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

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

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

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

Epic’s utopia is not an equilibrium

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

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

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

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

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

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

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

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

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

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

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

The emergence of new gaming platforms

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Final thoughts

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

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

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

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

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

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

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

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

1. Tying without foreclosure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. The threat of fragmentation

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

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

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

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

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

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

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

[…]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Google’s revenue sharing agreements

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

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

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

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

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

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

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

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

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

4. Conclusion

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

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

(Left, Android 10 Website; Right, iOS 13 Website)

In a previous post, I argued that the Commission failed to adequately define the relevant market in its recently published Google Android decision

This improper market definition might not be so problematic if the Commission had then proceeded to undertake a detailed (and balanced) assessment of the competitive conditions that existed in the markets where Google operates (including the competitive constraints imposed by Apple). 

Unfortunately, this was not the case. The following paragraphs respond to some of the Commission’s most problematic arguments regarding the existence of barriers to entry, and the absence of competitive constraints on Google’s behavior.

The overarching theme is that the Commission failed to quantify its findings and repeatedly drew conclusions that did not follow from the facts cited. As a result, it was wrong to conclude that Google faced little competitive pressure from Apple and other rivals.

1. Significant investments and network effects ≠ barriers to entry

In its decision, the Commission notably argued that significant investments (millions of euros) are required to set up a mobile OS and App store. It also argued that market for licensable mobile operating systems gave rise to network effects. 

But contrary to the Commission’s claims, neither of these two factors is, in and of itself, sufficient to establish the existence of barriers to entry (even under EU competition law’s loose definition of the term, rather than Stigler’s more technical definition)

Take the argument that significant investments are required to enter the mobile OS market.

The main problem is that virtually every market requires significant investments on the part of firms that seek to enter. Not all of these costs can be seen as barriers to entry, or the concept would lose all practical relevance. 

For example, purchasing a Boeing 737 Max airplane reportedly costs at least $74 million. Does this mean that incumbents in the airline industry are necessarily shielded from competition? Of course not. 

Instead, the relevant question is whether an entrant with a superior business model could access the capital required to purchase an airplane and challenge the industry’s incumbents.

Returning to the market for mobile OSs, the Commission should thus have questioned whether as-efficient rivals could find the funds required to produce a mobile OS. If the answer was yes, then the investments highlighted by the Commission were largely immaterial. As it happens, several firms have indeed produced competing OSs, including CyanogenMod, LineageOS and Tizen.

The same is true of Commission’s conclusion that network effects shielded Google from competitors. While network effects almost certainly play some role in the mobile OS and app store markets, it does not follow that they act as barriers to entry in competition law terms. 

As Paul Belleflamme recently argued, it is a myth that network effects can never be overcome. And as I have written elsewhere, the most important question is whether users could effectively coordinate their behavior and switch towards a superior platform, if one arose (See also Dan Spulber’s excellent article on this point).

The Commission completely ignored this critical interrogation during its discussion of network effects.

2. The failure of competitors is not proof of barriers to entry

Just as problematically, the Commission wrongly concluded that the failure of previous attempts to enter the market was proof of barriers to entry. 

This is the epitome of the Black Swan fallacy (i.e. inferring that all swans are white because you have never seen a relatively rare, but not irrelevant, black swan).

The failure of rivals is equally consistent with any number of propositions: 

  • There were indeed barriers to entry; 
  • Google’s products were extremely good (in ways that rivals and the Commission failed to grasp); 
  • Google responded to intense competitive pressure by continuously improving its product (and rivals thus chose to stay out of the market); 
  • Previous rivals were persistently inept (to take the words of Oliver Williamson); etc. 

The Commission did not demonstrate that its own inference was the right one, nor did it even demonstrate any awareness that other explanations were at least equally plausible.

3. First mover advantage?

Much of the same can be said about the Commission’s observation that Google enjoyed a first mover advantage

The elephant in the room is that Google was not the first mover in the smartphone market (and even less so in the mobile phone industry). The Commission attempted to sidestep this uncomfortable truth by arguing that Google was the first mover in the Android app store market. It then concluded that Google had an advantage because users were familiar with Android’s app store.

To call this reasoning “naive” would be too kind. Maybe consumers are familiar with Google’s products today, but they certainly weren’t when Google entered the market. 

Why would something that did not hinder Google (i.e. users’ lack of familiarity with its products, as opposed to those of incumbents such as Nokia or Blackberry) have the opposite effect on its future rivals? 

Moreover, even if rivals had to replicate Android’s user experience (and that of its app store) to prove successful, the Commission did not show that there was anything that prevented them from doing so — a particularly glaring omission given the open-source nature of the Android OS.

The result is that, at best, the Commission identified a correlation but not causality. Google may arguably have been the first, and users might have been more familiar with its offerings, but this still does not prove that Android flourished (and rivals failed) because of this.

4. It does not matter that users “do not take the OS into account” when they purchase a device

The Commission also concluded that alternatives to Android (notably Apple’s iOS and App Store) exercised insufficient competitive constraints on Google. Among other things, it argued that this was because users do not take the OS into account when they purchase a smartphone (so Google could allegedly degrade Android without fear of losing users to Apple)..

In doing so, the Commission failed to grasp that buyers might base their purchases on a devices’ OS without knowing it.

Some consumers will simply follow the advice of a friend, family member or buyer’s guide. Acutely aware of their own shortcomings, they thus rely on someone else who does take the phone’s OS into account. 

But even when they are acting independently, unsavvy consumers may still be driven by technical considerations. They might rely on a brand’s reputation for providing cutting edge devices (which, per the Commission, is the most important driver of purchase decisions), or on a device’s “feel” when they try it in a showroom. In both cases, consumers’ choices could indirectly be influenced by a phone’s OS.

