I’ve spent a fair amount of time at Project DisCo discussing how political, legal and regulatory processes in the United States are largely biased against disruptive innovators in favor of legacy incumbents. That’s typically just as true for Uber and its ride-hailing competitors as it is for Aereo, Hulu, Netflix and other streaming video — or over the top (“OTT”) — Internet television services. But perhaps no longer.
The Consumer Choice in Online Video Act (S.1680), introduced by Sen. Jay Rockefeller, chairman of the Senate Commerce Committee, aims to change things. The legislation’s stated objectives are to “give online video companies baseline protections so they can more effectively compete in order to bring lower prices and more choice to consumers eager for new video options” and to “prevent the anticompetitive practices that hamper the growth of online video distributors.” It does so by (a) requiring television content owners to negotiate Internet carriage arrangements with OTT providers in good faith, (b) guaranteeing such firms reasonable access to video programming by limiting the use of contractual provisions that harm the growth of online video competition, and (c) empowering the FCC to craft regulations governing the program access interface between online providers and traditional television networks and studios.
S.1680 is a remarkable legislative effort to predict where the nascent online programming market is headed. It anticipates that in order to fulfill their competitive potential, OTT video entrants will require similar legal protections to what satellite television providers have for years enjoyed. The bill applies the program access model developed several decades ago for satellite television to the new world of OTT video.
[He] has watched as the Internet has revolutionized many aspects of American life, from the economy, to health care, to education. It has proven to be a disruptive and transformative technology, and it has forever changed the way Americans live their lives. Consumers now use the Internet, for example, to purchase airline tickets, to reserve rental cars and hotel rooms, to do their holiday shopping. The Internet gives consumers the ability to identify prices and choices and offers an endless supply of competitive offerings that strive to meet individual consumer’s needs.
But that type of choice — with full transparency and real competition — has not been fully realized in today’s video marketplace. Rockefeller’s bill addresses this problem by promoting that transparency and choice. It addresses the core policy question of how to nurture new technologies and services, and make sure incumbents cannot simply perpetuate the status quo of ever-increasing bills and limited choice through exercise of their market power.
Modeled explicitly on the controversial 1992 Cable Act (which itself passed only over a presidential veto), S.1680 appears to be the first piece of legislation embracing disruption as a procompetiitive form of market evolution, including as its initial congressional “finding” that OTT services have the potential to “disrupt the traditional multichannel video distribution marketplace.” That’s excellent. At the same time, the bill’s choice of solution is contentious, by subjecting vertically integrated cable and television providers (e.g.,Comcast-NBCu) to another regime of program access and retransmission mandates. The legal standard fashioned for testing the validity of a television distribution contract in S.1680 is whether it “substantially deters the development of an online video distribution alternative.” Given the highly visible retransmission disputes that have arisen in recent months, such as the Tennis Channel and CBS, plus the lack of evidence that vertical integration in fact provides an incentive for exclusive dealing and content foreclosure, free market advocates are likely to object to this. Proponents of net neutrality rules, especially where data caps are concerned, have already spoken out in support.
The U.S. economy has seen its share of disruptive technologies derailed (at least in time-to-market) by archaic legal regimes. Look to Uber’s taxi-hailing service and Airbnb’s apartment rental innovations as recent examples. Most times it’s a case of old assumptions about consumer protection and competition having lost validity with changed circumstances. Other times it’s simple protectionism by legacy incumbents, as in the legal assault on Aereo’s IPTV streaming service for alleged copyright infringement. In the case of electric auto developer Telsa Motors, however, it’s something a little different.
The problem for Tesla’s well-reviewed vehicles — Consumer Reports gave the new Tesla S its highest car rating ever — is not technical, as the California start-up boasts impressive lithium battery innovations and is aggressively building its own chain of recharging stations. Instead the constraint is a plethora of state laws (48 in all) that prohibit or limit automobile manufacturers from selling direct to consumers or owning auto dealerships. These statutes, which date to the 1950s, are matched by a federal law known as the “Automobile Dealers’ Day In Court Act.” That legislation is an anomaly which allows dealers (franchisees) to sue in their home federal district court and recover legal fees if a manufacturer fails to “act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling or not renewing the franchise with said dealer.” (These sorts of lawsuits would otherwise require a minimum of $75,000 at stake, would be governed by state law and would not have the threat of fee-shifting.)
