Federal prosecutors have accused Google of using its deep pockets and status as the dominant internet search engine to shut out rivals and stifle meaningful competition. That charge is now the focus of a trial that began Tuesday in U.S. District Court in Washington, D.C., a proceeding that could have a significant impact on the tech industry.
The Gazette spoke with economist Shane Greenstein, Martin Marshall Professor of Business Administration at Harvard Business School, about the complexities of the case. Greenstein has written about the commercial evolution of the internet and studies competition and economics in the digital economy. This interview has been edited for clarity and length.
GAZETTE: What is Google accused of doing, and why is this case getting so much attention?
GREENSTEIN: This is the most significant antitrust case brought by the DOJ since the late ’90s. Second, it’s not illegal to make money in the United States, and they’re not being sued for that reason. Sometimes you hear commentators say that, and that’s just wrong. It’s OK to be successful; it is also OK to be innovative. This is another one people sometimes say. They’re not being accused of being too innovative.
Antitrust law is principally interested in two things in this case. Has a firm achieved a certain level of success that can be characterized as a monopoly? Has the monopoly used its leading position in ways that abused the competitive process?
That’s very subtle. Let’s break it down: First, the government prosecutors must meet a legal standard for showing the firm has achieved a leading position. It has to prove by a lot that it established and maintained a monopoly. And as obvious as that might sound to some, that’s often where a lot of the legal fight is. Because if Google can define the market in such a way that they convince the judge that they’re in a very competitive setting and could lose market share at any time, a judge could say, “Well then, they don’t have a monopoly.”
If, on the other hand, the prosecution can persuade the judge that Google is in such a position so as not to be seriously worried about losing much market share to a competitor, then the monopoly can be sustained. That’s going to be the very first thing that gets litigated.
GAZETTE: Why has DOJ set its sights on Google rather than some other dominant tech firm?
GREENSTEIN: I absolutely understand why this case was brought. Once they achieved a leading position, did they take action that damaged the competitive process? It’s the actions they’re accused of taking. Google signs contracts for default settings with the distributors of phones and computers. It’s not everyone, but it’s the vast majority of device makers and distributors. The concern is that these contracts make it impossible for new entrants or too difficult for new entrants who might compete with Google to get their new services in front of users. That’s the accusation.
GAZETTE: Contracts that are exclusive or allegedly anti-competitive?
GREENSTEIN: Yes, anti-competitive. It concerns the details about the default. These contracts determine the defaults on systems when you buy them, like when you buy a PC or a smartphone, and what those defaults look like in the contracts. The most recent numbers — 80 to 90 percent of just about everything in the U.S. has as its default the Google search engine. In my opinion, the most problematic contracts are the ones with Apple.
GAZETTE: What are Google and DOJ likely to argue?
GREENSTEIN: Google will argue that these defaults make the user experience more seamless and less full of friction. A default has to be set. In almost all devices, search engines serve as a default for many applications. And so, if something has to be set and since they’re so popular, they’ll argue, “What’s wrong with having them as the default? People want that anyway. If they’re doing things to help users get what they want anyway, that’s not a violation of antitrust.” That’s more or less going to be their argument.
The Department of Justice is going to argue that the default contracts are too restrictive. They don’t give users options for choice. Users, when they’re making the decision for defaults, typically make them at the moment they acquire the device. And so, these contracts so discourage consideration for any other default that it makes it challenging, if not impossible, for an alternative to ever get a foothold and establish a market.
It’s a lot of contracts. There’s a contract with AT&T; there’s a contract with Verizon. There’s one with every Android user. The one with Apple is the one that has gotten the most publicity. I’ve got to agree — that’s the one that’s the most eyebrow-raising if you’re an antitrust enforcer.
The Apple iPhone in the United States — nobody is as dominant in the smartphone market. Its primary competitor is Android, which is sponsored by Alphabet, the parent company of Google. Apple has a contract with Alphabet to make its default search engine Google’s. This is the part that just worries most experts who look at this: Google pays Apple in proportion to the number of searches Google gets from those searches. The amount of money exchanging hands over time is huge.
It’s not only for smartphones; it’s also for the Apple PC. Last year, it’s something like $10 billion dollars, and most of that is for the iPhone.
GAZETTE: So, they’ve purportedly captured the smartphone market because they own Android operating system, and they’ve locked down iPhones via these contracts?
GREENSTEIN: Capture is too strong a word, to be fair. You can change the default on your smartphone. It’s not an easy thing to do. But think about it: Apple and Alphabet compete in the smartphone market and yet, here they are, exchanging money to change the design on a competitor’s product.
The most likely alternative to the Android design is Apple’s. That is very suspicious. Two competitors are exchanging and agreeing to have the same feature. That is not allowed in monopolized markets. This is the principle at stake here, and that’s why they’re being brought to court. Google’s response is that this helps users, and why shouldn’t we pay them, just like a product supplier pays a grocery store for placement of their products on shelves? And then they’ll have to show that it helps users. The DOJ is going to come back with “Had you not done this, Apple could have made their own search engine or entertained offers from others. The money changing hands is changing incentives.”
GAZETTE: Some argue Microsoft never fully recovered its dominance or reputation after that court battle with DOJ. Could Google potentially face a similar fate?
GREENSTEIN: That is a valid concern among several risks. A couple of things Google should worry about — one is bad publicity. Brands are extraordinarily valuable, and cases like this tend to damage brands a lot. That’s why I’m surprised Google agreed to go to court. I expected them to settle out of court because they’re putting their brand at risk. So is Apple, to some extent, and they’re not even named in the suit.
No. 2, there’s the contracts themselves, and the way business is done. It’s in a huge number of things they do, so if the court rules that Google cannot use these kinds of contracts, that’s a big change.
No. 3, damages are a risk. If the court says not only is it Google can’t use these contracts, but it prevented all this entry over the last X number of years, and that entry could have made this much difference, the court could come up with an estimate of the damages that’s enormous. The amount of money at stake is potentially mind-boggling.
GAZETTE: What kind of changes might Google users see?
GREENSTEIN: It might change the process the day you buy a smartphone; it might change the process every time you buy an Apple computer. That’s something you might see down the road. I don’t think you’re going to see anything like that in the next couple of months because this is going to take a long time.
GAZETTE: Meaning Google might no longer be the default search engine on their smartphones and laptops or that it could be pulled off entirely?
GREENSTEIN: You’d have options. That would happen all over the United States but not necessarily worldwide. This is another reason I was a little surprised Google allowed this to go to court. It’s going to make public a bunch of details and arguments that will make it easy for the European Union to potentially pass the administrative rules that accomplish similar ends. So, there are some risks here for Alphabet that are fairly substantial. And yet, they think they’ve got a good case.
GAZETTE: Does this case have potential ramifications for the technology industry as a whole?
GREENSTEIN: Yes. This issue about defaults has shown up in other cases where firms develop monopoly power. The Big Five, they all worry about the legality of their default settings. Among them, Amazon does a little bit; Facebook does a little bit. Apple certainly does. Apple has got to be watching this very closely in relation to apps. The investor community is watching to see if the leadership is distracted. That was allegedly true in the Microsoft case.
Also, these kinds of cases tend to bring to light many details about how business gets done. Some in the industry might have speculated about those details, but not had perfect information about them. So, the analyst and investor community are watching this closely just because they will learn important things. Certainly, I’m going to be reading about this every day. And, of course, investors care. Both Apple and Google are at risk here, directly and indirectly.
The Daily Gazette
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