In more technical terms, a phone’s hardware and software are complementary goods. In these settings, it is extremely difficult to attribute overall improvements to just one of the two complements. For instance, a powerful OS and chipset are both equally necessary to deliver a responsive phone. The fact that consumers may misattribute a device’s performance to one of these two complements says nothing about their underlying contribution to a strong end-product (which, in turn, drives purchase decisions). Likewise, battery life is reportedly one of the most important features for users, yet few realize that a phone’s OS has a large impact on it.

Finally, if consumers were really indifferent to the phone’s operating system, then the Commission should have dropped at least part of its case against Google. The Commission’s claim that Google’s anti-fragmentation agreements harmed consumers (by reducing OS competition) has no purchase if Android is provided free of charge and consumers are indifferent to non-price parameters, such as the quality of a phone’s OS. 

5. Google’s users were not “captured”

Finally, the Commission claimed that consumers are loyal to their smartphone brand and that competition for first time buyers was insufficient to constrain Google’s behavior against its “captured” installed base.

It notably found that 82% of Android users stick with Android when they change phones (compared to 78% for Apple), and that 75% of new smartphones are sold to existing users. 

The Commission asserted, without further evidence, that these numbers proved there was little competition between Android and iOS.

But is this really so? In almost all markets consumers likely exhibit at least some loyalty to their preferred brand. At what point does this become an obstacle to interbrand competition? The Commission offered no benchmark mark against which to assess its claims.

And although inter-industry comparisons of churn rates should be taken with a pinch of salt, it is worth noting that the Commission’s implied 18% churn rate for Android is nothing out of the ordinary (see, e.g., here, here, and here), including for industries that could not remotely be called anticompetitive.

To make matters worse, the Commission’s own claimed figures suggest that a large share of sales remained contestable (roughly 39%).

Imagine that, every year, 100 devices are sold in Europe (75 to existing users and 25 to new users, according to the Commission’s figures). Imagine further that the installed base of users is split 76–24 in favor of Android. Under the figures cited by the Commission, it follows that at least 39% of these sales are contestable.

According to the Commission’s figures, there would be 57 existing Android users (76% of 75) and 18 Apple users (24% of 75), of which roughly 10 (18%) and 4 (22%), respectively, switch brands in any given year. There would also be 25 new users who, even according to the Commission, do not display brand loyalty. The result is that out of 100 purchasers, 25 show no brand loyalty and 14 switch brands. And even this completely ignores the number of consumers who consider switching but choose not to after assessing the competitive options.

Conclusion

In short, the preceding paragraphs argue that the Commission did not meet the requisite burden of proof to establish Google’s dominance. Of course, it is one thing to show that the Commission’s reasoning was unsound (it is) and another to establish that its overall conclusion was wrong.

At the very least, I hope these paragraphs will convey a sense that the Commission loaded the dice, so to speak. Throughout the first half of its lengthy decision, it interpreted every piece of evidence against Google, drew significant inferences from benign pieces of information, and often resorted to circular reasoning.

The following post in this blog series argues that these errors also permeate the Commission’s analysis of Google’s allegedly anticompetitive behavior.

A screenshot of a cell phone

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This is the first in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision. It draws on research from a soon-to-be published ICLE white paper.

The European Commission’s recent Google Android decision will surely go down as one of the most important competition proceedings of the past decade. And yet, an in-depth reading of the 328 page decision should leave attentive readers with a bitter taste.

One of the Commission’s most significant findings is that the Android operating system and Apple’s iOS are not in the same relevant market, along with the related conclusion that Apple’s App Store and Google Play are also in separate markets.

This blog post points to a series of flaws that undermine the Commission’s reasoning on this point. As a result, the Commission’s claim that Google and Apple operate in separate markets is mostly unsupported.

1. Everyone but the European Commission thinks that iOS competes with Android

Surely the assertion that the two predominant smartphone ecosystems in Europe don’t compete with each other will come as a surprise to… anyone paying attention: 

A screenshot of a cell phone

Description automatically generated

Apple 10-K:

The Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers.

Google 10-K:

We face competition from: Companies that design, manufacture, and market consumer electronics products, including businesses that have developed proprietary platforms.

This leads to a critical question: Why did the Commission choose to depart from the instinctive conclusion that Google and Apple compete vigorously against each other in the smartphone and mobile operating system market? 

As explained below, its justifications for doing so were deeply flawed.

2. It does not matter that OEMs cannot license iOS (or the App Store)

One of the main reasons why the Commission chose to exclude Apple from the relevant market is that OEMs cannot license Apple’s iOS or its App Store.

But is it really possible to infer that Google and Apple do not compete against each other because their products are not substitutes from OEMs’ point of view? 

The answer to this question is likely no.

Relevant markets, and market shares, are merely a proxy for market power (which is the appropriate baseline upon which build a competition investigation). As Louis Kaplow puts it:

[T]he entire rationale for the market definition process is to enable an inference about market power.

If there is a competitive market for Android and Apple smartphones, then it is somewhat immaterial that Google is the only firm to successfully offer a licensable mobile operating system (as opposed to Apple and Blackberry’s “closed” alternatives).

By exercising its “power” against OEMs by, for instance, degrading the quality of Android, Google would, by the same token, weaken its competitive position against Apple. Google’s competition with Apple in the smartphone market thus constrains Google’s behavior and limits its market power in Android-specific aftermarkets (on this topic, see Borenstein et al., and Klein).

This is not to say that Apple’s iOS (and App Store) is, or is not, in the same relevant market as Google Android (and Google Play). But the fact that OEMs cannot license iOS or the App Store is mostly immaterial for market  definition purposes.

 3. Google would find itself in a more “competitive” market if it decided to stop licensing the Android OS

The Commission’s reasoning also leads to illogical outcomes from a policy standpoint. 