In the ongoing saga of governmental antitrust investigations of Google, recent weeks have witnessed a new level of rhetoric and disingenuous use of the regulatory process to handicap, rather than promote, competition and innovation. The current case in point relates once again to search neutrality, but this time complaining rivals remarkably object to getting exactly what they’ve asked for over many years.
Just a little less than four months after the U.S. Federal Trade Commission (FTC) closed its monopolization investigation into alleged “search bias” by Google, the European Commission (EC) — the pan-European competition authority for the 30-nation European Economic Area (EEA) — released a set of proposed commitments by Google designed to resolve the competition “concerns” preliminarily outlined by EC competition chief Joaquin Almunia. That set off a firestorm of criticism from so-called “vertical” competitors (e.g., travel booking or consumer shopping sites), led by UK firm Foundem, a plaintiff against Google in its own antitrust lawsuit in England.
The first and most basic competition concern asserted by the EC was that Google gives preference to its own services, like travel search, by placing those “specialised” (in European spelling) search results above “organic” or “natural” search results. Google proposes to label these specialized results as paid placements and to add equally prominent links to vertical rivals alongside. Under the commitments Google would auction links for commercial services to qualifying rivals using a lengthy set of rules for transparent and equal treatment. It is precisely the paid link insertion remedy that Google critic and long-time legal adversary Gary Reback called for at an April 2013 FairSearch.org event in Washington, DC.
Foundem opposes that solution. But making heads or tails of Foundem’s rather incoherent response to Google’s EC settlement proposal is difficult. In part that’s because the response is a hodge-podge of discredited claims, incorrect assumptions and fuzzy reasoning. In part it’s because Foundem’s use of over-the-top language and Chicken Little predictions makes it impossible to decipher facts and reality from mere opinions and sour grapes. For instance:
If the Commission were to adopt Google’s proposals in anything like their present form, it would be unwittingly playing into Google’s hands — aiding and abetting Google in its long running strategy to transition commercial searches away from its natural search results and into its paid advertisements. Under these proposals, Google would not only continue to profit from the traffic it hijacks from rivals, but it would now also profit from the traffic it sends to rivals…. Any vertical search companies that survive the transition to such a radically altered and unfavourable marketplace would be left eking out a living on the slimmest of margins from the scraps left over from the traffic, and now revenues, that Google would be diverting to its own services.
If one separates the adjectives from Foundem’s substantive criticisms, there are four principal contentions it makes.
1. “Universal Search” labeling does not fix organic search manipulation. Foundem says the EC proposal addresses only the “preference” of Google’s own links in a prominent area of its redesigned Universal Search results pages, not the use of search algorithms allegedly to demote links to vertical rivals. “Instead, with a flourish of misdirection, they focus exclusively on its [sic] Universal Search inserts.” Because the commitments “ignore Google’s natural search results, they are misdirected in their application and fall far short of their target.”
2. Paid Rival Links would benefit Google financially. Foundem complains that Google’s proposal to insert paid links to vertical rivals for commercial searches will allow it to “monetise” (again in European spelling) rivals’ Web traffic. The proposal, Foundem claims, would allow Google to become “the main beneficiary of its rivals’ vertical search services as well as its own,” which would “extend Google’s existing monopoly powers and could eventually leave it in sole possession of the efficient, low-overhead, business model that has characterised and fuelled the internet revolution.”
3. Google should be prohibited from applying site quality algorithms. Foundem asserts that the use of website quality metrics designed to weed out malware, spam and search-manipulated sites that lack content is inherently anticompetitive, but that Google’s corresponding commitment to include all vertical rivals absent “some clearly defined Harmful Practices (such as illegal content and consumer deception)” or with “prior individual approval from the [European] Commission” is inadequate.
4. The Google commitments do not extend to non-search services. Foundem complains that ”vertical search was simply the natural first target for Google. Google can (and will, if it isn’t stopped) extend the same abusive practices into other sectors, including e-commerce, auctions, and social networks.” It opposes the proposed commitments because they do not cover these other Internet-based services.
