Oct 20, 2020 3:48 PM

Deals. Profits. Lock-in. Behind the DOJ Case Against Google

In an antitrust suit, the Justice Department claims the company uses exclusive deals with device makers and browser makers to prop up its near-monopoly on search.

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For the better part of a year, the tech world has wondered what, exactly, the Department of Justice’s long-rumored antitrust case against Google would look like. Now we have an answer. The department filed a complaint against Google on Tuesday, triggering the most significant antitrust case since the US sued Microsoft in the 1990s.

At the heart of the government’s case is Google’s use of exclusive contracts to become the default search engine on other companies’ browsers and devices. These techniques, the DOJ argues, helped Google transform from “a scrappy startup” to “a monopoly gatekeeper for the internet” that unfairly blocks the path of would-be rivals.

The scheme, according to the government, works like this. In the first step, Google makes deals with the companies who control access to search engines and apps: device manufacturers, browser makers, and mobile carriers. In the case of Apple devices, which account for roughly 15 percent of global smartphones, according to IDC, and a majority of US phones, Google pays to be the default search engine, to the tune of an estimated $8 billion to $12 billion annually—which the complaint notes is about 15 to 20 percent of Apple’s net income.

For devices that use Google’s Android operating system, which make up the vast majority of the global market, Google uses a mix of carrot and stick. It requires manufacturers who want to run Android to pre-load a bundle of Google apps on the default home screen and set Google as the default search. This isn’t much of a choice, since Android is really the only viable OS that non-Apple device makers can use. On the back end comes the carrot, when the manufacturers get a cut of Google’s revenue. According to the DOJ, these deals effectively lock out other search options, because people very rarely change their default search engine. That, in turn, deprives would-be rivals from getting enough users to build up the body of data needed to really compete with Google’s search results on the merits.

Step two: profits. With Google’s dominant position assured, and rivals locked out, it has a near-total monopoly on the tens of billions of dollars spent annually on general search advertising, allowing it to earn more in added revenue than it spends on the exclusive deals.

Step three: payouts. With those big profits in hand, Google can share a cut with Apple and with Android manufacturers, continually renewing its default status. The result: 60 percent of general search queries are made on a platform where Google has an exclusive deal, while another 20 percent take place on a browser Google owns, mainly Chrome.

The DOJ complaint leaves aside other allegations that have been made against Google, including its dominant share of digital advertising more broadly and its growing tendency to steer search users to the results that most benefit Google, rather than the most relevant ones. According to Sally Hubbard, director of enforcement strategy at the Open Markets Institute and the author of the forthcoming book Monopolies Suck, that’s probably because DOJ has focused on the conduct that’s the simplest to prove illegal under current antitrust law. To win its case, she explained, the government only needs to prove that Google has monopoly power and that it suppresses competition through exclusionary agreements.

“This is perhaps the easiest antitrust case to bring because there’s clear monopoly power in the market they’ve defined, the market shares are incredibly high, and the way exclusion of competition is being done is through exclusionary agreements,” Hubbard said. She likens the case to the case against Microsoft, where the government objected to the way Microsoft made computer makers install its browser instead of Netscape’s Navigator. “This is like a clone of US v Microsoft,” she said.

Google disagrees. “The department's complaint relies on dubious antitrust arguments to criticize our efforts to make Google search easily available to people,” wrote Kent Walker, Google’s chief legal officer, in a blog post. The company insists that its exclusive deals don’t really exclude. It rejects the premise that people tend to stick with the default search option, noting that defaults are easy to change. And in a call with reporters, company representatives cited comments by Apple executives suggesting that they set Google as the default on Safari because it’s the best search engine.

The trouble with this argument is that Google does spend billions to be the default search engine on Apple’s devices, its Safari web browser, and elsewhere. If defaults don’t matter, and Google is simply the first choice of consumers and manufacturers alike, then why spend all that money?

This may be why the company makes a second argument: Sure, it pays to promote its product, but it isn’t a search monopoly in the first place because people don’t search only on search engines. According to Google, it’s locked in fierce competition with the likes of Amazon, Kayak, Yelp, and anywhere else that people can look things up online. If that argument prevailed in court, and a judge agreed that Google doesn’t have monopoly power, then the exclusive deals wouldn’t violate the law.

We’re not going to find out how either argument fares for a long time. A case of this size will take years, especially given Google’s essentially limitless legal resources. That’s why it will be important to see how much pressure the company faces from elsewhere. While 11 state attorneys general joined the DOJ’s suit, all 50 states continue to work on their own antitrust investigations, which could touch on Google’s digital advertising monopoly. Meanwhile, the House antitrust subcommittee recently concluded an extensive investigation into competition issues in tech that resulted in bipartisan agreement on the need to strengthen federal antitrust laws.

Nor are the enforcers at the Justice Department necessarily finished. In a call with reporters, deputy attorney general Jeffrey Rosen called the Google lawsuit “a milestone, but not a stopping point,” and suggested that the department could bring more actions against Google or other tech companies in the future.

Somewhat unusually for an antitrust case, this one carries with it questions about partisan motivations. Attorney General William Barr, who in other contexts has proven a loyal servant to President Trump, reportedly pressured the department to bring a case this fall, over the objections of some career DOJ antitrust attorneys. That, along with loud claims from Trump allies that Google and other tech platforms are biased against Republicans, has driven suspicions that Barr is pursuing a political agenda. Notably, all of the state attorneys general who joined the new lawsuit are Republicans. On the other hand, the idea of strengthening antitrust enforcement to rein in the power of Big Tech is one of very few areas of real bipartisan agreement in Washington right now, championed by the likes of Elizabeth Warren on the left and Josh Hawley on the right.

The DOJ denies that the case was politically motivated or rushed. “In tech markets it is important for antitrust enforcers to move promptly,” said Rosen. If they don’t, he said, “we could lose the next wave of innovation. If that happens, Americans may never get to see the next Google.”