Design of Search Engine Services: Channel Interdependence in Search Engine Results

Edelman, Benjamin, and Zhenyu Lai. “Design of Search Engine Services: Channel Interdependence in Search Engine Results.” Journal of Marketing Research (JMR) 53, no. 6 (December 2016): 881-900. (First posted April 2013.)

The authors examine prominent placement of search engines’ own services and effects on users’ choices. Evaluating a natural experiment in which different results were shown to users who performed similar searches, they find that Google’s prominent placement of its Flight Search service increased the clicks on paid advertising listings by more than half while decreasing the clicks on organic search listings by about the same quantity. This effect appears to result from interactions between the design of search results and users’ decisions about where and how to focus their attention: users who decide what to click based on listings’ relevance became more likely to select paid listings, while users who are influenced by listings’ visual presentation and page position became more likely to click on Google’s own Flight Search listing. The authors consider implications of these findings for competition policy and for online marketing strategies.

Exploring and Assessing Google’s Practices in Mobile

Since its launch in 2007, Android has become the dominant mobile device operating system worldwide. In light of this commercial success and certain disputed business practices, Android has come under substantial attention from competition authorities. In a paper Damien Geradin and I posted this week, we present key aspects of Google’s strategy in mobile, focusing on Android-related practices that may have exclusionary effects. We then assess Google’s practices under competition law and, where appropriate, suggest remedies to right the violations we uncover.

Many of Google’s key practices in mobile are implemented through Mobile Application Distribution Agreements, confidential contracts that became available to the public through Oracle litigation and are available, to this day, only on my site. But we also evaluate Google restrictions embodied in other documents including Google’s Anti-Fragmentation Agreement as well as supplemental contracts with device manufacturers and mobile carriers providing for exclusive preinstallation of Google search.

If one accepts our conclusion that certain Google practices violate competition laws, it’s important to turn to the question of remedies–what changes Google must make. The natural starting point is to end Google’s contractual ties, allowing device manufacturers to install Google apps in whatever configurations they find convenient and in whatever way they believe the market will value. One might expect to see low-cost devices that feature Yahoo Search, MapQuest maps, and other apps that vendors are willing to pay to distribute. Other developers would retain a “pure Google” experience, foregoing such payments from competing app makers but offering apps from a single vendor, which some users may prefer.

Beyond that, remedies might seek to affirmatively restore competition. Because much of Google’s dominance in mobile seems to come from its powerful app store, Google Play, an intervention might seek to shore up other app stores–for example, letting them copy in Google’s APK’s so that they can offer Google apps to users who so choose. A full remedy would also attempt to restore competition for key apps. Just as Europe previously required Microsoft to show a screen promoting five different web browsers when a user booted Windows for the first time, a similar screen could provide users with a genuine choice of Android apps in each area where Google has favored its own offering. We suspect some users would favor a more privacy-protecting location service if that were prominent and easily available. Other users would probably find competing local services, such as TripAdvisor and Yelp, more trustworthy than Google’s offerings. These developments would increase choices for both users and advertisers, reduce the sphere of Google’s dominance, and begin to restore a competitive marketplace in fundamental mobile apps.

Our working paper:

Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile

(Updated October 26, 2016: This article, as revised, is forthcoming in the European Competition Journal.)

EC Statement of Objections on Google’s Tactics in Mobile

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.

  • Some MADA provisions explicitly do require that Google functions be the sole or default in their spheres. Consider the requirement that Google Search be the default search provider for all Web search access points (MADA Section 3.4(4)) and the requirement that Google’s Network Location Provider service must be preloaded and default (MADA Section 3.8(c)). One can hardly overstate the importance of these two functions. Search is the most natural way to monetize users’ activities and is the natural gateway to other functions and services. Meanwhile, location providers are the crucial translation between a phone’s sensors and its inferences about the user’s geographic location — collecting and aggregating location data with exceptional commercial value though of course also special privacy consequences. In these two crucial areas, Google does exactly what its defense claims it does not — requiring not only that its services be installed, but that they be installed as the sole and exclusive default. We are fortunate to be able to read the MADAs (HTC, Samsung) to see these requirements embodied in contract language.
  • The possibility of a more intrusive restriction does nothing to deny the harm from the approach Google chose. Google sketches a different restriction on competition that would cause even larger harm — requiring not just preinstallation of Google apps but explicit contractual exclusion of competitors. But the possibility of a worse alternative does not mean Google’s approach is permitted.
  • Google’s argument runs counter to settled European competition law. Consider experience from prior EC proceedings against Microsoft. Microsoft always allowed OEM’s to install other web browsers and other media players. Nonetheless Microsoft faced EC penalties for requiring that OEM’s include Microsoft’s browser and media player. The law of the land, for better or for worse, is that dominant firms may not invoke this approach.