Each of these criticisms is misplaced, but none more so than the claim that the Google proposal should be rejected because it somehow misses the big problem in search. The EC’s principal competition concern was that Google gave undue preference to its own vertical services with the invention of Universal Search. Therefore, inserting links to rivals in that same “preferential,” prominently outlined space above organic search results provides obvious parity between Google’s shopping service, for instance, and Foundem’s consumer electronics listings. The second concern was that Universal Search deceives users into thinking results are something other than promotion of Google’s own commercial services because the lack of a clear distinction between a promoted link and normal search results “left some consumers less able to make an informed choice.” Hence, as I’ve addressed in detail before, a label remedy is precisely the right solution to what is, at heart, a contention of misleading trade practices.
The FTC notably concluded that Google’s switch to Universal Search was a bona fide search innovation that benefited consumers. Mr. Almunia has made essentially the same concession. To the extent Foundem believes the practice is inherently anticompetitive and should be banned, as it appears, its critique is inapposite to an evaluation of the effectiveness of Google’s proposed EC commitments. Even in Europe, competition authorities do not outlaw products developed by firms with market power, and EC competition law, like that in the US, is strongly disinclined to sanction an antitrust case based on allegations of “anticompetitive product design.”
The reason for this restraint is simple: competition officials and courts are not engineers or businessmen and thus have no objective basis on which to assess whether product designs are “good” or not. That is a decision left to the marketplace, with consumers literally voting with their clicks and wallets. Indeed, such reserve is essential in technology markets, where product innovation occurs at the speed of light in and in which user interface and consumer experience are so subtle and competitively important. It is the reason former FTC chairman Jon Leibowitz — on behalf of a unanimous, politically diverse five-commissioner agency — rejected calls that antitrust should be used to “regulate the intricacies of Google’s search algorithms.” Ditto Mr. Almunia, who likewise told the Financial Timesback in January that his concern is “the way they present their own services” and that he was “not discussing the algorithm” used for Internet search.
Foundem’s other critiques are nonsensical. Including Paid Rival Links alongside Google’s own universal shopping and commercial links (themselves paid) requires someone to set a fair price. That is something bureaucrats and antitrust agencies again do not do well, if at all, but an auction does perfectly. There is plainly no room to include links for every commercial search site on every Google search results page, so an auction system allocates that scarce space to businesses based on their own financial calculus of the benefit of preferential placement. That’s not monetizing rivals’ traffic and does not require Foundem or any other Google competitor to participate. If these Paid Rival Links are as worthless as Foundem implies, then its prediction of Google using them as a way to usurp competitors’ revenues is especially silly, because the auction prices will be negligible. Indeed, to suggest that paid placement is for some reason invalid as a competitive search service represents the height of hubris for Foundem, whose business model is to sell all search results. If paid placement is OK for Foundem it is equally permissible for any other search firm, small or big or anywhere in between.
It’s hard to take seriously a company which contends that site quality algorithms are invalid, when we all know the entire SEO, pornography and content piracy industries try their damnedest to game search results and avoid content filters established by responsible search engines like Google. Foundem never explains why the objective criteria Google has committed to apply do not resolve its allegation that rival links were targeted for demotion unfairly. While I personally disagree with the need or justification for any such remedy, the fact is that Google’s proposed settlement directly addresses organic link results by precluding exactly the type of targeted “link demotion” that FairSearch.org, Mr. Reback and Foundem itself have long alleged Google engages in as a matter of ordinary course.
Lastly, consider for a brief moment Foundem’s odd criticism that Google has not offered proposals for “other sectors” like auctions and social networks. Foundem itself does not operate in those markets, which are obviously not Internet search. With the rather spectacular failure to date of Google+ to challenge Facebook and Twitter, or any Google service to take on eBay, no one has even claimed Google has any chance of monopolizing these very different markets. When and if there are problems of Google accumulating market power in new services against entrenched Web firms — an eventuality that is all but inconceivable today — antitrust authorities can intervene. To do so in a case about allegations of Web search dominance and abuse is unseemly by any standard, European or American.
Politics is too often about making promises elected officials may be unable to (or even know they cannot) deliver. Yet where law enforcement is concerned — especially antitrust, which directly affects the economic future of our country — politics typically yields subjective and biased results. So it is with much irony that competitors of Google recently began a very public political offensive aimed at pressuring the Federal Trade Commission to sue the Web search giant for unlawful monopolization.
