Trade War 2: European antitrust authorities take aim at Silicon Valley

Jul 23, 2018

Margrethe Vestager – veteran Danish politician and EU’s current Competition Commissioner – knows how to turn a phrase. “There’s no such thing as a free search”, she quipped, just before imposing a record €4.3 billion fine on Google for antitrust violations, in an apparent determination to make those words a reality.

In what is only the latest episode in the US-EU regulatory power struggle, three of Google’s commercial practices have been found illegal under European competition law. Firstly, the firm was requiring manufacturers of Android-running smartphones to pre-install Google Chrome web browser and the Google Search app on their devices as a condition for access to the Play Store, Google’s app store. As 90% of Android apps are downloaded through the Play Store, the possibility of withholding a licence to install it from manufacturers was found to be abuse of market power. Secondly, Google was paying some smartphone manufactures and network operators for them to pre-install the Google Search app on their devices. This was found to be an anti-competitive practice, because its competitors could not have done this while still turning a profit. Thirdly, if a manufacturer wanted to pre-install Google apps on their devices, they were not allowed to sell devices which were running a ‘forked’ version of Android, that is to say, a version which was not ‘approved’ by Google. Again, using the threat of withholding a suite of proprietary Google apps if a smartphone manufacturer did not use their favoured version was deemed to be an abuse of dominant position.

The Commission contended that these practices allowed Google to unfairly ‘direct’ users of Android smartphones to its search and browser products by having them pre-installed, unfairly advantaging them over alternative products available on the Android platform, and therefore reducing incentives for other firms to develop rival products. This, the Commission contented, deprived European citizens of the benefits of competition. They were also able to advantage their favoured version of the Android operating system over others, thus disincentivising development of devices running other versions, such as Amazon’s Fire OS which could have come pre-installed with alternative search and browser products. It also allows Google and the wider Alphabet group to boost revenues in area where they are strongest – web search – further cementing their dominant position in this area.

The decision is typical of the currently dominant philosophy of regulators and competition authorities involved in the technology market: that traditional ‘consumer welfare’ approach to competition is no longer fit for purpose. It’s no longer about spotting aggressive pricing or monopoly profits. By offering their products for free, technology giants are able to amass a huge user base complete with highly personalised data, which they then use to exert market dominance by, for example, withholding access to it from other technology businesses unless they play by their rules.

It’s a compelling story to tell. The sheer wealth and power of these companies makes the prospect of their downfall brought about by a smaller, more nimble competitors seems very hard to imagine.

But in the words of Lawrence Lessig, the ‘Elvis of cyberlaw’ legal academic who in 2001 helped to bring one of the pioneering technology antitrust cases against Microsoft, ‘life is about repeating the same mistakes in many different contexts.’ The litigation he staked his career on alleged that Microsoft engaged in anti-competitive practices for bundling its Windows OS – an undisputed market leader at the time – with its Internet Explorer browser pre-installed.

Sounds familiar? It’s almost an identical situation to the one Google have found themselves in – bundling your products together, then leveraging the popularity of Product #1 to attract users to Product #2, thus gaining an advantage over competitors who may well produce something superior to Product #2, but it won’t get a hearing because of how popular Product #1 is, and the competitors know that, so they don’t develop it. Or so the story goes.

He won the case, but – as he now admits – lost the argument. Since all Microsoft was able to do is to ‘nudge’ you towards Internet Explorer, it naturally proved a small barrier to innovation and it wasn’t long before Mozilla Firefox and then Google Chrome were being installed on Windows PCs all over the world. Would it have happened earlier if Microsoft was not engaging in bundling? Who knows. But the truth is that the dominance of big technology companies is a lot more precarious than it seems. It relies on their products constantly living up to the needs and wants of consumers in an environment where alternatives are a click (or, in this case, a tap) away.

The Commission believes that Android users have no reason to use alternative browsers or search apps from the pre-installed Google products, and use them due to status quo bias. Yet surely the primary reason is that these products work and they are happy with them, because Google happens to be (for the moment) the market leader in those two services. WhatsApp, CityMapper or Spotify occupy spaces where pre-installed Google offerings fall short of the mark – again, for the moment – and are therefore less dominant. Assuming, as the commission seemingly did, that it’s too much to ask users unhappy with an app to install an alternative is at best puzzling. Same argument applies to claims of social media companies abusing their dominant positions acquired through user data. But that data was acquired because their product was good, not other way around.

Two issues lie at the heart of this debate. First, to what extent should we consider consumer choices to be unduly influenced by what is in front of them and take the view – as the Commission did – that switching, be it an app or the entire platform (from Android to Apple, for example) is costly and should not be expected, and secondly, given absence of traditional antitrust indicators such as prices, how can we tell when a market is competitive? Is the absence of European rival to Apple, Google or Microsoft evidence enough? Would one have emerged if it wasn’t for the anti-competitive practices of American companies in Europe? Or, taking it all the way back to 2001, would Firefox or Chrome emerged earlier if it wasn’t for the anti-competitive practices of Microsoft with its Internet Explorer?

Unfortunately, the answer to both of these issues is a resounding: we don’t know. App usage statistics tell us what consumers choose, but they can never tell us why. This is particularly pronounced in products like web search, because realistically, there is only so much this product can be improved, so perhaps in this case it does matter what consumers see first – this won’t be as much of an issue with products like maps or music streaming, because in those cases there is always room for improvement, as shown by CityMapper and Spotify. Likewise, competition authorities would need insight into alternate universes to be able to truly tell if something that they are doing or not doing is preventing an emergence of new products or firms, given c onsumer welfare in a strict sense of the phrase is no longer the dominant philosophy.

European competition authorities have been pushing back against American technology giants for some time now. Cynics would say they’re attempting to clear the field for a European rival to emerge. Others, that it’s the lack of a revolving door between the regulators and the firms which remains well-oiled back home in Washington. Whatever the reason, their approach is here to stay – but that does not mean it should not be questioned. Right now, it is hard to imagine Google Search’s dominance waning. Just as hard as Internet Explorer’s in 2001, MySpace’s in 2005, or BB Messenger’s in 2010. But evidently not for everyone, and right now, certainly not for Snap Inc. Just ask Facebook

Author

Jan Zeber

Economics Research Fellow Read Full Bio

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