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.

Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile

Edelman, Benjamin, and Damien Geradin. “Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile.” European Competition Journal 12, nos. 2-3 (2016): 159-194.

Since its launch in 2007, Android has become the dominant mobile device operating system worldwide. In light of this commercial success and certain disputed business practices, Android has come under substantial attention from competition authorities. We present key aspects of Google’s strategy in mobile, focusing on Android-related practices that may have exclusionary effects. We then assess Google’s practices under competition law and, where appropriate, suggest remedies to right the violations we uncover.

The Online Ad Scams Every Marketer Should Watch Out For

The Online Ad Scams Every Marketer Should Watch Out For. HBR Online. October 13, 2015.

Imagine you run a retail store and hire a leafleteer to distribute handbills to attract new customers. You might assess her effectiveness by counting the number of customers who arrived carrying her handbill and, perhaps, presenting it for a discount. But suppose you realized the leafleteer was standing just outside your store’s front door, giving handbills to everyone on their way in. The measured “effectiveness” would be a ruse, merely counting customers who would have come in anyway. You’d be furious and would fire her in an instant. Fortunately, that wouldn’t actually be needed: anticipating being found out, few leafleteers would attempt such a scheme.

In online advertising, a variety of equally brazen ruses drain advertisers’ budgets — but usually it’s more difficult for advertisers to notice them. I’ve been writing about this problem since 2004, and doing my best to help advertisers avoid it.

In this piece for HBR Online, I survey these problems in a variety of types of online advertising — then try to offer solutions.

Beyond the FTC Memorandum: Comparing Google’s Internal Discussions with Its Public Claims

Disclosure: I serve as a consultant to various companies that compete with Google. That work is ongoing and covers varied subjects, most commonly advertising fraud. I write on my own—not at the suggestion or request of any client, without approval or payment from any client.

Through a FOIA request, the Wall Street Journal recently obtained–and generously provided to the public–never-before-seen documents from the FTC’s 2011-2012 investigation of Google for antitrust violations. The Journal’s initial report (Inside the U.S. Antitrust Probe of Google) examined the divergence between the staff’s recommendation and the FTC commissioners’ ultimate decision, while search engine guru Danny Sullivan later highlighted 64 notable quotes from the documents.

In this piece, I compare the available materials (particularly the staff memorandum’s primary source quotations from internal Google emails) with the company’s public statements on the same subjects. The comparison is revealing: Google’s public statements typically emphasize a lofty focus on others’ interests, such as giving users the most relevant results and paying publishers as much as possible. Yet internal Google documents reveal managers who are primarily focused on advancing the company’s own interests, including through concealed tactics that contradict the company’s public commitments.

About the Document

In a 169-page memorandum dated August 8, 2012, the FTC’s Bureau of Competition staff examined Google’s conduct in search and search advertising. Through a Freedom of Information Act (FOIA) request, the WSJ sought copies of FTC records pertaining to Google. It seems this memorandum was intended to be withheld from FTC’s FOIA request, as it probably could have been pursuant to FOIA exception 5 (deliberative process privilege). Nonetheless, the FTC inadvertently produced the memorandum — or, more precisely, approximately half the pages of the memorandum. In particular, the FTC produced the pages with even numbers.

To ease readers’ analysis of the memorandum, I have improved the PDF file posted by the WSJ. Key enhancements: I used optical character recognition to index the file’s text (facilitating users’ full-text search within the file and allowing search engines to index its contents). I deskewed the file (straightening crooked scans), corrected PDF page numbering (to match the document’s original numbering), created hyperlinks to access footnotes, and added a PDF navigation panel with the document’s table of contents. The resulting document: FTC Bureau of Competition Memorandum about Google — August 8, 2012.