This is not the first such initiative, just the most unprincipled and wrong-headed. Citing anonymous sources, the Washington Post reported recently that the nearly two-year antitrust investigation by the FTC of competitor complaints against Google would end soon with a settlement “without addressing the most serious charge” of alleged “search bias.” Those same competitors have, in response, dramatically accused the FTC of abandoning its “institutional integrity” and begun actively shopping for a more receptive audience at the U.S. Department of Justice’s Antitrust Division, saying they “are losing faith that the FTC will act forcefully on their complaints.”
Every competition lawyer can repeat the maxim that the antitrust laws protect competition, not competitors. That means hitting competitors where it hurts is a good thing because it helps consumers. So media leaks, revealing that — despite a committed chairman and the hiring of a high-profile litigator to bring a case against Google to trial — the FTC uncovered no evidence that any “manipulation” of search results actually harmed consumers, are revealing. Revealing the absence of legitimate grounds to file a search monopolization case against Google, that is. A settlement that does not include restrictions on Google’s Web search activities is not one which fails to “address” that serious charge, however, but instead one that eschews politicized antitrust enforcement in favor of following the evidence. When there is no compelling proof of a legal violation, prosecutors should and, absent outside interference usually will, stand down.
This author has said before that the idea of “search neutrality” — positing some objective standard for search engine results — is an oxymoron and an invalid basis for antitrust liability. What the search complainants and their lawyers, like Silicon Valley’s outspoken Gary Reback, do not get is that governmental intervention in a dynamic, rapidly evolving industry, in which the dominant firm of today was hardly a speck merely a decade ago and has no power to force anyone to use its services, smacks of subjectivity. Are the antitrust lawyers and economists in the federal government supposed to function as a Federal Search Commission? Should the FTC ask federal judges and juries to determine when search result rankings are “fair” and, if so, how could anyone possibly make that determination?
Even apart from the reality that the settled legal elements of monopolization are totally absent when applied to Google (market share, monopoly power over prices, barriers to entry, network effects, etc.), that has always been the Achilles’ Heel of the complaining competitors like Yelp and their FairSearch.org coalition. Google’s search algorithms represent its secret sauce and crown jewels, the code that tumbled Yahoo and long-forgotten firms like Alta Vista from their perch as erstwhile Web search leaders. Looking under the search hood would effectively put the federal government in the position of confiscating, or at least deflating the value, of those trade secrets. To do so under the guise of “fairness” is doubly misguided; the Supreme Court has definitively ruled that firms have no duty of fairness nor to assist rivals, and that even the most malicious attacks against individual competitors do not, without adverse consequences to broader market competition, give rise to an antitrust offense.
The media reports indicating that its antitrust investigation found no evidence of consumer harm in search or search advertising simply show that the FTC has done the right thing. As FTC Commissioner Thomas Rosch remarked, it is “not embarrassing” for the agency to vote not to bring a case, because the commission is “just doing its job.” No amount of taunting from competitors will or can change that fact. Far from a cop out, this is what we pay these public officials to do, in a dispassionate and principled manner. Keeping an open mind until the facts are collected and sorted through is commendable for public law enforcement officials, the opposite of an abdication of responsibility.
In this context, turning to the Justice Department in the face of the FTC’s conclusions is unseemly. Justice reviewed and approved Google’s earlier acquisition of travel software provider ITA, imposing competition conditions but pointedly not accepting FairSearch’s claims that the antitrust laws compel search neutrality. The FTC and DOJ agreed that the former would conduct the broader federal investigation into Google’s search practices. Unlike the Microsoft antitrust case of 1998, where the FTC was frozen into inaction by a deadlock, here the FTC appears to have at least a majority, if not unanimity, against a monopolization prosecution. It is Mr. Reback and his clients who should be embarrassed by their brazen forum-shopping, not the FTC and its chairman, which have conducted a thorough and careful investigation. That competitors do not like the result is sour grapes, rather than a failure of will by the antitrust agencies. Governmental prudence toward search neutrality represents wisdom, not capitulation.
Glenn Manishin is an antitrust partner with Troutman Sanders in Washington, D.C. He represented MCI in the United States v. AT&T antitrust case and several competitive software trade associations in the United States v. Microsoft case. He does not represent Google.
Late Friday afternoon, several stories appeared quoting unnamed sources that the Federal Trade Commission (FTC) has received a staff memo recommending an antitrust prosecution of Google. Now, in a letter just days ago to FTC Chairman Jon Leibowitz, Colorado Rep. Jared Polis — founder of bluemountain.com and ProFlowers.com — counseled that an FTC monopolization case against Google could lead to legislative blowback.