Google could suddenly find itself in a more “competitive” market if it decided to stop licensing the Android OS and operated a closed platform (like Apple does). The direct purchasers of its products – consumers – would then be free to switch between Apple and Google’s products.

As a result, an act that has no obvious effect on actual market power — and that could have a distinctly negative effect on consumers — could nevertheless significantly alter the outcome of competition proceedings on the Commission’s theory. 

One potential consequence is that firms might decide to close their platforms (or refuse to open them in the first place) in order to avoid competition scrutiny (because maintaining a closed platform might effectively lead competition authorities to place them within a wider relevant market). This might ultimately reduce product differentiation among mobile platforms (due to the disappearance of open ecosystems) – the exact opposite of what the Commission sought to achieve with its decision.

This is, among other things, what Antonin Scalia objected to in his Eastman Kodak dissent: 

It is quite simply anomalous that a manufacturer functioning in a competitive equipment market should be exempt from the per se rule when it bundles equipment with parts and service, but not when it bundles parts with service [when the manufacturer has a high share of the “market” for its machines’ spare parts]. This vast difference in the treatment of what will ordinarily be economically similar phenomena is alone enough to call today’s decision into question.

4. Market shares are a poor proxy for market power, especially in narrowly defined markets

Finally, the problem with the Commission’s decision is not so much that it chose to exclude Apple from the relevant markets, but that it then cited the resulting market shares as evidence of Google’s alleged dominance:

(440) Google holds a dominant position in the worldwide market (excluding China) for the licensing of smart mobile OSs since 2011. This conclusion is based on: 

(1) the market shares of Google and competing developers of licensable smart mobile OSs […]

In doing so, the Commission ignored one of the critical findings of the law & economics literature on market definition and market power: Although defining a narrow relevant market may not itself be problematic, the market shares thus adduced provide little information about a firm’s actual market power. 

For instance, Richard Posner and William Landes have argued that:

If instead the market were defined narrowly, the firm’s market share would be larger but the effect on market power would be offset by the higher market elasticity of demand; when fewer substitutes are included in the market, substitution of products outside of the market is easier. […]

If all the submarket approach signifies is willingness in appropriate cases to call a narrowly defined market a relevant market for antitrust purposes, it is unobjectionable – so long as appropriately less weight is given to market shares computed in such a market.

Likewise, Louis Kaplow observes that:

In choosing between a narrower and a broader market (where, as mentioned, we are supposing that the truth lies somewhere in between), one would ask whether the inference from the larger market share in the narrower market overstates market power by more than the inference from the smaller market share in the broader market understates market power. If the lesser error lies with the former choice, then the narrower market is the relevant market; if the latter minimizes error, then the broader market is best.

The Commission failed to heed these important findings.

5. Conclusion

The upshot is that Apple should not have been automatically excluded from the relevant market. 

To be clear, the Commission did discuss this competition from Apple later in the decision. And it also asserted that its findings would hold even if Apple were included in the OS and App Store markets, because Android’s share of devices sold would have ranged from 45% to 79%, depending on the year (although this ignores other potential metrics such as the value of devices sold or Google’s share of advertising revenue

However, by gerrymandering the market definition (which European case law likely permitted it to do), the Commission ensured that Google would face an uphill battle, starting from a very high market share and thus a strong presumption of dominance. 

Moreover, that it might reach the same result by adopting a more accurate market definition is no excuse for adopting a faulty one and resting its case (and undertaking its entire analysis) on it. In fact, the Commission’s choice of a faulty market definition underpins its entire analysis, and is far from a “harmless error.” 

I shall discuss the consequences of this error in an upcoming blog post. Stay tuned.

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.

By Pinar Akman, Professor of Law, University of Leeds*

The European Commission’s decision in Google Android cuts a fine line between punishing a company for its success and punishing a company for falling afoul of the rules of the game. Which side of the line it actually falls on cannot be fully understood until the Commission publishes its full decision. Much depends on the intricate facts of the case. As the full decision may take months to come, this post offers merely the author’s initial thoughts on the decision on the basis of the publicly available information.

The eye-watering fine of $5.1 billion — which together with the fine of $2.7 billion in the Google Shopping decision from last year would (according to one estimate) suffice to fund for almost one year the additional yearly public spending necessary to eradicate world hunger by 2030 — will not be further discussed in this post. This is because the fine is assumed to have been duly calculated on the basis of the Commission’s relevant Guidelines, and, from a legal and commercial point of view, the absolute size of the fine is not as important as the infringing conduct and the remedy Google will need to adopt to comply with the decision.

First things first. This post proceeds on the premise that the aim of competition law is to prevent the exclusion of competitors that are (at least) as efficient as the dominant incumbent, whose exclusion would ultimately harm consumers.

Next, it needs to be noted that the Google Android case is a more conventional antitrust case than Google Shopping in the sense that one can at least envisage a potentially robust antitrust theory of harm in the former case. If a dominant undertaking ties its products together to exclude effective competition in some of these markets or if it pays off customers to exclude access by its efficient competitors to consumers, competition law intervention may be justified.

The central question in Google Android is whether on the available facts this appears to have happened.

What we know and market definition

The premise of the case is that Google used its dominance in the Google Play Store (which enables users to download apps onto their Android phones) to “cement Google’s dominant position in general internet search.”

It is interesting that the case appears to concern a dominant undertaking leveraging its dominance from a market in which it is dominant (Google Play Store) into another market in which it is also dominant (internet search). As far as this author is aware, most (if not all?) cases of tying in the EU to date concerned tying where the dominant undertaking leveraged its dominance in one market to distort or eliminate competition in an otherwise competitive market.

Thus, for example, in Microsoft (Windows Operating System —> media players), Hilti (patented cartridge strips —> nails), and Tetra Pak II (packaging machines —> non-aseptic cartons), the tied market was actually or potentially competitive, and this was why the tying was alleged to have eliminated competition. It will be interesting to see which case the Commission uses as precedent in its decision — more on that later.