AdWords API restrictions impeding competition

In my June 2008 PPC Platform Competition and Google’s "May Not Copy" Restriction and July 2008 congressional testimony about competition in online search, it seems I was the first to alert policy-makers to brazen restrictions in Google’s AdWords API Terms and Conditions. The AdWords API provided full-featured access to advertisers’ AdWords campaigns. With both read and write capabilities, the AdWords API provided a straightforward facility for toolmakers to copy advertisers’ campaigns from AdWords to competing services, optimize campaigns across multiple services, and consolidate reporting across services. Instead, Google inserted contractual restrictions banning all of these functions. (Among other restrictions: "[T]he AdWords API Client may not offer a functionality that copies data from a non-AdWords account into an AdWords account or from an AdWords account to a non-AdWords account.")

Large advertisers could build their own tools to escape the restrictions. But for small to midsized advertisers, it would be unduly costly to make such tools on their own — requiring more up-front expenditure on tools than the resulting cost-savings would warrant. Crucially, Google prohibited software developers from writing the tools once and providing them to everyone interested — a much more efficient approach that would have saved small advertisers the trouble and expense of making their own tools. It was a brazen restriction with no plausible procompetitive purpose. The restriction caused clear harms: Small to midsized advertisers disproportionately used only Google AdWords, although Microsoft, Yahoo, and others could have provided a portion of the desired traffic at lower cost, reducing advertisers’ overall expense.

Historically, Google staff disputed these effects. For example, when I explained the situation in 2008, AdWords API product manager Doug Raymond told me in a personal email in March 2008 that the restrictions were intended to prevent "inaccurate comparisons of data [that] make it difficult for the end advertiser to understand the performance of AdWords relative to other products."

But internal discussions among Google staff confirm the effects I alleged. For example, in internal email, Google director of product management Richard Holden affirmed that many advertisers "don’t bother running campaigns on [Microsoft] or Yahoo because [of] the additional overhead needed to manage these other networks [in light of] the small amount of additional traffic" (staff memo at p.48, citing GOOGWOJC-000044501-05). Holden indicated that removing AdWords API restrictions would pave the way to more advertisers using more ad platforms, which he called a "significant boost to … competitors" (id.). He further confirmed that the change would bring cost savings to advertisers, noting that Microsoft and Yahoo "have lower average CPAs" (cost per acquisition, a key measure of price) (id.), meaning that advertisers would be receptive to using those platforms if they could easily do so. Indeed, Google had known these effects all along. In a 2006 document not attributed to a specific author, the FTC quotes Google planning to "fight commoditization of search networks by enforcing AdWords API T&Cs" (footnote 546, citing GOOGKAMA-0000015528), indicating that AdWords API restrictions allowed Google to avoid competing on the merits.

The FTC staff report reveals that, even within Google, the AdWords API restrictions were controversial. Holden ultimately sought to "to eliminate this requirement" (key AdWords API restrictions) because the removal would be "better for customers and the industry as a whole" since it would "[r]educe friction" and make processes more "efficient" by avoiding time-consuming and error-prone manual work. Holden’s proposal prompted (in his own words) "debate" and significant opposition. Indeed, Google co-founder Larry Page seems to have disapproved. (See staff report p.50, summarizing the staff’s understanding, as well as footnote 280 as to documents presented to Page for approval in relaxing AdWords API restrictions; footnote 281 reporting that "Larry was OK with" a revised proposal that retained "the status quo" and thus cancelled the proposed loosening of restrictions.) Hal Varian, Google’s chief economist, also sought to retain the restrictions: "We’re the dominant incumbent in this industry; the folks pushing us to develop our PAI will be the underdogs trying to unseat us" (footnote 547, citing GOOGVARI-0000069-60R). Ultimately Holden’s proposal was rejected, and Google kept the restrictions in place until FTC and EC pressure compelled their removal.

From one perspective, the story ends well: In due course, the FTC, EC investigators, and others came to recognize the impropriety of these restrictions. Google removed the offending provisions as part of its 2013 commitments to FTC (section II) and proposed commitments to the EC (section III). Yet advertisers have never received refunds of the amounts they overpaid as a result of Google’s improper impediments to using competing tools. If advertisers incurred extra costs to build their own tools, Google never reimbursed them. And Google’s tactics suppressed the growth of competing search engines (including their recruitment of advertisers to increase revenue and improve advertising relevance), thereby accelerating Google’s dominance. Finally, until the recent release of the FTC staff report, it was always difficult to prove what we now know: That Google’s longstanding statements about the purpose of the restrictions were pretextual, and that Google’s own product managers knew the restrictions were in place not to improve the information available to advertisers (as Raymond suggested), but rather to block competitors and preserve high revenue from advertisers that used only Google.