I believe that application of antitrust against Google would be a woefully misguided step that would threaten the very integrity of our antitrust system, and could ultimately lead to congressional action resulting in a reduction in the ability of the FTC to enforce critical antitrust protections in industries where markets are being distorted by monopolies or oligopolies.
Meanwhile, commentators are whacking each other silly. Sam Gustin observed in TimeBusiness that “Microsoft and its anti-Google allies have spent untold millions waging an overt and covert campaign designed to persuade regulators to hobble the search leader. Perhaps if these companies spent a little less time complaining and a little more time innovating, they’d have a better chance of competing in the marketplace.” In response, John Paczkowski at AllThingsDigital noted the Polis letter’s “fortuitous timing” and implied that it “seems a bit odd” for a junior legislator to threaten a sitting FTC chairman, concluding that “maybe we should all wait and see the FTC’s evidence and the merits of its case — if there is one — before threatening to limit the agency’s authority.”
It is clear to any objective observer that there is a case in the works and that the FTC, which on background leaked that four of five commissioners are already on board, sent a trial balloon out through the press last week. Paczkowski is naive if he believes the timing of the stories last Friday was also not “fortuitous” or that the “merits” of the FTC’s case may not properly be a matter of policy and political debate. Having witnessed this same pas de deux for years in connection with United States v. Microsoft Corp., it’s just business as usual in Washington, DC. That may not make it right or courteous, but it does make it completely unexceptional.
There have been hints by the FTC that it may rely on Section 5 as the basis for a potential case against Google. This strategy could have serious repercussions because the FTC’s use of unfair competition as a surrogate for what the antitrust laws do not or cannot reach would be unbounded from the rigorous Sherman Act standards of unlawful monopolization. The FTC has never won a pure Section 5 lawsuit before.
5. A “Pure” Section 5 Case Would Almost Certainly Lose, And Should
There is one point of law on which everyone agrees. As the Supreme Court held, Section 5 can reach business conduct that is not, of itself, violative of the antitrust laws. But exactly how far the statute extends beyond the Sherman Act is unclear; in the FTC’s 2008 public workshop on Section 5 As A Competition Statute there was much debate on that issue. Here’s how the FTC described the problem:
The precise reach of Section 5 and its relationship to other antitrust statutes has long been a matter of debate. The Supreme Court observed in Indiana Federation of Dentists that the “standard of ‘unfairness’ under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws but also practices that the Commission determines are against public policy for other reasons.” In the early 1980s, however, lower courts were critical of efforts by the FTC to enforce a reading of Section 5 that captured conduct falling outside the Sherman Act. In striking down the FTC’s orders, the Second Circuit in its “Ethyl” decision expressed concern that the Commission’s theory of liability failed “to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable.”
The vast majority of non-merger FTC cases enforce the Sherman Act. However, beginning in the early 1990s the Commission reached a number of consent agreements involving invitations to collude, practices that facilitate collusion or collusion-like results in the absence of an agreement, and misconduct relating to standard setting. Because the complaints in these cases did not allege all the elements of a Sherman Act violation, the Commission’s theory of liability rested on a broader reach of Section 5. As consent decrees, none of these cases was reviewed, let alone endorsed, by the courts.
And that’s the rub. Take “invitations to collude” for instance. Under Section 1 of the Sherman Act, an agreement among competitors, whether express or tacit, is the predicate to illegality. This has been interpreted to mean attempts at price-fixing are not unlawful unless the other company says “yes.” Famously, the Justice Department initially lost, but then won on appeal, a 1982 challenge to American Airlines’ overt attempt at fixing airfare rates using an antitrust theory of attempted joint monopolization, fashioned to end-run the requirement of a horizontal agreement. That case presented unique market circumstances (American and Braniff sharing dominance of Dallas “hub” flights) and unequivocally anticompetitive behavior that lacked any efficiency or competitive justification. Most antitrust scholars and practitioners thus generally agree that an invitation to fix prices is something the FTC should, as it has in the past, prosecute pursuant to Section 5, because the underlying conduct itself has no economic legitimacy other than to override marketplace competition.
