ills that allegedly plague modern antitrust law. The paper is widely regarded as the starting point of the so-called “hipster antitrust” movement.

But is there anything particularly noxious about Amazon’s behavior, or is it just the latest victim of a European crusade against American tech companies?

Where things stand so far

As is often the case in such matters, publicly available information regarding the Commission’s “probe” (the European watchdog is yet to open a formal investigation) is particularly thin. What we know so far comes from a number of declarations made by Margrethe Vestager (here and here) and a leaked questionnaire that was sent to Amazon’s rivals. Going on this limited information, it appears that the Commission is preoccupied about the manner in which Amazon uses the data that it gathers from its online merchants. In Vestager’s own words:

The question here is about the data, because if you as Amazon get the data from the smaller merchants that you host […] do you then also use this data to do your own calculations? What is the new big thing, what is it that people want, what kind of offers do they like to receive, what makes them buy things.

These concerns relate to the fact that Amazon acts as both a retailer in its own right and a platform for other retailers, which allegedly constitutes a “conflict of interest”. As a retailer, Amazon sells a wide range of goods directly to consumers. Meanwhile, its marketplace platform enables third party merchants to offer their goods in exchange for referral fees when items are sold (these fees typically range from 8% to 15%, depending on the type of good). Merchants can either execute theses orders themselves or opt for fulfilment by Amazon, in which case it handles storage and shipping. In addition to its role as a platform operator,  As of 2017, more than 50% of units sold on the Amazon marketplace where fulfilled by third-party sellers, although Amazon derived three times more revenue from its own sales than from those of third parties (note that Amazon Web Services is still by far its largest source of profits).

Mirroring concerns raised by Khan, the Commission worries that Amazon uses the data it gathers from third party retailers on its platform to outcompete them. More specifically, the concern is that Amazon might use this data to identify and enter the most profitable segments of its online platform, excluding other retailers in the process (or deterring them from joining the platform in the first place). Although there is some empirical evidence to support such claims, it is far from clear that this is in any way harmful to competition or consumers. Indeed, the authors of the paper that found evidence in support of the claims note:

Amazon is less likely to enter product spaces that require greater seller efforts to grow, suggesting that complementors’ platform‐specific investments influence platform owners’ entry decisions. While Amazon’s entry discourages affected third‐party sellers from subsequently pursuing growth on the platform, it increases product demand and reduces shipping costs for consumers.

Thou shalt not punish efficient behavior

The question is whether Amazon using data on rivals’ sales to outcompete them should raise competition concerns? After all, this is a standard practice in the brick-and-mortar industry, where most large retailers use house brands to go after successful, high-margin third-party brands. Some, such as Costco, even eliminate some third-party products from their shelves once they have a successful own-brand product. Granted, as Khan observes, Amazon may be doing this more effectively because it has access to vastly superior data. But does that somehow make Amazon’s practice harmful to social social welfare? Absent further evidence, I believe not.

The basic problem is the following. Assume that Amazon does indeed have a monopoly in the market for online retail platforms (or, in other words, that the Amazon marketplace is a bottleneck for online retailers). Why would it move into direct retail competition against its third party sellers if it is less efficient than them? Amazon would either have to sell at a loss or hope that consumers saw something in its products that warrants a higher price. A more profitable alternative would be to stay put and increase its fees. It could thereby capture all the profits of its independent retailers. Not that Amazon would necessarily want to do so, as this could potentially deter other retailers from joining its platform. The upshot is that Amazon has little incentive to exclude more efficient retailers.

Astute readers, will have observed that this is simply a restatement of the Chicago school’s Single Monopoly Theory, which broadly holds that, absent efficiencies, a monopolist in one line of commerce cannot increase its profits by entering the competitive market for a complementary good. Although the theory has drawn some criticism, it remains a crucial starting point with which enforcers must contend before they conclude that a monopolist’s behavior is anticompetitive.

So why does Amazon move into retail segments that are already occupied by its rivals? The most likely explanation is simply that it can source and sell these goods more efficiently than them, and that these efficiencies cannot be achieved through contracts with the said rivals. Once we accept the possibility that Amazon is simply more efficient, the picture changes dramatically. The sooner it overthrows less efficient rivals the better. Doing so creates valuable surplus that can flow to either itself or its consumers. This is true regardless of whether Amazon has a marketplace monopoly or not. Even if it does have a monopoly (which is doubtful given competition from the likes of Zalando, AliExpress, Google Search and eBay), at least some of these efficiencies will likely be passed on to consumers. Such a scenario is also perfectly compatible with increased profits for Amazon. The real test is whether output increases when Amazon enters segments that were previously occupied by rivals.

Of course, the usual critiques voiced against the “Single Monopoly Profit” theory apply here. It is plausible that, by excluding its retail rivals, Amazon is simply seeking to protect its alleged platform monopoly. However, the anecdotal evidence that has been raised thus far does not support this conclusion.

But what about innovation?

Possibly sensing the weakness of the “inefficiency” line of arguments against Amazon, critics will likely put put forward a second theory of harm. The claim is that by capturing the rents of potentially innovative retailers, Amazon may hamper their incentives to innovate and will therefore harm consumer choice. Margrethe Vestager intimated this much in a Bloomberg interview. Though this framing might seem tempting at first, it falters under close inspection.

The effects of Amazon’s behavior could first be framed in terms of appropriability — that is: the extent to which an innovator captures the social benefits of its innovation. The higher its share of those benefits, the larger its incentives to innovate. By forcing out its retail rivals, it is plausible that Amazon is reducing the returns which they earn on their potential innovations.

Another potential framing is that of holdup theory. Applied to this case, one could argue that rival retailers made sunk investments (potentially innovation-related) to join the Amazon platform, and that Amazon is behaving opportunistically by capturing their surplus. With hindsight, merchants might thus have opted to stay out of the Amazon marketplace.

Unfortunately for Amazon’s critics, there are numerous objections to these two framings. For a start, the business implication of both the appropriability and holdup theories is that firms can and should take sensible steps to protect their investments. The recent empirical paper mentioned above stresses that these actions are critical for the sake of Amazon’s retailers.

Potential solutions abound. Retailers could in principle enter into long-term exclusivity agreements with their suppliers (which would keep Amazon out of the market if there are no alternative suppliers). Alternatively, they could sign non-compete clauses with Amazon, exchange assets, or even outright merge. In fact, there is at least some evidence of this last possibility occurring, as Amazon has acquired some of its online retailers. The fact that some retailers have not opted for these safety measures (or other methods of appropriability) suggests that they either don’t perceive a threat or are unwilling to make the necessary investments. It might also be due to bad business judgement on their part).

Which brings us to the big question. Should competition law step into the breach in those cases where firms have refused to take even basic steps to protect their investments? The answer is probably no.

For a start, condoning this poor judgement encourages firms to rely on competition enforcement rather than private solutions  to solve appropriability and holdup issues. This is best understood with reference to moral hazard. By insuring firms against the capture of their profits, competition authorities disincentivize all forms of risk-mitigation on the part of those firms. This will ultimately raise enforcement costs (as firms become increasingly reliant on the antitrust system for protection).

It is also informationally much more burdensome, as authorities will systematically have to rule on the appropriate share of profits between parties to a case.

Finally, overprotecting these investments would go against the philosophy of the European Court of Justice’s Huawei ruling.  Albeit in the specific context of injunctions relating to SEPs, the Court conditioned competition liability on firms showing that they have taken a series of reasonable steps to sort out their disputes privately.

