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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law. 

A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them. 

Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.

Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust. 

Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.

The letter argues that:

  1. The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate. 
  2. Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
  3. Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
  4. Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
  5. History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
  6. Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.

The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.

Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies. 

The full letter is here.

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

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]

The public policy community’s infatuation with digital privacy has grown by leaps and bounds since the enactment of GDPR and the CCPA, but COVID-19 may leave the most enduring mark on the actual direction that privacy policy takes. As the pandemic and associated lockdowns first began, there were interesting discussions cropping up about the inevitable conflict between strong privacy fundamentalism and the pragmatic steps necessary to adequately trace the spread of infection. 

Axiomatic of this controversy is the Apple/Google contact tracing system, software developed for smartphones to assist with the identification of individuals and populations that have likely been in contact with the virus. The debate sparked by the Apple/Google proposal highlights what we miss when we treat “privacy” (however defined) as an end in itself, an end that must necessarily  trump other concerns. 

The Apple/Google contact tracing efforts

Apple/Google are doing yeoman’s work attempting to produce a useful contact tracing API given the headwinds of privacy advocacy they face. Apple’s webpage describing its new contact tracing system is a testament to the extent to which strong privacy protections are central to its efforts. Indeed, those privacy protections are in the very name of the service: “Privacy-Preserving Contact Tracing” program. But, vitally, the utility of the Apple/Google API is ultimately a function of its efficacy as a tracing tool, not in how well it protects privacy.

Apple/Google — despite the complaints of some states — are rolling out their Covid-19-tracking services with notable limitations. Most prominently, the APIs will not allow collection of location data, and will only function when users explicitly opt-in. This last point is important because there is evidence that opt-in requirements, by their nature, tend to reduce the flow of information in a system, and when we are considering tracing solutions to an ongoing pandemic surely less information is not optimal. Further, all of the data collected through the API will be anonymized, preventing even healthcare authorities from identifying particular infected individuals.

These restrictions prevent the tool from being as effective as it could be, but it’s not clear how Apple/Google could do any better given the political climate. For years, the Big Tech firms have been villainized by privacy advocates that accuse them of spying on kids and cavalierly disregarding consumer privacy as they treat individuals’ data as just another business input. The problem with this approach is that, in the midst of a generational crisis, our best tools are being excluded from the fight. Which begs the question: perhaps we have privacy all wrong? 

Privacy is one value among many

The U.S. constitutional order explicitly protects our privacy as against state intrusion in order to guarantee, among other things, fair process and equal access to justice. But this strong presumption against state intrusion—far from establishing a fundamental or absolute right to privacy—only accounts for part of the privacy story. 

The Constitution’s limit is a recognition of the fact that we humans are highly social creatures and that privacy is one value among many. Properly conceived, privacy protections are themselves valuable only insofar as they protect other things we value. Jane Bambauer explored some of this in an earlier post where she characterized privacy as, at best, an “instrumental right” — that is a tool used to promote other desirable social goals such as “fairness, safety, and autonomy.”

Following from Jane’s insight, privacy — as an instrumental good — is something that can have both positive and negative externalities, and needs to be enlarged or attenuated as its ability to serve instrumental ends changes in different contexts. 

According to Jane:

There is a moral imperative to ignore even express lack of consent when withholding important information that puts others in danger. Just as many states affirmatively require doctors, therapists, teachers, and other fiduciaries to report certain risks even at the expense of their client’s and ward’s privacy …  this same logic applies at scale to the collection and analysis of data during a pandemic.

Indeed, dealing with externalities is one of the most common and powerful justifications for regulation, and an extreme form of “privacy libertarianism” —in the context of a pandemic — is likely to be, on net, harmful to society.

Which brings us back to efforts of Apple/Google. Even if those firms wanted to risk the ire of  privacy absolutists, it’s not clear that they could do so without incurring tremendous regulatory risk, uncertainty and a popular backlash. As statutory matters, the CCPA and the GDPR chill experimentation in the face of potentially crippling fines. While the FTC Act’s Section 5 prohibition on “unfair or deceptive” practices is open to interpretation in manners which could result in existentially damaging outcomes. Further, some polling suggests that the public appetite for contact tracing is not particularly high – though, as is often the case, such pro-privacy poll outcomes rarely give appropriate shrift to the tradeoff required.