Hence the problem where Google is concerned. First, there is a recognized basis under Section 2 for attacking unilateral attempts to monopolize a relevant market. Absent the necessary dangerous probability of success, something woefully lacking here, an unfair competition case premised on conduct by a dominant firm that falls short of attempted monopolization is very likely to receive the same hostile judicial reaction the Commission acknowledged in 2008. Second, as private unfair competition cases (which may only be brought under state law, not Section 5) have explained, the absence of legitimate business justification can support an inference of anticompetitive behavior. Yet, in organizing and structuring its organic search results, no one disputes that Google has a real business justification to deliver better results to users and thus more eyeballs to advertisers: in other words to make money. Without the predatory sacrifice of short-run profits — i.e., with normal, profit-maximizing behavior — there is real economic legitimacy to the conduct forming the basis for a case against Google.
To make out a monopolization case, any plaintiff, FTC or otherwise, must not only show monopoly power in a relevant market, but also that anticompetitive practices led to (obtained) or protected (maintained) that power. Antitrust lawyers dub this the “conduct” element of Section 2. It’s what differentiates lawful monopolies, earned by innovation and business skill, from unlawful acts of monopolization.
Exclusionary or anticompetitive conduct — the terms are the same — is something other than competition on the merits. A colloquial definition which basically matches the judicial one is that anticompetitive conduct is business behavior that defeats competing firms on a basis other than efficiency. Likewise, conduct that sacrifices short-run profits in order to “recoup” those relative losses with higher future prices is not rational business behavior and is thus regarded by the law as presumptively predatory, the most egregious form of anticompetitive behavior.
4. Google Has Not Engaged In Exclusionary Practices
Try as they might, the proponents of an FTC case against Google have not made a credible showing anything Google has done meets these accepted tests for exclusionary conduct. The fallacy of their critique is summed up with a Web ad running now asking whether we can “trust” Google. Neither trust nor fairness have anything to do with the antitrust laws. Monopolization is not unfair competition, it is illegal competition.
Unfairness represents a qualitative judgment that has nothing to do with current antitrust law. As the modern Supreme Court has written:
Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or “purport to afford remedies for all torts committed by or against persons engaged in interstate commerce”…. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator’s losses and to harvest some additional gain.
In sum, marketplace competition is not boxing and there are no Marquess of Queensberry Rules governing how firms must fight “fairly”. Anything goes in our market system so long as it pits product against product and is not illegal — in other words, so long as the challenged practices do not use the power of a monopoly position to drive out equally-efficient competitors.
Antitrust law is characterized by rigorous, fact-intensive analysis, so much so that the prevailing jurisprudence holds that market definition (explored in Part II) generally should not be resolved on the “pleadings” alone, in other words without factual discovery. Nothing typifies the demanding analytical framework of antitrust more than monopoly power, part of the first element of a Section 2 monopolization case — possession of monopoly power in the relevant market. With respect to monopoly power, the potential case of FTC v. Google, Inc. will likely run into some especially significant barriers, no pun intended.
3. Google Has No Monopoly Power, Even In Internet Search/Advertising
There’s precious little room in a relatively brief blog series to expound on all the various elements that factor into a judicial finding of monopoly power. The basic principle is that a high market share (typically 70% or more), coupled with barriers to entry, allows an inference of monopoly power to be drawn. But like nearly all legal inferences that’s merely a rebuttable, prima facie construct, as direct proof of the “power to control price or exclude competition” is the best evidence of monopoly. (It’s just hard to find.)
This author has written elsewhere about The Fantasy Google Monopoly, in which I noted that “the reality is that Google neither acts like nor is sheltered from competition like the monopolists of the past, something the company’s critics never claim because they just can’t.”
Like the Red Queen in Through the Looking Glass, Google succeeds only by running faster than its competitors — merely to stay in the same place. There’s nothing about Internet search that locks users into Google’s search engine or its many other products. Nor is new entry at all difficult. There are few, if any, scale economies in search and the acquisition of data in today’s digital environment is relatively cost free. Microsoft’s impressive growth of Bing in a mere two or so years shows that new competition in search can come at any time.
While that sums up, rather cogently I must say, the antitrust analysis, let’s go to the coaches’ tape and break it down.
