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There’s a famous old political adage — “where you stand is where sit” (also known as Miles’ Law) — meaning basically that government policy positions are dictated more by agency imperative and institutional memory than objective consideration of the public interest. A related concept is “regulatory capture,” where administrative agencies over time become defenders of the status quo and pursue objectives more for regulated firms as their constituency than consumers. Capture theory is closely related to the “rent-seeking” and “political failure” theories developed by the public choice school of economics. Or as Harold Demsetz put it well in his influential 1968 article, Why Regulate Utilities?, “in utility industries, regulation has often been sought because of the inconvenience of competition.”
That’s no longer limited to electricity companies and other public utilities these days. With the advent of rapid, low-cost entry into previously sheltered markets, powered by technology and the sharing economy, today’s incumbent industries are taking regulatory capture and politics as rent seeking to new heights. At DisCo we’ve written extensively about Uber, Lyft, Airbnb, Tesla and many other disruptive new start-ups that are facing a backlash from established industries (taxis, hotels and auto dealers, respectively) which use consumer protection as a Trojan Horse to disguise preventing or delaying competition on price, features and service. Politicians in locales as diverse as New York, New Jersey, San Antonio and Seattle (believe it or not!) have, wittingly it seems, gone along so far.
This is where what antitrust lawyers dub competition advocacy comes into play. Most antitrust policy in the U.S. is made in federal court as a result of merger, monopolization and horizontal collusion prosecutions launched by the Department of Justice (DOJ) and the Federal Trade Commission (FTC). But due to our federal-state system and a judge-made doctrine allowing states to exempt some markets from competition despite federal antitrust demands (government action, and private conduct to obtain such action, is challengeable in only relative narrow circumstances), much of the battle takes place in the legislative and regulatory arenas. Accordingly, competition advocacy is the primary tool available to antitrust enforcers in the U.S. to oppose state and local regulations favoring established firms over start-ups and parochially sheltering in-state companies from out-of-state competitors. The result is that for three decades the federal antitrust agencies have engaged in affirmative outreach to state and local legislators and regulators in the form of comments, letters and occasional lawsuits that seek to drive home the basic truths that competition outperforms regulation and the law should not pick winners and losers when it comes to evolving markets. (State attorneys general also undertake competition advocacy, principally through amicus briefs, as well.)
Continue reading Competition Advocacy Matters—Here’s Why and How
Recently the United States federal antitrust enforcement agencies — the Federal Trade Commission and the Justice Department’s Antitrust Division — issued a joint policy statement designed to “make it clear that they do not believe that antitrust is, or should be, a roadblock to legitimate cybersecurity information sharing.” The release made headlines globally, but the real story is that the risk of antitrust exposure for exchange of cyber risk information, even among direct competitors, was and remains almost non-existent.
That is because the U.S. antitrust laws (principally Section 1 of the Sherman Act) prohibit horizontal conspiracies and agreements among rivals, like price fixing, that harm competition. In some areas, information exchange can be competitively problematic, for instance where firms share non-public bidding or price data, or M&A transactions where the deal parties “gun jump” by acting as if they were already merged instead of continuing to compete independently. Yet as the policy statement confirmed, “cyber threat information typically is very technical in nature and very different from the sharing of competitively sensitive information such as current or future prices and output or business plans” and is thus “highly unlikely to lead to a reduction in competition.”
That’s hardly new. More than a decade ago DOJ said exactly the same thing in approving a proposal for cybersecurity information sharing in the electric industry, and Antitrust Division chief Bill Baer called the 2014 reaffirmation “an antitrust non-brainer.” But perceptions can have consequences, and some had voiced the fear that the exchange of IT security information among competitors could present a slippery slope, a forum for the kind of hard-core anticompetitive agreements the government loves to prosecute. At least that is what the White House, which called antitrust law “long a perceived barrier to effective cybersecurity,” reasoned in encouraging the FTC-DOJ clarification. So clearing away the underbrush of misinformation should help reassure business executives that companies which share technical cybersecurity information such as indicators, threat signatures and security practices, and avoid exchanging competitively sensitive information like business plans or prices, will simply not run afoul of the antitrust laws.
Continue reading Cybersecurity & Antitrust
The strangely named Rockstar Consortium has been in the news again, in part because some of its members just formed a new lobbying group, the Partnership for American Innovation, aimed at preventing the current political furor over patent trolls from bleeding into a general overhaul of the U.S. patent system. Yet Rockstar is perhaps the most aggressive patent troll out there today. Hence the mounting pressure in Washington, DC for the Justice Department’s Antitrust Division — which signed off on the initial formation of Rockstar two years ago — to open up a formal probe into the consortium’s patent assertion activities directed against rival tech firms, principally Google, Samsung and other Android device manufacturers.