As a general matter, it’s important to think about the value of individual privacy, and how best to optimally protect it. But privacy does not stand above all other values in all contexts. It is entirely reasonable to conclude that, in a time of emergency, if private firms can devise more effective solutions for mitigating the crisis, they should have more latitude to experiment. Knee-jerk preferences for an amorphous “right of privacy” should not be used to block those experiments.

Much as with the Cosmic Turtle, its tradeoffs all the way down. Most of the U.S. is in lockdown, and while we vigorously protect our privacy, we risk frustrating the creation of tools that could put a light at the end of the tunnel. We are, in effect, trading liberty and economic self-determination for privacy.

Once the worst of the Covid-19 crisis has passed — hastened possibly by the use of contact tracing programs — we can debate the proper use of private data in exigent circumstances. For the immediate future, we should instead be encouraging firms like Apple/Google to experiment with better ways to control the pandemic. 

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

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

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

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

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

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

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

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

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

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

1. Food and other goods

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

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

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

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

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

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

(Source: Bloomberg)

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

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

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

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

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

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

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

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

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

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

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

Traffic has also increased significantly on popular gaming platforms.

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

2. Cashless payments

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

This is particularly evident in the food industry. 

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

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

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

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

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

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

3. High speed internet access

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

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

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

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

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

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

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

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

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

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

This is not without policy ramifications.

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

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

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

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

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

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

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

 4. Concluding remarks 

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

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

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

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

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

Who knew the techlash was susceptible to a virus?

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

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

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

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

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

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

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

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

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

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

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

1. Priceless information 

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

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

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

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

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

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

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

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

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

2. Social interactions

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

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

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

3. Working & Learning

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

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

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

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

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

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

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

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

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

Q: What has Big Tech ever done for us? 

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

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

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

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

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

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

The wrong economic models

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An incorrect view of innovation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

In mid-November, the 50 state attorneys general (AGs) investigating Google’s advertising practices expanded their antitrust probe to include the company’s search and Android businesses. Texas Attorney General Ken Paxton, the lead on the case, was supportive of the development, but made clear that other states would manage the investigations of search and Android separately. While attorneys might see the benefit in splitting up search and advertising investigations, platforms like Google need to be understood as a coherent whole. If the state AGs case is truly concerned with the overall impact on the welfare of consumers, it will need to be firmly grounded in the unique economics of this platform.

Back in September, 50 state AGs, including those in Washington, DC and Puerto Rico, announced an investigation into Google. In opening the case, Paxton said that, “There is nothing wrong with a business becoming the biggest game in town if it does so through free market competition, but we have seen evidence that Google’s business practices may have undermined consumer choice, stifled innovation, violated users’ privacy, and put Google in control of the flow and dissemination of online information.” While the original document demands focused on Google’s “overarching control of online advertising markets and search traffic,” reports since then suggest that the primary investigation centers on online advertising.

Defining the market

Since the market definition is the first and arguably the most important step in an antitrust case, Paxton has tipped his hand and shown that the investigation is converging on the online ad market. Yet, he faltered when he wrote in The Wall Street Journal that, “Each year more than 90% of Google’s $117 billion in revenue comes from online advertising. For reference, the entire market for online advertising is around $130 billion annually.” As Patrick Hedger of the Competitive Enterprise Institute was quick to note, Paxton cited global revenue numbers and domestic advertising statistics. In reality, Google’s share of the online advertising market in the United States is 37 percent and is widely expected to fall.

When Google faced scrutiny by the Federal Trade Commission in 2013, the leaked staff report explained that “the Commission and the Department of Justice have previously found online ‘search advertising’ to be a distinct product market.” This finding, which dates from 2007, simply wouldn’t stand today. Facebook’s ad platform was launched in 2007 and has grown to become a major competitor to Google. Even more recently, Amazon has jumped into the space and independent platforms like Telaria, Rubicon Project, and The Trade Desk have all made inroads. In contrast to the late 2000s, advertisers now use about four different online ad platforms.

