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EC Statement of Objections on Google's Tactics in Mobile

April 20, 2016


Today the European Commission announced a Statement of Objections to Google's approach to Android mobile licensing and applications. Broadly, the EC's concerns arise from Google's contractual restrictions on phone manufacturers -- requiring them to install certain apps, in certain settings, if they want other apps; preventing customizations that manufacturers would prefer; requiring manufacturers to set Google Search as the sole and default search provider.

These questions are near and dear to me because, so far as I know, I broke the story of Google's Mobile Application Distribution Agreement contracts, the previously-secret documents that embody most of the restrictions DG Comp challenges. I described these documents in a February 2014 post:

Google claims that its Android mobile operating system is "open" and "open source"—hence a benefit to competition. Little-known contract restrictions reveal otherwise: In order to obtain key mobile apps, including Google's own Search, Maps, and YouTube, manufacturers must agree to install all the apps Google specifies, with the prominence Google requires, including setting these apps as default where Google instructs. It's a classic tie and an instance of full line forcing: If a phone manufacturer wants any of the apps Google offers, it must take the others also.

I offered the HTC MADA and Samsung MADA, both as they stood as of year-end 2010. So far as I know, these are the only MADA's available on the web to this day; while Google now admits that MADAs exist (a fact unknown to the public before I posted these documents), no one has circulated any newer versions. Occasional news reports discuss new versions, most notably a September 2014 piece from The Information's Amir Efrati reporting new and growing requirements embodied in "confidential documents viewed by The Information" but unfortunately not available to the public. So the documents I posted remain the best available evidence of the relevant restrictions.

While news reports and the EC SO offer some sense of MADA requirements, there's no substitute for reading the plain language of the underlying contracts. I cited and quoted key sections in my 2014 piece:

"Devices may only be distributed if all Google Applications [listed elsewhere in the agreement] ... are pre-installed on the Device." See MADA section 2.1.

The phone manufacturer must “preload all Google Applications approved in the applicable Territory … on each device.” See MADA section 3.4(1).

The phone manufacturer must place “Google's Search and the Android Market Client icon [Google Play] ... at least on the panel immediately adjacent to the Default Home Screen,” with "all other Google Applications ... no more than one level below the Phone Top." See MADA Section 3.4(2)-(3).

The phone manufacturer must set “Google Search ... as the default search provider for all Web search access points.” See MADA Section 3.4(4).

Google's Network Location Provider service must be preloaded and the default. See MADA Section 3.8(c).

 

"Naked exclusion" and impeding competition

Competition lawyers offer the term "naked exclusion" for conduct unabashedly intended to exclude rivals, for which a dominant firm offers no efficiency justification. That diagnosis matches my understanding of these tactics, as the MADAs give no suggestion that Google is trying to help consumers or anyone else. Rather, the MADAs appear to be intended to push Google's own businesses and prevent competitors from getting traction.

Consider the impact on competing firms. Suppose some competing app maker sought to increase use of one of its apps, say Yahoo seeking greater usage of Yahoo Maps. Yahoo might reasonably offer a bonus payment to, say, Samsung as an incentive for featuring the Yahoo Maps app on new phones sold via, say, AT&T. To encourage users to give Yahoo Maps a serious try, Yahoo would want its service to be the only preinstalled mapping app; otherwise, Yahoo would rightly anticipate that many users would discard Yahoo Maps and go straight to the familiar Google Maps. For $2 per phone, Samsung might be happy to remove Google Maps and preinstall Yahoo Maps, figuring any dissatisfied consumer could download Google Maps. And if some of that $2 was passed back to consumers via a lower price for purchasing the phone, consumers might be pleased too. Crucially, Google's MADA prevents this effort and others like it. In particular, the MADA requirements prevent Samsung from removing any of the listed Google apps, Google Maps key among them. And if Samsung can only offer Yahoo the option to be a second preinstalled mapping app, it's much less clear that Yahoo is willing to pay. In fact, based on Yahoo's reasonable projections of user response, there may no longer be a price that Yahoo is willing to pay and Samsung is willing to accept.

The first key effect of the MADAs, then, is that they prevent new entrants and other competitors from paying to get exclusive placement. This impedes competition and entry, and streamlines Google's dominance.

Meanwhile, the MADAs correspondingly reduce pressure on Google to provide market-leading functionality and quality. Some competing apps might be a little bit better than Google's offerings, and a phone manufacturer might correctly assess that consumers would prefer those alternatives. But phone manufacturers can't switch to those offerings because the MADA disallows those changes. This barrier to switching in turn discourages competing app makers from even trying to compete. After all, if they can't get traction even when their apps are genuinely better, they won't be able to raise capital and won't develop the improvements in the first place.