Also noteworthy is that the Commission does not appear to have defined a separate mobile search market that would have been competitive but for Google’s alleged leveraging. The market has been defined as the general internet search market. So, according to the Commission, the Google Search App and Google Search engine appear to be one and the same thing, and desktop and mobile devices are equivalent (or substitutable).

Finding mobile and desktop devices to be equivalent to one another may have implications for other cases including the ongoing appeal in Google Shopping where, for example, the Commission found that “[m]obile [apps] are not a viable alternative for replacing generic search traffic from Google’s general search results pages” for comparison shopping services. The argument that mobile apps and mobile traffic are fundamental in Google Android but trivial in Google Shopping may not play out favourably for the Commission before the Court of Justice of the EU.

Another interesting market definition point is that the Commission has found Apple not to be a competitor to Google in the relevant market defined by the Commission: the market for “licensable smart mobile operating systems.” Apple does not fall within that market because Apple does not license its mobile operating system to anyone: Apple’s model eliminates all possibility of competition from the start and is by definition exclusive.

Although there is some internal logic in the Commission’s exclusion of Apple from the upstream market that it has defined, is this not a bit of a definitional stop? How can Apple compete with Google in the market as defined by the Commission when Apple allows only itself to use its operating system only on devices that Apple itself manufactures?

To be fair, the Commission does consider there to be some competition between Apple and Android devices at the level of consumers — just not sufficient to constrain Google at the upstream, manufacturer level.

Nevertheless, the implication of the Commission’s assessment that separates the upstream and downstream in this way is akin to saying that the world’s two largest corn producers that produce the corn used to make corn flakes do not compete with one another in the market for corn flakes because one of them uses its corn exclusively in its own-brand cereal.

Although the Commission cabins the use of supply-side substitutability in market definition, its own guidance on the topic notes that

Supply-side substitutability may also be taken into account when defining markets in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. This means that suppliers are able to switch production to the relevant products and market them in the short term….

Apple could — presumably — rather immediately and at minimal cost produce and market a version of iOS for use on third-party device makers’ devices. By the Commission’s own definition, it would seem to make sense to include Apple in the relevant market. Nevertheless, it has apparently not done so here.

The message that the Commission sends with the finding is that if Android had not been open source and freely available, and if Google competed with Apple with its own version of a walled-garden built around exclusivity, it is possible that none of its practices would have raised any concerns. Or, should Apple be expecting a Statement of Objections next from the EU Commission?

Is Microsoft really the relevant precedent?

Given that Google Android appears to revolve around the idea of tying and leveraging, the EU Commission’s infringement decision against Microsoft, which found an abusive tie in Microsoft’s tying of Windows Operating System with Windows Media Player, appears to be the most obvious precedent, at least for the tying part of the case.

There are, however, potentially important factual differences between the two cases. To take just a few examples:

  • Microsoft charged for the Windows Operating System, whereas Google does not;
  • Microsoft tied the setting of Windows Media Player as the default to OEMs’ licensing of the operating system (Windows), whereas Google ties the setting of Search as the default to device makers’ use of other Google apps, while allowing them to use the operating system (Android) without any Google apps; and
  • Downloading competing media players was difficult due to download speeds and lack of user familiarity, whereas it is trivial and commonplace for users to download apps that compete with Google’s.

Moreover, there are also some conceptual hurdles in finding the conduct to be that of tying.

First, the difference between “pre-installed,” “default,” and “exclusive” matters a lot in establishing whether effective competition has been foreclosed. The Commission’s Press Release notes that to pre-install Google Play, manufacturers have to also pre-install Google Search App and Google Chrome. It also states that Google Search is the default search engine on Google Chrome. The Press Release does not indicate that Google Search App has to be the exclusive or default search app. (It is worth noting, however, that the Statement of Objections in Google Android did allege that Google violated EU competition rules by requiring Search to be installed as the default. We will have to await the decision itself to see if this was dropped from the case or simply not mentioned in the Press Release).

In fact, the fact that the other infringement found is that of Google’s making payments to manufacturers in return for exclusively pre-installing the Google Search App indirectly suggests that not every manufacturer pre-installs Google Search App as the exclusive, pre-installed search app. This means that any other search app (provider) can also (request to) be pre-installed on these devices. The same goes for the browser app.

Of course, regardless, even if the manufacturer does not pre-install competing apps, the consumer is free to download any other app — for search or browsing — as they wish, and can do so in seconds.

In short, pre-installation on its own does not necessarily foreclose competition, and thus may not constitute an illegal tie under EU competition law. This is particularly so when download speeds are fast (unlike the case at the time of Microsoft) and consumers regularly do download numerous apps.

What may, however, potentially foreclose effective competition is where a dominant undertaking makes payments to stop its customers, as a practical matter, from selling its rivals’ products. Intel, for example, was found to have abused its dominant position through payments to a computer retailer in return for its not selling computers with its competitor AMD’s chips, and to computer manufacturers in return for delaying the launch of computers with AMD chips.

In Google Android, the exclusivity provision that would require manufacturers to pre-install Google Search App exclusively in return for financial incentives may be deemed to be similar to this.

Having said that, unlike in Intel where a given computer can have a CPU from only one given manufacturer, even the exclusive pre-installation of the Google Search App would not have prevented consumers from downloading competing apps. So, again, in theory effective competition from other search apps need not have been foreclosed.

It must also be noted that just because a Google app is pre-installed does not mean that it generates any revenue to Google — consumers have to actually choose to use that app as opposed to another one that they might prefer in order for Google to earn any revenue from it. The Commission seems to place substantial weight on pre-installation which it alleges to create “a status quo bias.”

