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

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

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

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

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

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

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

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

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

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

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

A brief history of smartphone competition

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

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

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

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

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

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

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

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

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

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

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

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

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

For example, the Commission asserts that

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

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

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

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

The troubling absence of Apple from the Commission’s decision

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

How can Apple compete with Google in the market as defined by the Commission when Apple allows only itself to use its operating system only on devices that Apple itself manufactures?

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

Conclusion

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

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

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

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

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

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

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

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

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

What we know and market definition

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Microsoft really the relevant precedent?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What will happen next?

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

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

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

 

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

Last week the editorial board of the Washington Post penned an excellent editorial responding to the European Commission’s announcement of its decision in its Google Shopping investigation. Here’s the key language from the editorial:

Whether the demise of any of [the complaining comparison shopping sites] is specifically traceable to Google, however, is not so clear. Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies. Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites…. Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

That’s actually a pretty thorough, if succinct, summary of the basic problems with the Commission’s case (based on its PR and Factsheet, at least; it hasn’t released the full decision yet).

I’ll have more to say on the decision in due course, but for now I want to elaborate on two of the points raised by the WaPo editorial board, both in service of its crucial rejoinder to the Commission that “Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies.”

First, the WaPo editorial board points out that:

Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites.

It is undoubtedly true that users “may well prefer to see a Google-generated list of vendors first.” It’s also crucial to understanding the changes in Google’s search results page that have given rise to the current raft of complaints.

As I noted in a Wall Street Journal op-ed two years ago:

It’s a mistake to consider “general search” and “comparison shopping” or “product search” to be distinct markets.

From the moment it was technologically feasible to do so, Google has been adapting its traditional search results—that familiar but long since vanished page of 10 blue links—to offer more specialized answers to users’ queries. Product search, which is what is at issue in the EU complaint, is the next iteration in this trend.

Internet users today seek information from myriad sources: Informational sites (Wikipedia and the Internet Movie Database); review sites (Yelp and TripAdvisor); retail sites (Amazon and eBay); and social-media sites (Facebook and Twitter). What do these sites have in common? They prioritize certain types of data over others to improve the relevance of the information they provide.

“Prioritization” of Google’s own shopping results, however, is the core problem for the Commission:

Google has systematically given prominent placement to its own comparison shopping service: when a consumer enters a query into the Google search engine in relation to which Google’s comparison shopping service wants to show results, these are displayed at or near the top of the search results. (Emphasis in original).

But this sort of prioritization is the norm for all search, social media, e-commerce and similar platforms. And this shouldn’t be a surprise: The value of these platforms to the user is dependent upon their ability to sort the wheat from the chaff of the now immense amount of information coursing about the Web.

As my colleagues and I noted in a paper responding to a methodologically questionable report by Tim Wu and Yelp leveling analogous “search bias” charges in the context of local search results:

Google is a vertically integrated company that offers general search, but also a host of other products…. With its well-developed algorithm and wide range of products, it is hardly surprising that Google can provide not only direct answers to factual questions, but also a wide range of its own products and services that meet users’ needs. If consumers choose Google not randomly, but precisely because they seek to take advantage of the direct answers and other options that Google can provide, then removing the sort of “bias” alleged by [complainants] would affirmatively hurt, not help, these users. (Emphasis added).

And as Josh Wright noted in an earlier paper responding to yet another set of such “search bias” charges (in that case leveled in a similarly methodologically questionable report by Benjamin Edelman and Benjamin Lockwood):

[I]t is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather individual competitors and websites. Edelman & Lockwood´s analysis provides a useful starting point for describing how search engines differ in their referrals to their own content. However, it is not useful from an antitrust policy perspective because it erroneously—and contrary to economic theory and evidence—presumes natural and procompetitive product differentiation in search rankings to be inherently harmful. (Emphasis added).

We’ll have to see what kind of analysis the Commission relies upon in its decision to reach its conclusion that prioritization is an antitrust problem, but there is reason to be skeptical that it will turn out to be compelling. The Commission states in its PR that:

The evidence shows that consumers click far more often on results that are more visible, i.e. the results appearing higher up in Google’s search results. Even on a desktop, the ten highest-ranking generic search results on page 1 together generally receive approximately 95% of all clicks on generic search results (with the top result receiving about 35% of all the clicks). The first result on page 2 of Google’s generic search results receives only about 1% of all clicks. This cannot just be explained by the fact that the first result is more relevant, because evidence also shows that moving the first result to the third rank leads to a reduction in the number of clicks by about 50%. The effects on mobile devices are even more pronounced given the much smaller screen size.

This means that by giving prominent placement only to its own comparison shopping service and by demoting competitors, Google has given its own comparison shopping service a significant advantage compared to rivals. (Emphasis added).

Whatever truth there is in the characterization that placement is more important than relevance in influencing user behavior, the evidence cited by the Commission to demonstrate that doesn’t seem applicable to what’s happening on Google’s search results page now.

Most crucially, the evidence offered by the Commission refers only to how placement affects clicks on “generic search results” and glosses over the fact that the “prominent placement” of Google’s “results” is not only a difference in position but also in the type of result offered.

Google Shopping results (like many of its other “vertical results” and direct answers) are very different than the 10 blue links of old. These “universal search” results are, for one thing, actual answers rather than merely links to other sites. They are also more visually rich and attractively and clearly displayed.

Ironically, Tim Wu and Yelp use the claim that users click less often on Google’s universal search results to support their contention that increased relevance doesn’t explain Google’s prioritization of its own content. Yet, as we note in our response to their study:

[I]f a consumer is using a search engine in order to find a direct answer to a query rather than a link to another site to answer it, click-through would actually represent a decrease in consumer welfare, not an increase.

In fact, the study fails to incorporate this dynamic even though it is precisely what the authors claim the study is measuring.