Finally, the MADAs prevent Google from needing to pay to get and retain preferred placements and defaults. On desktop computers, search engines pay to be a browser's default -- giving additional revenue to a computer manufacturer, and reducing device cost. But MADAs allow Google to require that it be the default search provider, and require that its apps be preinstalled and prominent, all without payment to phone manufacturers.

 

Assessing Google's responses

This week reporters conveyed to me Google's responses to the EC's SO. First, Google argued that it is merely requiring that its apps be preinstalled, not ruling out the possibility that other apps may be preinstalled too. That defense has three key weaknesses.

Second, Google told reporters that its tactics are necessary to protect the health of the Android ecosystem and to build and retain consumer trust. But this argument strains credibility. Would the Android ecosystem truly be less reliable or trustworthy if some phones came with, say, Yahoo Maps? The better assessment is that Google imposes MADA restrictions to advance its business interests. To evaluate these alternative understandings of Google's conduct, one might depose Google employees or better yet read contemporaneous documents. Beginning in 2010, Skyhook litigation revealed some of Google's internal email discussions in this area, revealing reveal that their purpose is competitive -- "using compatibility as a club to make them [phone makers] do things we want." Further evidence against Google's ecosystem/trust argument comes from Android's other notable ecosystem weaknesses -- from brazenly counterfeit apps to confusingly inconsistent user interfaces. Allowing those problems to fester for years, Google cannot plausibly claim significant consumer confusion or ecosystem harm from, say, a competing maps app clearly labeled as such.

Third, Google argued that dissatisfied phone manufacturers can always install core Android without any Google Mobile Services and hence without the MADA obligations. But this approach ignores commercial realities. In wealthy markets such as the EC and the US, few customers would accept an Android phone without Google Play, the app store necessary to install other apps. Without Google Play, consumers cannot get the Facebook app, the Pandora, Uber, and so on. Such a limited phone would be a nonstarter for mainstream users. Amazon's Fire flop reveals that even Amazon, with a trusted name and distinctive positioning, could not offer a viable phone without Google Play access to install other apps. Conversely, consider how much more attractive users would have found Fire had they been able to use Google Play to get the benefit of third-party apps alongside the distinctive features Amazon provided. But Google's MADA exactly prohibited that approach -- converting a promising potential competitor into a weakling that quickly collapsed.

 

Looking ahead

One crucial next step is discussion of remedies -- what exactly Google must do in order to correct the distortions its MADAs have created. Bloomberg reports Google reducing the number of apps phone manufacturers are required to preinstall and feature -- but dropping losers like Google Plus is just tinkering around the edges.

The obvious first step is that Google should withdraw the MADA restrictions. With no more MADA, phone manufacturers could take the distinct Google apps that they want, and not others. Google has no proper reason to prevent a phone manufacturer from combining Google Play with, say, Yahoo Maps and Bing Search. Indeed, with Google's search dominance increasingly protected from competition as Yahoo stumbles and Microsoft withdraws, these combinations are the most promising way to increase competition in mobile.

Next, it goes nearly without saying that Google should pay a substantial penalty. Billion-dollar fines have become routine in Europe's competition cases against American tech giants, including for conduct far less brazen and less obviously calculated to impede competition. Anything less at this point would seem to be a slap on the wrist undermining the importance of the EC's effort.

Most of all, a full remedy requires affirmative efforts to undo the harm from Google's years of improper conduct. After Microsoft's browser tactics were deemed unlawful, the company was for five years obliged to present a "ballot box" in which consumers affirmatively chose among the five most popular browsers -- presented in random order with no default. It's easy to envision a similar approach in mobile: Upon first activating a new smartphone, a user would choose among the top five maps apps, top five search engines, top five geolocation services, and so forth. These obligations would most naturally track all the verticals that Google has targeted through its MADA restrictions. As users saw these options, competing app makers would get a prominent opportunity to attract users at modest expense -- beginning to restore the competition that Google has improperly foreclosed.

Finally, a remedy should undo the secrecy Google has imposed. I wrote in 2014 about the remarkable steps required to obtain the MADAs -- documents whose very existence was purportedly confidential, and whose terms contradicted the public statements (and sworn testimony) of Google's leaders. This secrecy prevented app developers, competitors and the general public from knowing and debating Google's tactics and raising concerns for a prompt regulatory response. Furthermore, secrecy emboldened Google to invoke methods that would have been less attractive had they been subject to public scrutiny from the outset. As part of competition proceedings, Google should be compelled to publish key contracts, facilitating analysis and discussion by the interested public. Meanwhile, as John Gapper writes in the FT, it's ironic for Google to claim that EU officials "could be better informed" when Google itself limits distribution of the most important documents.