Concluding remarks

This is not to say that competition intervention should categorically be proscribed. But rather that the capture of a retailer’s investments by Amazon is an insufficient condition for enforcement actions. Instead, the Commission should question whether Amazon’s actions are truly detrimental to consumer welfare and output. Absent strong evidence that an excluded retailer offered superior products, or that Amazon’s move was merely a strategic play to prevent entry, competition authorities should let the chips fall where they may.

As things stand, there is simply no evidence to indicate that anything out of the ordinary is occurring on the Amazon marketplace. By shining the spotlight on Amazon, the Commission is putting itself under tremendous political pressure to move forward with a formal investigation (all the more so, given the looming European Parliament elections). This is regrettable, as there are surely more pressing matters for the European regulator to deal with. The Commission would thus do well to recall the words of Shakespeare in the Merchant of Venice: “All that glisters is not gold”. Applied in competition circles this translates to “all that is big is not inefficient”.

What to make of Wednesday’s decision by the European Commission alleging that Google has engaged in anticompetitive behavior? In this post, I contrast the European Commission’s (EC) approach to competition policy with US antitrust, briefly explore the history of smartphones and then discuss the ruling.

Asked about the EC’s decision the day it was announced, FTC Chairman Joseph Simons noted that, while the market is concentrated, Apple and Google “compete pretty heavily against each other” with their mobile operating systems, in stark contrast to the way the EC defined the market. Simons also stressed that for the FTC what matters is not the structure of the market per se but whether or not there is harm to the consumer. This again contrasts with the European Commission’s approach, which does not require harm to consumers. As Simons put it:

Once they [the European Commission] find that a company is dominant… that imposes upon the company kind of like a fairness obligation irrespective of what the effect is on the consumer. Our regulatory… our antitrust regime requires that there be a harm to consumer welfare — so the consumer has to be injured — so the two tests are a little bit different.

Indeed, and as the history below shows, the popularity of Apple’s iOS and Google’s Android operating systems arose because they were superior products — not because of anticompetitive conduct on the part of either Apple or Google. On the face of it, the conduct of both Apple and Google has led to consumer benefits, not harms. So, from the perspective of U.S. antitrust authorities, there is no reason to take action.

Moreover, there is a danger that by taking action as the EU has done, competition and innovation will be undermined — which would be a perverse outcome indeed. These concerns were reflected in a statement by Senator Mike Lee (R-UT):

Today’s decision by the European Commission to fine Google over $5 billion and require significant changes to its business model to satisfy EC bureaucrats has the potential to undermine competition and innovation in the United States,” Sen. Lee said. “Moreover, the decision further demonstrates the different approaches to competition policy between U.S. and EC antitrust enforcers. As discussed at the hearing held last December before the Senate’s Subcommittee on Antitrust, Competition Policy & Consumer Rights, U.S. antitrust agencies analyze business practices based on the consumer welfare standard. This analytical framework seeks to protect consumers rather than competitors. A competitive marketplace requires strong antitrust enforcement. However, appropriate competition policy should serve the interests of consumers and not be used as a vehicle by competitors to punish their successful rivals.

Ironically, the fundamental basis for the Commission’s decision is an analytical framework developed by economists at Harvard in the 1950s, which presumes that the structure of a market determines the conduct of the participants, which in turn presumptively affects outcomes for consumers. This “structure-conduct-performance” paradigm has been challenged both theoretically and empirically (and by “challenged,” I mean “demolished”).

Maintaining, as EC Commissioner Vestager has, that “What would serve competition is to have more players,” is to adopt a presumption regarding competition rooted in the structure of the market, without sufficient attention to the facts on the ground. As French economist Jean Tirole noted in his Nobel Prize lecture:

Economists accordingly have advocated a case-by-case or “rule of reason” approach to antitrust, away from rigid “per se” rules (which mechanically either allow or prohibit certain behaviors, ranging from price-fixing agreements to resale price maintenance). The economists’ pragmatic message however comes with a double social responsibility. First, economists must offer a rigorous analysis of how markets work, taking into account both the specificities of particular industries and what regulators do and do not know….

Second, economists must participate in the policy debate…. But of course, the responsibility here goes both ways. Policymakers and the media must also be willing to listen to economists.

In good Tirolean fashion, we begin with an analysis of how the market for smartphones developed. What quickly emerges is that the structure of the market is a function of intense competition, not its absence. And, by extension, mandating a different structure will likely impede competition, or, at the very least, will not likely contribute to it.

A brief history of smartphone competition

In 2006, Nokia’s N70 became the first smartphone to sell more than a million units. It was a beautiful device, with a simple touch screen interface and real push buttons for numbers. The following year, Apple released its first iPhone. It sold 7 million units — about the same as Nokia’s N95 and slightly less than LG’s Shine. Not bad, but paltry compared to the sales of Nokia’s 1200 series phones, which had combined sales of over 250 million that year — about twice the total of all smartphone sales in 2007.

By 2017, smartphones had come to dominate the market, with total sales of over 1.5 billion. At the same time, the structure of the market has changed dramatically. In the first quarter of 2018, Apple’s iPhone X and iPhone 8 were the two best-selling smartphones in the world. In total, Apple shipped just over 52 million phones, accounting for 14.5% of the global market. Samsung, which has a wider range of devices, sold even more: 78 million phones, or 21.7% of the market. At third and fourth place were Huawei (11%) and Xiaomi (7.5%). Nokia and LG didn’t even make it into the top 10, with market shares of only 3% and 1% respectively.

Several factors have driven this highly dynamic market. Dramatic improvements in cellular data networks have played a role. But arguably of greater importance has been the development of software that offers consumers an intuitive and rewarding experience.

Apple’s iOS and Google’s Android operating systems have proven to be enormously popular among both users and app developers. This has generated synergies — or what economists call network externalities — as more apps have been developed, so more people are attracted to the ecosystem and vice versa, leading to a virtuous circle that benefits both users and app developers.

By contrast, Nokia’s early smartphones, including the N70 and N95, ran Symbian, the operating system developed for Psion’s handheld devices, which had a clunkier user interface and was more difficult to code — so it was less attractive to both users and developers. In addition, Symbian lacked an effective means of solving the problem of fragmentation of the operating system across different devices, which made it difficult for developers to create apps that ran across the ecosystem — something both Apple (through its closed system) and Google (through agreements with carriers) were able to address. Meanwhile, Java’s MIDP used in LG’s Shine, and its successor J2ME imposed restrictions on developers (such as prohibiting access to files, hardware, and network connections) that seem to have made it less attractive than Android.

The relative superiority of their operating systems enabled Apple and the manufacturers of Android-based phones to steal a march on the early leaders in the smartphone revolution.

The fact that Google allows smartphone manufacturers to install Android for free, distributes Google Play and other apps in a free bundle, and pays such manufacturers for preferential treatment for Google Search, has also kept the cost of Android-based smartphones down. As a result, Android phones are the cheapest on the market, providing a powerful experience for as little as $50. It is reasonable to conclude from this that innovation, driven by fierce competition, has led to devices, operating systems, and apps that provide enormous benefits to consumers.

The Commission decision would harm device manufacturers, app developers and consumers

The EC’s decision seems to disregard the history of smartphone innovation and competition and their ongoing consequences. As Dirk Auer explains, the Open Handset Alliance (OHA) was created specifically to offer an effective alternative to Apple’s iPhone — and it worked. Indeed, it worked so spectacularly that Android is installed on about 80% of all new phones. This success was the result of several factors that the Commission now seeks to undermine:

First, in order to maintain order within the Android universe, and thereby ensure that apps developed for Android would function on the vast majority of Android devices, Google and the OHA sought to limit the extent to which Android “forks” could be created. (Apple didn’t face this problem because its source code is proprietary, so cannot be modified by third-party developers.) One way Google does this is by imposing restrictions on the licensing of its proprietary apps, such as the Google Play store (a repository of apps, similar to Apple’s App Store).

