Archives For competition

Since the European Commission (EC) announced its first inquiry into Google’s business practices in 2010, the company has been the subject of lengthy investigations by courts and competition agencies around the globe. Regulatory authorities in the United States, France, the United Kingdom, Canada, Brazil, and South Korea have all opened and rejected similar antitrust claims.

And yet the EC marches on, bolstered by Google’s myriad competitors, who continue to agitate for further investigations and enforcement actions, even as we — companies and consumers alike — enjoy the benefits of an increasingly dynamic online marketplace.

Indeed, while the EC has spent more than half a decade casting about for some plausible antitrust claim, the online economy has thundered ahead. Since 2010, Facebook has tripled its active users and multiplied its revenue ninefold; the number of apps available in the Amazon app store has grown from less than 4000 to over 400,000 today; and there are almost 1.5 billion more Internet users globally than there were in 2010. And consumers are increasingly using new and different ways to search for information: Amazon’s Alexa, Apple’s Siri, Microsoft’s Cortana, and Facebook’s Messenger are a few of the many new innovations challenging traditional search engines.

Advertisers have adapted to this evolution, moving increasingly online, and from search to display ads as mobile adoption has skyrocketedSocial networks like Twitter and Snapchat have come into their own, competing for the same (and ever-increasing) advertising dollars. For marketers, advertising on social networks is now just as important as advertising in search. No wonder e-commerce sales have more than doubled, to almost $2 trillion worldwide; for the first time, consumers purchased more online than in stores this past year.

To paraphrase Louis C.K.: Everything is amazing — and no one at the European Commission is happy.

The EC’s market definition is fatally flawed

Like its previous claims, the Commission’s most recent charges are rooted in the assertion that Google abuses its alleged dominance in “general search” advertising to unfairly benefit itself and to monopolize other markets. But European regulators continue to miss the critical paradigm shift among online advertisers and consumers that has upended this stale view of competition on the Internet. The reality is that Google’s competition may not, and need not, look exactly like Google itself, but it is competition nonetheless. And it’s happening in spades.

The key to understanding why the European Commission’s case is fundamentally flawed lies in an examination of how it defines the relevant market. Through a series of economically and factually unjustified assumptions, the Commission defines search as a distinct market in which Google faces limited competition and enjoys an 80% market share. In other words, for the EC, “general search” apparently means only nominal search providers like Google and Bing; it doesn’t mean companies like Amazon, Facebook and Twitter — Google’s biggest competitors.  

But the reality is that “general search” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google happens to use to match consumers and advertisers doesn’t reflect the substitutability of other mechanisms that do the same thing — merely because these mechanisms aren’t called “search.”

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive.

Consumers today are increasingly using platforms like Amazon and Facebook as substitutes for the searches they might have run on Google or Bing. “Closed” platforms like the iTunes store and innumerable apps handle copious search traffic but also don’t figure in the EC’s market calculations. And so-called “dark social” interactions like email, text messages, and IMs, drive huge amounts of some of the most valuable traffic on the Internet. This, in turn, has led to a competitive scramble to roll out completely new technologies like chatbots to meet consumers’ informational (and merchants’ advertising) needs.

Properly construed, Google’s market position is precarious

Like Facebook and Twitter (and practically every other Internet platform), advertising is Google’s primary source of revenue. Instead of charging for fancy hardware or offering services to users for a fee, Google offers search, the Android operating system, and a near-endless array of other valuable services for free to users. The company’s very existence relies on attracting Internet users and consumers to its properties in order to effectively connect them with advertisers.

But being an online matchmaker is a difficult and competitive enterprise. Among other things, the ability to generate revenue turns crucially on the quality of the match: All else equal, an advertiser interested in selling widgets will pay more for an ad viewed by a user who can be reliably identified as being interested in buying widgets.

Google’s primary mechanism for attracting users to match with advertisers — general search — is substantially about information, not commerce, and the distinction between product and informational searches is crucially important to understanding Google’s market and the surprisingly limited and tenuous market power it possesses.

General informational queries aren’t nearly as valuable to advertisers: Significantly, only about 30 percent of Google’s searches even trigger any advertising at all. Meanwhile, as of 2012, one-third of product searches started on Amazon while only 13% started on a general search engine.

As economist Hal Singer aptly noted in 2012,

[the data] suggest that Google lacks market power in a critical segment of search — namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”

While Google Search clearly offers substantial value to advertisers, its ability to continue to do so is precarious when confronted with the diverse array of competitors that, like Facebook, offer a level of granularity in audience targeting that general search can’t match, or that, like Amazon, systematically offer up the most valuable searchers.