The concern with this approach is that it is not possible to know whether those consumers who do not download competing apps do so out of a preference for Google’s apps or, instead, for other reasons that might indicate competition not to be working. Indeed, one hurdle as regards conceptualising the infringement as tying is that it would require establishing that a significant number of phone users would actually prefer to use Google Play Store (the tying product) without Google Search App (the tied product).

This is because, according to the Commission’s Guidance Paper, establishing tying starts with identifying two distinct products, and

[t]wo products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier.

Thus, if a substantial number of customers would not want to use Google Play Store without also preferring to use Google Search App, this would cause a conceptual problem for making out a tying claim.

In fact, the conduct at issue in Google Android may be closer to a refusal to supply type of abuse.

Refusal to supply also seems to make more sense regarding the prevention of the development of Android forks being found to be an abuse. In this context, it will be interesting to see how the Commission overcomes the argument that Android forks can be developed freely and Google may have legitimate business reasons in wanting to associate its own, proprietary apps only with a certain, standardised-quality version of the operating system.

More importantly, the possible underlying theory in this part of the case is that the Google apps — and perhaps even the licensed version of Android — are a “must-have,” which is close to an argument that they are an essential facility in the context of Android phones. But that would indeed require a refusal to supply type of abuse to be established, which does not appear to be the case.

What will happen next?

To answer the question raised in the title of this post — whether the Google Android decision will benefit consumers — one needs to consider what Google may do in order to terminate the infringing conduct as required by the Commission, whilst also still generating revenue from Android.

This is because unbundling Google Play Store, Google Search App and Google Chrome (to allow manufacturers to pre-install Google Play Store without the latter two) will disrupt Google’s main revenue stream (i.e., ad revenue generated through the use of Google Search App or Google Search within the Chrome app) which funds the free operating system. This could lead Google to start charging for the operating system, and limiting to whom it licenses the operating system under the Commission’s required, less-restrictive terms.

As the Commission does not seem to think that Apple constrains Google when it comes to dealings with device manufacturers, in theory, Google should be able to charge up to the monopoly level licensing fee to device manufacturers. If that happens, the price of Android smartphones may go up. It is possible that there is a new competitor lurking in the woods that will grow and constrain that exercise of market power, but how this will all play out for consumers — as well as app developers who may face increasing costs due to the forking of Android — really remains to be seen.

 

* Pinar Akman is Professor of Law, Director of Centre for Business Law and Practice, University of Leeds, UK. This piece has not been commissioned or funded by any entity. The author has not been involved in the Google Android case in any capacity. In the past, the author wrote a piece on the Commission’s Google Shopping case, ‘The Theory of Abuse in Google Search: A Positive and Normative Assessment under EU Competition Law,’ supported by a research grant from Google. The author would like to thank Peter Whelan, Konstantinos Stylianou, and Geoffrey Manne for helpful comments. All errors remain her own. The author can be contacted here.

Today the European Commission launched its latest salvo against Google, issuing a decision in its three-year antitrust investigation into the company’s agreements for distribution of the Android mobile operating system. The massive fine levied by the Commission will dominate the headlines, but the underlying legal theory and proposed remedies are just as notable — and just as problematic.

The nirvana fallacy

It is sometimes said that the most important question in all of economics is “compared to what?” UCLA economist Harold Demsetz — one of the most important regulatory economists of the past century — coined the term “nirvana fallacy” to critique would-be regulators’ tendency to compare messy, real-world economic circumstances to idealized alternatives, and to justify policies on the basis of the discrepancy between them. Wishful thinking, in other words.

The Commission’s Android decision falls prey to the nirvana fallacy. It conjures a world in which Google offers its Android operating system on unrealistic terms, prohibits it from doing otherwise, and neglects the actual consequences of such a demand.

The idea at the core of the Commission’s decision is that by making its own services (especially Google Search and Google Play Store) easier to access than competing services on Android devices, Google has effectively foreclosed rivals from effective competition. In order to correct that claimed defect, the Commission demands that Google refrain from engaging in practices that favor its own products in its Android licensing agreements:

At a minimum, Google has to stop and to not re-engage in any of the three types of practices. The decision also requires Google to refrain from any measure that has the same or an equivalent object or effect as these practices.

The basic theory is straightforward enough, but its application here reflects a troubling departure from the underlying economics and a romanticized embrace of industrial policy that is unsupported by the realities of the market.

In a recent interview, European Commission competition chief, Margrethe Vestager, offered a revealing insight into her thinking about her oversight of digital platforms, and perhaps the economy in general: “My concern is more about whether we get the right choices,” she said. Asked about Facebook, for example, she specified exactly what she thinks the “right” choice looks like: “I would like to have a Facebook in which I pay a fee each month, but I would have no tracking and advertising and the full benefits of privacy.”

Some consumers may well be sympathetic with her preference (and even share her specific vision of what Facebook should offer them). But what if competition doesn’t result in our — or, more to the point, Margrethe Vestager’s — prefered outcomes? Should competition policy nevertheless enact the idiosyncratic consumer preferences of a particular regulator? What if offering consumers the “right” choices comes at the expense of other things they value, like innovation, product quality, or price? And, if so, can antitrust enforcers actually engineer a better world built around these preferences?

Android’s alleged foreclosure… that doesn’t really foreclose anything

The Commission’s primary concern is with the terms of Google’s deal: In exchange for royalty-free access to Android and a set of core, Android-specific applications and services (like Google Search and Google Maps) Google imposes a few contractual conditions.

Google allows manufacturers to use the Android platform — in which the company has invested (and continues to invest) billions of dollars — for free. It does not require device makers to include any of its core, Google-branded features. But if a manufacturer does decide to use any of them, it must include all of them, and make Google Search the device default. In another (much smaller) set of agreements, Google also offers device makers a small share of its revenue from Search if they agree to pre-install only Google Search on their devices (although users remain free to download and install any competing services they wish).