Device manufacturers that don’t conform to these restrictions may still build devices with their forked version of Android — but without those Google apps. Indeed, Amazon chooses to develop a non-conforming version of Android and built its own app repository for its Fire devices (though it is still possible to add the Google Play Store). That strategy seems to be working for Amazon in the tablet market; in 2017 it rose past Samsung to become the second biggest manufacturer of tablets worldwide, after Apple.

Second, in order to be able to offer Android for free to smartphone manufacturers, Google sought to develop unique revenue streams (because, although the software is offered for free, it turns out that software developers generally don’t work for free). The main way Google did this was by requiring manufacturers that choose to install Google Play also to install its browser (Chrome) and search tools, which generate revenue from advertising. At the same time, Google kept its platform open by permitting preloads of rivals’ apps and creating a marketplace where rivals can also reach scale. Mozilla’s Firefox browser, for example, has been downloaded over 100 million times on Android.

The importance of these factors to the success of Android is acknowledged by the EC. But instead of treating them as legitimate business practices that enabled the development of high-quality, low-cost smartphones and a universe of apps that benefits billions of people, the Commission simply asserts that they are harmful, anticompetitive practices.

For example, the Commission asserts that

In order to be able to pre-install on their devices Google’s proprietary apps, including the Play Store and Google Search, manufacturers had to commit not to develop or sell even a single device running on an Android fork. The Commission found that this conduct was abusive as of 2011, which is the date Google became dominant in the market for app stores for the Android mobile operating system.

This is simply absurd, to say nothing of ahistorical. As noted, the restrictions on Android forks plays an important role in maintaining the coherency of the Android ecosystem. If device manufacturers were able to freely install Google apps (and other apps via the Play Store) on devices running problematic Android forks that were unable to run the apps properly, consumers — and app developers — would be frustrated, Google’s brand would suffer, and the value of the ecosystem would be diminished. Extending this restriction to all devices produced by a specific manufacturer, regardless of whether they come with Google apps preinstalled, reinforces the importance of the prohibition to maintaining the coherency of the ecosystem.

It is ridiculous to say that something (efforts to rein in Android forking) that made perfect sense until 2011 and that was central to the eventual success of Android suddenly becomes “abusive” precisely because of that success — particularly when the pre-2011 efforts were often viewed as insufficient and unsuccessful (a January 2012 Guardian Technology Blog post, “How Google has lost control of Android,” sums it up nicely).

Meanwhile, if Google is unable to tie pre-installation of its search and browser apps to the installation of its app store, then it will have less financial incentive to continue to maintain the Android ecosystem. Or, more likely, it will have to find other ways to generate revenue from the sale of devices in the EU — such as charging device manufacturers for Android or Google Play. The result is that consumers will be harmed, either because the ecosystem will be degraded, or because smartphones will become more expensive.

The troubling absence of Apple from the Commission’s decision

In addition, the EC’s decision is troublesome in other ways. First, for its definition of the market. The ruling asserts that “Through its control over Android, Google is dominant in the worldwide market (excluding China) for licensable smart mobile operating systems, with a market share of more than 95%.” But “licensable smart mobile operating systems” is a very narrow definition, as it necessarily precludes operating systems that are not licensable — such as Apple’s iOS and RIM’s Blackberry OS. Since Apple has nearly 25% of the market share of smartphones in Europe, the European Commission has — through its definition of the market — presumed away the primary source of effective competition. As Pinar Akman has noted:

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?

The EU then invents a series of claims regarding the lack of competition with Apple:

  • end user purchasing decisions are influenced by a variety of factors (such as hardware features or device brand), which are independent from the mobile operating system;

It is not obvious that this is evidence of a lack of competition. A better explanation is that the EU’s narrow definition of the market is defective. In fact, one could easily draw the opposite conclusion of that drawn by the Commission: the fact that purchasing decisions are driven by various factors suggests that there is substantial competition, with phone manufacturers seeking to design phones that offer a range of features, on a number of dimensions, to best capture diverse consumer preferences. They are able to do this in large part precisely because consumers are able to rely upon a generally similar operating system and continued access to the apps that they have downloaded. As Tim Cook likes to remind his investors, Apple is quite successful at targeting “Android switchers” to switch to iOS.

 

  • Apple devices are typically priced higher than Android devices and may therefore not be accessible to a large part of the Android device user base;

 

And yet, in the first quarter of 2018, Apple phones accounted for five of the top ten selling smartphones worldwide. Meanwhile, several competing phones, including the fifth and sixth best-sellers, Samsung’s Galaxy S9 and S9+, sell for similar prices to the most expensive iPhones. And a refurbished iPhone 6 can be had for less than $150.

 

  • Android device users face switching costs when switching to Apple devices, such as losing their apps, data and contacts, and having to learn how to use a new operating system;

 

This is, of course, true for any system switch. And yet the growing market share of Apple phones suggests that some users are willing to part with those sunk costs. Moreover, the increasing predominance of cloud-based and cross-platform apps, as well as Apple’s own “Move to iOS” Android app (which facilitates the transfer of users’ data from Android to iOS), means that the costs of switching border on trivial. As mentioned above, Tim Cook certainly believes in “Android switchers.”

 

  • even if end users were to switch from Android to Apple devices, this would have limited impact on Google’s core business. That’s because Google Search is set as the default search engine on Apple devices and Apple users are therefore likely to continue using Google Search for their queries.

 

This is perhaps the most bizarre objection of them all. The fact that Apple chooses to install Google search as the default demonstrates that consumers prefer that system over others. Indeed, this highlights a fundamental problem with the Commission’s own rationale, As Akman notes:

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.

Conclusion

As the foregoing demonstrates, the EC’s decision is based on a fundamental misunderstanding of the nature and evolution of the market for smartphones and associated applications. The statement by Commissioner Vestager quoted above — that “What would serve competition is to have more players” — belies this misunderstanding and highlights the erroneous assumptions underpinning the Commission’s analysis, which is wedded to a theory of market competition that was long ago thrown out by economists.

And, thankfully, it appears that the FTC Chairman is aware of at least some of the flaws in the EC’s conclusions.

Google will undoubtedly appeal the Commission’s decision. For the sakes of the millions of European consumers who rely on Android-based phones and the millions of software developers who provide Android apps, let’s hope that they succeed.

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 earned in 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.

For the Commission, Google’s earned enough [trust me: you should follow the link. It’s my favorite joke…].

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.

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.

Commission’s hubris

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 EC’s Android decision is expected sometime in the next couple of weeks. Current speculation is that the EC may issue a fine exceeding last year’s huge 2.4B EU fine for Google’s alleged antitrust violations related to the display of general search results. Based on the statement of objections (“SO”), I expect the Android decision will be a muddle of legal theory that not only fails to connect to facts and marketplace realities, but also will  perversely incentivize platform operators to move toward less open ecosystems.

As has been amply demonstrated (see, e.g., here and here), the Commission has made fundamental errors with its market definition analysis in this case. Chief among its failures is the EC’s incredible decision to treat the relevant market as licensable mobile operating systems, which notably excludes the largest smartphone player by revenue, Apple.