Further, as the WaPo editorial intimates, these universal search results (including Google Shopping results) are quite plausibly more valuable to users. As even Tim Wu and Yelp note:

No one truly disagrees that universal search, in concept, can be an important innovation that can serve consumers.

Google sees it exactly this way, of course. Here’s Tim Wu and Yelp again:

According to Google, a principal difference between the earlier cases and its current conduct is that universal search represents a pro-competitive, user-serving innovation. By deploying universal search, Google argues, it has made search better. As Eric Schmidt argues, “if we know the answer it is better for us to answer that question so [the user] doesn’t have to click anywhere, and in that sense we… use data sources that are our own because we can’t engineer it any other way.”

Of course, in this case, one would expect fewer clicks to correlate with higher value to users — precisely the opposite of the claim made by Tim Wu and Yelp, which is the surest sign that their study is faulty.

But the Commission, at least according to the evidence cited in its PR, doesn’t even seem to measure the relative value of the very different presentations of information at all, instead resting on assertions rooted in the irrelevant difference in user propensity to click on generic (10 blue links) search results depending on placement.

Add to this Pinar Akman’s important point that Google Shopping “results” aren’t necessarily search results at all, but paid advertising:

[O]nce one appreciates the fact that Google’s shopping results are simply ads for products and Google treats all ads with the same ad-relevant algorithm and all organic results with the same organic-relevant algorithm, the Commission’s order becomes impossible to comprehend. Is the Commission imposing on Google a duty to treat non-sponsored results in the same way that it treats sponsored results? If so, does this not provide an unfair advantage to comparison shopping sites over, for example, Google’s advertising partners as well as over Amazon, eBay, various retailers, etc…?

Randy Picker also picks up on this point:

But those Google shopping boxes are ads, Picker told me. “I can’t imagine what they’re thinking,” he said. “Google is in the advertising business. That’s how it makes its money. It has no obligation to put other people’s ads on its website.”

The bottom line here is that the WaPo editorial board does a better job characterizing the actual, relevant market dynamics in a single sentence than the Commission seems to have done in its lengthy releases summarizing its decision following seven full years of investigation.

The second point made by the WaPo editorial board to which I want to draw attention is equally important:

Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

The Commission dismisses this argument in its Factsheet:

The Commission Decision concerns the effect of Google’s practices on comparison shopping markets. These offer a different service to merchant platforms, such as Amazon and eBay. Comparison shopping services offer a tool for consumers to compare products and prices online and find deals from online retailers of all types. By contrast, they do not offer the possibility for products to be bought on their site, which is precisely the aim of merchant platforms. Google’s own commercial behaviour reflects these differences – merchant platforms are eligible to appear in Google Shopping whereas rival comparison shopping services are not.

But the reality is that “comparison shopping,” just like “general search,” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google (or Foundem, or Amazon, or Facebook…) happens to use doesn’t reflect the extent of substitutability between these different mechanisms.

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

And the fact that Amazon and eBay “offer the possibility for products to be bought on their site” doesn’t take away from the fact that they also “offer a tool for consumers to compare products and prices online and find deals from online retailers of all types.” Not only do these sites contain enormous amounts of valuable (and well-presented) information about products, including product comparisons and consumer reviews, but they also actually offer comparisons among retailers. In fact, Fifty percent of the items sold through Amazon’s platform, for example, are sold by third-party retailers — the same sort of retailers that might also show up on a comparison shopping site.

More importantly, though, as the WaPo editorial rightly notes, “[t]hose who aren’t happy anyway have other options.” Google just isn’t the indispensable gateway to the Internet (and definitely not to shopping on the Internet) that the Commission seems to think.

Today over half of product searches in the US start on Amazon. The majority of web page referrals come from Facebook. Yelp’s most engaged users now access it via its app (which has seen more than 3x growth in the past five years). And a staggering 40 percent of mobile browsing on both Android and iOS now takes place inside the Facebook app.

Then there are “closed” platforms like the iTunes store and innumerable other apps that handle copious search traffic (including shopping-related traffic) but also don’t figure in the Commission’s analysis, apparently.

In fact, billions of users reach millions of companies every day through direct browser navigation, social media, apps, email links, review sites, blogs, and countless other means — all without once touching Google.com. So-called “dark social” interactions (email, text messages, and IMs) drive huge amounts of some of the most valuable traffic on the Internet, in fact.

All of this, in turn, has led to a competitive scramble to roll out completely new technologies to meet consumers’ informational (and merchants’ advertising) needs. The already-arriving swarm of VR, chatbots, digital assistants, smart-home devices, and more will offer even more interfaces besides Google through which consumers can reach their favorite online destinations.

The point is this: Google’s competitors complaining that the world is evolving around them don’t need to rely on Google. That they may choose to do so does not saddle Google with an obligation to ensure that they can always do so.

Antitrust laws — in Europe, no less than in the US — don’t require Google or any other firm to make life easier for competitors. That’s especially true when doing so would come at the cost of consumer-welfare-enhancing innovations. The Commission doesn’t seem to have grasped this fundamental point, however.

The WaPo editorial board gets it, though:

The immense size and power of all Internet giants are a legitimate focus for the antitrust authorities on both sides of the Atlantic. Brussels vs. Google, however, seems to be a case of punishment without crime.

Regardless of the merits and soundness (or lack thereof) of this week’s European Commission Decision in the Google Shopping case — one cannot assess this until we have the text of the decision — two comments really struck me during the press conference.

First, it was said that Google’s conduct had essentially reduced innovation. If I heard correctly, this is a formidable statement. In 2016, another official EU service published stats that described Alphabet as increasing its R&D by 22% and ranked it as the world’s 4th top R&D investor. Sure it can always be better. And sure this does not excuse everything. But still. The press conference language on incentives to innovate was a bit of an oversell, to say the least.

