The Problems With The DOJ's Google Lawsuit
The DOJ makes several accusations of anti-competitive activity against Google - and some of them don't hold up
After a year-long investigation the Department of Justice, along with eleven states, filed suit this week against Google for engaging in what they consider to be anti-competitive practices. The crux of their argument seems to be that because Google has a dominant market share in both the search engine market and in the web advertising market that it has a de facto monopoly in those areas, and that it gained that dominant market share through actions they allege violate Section 2 of the Sherman Act and the ruling in United States v. Microsoft.
Before I get into my breakdown of the lawsuit let me go ahead and say - yes I know this is political theatre, yes I know the timing is politically motivated, and yes I am aware that the results of the general election may influence the course of this case. That being said, the lawsuit is now real and while Biden has not commented specifically on this case Democrats would be just as happy to pursue an antitrust case against Google as Republicans are.
The DOJ’s suit against Google is the first of its kind since United States v. Microsoft, and there are some similarities in the two cases and also a bit of foreshadowing of how the Google case will play out. In the Microsoft case, the DOJ alleged that Microsoft engaged in anticompetitive practices by placing restrictions on hardware manufacturers that used Windows as their operating system but the main complaint was that by bundling Internet Explorer (IE) with the Windows operating system Microsoft was exploiting their dominant market share in the desktop operating system market to make Internet Explorer the dominant web browser. The second point had a bit of weight - in the late 90’s in order to install another browser on a computer a consumer would have to physically go to a store or send off by mail to get the software and then load the browser software onto their computer themselves. Microsoft’s argument was that IE was integral to the Windows operating system and therefore had to be included, that IE was not a product itself but a feature, and that consumers were getting the benefits of IE (i.e. the web browser functionality) for free.
The case, initially filed on May 18th 1998, led to a dramatic court case that revolved around how easy or difficult it would be for a consumer to install a web browser other than IE and if Windows could indeed function with IE uninstalled. Bill Gates gave testimony so evasive even the judge had to laugh and Microsoft submitted into evidence falsified tapes showing that other web browsers could be easily installed and that Windows would be significantly impacted by removing IE. In response, the DOJ produced their own tapes that showed Microsoft falsified the tapes they submitted to the court.
On June 7th 2000 the court issued the ruling that Microsoft was to be split into two companies - one to handle Windows and the other to handle all other Microsoft software products. Microsoft appealed and on June 28th 2001 the DC Circuit Court of Appeals overturned the ruling that Microsoft must be split, and on November 2nd 2001 the DOJ and Microsoft reached a settlement to end the case. The settlement was poorly received by many of the plaintiffs on the case; Microsoft was ordered to make their application programming interface available to third party software providers and a three-person panel was appointed to keep an eye on Microsoft for five years to ensure compliance. And that’s it. Microsoft did not have to stop bundling IE with Windows and did not have to change a single line of code. Ultimately the DOJ spent three years pursuing a case against Microsoft and ended up with practically nothing; there is a lesson in there for the current DOJ.
I don’t mean this to be an exhaustive takedown of the lawsuit but there are key areas where I want to refute the DOJ’s arguments against Google because, honestly, they make no sense once you apply a bit of common sense.
First, the assertion by the DOJ that Google pays billions a year to be the default web browser for various other sites and tech devices, the most contentious of these being the $10B a year Google pays to Apple to be the default browser on their products. The DOJ holds this up as an example of anti-competitive activity since clearly no other company could afford such high fees. There are currently three active web crawlers; Google, Bing which is owned by Microsoft, and DuckDuckGo. Theoretically any one of them could make some of the deals Google made to be a default web browser, especially Microsoft. Speaking specifically on Apple, the reason why Google is the default web browser is that Tim Cook decided that is what would be best for Apple. Ironically enough, Cook took criticism at the time for going with Google over DuckDuckGo as Apple has made privacy one of their largest concerns. I’m sure the fact that Google could pay what Apple was asking was a determining factor in Cook’s decision but for me to buy the DOJ’s argument I would have to accept that Google set the asking price and not Apple. That’s not how buying and selling works; the seller sets the price and the buyer decides if they accept that price. If the DOJ wants to be angry at one of the parties here, they should be mad at Apple for pricing everyone but Google out of the market.
The Apple deal also leaves Google in a really weird spot; while the two companies don’t compete in the web search market they fiercely compete in the mobile OS and hardware markets with Apple having dominant market share in the hardware market. So Google, to increase its dominant market share in the web search market, has to pay $10B a year to its top competitor in the mobile OS and hardware markets, which Apple presumably uses on research and development on software and hardware to further edge Google out of the markets where Apple has dominant market share. Plus, by going with a third party for their web search capabilities Apple doesn’t have to develop its own. This feels more like a solid case of anticompetitive activity by Apple if anyone.