Moreover, the relationship between ad prices and industry concentration is complicated. In traditional economic analysis, fewer suppliers of a product generally translates into higher prices. In the online ad market, however, fewer advertisers means that ad buyers can efficiently target people through keywords. Because advertisers have access to superior information, research finds that more concentration tends to lead to lower search engine revenues. 

The addition of new fronts in the state AGs’ investigation could spell disaster for consumers. While search and advertising are distinct markets, it is the act of tying the two together that makes platforms like Google valuable to users and advertisers alike. Demand is tightly integrated between the two sides of the platform. Changes in user and advertiser preferences have far outsized effects on the overall platform value because each side responds to the other. If users experience an increase in price or a reduction in quality, then they will use the platform less or just log off completely. Advertisers see this change in users and react by reducing their demand for ad placements as well. When advertisers drop out, the total amount of content also recedes and users react once again. Economists call these relationships demand interdependencies. The demand on one side of the market is interdependent with demand on the other. Research on magazines, newspapers, and social media sites all support the existence of demand interdependencies. 

Economists David Evans and Richard Schmalensee, who were cited extensively in the Supreme Court case Ohio v. American Express, explained the importance of their integration into competition analysis, “The key point is that it is wrong as a matter of economics to ignore significant demand interdependencies among the multiple platform sides” when defining markets. If they are ignored, then the typical analytical tools will yield incorrect assessments. Understanding these relationships makes the investigation all that more difficult.

The limits of remedies

Most likely, this current investigation will follow the trajectory of Microsoft in the 1990s when states did the legwork for a larger case brought by the Department of Justice (DoJ). The DoJ already has its own investigation into Google and will probably pull together all of the parties for one large suit. Google is also subject to a probe by the House of Representatives Judiciary Committee as well. What is certain is that Google will be saddled with years of regulatory scrutiny, but what remains unclear is what kind of changes the AGs are after.

The investigation might aim to secure behavioral changes, but these often come with a cost in platform industries. The European Commission, for example, got Google to change its practices with its Android operating system for mobile phones. Much like search and advertising, the Android ecosystem is a platform with cross subsidization and demand interdependencies between the various sides of the market. Because the company was ordered to stop tying the Android operating system to apps, manufacturers of phones and tablets now have to pay a licensing fee in Europe if they want Google’s apps and the Play Store. Remedies meant to change one side of the platform resulted in those relationships being unbundled. When regulators force cross subsidization to become explicit prices, consumers are the one who pay.

The absolute worst case scenario would be a break up of Google, which has been a centerpiece of Senator Elizabeth Warren’s presidential platform. As I explained last year, that would be a death warrant for the company:

[T]he value of both Facebook and Google comes in creating the platform, which combines users with advertisers. Before the integration of ad networks, the search engine industry was struggling and it was simply not a major player in the Internet ecosystem. In short, the search engines, while convenient, had no economic value. As Michael Moritz, a major investor of Google, said of those early years, “We really couldn’t figure out the business model. There was a period where things were looking pretty bleak.” But Google didn’t pave the way. Rather, Bill Gross at GoTo.com succeeded in showing everyone how advertising could work to build a business. Google founders Larry Page and Sergey Brin merely adopted the model in 2002 and by the end of the year, the company was profitable for the first time. Marrying the two sides of the platform created value. Tearing them apart will also destroy value.

The state AGs need to resist making this investigation into a political showcase. As Pew noted in documenting the rise of North Carolina Attorney General Josh Stein to national prominence, “What used to be a relatively high-profile position within a state’s boundaries has become a springboard for publicity across the country.” While some might cheer the opening of this investigation, consumer welfare needs to be front and center. To properly understand how consumer welfare might be impacted by an investigation, the state AGs need to take seriously the path already laid out by platform economics. For the sake of consumers, let’s hope they are up to the task. 

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

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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.

In March of this year, Elizabeth Warren announced her proposal to break up Big Tech in a blog post on Medium. She tried to paint the tech giants as dominant players crushing their smaller competitors and strangling the open internet. This line in particular stood out: “More than 70% of all Internet traffic goes through sites owned or operated by Google or Facebook.