This move, though perhaps expedient for the EC, leads the Commission to view with disapproval an otherwise competitively justifiable set of licensing requirements that Google imposes on its partners. This includes anti-fragmentation and app-bundling provisions (“Provisions”) in the agreements that partners sign in order to be able to distribute Google Mobile Services (“GMS”) with their devices. Among other things, the Provisions guarantee that a basic set of Google’s apps and services will be non-exclusively featured on partners’ devices.

The Provisions — when viewed in a market in which Apple is a competitor — are clearly procompetitive. The critical mass of GMS-flavored versions of Android (as opposed to vanilla Android Open Source Project (“AOSP”) devices) supplies enough predictability to an otherwise unruly universe of disparate Android devices such that software developers will devote the sometimes considerable resources necessary for launching successful apps on Android.

Open source software like AOSP is great, but anyone with more than a passing familiarity with Linux recognizes that the open source movement often fails to produce consumer-friendly software. In order to provide a critical mass of users that attract developers to Android, Google provides a significant service to the Android market as a whole by using the Provisions to facilitate a predictable user (and developer) experience.

Generativity on platforms is a complex phenomenon

To some extent, the EC’s complaint is rooted in a bias that Android act as a more “generative” platform such that third-party developers are relatively better able to reach users of Android devices. But this effort by the EC to undermine the Provisions will be ultimately self-defeating as it will likely push mobile platform providers to converge on similar, relatively more closed business models that provide less overall consumer choice.

Even assuming that the Provisions somehow prevent third-party app installs or otherwise develop a kind of path-dependency among users such that they never seek out new apps (which the data clearly shows is not happening), focusing on third-party developers as the sole or primary source of innovation on Android is a mistake.

The control that platform operators like Apple and Google exert over their respective ecosystems does not per se create more or less generativity on the platforms. As Gus Hurwitz has noted, “literature and experience amply demonstrate that ‘open’ platforms, or general-purpose technologies generally, can promote growth and increase social welfare, but they also demonstrate that open platforms can also limit growth and decrease welfare.” Conversely, tighter vertical integration (the Apple model) can also produce more innovation than open platforms.

What is important is the balance between control and freedom, and the degree to which third-party developers are able to innovate within the context of a platform’s constraints. The existence of constraints — either Apple’s more tightly controlled terms, or Google’s more generous Provisions — themselves facilitate generativity.

In short, it is overly simplistic to view generativity as something that happens at the edges without respect to structural constraints at the core. The interplay between platform and developer is complex and complementary, and needs to be viewed as a dynamic process.

Whither platform diversity?

I love Apple’s devices and I am quite happy living within its walled garden. But I certainly do not believe that Apple’s approach is the only one that makes sense. Yet, in its SO, the EC blesses Apple’s approach as the proper way to manage a mobile ecosystem. It explicitly excluded Apple from a competitive analysis, and attacked Google on the basis that it imposed restrictions in the context of licensing its software. Thus, had Google opted instead to create a separate walled garden of its own on the Apple model, everything it had done would have otherwise been fine. This means that Google is now subject to an antitrust investigation for attempting to develop a more open platform.

With this SO, the EC is basically asserting that Google is anticompetitively bundling without being able to plausibly assert foreclosure (because, again, third-party app installs are easy to do and are easily shown to number in the billions). I’m sure Google doesn’t want to move in the direction of having a more closed system, but the lesson of this case will loom large for tomorrow’s innovators.

In the face of eager antitrust enforcers like those in the EU, the easiest path for future innovators will be to keep everything tightly controlled so as to prevent both fragmentation and misguided regulatory intervention.

What happened

Today, following a six year investigation into Google’s business practices in India, the Competition Commission of India (CCI) issued its ruling.

Two things, in particular, are remarkable about the decision. First, while the CCI’s staff recommended a finding of liability on a litany of claims (the exact number is difficult to infer from the Commission’s decision, but it appears to be somewhere in the double digits), the Commission accepted its staff’s recommendation on only three — and two of those involve conduct no longer employed by Google.

Second, nothing in the Commission’s finding of liability or in the remedy it imposes suggests it approaches the issue as the EU does. To be sure, the CCI employs rhetoric suggesting that “search bias” can be anticompetitive. But its focus remains unwaveringly on the welfare of the consumer, not on the hyperbolic claims of Google’s competitors.

What didn’t happen

In finding liability on only a single claim involving ongoing practices — the claim arising from Google’s “unfair” placement of its specialized flight search (Google Flights) results — the Commission also roundly rejected a host of other claims (more than once with strong words directed at its staff for proposing such woefully unsupported arguments). Among these are several that have been raised (and unanimously rejected) by competition regulators elsewhere in the world. These claims related to a host of Google’s practices, including:

  • Search bias involving the treatment of specialized Google content (like Google Maps, YouTube, Google Reviews, etc.) other than Google Flights
  • Search bias involving the display of Universal Search results (including local search, news search, image search, etc.), except where these results are fixed to a specific position on every results page (as was the case in India before 2010), instead of being inserted wherever most appropriate in context
  • Search bias involving OneBox results (instant answers to certain queries that are placed at the top of search results pages), even where answers are drawn from Google’s own content and specific, licensed sources (rather than from crawling the web)
  • Search bias involving sponsored, vertical search results (e.g., Google Shopping results) other than Google Flights. These results are not determined by the same algorithm that returns organic results, but are instead more like typical paid search advertising results that sometimes appear at the top of search results pages. The Commission did find that Google’s treatment of its Google Flight results (another form of sponsored result) violated India’s competition laws
  • The operation of Google’s advertising platform (AdWords), including the use of a “Quality Score” in its determination of an ad’s relevance (something Josh Wright and I discuss at length here)
  • Google’s practice of allowing advertisers to bid on trademarked keywords
  • Restrictions placed by Google upon the portability of advertising campaign data to other advertising platforms through its AdWords API
  • Distribution agreements that set Google as the default (but not exclusive) search engine on certain browsers
  • Certain restrictions in syndication agreements with publishers (websites) through which Google provides search and/or advertising (Google’s AdSense offering). The Commission found that negotiated search agreements that require Google to be the exclusive search provider on certain sites did violate India’s competition laws. It should be noted, however, that Google has very few of these agreements, and no longer enters into them, so the finding is largely historical. All of the other assertions regarding these agreements (and there were numerous claims involving a number of clauses in a range of different agreements) were rejected by the Commission.

Just like competition authorities in the US, Canada, and Taiwan that have properly focused on consumer welfare in their Google investigations, the CCI found important consumer benefits from these practices that outweigh any inconveniences they may impose on competitors. And, just as in those jurisdictions, all of them were rejected by the Commission.

Still improperly assessing Google’s dominance

The biggest problem with the CCI’s decision is its acceptance — albeit moderated in important ways — of the notion that Google owes a special duty to competitors given its position as an alleged “gateway” to the Internet:

In the present case, since Google is the gateway to the internet for a vast majority of internet users, due to its dominance in the online web search market, it is under an obligation to discharge its special responsibility. As Google has the ability and the incentive to abuse its dominant position, its “special responsibility” is critical in ensuring not only the fairness of the online web search and search advertising markets, but also the fairness of all online markets given that these are primarily accessed through search engines. (para 202)

As I’ve discussed before, a proper analysis of the relevant markets in which Google operates would make clear that Google is beset by actual and potential competitors at every turn. Access to consumers by advertisers, competing search services, other competing services, mobile app developers, and the like is readily available. The lines between markets drawn by the CCI are based on superficial distinctions that are of little importance to the actual relevant market.

Consider, for example: Users seeking product information can get it via search, but also via Amazon and Facebook; advertisers can place ad copy and links in front of millions of people on search results pages, and they can also place them in front of millions of people on Facebook and Twitter. Meanwhile, many specialized search competitors like Yelp receive most of their traffic from direct navigation and from their mobile apps. In short, the assumption of market dominance made by the CCI (and so many others these days) is based on a stilted conception of the relevant market, as Google is far from the only channel through which competitors can reach consumers.

The importance of innovation in the CCI’s decision

Of course, it’s undeniable that Google is an important mechanism by which competitors reach consumers. And, crucially, nowhere did the CCI adopt Google’s critics’ and competitors’ frequently asserted position that Google is, in effect, an “essential facility” requiring extremely demanding limitations on its ability to control its product when doing so might impede its rivals.

So, while the CCI defines the relevant markets and adopts legal conclusions that confer special importance on Google’s operation of its general search results pages, it stops short of demanding that Google treat competitors on equal terms to its own offerings, as would typically be required of essential facilities (or their close cousin, public utilities).

Significantly, the Commission weighs the imposition of even these “special responsibilities” against the effects of such duties on innovation, particularly with respect to product design.

The CCI should be commended for recognizing that any obligation imposed by antitrust law on a dominant company to refrain from impeding its competitors’ access to markets must stop short of requiring the company to stop innovating, even when its product innovations might make life difficult for its competitors.

Of course, some product design choices can be, on net, anticompetitive. But innovation generally benefits consumers, and it should be impeded only where doing so clearly results in net consumer harm. Thus:

[T]he Commission is cognizant of the fact that any intervention in technology markets has to be carefully crafted lest it stifles innovation and denies consumers the benefits that such innovation can offer. This can have a detrimental effect on economic welfare and economic growth, particularly in countries relying on high growth such as India…. [P]roduct design is an important and integral dimension of competition and any undue intervention in designs of SERP [Search Engine Results Pages] may affect legitimate product improvements resulting in consumer harm. (paras 203-04).

As a consequence of this cautious approach, the CCI refused to accede to its staff’s findings of liability based on Google’s treatment of its vertical search results without considering how Google’s incorporation of these specialized results improved its product for consumers. Thus, for example:

The Commission is of opinion that requiring Google to show third-party maps may cause a delay in response time (“latency”) because these maps reside on third-party servers…. Further, requiring Google to show third-party maps may break the connection between Google’s local results and the map…. That being so, the Commission is of the view that no case of contravention of the provisions of the Act is made out in Google showing its own maps along with local search results. The Commission also holds that the same consideration would apply for not showing any other specialised result designs from third parties. (para 224 (emphasis added))

The CCI’s laudable and refreshing focus on consumer welfare

Even where the CCI determined that Google’s current practices violate India’s antitrust laws (essentially only with respect to Google Flights), it imposed a remedy that does not demand alteration of the overall structure of Google’s search results, nor its algorithmic placement of those results. In fact, the most telling indication that India’s treatment of product design innovation embodies a consumer-centric approach markedly different from that pushed by Google’s competitors (and adopted by the EU) is its remedy.

Following its finding that

[p]rominent display and placement of Commercial Flight Unit with link to Google’s specialised search options/ services (Flight) amounts to an unfair imposition upon users of search services as it deprives them of additional choices (para 420),

the CCI determined that the appropriate remedy for this defect was:

So far as the contravention noted by the Commission in respect of Flight Commercial Unit is concerned, the Commission directs Google to display a disclaimer in the commercial flight unit box indicating clearly that the “search flights” link placed at the bottom leads to Google’s Flights page, and not the results aggregated by any other third party service provider, so that users are not misled. (para 422 (emphasis added))

Indeed, what is most notable — and laudable — about the CCI’s decision is that both the alleged problem, as well as the proposed remedy, are laser-focused on the effect on consumers — not the welfare of competitors.

Where the EU’s recent Google Shopping decision considers that this sort of non-neutral presentation of Google search results harms competitors and demands equal treatment by Google of rivals seeking access to Google’s search results page, the CCI sees instead that non-neutral presentation of results could be confusing to consumers. It does not demand that Google open its doors to competitors, but rather that it more clearly identify when its product design prioritizes Google’s own content rather than determine priority based on its familiar organic search results algorithm.

This distinction is significant. For all the language in the decision asserting Google’s dominance and suggesting possible impediments to competition, the CCI does not, in fact, view Google’s design of its search results pages as a contrivance intended to exclude competitors from accessing markets.

The CCI’s remedy suggests that it has no problem with Google maintaining control over its search results pages and determining what results, and in what order, to serve to consumers. Its sole concern, rather, is that Google not get a leg up at the expense of consumers by misleading them into thinking that its product design is something that it is not.

Rather than dictate how Google should innovate or force it to perpetuate an outdated design in the name of preserving access by competitors bent on maintaining the status quo, the Commission embraces the consumer benefits of Google’s evolving products, and seeks to impose only a narrowly targeted tweak aimed directly at the quality of consumers’ interactions with Google’s products.

Conclusion

As some press accounts of the CCI’s decision trumpet, the Commission did impose liability on Google for abuse of a dominant position. But its similarity with the EU’s abuse of dominance finding ends there. The CCI rejected many more claims than it adopted, and it carefully tailored its remedy to the welfare of consumers, not the lamentations of competitors. Unlike the EU, the CCI’s finding of a violation is tempered by its concern for avoiding harmful constraints on innovation and product design, and its remedy makes this clear. Whatever the defects of India’s decision, it offers a welcome return to consumer-centric antitrust.

This week the FCC will vote on Chairman Ajit Pai’s Restoring Internet Freedom Order. Once implemented, the Order will rescind the 2015 Open Internet Order and return antitrust and consumer protection enforcement to primacy in Internet access regulation in the U.S.

In anticipation of that, earlier this week the FCC and FTC entered into a Memorandum of Understanding delineating how the agencies will work together to police ISPs. Under the MOU, the FCC will review informal complaints regarding ISPs’ disclosures about their blocking, throttling, paid prioritization, and congestion management practices. Where an ISP fails to make the proper disclosures, the FCC will take enforcement action. The FTC, for its part, will investigate and, where warranted, take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts.

Critics of Chairman Pai’s plan contend (among other things) that the reversion to antitrust-agency oversight of competition and consumer protection in telecom markets (and the Internet access market particularly) would be an aberration — that the US will become the only place in the world to move backward away from net neutrality rules and toward antitrust law.

But this characterization has it exactly wrong. In fact, much of the world has been moving toward an antitrust-based approach to telecom regulation. The aberration was the telecom-specific, common-carrier regulation of the 2015 Open Internet Order.

The longstanding, global transition from telecom regulation to antitrust enforcement

The decade-old discussion around net neutrality has morphed, perhaps inevitably, to join the larger conversation about competition in the telecom sector and the proper role of antitrust law in addressing telecom-related competition issues. Today, with the latest net neutrality rules in the US on the chopping block, the discussion has grown more fervent (and even sometimes inordinately violent).

On the one hand, opponents of the 2015 rules express strong dissatisfaction with traditional, utility-style telecom regulation of innovative services, and view the 2015 rules as a meritless usurpation of antitrust principles in guiding the regulation of the Internet access market. On the other hand, proponents of the 2015 rules voice skepticism that antitrust can actually provide a way to control competitive harms in the tech and telecom sectors, and see the heavy hand of Title II, common-carrier regulation as a necessary corrective.

