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Near the end of her new proposal to break up Facebook, Google, Amazon, and Apple, Senator Warren asks, “So what would the Internet look like after all these reforms?”

It’s a good question, because, as she herself notes, “Twenty-five years ago, Facebook, Google, and Amazon didn’t exist. Now they are among the most valuable and well-known companies in the world.”

To Warren, our most dynamic and innovative companies constitute a problem that needs solving.

She described the details of that solution in a blog post:

First, [my administration would restore competition to the tech sector] by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.

* * *

For smaller companies…, their platform utilities would be required to meet the same standard of fair, reasonable, and nondiscriminatory dealing with users, but would not be required to structurally separate….

* * *
Second, my administration would appoint regulators committed to reversing illegal and anti-competitive tech mergers….
I will appoint regulators who are committed to… unwind[ing] anti-competitive mergers, including:

– Amazon: Whole Foods; Zappos;
– Facebook: WhatsApp; Instagram;
– Google: Waze; Nest; DoubleClick

Elizabeth Warren’s brave new world

Let’s consider for a moment what this brave new world will look like — not the nirvana imagined by regulators and legislators who believe that decimating a company’s business model will deter only the “bad” aspects of the model while preserving the “good,” as if by magic, but the inevitable reality of antitrust populism.  

Utilities? Are you kidding? For an overview of what the future of tech would look like under Warren’s “Platform Utility” policy, take a look at your water, electricity, and sewage service. Have you noticed any improvement (or reduction in cost) in those services over the past 10 or 15 years? How about the roads? Amtrak? Platform businesses operating under a similar regulatory regime would also similarly stagnate. Enforcing platform “neutrality” necessarily requires meddling in the most minute of business decisions, inevitably creating unintended and costly consequences along the way.

Network companies, like all businesses, differentiate themselves by offering unique bundles of services to customers. By definition, this means vertically integrating with some product markets and not others. Why are digital assistants like Siri bundled into mobile operating systems? Why aren’t the vast majority of third-party apps also bundled into the OS? If you want utilities regulators instead of Google or Apple engineers and designers making these decisions on the margin, then Warren’s “Platform Utility” policy is the way to go.

Grocery Stores. To take one specific case cited by Warren, how much innovation was there in the grocery store industry before Amazon bought Whole Foods? Since the acquisition, large grocery retailers, like Walmart and Kroger, have increased their investment in online services to better compete with the e-commerce champion. Many industry analysts expect grocery stores to use computer vision technology and artificial intelligence to improve the efficiency of check-out in the near future.

Smartphones. Imagine how forced neutrality would play out in the context of iPhones. If Apple can’t sell its own apps, it also can’t pre-install its own apps. A brand new iPhone with no apps — and even more importantly, no App Store — would be, well, just a phone, out of the box. How would users even access a site or app store from which to download independent apps? Would Apple be allowed to pre-install someone else’s apps? That’s discriminatory, too. Maybe it will be forced to offer a menu of all available apps in all categories (like the famously useless browser ballot screen demanded by the European Commission in its Microsoft antitrust case)? It’s hard to see how that benefits consumers — or even app developers.

Source: Free Software Magazine

Internet Search. Or take search. Calls for “search neutrality” have been bandied about for years. But most proponents of search neutrality fail to recognize that all Google’s search results entail bias in favor of its own offerings. As Geoff Manne and Josh Wright noted in 2011 at the height of the search neutrality debate:

[S]earch engines offer up results in the form not only of typical text results, but also maps, travel information, product pages, books, social media and more. To the extent that alleged bias turns on a search engine favoring its own maps, for example, over another firm’s, the allegation fails to appreciate that text results and maps are variants of the same thing, and efforts to restrain a search engine from offering its own maps is no different than preventing it from offering its own search results.

Nevermind that Google with forced non-discrimination likely means Google offering only the antiquated “ten blue links” search results page it started with in 1998 instead of the far more useful “rich” results it offers today; logically it would also mean Google somehow offering the set of links produced by any and all other search engines’ algorithms, in lieu of its own. If you think Google will continue to invest in and maintain the wealth of services it offers today on the strength of the profits derived from those search results, well, Elizabeth Warren is probably already your favorite politician.

Source: Web Design Museum  

And regulatory oversight of algorithmic content won’t just result in an impoverished digital experience; it will inevitably lead to an authoritarian one, as well:

Any agency granted a mandate to undertake such algorithmic oversight, and override or reconfigure the product of online services, thereby controls the content consumers may access…. This sort of control is deeply problematic… [because it saddles users] with a pervasive set of speech controls promulgated by the government. The history of such state censorship is one which has demonstrated strong harms to both social welfare and rule of law, and should not be emulated.

Digital Assistants. Consider also the veritable cage match among the tech giants to offer “digital assistants” and “smart home” devices with ever-more features at ever-lower prices. Today the allegedly non-existent competition among these companies is played out most visibly in this multi-featured market, comprising advanced devices tightly integrated with artificial intelligence, voice recognition, advanced algorithms, and a host of services. Under Warren’s nondiscrimination principle this market disappears. Each device can offer only a connectivity platform (if such a service is even permitted to be bundled with a physical device…) — and nothing more.

But such a world entails not only the end of an entire, promising avenue of consumer-benefiting innovation, it also entails the end of a promising avenue of consumer-benefiting competition. It beggars belief that anyone thinks consumers would benefit by forcing technology companies into their own silos, ensuring that the most powerful sources of competition for each other are confined to their own fiefdoms by order of law.

Breaking business models

Beyond the product-feature dimension, Sen. Warren’s proposal would be devastating for innovative business models. Why is Amazon Prime Video bundled with free shipping? Because the marginal cost of distribution for video is close to zero and bundling it with Amazon Prime increases the value proposition for customers. Why is almost every Google service free to users? Because Google’s business model is supported by ads, not monthly subscription fees. Each of the tech giants has carefully constructed an ecosystem in which every component reinforces the others. Sen. Warren’s plan would not only break up the companies, it would prohibit their business models — the ones that both created and continue to sustain these products. Such an outcome would manifestly harm consumers.