This statistic immediately struck me as outlandish, but I knew I would need to do some digging to fact check it. After seeing the claim repeated in a recent profile of the Open Markets Institute — “Google and Facebook control websites that receive 70 percent of all internet traffic” — I decided to track down the original source for this surprising finding. 

Warren’s blog post links to a November 2017 Newsweek article — “Who Controls the Internet? Facebook and Google Dominance Could Cause the ‘Death of the Web’” — written by Anthony Cuthbertson. The piece is even more alarmist than Warren’s blog post: “Facebook and Google now have direct influence over nearly three quarters of all internet traffic, prompting warnings that the end of a free and open web is imminent.

The Newsweek article, in turn, cites an October 2017 blog post by André Staltz, an open source freelancer, on his personal website titled “The Web began dying in 2014, here’s how”. His takeaway is equally dire: “It looks like nothing changed since 2014, but GOOG and FB now have direct influence over 70%+ of internet traffic.” Staltz claims the blog post took “months of research to write”, but the headline statistic is merely aggregated from a December 2015 blog post by Parse.ly, a web analytics and content optimization software company.

Source: André Staltz

The Parse.ly article — “Facebook Continues to Beat Google in Sending Traffic to Top Publishers” — is about external referrals (i.e., outside links) to publisher sites (not total internet traffic) and says the “data set used for this study included around 400 publisher domains.” This is not even a random sample much less a comprehensive measure of total internet traffic. Here’s how they summarize their results: “Today, Facebook remains a top referring site to the publishers in Parse.ly’s network, claiming 39 percent of referral traffic versus Google’s share of 34 percent.” 

Source: Parse.ly

So, using the sources provided by the respective authors, the claim from Elizabeth Warren that “more than 70% of all Internet traffic goes through sites owned or operated by Google or Facebook” can be more accurately rewritten as “more than 70 percent of external links to 400 publishers come from sites owned or operated by Google and Facebook.” When framed that way, it’s much less conclusive (and much less scary).

But what’s the real statistic for total internet traffic? This is a surprisingly difficult question to answer, because there is no single way to measure it: Are we talking about share of users, or user-minutes, of bits, or total visits, or unique visits, or referrals? According to Wikipedia, “Common measurements of traffic are total volume, in units of multiples of the byte, or as transmission rates in bytes per certain time units.”

One of the more comprehensive efforts to answer this question is undertaken annually by Sandvine. The networking equipment company uses its vast installed footprint of equipment across the internet to generate statistics on connections, upstream traffic, downstream traffic, and total internet traffic (summarized in the table below). This dataset covers both browser-based and app-based internet traffic, which is crucial for capturing the full picture of internet user behavior.

Source: Sandvine

Looking at two categories of traffic analyzed by Sandvine — downstream traffic and overall traffic — gives lie to the narrative pushed by Warren and others. As you can see in the chart below, HTTP media streaming — a category for smaller streaming services that Sandvine has not yet tracked individually — represented 12.8% of global downstream traffic and Netflix accounted for 12.6%. According to Sandvine, “the aggregate volume of the long tail is actually greater than the largest of the short-tail providers.” So much for the open internet being smothered by the tech giants.

Source: Sandvine

As for Google and Facebook? The report found that Google-operated sites receive 12.00 percent of total internet traffic while Facebook-controlled sites receive 7.79 percent. In other words, less than 20 percent of all Internet traffic goes through sites owned or operated by Google or Facebook. While this statistic may be less eye-popping than the one trumpeted by Warren and other antitrust activists, it does have the virtue of being true.

Source: Sandvine

[This post is the seventh in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]

[This post is authored by Alec Stapp, Research Fellow at the International Center for Law & Economics]

Should we break up Microsoft? 

In all the talk of breaking up “Big Tech,” no one seems to mention the biggest tech company of them all. Microsoft’s market cap is currently higher than those of Apple, Google, Amazon, and Facebook. If big is bad, then, at the moment, Microsoft is the worst.

