Last Tuesday, the Department of Justice (DOJ) kicked off its first major monopolization trial since the Microsoft case of the late 1990s. The target this time is a Microsoft rival: Google. Google’s ubiquitous search engine competes with Microsoft’s Bing, which powers search engines Yahoo and DuckDuckGo.
Filed in the waning days of the Trump administration, the government’s lawsuit alleges that Google has cemented its monopoly power in general internet search and related search advertising by paying to be the default search engine on various “search access points.” Specifically, Google secures default status by agreeing to share search advertising revenue with web browsers like Mozilla’s Firefox, producers of Android phones and the carriers who service them, and iPhone maker Apple. In the government’s telling, these deals prevent Google’s search rivals from achieving the scale they need to become formidable competitors.
To establish illegal monopolization, the government must prove 1) that Google possesses monopoly power in a market and 2) that it has engaged in anti-competitive conduct to secure, maintain, or enhance that power. Given Google’s greater-than-90-percent market share in general internet search, the first element is likely satisfied. The trial before Judge Amit Mehta in the U.S. District Court for the District of Columbia will therefore focus on the second element: Are Google’s arrangements anti-competitive, or is Google just competing vigorously?
The government likens Google’s conduct to that of Microsoft in the 1990s. In that case, the government proved that Microsoft had maintained its monopoly in computer operating systems by killing off web browsers that could eventually create competition for Microsoft’s Windows. Microsoft cut off its rivals from the best outlets for distributing web browsers: original equipment manufacturers like Dell (OEMs) and internet access providers like AOL (IAPs). By paying to be the default search engine on key search access points, DOJ contends, Google today similarly forecloses rival search engines from the best means of distributing their products to users.
Noting the similarities between the Microsoft and Google cases, the Wall Street Journal recently observed that the Google legal team’s “top job” will be “explaining why this time is different in the biggest fight between the U.S. and a tech company in 25 years.”
But there are important distinctions between the Microsoft and Google cases. They highlight three questions that may well determine the outcome of the Google trial.
How sticky are search defaults?
In the early days of the internet, changing the software needed to perform basic tasks like web browsing and search was difficult. If your computer came with a pre-installed browser, you could change it, but you’d have to physically install new software on your machine. Switching costs were high.
Today, by contrast, changing a search engine is a simple task. On an iPhone, just go to Settings > Safari > Search Engine, and a menu pops up offering Google, Yahoo, Bing, DuckDuckGo, and Ecosia. If you forget, you can ask Google how to change your search engine. It will tell you.
Given the ease today of switching digital service providers, defaults are far less sticky than they used to be—a fact that Microsoft knows all too well. Microsoft still dominates desktop operating systems with a market share of nearly 70 percent. Its Windows operating system features its own product, Edge, as the default web browser, and Edge defaults to Bing for search. Windows users, however, routinely alter these defaults, so much so that Google’s Chrome leads the desktop browser market (with a 64 percent share versus Edge’s 11 percent) and Google Search, the desktop search engine market (84 percent versus Bing’s 9 percent).
This may explain why Microsoft, whose market capitalization is about 1.5 times that of Google’s parent company, hasn’t outbid Google for default status. Microsoft understands that defaults to less desirable services aren’t very sticky. Indeed, “Google” is the is the No. 1 search term on Bing.
DOJ has enlisted a behavioral economist to testify that search defaults are sticky enough to create competitive problems (or, in his words, that “search engine defaults generate a sizable and robust bias towards the default”). Given Microsoft’s experience with defaults, though, the government faces an uphill battle on that point.
How important is scale for search engines?
In the Microsoft case, the appellate court stressed that “Microsoft reduced rival browsers’ usage share not by improving its own product but, rather, by preventing OEMs from taking actions that could increase rivals’ share of usage.” In the case at hand, though, DOJ repeatedly contends that increasing the usage of a search engine enhances its quality.