Second, the Commission views this decision as a “precedent” or as a “framework” that will inform the way dominant Internet platforms should display, intermediate and market their services and those of their competitors. This may fuel additional complaints by other vertical search rivals against (i) Google in relation to other product lines, but also against (ii) other large platform players.

Beyond this, the Commission’s approach raises a gazillion questions of law and economics. Pending the disclosure of the economic evidence in the published decision, let me share some thoughts on a few (arbitrarily) selected legal issues.

First, the Commission has drawn the lesson of the Microsoft remedy quagmire. The Commission refrains from using a trustee to ensure compliance with the decision. This had been a bone of contention in the 2007 Microsoft appeal. Readers will recall that the Commission had imposed on Microsoft to appoint a monitoring trustee, who was supposed to advise on possible infringements in the implementation of the decision. On appeal, the Court eventually held that the Commission was solely responsible for this, and could not delegate those powers. Sure, the Commission could “retai[n] its own external expert to provide advice when it investigates the implementation of the remedies.” But no more than that.

Second, we learn that the Commission is no longer in the business of software design. Recall the failed untying of WMP and Windows — Windows Naked sold only 11,787 copies, likely bought by tech bootleggers willing to acquire the first piece of software ever designed by antitrust officials — or the browser “Choice Screen” compliance saga which eventually culminated with a €561 million fine. Nothing of this can be found here. The Commission leaves remedial design to the abstract concept of “equal treatment”.[1] This, certainly, is a (relatively) commendable approach, and one that could inspire remedies in other unilateral conduct cases, in particular, exploitative conduct ones where pricing remedies are both costly, impractical, and consequentially inefficient.

On the other hand, readers will also not fail to see the corollary implication of “equal treatment”: search neutrality could actually cut both ways, and lead to a lawful degradation in consumer welfare if Google were ever to decide to abandon rich format displays for both its own shopping services and those of rivals.

Third, neither big data nor algorithmic design is directly vilified in the case (“The Commission Decision does not object to the design of Google’s generic search algorithms or to demotions as such, nor to the way that Google displays or organises its search results pages”). In fact, the Commission objects to the selective application of Google’s generic search algorithms to its own products. This is an interesting, and subtle, clarification given all the coverage that this topic has attracted in recent antitrust literature. We are in fact very close to a run of the mill claim of disguised market manipulation, not causally related to data or algorithmic technology.

Fourth, Google said it contemplated a possible appeal of the decision. Now, here’s a challenging question: can an antitrust defendant effectively exercise its right to judicial review of an administrative agency (and more generally its rights of defense), when it operates under the threat of antitrust sanctions in ongoing parallel cases investigated by the same agency (i.e., the antitrust inquiries related to Android and Ads)? This question cuts further than the Google Shopping case. Say firm A contemplates a merger with firm B in market X, while it is at the same time subject to antitrust investigations in market Z. And assume that X and Z are neither substitutes nor complements so there is little competitive relationship between both products. Can the Commission leverage ongoing antitrust investigations in market Z to extract merger concessions in market X? Perhaps more to the point, can the firm interact with the Commission as if the investigations are completely distinct, or does it have to play a more nuanced game and consider the ramifications of its interactions with the Commission in both markets?

Fifth, as to the odds of a possible appeal, I don’t believe that arguments on the economic evidence or legal theory of liability will ever be successful before the General Court of the EU. The law and doctrine in unilateral conduct cases are disturbingly — and almost irrationally — severe. As I have noted elsewhere, the bottom line in the EU case-law on unilateral conduct is to consider the genuine requirement of “harm to competition” as a rhetorical question, not an empirical one. In EU unilateral conduct law, exclusion of every and any firm is a per se concern, regardless of evidence of efficiency, entry or rivalry.

In turn, I tend to opine that Google has a stronger game from a procedural standpoint, having been left with (i) the expectation of a settlement (it played ball three times by making proposals); (ii) a corollary expectation of the absence of a fine (settlement discussions are not appropriate for cases that could end with fines); and (iii) a full seven long years of an investigatory cloud. We know from the past that EU judges like procedural issues, but like comparably less to debate the substance of the law in unilateral conduct cases. This case could thus be a test case in terms of setting boundaries on how freely the Commission can U-turn a case (the Commissioner said “take the case forward in a different way”).

Today ICLE released a white paper entitled, A critical assessment of the latest charge of Google’s anticompetitive bias from Yelp and Tim Wu.

The paper is a comprehensive response to a study by Michael Luca, Timothy Wu, Sebastian Couvidat, Daniel Frank, & William Seltzer, entitled, Is Google degrading search? Consumer harm from Universal Search.

The Wu, et al. paper will be one of the main topics of discussion at today’s Capitol Forum and George Washington Institute of Public Policy event on Dominant Platforms Under the Microscope: Policy Approaches in the US and EU, at which I will be speaking — along with a host of luminaries including, inter alia, Josh Wright, Jonathan Kanter, Allen Grunes, Catherine Tucker, and Michael Luca — one of the authors of the Universal Search study.

Follow the link above to register — the event starts at noon today at the National Press Club.

Meanwhile, here’s a brief description of our paper:

Late last year, Tim Wu of Columbia Law School (and now the White House Office of Management and Budget), Michael Luca of Harvard Business School (and a consultant for Yelp), and a group of Yelp data scientists released a study claiming that Google has been purposefully degrading search results from its more-specialized competitors in the area of local search. The authors’ claim is that Google is leveraging its dominant position in general search to thwart competition from specialized search engines by favoring its own, less-popular, less-relevant results over those of its competitors:

To improve the popularity of its specialized search features, Google has used the power of its dominant general search engine. The primary means for doing so is what is called the “universal search” or the “OneBox.”

This is not a new claim, and researchers have been attempting (and failing) to prove Google’s “bias” for some time. Likewise, these critics have drawn consistent policy conclusions from their claims, asserting that antitrust violations lie at the heart of the perceived bias. But the studies are systematically marred by questionable methodology and bad economics.