Apart from size, antitrust activists also claim that the structure and behavior of the Big Four — Facebook, Google, Apple, and Amazon — is why they deserve to be broken up. But they never include Microsoft, which is curious given that most of their critiques also apply to the largest tech giant:

  1. Microsoft is big (current market cap exceeds $1 trillion)
  2. Microsoft is dominant in narrowly-defined markets (e.g., desktop operating systems)
  3. Microsoft is simultaneously operating and competing on a platform (i.e., the Microsoft Store)
  4. Microsoft is a conglomerate capable of leveraging dominance from one market into another (e.g., Windows, Office 365, Azure)
  5. Microsoft has its own “kill zone” for startups (196 acquisitions since 1994)
  6. Microsoft operates a search engine that preferences its own content over third-party content (i.e., Bing)
  7. Microsoft operates a platform that moderates user-generated content (i.e., LinkedIn)

To be clear, this is not to say that an antitrust case against Microsoft is as strong as the case against the others. Rather, it is to say that the cases against the Big Four on these dimensions are as weak as the case against Microsoft, as I will show below.

Big is bad

Tim Wu published a book last year arguing for more vigorous antitrust enforcement — including against Big Tech — called “The Curse of Bigness.” As you can tell by the title, he argues, in essence, for a return to the bygone era of “big is bad” presumptions. In his book, Wu mentions “Microsoft” 29 times, but only in the context of its 1990s antitrust case. On the other hand, Wu has explicitly called for antitrust investigations of Amazon, Facebook, and Google. It’s unclear why big should be considered bad when it comes to the latter group but not when it comes to Microsoft. Maybe bigness isn’t actually a curse, after all.

As the saying goes in antitrust, “Big is not bad; big behaving badly is bad.” This aphorism arose to counter erroneous reasoning during the era of structure-conduct-performance when big was presumed to mean bad. Thanks to an improved theoretical and empirical understanding of the nature of the competitive process, there is now a consensus that firms can grow large either via superior efficiency or by engaging in anticompetitive behavior. Size alone does not tell us how a firm grew big — so it is not a relevant metric.

Dominance in narrowly-defined markets

Critics of Google say it has a monopoly on search and critics of Facebook say it has a monopoly on social networking. Microsoft is similarly dominant in at least a few narrowly-defined markets, including desktop operating systems (Windows has a 78% market share globally): 

Source: StatCounter

Microsoft is also dominant in the “professional networking platform” market after its acquisition of LinkedIn in 2016. And the legacy tech giant is still the clear leader in the “paid productivity software” market. (Microsoft’s Office 365 revenue is roughly 10x Google’s G Suite revenue).

The problem here is obvious. These are overly-narrow market definitions for conducting an antitrust analysis. Is it true that Facebook’s platforms are the only service that can connect you with your friends? Should we really restrict the productivity market to “paid”-only options (as the EU similarly did in its Android decision) when there are so many free options available? These questions are laughable. Proper market definition requires considering whether a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price (SSNIP). If not (which is likely the case in the narrow markets above), then we should employ a broader market definition in each case.

Simultaneously operating and competing on a platform

Elizabeth Warren likes to say that if you own a platform, then you shouldn’t both be an umpire and have a team in the game. Let’s put aside the problems with that flawed analogy for now. What she means is that you shouldn’t both run the platform and sell products, services, or apps on that platform (because it’s inherently unfair to the other sellers). 

Warren’s solution to this “problem” would be to create a regulated class of businesses called “platform utilities” which are “companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties.” Microsoft’s revenue last quarter was $32.5 billion, so it easily meets the first threshold. And Windows obviously qualifies as “a platform for connecting third parties.”

Just as in mobile operating systems, desktop operating systems are compatible with third-party applications. These third-party apps can be free (e.g., iTunes) or paid (e.g., Adobe Photoshop). Of course, Microsoft also makes apps for Windows (e.g., Word, PowerPoint, Excel, etc.). But the more you think about the technical details, the blurrier the line between the operating system and applications becomes. Is the browser an add-on to the OS or a part of it (as Microsoft Edge appears to be)? The most deeply-embedded applications in an OS are simply called “features.”