Both of Warren’s policy “solutions” are misguided and will lead to higher prices and less innovation. Her cause for alarm is built on a multitude of mistaken assumptions, but let’s address just a few (Warren in bold):

  • “Nearly half of all e-commerce goes through Amazon.” Yes, but it has only 5% of total retail in the United States. As my colleague Kristian Stout says, “the Internet is not a market; it’s a distribution channel.”
  • “Amazon has used its immense market power to force smaller competitors like to sell at a discounted rate.” The real story, as the founders of freely admitted, is that they sold diapers as what they hoped would be a loss leader, intending to build out sales of other products once they had a base of loyal customers:

And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.

Like all entrepreneurs,’s founders took a calculated risk that didn’t pay off as hoped. Amazon subsequently acquired the company (after it had declined a similar buyout offer from Walmart). (Antitrust laws protect consumers, not inefficient competitors). And no, this was not a case of predatory pricing. After many years of trying to make the business profitable as a subsidiary, Amazon shut it down in 2017.

  • “In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government’s antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.” The government’s settlement with Microsoft is not the reason Google and Facebook were able to emerge. Neither company entered the browser market at launch. Instead, they leapfrogged the browser entirely and created new platforms for the web (only later did Google create Chrome).

    Furthermore, if the Microsoft case is responsible for “clearing a path” for Google is it not also responsible for clearing a path for Google’s alleged depredations? If the answer is that antitrust enforcement should be consistently more aggressive in order to rein in Google, too, when it gets out of line, then how can we be sure that that same more-aggressive enforcement standard wouldn’t have curtailed the extent of the Microsoft ecosystem in which it was profitable for Google to become Google? Warren implicitly assumes that only the enforcement decision in Microsoft was relevant to Google’s rise. But Microsoft doesn’t exist in a vacuum. If Microsoft cleared a path for Google, so did every decision not to intervene, which, all combined, created the legal, business, and economic environment in which Google operates.

Warren characterizes Big Tech as a weight on the American economy. In fact, nothing could be further from the truth. These superstar companies are the drivers of productivity growth, all ranking at or near the top for most spending on research and development. And while data may not be the new oil, extracting value from it may require similar levels of capital expenditure. Last year, Big Tech spent as much or more on capex as the world’s largest oil companies:

Source: WSJ

Warren also faults Big Tech for a decline in startups, saying,

The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.

But this trend predates the existence of the companies she criticizes, as this chart from Quartz shows:

The exact causes of the decline in business dynamism are still uncertain, but recent research points to a much more mundane explanation: demographics. Labor force growth has been declining, which has led to an increase in average firm age, nudging fewer workers to start their own businesses.

Furthermore, it’s not at all clear whether this is actually a decline in business dynamism, or merely a change in business model. We would expect to see the same pattern, for example, if would-be startup founders were designing their software for acquisition and further development within larger, better-funded enterprises.

Will Rinehart recently looked at the literature to determine whether there is indeed a “kill zone” for startups around Big Tech incumbents. One paper finds that “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.” Another shows an inverse correlation across 50 countries between GDP and entrepreneurship rates. Robert Lucas predicted these trends back in 1978, pointing out that productivity increases would lead to wage increases, pushing marginal entrepreneurs out of startups and into big companies.

It’s notable that many in the venture capital community would rather not have Sen. Warren’s “help”:

Arguably, it is also simply getting harder to innovate. As economists Nick Bloom, Chad Jones, John Van Reenen and Michael Webb argue,

just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.

If this assessment is correct, it may well be that coming up with productive and profitable innovations is simply becoming more expensive, and thus, at the margin, each dollar of venture capital can fund less of it. Ironically, this also implies that larger firms, which can better afford the additional resources required to sustain exponential growth, are a crucial part of the solution, not the problem.

Warren believes that Big Tech is the cause of our social ills. But Americans have more trust in Amazon, Facebook, and Google than in the political institutions that would break them up. It would be wise for her to reflect on why that might be the case. By punishing our most valuable companies for past successes, Warren would chill competition and decrease returns to innovation.

Finally, in what can only be described as tragic irony, the most prominent political figure who shares Warren’s feelings on Big Tech is President Trump. Confirming the horseshoe theory of politics, far-left populism and far-right populism seem less distinguishable by the day. As our colleague Gus Hurwitz put it, with this proposal Warren is explicitly endorsing the unitary executive theory and implicitly endorsing Trump’s authority to direct his DOJ to “investigate specific cases and reach specific outcomes.” Which cases will he want to have investigated and what outcomes will he be seeking? More good questions that Senator Warren should be asking. The notion that competition, consumer welfare, and growth are likely to increase in such an environment is farcical.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” contracts to license its proprietary suite of mobile apps, Google Mobile Services, to device manufacturers.

I’ve written about this at length before. As I said previously,

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

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.”

Microsoft (via another of its front groups, ICOMP) responded in predictable fashion.

While the hysteria over private, mutually beneficial contracts negotiated between sophisticated corporations was always patently absurd (who ever heard of sensitive commercial contracts that weren’t confidential?), Edelman’s claim that the Google MADAs operate to “suppress competition” with “no plausible pro-consumer benefits” was the subject of my previous post.

I won’t rehash all of those arguments here, but rather point to another indication that such contract terms are not anticompetitive: The recent revelation that they are used by others in the same industry — including, we’ve learned (to no one’s surprise), Microsoft.

Much like the release of Google’s MADAs in an unrelated lawsuit, the ongoing patent licensing contract dispute between Microsoft and Samsung has obliged the companies to release their own agreements. As it happens, they are at least as restrictive as the Google agreements criticized by Edelman — and, in at least one way, even more so.

Some quick background: As I said in my previous post, it is no secret that equipment manufacturers have the option to license a free set of Google apps (Google Mobile Services) and set Google as the default search engine. However, Google allows OEMs to preinstall other competing search engines as they see fit. Indeed, no matter which applications come pre-installed, the user can easily download Yahoo!, Microsoft’s Bing, Yandex, Naver, DuckDuckGo and other search engines for free from the Google Play Store.

But Microsoft has sought to impose even-more stringent constraints on its device partners. One of the agreements disclosed in the Microsoft-Samsung contract litigation, the “Microsoft-Samsung Business Collaboration Agreement,” requires Samsung to set Bing as the search default for all Windows phones and precludes Samsung from pre-installing any other search applications on Windows-based phones. Samsung must configure all of its Windows Phones to use Microsoft Search Services as the

default Web Search  . . . in all instances on such properties where Web Search can be launched or a Query submitted directly by a user (including by voice command) or automatically (including based on location or context).