Specialized search and favoring Google’s own services: benefiting users or Google?

For nearly a decade, competitors and others have questioned Google’s practice of featuring its own services in its search results. The core concern is that Google grants its own services favored and certain placement, preferred format, and other benefits unavailable to competitors — giving Google a significant advantage as it enters new sectors. Indeed, anticipating Google’s entry and advantages, prospective competitors might reasonably seek other opportunities. As a result, users end up with fewer choices of service providers, and advertisers with less ability to find alternatives if Google’s offerings are too costly or otherwise undesirable.

Against this backdrop, Google historically claimed its new search results were "quicker and less hassle" than alternatives, and that the old "ten blue links" format was outdated. "[W]e built Google for users," the company claimed, arguing that the design changes benefit users. In a widely-read 2008 post, Google Fellow Amit Singhal explained Google’s emphasis on "the most relevant results" and the methods used to assure result relevance. Google’s "Ten things we know to be true" principles begin with "focus on the user," claiming that Google’s services "will ultimately serve you [users], rather than our own internal goal or bottom line."

With access to internal Google discussions, FTC staff paint quite a different picture of Google’s motivations. Far from assessing what would most benefit users, Google staff examine the "threat" (footnote 102, citing GOOG-ITA-04-0004120-46) and "challenge" of "aggregators" which would cause "loss of query volumes" to competing sites and which also offer a "better advertiser proposition" through "cheaper, lower-risk" pricing (FTC staff report p.20 and footnote 102, citing GOOG-Texas-1486928-29). The documents continue at length: "the power of these brands [competing services] and risk to our monetizable traffic" (footnote 102, citing GOOG-ITA-05-0012603-16), with "merchants increasing % of spend on" competing services (footnote 102, citing GOOG-ITA-04-0004120-46). Bill Brougher, a Google product manager assessed the risks:

[W]hat is the real threat if we don’t execute on verticals? (a) loss of traffic from because folks search elsewhere for some queries; (b) related revenue loss for high spend verticals like travel; (c) missing opty if someone else creates the platform to build verticals; (d) if one of our big competitors builds a constellation of high quality verticals, we are hurt badly

(footnote 102, citing GOOG-ITA-06-0021809-13) Notice Brougher’s sole focus on Google’s business interests, with not a word spent on what is best for users.

Moreover, the staff report documents Google’s willingness to worsen search results in order to advance the company’s strategic interests. Google’s John Hanke (then Vice President of Product Management for Geo) explained that "we want to win [in local] and we are willing to take some hits [i.e. trigger incorrectly sometimes]" (footnote 121, citing GOOG-Texas-0909676-77, emphasis added). Google also proved willing to sacrifice user experience in its efforts to demote competing services, particularly in the competitive sector of comparison shopping services. Google used human "raters" to compare product listings, but in 2006 experiments the raters repeatedly criticized Google’s proposed changes because they favored competing comparison shopping services: "We had moderate losses [in raters’ assessments of quality when Google made proposed changes] because the raters thought this was worse than a bizrate or nextag page" (footnote 154, citing GOOGSING-000014116-17). Rather than accept raters’ assessment that competitors had high-quality offerings that should remain in search results, Google changed raters’ criteria twice, finally imposing a set of criteria in which competitors’ services were no longer ranked favorably (footnote 154, citing GOOGEC-0168014-27, GOOGEC-0148152-56, GOOGC-0014649).

Specialized search and favoring Google’s own services: targeting bad sites or solid competitors?

In public statements, Google often claimed that sites were rightly deprioritized in search results, indicating that demotions targeted "low quality," "shallow" sites with "duplicate, overlapping, or redundant" content that is "mass-produced by or outsourced to a large number of creators … so that individual pages or sites don’t get as much attention or care." Google Senior Vice President Jonathan Rosenberg chose the colorful phrase "faceless scribes of drivel" to describe sites Google would demote "to the back of the arena."

But when it came to the competing shopping services Google staff sought to relegate, Google’s internal assessments were quite different. "The bizrate/nextag/epinions pages are decently good results. They are usually well-format[t]ed, rarely broken, load quickly and usually on-topic. Raters tend to like them. …. [R]aters like the variety of choices the meta-shopping site[s] seem… to give" (footnote 154, citing GOOGSING-000014375).