While the evidence seems clear that an early-20th-century approach to telecom regulation is indeed inappropriate for the modern Internet (see our lengthy discussions on this point, e.g., here and here, as well as Thom Lambert’s recent post), it is perhaps less clear whether antitrust, with its constantly evolving, common-law foundation, is up to the task.

To answer that question, it is important to understand that for decades, the arc of telecom regulation globally has been sweeping in the direction of ex post competition enforcement, and away from ex ante, sector-specific regulation.

Howard Shelanski, who served as President Obama’s OIRA Administrator from 2013-17, Director of the Bureau of Economics at the FTC from 2012-2013, and Chief Economist at the FCC from 1999-2000, noted in 2002, for instance, that

[i]n many countries, the first transition has been from a government monopoly to a privatizing entity controlled by an independent regulator. The next transformation on the horizon is away from the independent regulator and towards regulation through general competition law.

Globally, nowhere perhaps has this transition been more clearly stated than in the EU’s telecom regulatory framework which asserts:

The aim is to progressively reduce ex ante sector-specific regulation progressively as competition in markets develops and, ultimately, for electronic communications [i.e., telecommunications] to be governed by competition law only. (Emphasis added.)

To facilitate the transition and quash regulatory inconsistencies among member states, the EC identified certain markets for national regulators to decide, consistent with EC guidelines on market analysis, whether ex ante obligations were necessary in their respective countries due to an operator holding “significant market power.” In 2003 the EC identified 18 such markets. After observing technological and market changes over the next four years, the EC reduced that number to seven in 2007 and, in 2014, the number was further reduced to four markets, all wholesale markets, that could potentially require ex ante regulation.

It is important to highlight that this framework is not uniquely achievable in Europe because of some special trait in its markets, regulatory structure, or antitrust framework. Determining the right balance of regulatory rules and competition law, whether enforced by a telecom regulator, antitrust regulator, or multi-purpose authority (i.e., with authority over both competition and telecom) means choosing from a menu of options that should be periodically assessed to move toward better performance and practice. There is nothing jurisdiction-specific about this; it is simply a matter of good governance.

And since the early 2000s, scholars have highlighted that the US is in an intriguing position to transition to a merged regulator because, for example, it has both a “highly liberalized telecommunications sector and a well-established body of antitrust law.” For Shelanski, among others, the US has been ready to make the transition since 2007.

Far from being an aberrant move away from sound telecom regulation, the FCC’s Restoring Internet Freedom Order is actually a step in the direction of sensible, antitrust-based telecom regulation — one that many parts of the world have long since undertaken.

How antitrust oversight of telecom markets has been implemented around the globe

In implementing the EU’s shift toward antitrust oversight of the telecom sector since 2003, agencies have adopted a number of different organizational reforms.

Some telecom regulators assumed new duties over competition — e.g., Ofcom in the UK. Other non-European countries, including, e.g., Mexico have also followed this model.

Other European Member States have eliminated their telecom regulator altogether. In a useful case study, Roslyn Layton and Joe Kane outline Denmark’s approach, which includes disbanding its telecom regulator and passing the regulation of the sector to various executive agencies.

Meanwhile, the Netherlands and Spain each elected to merge its telecom regulator into its competition authority. New Zealand has similarly adopted this framework.

A few brief case studies will illuminate these and other reforms:

The Netherlands

In 2013, the Netherlands merged its telecom, consumer protection, and competition regulators to form the Netherlands Authority for Consumers and Markets (ACM). The ACM’s structure streamlines decision-making on pending industry mergers and acquisitions at the managerial level, eliminating the challenges arising from overlapping agency reviews and cross-agency coordination. The reform also unified key regulatory methodologies, such as creating a consistent calculation method for the weighted average cost of capital (WACC).

The Netherlands also claims that the ACM’s ex post approach is better able to adapt to “technological developments, dynamic markets, and market trends”:

The combination of strength and flexibility allows for a problem-based approach where the authority first engages in a dialogue with a particular market player in order to discuss market behaviour and ensure the well-functioning of the market.

The Netherlands also cited a significant reduction in the risk of regulatory capture as staff no longer remain in positions for long tenures but rather rotate on a project-by-project basis from a regulatory to a competition department or vice versa. Moving staff from team to team has also added value in terms of knowledge transfer among the staff. Finally, while combining the cultures of each regulator was less difficult than expected, the government reported that the largest cause of consternation in the process was agreeing on a single IT system for the ACM.

Spain

In 2013, Spain created the National Authority for Markets and Competition (CNMC), merging the National Competition Authority with several sectoral regulators, including the telecom regulator, to “guarantee cohesion between competition rulings and sectoral regulation.” In a report to the OECD, Spain stated that moving to the new model was necessary because of increasing competition and technological convergence in the sector (i.e., the ability for different technologies to offer the substitute services (like fixed and wireless Internet access)). It added that integrating its telecom regulator with its competition regulator ensures

a predictable business environment and legal certainty [i.e., removing “any threat of arbitrariness”] for the firms. These two conditions are indispensable for network industries — where huge investments are required — but also for the rest of the business community if investment and innovation are to be promoted.

Like in the Netherlands, additional benefits include significantly lowering the risk of regulatory capture by “preventing the alignment of the authority’s performance with sectoral interests.”

Denmark

In 2011, the Danish government unexpectedly dismantled the National IT and Telecom Agency and split its duties between four regulators. While the move came as a surprise, it did not engender national debate — vitriolic or otherwise — nor did it receive much attention in the press.

Since the dismantlement scholars have observed less politicization of telecom regulation. And even though the competition authority didn’t take over telecom regulatory duties, the Ministry of Business and Growth implemented a light touch regime, which, as Layton and Kane note, has helped to turn Denmark into one of the “top digital nations” according to the International Telecommunication Union’s Measuring the Information Society Report.

New Zealand

The New Zealand Commerce Commission (NZCC) is responsible for antitrust enforcement, economic regulation, consumer protection, and certain sectoral regulations, including telecommunications. By combining functions into a single regulator New Zealand asserts that it can more cost-effectively administer government operations. Combining regulatory functions also created spillover benefits as, for example, competition analysis is a prerequisite for sectoral regulation, and merger analysis in regulated sectors (like telecom) can leverage staff with detailed and valuable knowledge. Similar to the other countries, New Zealand also noted that the possibility of regulatory capture “by the industries they regulate is reduced in an agency that regulates multiple sectors or also has competition and consumer law functions.”

Advantages identified by other organizations

The GSMA, a mobile industry association, notes in its 2016 report, Resetting Competition Policy Frameworks for the Digital Ecosystem, that merging the sector regulator into the competition regulator also mitigates regulatory creep by eliminating the prodding required to induce a sector regulator to roll back regulation as technological evolution requires it, as well as by curbing the sector regulator’s temptation to expand its authority. After all, regulators exist to regulate.

At the same time, it’s worth noting that eliminating the telecom regulator has not gone off without a hitch in every case (most notably, in Spain). It’s important to understand, however, that the difficulties that have arisen in specific contexts aren’t endemic to the nature of competition versus telecom regulation. Nothing about these cases suggests that economic-based telecom regulations are inherently essential, or that replacing sector-specific oversight with antitrust oversight can’t work.

Contrasting approaches to net neutrality in the EU and New Zealand

Unfortunately, adopting a proper framework and implementing sweeping organizational reform is no guarantee of consistent decisionmaking in its implementation. Thus, in 2015, the European Parliament and Council of the EU went against two decades of telecommunications best practices by implementing ex ante net neutrality regulations without hard evidence of widespread harm and absent any competition analysis to justify its decision. The EU placed net neutrality under the universal service and user’s rights prong of the regulatory framework, and the resulting rules lack coherence and economic rigor.

BEREC’s net neutrality guidelines, meant to clarify the EU regulations, offered an ambiguous, multi-factored standard to evaluate ISP practices like free data programs. And, as mentioned in a previous TOTM post, whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs.

Notably, while BEREC has not provided clear guidance, a 2017 report commissioned by the EU’s Directorate-General for Competition weighing competitive benefits and harms of zero rating concluded “there appears to be little reason to believe that zero-rating gives rise to competition concerns.”

The report also provides an ex post framework for analyzing such deals in the context of a two-sided market by assessing a deal’s impact on competition between ISPs and between content and application providers.

The EU example demonstrates that where a telecom regulator perceives a novel problem, competition law, grounded in economic principles, brings a clear framework to bear.

In New Zealand, if a net neutrality issue were to arise, the ISP’s behavior would be examined under the context of existing antitrust law, including a determination of whether the ISP is exercising market power, and by the Telecommunications Commissioner, who monitors competition and the development of telecom markets for the NZCC.

Currently, there is broad consensus among stakeholders, including a local content providers and networking equipment manufacturers, that there is no need for ex ante regulation of net neutrality. Wholesale ISP, Chorus, states, for example, that “in any event, the United States’ transparency and non-interference requirements [from the 2015 OIO] are arguably covered by the TCF Code disclosure rules and the provisions of the Commerce Act.”

The TCF Code is a mandatory code of practice establishing requirements concerning the information ISPs are required to disclose to consumers about their services. For example, ISPs must disclose any arrangements that prioritize certain traffic. Regarding traffic management, complaints of unfair contract terms — when not resolved by a process administered by an independent industry group — may be referred to the NZCC for an investigation in accordance with the Fair Trading Act. Under the Commerce Act, the NZCC can prohibit anticompetitive mergers, or practices that substantially lessen competition or that constitute price fixing or abuse of market power.

In addition, the NZCC has been active in patrolling vertical agreements between ISPs and content providers — precisely the types of agreements bemoaned by Title II net neutrality proponents.

In February 2017, the NZCC blocked Vodafone New Zealand’s proposed merger with Sky Network (combining Sky’s content and pay TV business with Vodafone’s broadband and mobile services) because the Commission concluded that the deal would substantially lessen competition in relevant broadband and mobile services markets. The NZCC was

unable to exclude the real chance that the merged entity would use its market power over premium live sports rights to effectively foreclose a substantial share of telecommunications customers from rival telecommunications services providers (TSPs), resulting in a substantial lessening of competition in broadband and mobile services markets.

Such foreclosure would result, the NZCC argued, from exclusive content and integrated bundles with features such as “zero rated Sky Sport viewing over mobile.” In addition, Vodafone would have the ability to prevent rivals from creating bundles using Sky Sport.

The substance of the Vodafone/Sky decision notwithstanding, the NZCC’s intervention is further evidence that antitrust isn’t a mere smokescreen for regulators to do nothing, and that regulators don’t need to design novel tools (such as the Internet conduct rule in the 2015 OIO) to regulate something neither they nor anyone else knows very much about: “not just the sprawling Internet of today, but also the unknowable Internet of tomorrow.” Instead, with ex post competition enforcement, regulators can allow dynamic innovation and competition to develop, and are perfectly capable of intervening — when and if identifiable harm emerges.

Conclusion

Unfortunately for Title II proponents — who have spent a decade at the FCC lobbying for net neutrality rules despite a lack of actionable evidence — the FCC is not acting without precedent by enabling the FTC’s antitrust and consumer protection enforcement to police conduct in Internet access markets. For two decades, the object of telecommunications regulation globally has been to transition away from sector-specific ex ante regulation to ex post competition review and enforcement. It’s high time the U.S. got on board.

In recent years, the European Union’s (EU) administrative body, the European Commission (EC), increasingly has applied European competition law in a manner that undermines free market dynamics.  In particular, its approach to “dominant” firm conduct disincentivizes highly successful companies from introducing product and service innovations that enhance consumer welfare and benefit the economy – merely because they threaten to harm less efficient competitors.

For example, the EC fined Microsoft 561 million euros in 2013 for its failure to adhere to an order that it offer a version of its Window software suite that did not include its popular Windows Media Player (WMP) – despite the lack of consumer demand for a “dumbed down” Windows without WMP.  This EC intrusion into software design has been described as a regulatory “quagmire.”

In June 2017 the EC fined Google 2.42 billion euros for allegedly favoring its own comparison shopping service over others favored in displaying Google search results – ignoring economic research that shows Google’s search policies benefit consumers.  Google also faces potentially higher EC antitrust fines due to alleged abuses involving android software (bundling of popular Google search and Chrome apps), a product that has helped spur dynamic smartphone innovations and foster new markets.

Furthermore, other highly innovative single firms, such as Apple and Amazon (favorable treatment deemed “state aids”), Qualcomm (alleged anticompetitive discounts), and Facebook (in connection with its WhatsApp acquisition), face substantial EC competition law penalties.

Underlying the EC’s current enforcement philosophy is an implicit presumption that innovations by dominant firms violate competition law if they in any way appear to disadvantage competitors.  That presumption forgoes considering the actual effects on the competitive process of dominant firm activities.  This is a recipe for reduced innovation, as successful firms “pull their competitive punches” to avoid onerous penalties.

The European Court of Justice (ECJ) implicitly recognized this problem in its September 6, 2017 decision setting aside the European General Court’s affirmance of the EC’s 2009 1.06 billion euro fine against Intel.  Intel involved allegedly anticompetitive “loyalty rebates” by Intel, which allowed buyers to achieve cost savings in Intel chip purchases.  In remanding the Intel case to the General Court for further legal and factual analysis, the ECJ’s opinion stressed that the EC needed to do more than find a dominant position and categorize the rebates in order to hold Intel liable.  The EC also needed to assess the “capacity of [Intel’s] . . . practice to foreclose competitors which are at least as efficient” and whether any exclusionary effect was outweighed by efficiencies that also benefit consumers.  In short, evidence-based antitrust analysis was required.  Mere reliance on presumptions was not enough.  Why?  Because competition on the merits is centered on the recognition that the departure of less efficient competitors is part and parcel of consumer welfare-based competition on the merits.  As the ECJ cogently put it:

[I]t must be borne in mind that it is in no way the purpose of Article 102 TFEU [which prohibits abuse of a dominant position] to prevent an undertaking from acquiring, on its own merits, the dominant position on a market.  Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market . . . .  [N]ot every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation[.]

Although the ECJ’s recent decision is commendable, it does not negate the fact that Intel had to wait eight years to have its straightforward arguments receive attention – and the saga is far from over, since the General Court has to address this matter once again.  These sorts of long-term delays, during which firms face great uncertainty (and the threat of further EC investigations and fines), are antithetical to innovative activity by enterprises deemed dominant.  In short, unless and until the EC changes its competition policy perspective on dominant firm conduct (and there are no indications that such a change is imminent), innovation and economic dynamism will suffer.

Even if the EC dithers, the United Kingdom’s (UK) imminent withdrawal from the EU (Brexit) provides it with a unique opportunity to blaze a new competition policy trail – and perhaps in so doing influence other jurisdictions.

In particular, Brexit will enable the UK’s antitrust enforcer, the Competition and Markets Authority (CMA), to adopt an outlook on competition policy in general – and on single firm conduct in particular – that is more sensitive to innovation and economic dynamism.  What might such a CMA enforcement policy look like?  It should reject the EC’s current approach.  It should focus instead on the actual effects of competitive activity.  In particular, it should incorporate the insights of decision theory (see here, for example) and place great weight on efficiencies (see here, for example).