Essentially, that’s it. Google doesn’t allow device makers to pick and choose between parts of the ecosystem of Google products, free-riding on Google’s brand and investments. But manufacturers are free to use the Android platform and to develop their own competing brand built upon Google’s technology.

Other apps may be installed in addition to Google’s core apps. Google Search need not be the exclusive search service, but it must be offered out of the box as the default. Google Play and Chrome must be made available to users, but other app stores and browsers may be pre-installed and even offered as the default. And device makers who choose to do so may share in Search revenue by pre-installing Google Search exclusively — but users can and do install a different search service.

Alternatives to all of Google’s services (including Search) abound on the Android platform. It’s trivial both to install them and to set them as the default. Meanwhile, device makers regularly choose to offer these apps alongside Google’s services, and some, like Samsung, have developed entire customized app suites of their own. Still others, like Amazon, pre-install no Google apps and use Android without any of these constraints (and whose Google-free tablets are regularly ranked as the best-rated and most popular in Europe).

By contrast, Apple bundles its operating system with its devices, bypasses third-party device makers entirely, and offers consumers access to its operating system only if they pay (lavishly) for one of the very limited number of devices the company offers, as well. It is perhaps not surprising — although it is enlightening — that Apple earns more revenue in an average quarter from iPhone sales than Google is reported to have 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.

Regardless of which standard you want to apply to competition law – consumer welfare, total welfare, hipster, or redneck antitrust – it’s never good when competition/antitrust agencies are undermining innovation. Yet, this is precisely what the European Commission is doing.

Today, the agency announced a €4.34 billion fine against Alphabet (Google). It represents more than 30% of what the company invests annually in R&D (based on 2017 figures). This is more than likely to force Google to cut its R&D investments, or, at least, to slow them down.

In fact, the company says in a recent 10-K filing with the SEC that it is uncertain as to the impact of these sanctions on its financial stability. It follows that the European Commission necessarily is ignorant of such concerns, as well, which is thus clearly not reflected in the calculation of its fine.

One thing is for sure, however: In the end, consumers will suffer if the failure to account for the fine’s effect on innovation will lead to less of it from Google.

And Google is not alone in this situation. In a paper just posted by the International Center for Law & Economics, I conduct an empirical study comparing all the fines imposed by the European Commission on the basis of Article 102 TFEU over the period 2004 to 2018 (Android included) with the annual R&D investments by the targeted companies.

The results are indisputable: The European Commission’s fines are disproportionate in this regard and have the probable effect of slowing down the innovation of numerous sanctioned companies.

For this reason, an innovation protection mechanism should be incorporated into the calculation of the EU’s Article 102 fines. I propose doing so by introducing a new limit that caps Article 102 fines at a certain percentage of companies’ investment in R&D.

The full paper is available here.

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.

Today’s Canadian Competition Bureau (CCB) Google decision marks yet another regulator joining the chorus of competition agencies around the world that have already dismissed similar complaints relating to Google’s Search or Android businesses (including the US FTC, the Korea FTC, the Taiwan FTC, and AG offices in Texas and Ohio).

A number of courts around the world have also rejected competition complaints against the company, including courts in the US, France, the UK, Germany, and Brazil.

After an extensive, three-year investigation into Google’s business practices in Canada, the CCB

did not find sufficient evidence that Google engaged in [search manipulation, preferential treatment of Google services, syndication agreements, distribution agreements, exclusion of competitors from its YouTube mobile app, or tying of mobile ads with those on PCs and tablets] for an anti-competitive purpose, and/or that the practices resulted in a substantial lessening or prevention of competition in any relevant market.

Like the US FTC, the CCB did find fault with Google’s use of restriction on its AdWords API — but Google had already revised those terms worldwide following the FTC investigation, and has committed to the CCB to maintain the revised terms for at least another 5 years.

Other than a negative ruling from Russia’s competition agency last year in favor of Yandex — essentially “the Russian Google,” and one of only a handful of Russian tech companies of significance (surely a coincidence…) — no regulator has found against Google on the core claims brought against it.

True, investigations in a few jurisdictions, including the EU and India, are ongoing. And a Statement of Objections in the EU’s Android competition investigation appears imminent. But at some point, regulators are going to have to take a serious look at the motivations of the entities that bring complaints before wasting more investigatory resources on their behalf.

Competitor after competitor has filed complaints against Google that amount to, essentially, a claim that Google’s superior services make it too hard to compete. But competition law doesn’t require that Google or any other large firm make life easier for competitors. Without a finding of exclusionary harm/abuse of dominance (and, often, injury to consumers), this just isn’t anticompetitive conduct — it’s competition. And the overwhelming majority of competition authorities that have examined the company have agreed.

Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?

Canada joins the chorus

The Canadian decision mirrors the reasoning that regulators around the world have employed in reaching the decision that Google hasn’t engaged in anticompetitive conduct.

Two of the more important results in the CCB’s decision relate to preferential treatment of Google’s services (e.g., promotion of its own Map or Shopping results, instead of links to third-party aggregators of the same services) — the tired “search bias” claim that started all of this — and the distribution agreements that Google enters into with device manufacturers requiring inclusion of Google search as a default installation on Google Android phones.

On these key issues the CCB was unequivocal in its conclusions.

On search bias:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

And on search distribution agreements:

Google competes with other search engines for the business of hardware manufacturers and software developers. Other search engines can and do compete for these agreements so they appear as the default search engine…. Consumers can and do change the default search engine on their desktop and mobile devices if they prefer a different one to the pre-loaded default…. Google’s distribution agreements have not resulted in a substantial lessening or prevention of competition in Canada.

And here is the crucial point of the CCB’s insight (which, so far, everyone but Russia seems to appreciate): Despite breathless claims from rivals alleging they can’t compete in the face of their placement in Google’s search results, data barriers to entry, or default Google search on mobile devices, Google does actually face significant competition. Both the search bias and Android distribution claims were dismissed essentially because, whatever competitors may prefer Google do, its conduct doesn’t actually preclude access to competing services.