Interestingly, the agreement also requires Samsung to install Microsoft Search Services as a non-default search option on all of Samsung’s non-Microsoft Android devices (to the extent doing so does not conflict with other contracts).

Of course, the Microsoft-Samsung contract is expressly intended to remain secret: Its terms are declared to be “Confidential Information,” prohibiting Samsung from making “any public statement regarding the specific terms of [the] Agreement” without Microsoft’s consent.

Meanwhile, the accompanying Patent License Agreement provides that

all terms and conditions in this Agreement, including the payment amount [and the] specific terms and conditions in this Agreement (including, without limitation, the amount of any fees and any other amounts payable to Microsoft under this Agreement) are confidential and shall not be disclosed by either Party.

In addition to the confidentiality terms spelled out in these two documents, there is a separate Non-Disclosure Agreement—to further dispel any modicum of doubt on that score. Perhaps this is why Edelman was unaware of the ubiquity of such terms (and their confidentiality) when he issued his indictment of the Google agreements but neglected to mention Microsoft’s own.

In light of these revelations, Edelman’s scathing contempt for the “secrecy” of Google’s MADAs seems especially disingenuous:

MADA secrecy advances Google’s strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response…Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google’s restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.

If, as Edelman claims, Google’s objectionable contract terms “serve both to help Google expand into areas where competition could otherwise occur, and to prevent competitors from gaining traction,” then what are the very same sorts of terms doing in Microsoft’s contracts with Samsung? The revelation that Microsoft employs contracts similar to — and similarly confidential to — Google’s highlights the hypocrisy of claims that such contracts serve anticompetitive aims.

In fact, as I discussed in my previous post, there are several pro-competitive justifications for such agreements, whether undertaken by a market leader or a newer entrant intent on catching up. Most obviously, such contracts help to ensure that consumers receive the user experience they demand on devices manufactured by third parties. But more to the point, the fact that such arrangements permeate the market and are adopted by both large and small competitors is strong indication that such terms are pro-competitive.

At the very least, they absolutely demonstrate that such practices do not constitute prima facie evidence of the abuse of market power.

[Reminder: See the “Disclosures” page above. ICLE has received financial support from Google in the past, and I formerly worked at Microsoft. Of course, the views here are my own, although I encourage everyone to agree with them.]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But Google Android is far from the only Android experience.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EU regulators, take note.

I have been a critic of the Federal Trade Commission’s investigation into Google since it was a gleam in its competitors’ eyes—skeptical that there was any basis for a case, and concerned about the effect on consumers, innovation and investment if a case were brought.

While it took the Commission more than a year and a half to finally come to the same conclusion, ultimately the FTC had no choice but to close the case that was a “square peg, round hole” problem from the start.

Now that the FTC’s investigation has concluded, an examination of the nature of the markets in which Google operates illustrates why this crusade was ill-conceived from the start. In short, the “realities on the ground” strongly challenged the logic and relevance of many of the claims put forth by Google’s critics. Nevertheless, the politics are such that their nonsensical claims continue, in different forums, with competitors continuing to hope that they can wrangle a regulatory solution to their competitive problem.

The case against Google rested on certain assumptions about the functioning of the markets in which Google operates. Because these are tech markets, constantly evolving and complex, most assumptions about the scope of these markets and competitive effects within them are imperfect at best. But there are some attributes of Google’s markets—conveniently left out of the critics’ complaints— that, properly understood, painted a picture for the FTC that undermined the basic, essential elements of an antitrust case against the company.

That case was seriously undermined by the nature and extent of competition in the markets the FTC was investigating. Most importantly, casual references to a “search market” and “search advertising market” aside, Google actually competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search offers a valuable opportunity for targeting an advertiser’s message, but it is by no means alone: there are myriad (and growing) other mechanisms to access consumers online.

Consumers use Google because they are looking for information — but there are lots of ways to do that. There are plenty of apps that circumvent Google, and consumers are increasingly going to specialized sites to find what they are looking for. The search market, if a distinct one ever existed, has evolved into an online information market that includes far more players than those who just operate traditional search engines.

We live in a world where what prevails today won’t prevail tomorrow. The tech industry is constantly changing, and it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market. In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search market” is far from unassailable.

This is progress — creative destruction — not regress, and such changes should not be penalized.

Another common refrain from Google’s critics was that Google’s access to immense amounts of data used to increase the quality of its targeting presented a barrier to competition that no one else could match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.

Even if scale doesn’t come cheaply, the fact that challenging firms might have to spend the same (or, in this case, almost certainly less) Google did in order to replicate its success is not a “barrier to entry” that requires an antitrust remedy. Data about consumer interests is widely available (despite efforts to reduce the availability of such data in the name of protecting “privacy”—which might actually create barriers to entry). It’s never been the case that a firm has to generate its own inputs for every product it produces — and there’s no reason to suggest search or advertising is any different.

Additionally, to defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged were illusory. Bing and other recent entrants in the general search business have enjoyed success precisely because they were able to obtain the inputs (in this case, data) necessary to develop competitive offerings.

Meanwhile unanticipated competitors like Facebook, Amazon, Twitter and others continue to knock at Google’s metaphorical door, all of them entering into competition with Google using data sourced from creative sources, and all of them potentially besting Google in the process. Consider, for example, Amazon’s recent move into the targeted advertising market, competing with Google to place ads on websites across the Internet, but with the considerable advantage of being able to target ads based on searches, or purchases, a user has made on Amazon—the world’s largest product search engine.

Now that the investigation has concluded, we come away with two major findings. First, the online information market is dynamic, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each development in the market – whether offered by Google or its competitors and whether facilitated by technological change or shifting consumer preferences – has presented different, novel and shifting opportunities and challenges for companies interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” missed the mark precisely because there was simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

It would be churlish not to give credit where credit is due—and credit is due the FTC. I continue to think the investigation should have ended before it began, of course, but the FTC is to be commended for reaching this result amidst an overwhelming barrage of pressure to “do something.”

But there are others in this sadly politicized mess for whom neither the facts nor the FTC’s extensive investigation process (nor the finer points of antitrust law) are enough. Like my four-year-old daughter, they just “want what they want,” and they will stamp their feet until they get it.

While competitors will be competitors—using the regulatory system to accomplish what they can’t in the market—they do a great disservice to the very customers they purport to be protecting in doing so. As Milton Friedman famously said, in decrying “The Business Community’s Suicidal Impulse“:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

I do blame businessmen when, in their political activities, individual businessmen and their organizations take positions that are not in their own self-interest and that have the effect of undermining support for free private enterprise. In that respect, businessmen tend to be schizophrenic. When it comes to their own businesses, they look a long time ahead, thinking of what the business is going to be like 5 to 10 years from now. But when they get into the public sphere and start going into the problems of politics, they tend to be very shortsighted.

Ironically, Friedman was writing about the antitrust persecution of Microsoft by its rivals back in 1999:

Is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process, that by the time this suit is over, who knows what the shape of the industry will be.… [Y]ou will rue the day when you called in the government.

Among Microsoft’s chief tormentors was Gary Reback. He’s spent the last few years beating the drum against Google—but singing from the same song book. Reback recently told the Washington Post, “if a settlement were to be proposed that didn’t include search, the institutional integrity of the FTC would be at issue.” Actually, no it wouldn’t. As a matter of fact, the opposite is true. It’s hard to imagine an agency under more pressure, from more quarters (including the Hill), to bring a case around search. Doing so would at least raise the possibility that it were doing so because of pressure and not the merits of the case. But not doing so in the face of such pressure? That can almost only be a function of institutional integrity.

As another of Google’s most-outspoken critics, Tom Barnett, noted:

[The FTC has] really put [itself] in the position where they are better positioned now than any other agency in the U.S. is likely to be in the immediate future to address these issues. I would encourage them to take the issues as seriously as they can. To the extent that they concur that Google has violated the law, there are very good reasons to try to address the concerns as quickly as possible.

As Barnett acknowledges, there is no question that the FTC investigated these issues more fully than anyone. The agency’s institutional culture and its committed personnel, together with political pressure, media publicity and endless competitor entreaties, virtually ensured that the FTC took the issues “as seriously as they [could]” – in fact, as seriously as anyone else in the world. There is simply no reasonable way to criticize the FTC for being insufficiently thorough in its investigation and conclusions.

Nor is there a basis for claiming that the FTC is “standing in the way” of the courts’ ability to review the issue, as Scott Cleland contends in an op-ed in the Hill. Frankly, this is absurd. Google’s competitors have spent millions pressuring the FTC to bring a case. But the FTC isn’t remotely the only path to the courts. As Commissioner Rosch admonished,

They can darn well bring [a case] as a private antitrust action if they think their ox is being gored instead of free-riding on the government to achieve the same result.

Competitors have already beaten a path to the DOJ’s door, and investigations are still pending in the EU, Argentina, several US states, and elsewhere. That the agency that has leveled the fullest and best-informed investigation has concluded that there is no “there” there should give these authorities pause, but, sadly for consumers who would benefit from an end to competitors’ rent seeking, nothing the FTC has done actually prevents courts or other regulators from having a crack at Google.

The case against Google has received more attention from the FTC than the merits of the case ever warranted. It is time for Google’s critics and competitors to move on.

[Crossposted at]

As the Google antitrust discussion heats up on its way toward some culmination at the FTC, I thought it would be helpful to address some of the major issues raised in the case by taking a look at what’s going on in the market(s) in which Google operates. To this end, I have penned a lengthy document — The Market Realities that Undermine the Antitrust Case Against Google — highlighting some of the most salient aspects of current market conditions and explaining how they fit into the putative antitrust case against Google.

While not dispositive, these “realities on the ground” do strongly challenge the logic and thus the relevance of many of the claims put forth by Google’s critics. The case against Google rests on certain assumptions about how the markets in which it operates function. But these are tech markets, constantly evolving and complex; most assumptions (and even “conclusions” based on data) are imperfect at best. In this case, the conventional wisdom with respect to Google’s alleged exclusionary conduct, the market in which it operates (and allegedly monopolizes), and the claimed market characteristics that operate to protect its position (among other things) should be questioned.

The reality is far more complex, and, properly understood, paints a picture that undermines the basic, essential elements of an antitrust case against the company.

The document first assesses the implications for Market Definition and Monopoly Power of these competitive realities. Of note:

  • Users use Google because they are looking for information — but there are lots of ways to do that, and “search” is not so distinct that a “search market” instead of, say, an “online information market” (or something similar) makes sense.
  • Google competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search is important in this, but it is by no means alone, and there are myriad (and growing) other mechanisms to access consumers online.
  • To define the relevant market in terms of the particular mechanism that prevails to accomplish the matching of consumers and advertisers does not reflect the substitutability of other mechanisms that do the same thing but simply aren’t called “search.”
  • In a world where what prevails today won’t — not “might not,” but won’t — prevail tomorrow, it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market.
  • In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search” market looks far from unassailable.

Next I address Anticompetitive Harm — how the legal standard for antitrust harm is undermined by a proper understanding of market conditions:

  • Antitrust law doesn’t require that Google or any other large firm make life easier for competitors or others seeking to access resources owned by these firms.
  • Advertisers are increasingly targeting not paid search but rather social media to reach their target audiences.
  • But even for those firms that get much or most of their traffic from “organic” search, this fact isn’t an inevitable relic of a natural condition over which only the alleged monopolist has control; it’s a business decision, and neither sensible policy nor antitrust law is set up to protect the failed or faulty competitor from himself.
  • Although it often goes unremarked, paid search’s biggest competitor is almost certainly organic search (and vice versa). Nextag may complain about spending money on paid ads when it prefers organic, but the real lesson here is that the two are substitutes — along with social sites and good old-fashioned email, too.
  • It is incumbent upon critics to accurately assess the “but for” world without the access point in question. Here, Nextag can and does use paid ads to reach its audience (and, it is important to note, did so even before it claims it was foreclosed from Google’s users). But there are innumerable other avenues of access, as well. Some may be “better” than others; some that may be “better” now won’t be next year (think how links by friends on Facebook to price comparisons on Nextag pages could come to dominate its readership).
  • This is progress — creative destruction — not regress, and such changes should not be penalized.