Usually the fatal defect in antitrust claims of horizontal collusion is proving that competing firms acted in parallel fashion from mutual agreement rather than independent business judgment. In the case of Rockstar — a joint venture among nearly all smartphone platform providers except Google — that problem is not present because the entity itself exists only by agreement among its owner firms. The question for U.S. antitrust enforcers is thus the traditional substantive inquiry, under Section 1 of the Sherman Act, whether Rockstar’s conduct is unreasonably restrictive of competition.
Despite its cocky moniker, Rockstar is simply a corporate patent troll hatched by Google’s rivals, who collectively spent $4.5 billion ($2.5 billion from Apple alone) in 2012 to buy a trove of wireless-related patents out of bankruptcy from Nortel, the long-defunct Canadian telecom company. It is engaged in a zero-sum game of gotcha against the Android ecosystem. As Brian Kahin explained presciently on DisCo then, Rockstar is not about making money, it’s about raising costs for rivals — making strategic use of the patent system’s problems for competitive advantage. Creating or collaborating with trolls is a new game known as privateering, which allows big producing companies to do indirectly what they cannot do directly for fear of exposure to expensive counterclaims. Essentially, it’s patent trolling gone corporate. As another pro-patent lobbying group said at the time, Rockstar represents “a perfect example of a ‘patent troll’ — they bought the patents they did not invent and do not practice; and they bought it for litigation.” Predictiv’s Jonathan Low put it quite well in his The Lowdown blog:
The Rockstar consortium, perhaps more appropriately titled “crawled out from under a rock,” is using classic patent troll tactics since their own technologies and marketing strategies have fallen short in the face of the Android emergence as a global power. Those tactics are to buy patents in hopes of finding cause, however flimsy, to charge others for alleged violations of patents bought for this purpose. Rockstar calls this “privateering” in order to distance itself from the stench of patent trolling, but there are no discernible differences.
Continue reading Rockstar’s Patent Trolling Conspiracy
No one in government or business has a crystal ball. Yet predictions of what is coming in markets characterized by rapid and disruptive innovation seem to be being made more often by competition enforcement agencies these days than in the past. It’s a trend that raises troublesome issues about the role of antitrust law and policy in shaping the future of competition.
Take two examples. The first is Nielsen’s $1.3 billion merger with Arbitron this fall. Nielsen specializes in television ratings, less well-known Arbitron principally in radio and “second screen” TV. Nonetheless, the Federal Trade Commission — by a divided 2-1 vote — concluded that if consummated, the acquisition might lessen competition in the market for “national syndicated cross-platform measurement services.” The consent decree settlement dictates that the post-merger firm sell and license, for at least eight years, certain Arbitron assets used to develop cross-platform audience measurement services to an FTC-approved buyer and take steps designed to ensure the success of the acquirer as a viable competitor.
In announcing the decree, FTC chair Edith Ramirez noted that “Effective merger enforcement requires that we look carefully at likely competitive effects that may be just around the corner.” That’s right, and the underlying antitrust law (Section 7 of the Clayton Act) has properly been described as an “incipiency” statute designed to nip monopolies and anticompetitive market structure in the bud before they can ripen into reality. Nonetheless, the difference is that making a predictive judgment about future competition in an existing market is different from predicting that in the future new markets will emerge. No one actually offers the advertising Nirvana of cross-platform audience measurement today. Nor is it clear that the future of measurement services will rely at all on legacy technologies (such as Nielsen’s viewer logs) in charting audiences for radically different content like streaming “over the top” television programming.
The problem is that divining the future of competition even in extant but emerging markets (“nascent” markets) is extraordinarily uncertain and difficult. That’s why successful entrepreneurs and venture capitalists make the big bucks, for seeing the future in a way others do not. That sort of vision is not something in which policy makers and courts have any comparative expertise, however. Where the analysis is ex post, things are different. In the Microsoft monopolization cases, for instance, the question was not predicting whether Netscape and its then-revolutionary Web browser would offer a cross-platform programming functionality to threaten the Windows desktop monopoly — it already had — but rather whether Microsoft abused its power to eliminate such cross-platform competition because of the potential long-term threat it posed. By contrast, in the Nielsen-Arbitron deal, the government is operating in the ex ante world in which the market it is concerned about, as well as the firms in and future entrants into that market, have yet to be seen at all.