Even though Warren hasn’t explicitly mentioned that her plan would cover Microsoft, it almost certainly would. Previously, she left Apple out of the Medium post announcing her policy, only to later tell a journalist that the iPhone maker would also be prohibited from producing its own apps. But what Warren fails to include in her announcement that she would break up Apple is that trying to police the line between a first-party platform and third-party applications would be a nightmare for companies and regulators, likely leading to less innovation and higher prices for consumers (as they attempt to rebuild their previous bundles).

Leveraging dominance from one market into another

The core critique in Lina Khan’s “Amazon’s Antitrust Paradox” is that the very structure of Amazon itself is what leads to its anticompetitive behavior. Khan argues (in spite of the data) that Amazon uses profits in some lines of business to subsidize predatory pricing in other lines of businesses. Furthermore, she claims that Amazon uses data from its Amazon Web Services unit to spy on competitors and snuff them out before they become a threat.

Of course, this is similar to the theory of harm in Microsoft’s 1990s antitrust case, that the desktop giant was leveraging its monopoly from the operating system market into the browser market. Why don’t we hear the same concern today about Microsoft? Like both Amazon and Google, you could uncharitably describe Microsoft as extending its tentacles into as many sectors of the economy as possible. Here are some of the markets in which Microsoft competes (and note how the Big Four also compete in many of these same markets):

What these potential antitrust harms leave out are the clear consumer benefits from bundling and vertical integration. Microsoft’s relationships with customers in one market might make it the most efficient vendor in related — but separate — markets. It is unsurprising, for example, that Windows customers would also frequently be Office customers. Furthermore, the zero marginal cost nature of software makes it an ideal product for bundling, which redounds to the benefit of consumers.

The “kill zone” for startups

In a recent article for The New York Times, Tim Wu and Stuart A. Thompson criticize Facebook and Google for the number of acquisitions they have made. They point out that “Google has acquired at least 270 companies over nearly two decades” and “Facebook has acquired at least 92 companies since 2007”, arguing that allowing such a large number of acquisitions to occur is conclusive evidence of regulatory failure.

Microsoft has made 196 acquisitions since 1994, but they receive no mention in the NYT article (or in most of the discussion around supposed “kill zones”). But the acquisitions by Microsoft or Facebook or Google are, in general, not problematic. They provide a crucial channel for liquidity in the venture capital and startup communities (the other channel being IPOs). According to the latest data from Orrick and Crunchbase, between 2010 and 2018, there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion

By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. Making it harder for a startup to be acquired would not result in more venture capital investment (and therefore not in more IPOs), according to recent research by Gordon M. Phillips and Alexei Zhdanov. The researchers show that “the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment.”

As investor and serial entrepreneur Leonard Speiser said recently, “If the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” 

Search engine bias

Google is often accused of biasing its search results to favor its own products and services. The argument goes that if we broke them up, a thousand search engines would bloom and competition among them would lead to less-biased search results. While it is a very difficult — if not impossible — empirical question to determine what a “neutral” search engine would return, one attempt by Josh Wright found that “own-content bias is actually an infrequent phenomenon, and Google references its own content more favorably than other search engines far less frequently than does Bing.” 

The report goes on to note that “Google references own content in its first results position when no other engine does in just 6.7% of queries; Bing does so over twice as often (14.3%).” Arguably, users of a particular search engine might be more interested in seeing content from that company because they have a preexisting relationship. But regardless of how we interpret these results, it’s clear this not a frequent phenomenon.

So why is Microsoft being left out of the antitrust debate now?

One potential reason why Google, Facebook, and Amazon have been singled out for criticism of practices that seem common in the tech industry (and are often pro-consumer) may be due to the prevailing business model in the journalism industry. Google and Facebook are by far the largest competitors in the digital advertising market, and Amazon is expected to be the third-largest player by next year, according to eMarketer. As Ramsi Woodcock pointed out, news publications are also competing for advertising dollars, the type of conflict of interest that usually would warrant disclosure if, say, a journalist held stock in a company they were covering.

Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”

Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.