The complaint alleges, for example, that “[g]reater scale improves the quality of a general search engine’s algorithms” (¶35) and that “[t]he additional data from scale allows improved automated learning for algorithms to deliver more relevant results, particularly on ‘fresh’ queries (queries seeking recent information), location-based queries (queries asking about something in the searcher’s vicinity), and ‘long-tail’ queries (queries used infrequently).” The complaint further observes that “[t]he most effective way to achieve scale is for the general search engine to be the preset default on mobile devices, computers, and other devices.”
If all that is true, then Google’s efforts to secure scale—unlike Microsoft’s efforts to foreclose browser rivals from the best means of distribution—allow it to improve its own product.
That is damning to the government’s case. Just as antitrust does not require highly efficient firms to keep their prices high to allow less efficient rivals to stay in business, it shouldn’t require even dominant firms to refrain from efforts to improve their products in order to give their competitors a foothold.
At trial, DOJ might amend its views on the benefits of scale. It could contend that the benefits to search quality from having more users—“economies of scale”—run out at a certain level of usage, and that Google has already hit that point. In most industries, there is a point beyond which a participating firm can no longer improve its offering (i.e., enhance its product quality or lower its per-unit cost) by getting bigger. If Google has already exceeded that “minimum efficient scale,” then its efforts to grow its usage even further by securing default status could harm its rivals without improving its own offering and might resemble the behavior in Microsoft.
If DOJ takes that tack, though, it runs a huge risk. While Bing has a much smaller market share than Google Search, it still operates on a massive scale, with more than 100 million daily active users, more than 1 billion visits per month, and around 900 million searches per day (or 625,000 per minute). With that level of usage, Bing has vast hordes of data for training its algorithms. If its scale is sufficient to exhaust scale economies, then Google’s default deals aren’t hindering its ability to compete. Nor are they impairing Yahoo and DuckDuckGo, which are powered by Bing.
When it comes to scale effects then, DOJ faces a Goldilocks problem. If the benefits of scale for search engine quality go on indefinitely, then Google’s deals improve its product and constitute competition on the merits. If scale efficiencies max out at a size smaller than Bing, then Google’s deals aren’t depriving its rivals of the scale needed to compete effectively and thus aren’t anti-competitive. Only if scale economies end at just the right point—bigger than Bing but smaller than Google—can the government prove anticompetitive harm. That’s a tough needle to thread.
What about the consumer benefits Google’s arrangements provide?
A final difference between the Microsoft and Google cases concerns consumer benefits from the challenged conduct. Whereas Microsoft’s actions to foreclose browser rivals from distribution outlets did not help consumers, Google’s default arrangements do.
Consider the Android deals. Google owns the Android operating system and licenses it to OEMs for free. Google does so because it can earn advertising revenue from web searches on Android-powered phones, tablets, and computers. Ensuring that Google Search is widely used on Android products—a result of Google’s search defaults—keeps Android free for manufacturers and enables them to charge lower phone and tablet prices than Apple charges.
Google’s deals with web browsers ensure that independent browsers can stay in business and compete with Google’s Chrome and Apple’s Safari. Google’s payments for default status on Firefox represent more than 80 percent of Mozilla’s revenue and keep the company afloat. If Google’s payments are barred, Mozilla may very well fail.
Google’s deal with Apple also benefits consumers. Google is constantly aware that its much larger rival, Microsoft, could improve its own product (to avoid user switching), pay generously for default status, and thereby take valuable scale from Google, potentially impairing the quality of Google Search. To prevent that from happening, Google shares with Apple a generous portion of its search ad revenues—eight to twelve billion dollars a year, DOJ says. Given the intense competition for mobile device sales, Apple likely passes much of that gain to consumers in the form of lower phone and tablet prices.
Despite the professed wishes of the top federal antitrust enforcers, U.S. courts still decide antitrust cases with an eye toward promoting consumer welfare. It seems doubtful that a federal judge would upend arrangements that facilitate free Android licenses, the continued existence of independent web browsers, and cheaper iPhones.
Despite superficial similarities, then, the Google case is not just Microsoft redux. Given the ease with which consumers may alter digital defaults, the likelihood that Google’s default deals enhance its product quality, and the consumer benefits that flow from the arrangements, DOJ has a tough row to hoe.