Second, the DOJ alleges that Google has a stranglehold on the web advertising market due to its dominance in the web search market, stating in the lawsuit -
“Few advertisers would find alternate sources a suitable substitute for search advertising. Thus, there are no reasonable substitutes for search advertising, and a search advertising monopolist would be able to maintain prices above the level that would prevail in a competitive market.”
The DOJ can certainly split hairs here and say when they say “search advertising” they are referring solely to advertising placed directly on a search engine’s website but the idea that Google is the only place a company can go for online advertising is demonstratively false. There are two fast emerging options of online advertisers that I could argue are superior to Google AdWords - Facebook Ads and Amazon Advertising.
Facebook Ads - which includes ads seen on Instagram - are the next step in the evolution of targeted advertising. Instead of being reactive, waiting on a search query to serve up ads, they are proactive, pushing ads into your feed based on what Facebook has determined you like. Unlike Google's ad placement, which many of us have learned to skip over in favor of seeing the organic search results, one cannot scroll their feed without seeing Facebook / Instagram Ads. And speaking from personal experience those ads are highly effective; I’ve bought several items off of those ads whereas I can’t remember the last time I clicked on a Google AdWords ad. Unless Google can figure out some way to innovate AdWords to be able to compete with the kind of granular push advertising Facebook Ads provides I don’t see their dominant market share lasting, despite their reach and AdWord’s 20 year track record.
Amazon Advertising is also poised to become an advertising juggernaut. While it works the same way AdWords does, serving up ads based on a search query, it does so on Amazon. The advantage for advertisers to place ads on Amazon instead of Google is that consumers are now starting their product searches on Amazon. According to a CivicsScience poll conducted in June 2019, a staggering 49% of online shoppers start their searches on Amazon versus 22% starting their search on Google.
(H/T Alec Stapp)
I can safely assume that number has climbed since June 2019, with more consumers becoming reliant on online shopping and Amazon in particular during the COVID pandemic. The argument the DOJ makes is that the buyers with high purchase intent are the ones doing Google searches, I’m not convinced that is true anymore.
Third, the DOJ takes issue with Google requiring hardware manufacturers who want to use Android as their OS sign an anti-forking deal and commit to installing certain Google apps. I’ll start with the anti-forking agreement since that requires a bit of explanation. When Google allows a hardware manufacturer to use Android as an OS it’s not under a licensing deal like Microsoft; Google hands over the entirety of the Android source code to the manufacturer. Anyone who has that source code can create a “fork” of the Android OS - a completely different and customized version of the OS that may not bear any resemblance to other versions. Google doesn’t want that for the simple reason that if they are going to “sell” Android to the consumer market there needs to be only one official version of Android. Without anti-forking agreements, there could be a dozen versions of the Android OS on the market, which would be pretty confusing for consumers. The DOJ presents anti-forking agreements as some nefarious plot to lock hardware manufacturers into a specific infrastructure which...yes Google wants to lock hardware manufacturers into a specific infrastructure but not for nefarious reasons.
Moving on to the Google app requirements - Google asks that in return for them allowing hardware manufacturers to use the Android OS free of charge that they promise to install certain apps and make them nondeletable. Those apps are Google Play, Chrome, the Google search app, Gmail, Maps, and YouTube. This brings me to my favorite part of this lawsuit, which is that the DOJ thinks we’re all a bunch of morons. Their argument here has shades of United States v. Microsoft in that the DOJ asserts that because those apps are preinstalled and nondeletable that it gives Google an unfair advantage when it comes to what apps the consumer ends up using. For example, the argument is that because the Google search bar is installed the vast majority of people doing an internet search on their Android phone will use it. Which, OK, but why is that? The DOJ has an answer:
“Preset default settings are important. Consumers may not understand that they can change the browser’s percent default search engine, or consumers may not bother to invest the time to make such a switch.”
So according to the DOJ if you use the preset defaults on your phone it’s because you’re dumb or lazy. Never considered is the third option; you like the preset defaults, or at least enough to not care about changing them. Unlike the DOJ I know you are all smart people who are aware that you have options, that in one of those diabolical nondeletable apps there is a whole host of other apps you can download that would replace the function of a similar Google app. Unlike in the late 90’s when United States v. Microsoft was being debated, you don’t have to go anywhere or do much to swap out what web browser you’d like to use. All you have to do is open the Google Play app, choose your preferred browser, download it, and switch the app icon placement of Chrome and whatever browser you prefer.
What the DOJ hopes to accomplish with this lawsuit is unclear. There are no preferred remedies listed in the suit but the DOJ has said that everything is on the table, including breaking up Google. It will be years before we know the fate of Google, presuming this case goes forward under a potential Biden administration, but the federal government involving itself in the tech sector does not bode well. The DOJ cites the urgency to preserve the next wave of innovation in tech; I can think of nothing that will hinder that wave more than the threat of the federal government deciding what is and is not appropriate behavior from a tech company.