DOJ v. Google – will Google be broken up?

DOJ v. Google – will Google be broken up?

The time has come: After some speculation about a lawsuit against Google in the USA, the US Department of Justice (“DOJ”) on 20 October 2020 has filed a lawsuit against Google for violation of the Sherman Antitrust Act (just two weeks before the presidential election!). Johannes Persch gives an overview of the 64-pages complaint.

Google is accused of illegally maintaining its monopoly in the general search engine market by denying competitors access to distribution channels. Eleven States have joined the action, all of whose Attorney Generals are Republican.

1. Introductory words of the DOJ (paras 1-13)

The DOJ begins the lawsuit with a brief overview of Google – from a scrappy start-up to a monopoly gatekeeper with a market value of over one trillion dollars (para 1). Then it explains where search engines are used: On the computer or – more and more – on the mobile phone. So far, no surprises. It only gets more exciting afterwards: the most effective means of distribution for a search engine is to be set as the standard search engine – defaults are sticky. Although users could theoretically download another search engine app or change the default search engine, most users would simply not do this. The default search engine enjoys de facto exclusivity (para 3). Google has made itself the sole beneficiary of this consumer inertia through a system of exclusivity agreements and billions of dollars in payments to smartphone manufacturers, mobile operators and browser developers: Google is set as the default virtually everywhere (paras 2-6). This is followed by a few paragraphs on how this behavior creates barriers to market entry and inhibits innovation (paras 7-9): operating a search engine is not only enormously expensive, but also depends on economies of scale with the available data. Google’s practice prevents other search engines from achieving sufficient economies of scale to compete with Google: They lack (scaled) access to users, advertisers and data.

Looking to the future, Google is in the process of applying the same practice to the next generation of electronic devices, i.e. smart speakers, intelligent vehicles, etc. (para 12). The internet of things is thus the next area that could fall prey to Google.

The protection of consumers, advertisers and all companies in the internet industry requires that Google’s behavior be stopped (para 13). Here the action even includes – still rather unusual for American antitrust practice – the keyword data protection.

2. How does the DOJ describe the industry (paras 19-51)?

It then explains how search engines work: By using software to crawl the internet. This crawling turns out to be quite expensive and complex: Google maintains an index of over 100,000,000 gigabytes (= 100 pentabytes). If you were to store this on CDs, you would need about 133 million blanks! Building a comparable index would require “billions of dollars” of initial investment and maintenance costs of “hundreds of millions of dollars” (para 22). The complaint goes on to briefly describe the difference between general and specialized search engines (paras 23-34): the former (Google, Bing, DuckDuckGo, Yahoo) are a one-stop shop for the user, who can search the whole Internet with search terms without any further limitation. The latter (e.g. Expedia or Amazon), on the other hand, provide focused results.

As everyone knows today, Google is not free for the user: He pays with data and attention (para 25). Equally unsurprising: Google makes money with advertising (paras 26-34). In addition to the Search Engine Result Pages (SERP), i.e. the “real” (unpaid/original) search results, Google also displays paid results. Traditionally, these are paid ads which, with the exception that they are marked as advertising, look quite similar to the other results (para 30). However, Google is also increasingly selling more specific ads: This is the small box (also marked as advertising) which appears at the top of some search result pages and in which, for example, shoes or hotels are displayed with a picture and a price (para 31). The attentive reader will recall that this box played a certain role in the European Commission’s Google Shopping case, in which the Commission prohibited Google from favoring its own price comparison service on the search results page.

The DOJ continues: The more customers a search engine has, the more attractive it is to advertisers, not only because more potential customers can be reached with the advertising, but also because the advertising can be more accurately targeted (para 37). Ultimately, only those who achieve sufficiently pronounced economies of scale can operate successfully as search engines (para 38).

Google achieves these economies of scale primarily through one thing: the default status (paras 39-87). Computers and mobile devices are generally supplied with a selection of pre-installed apps with search access points. These are mainly the browser with a default search engine, search apps and widgets or the voice assistant.

Distribution on mobile devices is particularly important (paras 42-47). Around 60% of all search queries in the USA are carried out on mobile devices, and the trend is rising. Among mobile devices, there are mainly those that operate with iOS (Apple) (60%) and those that run with Android (40%). Google is the default search engine for the vast majority of search access points on mobile devices on both systems: This applies to Apple Safari and Google Chrome, but also to the other access points (home button, search bar, voice assistant “OK Google” …). Anyone who picks up a new mobile phone and uses it to search for something on the internet will first end up at Google.

The nice thing about proceedings against Google is that you can follow everything on your own device with just a few clicks. So, if you want to take a short break from reading… After a quick check: On my mobile phone, I am directed towards Google in at least four ways (search widget, Chrome, Firefox, Home Button).

The picture is similar for computers (paras 48-49): in most browsers, Google is set as the default search engine and appears as the home page when the browser is opened.

We are slowly approaching the heart of the case…

3. How does Google manage to be set as default everywhere (paras 52-87)? 

First, Google enters into exclusionary agreements with manufacturers and mobile operators. These cover 60% of all search queries (80% for mobile). Second, some search access points are owned by Google itself, such as Google Chrome. Google’s own search access points cover another 20% of searches.

In essence, Google’s practices are as follows (paras 54-56): (1) Anti-forking Agreements which prohibit Android versions if they do not comply with Google’s standards; (2) Google only grants access to APIs (programming interfaces) and major proprietary applications (Google App Store!), if other Google Apps are also pre-installed and Google is given the best real estate on the standard home screen; (3) Google simply pays manufacturers, mobile operators and browser developers to set Google as the standard (“Revenue Sharing Agreements“).

(a) Anti-forking Agreements (paras 58-75)

Android is open source, i.e. the source code is freely available and can be installed on a device by any manufacturer. Theoretically, Android can therefore be modified without major technical difficulties – thus creating an Android fork (para 60). The best known is FireOS from Amazon. Android forks are, according to the DOJ, practically prohibited by Anti-forking Agreement (AFAs).

Until 2017, manufacturers had to sign these AFAs: they were not allowed to sell or develop a single device powered by an Android Fork. Then the European Commission stepped in and prohibited Google this behavior. Since then, the agreements are called Android Compatibility Commitments (ACCs) and leave manufacturers (a little bit) more freedom: they are now allowed to produce devices with Android Forks for third parties, but are still not allowed to develop, sell, distribute or promote Android Forks themselves (para 70).

Why are manufacturers entering into this agreement? Although Android is open source, this does not apply to all Google Apps, especially not to the Google Play Store. If manufacturers want to pre-install these apps, they must sign the AFAs (or today ACCs) (para 73). Access to Application Programming Interfaces (APIs) is also only granted to signatories to the agreements (para 74). Without this access, an app cannot, for example, send push messages. Anyone who remembers the debate about the Corona app in Germany knows how important API access is for app developers.

b) Pre-installation of all major Google Apps (paras 76-77)

To access the Google Play Store and APIs, manufacturers must also agree to pre-install a number of other apps: Chrome, Google Search App, Google Search Widget and Google Assistant. For all these apps, Google is the default search engine. Until 2017, manufacturers had to set Google as the default on all other apps that can be used as a search access point.

(c) Revenue sharing agreements (paras 78-87)

Google’s third distribution strategy is probably the simplest: Google pays for its placement as the default search engine. The amount depends on the income generated via the respective search access point, hence the term revenue sharing. These payments are made subject to a number of conditions that vary over time and depending on the manufacturer. At the heart of the matter, however, is always the manufacturer’s commitment to set Google as the default on all search access points. Such agreements exist with device manufacturers (including Apple), browser developers and mobile operators. In some cases, Google only pays if all models of a manufacturer are tied, in other cases it only pays for specific device models (para 79). Just to get an idea of the scale: Google pays Apple between USD 8 and 12 billion annually (para 118).

4. Which markets are affected (paras 88-110)?

The DOJ considers that the following markets are affected: 1. the market for general search engines; 2. the market for search engine advertising and general search text advertising. The relevant geographic market is the USA. Google has a monopoly in all affected markets.

The DOJ justifies the separate market for search engine advertising as distinct from other advertising offline (e.g. posters, TV and radio) and online (e.g. social media advertising!) on the grounds that search engine advertising cannot be substituted by it (para 99). Search engine advertising is particularly close to the consumer’s point of purchase. It is to be expected that at least the distinction from offline advertising will remain undisputed.

Google’s market position is impressive in both markets: in the general search engine market Google has a market share of 82% for computer searches and 94% for mobile searches (para 93). The main reason for this difference is probably the fact that Bing still has a 12% share in the computer search market. Arguably only because Bing is pre-installed on Microsoft browsers. This shows once again that the basic assumption of the DOJ – defaults are sticky – must be true in principle.

In the market for search engine advertising, Google has, calculated on the basis of total expenditure on such advertising, a market share of at least 70% (para 108). Under the market definition adopted by the DOJ, Google’s dominant position is therefore clear in all markets.

5. What does the DOJ accuse Google of (paras 111-165)?

The core of the accusation against Google is that Google has obstructed the distribution of competing search engines through the practices described above. This has prevented them from scaling up sufficiently to be able to compete with Google, inter alia, in terms of the quality of their service (para 113). Google “deprives rivals of the quality, reach, and financial position necessary to mount any meaningful competition to Google’s longstanding monopolies” (para 115).

(a) Revenue Sharing Agreements

No competitor of Google would be able to pay comparable sums of money to the manufacturers (especially Apple!), mobile phone providers etc. to be set up as the default search engine. Other search engines do not have a monopoly return. Moreover, no other search engine is in a position to offer a comparable quality and brand as Google (para 122). In other words: Google is bigger, better and richer than any competitor. Thus, due to Google’s behavior, no one else can make it as a standard in apps and browsers.

Revenue sharing agreements also exist with most browsers (paras 156-159). This concerns in particular Apple Safari and Mozilla Firefox. Only Microsoft is not paid for setting Google as the default search engine on its browsers – instead, Bing is preset there. According to DOJ, in a competitive market, rivals would compete to be set as the default search engine (para 159).

This line of argumentation is likely to become particularly exciting in the proceedings since the question arises as to how far Google could/must have acted differently. Assuming that Apple started an auction for the default in Safari, then – at least according to the DOJ’s statements – at present practically only Google could win this auction. Even if qualitative criteria were to play a role, only Google would be able to meet them. The same seems to be true for an auction for any browser`s default search engine. It is therefore not surprising that Google claims to be simply competing on the merits (e.g. with Bing).

A look at Europe can help here: The Commission has already found the abuse of market power in Google (Android) in the revenue sharing agreements for Android devices (there, paras 1188-1336). In the EU, at least for new Android devices, users can now choose between several search engines as the standard for Chrome and the Home Screen Search Box in the so-called choice screen. Other providers can bid to be displayed there – besides Google. Bing usually makes it onto the list of Choice Screen winners. DuckDuckGo, on the other hand, usually went away empty-handed, which is why their operators criticize the auction model.

However, the DOJ’s accusation goes even further here, as it also opposes revenue sharing agreements, which at least on paper do not require exclusivity. Furthermore, the complaint is also explicitly directed against the revenue sharing agreements with Apple. Unlike Android device manufacturers, Apple is unlikely to be dependent on Google. It will therefore be difficult to reproach Google for the lack of a choice screen on Apple devices.

b) Pre-installation of Google Apps and Anti Forking Agreements/Android Compatibility Commitments

On Android smartphones, the mandatory pre-installation of Google Apps and the ACCs or AFFs are added to the payments. The Revenue Sharing Agreements are dependent on the fact that the Google Apps (Google Search!) are also pre-installed and an AFF or ACC is concluded. In most cases, it is prohibited to pre-install search access points with preset search engines other than Google (para 124).

Without AFFs and ACCs, a new smartphone operating system based on Android (open source!) could be developed relatively cheaply, according to the DOJ, on which other Android apps would then work without major changes (para 127). An alternative operating system, in turn, could be used as a way of spreading search engines other than Google (para 126). Google has prevented this through its practice (paras 130-132). Not even Amazon’s FireOS, where Bing was set as the default search engine, could compete with Google’s Android version (para 131).

It is not without reason that the argumentation sounds familiar: The EU Commission has already accused Google of the same in Google (Android) in 2018 (there, para 1038-1145, in particular para 1140).

The pre-installation of Google Apps also strengthens Google’s monopoly in the search engine market (paras 133-143). In order to gain access to Google’s API interfaces and to be allowed to pre-install Google and the Google Play Store (and related apps), all six core apps must be pre-installed: Google Play, Chrome, Google Search, Gmail, Maps, YouTube (para 134). This would also close off channels for competitors to distribute their search engine (para 135). This is particularly so because Google must be set as the default search engine on these pre-installed apps (para 137) and these apps must be positioned preferentially on the mobile phone display (para 138). The Google search widget must, for example, be placed on the standard home screen – so it naturally makes little sense for the user to install another search widget in the same (or most likely also in a different) place. The Google Assistant is also preferred over other voice assistants (e.g. Amazon Alexa) (para 141).

Here too, the allegation essentially corresponds to that made by the Commission in Google (Android) (there, paras 752-1010).

c) The next generation: The Internet of Things

Moreover, Google is already in the process of taking control of the defaults on next generation devices (Smart Watches, Smart TVS, Intelligent Vehicles) with essentially the same behavior (paras 160-165). There is therefore a risk that Google will continue to undermine competition in the future:

„Google is poised to ensure that history repeats itself, and that all search access points funnel users in one direction: toward Google.” (para 165)

6. What is the competitive harm (paras 166-172)?

Hardly surprisingly, the DOJ’s focus here is on the fact that competitors would be denied access to distribution channels for their search engine. Because customers do not change the default settings but stay with Google, rival search engines do not have a chance to compete with Google.

Consumers are harmed by a reduction in quality (here again: privacy!) and less choice in search engines (para 167). Advertisers pay too much (money) for too little (quality) (para 168).

In addition, the DOJ describes a development of Google that every reader has probably already observed: The organic results (i.e. the real reason for the user to open Google) are more and more pushed down by paid results. In order to be perceived in any relevant way, website operators must buy more and more search engine advertising from Google (para 170).

As a short reading break, you can watch this here in the Washington Post video or – even better – try it out for yourself with a few search terms.

It is obvious that the Google search engine has changed over the years. For some search terms it is becoming increasingly tedious to scroll down to the organic results. The extent to which this is linked to anti-competitive behavior remains to be seen. After all, it could simply be the imposition of a monopoly price, which is not prohibited in itself. The theory of harm therefore still seems rather thin.

7. Will Google be broken up?

Probably not. The DOJ has not yet demanded any concrete remedies – apart from the cessation of the behavior. However, structural reliefs are called for (para 194 b). The Wall Street Journal reports that according to a DOJ employee nothing is off the table. Whether a break-up is coming or what it might look like (splitting off chrome?) and whether this would benefit the competition at all can only be speculated about at the moment. At least for Android devices, a choice screen solution remains conceivable, as it is already practiced in the EU (see above at 5.a.).

8. What does Google say?

Google is fighting for public opinion and has commented in a post on the DOJ’s complaint. In it, the home screen is compared with a supermarket shelf: there, too, the cereal manufacturer could pay the supermarket to place its cereals at eye level. The narrative is clear: digital markets are not as extraordinary as the DOJ would have us believe, and Google is ultimately no different from a muesli manufacturer. Unsurprisingly, Google does not mention that the muesli manufacturer most of the times is not dominant.

Google also explains (with video instructions) how easy it is to set up other search engines on all kinds of devices and in apps. The argument: people do not use Google because they have to, but because they want to. Despite the concession to Google’s quality (to make yourself a picture, compare it with other search engines: try finding this blog with the search term “DKART” on another search engine), this does not explain why Google puts so much money into being set as the default search engine everywhere. It all sounds a lot like Google’s old mantra competition is just one click away. Only in the last years (or even decades?) nobody seems to have done this one click and there is nothing to suggest that this will change in the future.

9. What happens next?

The DOJ itself already sees the case in a list with the major US antitrust cases AT&T and Microsoft. However, the case does not bring many new ideas, at least in comparison to the cases already conducted in Europe. In the US, however, it is practically the first major antitrust case against a technology company since Microsoft. Google (like Apple, Amazon and Facebook) has also been in the focus of American politics for some time. The proceedings thus promise to be interesting.

It is likely that more State Attorney Generals (including Democratic ones) will join the trial. Who knows, perhaps antitrust law can even help to reunite this deeply divided country.

However, we will have to wait a little longer until a decision (or a settlement) is reached. In the Microsoft case, it took about three years from filing the complaint to reaching a settlement, in AT&T it took four.

Johannes Persch, LL.M. (Chicago) is a trainee lawyer at the Düsseldorf District Court and a research assistant at the Chair of Civil Law, German and European Business and Employment Law (Professor Kainer) at the University of Mannheim.

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