The True North strong and free [of meritless competitor complaints]

Exclusionary conduct must, well, exclude. But surfacing Google’s own “subjective” search results, even if they aren’t as high quality, doesn’t exclude competitors, according to the CCB and the other regulatory agencies that have also dismissed such claims. Similarly, consumers’ ability to switch search engines (“competition is just a click away,” remember), as well as OEMs’ ability to ship devices with different search engine defaults, ensure that search competitors can access consumers.

Former FTC Commissioner Josh Wright’s analysis of “search bias” in Google’s results applies with equal force to these complaints:

It is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather [than] individual competitors and websites… [but these results] are not useful from an antitrust policy perspective because they erroneously—and contrary to economic theory and evidence—presume natural and procompetitive product differentiation in search rankings to be inherently harmful.

The competitors that bring complaints to antitrust authorities seek to make a demand of Google that is rarely made of any company: that it must provide access to its competitors on equal terms. But one can hardly imagine a valid antitrust complaint arising because McDonald’s refuses to sell a Whopper. The law on duties to deal is heavily circumscribed for good reason, as Josh Wright and I have pointed out:

The [US Supreme] Court [in Trinko] warned that the imposition of a duty to deal would threaten to “lessen the incentive for the monopolist, the rival, or both to invest in… economically beneficial facilities.”… Because imposition of a duty to deal with rivals threatens to decrease the incentive to innovate by creating new ways of producing goods at lower costs, satisfying consumer demand, or creating new markets altogether, courts and antitrust agencies have been reluctant to expand the duty.

Requiring Google to link to other powerful and sophisticated online search companies, or to provide them with placement on Google Android mobile devices, on the precise terms it does its own products would reduce the incentives of everyone to invest in their underlying businesses to begin with.

This is the real threat to competition. And kudos to the CCB for recognizing it.

The CCB’s investigation was certainly thorough, and its decision appears to be well-reasoned. Other regulators should take note before moving forward with yet more costly investigations.

Last year, Microsoft’s new CEO, Satya Nadella, seemed to break with the company’s longstanding “complain instead of compete” strategy to acknowledge that:

We’re going to innovate with a challenger mindset…. We’re not coming at this as some incumbent.

Among the first items on his agenda? Treating competing platforms like opportunities for innovation and expansion rather than obstacles to be torn down by any means possible:

We are absolutely committed to making our applications run what most people describe as cross platform…. There is no holding back of anything.

Earlier this week, at its Build Developer Conference, Microsoft announced its most significant initiative yet to bring about this reality: code built into its Windows 10 OS that will enable Android and iOS developers to port apps into the Windows ecosystem more easily.

To make this possible… Windows phones “will include an Android subsystem” meant to play nice with the Java and C++ code developers have already crafted to run on a rival’s operating system…. iOS developers can compile their Objective C code right from Microsoft’s Visual Studio, and turn it into a full-fledged Windows 10 app.

Microsoft also announced that its new browser, rebranded as “Edge,” will run Chrome and Firefox extensions, and that its Office suite would enable a range of third-party services to integrate with Office on Windows, iOS, Android and Mac.

Consumers, developers and Microsoft itself should all benefit from the increased competition that these moves are certain to facilitate.

Most obviously, more consumers may be willing to switch to phones and tablets with the Windows 10 operating system if they can continue to enjoy the apps and extensions they’ve come to rely on when using Google and Apple products. As one commenter said of the move:

I left Windows phone due to the lack of apps. I love the OS though, so if this means all my favorite apps will be on the platform I’ll jump back onto the WP bandwagon in a heartbeat.

And developers should invest more in development when they can expect additional revenue from yet another platform running their apps and extensions, with minimal additional development required.

It’s win-win-win. Except perhaps for Microsoft’s lingering regulatory strategy to hobble Google.

That strategy is built primarily on antitrust claims, most recently rooted in arguments that consumers, developers and competitors alike are harmed by Google’s conduct around Android which, it is alleged, makes it difficult for OS makers (like Cyanogen) and app developers (like Microsoft Bing) to compete.

But Microsoft’s interoperability announcements (along with a host of other rapidly evolving market characteristics) actually serve to undermine the antitrust arguments that Microsoft, through groups like FairSearch and ICOMP, has largely been responsible for pushing in the EU against Google/Android.

The reality is that, with innovations like the one Microsoft announced this week, Microsoft, Google and Apple (and Samsung, Nokia, Tizen, Cyanogen…) are competing more vigorously on several fronts. Such competition is evidence of a vibrant marketplace that is simply not in need of antitrust intervention.

The supreme irony in this is that such a move represents a (further) nail in the coffin of the supposed “applications barrier to entry” that was central to the US DOJ’s antitrust suit against Microsoft and that factors into the contemporary Android antitrust arguments against Google.

Frankly, the argument was never very convincing. Absent unjustified and anticompetitive efforts to prop up such a barrier, the “applications barrier to entry” is just a synonym for “big.” Admittedly, the DC Court of Appeals in Microsoft was careful — far more careful than the district court — to locate specific, narrow conduct beyond the mere existence of the alleged barrier that it believed amounted to anticompetitive monopoly maintenance. But central to the imposition of liability was the finding that some of Microsoft’s conduct deterred application developers from effectively accessing other platforms, without procompetitive justification.

With the implementation of initiatives like the one Microsoft has now undertaken in Windows 10, however, it appears that such concerns regarding Google and mobile app developers are unsupportable.

Of greatest significance to the current Android-related accusations against Google, the appeals court in Microsoft also reversed the district court’s finding of liability based on tying, noting in particular that:

If OS vendors without market power also sell their software bundled with a browser, the natural inference is that sale of the items as a bundle serves consumer demand and that unbundled sale would not.