This qualitative difference between nascent markets and future markets (not futures markets, which hedge the future value of existing products based on supply, demand and time value of money) is important for the Schumpterian process of creative destruction. When businesses are looking to remain relevant as technology and usage changes, they are betting with their own money. The right projection will yield a higher return on investment than bad predictions. Creating new products and services to meet unsatisfied demand may represent an inflection point, “tipping” the new market to the first mover, but it may also represent the 21st century’s Edsel or New Coke, i.e., a market that either never materializes or that develops very differently from what was at first imagined.
Continue reading Future Markets, Nascent Markets and Competitive Predictions
Just a couple of weeks ago I put together a brief synopsis of the now-closed Federal Trade Commission (FTC) investigation of Google, Inc. for alleged monopolization, titled Deconstructing the FTC’s Google Investigation. To make the article fit within the space constraints of the American Bar Association’s Monopoly Matters newsletter, though, a few thoughts had to be edited out. One that is particularly appropriate now is the cogent observation by former FTC Chairman Jon Leibowitz that rivals frequently operate under the “mistaken belief” that criticizing the agency “will influence the outcome in other jurisdictions.”
Last Wednesday’s PR event by the FairSearch.org coalition made that evident in spades. We’ve discussed before that use of competition law to handicap other firms, rather than removing barriers to market competition, is unabashed protectionism, which can (perhaps should) backfire. The FairSearch companies continue to insist, as the coalition’s U.S. lawyer summarized, that the FTC “did not take on the issue of search bias.” That’s hogwash. The Commission found no evidence of harm to competition and, more importantly, rejected the FairSearch call for “regulating the intricacies of Google’s search engine algorithm.” And yet like Chicken Little, these companies continue to claim the sky is falling.
Leave aside for a moment that the FairSearch media event featured four legal presenters, all of whom are supporters of its lobbying positions, instead of a “fair and balanced” debate. And forget for a moment that the European Union’s parallel investigation (wrapped in much of the secrecy typical of an EU approach to competition regulation) is some 42 months old, with a possible end just recently within sight. What is most remarkable about the denial exhibited at the FairSearch media event is its blatant internal inconsistency. Three examples of the group’s positions make this abundantly clear.
- “Deception” Warrants a Disclosure Remedy. Former Assistant Attorney General Tom Barnett testified in 2011, for a founding FairSearch member, that Google acted anticompetitively because its “display of search results is deceptive to users.” FairSearch’s European counsel said the same thing recently, namely that Google “uses deceptive conduct to lockout competition in mobile.” But as I’ve noted previously, deception of this sort raises consumer protection issues, not legitimate antitrust concerns. Remarkably, Gary Reback scoffed at the reported suggestion by the EU’s Joaquin Almunia that a labeling remedy for Google’s revamped universal search results is appropriate, saying it’s “like telling McDonald’s customers they should eat healthy…it will not make a difference.” To the contrary, if deception is the problem then full disclosure has always been the answer. Where consumers are free to choose other search engines, and are told explicitly that some search results point to Google’s own “vertical” sites, whether they opt not to act is something about which competition authorities should be indifferent. Antitrust, at least in the United States, is not a Mayor Bloomberg-type vehicle for social engineering.
- Price Regulation Is Not the Job of Competition Enforcers. Ironically, the newest FairSearch approach raises the even more subtle antitrust issue of whether Google can be required to sell sponsored link ads to vertical rivals like Kayak and Yelp.
 Known in competition parlance as a “unilateral refusal to deal,” the idea is that the remedy for Google’s preferential placement of its own services in organic search results should be a mandatory sale of ad space to purportedly “demoted” competitors. That’s hard to swallow under American antitrust doctrine, which makes unilateral refusal cases very difficult to win, described by the Supreme Court as the “outer limits” of the Sherman Act. More importantly, as Reback put it, the obligation would be to sell ad space on “reasonable and nondiscriminatory terms,” which in turn means that an enforcement agency or court would have to decide whether the ad rates charged by Google were “reasonable.” So while disclaiming an intention to create a federal search regulatory commission, the FairSearch companies are in fact doing just that. Even in price fixing cases, antitrust agencies and courts do not decide what a fair or reasonable price is, because they lack the ability to do so and because, after all, that’s the function of competition.
- Mobile Really Is Different. The FairSearch event also included a competition lawyer for Nokia (Ms. Jenni Lukander), who contended that Google acted irrationally by giving away its Android mobile operating system, claiming the OS is merely a “Trojan Horse to monetize mobile markets.” So what? Providing free or open source software while profiting from ancillary products or services is a valid business strategy, pioneered by Netscape nearly 20 years ago and exemplified by Java, MySQL and numerous “freemium” sites such as Dropbox, Evernote, etc., available today. (This complaint is even stranger given that Nokia open-sourced its own mobile operating system in 2010, presumably for rational business reasons.) The FairSearch panelists argue that mobile is different because Google is supposedly “dominant” in mobile search, citing a market share of some 97%. That is both factually wrong and immaterial. Mobile is indeed different because Web search is rapidly being replaced by voice-search and app-based queries, which make any Google advantage in desktop search engines irrelevant. When Yelp gets nearby 50% of its traffic from its own smartphone app, it is impossible to seriously maintain that Google’s search engine is “diverting traffic” in the mobile space from rivals. Moreover, what the newest FairSearch complaint in Europe contends is that Google’s control over the Android OS limits OEM freedom by requiring some Google app icons (like the Google Play app store) to be displayed. As Dan Rowinski observed in readwrite mobile, that’s incorrect — “all kinds of stupid,” in his words. See Amazon’s locked-down Kindle, which runs Android without a single Google icon or app, as just one example. Most significantly, none of these vertical restrictions, even if they have the effect Nokia suggests, has any impact at all on search or search advertising in the mobile market. It is a fair conclusion that by venturing into the mobile OS arena, FairSearch is not looking for search fairness as much as to handicap and distract a rival with the threat of government regulation.
Here is how the New York Times summarized the new Android complaint by FairSearch.
The complaint was filed by Fairsearch Europe, a group of Google’s competitors, including the mobile phone maker Nokia and the software titan Microsoft, and by other companies, like Oracle. It accuses Google of using the Android software “as a deceptive way to build advantages for key Google apps in 70 percent of the smartphones shipped today,” said Thomas Vinje, the lead lawyer for Fairsearch Europe, referring to Android’s share of the smartphone market.
Any believer in the merits of competitive market economies must object to such misuse of competition laws. They should also, I suggest, react the same way to the most recent indication from Mr. Almunia that the EU’s purpose in investigating Google is to “guarantee that search results have the highest possible quality.” Nothing distills the difference between the European and American approaches to competition law as much as that revealing admission. Product quality is a function of the marketplace, not the government. And if regulation of search quality is deemed a subject warranting governmental regulation (which this author hopes never occurs), the one principle on which every objective observer would agree is that a regulatory scheme should apply uniformly to all firms in the market. That is plainly not what FairSearch strives to achieve, and thus why its proposals should be rejected by enforcement authorities worldwide.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
No, the title is not meant to imply a post about the privacy implications of mobile medical apps for psychotherapy. Instead, we’re taking a look at how the government acts at cross-purposes to itself when it comes to the oh-so-slow development of rules for new technologies and markets. The last few weeks have seen a couple of remarkable announcements, one from the FTC about digital advertising disclaimers and one from the SEC about corporate financial disclosures. Both were presented by the agencies as ways to enable use of social media by corporations — but instead just make things much harder, if not totally impracticable.
Two weeks ago, the Federal Trade Commission basically said “to heck” with form factor and responsive Web design by concluding that disclaimers, caveats and related mandatory advertising disclosures cannot be put into a popup window and must be in the same “conspicuous” format — font size and all — regardless of the device or medium.  The FDA had already cracked down on trailblazing pharma firms that tried Facebook advertisements on the same grounds. Both enforcement decisions demonstrate a complete lack of familiarity with new media and an inability to flexibly apply the principles of regulatory schemes to changing circumstances.
Even if, unlike advertiser contentions, potential “Do Not Track” mandates for Web browsing would not kill the Internet content industry, the FTC has signaled it is prepared unilaterally to dictate the size of social media ads in the guise of consumer protection. The old guidance allowed for “proximity” of disclosures — that is, disclosures that were “near, and when possible, on the same screen.” The new guidance places heightened emphasis on disclosures being clear and conspicuous to consumers across all platforms. The newly announced principle is that disclosures should be “as close as possible,” with short form disclosures such as hyperlinks or hashtags permitted only when their meaning is understood by consumers.
Check out this remarkable assertion, for instance:
If a disclosure is necessary to prevent an advertisement from being deceptive, unfair or otherwise violative of a Commission rule, and if it is not possible to make the disclosure clear and conspicuous, then either the claim should be modified so the disclosure is not necessary or the ad should not be disseminated. Moreover, if a particular platform does not provide an opportunity to make clear and conspicuous disclosures, it should not be used to disseminate advertisements that require such disclosures.
A second and related announcement came on Tuesday from the Securities & Exchange Commission. The SEC is the federal agency which pioneered use of Facebook and other social media services in the corporate realm by providing 2008 guidance that release of corporate earnings and other “material” financial information can permissibly utilize social media. Yet now the same agency — after a fruitless investigation of Netflix CEO Reed Hastings for an innocuous Facebook post — says that companies may treat social media as legitimate outlets for communication, much like corporate Web sites or the agency’s own public filing system called Edgar, but first have to make clear which Twitter feeds or Facebook pages will serve as potential outlets for announcements.
It is difficult to reconcile these new regulatory positions with the objectives the agencies articulate. The SEC says it believes that “company disclosures should be more readily available to investors in a variety of locations and formats to facilitate investor access to that information,” but its actions only serve to make the choice of location and format more rigid, and with fines a potential consequence for those pursuing flexibility. Almost any lawyer counseling public company clients today will advise that financial information that in the future could be considered material by the SEC must be constrained to an official, designated Web page. So much for tweets, Facebook and other real-time forums, they’re just too risky — even though Hastings survived unscathed. The correct approach for the vast majority of the 13,000+ public companies in the U.S. is to steer clear of social media, at least for now, because the downside is simply too great.
Coming from a government that professes to want to encourage broader use of these new media, that’s classic bi-polarism, obviously not in a happy phase.
Note: Originally written for and reposted with permission of my law firm’s Information Intersection blog.
This article was published by the ABA Antitrust Section’s Unilateral Conduct Committee in its Monopoly Matters journal for Spring 2013. (Reprinted with permission.)
The recently closed Federal Trade Commission (“FTC”) investigation of Google, Inc. for alleged monopolization[1] illustrates a truism of antitrust practice. The flexibility of antitrust law in adapting to new industries and modes of anticompetitive conduct is also a source of frustration, because the ex ante application of the domain’s broad principles to particular business practices is tricky to forecast without highly intensive, fact-specific analysis.
While a lot of ink was spilled following now-former Chairman Jon Leibowitz’s January 3, 2013 press conference, not much has attempted an analytical review of the merits. With the caveat that no outsider knows precisely what evidence the agency collected, this article tries to do just that. The lessons drawn are surprisingly unremarkable. Even in “new economy” industries, the tried-and-true elements of a monopolization claim remain crucial. Where unilateral conduct exhibits plausible efficiencies without serious evidence of competitive harm in a relevant market, it is impossible to make a viable case of monopoly maintenance under Section 2 of the Sherman Act (“Section 2”).
A. Market Definition
As every antitrust practitioner can recite, being a monopoly is not itself illegal, rather it is unlawful to obtain or maintain monopoly power by exclusionary or anticompetitive means in a relevant antitrust market. The existence of a putative “Internet search” market is thus a core proposition in any attack on Google for unlawful monopolization; the necessary premise is that Google’s high share — estimated to be anywhere between 65 to 80% — for Web searches is the foundation of an alleged monopoly.
Here the legal analysis begins to break down. Internet search is a free product for which 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, Google’s high “market share” may not in fact reflect any actual market power. More importantly, search users are like television viewers; they are an input into a different product, search advertising, in which consumers are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC and ABC compete for television viewers in order to sell more advertising, so too do search engines monetize the service by selling Internet eyeballs to advertisers.[2]
Relevant market analysis must therefore focus on the area where Google in fact competes with other search engines, namely the sale of search advertising. There are two significant problems with a “search advertising” market. First, this market definition does nothing to advance the cause of complainants such as Yelp, Kayak and other so-called “vertical” competitors of Google’s non-search products, because they do not compete for search advertisers. Second, the relevant market cannot be so limited:
- Web search ads are good substitutes for display (e.g., banner) ads. Because advertisers pay for users who click through to their sites, both represent alternative ways to reach consumers. If Google raised prices for search ads,customers would switch more of their advertising dollars to display ads. And the Internet display ad segment is something in which Google has lagged well ll behind the leader, Facebook.
- Both search and display ads increasingly compete against mobile search ads. This rapidly growing segment is radically different, with searches designed to retrieve more targeted results and in which a near-majority of searches are performed within smartphone and tablet apps like OpenTable, FourSquare and others, bypassing traditional search engines.