Next I take on the perennial issue of Error Costs and the Risks of Erroneous Enforcement arising from an incomplete and inaccurate understanding of Google’s market:

  • Microsoft’s market position was unassailable . . . until it wasn’t — and even at the time, many could have told you that its perceived dominance was fleeting (and many did).
  • Apple’s success (and the consumer value it has created), while built in no small part on its direct competition with Microsoft and the desktop PCs which run it, was primarily built on a business model that deviated from its once-dominant rival’s — and not on a business model that the DOJ’s antitrust case against the company either facilitated or anticipated.
  • Microsoft and Google’s other critic-competitors have more avenues to access users than ever before. Who cares if users get to these Google-alternatives through their devices instead of a URL? Access is access.
  • It isn’t just monopolists who prefer not to innovate: their competitors do, too. To the extent that Nextag’s difficulties arise from Google innovating, it is Nextag, not Google, that’s working to thwart innovation and fighting against dynamism.
  • Recall the furor around Google’s purchase of ITA, a powerful cautionary tale. As of September 2012, Google ranks 7th in visits among metasearch travel sites, with a paltry 1.4% of such visits. Residing at number one? FairSearch founding member, Kayak, with a whopping 61%. And how about FairSearch member Expedia? Currently, it’s the largest travel company in the world, and it has only grown in recent years.

The next section addresses the essential issue of Barriers to Entry and their absence:

  • One common refrain from Google’s critics is that Google’s access to immense amounts of data used to increase the quality of its targeting presents a barrier to competition that no one else can match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.
  • It’s never been the case that a firm has to generate its own inputs into every product it produces — and there is no reason to suggest search/advertising is any different.
  • Meanwhile, Google’s chief competitor, Microsoft, is hardly hurting for data (even, quite creatively, culling data directly from Google itself), despite its claims to the contrary. And while regulators and critics may be looking narrowly and statically at search data, Microsoft is meanwhile sitting on top of copious data from unorthodox — and possibly even more valuable — sources.
  • To defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged are illusory.

The next section takes on recent claims revolving around The Mobile Market and Google’s position (and conduct) there:

  • If obtaining or preserving dominance is simply a function of cash, Microsoft is sitting on some $58 billion of it that it can devote to that end. And JP Morgan Chase would be happy to help out if it could be guaranteed monopoly returns just by throwing its money at Bing. Like data, capital is widely available, and, also like data, it doesn’t matter if a company gets it from selling search advertising or from selling cars.
  • Advertisers don’t care whether the right (targeted) user sees their ads while playing Angry Birds or while surfing the web on their phone, and users can (and do) seek information online (and thus reveal their preferences) just as well (or perhaps better) through Wikipedia’s app as via a Google search in a mobile browser.
  • Moreover, mobile is already (and increasingly) a substitute for the desktop. Distinguishing mobile search from desktop search is meaningless when users use their tablets at home, perform activities that they would have performed at home away from home on mobile devices simply because they can, and where users sometimes search for places to go (for example) on mobile devices while out and sometimes on their computers before they leave.
  • Whatever gains Google may have made in search from its spread into the mobile world is likely to be undermined by the massive growth in social connectivity it has also wrought.
  • Mobile is part of the competitive landscape. All of the innovations in mobile present opportunities for Google and its competitors to best each other, and all present avenues of access for Google and its competitors to reach consumers.

The final section Concludes.

The lessons from all of this? There are two. First, these are dynamic markets, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each of these developments has presented different, novel and shifting opportunities and challenges for firms interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” misses the mark precisely because there is simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

Perhaps most important is this:

Competition with Google may not and need not look exactly like Google itself, and some of this competition will usher in innovations that Google itself won’t be able to replicate. But this doesn’t make it any less competitive.  

Competition need not look identical to be competitive — that’s what innovation is all about. Just ask those famous buggy whip manufacturers.

On Tuesday the European Commission opened formal proceedings against Motorola Mobility based on its patent licensing practices surrounding some of its core cellular telephony, Internet video and Wi-fi technology. The Commission’s concerns, echoing those raised by Microsoft and Apple, center on Motorola’s allegedly high royalty rates and its efforts to use injunctions to enforce the “standards-essential patents” at issue.

As it happens, this development is just the latest, like so many in the tech world these days, in Microsoft’s ongoing regulatory, policy and legal war against Google, which announced in August it was planning to buy Motorola.

Microsoft’s claim and the Commission’s concern that Motorola’s royalty offer was, in Microsoft’s colorful phrase, “so over-reaching that no rational company could ever have accepted it or even viewed it as a legitimate offer,” is misplaced. Motorola is seeking a royalty rate for its patents that is seemingly in line with customary rates.

In fact, Microsoft’s claim that Motorola’s royalty ask is extraordinary is refuted by its own conduct. As one commentator notes:

Microsoft complained that it might have to pay a tribute of up to $22.50 for every $1,000 laptop sold, and suggested that it might be fairer to pay just a few cents. This is the firm that is thought to make $10 to $15 from every $500 Android device that is sold, and for a raft of trivial software patents, not standard essential ones.

Seemingly forgetting this, Microsoft criticizes Motorola’s royalty ask on its 50 H.264 video codec patents by comparing it to the amount Microsoft pays for more than 2000 other patents in the video codec’s patent pool, claiming that the former would cost it $4 billion while the latter costs it only $6.5 million. But this is comparing apples and oranges. It is not surprising to find some patents worth orders of magnitude more than others and to find that license rates are a complicated function of the contracting parties’ particular negotiating positions and circumstances. It is no more inherently inappropriate for Microsoft to rake in 2-3% of the price of every Nook Barnes and Nobles sells than it is for Motorola to net 2.25% of the price of each Windows-operated computer sold – which is the royalty rate Motorola is seeking and which Microsoft wants declared anticompetitive out of hand.

It’s not clear how much negotiation, if any, has taken place between the companies over the terms of Microsoft’s licensing of Motorola’s patents, but what is clear is that Microsoft’s complaint, echoed by the EC, is based on the size of Motorola’s initial royalty demand and its use of a legal injunction to enforce its patent rights. Unfortunately, neither of these is particularly problematic, especially in an environment where companies like Microsoft and Apple aggressively wield exactly such tools to gain a competitive negotiating edge over their own competitors.

The court adjudicating this dispute in the ongoing litigation in U.S. district court in Washington has thus far agreed. The court denied Microsoft’s request for summary judgment that Motorola’s royalty demand violated its RAND commitment, noting its disagreement with Microsoft’s claim that “it is always facially unreasonable for a proposed royalty rate to result in a larger royalty payment for products that have higher end prices. Indeed, Motorola has previously entered into licensing agreements for its declared-essential patents at royalty rates similar to those offered to Microsoft and with royalty rates based on the price of the end product.”