This latest study by Tim Wu, along with a cadre of researchers employed by Yelp (one of Google’s competitors and one of its chief antitrust provocateurs), fares no better, employing slightly different but equally questionable methodology, bad economics, and a smattering of new, but weak, social science. (For a thorough criticism of the inherent weaknesses of Wu et al.’s basic social science methodology, see Miguel de la Mano, Stephen Lewis, and Andrew Leyden, Focus on the Evidence: A Brief Rebuttal of Wu, Luca, et al (2016), available here).

The basic thesis of the study is that Google purposefully degrades its local searches (e.g., for restaurants, hotels, services, etc.) to the detriment of its specialized search competitors, local businesses, consumers, and even Google’s bottom line — and that this is an actionable antitrust violation.

But in fact the study shows nothing of the kind. Instead, the study is marred by methodological problems that, in the first instance, make it impossible to draw any reliable conclusions. Nor does the study show that Google’s conduct creates any antitrust-relevant problems. Rather, the construction of the study and the analysis of its results reflect a superficial and inherently biased conception of consumer welfare that completely undermines the study’s purported legal and economic conclusions.

Read the whole thing here.

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

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

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

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

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

The EC’s market definition is fatally flawed

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

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

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

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

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

Properly construed, Google’s market position is precarious

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

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

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

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

As economist Hal Singer aptly noted in 2012,

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

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

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

Competitors want a free lunch

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

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

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

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

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

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

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

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

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

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

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

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

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

Nostalgia makes for bad regulatory policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Canada joins the chorus

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

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

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

On search bias:

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

And on search distribution agreements:

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

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

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

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

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

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

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

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

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

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

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

In my article published today in The Daily Signal, I delve into the difficulties of curbing Internet-related copyright infringement.  The key points are summarized below.

U.S. industries that rely on copyright protection (such as motion pictures, music, television, visual arts, and software) are threatened by the unauthorized Internet downloading of copyrighted writings, designs, artwork, music and films. U.S. policymakers must decide how best to protect the creators of copyrighted works without harming growth and innovation in Internet services or vital protections for free speech.

The Internet allows consumers to alter and immediately transmit perfect digital copies of copyrighted works around the world and has generated services designed to provide these tools. Those tools include, for example, peer-to-peer file-sharing services and mobile apps designed to foster infringement. Many websites that provide pirated content—including, for example, online video-streaming sites—are located outside the United States. Such piracy costs the U.S. economy billions of dollars in losses per year—including reduced income for creators and other participants in copyright-intensive industries.

Curtailing online infringement will require a combination of litigation, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders and business innovations that lessen incentives to infringe.

The CPI Antitrust Chronicle published Geoffrey Manne’s and my recent paperThe Problems and Perils of Bootstrapping Privacy and Data into an Antitrust Framework as part of a symposium on Big Data in the May 2015 issue. All of the papers are worth reading and pondering, but of course ours is the best ;).

In it, we analyze two of the most prominent theories of antitrust harm arising from data collection: privacy as a factor of non-price competition, and price discrimination facilitated by data collection. We also analyze whether data is serving as a barrier to entry and effectively preventing competition. We argue that, in the current marketplace, there are no plausible harms to competition arising from either non-price effects or price discrimination due to data collection online and that there is no data barrier to entry preventing effective competition.

The issues of how to regulate privacy issues and what role competition authorities should in that, are only likely to increase in importance as the Internet marketplace continues to grow and evolve. The European Commission and the FTC have been called on by scholars and advocates to take greater consideration of privacy concerns during merger review and encouraged to even bring monopolization claims based upon data dominance. These calls should be rejected unless these theories can satisfy the rigorous economic review of antitrust law. In our humble opinion, they cannot do so at this time.

Excerpts:

PRIVACY AS AN ELEMENT OF NON-PRICE COMPETITION

The Horizontal Merger Guidelines have long recognized that anticompetitive effects may “be manifested in non-price terms and conditions that adversely affect customers.” But this notion, while largely unobjectionable in the abstract, still presents significant problems in actual application.

First, product quality effects can be extremely difficult to distinguish from price effects. Quality-adjusted price is usually the touchstone by which antitrust regulators assess prices for competitive effects analysis. Disentangling (allegedly) anticompetitive quality effects from simultaneous (neutral or pro-competitive) price effects is an imprecise exercise, at best. For this reason, proving a product-quality case alone is very difficult and requires connecting the degradation of a particular element of product quality to a net gain in advantage for the monopolist.

Second, invariably product quality can be measured on more than one dimension. For instance, product quality could include both function and aesthetics: A watch’s quality lies in both its ability to tell time as well as how nice it looks on your wrist. A non-price effects analysis involving product quality across multiple dimensions becomes exceedingly difficult if there is a tradeoff in consumer welfare between the dimensions. Thus, for example, a smaller watch battery may improve its aesthetics, but also reduce its reliability. Any such analysis would necessarily involve a complex and imprecise comparison of the relative magnitudes of harm/benefit to consumers who prefer one type of quality to another.

PRICE DISCRIMINATION AS A PRIVACY HARM

If non-price effects cannot be relied upon to establish competitive injury (as explained above), then what can be the basis for incorporating privacy concerns into antitrust? One argument is that major data collectors (e.g., Google and Facebook) facilitate price discrimination.

The argument can be summed up as follows: Price discrimination could be a harm to consumers that antitrust law takes into consideration. Because companies like Google and Facebook are able to collect a great deal of data about their users for analysis, businesses could segment groups based on certain characteristics and offer them different deals. The resulting price discrimination could lead to many consumers paying more than they would in the absence of the data collection. Therefore, the data collection by these major online companies facilitates price discrimination that harms consumer welfare.