In order to compete in this market — one properly defined to include actual competitors — Google has had to constantly innovate to maintain its position. Unlike a complacent monopolist, it has evolved to meet changing consumer demand, shifting technology and inventive competitors. Thus, Google’s search algorithm has changed substantially over the years to make more effective use of the information available to ensure relevance; search results have evolved to give consumers answers to queries rather than just links, and to provide more-direct access to products and services; and, as users have shifted more and more of their time and attention to mobile devices, search has incorporated more-localized results.

Competitors want a free lunch

Critics complain, nevertheless, that these developments have made it harder, in one way or another, for rivals to compete. And the EC has provided a willing ear. According to Commissioner Vestager last week:

Google has come up with many innovative products that have made a difference to our lives. But that doesn’t give Google the right to deny other companies the chance to compete and innovate. Today, we have further strengthened our case that Google has unduly favoured its own comparison shopping service in its general search result pages…. (Emphasis added).

Implicit in this statement is the remarkable assertion that by favoring its own comparison shopping services, Google “den[ies] other companies the chance to compete and innovate.” Even assuming Google does “favor” its own results, this is an astounding claim.

First, it is not a violation of competition law simply to treat competitors’ offerings differently than one’s own, even for a dominant firm. Instead, conduct must actually exclude competitors from the market, without offering countervailing advantages to consumers. But Google’s conduct is not exclusionary, and there are many benefits to consumers.

As it has from the start of its investigations of Google, the EC begins with a flawed assumption: that Google’s competitors both require, and may be entitled to, unfettered access to Google’s property in order to compete. But this is patently absurd. Google is not an essential facility: Billions of users reach millions of companies everyday through direct browser navigation, apps, email links, review sites and blogs, and countless other means — all without once touching Google.com.

Google Search results do not exclude competitors, whether comparison shopping sites or others. For example, 72% of TripAdvisor’s U.S. traffic comes from search, and almost all of that from organic results; other specialized search sites see similar traffic volumes.

More important, however, in addition to continuing to reach rival sites through Google Search, billions of consumers access rival services directly through their mobile apps. In fact, for Yelp,

Approximately 21 million unique devices accessed Yelp via the mobile app on a monthly average basis in the first quarter of 2016, an increase of 32% compared to the same period in 2015. App users viewed approximately 70% of page views in the first quarter and were more than 10 times as engaged as website users, as measured by number of pages viewed. (Emphasis added).

And a staggering 40 percent of mobile browsing is now happening inside the Facebook app, competing with the browsers and search engines pre-loaded on smartphones.

Millions of consumers also directly navigate to Google’s rivals via their browser by simply typing, for example, “Yelp.com” in their address bar. And as noted above, consumers are increasingly using Google rivals’ new disruptive information engines like Alexa and Siri for their search needs. Even the traditional search engine space is competitive — in fact, according to Wired, as of July 2016:

Microsoft has now captured more than one-third of Internet searches. Microsoft’s transformation from a company that sells boxed software to one that sells services in the cloud is well underway. (Emphasis added).

With such numbers, it’s difficult to see how rivals are being foreclosed from reaching consumers in any meaningful way.

Meanwhile, the benefits to consumers are obvious: Google is directly answering questions for consumers rather than giving them a set of possible links to click through and further search. In some cases its results present entirely new and valuable forms of information (e.g., search trends and structured data); in others they serve to hone searches by suggesting further queries, or to help users determine which organic results (including those of its competitors) may be most useful. And, of course, consumers aren’t forced to endure these innovations if they don’t find them useful, as they can quickly switch to other providers.  

Nostalgia makes for bad regulatory policy

Google is not the unstoppable monopolist of the EU competition regulators’ imagining. Rather, it is a continual innovator, forced to adapt to shifting consumer demand, changing technology, and competitive industry dynamics. And, instead of trying to hamstring Google, if they are to survive, Google’s competitors (and complainants) must innovate as well.

Dominance in technology markets — especially online — has always been ephemeral. Once upon a time, MySpace, AOL, and Yahoo were the dominant Internet platforms. Kodak, once practically synonymous with “instant camera” let the digital revolution pass it by. The invincible Sony Walkman was upended by mp3s and the iPod. Staid, keyboard-operated Blackberries and Nokias simply couldn’t compete with app-driven, graphical platforms from Apple and Samsung. Even today, startups like Snapchat, Slack, and Spotify gain massive scale and upend entire industries with innovative new technology that can leave less-nimble incumbents in the dustbin of tech history.

Put differently, companies that innovate are able to thrive, while those that remain dependent on yesterday’s technology and outdated business models usually fail — and deservedly so. It should never be up to regulators to pick winners and losers in a highly dynamic and competitive market, particularly if doing so constrains the market’s very dynamism. As Alfonso Lamadrid has pointed out:

It is companies and not competition enforcers which will strive or fail in the adoption of their business models, and it is therefore companies and not competition enforcers who are to decide on what business models to use. Some will prove successful and others will not; some companies will thrive and some will disappear, but with experimentation with business models, success and failure are and have always been part of the game.

In other words, we should not forget that competition law is, or should be, business-model agnostic, and that regulators are – like anyone else – far from omniscient.

Like every other technology company before them, Google and its competitors must be willing and able to adapt in order to keep up with evolving markets — just as for Lewis Carroll’s Red Queen, “it takes all the running you can do, to keep in the same place.” Google confronts a near-constantly evolving marketplace and fierce competition from unanticipated quarters; companies that build their businesses around Google face a near-constantly evolving Google. In the face of such relentless market dynamism, neither consumers nor firms are well served by regulatory policy rooted in nostalgia.  

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.

In an effort to control drug spending, several states are considering initiatives that will impose new price controls on prescription drugs. Ballot measures under consideration in California and Ohio will require drug companies to sell drugs under various state programs at a mandated discount. And legislators in Massachusetts and Pennsylvania have drafted bills that would create new government commissions to regulate the price of drugs. These state initiatives have followed proposals by presidential nominees to enact new price controls to address the high costs of pharmaceuticals.

As I explain in a new study, further price controls are a bad idea for several reasons.

First, as I discussed in a previous post, several government programs, such as Medicaid, the 340B Program, the Department of Defense and Veterans Affairs drug programs, and spending in the coverage gap of Medicare Part D, already impose price controls. Under these programs, required rebates are typically calculated as set percentages off of a drug company’s average drug price. But this approach gives drug companies an incentive to raise prices; a required percentage rebate off of a higher average price can serve to offset the mandated price control.

Second, over 40 percent of drugs sold in the U.S. are sold under government programs that mandate price controls. With such a large share of their drugs sold at significant discounts, drug companies have the incentive to charge even higher prices to other non-covered patients to offset the discounts. Indeed, numerous studies and government analyses have concluded that required discounts under Medicaid and Medicare have resulted in increased prices for other consumers as manufacturers seek to offset revenue lost under price controls.

Third, evidence suggests that price controls contribute to significant drug shortages: at a below-market price, the demand for drugs exceeds the amount of drugs that manufacturers are willing or able to sell.

Fourth, price controls hinder innovation in the pharmaceutical industry. Brand drug companies incur an average of $2.6 billion in costs to bring each new drug to market with FDA approval. They must offset these significant costs with revenues earned during the patent period; within 3 months after patent expiry, generic competitors will have already captured over 70 percent of the brand drugs’ market share and significantly eroded their profits. But price controls imposed on drugs under patent increase the risk that drug companies will not earn the profits they need to offset their development costs (only 20% of marketed brand drugs ever earn enough sales to cover their development cost). The result will be less R&D spending and less innovation. Indeed, a substantial body of empirical literature establishes that pharmaceutical firms’ profitability is linked to their research and development efforts and innovation.

Instead of imposing price controls, the government should increase drug competition in order to reduce drug spending without these negative consequences. Increased drug competition will expand product offerings, giving consumers more choice in the drugs they take. It will also lower prices and spur innovation as suppliers compete to attain or protect valuable market share from rivals.

First, the FDA should reduce the backlog of generic drugs awaiting approval. The single most important factor in controlling drug spending in recent decades has been the dramatic increase in generic drug usage; generic drugs have saved consumers $1.68 trillion over the past decade. But the degree to which generics reduce drug prices depends on the number of generic competitors in the market; the more competitors, the more price competition and downward pressure on prices. Unfortunately, a backlog of generic drug approvals at the FDA has restricted generic competition in many important market segments. There are currently over 3,500 generic applications pending approval; fast-tracking these FDA approvals will provide consumers with many new lower-priced drug options.

Second, regulators should expedite the approval and acceptance of biosimilars—the generic counterparts to high-priced biologic drugs. Biologic drugs are different from traditional medications because they are based on living organisms and, as a result, are far more complex and expensive to develop. By 2013, spending on biologic drugs comprised a quarter of all drug spending in the U.S., and their share of drug spending is expected increase significantly over the next decade. Unfortunately, the average cost of a biologic drug is 22 times greater than a traditional drug, making them prohibitively expensive for many consumers.

Fortunately, Congress has recognized the need for cheaper, “generic” substitutes for biologic drugs—or biosimilars. As part of the Affordable Care Act, Congress created a biosimilars approval pathway that would enable these cheaper biologic drugs to obtain FDA approval and reach patients more quickly. Nevertheless, the FDA has approved only one biosimilar for use in the U.S. despite several pending biosimilar applications. The agency has also yet to provide any meaningful guidance as to what standards it will employ in determining whether a biosimilar is interchangeable with a biologic. Burdensome requirements for interchangeability increase the difficulty and cost of biosimilar approval and limit the ease of biosimilar substitution at pharmacies.

Expediting the approval of biosimilars will increase competition in the market for biologic drugs, reducing prices and allowing more patients access to these life-saving and life-enhancing treatments. Estimates suggest that a biosimilar approval pathway at the FDA will save U.S. consumers between $44 billion and $250 billion over the next decade.

The recent surge in drug spending must be addressed to ensure that patients can continue to afford life-saving and life-enhancing medications. However, proposals calling for new price controls are the wrong approach. While superficially appealing, price controls may have unintended consequences—less innovation, drug shortages, and higher prices for some consumers—that could harm consumers rather than helping them. In contrast, promoting competition will lower pharmaceutical prices and drug spending without these deleterious effects.

 

 

 

By Morgan Reed

In Philip K. Dick’s famous short story that inspired the Total Recall movies, a company called REKAL could implant “extra-factual memories” into the minds of anyone. That technology may be fictional, but the Apple eBooks case suggests that the ability to insert extra-factual memories into the courts already exists.

The Department of Justice, the Second Circuit majority, and even the Solicitor General’s most recent filing opposing cert. all assert that the large publishing houses invented a new “agency” business model as a way to provide leverage to raise prices, and then pushed it on Apple.

The basis of the government’s claim is that Apple had “just two months to develop a business model” once Steve Jobs had approved the “iBookstore” ebook marketplace. The government implies that Apple was a company so obviously old, inept, and out-of-ideas that it had to rely on the big publishers for an innovative business model to help it enter the market. And the court bought it “wholesale,” as it were. (Describing Apple’s “a-ha” moment when it decided to try the agency model, the court notes, “[n]otably, the possibility of an agency arrangement was first mentioned by Hachette and HarperCollins as a way ‘to fix Amazon pricing.'”)

The claim has no basis in reality, of course. Apple had embraced the agency model long before, as it sought to disrupt the way software was distributed. In just the year prior, Apple had successfully launched the app store, a ground-breaking example of the agency model that started with only 500 apps but had grown to more than 100,000 in 12 months. This was an explosion of competition — remember, nearly all of those apps represented a new publisher: 100,000 new potential competitors.

So why would the government create such an absurd fiction?

Because without that fiction, Apple moves from “conspirator” to “competitor.” Instead of anticompetitive scourge, it becomes a disruptor, bringing new competition to an existing market with a single dominant player (Amazon Kindle), and shattering the control held by the existing publishing industry.

More than a decade before the App Store, software developers had observed that the wholesale model for distribution created tremendous barriers for entry, increased expense, and incredible delays in getting to market. Developers were beholden to a tiny number of physical stores that sold shelf space and required kickbacks (known as spiffs). Today, there are legions of developers producing App content, and developers have earned more than $10 billion in sales through Apple’s App Store. Anyone with an App idea or, moreover, an idea for a book, can take it straight to consumers rather than having to convince a publisher, wholesaler or retailer that it is worth purchasing and marketing.

This disintermediation is of critical benefit to consumers — and yet the Second Circuit missed it. The court chose instead to focus on the claim that if the horizontal competitors conspired, then Apple, which had approached the publishers to ensure initial content would exist at time of launch, was complicit. Somehow Apple could be a horizontal competitor even through it wasn’t part of the publishing industry!

There was another significant consumer and competitive benefit from Apple’s entry into the market and the shift to the agency model. Prior to the Apple iPad, truly interactive books were mostly science fiction, and the few pilot projects that existed had little consumer traction. Amazon, which held 90% of the electronic books market, chose to focus on creating technology that mirrored the characteristics of reading on paper: a black and white screen and the barest of annotation capabilities.

When the iPad was released, Apple sent up a signal flag that interactivity would be a focal point of the technology by rolling out tools that would allow developers to access the iPad’s accelerometer and touch sensitive screen to create an immersive experience. The result? Products that help children with learning disabilities, and competitors fighting back with improved products.

Finally, Apple’s impact on consumers and competition was profound. Amazon switched, as well, and the nascent world of self publishing exploded. Books like Hugh Howey’s Wool series (soon to be a major motion picture) were released as smaller chunks for only 99 cents. And “the Martian,” which is up for several Academy Awards found a home and an audience long before any major publisher came calling.

We all need to avoid the trip to REKAL and remember what life was like before the advent of the agency model. Because if the Second Circuit decision is allowed to stand, the implication for any outside competitor looking to disrupt a market is as grim and barren as the surface of Mars.

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.

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemicMicrosoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engineNokia provides mapping services, and the app store is Amazon’s own.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors 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.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

EU regulators, take note.