The staggering aggregate numbers touted by Microsoft in its complaint and repeated by bloggers and journalists the world over are not a function of Motorola seeking an exorbitant royalty but rather a function Microsoft’s selling a lot of operating systems and earning a lot of revenue doing it. While the aggregate number ($4 billion, according to Microsoft) is huge, it is, as the court notes, based on a royalty rate that is in line with similar agreements.

The court also takes issue with Microsoft’s contention that the mere offer of allegedly unreasonable terms constitutes a breach of Motorola’s RAND commitment to license its patents on commercially reasonable terms. Quite sensibly, the court notes:

[T]he court is mindful that at the time of an initial offer, it is difficult for the offeror to know what would in fact constitute RAND terms for the offeree. Thus, what may appear to be RAND terms from the offeror’s perspective may be rejected out-of-pocket as non-RAND terms by the offeree. Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties’ unique circumstances.

Resolution of such an impasse may ultimately fall to the courts. Thus the royalty rate issue is in fact closely related to the second issue raised by the EC’s investigation: the use or threat of injunction to enforce standards-essential patents.

While some scholars and many policy advocates claim that injunctions in the standards context raise the specter of costly hold-ups (patent holders extracting not only the market value of their patent, but also a portion of the costs that the infringer would incur if it had to implement its technology without the patent), there is no empirical evidence supporting the claim that patent holdup is a pervasive problem.

And the theory doesn’t comfortably support such a claim, either. Motorola, for example, has no interest in actually enforcing an injunction: Doing so is expensive and, notably, not nearly as good for the bottom line as actually receiving royalties from an agreed-upon contract. Instead, injunctions are, just like the more-attenuated liability suit for patent infringement, a central aspect of our intellectual property system, the means by which innovators and their financiers can reasonably expect a return on their substantial up-front investments in technology development.

Moreover, and apparently unbeknownst to those who claim that injunctions are the antithesis of negotiated solutions to licensing contests, the threat of injunction actually facilitates efficient transacting. Injunctions provide clearer penalties than damage awards for failing to reach consensus and are thus better at getting both parties on to the table with matched expectations. And this is especially true in the standards-setting context where the relevant parties are generally repeat players and where they very often have both patents to license and the need to license patents from the standard—both of which help to induce everyone to come to the table, lest they find themselves closed off from patents essential to their own products.

Antitrust intervention in standard setting negotiations based on an allegedly high initial royalty rate offer or the use of an injunction to enforce a patent is misdirected and costly. One of the clearest statements of the need for antitrust restraint in the standard setting context comes from a June 2011 comment filed with the FTC:

[T]he existence of a RAND commitment to offer patent licenses should not preclude a patent holder from seeking preliminary injunctive relief. . . . Any uniform declaration that such relief would not be available if the patent holder has made a commitment to offer a RAND license for its essential patent claims in connection with a standard may reduce any incentives that implementers might have to engage in good faith negotiations with the patent holder.

Most of the SSOs and their stakeholders that have considered these proposals over the years have determined that there are only a limited number of situations where patent hold-up takes place in the context of standards-setting. The industry has determined that those situations generally are best addressed through bi-lateral negotiation (and, in rare cases, litigation) as opposed to modifying the SSO’s IPR policy [by precluding injunctions or mandating a particular negotiation process].

The statement’s author? Why, Microsoft, of course.

Patents are an important tool for encouraging the development and commercialization of advanced technology, as are standard setting organizations. Antitrust authorities should exercise great restraint before intervening in the complex commercial negotiations over technology patents and standards. In Motorola’s case, the evidence of conduct that might harm competition is absent, and all that remains are, in essence, allegations that Motorola is bargaining hard and enforcing its property rights. The EC should let competition run its course.

In my series of three posts (here, here and here) drawn from my empirical study on search bias I have examined whether search bias exists, and, if so, how frequently it occurs.  This, the final post in the series, assesses the results of the study (as well as the Edelman & Lockwood (E&L) study to which it responds) to determine whether the own-content bias I’ve identified is in fact consistent with anticompetitive foreclosure or is otherwise sufficient to warrant antitrust intervention.

As I’ve repeatedly emphasized, while I refer to differences among search engines’ rankings of their own or affiliated content as “bias,” without more these differences do not imply anticompetitive conduct.  It is wholly unsurprising and indeed consistent with vigorous competition among engines that differentiation emerges with respect to algorithms.  However, it is especially important to note that the theories of anticompetitive foreclosure raised by Google’s rivals involve very specific claims about these differences.  Properly articulated vertical foreclosure theories proffer both that bias is (1) sufficient in magnitude to exclude Google’s rivals from achieving efficient scale, and (2) actually directed at Google’s rivals.  Unfortunately for search engine critics, their theories fail on both counts.  The observed own-content bias appears neither to be extensive enough to prevent rivals from gaining access to distribution nor does it appear to target Google’s rivals; rather, it seems to be a natural result of intense competition between search engines and of significant benefit to consumers.

Vertical foreclosure arguments are premised upon the notion that rivals are excluded with sufficient frequency and intensity as to render their efforts to compete for distribution uneconomical.  Yet the empirical results simply do not indicate that market conditions are in fact conducive to the types of harmful exclusion contemplated by application of the antitrust laws.  Rather, the evidence indicates that (1) the absolute level of search engine “bias” is extremely low, and (2) “bias” is not a function of market power, but an effective strategy that has arisen as a result of serious competition and innovation between and by search engines.  The first finding undermines competitive foreclosure arguments on their own terms, that is, even if there were no pro-consumer justifications for the integration of Google content with Google search results.  The second finding, even more importantly, reveals that the evolution of consumer preferences for more sophisticated and useful search results has driven rival search engines to satisfy that demand.  Both Bing and Google have shifted toward these results, rendering the complained-of conduct equivalent to satisfying the standard of care in the industry–not restraining competition.

A significant lack of search bias emerges in the representative sample of queries.  This result is entirely unsurprising, given that bias is relatively infrequent even in E&L’s sample of queries specifically designed to identify maximum bias.  In the representative sample, the total percentage of queries for which Google references its own content when rivals do not is even lower—only about 8%—meaning that Google favors its own content far less often than critics have suggested.  This fact is crucial and highly problematic for search engine critics, as their burden in articulating a cognizable antitrust harm includes not only demonstrating that bias exists, but further that it is actually competitively harmful.  As I’ve discussed, bias alone is simply not sufficient to demonstrate any prima facie anticompetitive harm as it is far more often procompetitive or competitively neutral than actively harmful.  Moreover, given that bias occurs in less than 10% of queries run on Google, anticompetitive exclusion arguments appear unsustainable.

