Wednesday, October 21, 2020

The Google Antitrust Case and Echoes of Microsoft

The US Department  of Justice has filed an antitrust case against Google. The DoJ press release is here;  the actual complaint filed with the US District Court for the District of Columbia is here. Major antitrust cases often take years to litigate and resolve, so there will be plenty of time to dig into the details as they emerge. Here, I want to reflect back on the previous major antitrust case in the tech sector, the antitrust case against Microsoft that was resolved back in 2001. 

For both cases, the key starting point is to remember that in US antitrust law, being big and having a large market share is not a crime. Instead, the possibility of a crime emerges when a company with a large market share leverages that market share in a way that helps to entrench its own position and block potential competition. Thus, the antitrust case digs down into specific contractual details.

In the Microsoft antitrust case, for example, the specific legal question was not whether Microsoft was big (it was), or whether it dominated the market for computer operating systems (it did). The legal question was whether Microsoft was using its contracts with personal computer manufacturers in a way that excluded other potential competitors. In particular, Microsoft signed contracts requiring that computer makers license and install Microsoft's Internet Explorer browser system as a condition of having a license to install the Windows 95 operating system. Microsoft had expressed fears in internal memos that alternative browsers like Netscape Navigator might become the fundamental basis for how computers and software interacted in the future. From the perspective of antitrust regulators, Microsoft's efforts to used contracts as a way of linking together its operating system and its browser seemed like anticompetitive behavior. (For an overview of the issues in the Microsoft case, a useful starting point is a three-paper symposium back in the Spring 2001 issue of the Journal of Economic Perspectives.)

After several judicial decisions went against Microsoft, the case was resolved with a consent agreement in November 2001. Microsoft agreed to stop linking its operating system and its web browser. It agreed to share some of its coding so that it was easier for competitors to produce software that would connect to Microsoft products. Microsoft also agreed to an independent oversight board that would oversee its actions for potentially anticompetitive behavior for five years. 

As we look back on that Microsoft settlement today, it's worth noting that losing the antitrust case in the courts and being pressured into a consent agreement certainly did not destroy Microsoft. The firm was not broken up into separate firms. In 2020, Microsoft ranks either #1 or very near the top of all US companies as measured by the total value of its stock. 

Looking again at the antitrust case against Google, the claims are focused on specific contractual details. For example, here's how the Department of Justice listed the issues in its press release: 

As alleged in the Complaint, Google has entered into a series of exclusionary agreements that collectively lock up the primary avenues through which users access search engines, and thus the internet, by requiring that Google be set as the preset default general search engine on billions of mobile devices and computers worldwide and, in many cases, prohibiting preinstallation of a competitor. In particular, the Complaint alleges that Google has unlawfully maintained monopolies in search and search advertising by:
  • Entering into exclusivity agreements that forbid preinstallation of any competing search service.
  • Entering into tying and other arrangements that force preinstallation of its search applications in prime locations on mobile devices and make them undeletable, regardless of consumer preference.
  • Entering into long-term agreements with Apple that require Google to be the default – and de facto exclusive – general search engine on Apple’s popular Safari browser and other Apple search tools.
  • Generally using monopoly profits to buy preferential treatment for its search engine on devices, web browsers, and other search access points, creating a continuous and self-reinforcing cycle of monopolization.
As noted earlier, I expect these allegations will result in years of litigation. But I also strongly suspect that even if Google eventually loses in court and signs a consent agreement, it ultimately won't injure Google much or at all as a company, nor will it make a lot of difference in the short- or the medium-term to the market for online searches. If this is the ultimate outcome, I'm not sure it's a bad thing. After all, what are we really talking about in  this case? As Preston McAfee has pointed out, "First, let's be clear about what Facebook and Google monopolize: digital advertising. The accurate phrase is `exercise market power,' rather than monopolize, but life is short. Both companies give away their consumer product; the product they sell is advertising. While digital advertising is probably a market for antitrust purposes, it is not in the top 10 social issues we face and possibly not in the top thousand. Indeed, insofar as advertising is bad for consumers, monopolization, by increasing the price of advertising, does a social good." 