This argument misses a large part of the story, however. The flip side is that price discrimination could have benefits to those who receive lower prices from the scheme than they would have in the absence of the data collection, a possibility explored by the recent White House Report on Big Data and Differential Pricing.

While privacy advocates have focused on the possible negative effects of price discrimination to one subset of consumers, they generally ignore the positive effects of businesses being able to expand output by serving previously underserved consumers. It is inconsistent with basic economic logic to suggest that a business relying on metrics would want to serve only those who can pay more by charging them a lower price, while charging those who cannot afford it a larger one. If anything, price discrimination would likely promote more egalitarian outcomes by allowing companies to offer lower prices to poorer segments of the population—segments that can be identified by data collection and analysis.

If this group favored by “personalized pricing” is as big as—or bigger than—the group that pays higher prices, then it is difficult to state that the practice leads to a reduction in consumer welfare, even if this can be divorced from total welfare. Again, the question becomes one of magnitudes that has yet to be considered in detail by privacy advocates.

DATA BARRIER TO ENTRY

Either of these theories of harm is predicated on the inability or difficulty of competitors to develop alternative products in the marketplace—the so-called “data barrier to entry.” The argument is that upstarts do not have sufficient data to compete with established players like Google and Facebook, which in turn employ their data to both attract online advertisers as well as foreclose their competitors from this crucial source of revenue. There are at least four reasons to be dubious of such arguments:

  1. Data is useful to all industries, not just online companies;
  2. It’s not the amount of data, but how you use it;
  3. Competition online is one click or swipe away; and
  4. Access to data is not exclusive

CONCLUSION

Privacy advocates have thus far failed to make their case. Even in their most plausible forms, the arguments for incorporating privacy and data concerns into antitrust analysis do not survive legal and economic scrutiny. In the absence of strong arguments suggesting likely anticompetitive effects, and in the face of enormous analytical problems (and thus a high risk of error cost), privacy should remain a matter of consumer protection, not of antitrust.

The precise details underlying the European Commission’s (EC) April 15 Statement of Objections (SO), the EC’s equivalent of an antitrust complaint, against Google, centered on the company’s promotion of its comparison shopping service (CSS), “Google Shopping,” have not yet been made public.  Nevertheless, the EC’s fact sheet describing the theory of the case is most discouraging to anyone who believes in economically sound, consumer welfare-oriented antitrust enforcement.   Put simply, the SO alleges that Google is “abusing its dominant position” in online search services throughout Europe by systematically positioning and prominently displaying its CSS in its general search result pages, “irrespective of its merits,” causing the Google CSS to achieve higher rates of growth than CSSs promoted by rivals.  According to the EC, this behavior “has a negative impact on consumers and innovation”.  Why so?  Because this “means that users do not necessarily see the most relevant shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.”  (Emphasis added.)  The EC’s proposed solution?  “Google should treat its own comparison shopping services and those of rivals in the same way.”

The EC’s latest action may represent only “the tip of a Google EC antitrust iceberg,” since the EC has stated that it is continuing to investigate other aspects of Google’s behavior, including Google agreements with respect to the Android operating system, plus “the favourable treatment by Google in its general search results of other specialised search services, and concerns with regard to copying of rivals’ web content (known as ‘scraping’), advertising exclusivity and undue restrictions on advertisers.”  For today, I focus on the tip, leaving consideration of the bulk of the iceberg to future commentaries, as warranted.  (Truth on the Market has addressed Google-related antitrust issues previously — see, for example, here, here, and here.)

The EC’s April 15 Google SO is troublesome in multiple ways.

First, the claim that Google does not “necessarily” array the most relevant search results in a manner desired by consumers appears to be in tension with the findings of an exhaustive U.S. antitrust investigation of the company.  As U.S. Federal Trade Commissioner Josh Wright pointed out in a recent speech, the FTC’s 2013 “closing statement [in its Google investigation] indicates that Google’s so-called search bias did not, in fact, harm consumers; to the contrary, the evidence suggested that ‘Google likely benefited consumers by prominently displaying its vertical content on its search results page.’  The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior – so-called ‘click through’ data – which showed how consumers reacted to Google’s promotion of its vertical properties.”

Second, even assuming that Google’s search engine practices have weakened competing CSSs, that would not justify EC enforcement action against Google.  As Commissioner Wright also explained, the FTC “accepted arguments made by competing websites that Google’s practices injured them and strengthened Google’s market position, but correctly found that these were not relevant considerations in a proper antitrust analysis focused upon consumer welfare rather than harm to competitors.”  The EC should keep this in mind, given that, as former EC Competition Commissioner Joaquin Almunia emphasized, “[c]onsumer welfare is not just a catchy phrase.  It is the cornerstone, the guiding principle of EU competition policy.”

Third, and perhaps most fundamentally, although EC disclaims an interest in “interfere[ing] with” Google’s search engine algorithm, dictating an “equal treatment of competitors” result implicitly would require intrusive micromanagement of Google’s search engine – a search engine which is at the heart of the company’s success and has bestowed enormous welfare benefits on consumers and producers alike.  There is no reason to believe that EC policing of EC CSS listings to promote an “equal protection of competitors” mandate would result in a search experience that better serves consumers than the current Google policy.  Consistent with this point, in its 2013 Google closing statement, the FTC observed that it lacked the ability to “second-guess” product improvements that plausibly benefit consumers, and it stressed that “condemning legitimate product improvements risks harming consumers.”

Fourth, competing CSSs have every incentive to inform consumers if they believe that Google search results are somehow “inferior” to their offerings.  They are free to advertise and publicize the merits of their services, and third party intermediaries that rate browsers may be expected to report if Google Shopping consistently offers suboptimal consumer services.  In short, “the word will get out.”  Even in the absence of perfect information, consumers can readily at low cost browse alternative CSSs to determine whether they prefer their services to Google’s – “help is only a click away.”