Indeed, theories of vertical foreclosure find virtually zero empirical support in the data.  Moreover, it appears that, rather than being a function of monopolistic abuse of power, search bias has emerged as an efficient competitive strategy, allowing search engines to differentiate their products in ways that benefit consumers.  I find that when search engines do reference their own content on their search results pages, it is generally unlikely that another engine will reference this same content.  However, the fact that both this percentage and the absolute level of own content inclusion is similar across engines indicates that this practice is not a function of market power (or its abuse), but is rather an industry standard.  In fact, despite conducting a much smaller percentage of total consumer searches, Bing is consistently more biased than Google, illustrating that the benefits search engines enjoy from integrating their own content into results is not necessarily a function of search engine size or volume of queries.  These results are consistent with a business practice that is efficient and at significant tension with arguments that such integration is designed to facilitate competitive foreclosure. Continue Reading…

My last two posts on search bias (here and here) have analyzed and critiqued Edelman & Lockwood’s small study on search bias.  This post extends this same methodology and analysis to a random sample of 1,000 Google queries (released by AOL in 2006), to develop a more comprehensive understanding of own-content bias.  As I’ve stressed, these analyses provide useful—but importantly limited—glimpses into the nature of the search engine environment.  While these studies are descriptively helpful, actual harm to consumer welfare must always be demonstrated before cognizable antitrust injuries arise.  And naked identifications of own-content bias simply do not inherently translate to negative effects on consumers (see, e.g., here and here for more comprehensive discussion).

Now that’s settled, let’s jump into the results of the 1,000 random search query study.

How Do Search Engines Rank Their Own Content?

Consistent with our earlier analysis, a starting off point for thinking about measuring differentiation among search engines with respect to placing their own content is to compare how a search engine ranks its own content relative to how other engines place that same content (e.g. to compare how Google ranks “Google Maps” relative to how Bing or Blekko rank it).   Restricting attention exclusively to the first or “top” position, I find that Google simply does not refer to its own content in over 90% of queries.  Similarly, Bing does not reference Microsoft content in 85.4% of queries.  Google refers to its own content in the first position when other search engines do not in only 6.7% of queries; while Bing does so over twice as often, referencing Microsoft content that no other engine references in the first position in 14.3% of queries.  The following two charts illustrate the percentage of Google or Bing first position results, respectively, dedicated to own content across search engines.

The most striking aspect of these results is the small fraction of queries for which placement of own-content is relevant.  The results are similar when I expand consideration to the entire first page of results; interestingly, however, while the levels of own-content bias are similar considering the entire first page of results, Bing is far more likely than Google to reference its own content in its very first results position.

Examining Search Engine “Bias” on Google

Two distinct differences between the results of this larger study and my replication of Edelman & Lockwood emerge: (1) Google and Bing refer to their own content in a significantly smaller percentage of cases here than in the non-random sample; and (2) in general, when Google or Bing does rank its own content highly, rival engines are unlikely to similarly rank that same content.

The following table reports the percentages of queries for which Google’s ranking of its own content and its rivals’ rankings of that same content differ significantly. When Google refers to its own content within its Top 5 results, at least one other engine similarly ranks this content for only about 5% of queries.

The following table presents the likelihood that Google content will appear in a Google search, relative to searches conducted on rival engines (reported in odds ratios).

The first and third columns report results indicating that Google affiliated content is more likely to appear in a search executed on Google rather than rival engines.  Google is approximately 16 times more likely to refer to its own content on its first page as is any other engine.  Bing and Blekko are both significantly less likely to refer to Google content in their first result or on their first page than Google is to refer to Google content within these same parameters.  In each iteration, Bing is more likely to refer to Google content than is Blekko, and in the case of the first result, Bing is much more likely to do so.  Again, to be clear, the fact that Bing is more likely to rank its own content is not suggestive that the practice is problematic.  Quite the contrary, the demonstration that firms both with and without market power in search (to the extent that is a relevant antitrust market) engage in similar conduct the correct inference is that there must be efficiency explanations for the practice.  The standard response, of course, is that the competitive implications of a practice are different when a firm with market power does it.  That’s not exactly right.  It is true that firms with market power can engage in conduct that gives rise to potential antitrust problems when the same conduct from a firm without market power would not; however, when firms without market power engage in the same business practice it demands that antitrust analysts seriously consider the efficiency implications of the practice.  In other words, there is nothing in the mantra that things are “different” when larger firms do them that undercut potential efficiency explanations.

Examining Search Engine “Bias” on Bing

For queries within the larger sample, Bing refers to Microsoft content within its Top 1 and 3 results when no other engine similarly references this content for a slightly smaller percentage of queries than in my Edelman & Lockwood replication.  Yet Bing continues to exhibit a strong tendency to rank Microsoft content more prominently than rival engines.  For example, when Bing refers to Microsoft content within its Top 5 results, other engines agree with this ranking for less than 2% of queries; and Bing refers to Microsoft content that no other engine does within its Top 3 results for 99.2% of queries:

Regression analysis further illustrates Bing’s propensity to reference Microsoft content that rivals do not.  The following table reports the likelihood that Microsoft content is referred to in a Bing search as compared to searches on rival engines (again reported in odds ratios).

Bing refers to Microsoft content in its first results position about 56 times more often than rival engines refer to Microsoft content in this same position.  Across the entire first page, Microsoft content appears on a Bing search about 25 times more often than it does on any other engine.  Both Google and Blekko are accordingly significantly less likely to reference Microsoft content.  Notice further that, contrary to the findings in the smaller study, Google is slightly less likely to return Microsoft content than is Blekko, both in its first results position and across its entire first page.

A Closer Look at Google v. Bing

 Consistent with the smaller sample, I find again that Bing is more biased than Google using these metrics.  In other words, Bing ranks its own content significantly more highly than its rivals do more frequently then Google does, although the discrepancy between the two engines is smaller here than in the study of Edelman & Lockwood’s queries.  As noted above, Bing is over twice as likely to refer to own content in first results position than is Google.

Figures 7 and 8 present the same data reported above, but with Blekko removed, to allow for a direct visual comparison of own-content bias between Google and Bing.

Consistent with my earlier results, Bing appears to consistently rank Microsoft content higher than Google ranks the same (Microsoft) content more frequently than Google ranks Google content more prominently than Bing ranks the same (Google) content.

This result is particularly interesting given the strength of the accusations condemning Google for behaving in precisely this way.  That Bing references Microsoft content just as often as—and frequently even more often than!—Google references its own content strongly suggests that this behavior is a function of procompetitive product differentiation, and not abuse of market power.  But I’ll save an in-depth analysis of this issue for my next post, where I’ll also discuss whether any of the results reported in this series of posts support anticompetitive foreclosure theories or otherwise suggest antitrust intervention is warranted.

In my last post, I discussed Edelman & Lockwood’s (E&L’s) attempt to catch search engines in the act of biasing their results—as well as their failure to actually do so.  In this post, I present my own results from replicating their study.  Unlike E&L, I find that Bing is consistently more biased than Google, for reasons discussed further below, although neither engine references its own content as frequently as E&L suggest.

I ran searches for E&L’s original 32 non-random queries using three different search engines—Google, Bing, and Blekko—between June 23 and July 5 of this year.  This replication is useful, as search technology has changed dramatically since E&L recorded their results in August 2010.  Bing now powers Yahoo, and Blekko has had more time to mature and enhance its results.  Blekko serves as a helpful “control” engine in my study, as it is totally independent of Google and Microsoft, and so has no incentive to refer to Google or Microsoft content unless it is actually relevant to users.  In addition, because Blekko’s model is significantly different than Google and Microsoft’s, if results on all three engines agree that specific content is highly relevant to the user query, it lends significant credibility to the notion that the content places well on the merits rather than being attributable to bias or other factors.

How Do Search Engines Rank Their Own Content?

Focusing solely upon the first position, Google refers to its own products or services when no other search engine does in 21.9% of queries; in another 21.9% of queries, both Google and at least one other search engine rival (i.e. Bing or Blekko) refer to the same Google content with their first links.

But restricting focus upon the first position is too narrow.  Assuming that all instances in which Google or Bing rank their own content first and rivals do not amounts to bias would be a mistake; such a restrictive definition would include cases in which all three search engines rank the same content prominently—agreeing that it is highly relevant—although not all in the first position. 

The entire first page of results provides a more informative comparison.  I find that Google and at least one other engine return Google content on the first page of results in 7% of the queries.  Google refers to its own content on the first page of results without agreement from either rival search engine in only 7.9% of the queries.  Meanwhile, Bing and at least one other engine refer to Microsoft content in 3.2% of the queries.  Bing references Microsoft content without agreement from either Google or Blekko in 13.2% of the queries:

This evidence indicates that Google’s ranking of its own content differs significantly from its rivals in only 7.9% of queries, and that when Google ranks its own content prominently it is generally perceived as relevant.  Further, these results suggest that Bing’s organic search results are significantly more biased in favor of Microsoft content than Google’s search results are in favor of Google’s content.

Examining Search Engine “Bias” on Google

The following table presents the percentages of queries for which Google’s ranking of its own content differs significantly from its rivals’ ranking of that same content.

Note that percentages below 50 in this table indicate that rival search engines generally see the referenced Google content as relevant and independently believe that it should be ranked similarly.

So when Google ranks its own content highly, at least one rival engine typically agrees with this ranking; for example, when Google places its own content in its Top 3 results, at least one rival agrees with this ranking in over 70% of queries.  Bing especially agrees with Google’s rankings of Google content within its Top 3 and 5 results, failing to include Google content that Google ranks similarly in only a little more than a third of queries.

Examining Search Engine “Bias” on Bing

Bing refers to Microsoft content in its search results far more frequently than its rivals reference the same Microsoft content.  For example, Bing’s top result references Microsoft content for 5 queries, while neither Google nor Blekko ever rank Microsoft content in the first position:

This table illustrates the significant discrepancies between Bing’s treatment of its own Microsoft content relative to Google and Blekko.  Neither rival engine refers to Microsoft content Bing ranks within its Top 3 results; Google and Blekko do not include any Microsoft content Bing refers to on the first page of results in nearly 80% of queries.

Moreover, Bing frequently ranks Microsoft content highly even when rival engines do not refer to the same content at all in the first page of results.  For example, of the 5 queries for which Bing ranks Microsoft content in its top result, Google refers to only one of these 5 within its first page of results, while Blekko refers to none.  Even when comparing results across each engine’s full page of results, Google and Blekko only agree with Bing’s referral of Microsoft content in 20.4% of queries.

Although there are not enough Bing data to test results in the first position in E&L’s sample, Microsoft content appears as results on the first page of a Bing search about 7 times more often than Microsoft content appears on the first page of rival engines.  Also, Google is much more likely to refer to Microsoft content than Blekko, though both refer to significantly less Microsoft content than Bing.

A Closer Look at Google v. Bing

On E&L’s own terms, Bing results are more biased than Google results; rivals are more likely to agree with Google’s algorithmic assessment (than with Bing’s) that its own content is relevant to user queries.  Bing refers to Microsoft content other engines do not rank at all more often than Google refers its own content without any agreement from rivals.  Figures 1 and 2 display the same data presented above in order to facilitate direct comparisons between Google and Bing.

As Figures 1 and 2 illustrate, Bing search results for these 32 queries are more frequently “biased” in favor of its own content than are Google’s.  The bias is greatest for the Top 1 and Top 3 search results.

My study finds that Bing exhibits far more “bias” than E&L identify in their earlier analysis.  For example, in E&L’s study, Bing does not refer to Microsoft content at all in its Top 1 or Top 3 results; moreover, Bing refers to Microsoft content within its entire first page 11 times, while Google and Yahoo refer to Microsoft content 8 and 9 times, respectively.  Most likely, the significant increase in Bing’s “bias” differential is largely a function of Bing’s introduction of localized and personalized search results and represents serious competitive efforts on Bing’s behalf.

Again, it’s important to stress E&L’s limited and non-random sample, and to emphasize the danger of making strong inferences about the general nature or magnitude of search bias based upon these data alone.  However, the data indicate that Google’s own-content bias is relatively small even in a sample collected precisely to focus upon the queries most likely to generate it.  In fact—as I’ll discuss in my next post—own-content bias occurs even less often in a more representative sample of queries, strongly suggesting that such bias does not raise the competitive concerns attributed to it.