Overview
In one of those rare moments in which antitrust makes both the front page and the nightly news, Judge Amit Mehta of the D.C. District Court last week upheld the United States' and 35 individual states' challenge to Google’s search dominance, concluding after a bench trial that Google is a monopolist that improperly used its monopoly power to further its dominant market position in violation of Section 2 of the Sherman Antitrust Act.[1] Although the court has deferred for the moment the thorny problem of designing a remedy, the ruling may lead to greater competition in the search and search text advertising markets.
According to Judge Mehta, Google is a monopolist in both the "general search services" and "general search text ads" markets. As defined by the court, general search services encompass Google, Bing, Yahoo!, and other search platforms that help users find content across the internet based on user queries. General search text ads are paid written advertisements that appear on a search engine results page (SERP) in response to user queries, usually as the top three or four results on a SERP. The court found that Google was a monopolist in these two markets because of Google's dominant market share, because of the substantial barriers to entry associated with these markets, and because trial evidence proved that Google could raise ad prices without regard to competition.
Merely being a monopolist, however, is not sufficient to establish a monopolization claim. The plaintiffs also had to prove that Google willfully acquired or maintained its monopoly power through exercising that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. The court found that Google had improperly exercised its monopoly power through its exclusive agreements with prominent search distribution channels like Apple, Android phone manufacturers like Microsoft and Samsung, and web browsers like Mozilla. Under these agreements, Google paid billions of dollars to these distribution channels in exchange for the channels pre-selecting Google as the exclusive default search engine for their users. For example, under the terms of Google's contract with Apple, Google is the exclusive default search engine for all searches on Apple's Safari browser. Google also tied the licensing of its Android operating system to the requirement that phone manufacturers make Google the default search engine on all devices. Even Microsoft, the owner of Google’s top competitor Bing, made Google the default search engine on its own phones. The court determined that these exclusivity and licensing agreements harmed search competition, leading to significant advertising price increases over time.
Judge Mehta was not convinced by Google's purported pro-competitive justifications for these agreements. Google claimed, for example, that having a default search engine improved and simplified Apple and Android phone users' experience. But Judge Mehta held that these benefits could be obtained without exclusivity. The court also rejected Google's argument that the contest to be the default search engine led Google and its competitors to improve their search capabilities. The court said that while this argument may have force in a competitive market, there was no real competition for Google to be the exclusive default search provider for its distribution partners. According to Judge Mehta, "it is a market reality that no firm other than Google has held a default on any Apple or Android device for a decade or more, so the distribution agreements have not served as a 'normal competitive tool.' And when partners have asked for flexibility on the defaults, perhaps with an eye toward generating competition, Google has resisted."
The court also rejected Google's contention that its payments to Apple and Mozilla helped to improve their browsers and helped Android phone manufacturers improve their devices. As for Apple, there was nothing in the exclusivity agreement that required Apple to use Google's payments under that agreement to improve its Safari browser and little evidence that Apple in fact used these funds to do so. The same is true for the smartphone manufacturers. While Judge Mehta found that Mozilla likely did use its payments from its agreement with Google to improve its Firefox browser’s capabilities—given that Mozilla receives most of its revenue from Google—he found that Mozilla's share of the browser market is so small that its additional output produced "at most, marginal pro-competitive benefits."
Although Judge Mehta held that Google was a monopolist and violated Section 2, he has yet to decide the remedy for this violation. Instead, the remedy will be determined in a later proceeding. Potential remedies include everything from an injunction requiring users of smartphones to choose from a menu of potential default search engines, to an injunction invalidating Google's exclusive default agreements, to requiring Google's parent company Alphabet to divest parts of its business—including its Android operating system—from its search business.[2]
How the Google decision might reshape the search, advertising, and broader technology industries is not completely clear because the court has yet to determine the remedy. If, however, the eventual remedy invalidates Google’s default agreements with search providers, there could be substantial implications for the search and advertising markets. Eliminating Google's exclusivity could reduce some of the barriers for new entry into the search market, both by allowing Google’s competitors to obtain favorable deals with distribution channels, and by ending Google’s cash payments to potential entrants like Apple that dissuaded them from entering. Apple and others could enter as competitors, and existing players like Microsoft’s Bing may gain market share. Search should become more competitive, leading to lower prices for search text advertising. But companies like Apple, Samsung, and mobile phone carriers will likely lose dependable revenue streams from Google.
Further, an injunction preventing Google from entering into default agreements may be difficult to enforce, as Google and its distribution partners may seek workarounds. This current litigation between Apple and Epic Games, the maker of the popular Fortnite game, is instructive. There, the court ordered Apple to provide a vehicle to allow application developers, like Epic, to develop a link for customers to make in-app purchases outside of Apple's App Store, which takes a 30 percent commission on all in-app purchases. According to recent court filings by Epic, Apple provided developers with a link for customers to make in-app purchases outside the App Store, but charged developers a 27 percent commission for providing this service. Epic and Apple are now back in court with Epic claiming that Apple has not complied in good faith with the injunction. An example of how an Epic Games workaround could occur is if an injunction prohibited Google from entering into exclusivity agreements, and required customers to choose their default search engine, but did not prevent Google from paying to be the first option displayed to users.
[1] Politico published the opinion at this link: https://www.politico.com/f/?id=00000191-23f0-d160-aff9-6bff4bbe0000
[2] For an in-depth analysis of potential remedies, see Ashley Belanger, All the Ways to Destroy Google’s Monopoly in Search, Ars Technica (Aug. 7, 2024), https://arstechnica.com/tech-policy/2024/08/all-the-possible-ways-to-destroy-googles-monopoly-in-search/.