No Bottleneck or “Gateway” Control. Ten years ago, when the FCC and FTC both believed America Online — which boasted a very high share of dial-up Internet access — had monopoly power, the (fleeting) conclusion rested on the fact that AOL controlled access by its customers to the Internet and thus competing Internet content. Much like the pre-divestiture AT&T Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not own the Internet’s tramsission lines or 4G spectrum, and is thus not a bottleneck. Regardless of search share or volume, the reality is that Google has no control over the content its search users can access on the Internet. Web search is one of many ways, together with links, URLs, browser bookmarks, directories, QR codes, email marketing and uncountable others, for Internet sites to drive traffic and hits. Google is not a gateway so much as it is a highly and quickly searchable index of the Web. When there’s a host of other ways to find a page, the index itself is just a convenience, as much for bound books as for Web sites.
No Power Over Price. Whether search ad rates are the price of search or alternatively the relevant antitrust market itself, they fail on the central monopoly power criterion of control over price. As micro-economics teaches, a monopolist can increase prices above marginal costs, resulting in a “deadweight” loss to consumer welfare. Yet Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys the ads (as many or as few as it wants) at the winning bid price. Certainly, there are ways to game any auction to favor some bidders over others or to exert indirect influence on the wining auction price. But so far as we can tell, such a theory of pricing power is not involved in the FTC’s threatened monopolization claim against Google. And if it were, that case would be even harder to prove than this overview analysis concludes.
No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on so-called “network effects.” Network effects exist when the value of a product increases in proportion to the number of other users of the product, hence a name which originated in telephone antitrust cases, where subscriber demand for service rose in proportion to the number of interconnected telephone companies (and thus other telephone subscribers) the end user could call. Network effects are in part a barrier to entry, by increasing requirements for scale economies by new firms, and a source of power to exclude rivals, by allowing the dominant network effects firm to deny competitors critical mass. Yet there is no, or at least precious little, evidence that with respect to search users and search advertisers, there are any network effects at all involved with Google. That you may conduct Web searches using Google’s engine makes it no more likely that me or any other Web users will select Google for search. That Sears may buy some AdWords keywords for search advertising makes it only slightly if at all more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads via a Google auction.
No Entry Barriers. A monopoly in a market in which entry by new competitors is unlimited cannot be sustained for long. Thus, as noted antitrust law couples market share with barriers to entry in assessing monopoly power. It is difficult if not impossible to make a serious case that there are substantial entry barriers in Internet search or advertising. Web page indexing — the key input to search — is a product of raw computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s Internet economy. That Facebook is planing to launch its own search product says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier. As the UK’s Daily Mail wrote, “Facebook is looking to tackle Google by making search a much more prominent part of it social network.” The Red Queen strikes again.
“Data” Is Not a Search Entry Barrier. Proponents of a Google monopolization prosecution have recently refined their analysis, suggesting that the wealth of demographic data assembled by Google from users’ Web searches is a barrier to entry. That’s a smokescreen. Data about consumer preferences and behavior — aggregated and (much to the annoyance of privacy advocates) individualized — is also a commodity in our modern economy. Whether credit and commercial transaction data via the “big three” credit reporting agencies, product preference and consumer satisfaction data from J.C. Power and the like, or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap. (The U.S. legal presumption that a company owns, and thus can sell, data about its customers plays into this point, but is not relevant for antitrust purposes.) The corollary to this argument is that economies of scale pose a barrier to entry, an even more subtle concept which, unlike network effects, has not been recognized by mainstream antitrust courts as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all. Suffice it to say, the FTC would have to make new antitrust law if it relies on this novel theory, which seems to contradict the factual realities of the ubiquitous availability of inexpensive data and data storage on consumer preference and behavior today.
To sum up, claims that Google enjoys monopoly power in Internet search or search advertising fail in the face of the recognized criteria for that crucial Section 2 monopolization factor. Without monopoly power, unilateral (as opposed to concerted among competitors) action by a single firm is of no antitrust significance. Indeed, an implicit — and sometimes articulated — presumption in the arguments in favor of an FTC monopolization case is that Internet search is a “natural monopoly,” one dictated and preordained by the economic structure of the market. As an antitrust lawyer who while with the DOJ in the 1980s railed against the proposition that cable TV represented a natural monopoly — something satellite television and IPTV have at long last conclusively disproven — this author abhors that construct.