Ultimately, it seems to me as if the most important outcomes of these big-tech antitrust cases may not be about the details of contractual tying. Instead, the important outcome is that the company is put on notice that it is being closely watched for anticompetitive behavior, it has been judged legally guilty of such behavior, and it needs to back away from anything resembling such behavior moving forward.  

Looking back at the aftermath of the Microsoft case, for example, some commenters have suggested that it caused Microsoft to back away from buying other upstart tech companies--like buying Google and Facebook when they were young firms. A common complaint against the FAANG companies— Facebook, Apple, Amazon, Netflix, and Google--is that they are buying up companies that could have turned into their future competitors. A recent report from the House Judiciary Committee ("Investigation of Competition in Digital Markets") points out that "since 1998, Amazon, Apple, Facebook, and Google collectively have purchased more than 500 companies. The antitrust agencies did not block a single acquisition. In one instance—Google’s purchase of ITA—the Justice Department required Google to agree to certain terms in a consent decree before proceeding with the transaction."

It's plausible to me that the kinds of contracts Google has been signing with Apple or other firms are a kind of anticompetitive behavior that deserves attention from the antitrust authorities. But the big-picture question here is about the forces that govern overall competition in these digital markets, and one major concern seems to me that the big tech fish are protecting their dominant positions by buying up the little tech fish, before the little ones have a chance to grow up and become challengers for market share. 

Mark A. Lemley and Andrew McCreary offer a strong statement of this view in their paper "Exit Strategy (Stanford Law and Economics Olin Working Paper #542, last revised January 30, 2020).  They write (footnotes omitted): 

There are many reasons tech markets feature dominant firms, from lead-time advantages to branding to network effects that drive customers to the most popular sites. But traditionally those markets have been disciplined by so-called Schumpeterian competition — competition to displace the current incumbent and become the next dominant firm. Schumpeterian competition involves leapfrogging by successive generations of technology. Nintendo replaces Atari as the leading game console manufacturer, then Sega replaces Nintendo, then Sony replaces Sega, then Microsoft replaces Sony, then Sony returns to displace Microsoft. And so on. One of the biggest puzzles of the modern tech industry is why Schumpeterian competition seems to have disappeared in large swaths of the tech industry. Despite the vaunted speed of technological change, Apple, Amazon, Google, Microsoft, and Netflix are all more than 20 years old. Even the baby of the dominant firms, Facebook, is over 15 years old. Where is the next Google, the next Amazon, the next Facebook?
Their answer is the "exit strategy" for the hottest up-and-coming tech firms isn't to do a stock offering, remain an independent company, and keep building the firm until perhaps it will challenge one of the existing tech Goliaths. Instead, the "exit strategy," often driven by venture capital firms, is for the new firms to sell themselves to the existing firms. 

This particular antitrust case against Google's allegedly anticompetitive behavior in the search engine market is surely just one of the cases Google will face in the future, both in the US and around the world. The attentive reader will have noticed that nothing in the current complaint is about broader topics like how Google collects or makes use of  information on consumers. There's nothing about how Google might or might not be manipulating the search algorithms to provide an advantage to Google-related products: for example, there have been claims that if you try to search Google for websites that do their own searches and price comparisons, those websites may be hard to find. There are also questions about whether or how Google manipulates its search results based on partisan political purposes. 

As I look back at the Microsoft case, my suspicion is that the biggest part of the outcome was that when Microsoft was under the antitrust microscope, other companies that eventually became its big-tech competitors had a chance to grow and flourish on their own. With Google, the big issue isn't really about details of specific contractual agreements relating to its search engine, but whether Google and the other giants of the digital economy are leaving sufficient room for their future competitors. 

For more posts on antitrust and the big tech companies, some previous posts include: