According to media reports, the U.S. court recently officially launched the antitrust trial of the Department of Justice against Google. Google is facing the largest antitrust trial in its 25 years of existence. The U.S. Department of Justice says Google pays Apple, Samsung and other companies more than $10 billion a year to maintain its status as the default search engine on computers and mobile devices. This move shuts out competitors and stifles innovation in the industry.
The author checked the indictment of the case on the website of the U.S. Department of Justice, as well as Google's statement of defense, and found that if the case occurred in China, according to my country's judicial practice, especially the rules determined in the judgment of Qihoo 360 v. Tencent, the court may dismiss the prosecution. Moreover, this case has many variables, and even ChatGPT will give Google extra points. China's "Anti-Monopoly Law" theory has the same origin as that of the United States, and the United States also has pending cases that China cannot win. However, in another antitrust case against advertising services filed by the U.S. Department of Justice, Google may be at greater risk.
1. Introduction to the case
The U.S. Department of Justice says Google has been a monopoly since at least 2010 and currently controls more than 89% of the online search market. The company abused its monopoly position by paying more than $10 billion a year to sign exclusive agreements with mobile phone manufacturers such as Apple and Samsung, as well as web browser providers, to make Google the default search engine on most devices. Exclusive agreements also increase barriers to entry for competitors, especially smaller innovative search companies that cannot afford the billions of dollars in entry fees, the DOJ complaint said. For the search engine industry, scale is very important. The agreements signed by Google and companies such as Apple and Samsung lock in its own scale and deprive its competitors of scale, which is illegally maintaining its monopoly position.
Google has denied the accusations, insisting that its dominance in search is because it provides better services than its competitors and that it pays partners such as Apple, Samsung and web browser providers to compensate them for their work to ensure that their software receives security updates and other maintenance. In this regard, Apple CEO Tim Cook, who signed an agreement with Google, said that Apple made Google the default search engine in the Safari browser mainly because their search engine is the best.
This response from Google is great: It is worth noting that in 2014, Mozilla (browser service provider) chose Yahoo as the default search engine, but many users actually changed back to Google. In other words, while the default settings are important (that's why we pay), they're easy to change. People can and do switch. In contrast, Microsoft pre-installed the Edge browser on Windows, set Bing as the default search engine, and actively made switching difficult. Despite this, the vast majority of Microsoft users still choose to use Google to search. In fact, “Google” is Bing’s number one search query worldwide. Contrary to the Department of Justice's theory, people know they have choices, and they make them.
2. Analysis of the legality and legitimacy of the default search engine agreement
This lawsuit is very interesting, but if it were in China, I don’t think the plaintiff is optimistic. Google's behavior of spending huge sums of money to purchase the default search engine status is suspected of two types of monopoly behavior in the Anti-Monopoly Law, illegal monopoly agreements and abuse of market dominance. However, no directly illegal clauses can be found in China's Anti-Monopoly Law.
1. Let’s first look at the terms of the monopoly agreement. There is no direct violation of Article 17 involving horizontal monopoly: Competing operators are prohibited from entering into the following monopoly agreements: (1) fixing or changing the price of goods; (2) limiting the production quantity or sales quantity of goods; (3) dividing the sales market or raw material procurement market; (4) restricting the purchase of new technologies and new equipment or restricting the development of new technologies and new products; (5) boycotting transactions; (6) other monopoly agreements identified by the anti-monopoly law enforcement agency of the State Council.
2. There is no direct violation of Article 18 involving vertical monopoly: operators are prohibited from entering into the following monopoly agreements with transaction counterparts: (1) fixing the price of goods for resale to third parties; (2) limiting the minimum price for resale of goods to third parties; (3) other monopoly agreements identified by the anti-monopoly law enforcement agency of the State Council.
3. There is no direct violation of Article 22 involving abuse of market dominance: operators with a dominant market position are prohibited from engaging in the following behaviors that abuse their market dominance: (1) selling goods at unfairly high prices or purchasing goods at unfairly low prices; (2) selling goods at prices below cost without justifiable reasons; (3) refusing to trade with counterparties without justifiable reasons; (4) without justifiable reasons. (5) tying goods without justifiable reasons, or attaching other unreasonable trading conditions to transactions; (6) applying differential treatment to counterparties with the same conditions in terms of transaction prices and other trading conditions without justifiable reasons; (7) other abuses of market dominance determined by the anti-monopoly law enforcement agency of the State Council.
4. The essence of Google’s behavior is involution. The "other" clauses in the above three articles may still be violated, but after all, they are not violations of express provisions. In addition to illegality, legitimacy also depends on legitimacy. In my personal opinion, Google’s behavior of spending huge sums of money to purchase the default search engine is not particularly unfair, because the essence of this behavior is: involution, a kind of implicit exclusion. Google pays high prices for the entrance of search engines such as Apple, Samsung, and Mozilla, high basic default search engine setting fees and high advertising shares. It uses its scale effect to have deep pockets and squeeze out competitors. Similar behavior will be done by all industry-leading companies in the to C field. For example, fast-moving consumer goods pay higher supermarket shelf fees to obtain prime positions. But their ability to defeat their competitors in the market mainly relies on better service quality.
5. Microsoft's Bing is doing the same thing. And Google has not done anything wrong. The default agreement they signed with Apple and Samsung does not prohibit users from using competitors' services. Users can change the default search engine. It is not maliciously incompatible like Microsoft did with Netscape Browser. There is insufficient basis to accuse it of serious unfairness. What’s even more ironic is that Microsoft is now doing the same thing on PCs. Because Microsoft has a monopoly on the Windows operating system, users who start a new computer for the first time must open Microsoft browsers, such as Edge, and IE back then. They all use Microsoft’s Bing as the default search engine, but users don’t like Bing’s services. The first thing they do when opening Bing is to search Google. So even though Bing is the default search engine on PCs, their market share in the United States is only about one-tenth of Google’s.
3. The impact of the 3Q war verdict and ChatGPT on the Google case
Although a monopoly agreement is also involved, if this case is prosecuted domestically, the plaintiff will most likely choose abuse of market dominance as the key cause of action. But the key question is: Google's technology is more powerful and its services are better. Therefore, if the illegality and legitimacy can be maintained, even if Google has a dominant market position in the general search engine market, this behavior may not be deemed to constitute an abuse of dominant position.
Moreover, domestic courts have always been cautious in identifying market dominance in the Internet field. In the classic Qihoo 360 v. Tencent abuse of market dominance case, Tencent, like Google, has a market share of more than 50%. As an instant messaging software service provider, its network effect and customer stickiness are much higher than Google's search engine services, but it was not deemed to have a market dominance. Because the Supreme People's Court believes that according to the provisions of the Anti-Monopoly Law, even if the market share reaches 50% as stipulated in the Anti-Monopoly Law, it still depends on whether the provider of goods and services has market power. In the case of Qihoo 360 v. Tencent, Tencent does not have market power, so it does not have market dominance.
The first-instance verdict of the Qihu case: 2. Regarding "customer stickiness" and network effects... When Tencent and Tencent Computer developed and operated QQ products, MSN was the instant messaging service provider with the largest domestic market share. However, Tencent and Tencent Computer relied on their distinctive products and high-quality services to rapidly expand their business scale and attract the number of users, eventually surpassing MSN in market share in a relatively short period of time. It can be seen that network effects and user lock-in effects are not insurmountable barriers to instant messaging products and services.
The second-instance judgment of the Qihoo case: The first-instance court used Tencent QQ’s successful entry into the instant messaging service market where MSN has a relatively high market share as an example to demonstrate that network effects and user stickiness are not obvious obstacles to market entry. In the first-instance evidence of this case, there was no relevant evidence that could directly prove that MSN had a dominant market position in the instant messaging market in mainland China when Tencent QQ entered the market, and compared with the market conditions at that time, the market environment had changed. Therefore, the argument of the first instance court lacked a solid factual basis and persuasiveness. However, the court of first instance did not just use this to determine that it is easier to enter the instant messaging service market, but comprehensively analyzed multiple factors to make the final judgment. The problems inherent in this argument do not affect the correctness of its final conclusion.
Even Tencent's PC-side instant messaging service does not have a dominant market position in China. How can Google's search engine service be deemed to have a dominant position? If this case were fought in the country, wouldn't this point be able to be solved? In fact, there are still ways. The key depends on how the relevant market is defined. The 3Q war happened in 2010, and the market has changed thirteen years later. The mobile terminal is the mainstream battlefield for industrial development, and compared with the more open, compatible and easily replaceable services on the PC side, the mobile terminal is more closed and exclusive, and the substitutability of services is also weaker. Therefore, if the relevant market of Internet services is defined on the mobile side, or at least includes the mobile side, to prove market dominance, there will be a breakthrough more likely than on the PC side.
If the lawsuit is domestic, another variable is ChatGPT. Artificial intelligence is the focus of the development of the Internet industry this year, but Google’s artificial intelligence service Bard is much inferior to OpenAI’s ChatGPT. Microsoft invested heavily in OpenAI to help it develop ChatGPT, and thus obtained the exclusive right to cooperate with search engines. Microsoft's Bing has embedded ChatGPT's artificial intelligence service in the search engine. The search experience has been greatly improved, and there are signs of potential to challenge Google. If the court hears the Google search engine antitrust case in China, this will also be an important consideration for the court to determine market dominance: competition in the search engine service market is relatively fierce and open, so even if Google has a high market share, it may not necessarily have super dominance over the market.
4. Google’s risks lie on the other side of the two-sided market
If this case were tried in the country, it would definitely receive less attention than the 3Q war. Because during the 3Q war, Tencent required users to choose between 360 and Tencent, so user perception was relatively strong. The Google case has a relatively indirect impact on consumers. Although theoretically, monopolistic behavior will damage the competition dividends and innovation dividends that consumers can obtain from normal competition, but search engines are a two-sided market, and service providers do not charge consumers, so consumers have a weak perception of the harm of monopolistic behavior.
What is a two-sided market? In layman's terms, one side earns money from basic services for free, and the other side earns money from value-added services for a fee. Both sides are carried out at the same time. Google and Facebook in the United States, and Baidu and Tencent in China all have this model. For example, when we use Baidu to search content, the search service is one side of the two-sided market. Baidu does not charge us here, but in the search results, Baidu will give some advertisements. In terms of the basic business models of search engines, Google and Baidu are similar.
Let’s talk about what the relevant market is. The market share mentioned above is the share in the relevant market defined in the anti-monopoly case. How to define the relevant market is crucial to whether the anti-monopoly case can be won. Because search engines are a two-sided market, there are two relevant markets in this case: one is the general search service market in the United States. Google has a monopoly in the U.S. general search service market. There are currently only four meaningful universal search providers in this market: Google, Bing, Yahoo, and DuckDuckGo. According to public data sources, Google's current market share in general search services is approximately 89%.
Another relevant market is the US search advertising market. The advertising market consists of all types of ads generated in response to online search queries, including general search text ads (served by general search engines such as Google and Bing) and other specialized search ads (served by general search engines and specialized search providers such as Amazon, Expedia or Yelp). Based on public estimates of total U.S. search advertising expenditures, Google’s share of the U.S. search advertising market accounts for more than 70%.
Why do I introduce the two-sided market at the end? Because my judgment is that the U.S. Department of Justice may not win this case. However, in addition to this case, the U.S. Department of Justice also sued Google for another antitrust case in early 2023: accusing it of having an illegal monopoly in the advertising model. It also represents websites and advertisers, and it also operates an online advertising exchange. It is like being a brokerage firm such as Goldman Sachs and Morgan Stanley, and also doing work for the New York Stock Exchange. There is a serious conflict of interest. This case may hit Google's soft spot. The focus of the case is that on the other side of the two-sided market, Google's illegal monopoly constitutes a conflict of interest, harming the interests of advertisers and websites that sell advertising spaces. This case is being tried in a district court in Virginia. The prosecutor in charge of the Department of Justice has worked for Google’s competitors Microsoft, Yelp and News Corporation. He knows Google better, so his approach may be more correct.
The author of this article: You Yunting, senior partner of Shanghai Dabang Law Firm and intellectual property lawyer. Tel: 8621-52134900, Email: [email protected], this article only represents the author’s opinion.