Let us hope that the CMA acts boldly – carpe diem.  Such action, combined with other regulatory reforms, could contribute substantially to the economic success of Brexit (see here).

Today I published an article in The Daily Signal bemoaning the European Commission’s June 27 decision to fine Google $2.7 billion for engaging in procompetitive, consumer welfare-enhancing conduct.  The article is reproduced below (internal hyperlinks omitted), in italics:

On June 27, the European Commission—Europe’s antitrust enforcer—fined Google over $2.7 billion for a supposed violation of European antitrust law that bestowed benefits, not harm, on consumers.

And that’s just for starters. The commission is vigorously pursuing other antitrust investigations of Google that could lead to the imposition of billions of dollars in additional fines by European bureaucrats.

The legal outlook for Google is cloudy at best. Although the commission’s decisions can be appealed to European courts, European Commission bureaucrats have a generally good track record in winning before those tribunals.

But the problem is even bigger than that.

Recently, questionable antitrust probes have grown like topsy around the world, many of them aimed at America’s most creative high-tech firms. Beneficial innovations have become legal nightmares—good for defense lawyers, but bad for free market competition and the health of the American economy.

What great crime did Google commit to merit the huge European Commission fine?

The commission claims that Google favored its own comparison shopping service over others in displaying Google search results.

Never mind that consumers apparently like the shopping-related service links they find on Google (after all, they keep using its search engine in droves), or can patronize any other search engine or specialized comparison shopping service that can be found with a few clicks of the mouse.

This is akin to saying that Kroger or Walmart harm competition when they give favorable shelf space displays to their house brands. That’s ridiculous.

Somehow, such “favoritism” does not prevent consumers from flocking to those successful chains, or patronizing their competitors if they so choose. It is the essence of vigorous free market rivalry.  

The commission’s theory of anticompetitive behavior doesn’t hold water, as I explained in an earlier article. The Federal Trade Commission investigated Google’s search engine practices several years ago and found no evidence that alleged Google search engine display bias harmed consumers.

To the contrary, as former FTC Commissioner (and leading antitrust expert) Josh Wright has pointed out, and as the FTC found:

Google likely benefited consumers by prominently displaying its vertical content on its search results page. The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior—so-called ‘click through’ data—which showed how consumers reacted to Google’s promotion of its vertical properties.

In short, Google’s search policies benefit consumers. Antitrust is properly concerned with challenging business practices that harm consumer welfare and the overall competitive process, not with propping up particular competitors.

Absent a showing of actual harm to consumers, government antitrust cops—whether in Europe, the U.S., or elsewhere—should butt out.

Unfortunately, the European Commission shows no sign of heeding this commonsense advice. The Europeans have also charged Google with antitrust violations—with multibillion-dollar fines in the offing—based on the company’s promotion of its Android mobile operating service and its AdSense advertising service.

(That’s not all—other European Commission Google inquiries are also pending.)

As in the shopping services case, these investigations appear to be woefully short on evidence of harm to competition and consumer welfare.

The bigger question raised by the Google matters is the ability of any highly successful individual competitor to efficiently promote and favor its own offerings—something that has long been understood by American enforcers to be part and parcel of free-market competition.

As law Professor Michael Carrier points outs, any changes the EU forces on Google’s business model “could eventually apply to any way that Amazon, Facebook or anyone else offers to search for products or services.”

This is troublesome. Successful American information-age companies have already run afoul of the commission’s regulatory cops.

Microsoft and Intel absorbed multibillion-dollar European Commission antitrust fines in recent years, based on other theories of competitive harm. Amazon, Facebook, and Apple, among others, have faced European probes of their competitive practices and “privacy policies”—the terms under which they use or share sensitive information from consumers.

Often, these probes have been supported by less successful rivals who would rather rely on government intervention than competition on the merits.

Of course, being large and innovative is not a legal shield. Market-leading companies merit being investigated for actions that are truly harmful. The law applies equally to everyone.

But antitrust probes of efficient practices that confer great benefits on consumers (think how much the Google search engine makes it easier and cheaper to buy desired products and services and obtain useful information), based merely on the theory that some rivals may lose business, do not advance the free market. They retard it.

Who loses when zealous bureaucrats target efficient business practices by large, highly successful firms, as in the case of the European Commission’s Google probes and related investigations? The general public.

“Platform firms” like Google and Amazon that bring together consumers and other businesses will invest less in improving their search engines and other consumer-friendly features, for fear of being accused of undermining less successful competitors.

As a result, the supply of beneficial innovations will slow, and consumers will be less well off.

What’s more, competition will weaken, as the incentive to innovate to compete effectively with market leaders will be reduced. Regulation and government favor will substitute for welfare-enhancing improvement in goods, services, and platform quality. Economic vitality will inevitably be reduced, to the public’s detriment.

Europe is not the only place where American market leaders face unwarranted antitrust challenges.

For example, Qualcomm and InterDigital, U.S. firms that are leaders in smartphone communications technologies that power mobile interconnections, have faced large antitrust fines for, in essence, “charging too much” for licenses to their patented technologies.

South Korea also claimed to impose a “global remedy” that imposed its artificially low royalty rates on all of Qualcomm’s licensing agreements around the world.

(All this is part and parcel of foreign government attacks on American intellectual property—patents, copyrights, trademarks, and trade secrets—that cost U.S. innovators hundreds of billions of dollars a year.)

 

A lack of basic procedural fairness in certain foreign antitrust proceedings has also bedeviled American companies, preventing them from being able to defend their conduct. Foreign antitrust has sometimes been perverted into a form of “industrial policy” that discriminates against American companies in favor of domestic businesses.

What can be done to confront these problems?

In 2016, the U.S. Chamber of Commerce convened a group of trade and antitrust experts to examine the problem. In March 2017, the chamber released a report by the experts describing the nature of the problem and making specific recommendations for U.S. government action to deal with it.

Specifically, the experts urged that a White House-led interagency task force be set up to develop a strategy for dealing with unwarranted antitrust attacks on American businesses—including both misapplication of legal rules and violations of due process.

The report also called for the U.S. government to work through existing international institutions and trade negotiations to promote a convergence toward sounder antitrust practices worldwide.

The Trump administration should take heed of the experts’ report and act decisively to combat harmful foreign antitrust distortions. Antitrust policy worldwide should focus on helping the competitive process work more efficiently, not on distorting it by shacking successful innovators.

One more point, not mentioned in the article, merits being stressed.  Although the United States Government cannot control a foreign sovereign’s application of its competition law, it can engage in rhetoric and public advocacy aimed at convincing that sovereign to apply its law in a manner that promotes consumer welfare, competition on the merits, and economic efficiency.  Regrettably, the Obama Administration, particularly in the latter part of its second term, did a miserable job in promoting a facts-based, empirical approach to antitrust enforcement, centered on hard facts, not on mere speculative theories of harm.  In particular, certain political appointees lent lip service or silent acquiescence to inappropriate antitrust attacks on the unilateral exercise of intellectual property rights.  In addition, those senior officials made statements that could have been interpreted as supportive of populist “big is bad” conceptions of antitrust that had been discredited decades ago – through sound scholarship, by U.S. enforcement policies, and in judicial decisions.  The Trump Administration will have an opportunity to correct those errors, and to restore U.S. policy leadership in support of sound, pro-free market antitrust principles.  Let us hope that it does so, and soon.