Even if they are correct, the parties pressing for government antitrust action against Google cannot claim the courts have ever recognized the concept of natural monopoly as a surrogate for the United States v. Grinnell Corp.requisite demonstration of actual monopoly power, willfully obtained or sheltered by exclusionary practices. We’ll turn to that question, whether Google has engaged in conduct antitrust law deems anticompetitive, next.
Last week I participated in a “parliamentary” debate, sponsored by TechFreedom, on the Federal Trade Commission’s anticipated lawsuit against Google for monopolization. The dialog is interesting, if I say so myself!!
[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I.]
Section 2 of the 1890 Sherman Act (15 U.S.C. § 2) makes “monopolization” unlawful. As every antitrust practitioner can recite by heart, this means that being a monopoly is not illegal, rather it is illegal to obtain or maintain monopoly power in a “relevant market” by exclusionary or anticompetitive means.
The most famous articulation of this basic principle comes from the case of United States v. Grinnell Corp. (“Grinnell“), 384 U.S. 563 (1966), in which the U.S. Supreme Court explained that a monopoly position reached as a result of a “superior product, business acumen or historic accident” is different from one achieved by the “willful acquisition or maintenance of that power.” That slightly schizophrenic approach reflects the basic conflict within antitrust itself. The law encourages, and permits, firms with market power (typically a synonym for monopoly power, although economists disagree at the margins) to compete aggressively on the merits, and even to eliminate competitors. Yet to tame the results of unbridled capitalism, Section 2 constrains companies from creating or defending monopoly power with anticompetitive practices.
2. Internet Search and Search Advertising are Not Relevant Antitrust Markets
The starting point for every antitrust case is market definition — outlining the contours of a market, in which the defendant participates, in order to assess whether the firm possesses monopoly power in that market. In defining the relevant antitrust market, courts determine which products compete with the defendant’s product and thus limit or prevent the exercise of market power. Typically, this process involves examining substitutability of products (both from a demand and a supply perspective) to find whether consumers and rivals could switch to another source (or sources) if the defendant firm were to raise price or restrict output. For example, in the 1950s chemical innovator duPont was charged with monopolizing the cellophane market, a product it invented, but the courts ruled that the relevant antitrust market could not be so narrowly limited because cellophane was interchangeable with other food wrapping materials. The “great sensitivity of customers in the flexible packaging markets to price or quality changes” prevented duPont from exerting monopoly control over price.
The more broadly the relevant antitrust market is defined, the less likely it is the defendant has the ability to exercise monopoly power in that market. As a corollary, if the targeted firm does not have monopoly power in the relevant market, there generally cannot be Section 2 liability. Many recent antitrust cases, including the FTC’s controversial attempt to block Whole Foods’ acquisition of Wild Oats and the Justice Department’s challenge to the Oracle-PeopleSoft merger, have turned on market definition.
With that background, let’s look at the purported “Internet search” market. That’s obviously the core proposition in any attack on Google for unlawful monopolization, because the necessary premise is that Google’s dominant share — estimated at from 65 to 80% — of Web searches is the foundation of its alleged monopoly. But here the antitrust analysis begins to break down. Internet search is a free product in which the consumers (Internet users) are charged nothing, with the service supported by advertising revenues. Since monopoly power is the “power to control price or exclude competition,” one must necessarily ask whether Google’s high “market share” reflects any market power at all. More importantly, search users are just like broadcast television viewers; they are an input into a different product — search advertising — in which consumers themselves are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC, ABC, CBS and Fox compete for television eyeballs in order to sell more advertising (hence profiting) to sponsors, so too do Internet search engines monetize the service by selling eyeballs to advertisers.
Google’s share of search by itself is therefore almost meaningless. Even if the relevant market is confined to search, moreover, there is nothing that enables Google to prevent users from switching, instantaneously, to another of the scores of search engine providers on the Internet. (It should go without saying that even the government does not contend that Google displaced Yahoo!, Alta Vista, Ask.com and the many former search giants that dominated the Internet in the 1990s with anything other than better, more useful, search results, a consequence of better algorithms — the epitome of Grinnell’s “superior product.”) So the relevant market analysis must therefore focus on the area where Google in fact competes with other search engine providers, namely in the sale of search advertising. We all know that the links displayed alongside so-called “organic” search results are paid, listed conspicuously as “sponsored” results. Without search advertising, in today’s Internet economy there would be no free search engine services.
Making a predictive judgment about future competition in an existing market is quite different from predicting that in the… »
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