- Advertising-supported Internet services increasingly compete with traditional media for revenues. Newspapers have lost huge swaths of advertising revenues — especially, though hardly just, classified ads to Craigslist, etc. — but are making money in digital advertising. Nearly 1/3 of the New York Times’ total revenue came from online ads as far back as 2010.[3]
Neither the Chairman’s press conference nor the FTC’s parallel opinion on standard-essential-patents reveal whether the Commission agreed search advertising is a relevant market. One point seems clear: whatever the FTC concluded in its 2007 Google-DoubleClick merger review,[4] there are precious little indicia today supporting either Internet search or search advertising as stand-alone product markets for Section 2 purposes. See, e.g., Peterson v. Google, Inc., 2007 U.S. DIST LEXIS 47920 (N.D. Cal. 2007) (no basis to distinguish search advertising from other Internet advertising in market definition). As the Commission cautioned in 2007, “accounting for the dynamic nature” of “the online advertising space … requires solid grounding in facts and the careful application of tested antitrust analysis.”[5]
B. Monopoly Power
This author has written elsewhere about The Fantasy Google Monopoly,[6] in which I observed 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.” The facts suggest that regardless of Google’s share in a properly defined market, Google does not enjoy market power.
No Bottleneck or “Gateway” Control. Ten years ago, when the FTC believed America Online had market power, the conclusion rested on the fact that a vertically integrated AOL controlled access to competing Internet content.[7] Much like the pre-divestiture Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not control the Internet’s physical network and is thus not a bottleneck. “Google, or any search engine, cannot be a gateway to the Internet.”[8]
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 criterion of control over price. Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys at its winning bid price. Certainly, there are ways to game an auction to favor some bidders and exert indirect influence on price. But such a novel theory of auction pricing power was apparently not asserted in the FTC’s investigation of Google.
No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on “network effects.”[9] 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. There is little to suggest there are significant network effects in search or search advertising. That Sears may buy some search ad keywords, for example, makes it only slightly more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads.
No Entry Barriers. A monopoly in a market in which entry is unlimited cannot be sustained for long. It is difficult to make a serious case that there are substantial entry barriers in Internet search. Web page indexing, the key input, is a product of computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s economy. That Facebook has recently launched its own search product[10] says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier.
“Data” Is Not a Search Entry Barrier. Proponents of a Google prosecution argued that the demographic data assembled from Web searches is a barrier to entry. Yet data about consumer preferences and behavior is also a commodity. Whether credit and commercial transaction data via the “big three” reporting agencies, consumer satisfaction data from J.C. Power or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap.[11] The corollary suggestion that economies of scale pose an insurmountable barrier to search entry represents an even more subtle concept which, unlike network effects, has not been recognized as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all.
C. Exclusionary Practices
The proponents of an FTC case obviously did not make a credible showing that Google’s search practices meet the requisite tests for exclusionary conduct — competition on a basis other than efficiency or the predatory sacrifice of short-term profits.[12] The failure was an analytical one, summed up with a Web ad running now, asking whether consumers can “trust” Google. Unfairness is a qualitative judgment that has nothing to do with current antitrust law. As the 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.”[13]
Search “Fairness” Is Not An Antitrust Obligation. The firms pushing for a prosecution contended that Google’s algorithms artificially lowered search results for specialized vertical rivals. Their theory that Web search has an inherent standard of fairness, something once called “search neutrality,” is epitomized by the name of the coalition that lobbied the FTC: FairSearch.org.
Dividing this issue into two parts, first consider whether such practices have an adverse effect on competition. Even if travel booking sites, for instance, compete with Google in search, there is no evidence that so-called link demotion diminishes their Web traffic. Some of these are the same companies that forecast Google would force them out of business but now boast of successful IPOs. Moreover, driving traffic to a website can easily be duplicated through other low-cost means, from email campaigns to QR codes.[14]
Second, consider whether there is a practical way to ferret out from Google’s constant tweaking of its algorithms which changes “demoted” quasi-search rivals. Since nearly everyone admits Google got to its present position by building a better search engine, the trade secret and IP consequences of such a monopolization theory are enforcement quicksand.
Most importantly, the changes Google makes to its search algorithms are designed to offer consumers a superior product. As Leibowitz summarized, “Google’s primary reason for changing the look and feel of its search results to highlight its own products was to improve the user experience.” [15] Where unilateral conduct exhibits such plausible efficiencies without evidence of substantial competitive harm, the exclusionary conduct element of a Section 2 case is not present.
Deception Without Much More Is Not Exclusionary. Former AAG Tom Barnett said in 2011 that the search firm acted anticompetitively because “Google’s display of search results is deceptive to users.”[16] Hardly. Although the Microsoft decision broke new legal ground in assessing when networks effects matter under Section 2, it did not create a “deception” prong of monopolization.[17] Lying may violate truth-in-advertising and consumer protection statutes, such as Section 5 of the FTC Act, but does not constitute anticompetitive conduct for Sherman Act purposes.
Use of Monopoly Power For “Leverage” Is Not Unlawful. A final problem with an FTC antitrust case was that it represented the discarded notion of monopoly leveraging. Vertical rivals like TripAdvisor and Kayak in reality compete with Google’s complementary content (e.g., Zagat and profiles) and sales (e.g., Google Checkout and ITA travel booking software) products. In other words, the claim is that Google uses its purported power in the search market to gain a competitive advantage in a second, different market. Of course, monopoly leveraging has been overruled as a stand-alone Section 2 violation.[18] Only if the competitive impact in the second market amounts to an attempt to monopolize is this sort of behavior illegal. It is impossible to conceive of an FTC complaint that could have credibly asserted there exists a “dangerous probability” Google would monopolize airline bookings, travel reviews or any other Internet content.
E. Durability
Consumer allegiance in technology is fleeting. The dramatically changed market positions of Myspace, Yahoo!, AOL and other, former online behemoths are the result of disruptive business models fueled by sweeping changes in underlying technology. No firm, including Google, is immune to such inflection points. With the accelerating substitution of apps, voice-response and social search (e.g., Apple’s Siri and Facebook’s Graph Search) — bolstered by evidence that in 2012, Google’s search advertising rates fell significantly for the first time[19] — there is little to suggest that any market power Google may hold exhibits the durability necessary for proof of monopoly power.[20]
F. Remedy
Chairman Leibowitz noted that the complainants had asked to “regulate the intricacies of Google’s search engine algorithm.”[21] The evident implication is one of institutional competence. Just as the Microsoft court articulated a policy of avoiding extension of per se rules like tying to volatile technology markets,[22] the FTC was obviously worried that delving into the innards of Google’s “secret sauce” could do more bad than good.
There is ample basis for caution. Witness, for instance, the 1982 AT&T consent decree, which most knowledgeable observers conclude transformed the Antitrust Division from a litigation agency into a de facto telecommunications regulator. While the FTC is better-positioned institutionally to act as regulator, it nonetheless shares the same antitrust policy bias favoring what the late Judge Harold Greene famously called the “surer, cleaner” remedy of divestiture.[23]
It is true that in vertical mergers, the enforcement agencies have more recently fashioned consent decrees which impose behavioral conditions. Yet the deferential judicial oversight of merger settlements “leaves the issue of remedies as one where the antitrust agencies possess considerable discretion.”[24] That ambiguity has led former enforcement officials to bemoan the departure from a “law enforcement” antitrust model in favor of a regulatory one where “antitrust counselors find themselves focusing, not just on whether conduct contemplated by their clients is illegal,” but on what agencies are likely to seek in the nature of remedies.[25]
The late Judge Robert Bork and Prof. Greg Sidak have observed that “a mandate that Google provide its competitors access to the top Google search positions through antitrust injunction or consent decree would be virtually impossible to enforce.”[26] There are no neutral or objective criteria on which to assess the appropriate listing order of search results; by its very nature, Internet search is an effort to predict the information users are looking to obtain. “Rankings” of Web sites are based on a myriad of factors (reciprocal links, hits, metadata, etc.) that is the role of search engines to interpolate. To wade into the morass of regulating the operations of Google’s algorithms would place the FTC in the untenable position of deciding, as a legal matter, the business merits of nearly every change to the highly automated delivery of search results. As the Court emphasized in Trinko, antitrust remedies are inappropriate if they require courts “to act as central planners, identifying the proper price, quantity and other terms of dealing — a role for which they are ill suited.”[27] That is surely a recipe for subjectivity and ultimately disaster.
Conclusion
Unlike in the EU, a Federal Trade Commission decision not to institute enforcement action does not result in a formal opinion. That hinders exploration of the antitrust analysis utilized by the agency in closing its two-year monopolization investigation of Google. Deconstructing that analysis with informed inferences nonetheless reveals that the FTC faced a daunting task in seeking to hold Google accountable under Section 2. The decision to fold-up its tent represents an admirable instance of prosecutorial restraint by an agency that had been very publicly hounded by Google’s rivals.
* Glenn Manishin was counsel to MCI in the AT&T antitrust case and served as a principal lawyer for ProComp (AOL, Oracle, Sun, etc.) and several software trade associations in the Microsoft monopolization case. Manishin does not represent Google.
[1] See Google Press Conference, Opening Remarks of FTC Chairman Jon Leibowitz, Jan. 3, 2013, http://ht.ly/ j0vWQ (“Leibowitz Remarks”); In re Motorola Mobility LLC, a limited liability company, and Google Inc., a corporation, FTC File No. 121 0120 (Jan. 3, 2013), http://ht.ly/j0jcm.
[17] 253 F. 3d 34, 84 (D.C. Cir. 2001) (en banc). Microsoft was held liable under Section 2 for deceiving Java developers that programs written with Microsoft’s Java tools would be OS-indifferent. In reality, the Microsoft interface created Windows-only Java apps that would not run on any other platform, thus reinforcing the Windows desktop monopoly. No one argues that Google has tricked advertisers or search users into utilizing Google products when they thought they were creating a Google-free computing environment.
Given news that a European consortium of rivals has submitted yet another monopolization complaint against Google to the EU Commission, it is time to take stock of where we are in this long-running saga. A month ago the U.S. Federal Trade Commission (FTC) dropped its independent investigation, concluding that the facts did not support an antitrust prosecution of Google. Since then, the rhetoric from Google’s critics has reached absurd levels.
For instance, Bloomberg ran an editorial titled The FTC’s Missed Opportunity On Google. There the editors opined that “The FTC missed an opportunity to explore publicly one of the paramount questions of our day: is Google abusing its role as gatekeeper to the digital economy?” It is unfortunate that a leading American business publication could have so little understanding of competition policy and the role of antitrust law in policing the U.S. market economy. The editorial starts from an incorrect premise and proceeds to suggest, of all Luddite things, regulation of Internet search engines as “a public utility of sorts for e-commerce.” That’s obviously the theme of Google’s commercial rivals, but it’s neither correct nor appropriate.
Google’s alleged search dominance is hardly that of a gatekeeper. The fact 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. Google succeeds only by running faster than its competitors. 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 “big data” in today’s digital environment is relatively low cost, due to massively scalable storage architecture. Microsoft’s impressive growth of Bing in a mere three or so years shows that new competition in search can come at any time. Facebook’s recent, disruptive entry into search, leveraging its own trove of personalized user data, proves the point. As a result, Google remains surrounded by scores if not hundreds of competing providers of search, and succeeds relative to those rivals because its algorithms and search results are deemed superior (more accurate and useable) by Web patrons.
So what of this supposed “gatekeeper” role? North Korea is a gatekeeper to Internet content for its repressed citizens, but Google has none of that awesome economic and censorship power. If Google were really a search or Internet advertising monopolist, it would increase price like all classic monopolists, because monopoly power gives a firm the ability to do so. Yet Google search is a free product, supported by advertising. And that advertising is not priced by Google itself, rather through an auction among advertisers bidding on the use of search keywords. Google doesn’t control price, let alone raise prices. In fact, as its 2012 SEC filings admit, AdWords prices have fallen 15% in recent quarters.
The facts on the ground simply do not support the claim that Google’s search engine represents a bottleneck through which rivals must pass to gain website traffic. “Vertical” search competitors such as Yelp get nearly 50% of their traffic from smartphone apps, bypassing search engines, and thus Google, entirely. The only empirical data point supporting the Bloomberg thesis is that Web users tend to click much more on links displayed on the first or second pages of search results. But consumer inertia, lethargy or laziness doesn’t make Google itself any more powerful; and it certainly is no basis for antitrust intervention.
The call by the FTC to stay out of Internet search was a dispassionate end to a highly politicized investigation. Stripped of rhetoric, the Commission’s chairman, hardly a wallflower when it comes to aggressive enforcement, realized that the risk of transforming U.S. antitrust enforcers from prosecutors to regulators — something all knowledgeable antitrust lawyers regard as anathema — is very substantial in the area of Internet search. Search is inherently subjective, since its object is to produce results predicted to best satisfy a user’s interests. There is no objective standard against which to gauge the reliability, rank or relevance of Web sites in response to a search query. So putting Google under the antitrust lens for how it treats its own links versus so-called “organic” search results would embroil federal antitrusters in the Vietnam of Internet oversight, where ad hoc rules must be made up and the only way to “save” the search market would be to cripple the algorithms Google has used to make it the most popular search engine in the world. Further, treating Google as a public utility is nonsense in an era when even telephone and cable television companies, which have long-standing geographic exclusivities and control real bottleneck monopoly facilities, are no longer regulated as utilities.
Continue reading A Vietnam of Internet Regulation
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.
Note: Reposted with permission from Law360.
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.
Google Antitrust Action Could Cost FTC Power, Dem Warns | Law360. That’s consistent with what I suggested in my five-part series Why An FTC Case Against Google Is A Really Bad Idea, but of course goes even further as my legal analysis did not address potential political or legislative reaction to a formal FTC complaint.
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.
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June 6th, 2014 | 
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