Fifth, the most likely outcome of an EC “victory” in this case would be a reduced incentive for Google to invest in improving its search engine, knowing that its ability to monetize search engine improvements could be compromised by future EC decisions to prevent an improved search engine from harming rivals.  What’s worse, other developers of service platforms and other innovative business improvements would similarly “get the message” that it would not be worth their while to innovate to the point of dominance, because their returns to such innovation would be constrained.  In sum, companies in a wide variety of sectors would have less of an incentive to innovate, and this in turn would lead to reduced welfare gains and benefits to consumers.  This would yield (as the EC’s fact sheet put it) “a negative impact on consumers and innovation”, because companies across industries operating in Europe would know that if their product were too good, they would attract the EC’s attention and be put in their place.  In other words, a successful EC intervention here could spawn the very welfare losses (magnified across sectors) that the Commission cited as justification for reining in Google in the first place!

Finally, it should come as no surprise that a coalition of purveyors of competing search engines and online shopping sites lobbied hard for EC antitrust action against Google.  When government intervenes heavily and often in markets to “correct” perceived “abuses,” private actors have a strong incentive to expend resources on achieving government actions that disadvantage their rivals – resources that could otherwise have been used to compete more vigorously and effectively.  In short, the very existence of expansive regulatory schemes disincentivizes competition on the merits, and in that regard tends to undermine welfare.  Government officials should keep that firmly in mind when private actors urge them to act decisively to “cure” marketplace imperfections by limiting a rival’s freedom of action.

Let us hope that the EC takes these concerns to heart before taking further action against Google.

Recent years have seen an increasing interest in incorporating privacy into antitrust analysis. The FTC and regulators in Europe have rejected these calls so far, but certain scholars and activists continue their attempts to breathe life into this novel concept. Elsewhere we have written at length on the scholarship addressing the issue and found the case for incorporation wanting. Among the errors proponents make is a persistent (and woefully unsubstantiated) assertion that online data can amount to a barrier to entry, insulating incumbent services from competition and ensuring that only the largest providers thrive. This data barrier to entry, it is alleged, can then allow firms with monopoly power to harm consumers, either directly through “bad acts” like price discrimination, or indirectly by raising the costs of advertising, which then get passed on to consumers.

A case in point was on display at last week’s George Mason Law & Economics Center Briefing on Big Data, Privacy, and Antitrust. Building on their growing body of advocacy work, Nathan Newman and Allen Grunes argued that this hypothesized data barrier to entry actually exists, and that it prevents effective competition from search engines and social networks that are interested in offering services with heightened privacy protections.

According to Newman and Grunes, network effects and economies of scale ensure that dominant companies in search and social networking (they specifically named Google and Facebook — implying that they are in separate markets) operate without effective competition. This results in antitrust harm, they assert, because it precludes competition on the non-price factor of privacy protection.

In other words, according to Newman and Grunes, even though Google and Facebook offer their services for a price of $0 and constantly innovate and upgrade their products, consumers are nevertheless harmed because the business models of less-privacy-invasive alternatives are foreclosed by insufficient access to data (an almost self-contradicting and silly narrative for many reasons, including the big question of whether consumers prefer greater privacy protection to free stuff). Without access to, and use of, copious amounts of data, Newman and Grunes argue, the algorithms underlying search and targeted advertising are necessarily less effective and thus the search product without such access is less useful to consumers. And even more importantly to Newman, the value to advertisers of the resulting consumer profiles is diminished.

Newman has put forth a number of other possible antitrust harms that purportedly result from this alleged data barrier to entry, as well. Among these is the increased cost of advertising to those who wish to reach consumers. Presumably this would harm end users who have to pay more for goods and services because the costs of advertising are passed on to them. On top of that, Newman argues that ad networks inherently facilitate price discrimination, an outcome that he asserts amounts to antitrust harm.

FTC Commissioner Maureen Ohlhausen (who also spoke at the George Mason event) recently made the case that antitrust law is not well-suited to handling privacy problems. She argues — convincingly — that competition policy and consumer protection should be kept separate to preserve doctrinal stability. Antitrust law deals with harms to competition through the lens of economic analysis. Consumer protection law is tailored to deal with broader societal harms and aims at protecting the “sanctity” of consumer transactions. Antitrust law can, in theory, deal with privacy as a non-price factor of competition, but this is an uneasy fit because of the difficulties of balancing quality over two dimensions: Privacy may be something some consumers want, but others would prefer a better algorithm for search and social networks, and targeted ads with free content, for instance.

In fact, there is general agreement with Commissioner Ohlhausen on her basic points, even among critics like Newman and Grunes. But, as mentioned above, views diverge over whether there are some privacy harms that should nevertheless factor into competition analysis, and on whether there is in fact  a data barrier to entry that makes these harms possible.

As we explain below, however, the notion of data as an antitrust-relevant barrier to entry is simply a myth. And, because all of the theories of “privacy as an antitrust harm” are essentially predicated on this, they are meritless.

First, data is useful to all industries — this is not some new phenomenon particular to online companies

It bears repeating (because critics seem to forget it in their rush to embrace “online exceptionalism”) that offline retailers also receive substantial benefit from, and greatly benefit consumers by, knowing more about what consumers want and when they want it. Through devices like coupons and loyalty cards (to say nothing of targeted mailing lists and the age-old practice of data mining check-out receipts), brick-and-mortar retailers can track purchase data and better serve consumers. Not only do consumers receive better deals for using them, but retailers know what products to stock and advertise and when and on what products to run sales. For instance:

  • Macy’s analyzes tens of millions of terabytes of data every day to gain insights from social media and store transactions. Over the past three years, the use of big data analytics alone has helped Macy’s boost its revenue growth by 4 percent annually.
  • Following its acquisition of Kosmix in 2011, Walmart established @WalmartLabs, which created its own product search engine for online shoppers. In the first year of its use alone, the number of customers buying a product on Walmart.com after researching a purchase increased by 20 percent. According to Ron Bensen, the vice president of engineering at @WalmartLabs, the combination of in-store and online data could give brick-and-mortar retailers like Walmart an advantage over strictly online stores.
  • Panera and a whole host of restaurants, grocery stores, drug stores and retailers use loyalty cards to advertise and learn about consumer preferences.

And of course there is a host of others uses for data, as well, including security, fraud prevention, product optimization, risk reduction to the insured, knowing what content is most interesting to readers, etc. The importance of data stretches far beyond the online world, and far beyond mere retail uses more generally. To describe even online giants like Amazon, Apple, Microsoft, Facebook and Google as having a monopoly on data is silly.

Second, it’s not the amount of data that leads to success but building a better mousetrap

The value of knowing someone’s birthday, for example, is not in that tidbit itself, but in the fact that you know this is a good day to give that person a present. Most of the data that supports the advertising networks underlying the Internet ecosphere is of this sort: Information is important to companies because of the value that can be drawn from it, not for the inherent value of the data itself. Companies don’t collect information about you to stalk you, but to better provide goods and services to you.

Moreover, data itself is not only less important than what can be drawn from it, but data is also less important than the underlying product it informs. For instance, Snapchat created a challenger to  Facebook so successfully (and in such short time) that Facebook attempted to buy it for $3 billion (Google offered $4 billion). But Facebook’s interest in Snapchat wasn’t about its data. Instead, Snapchat was valuable — and a competitive challenge to Facebook — because it cleverly incorporated the (apparently novel) insight that many people wanted to share information in a more private way.

Relatedly, Twitter, Instagram, LinkedIn, Yelp, Pinterest (and Facebook itself) all started with little (or no) data and they have had a lot of success. Meanwhile, despite its supposed data advantages, Google’s attempts at social networking — Google+ — have never caught up to Facebook in terms of popularity to users (and thus not to advertisers either). And scrappy social network Ello is starting to build a significant base without data collection for advertising at all.

At the same time it’s simply not the case that the alleged data giants — the ones supposedly insulating themselves behind data barriers to entry — actually have the type of data most relevant to startups anyway. As Andres Lerner has argued, if you wanted to start a travel business, the data from Kayak or Priceline would be far more relevant. Or if you wanted to start a ride-sharing business, data from cab companies would be more useful than the broad, market-cross-cutting profiles Google and Facebook have. Consider companies like Uber, Lyft and Sidecar that had no customer data when they began to challenge established cab companies that did possess such data. If data were really so significant, they could never have competed successfully. But Uber, Lyft and Sidecar have been able to effectively compete because they built products that users wanted to use — they came up with an idea for a better mousetrap.The data they have accrued came after they innovated, entered the market and mounted their successful challenges — not before.

In reality, those who complain about data facilitating unassailable competitive advantages have it exactly backwards. Companies need to innovate to attract consumer data, otherwise consumers will switch to competitors (including both new entrants and established incumbents). As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results: The continued explosion of new products, services and other apps is evidence that data is not a bottleneck to competition but a spur to drive it.

Third, competition online is one click or thumb swipe away; that is, barriers to entry and switching costs are low

Somehow, in the face of alleged data barriers to entry, competition online continues to soar, with newcomers constantly emerging and triumphing. This suggests that the barriers to entry are not so high as to prevent robust competition.

Again, despite the supposed data-based monopolies of Facebook, Google, Amazon, Apple and others, there exist powerful competitors in the marketplaces they compete in:

  • If consumers want to make a purchase, they are more likely to do their research on Amazon than Google.
  • Google flight search has failed to seriously challenge — let alone displace —  its competitors, as critics feared. Kayak, Expedia and the like remain the most prominent travel search sites — despite Google having literally purchased ITA’s trove of flight data and data-processing acumen.
  • People looking for local reviews go to Yelp and TripAdvisor (and, increasingly, Facebook) as often as Google.
  • Pinterest, one of the most highly valued startups today, is now a serious challenger to traditional search engines when people want to discover new products.
  • With its recent acquisition of the shopping search engine, TheFind, and test-run of a “buy” button, Facebook is also gearing up to become a major competitor in the realm of e-commerce, challenging Amazon.
  • Likewise, Amazon recently launched its own ad network, “Amazon Sponsored Links,” to challenge other advertising players.

Even assuming for the sake of argument that data creates a barrier to entry, there is little evidence that consumers cannot easily switch to a competitor. While there are sometimes network effects online, like with social networking, history still shows that people will switch. MySpace was considered a dominant network until it made a series of bad business decisions and everyone ended up on Facebook instead. Similarly, Internet users can and do use Bing, DuckDuckGo, Yahoo, and a plethora of more specialized search engines on top of and instead of Google. And don’t forget that Google itself was once an upstart new entrant that replaced once-household names like Yahoo and AltaVista.

Fourth, access to data is not exclusive

Critics like Newman have compared Google to Standard Oil and argued that government authorities need to step in to limit Google’s control over data. But to say data is like oil is a complete misnomer. If Exxon drills and extracts oil from the ground, that oil is no longer available to BP. Data is not finite in the same way. To use an earlier example, Google knowing my birthday doesn’t limit the ability of Facebook to know my birthday, as well. While databases may be proprietary, the underlying data is not. And what matters more than the data itself is how well it is analyzed.

This is especially important when discussing data online, where multi-homing is ubiquitous, meaning many competitors end up voluntarily sharing access to data. For instance, I can use the friend-finder feature on WordPress to find Facebook friends, Google connections, and people I’m following on Twitter who also use the site for blogging. Using this feature allows WordPress to access your contact list on these major online players.

Friend-Finder

Further, it is not apparent that Google’s competitors have less data available to them. Microsoft, for instance, has admitted that it may actually have more data. And, importantly for this discussion, Microsoft may have actually garnered some of its data for Bing from Google.

If Google has a high cost per click, then perhaps it’s because it is worth it to advertisers: There are more eyes on Google because of its superior search product. Contra Newman and Grunes, Google may just be more popular for consumers and advertisers alike because the algorithm makes it more useful, not because it has more data than everyone else.

Fifth, the data barrier to entry argument does not have workable antitrust remedies

The misguided logic of data barrier to entry arguments leaves a lot of questions unanswered. Perhaps most important among these is the question of remedies. What remedy would apply to a company found guilty of leveraging its market power with data?

It’s actually quite difficult to conceive of a practical means for a competition authority to craft remedies that would address the stated concerns without imposing enormous social costs. In the unilateral conduct context, the most obvious remedy would involve the forced sharing of data.

On the one hand, as we’ve noted, it’s not clear this would actually accomplish much. If competitors can’t actually make good use of data, simply having more of it isn’t going to change things. At the same time, such a result would reduce the incentive to build data networks to begin with. In their startup stage, companies like Uber and Facebook required several months and hundreds of thousands, if not millions, of dollars to design and develop just the first iteration of the products consumers love. Would any of them have done it if they had to share their insights? In fact, it may well be that access to these free insights is what competitors actually want; it’s not the data they’re lacking, but the vision or engineering acumen to use it.

Other remedies limiting collection and use of data are not only outside of the normal scope of antitrust remedies, they would also involve extremely costly court supervision and may entail problematic “collisions between new technologies and privacy rights,” as the last year’s White House Report on Big Data and Privacy put it.

It is equally unclear what an antitrust enforcer could do in the merger context. As Commissioner Ohlhausen has argued, blocking specific transactions does not necessarily stop data transfer or promote privacy interests. Parties could simply house data in a standalone entity and enter into licensing arrangements. And conditioning transactions with forced data sharing requirements would lead to the same problems described above.

If antitrust doesn’t provide a remedy, then it is not clear why it should apply at all. The absence of workable remedies is in fact a strong indication that data and privacy issues are not suitable for antitrust. Instead, such concerns would be better dealt with under consumer protection law or by targeted legislation.

The Wall Street Journal reported yesterday that the FTC Bureau of Competition staff report to the commissioners in the Google antitrust investigation recommended that the Commission approve an antitrust suit against the company.

While this is excellent fodder for a few hours of Twitter hysteria, it takes more than 140 characters to delve into the nuances of a 20-month federal investigation. And the bottom line is, frankly, pretty ho-hum.

As I said recently,

One of life’s unfortunate certainties, as predictable as death and taxes, is this: regulators regulate.

The Bureau of Competition staff is made up of professional lawyers — many of them litigators, whose existence is predicated on there being actual, you know, litigation. If you believe in human fallibility at all, you have to expect that, when they err, FTC staff errs on the side of too much, rather than too little, enforcement.

So is it shocking that the FTC staff might recommend that the Commission undertake what would undoubtedly have been one of the agency’s most significant antitrust cases? Hardly.

Nor is it surprising that the commissioners might not always agree with staff. In fact, staff recommendations are ignored all the time, for better or worse. Here are just a few examples: R.J Reynolds/Brown & Williamson merger, POM Wonderful , Home Shopping Network/QVC merger, cigarette advertising. No doubt there are many, many more.

Regardless, it also bears pointing out that the staff did not recommend the FTC bring suit on the central issue of search bias “because of the strong procompetitive justifications Google has set forth”:

Complainants allege that Google’s conduct is anticompetitive because if forecloses alternative search platforms that might operate to constrain Google’s dominance in search and search advertising. Although it is a close call, we do not recommend that the Commission issue a complaint against Google for this conduct.

But this caveat is enormous. To report this as the FTC staff recommending a case is seriously misleading. Here they are forbearing from bringing 99% of the case against Google, and recommending suit on the marginal 1% issues. It would be more accurate to say, “FTC staff recommends no case against Google, except on a couple of minor issues which will be immediately settled.”

And in fact it was on just these minor issues that Google agreed to voluntary commitments to curtail some conduct when the FTC announced it was not bringing suit against the company.

The Wall Street Journal quotes some other language from the staff report bolstering the conclusion that this is a complex market, the conduct at issue was ambiguous (at worst), and supporting the central recommendation not to sue:

We are faced with a set of facts that can most plausibly be accounted for by a narrative of mixed motives: one in which Google’s course of conduct was premised on its desire to innovate and to produce a high quality search product in the face of competition, blended with the desire to direct users to its own vertical offerings (instead of those of rivals) so as to increase its own revenues. Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google’s monopoly power over search and search advertising.

On a global level, the record will permit Google to show substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.

This is exactly when you want antitrust enforcers to forbear. Predicting anticompetitive effects is difficult, and conduct that could be problematic is simultaneously potentially vigorous competition.

That the staff concluded that some of what Google was doing “harmed competitors” isn’t surprising — there were lots of competitors parading through the FTC on a daily basis claiming Google harmed them. But antitrust is about protecting consumers, not competitors. Far more important is the staff finding of “substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.”

Indeed, the combination of “substantial innovation,” “intense competition from Microsoft and others,” and “Google’s strong procompetitive justifications” suggests a well-functioning market. It similarly suggests an antitrust case that the FTC would likely have lost. The FTC’s litigators should probably be grateful that the commissioners had the good sense to vote to close the investigation.

Meanwhile, the Wall Street Journal also reports that the FTC’s Bureau of Economics simultaneously recommended that the Commission not bring suit at all against Google. It is not uncommon for the lawyers and the economists at the Commission to disagree. And as a general (though not inviolable) rule, we should be happy when the Commissioners side with the economists.

While the press, professional Google critics, and the company’s competitors may want to make this sound like a big deal, the actual facts of the case and a pretty simple error-cost analysis suggests that not bringing a case was the correct course.