Of course this is exactly what Microsoft Windows Phone (which decidedly does not have market power) does, suggesting that the bundling of mobile OS’s with proprietary apps is procompetitive.

Similarly, in reviewing the eventual consent decree in Microsoft, the appeals court upheld the conditions that allowed the integration of OS and browser code, and rejected the plaintiff’s assertion that a prohibition on such technological commingling was required by law.

The appeals court praised the district court’s recognition that an appropriate remedy “must place paramount significance upon addressing the exclusionary effect of the commingling, rather than the mere conduct which gives rise to the effect,” as well as the district court’s acknowledgement that “it is not a proper task for the Court to undertake to redesign products.”  Said the appeals court, “addressing the applications barrier to entry in a manner likely to harm consumers is not self-evidently an appropriate way to remedy an antitrust violation.”

Today, claims that the integration of Google Mobile Services (GMS) into Google’s version of the Android OS is anticompetitive are misplaced for the same reason:

But making Android competitive with its tightly controlled competitors [e.g., Apple iOS and Windows Phone] requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

In fact, some commenters have even suggested that, by effectively making the OS more “open,” Microsoft’s new Windows 10 initiative might undermine the Windows experience in exactly this fashion:

As a Windows Phone developer, I think this could easily turn into a horrible idea…. [I]t might break the whole Windows user experience Microsoft has been building in the past few years. Modern UI design is a different approach from both Android and iOS. We risk having a very unhomogenic [sic] store with lots of apps using different design patterns, and Modern UI is in my opinion, one of the strongest points of Windows Phone.

But just because Microsoft may be willing to take this risk doesn’t mean that any sensible conception of competition law and economics should require Google (or anyone else) to do so, as well.

Most significantly, Microsoft’s recent announcement is further evidence that both technological and contractual innovations can (potentially — the initiative is too new to know its effect) transform competition, undermine static market definitions and weaken theories of anticompetitive harm.

When apps and their functionality are routinely built into some OS’s or set as defaults; when mobile apps are also available for the desktop and are seamlessly integrated to permit identical functions to be performed on multiple platforms; and when new form factors like Apple MacBook Air and Microsoft Surface blur the lines between mobile and desktop, traditional, static anticompetitive theories are out the window (no pun intended).

Of course, it’s always been possible for new entrants to overcome network effects and scale impediments by a range of means. Microsoft itself has in the past offered to pay app developers to write for its mobile platform. Similarly, it offers inducements to attract users to its Bing search engine and it has devised several creative mechanisms to overcome its claimed scale inferiority in search.

A further irony (and market complication) is that now some of these apps — the ones with network effects of their own — threaten in turn to challenge the reigning mobile operating systems, exactly as Netscape was purported to threaten Microsoft’s OS (and lead to its anticompetitive conduct) back in the day. Facebook, for example, now offers not only its core social media function, but also search, messaging, video calls, mobile payments, photo editing and sharing, and other functionality that compete with many of the core functions built into mobile OS’s.

But the desire by apps like Facebook to expand their networks by being on multiple platforms, and the desire by these platforms to offer popular apps in order to attract users, ensure that Facebook is ubiquitous, even without any antitrust intervention. As Timothy Bresnahan, Joe Orsini and Pai-Ling Yin demonstrate:

(1) The distribution of app attractiveness to consumers is skewed, with a small minority of apps drawing the vast majority of consumer demand. (2) Apps which are highly demanded on one platform tend also to be highly demanded on the other platform. (3) These highly demanded apps have a strong tendency to multihome, writing for both platforms. As a result, the presence or absence of apps offers little reason for consumers to choose a platform. A consumer can choose either platform and have access to the most attractive apps.

Of course, even before Microsoft’s announcement, cross-platform app development was common, and third-party platforms like Xamarin facilitated cross-platform development. As Daniel O’Connor noted last year:

Even if one ecosystem has a majority of the market share, software developers will release versions for different operating systems if it is cheap/easy enough to do so…. As [Torsten] Körber documents [here], building mobile applications is much easier and cheaper than building PC software. Therefore, it is more common for programmers to write programs for multiple OSes…. 73 percent of apps developers design apps for at least two different mobiles OSes, while 62 percent support 3 or more.

Whether Microsoft’s interoperability efforts prove to be “perfect” or not (and some commenters are skeptical), they seem destined to at least further decrease the cost of cross-platform development, thus reducing any “application barrier to entry” that might impede Microsoft’s ability to compete with its much larger rivals.

Moreover, one of the most interesting things about the announcement is that it will enable Android and iOS apps to run not only on Windows phones, but also on Windows computers. Some 1.3 billion PCs run Windows. Forget Windows’ tiny share of mobile phone OS’s; that massive potential PC market (of which Microsoft still has 91 percent) presents an enormous ready-made market for mobile app developers that won’t be ignored.

It also points up the increasing absurdity of compartmentalizing these markets for antitrust purposes. As the relevant distinctions between mobile and desktop markets break down, the idea of Google (or any other company) “leveraging its dominance” in one market to monopolize a “neighboring” or “related” market is increasingly unsustainable. As I wrote earlier this week:

Mobile and social media have transformed search, too…. This revolution has migrated to the computer, which has itself become “app-ified.” Now there are desktop apps and browser extensions that take users directly to Google competitors such as Kayak, eBay and Amazon, or that pull and present information from these sites.

In the end, intentionally or not, Microsoft is (again) undermining its own case. And it is doing so by innovating and competing — those Schumpeterian concepts that were always destined to undermine antitrust cases in the high-tech sector.

If we’re lucky, Microsoft’s new initiatives are the leading edge of a sea change for Microsoft — a different and welcome mindset built on competing in the marketplace rather than at regulators’ doors.