Here too, Google’s senior leaders approved the decision to favor Google’s services. Google co-founder Larry Page personally reviewed the prominence of Google’s services and, indeed, sought to make Google services more prominent. For example: "Larry thought product [Google’s shopping service] should get more exposure" (footnote 120, citing GOOG-Texas-1004148). Product managers agreed, calling it "strategic" to "dial up" Google Shopping (footnote 120, citing GOOG-Texas-0197424). Others noted the competitive importance: Preferred placement of Google’s specialized search services was deemed important to avoid "ced[ing] recent share gains to competitors" (footnote 121, citing GOOG-Texas-0191859) or indeed essential: "most of us on geo [Google Local] think we won’t win unless we can inject a lot more of local directly into google results" (footnote 121, citing GOOGEC-0069974). Assessing "Google’s key strengths" in launching product search, one manager flagged Google’s control over " real estate for the ~70MM of product queries/day in US/UK/De alone" (footnote 121, citing GOOG-Texas-0199909), a unique advantage that competing services could not match.

Specialized search and favoring Google’s own services: algorithms versus human decisions

A separate divergence from Google’s public statements comes in the use of staff decisions versus algorithms to select results. Amit Singhal’s 2008 post presented the company’s (supposed) insistence on "no manual intervention":

In our view, the web is built by people. You are the ones creating pages and linking to pages. We are using all this human contribution through our algorithms. The final ordering of the results is decided by our algorithms using the contributions of the greater Internet community, not manually by us. We believe that the subjective judgment of any individual is, well … subjective, and information distilled by our algorithms from the vast amount of human knowledge encoded in the web pages and their links is better than individual subjectivity.

2011 testimony from Google Chairman Eric Schmidt (written responses to the Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights) made similar claims: "The decision whether to display a onebox is determined based on Google’s assessment of user intent" (p.2). Schmidt further claimed that Google displayed its own services because they "are responsive to what users are looking for," in order to "enhance[e] user satisfaction" (p.2).

The FTC’s memorandum quotes ample internal discussions to the contrary. For one, Google repeatedly changed the instructions for raters until raters assessed Google’s services favorably (the practice discussed above, citing and quoting from footnote 154). Similarly, Page called for "more exposure" for Google services and staff wanted "a lot more of local directly into search results" (cited above). In each instance, Google managers and staff substituted their judgment for algorithms and user preferences as embodied in click-through rate. Furthermore, Google modified search algorithms to show Google’s services whenever a "blessed site" (key competitor) appeared. Google staff explained the process: "Product universal top promotion based on shopping comparison [site] presence" (footnote 136 citing GOOGLR-00161978) and "add[ing] a ‘concurring sites’ signal to bias ourselves toward triggering [display of a Google local service] when a local-oriented aggregator site (i.e. Citysearch) shows up in the web results" (footnote 136 citing GOOGLR-00297666). Whether implemented by hand or through human-directed changes to algorithms, Google sought to put its own services first, contrary to prior commitments to evenhandedness.

At the same time, Google systematically applied lesser standards to its own services. Examining Google’s launch report for a 2008 algorithm change, FTC staff said that Google elected to show its product search OneBox "regardless of the quality" of that result (footnote 119, citing GOOGLR-00330279-80) and despite "pretty terribly embarrassing failures" in returning low-quality results (footnote 170, citing GOOGWRIG-000041022). Indeed, Google’s product search service apparently failed Google’s standard criteria for being indexed by Google search (p.80 and footnote 461), yet Google nonetheless put the service in top positions (p.30 and footnote 170, citing GOOG-Texas-0199877-906).

The FTC’s documents also call into question Eric Schmidt’s 2011 claim (in written responses to a Senate committee) that "universal search results are our search service — they are not some separate ‘Google product or service’ that can be ‘favored.’" The quotes in the preceding paragraph indicate that Google staff knew they could give Google’s own services "more exposure" by "inject[ing] a lot more of [the services] into google results." Whether or not these are "separate" services, they certainly can be made more or less prominent–as Google’s Page and staff recognized, but as Schmidt’s testimony denies. Meanwhile, in oral testimony, Schmidt said "I’m not aware of any unnecessary or strange boosts or biases." But consider Google’s "concurring sites" feature, which caused Google services to appear whenever key competitors’ services were shown (footnote 136 citing GOOGLR-00297666). This was surely not genuinely "necessary" in the sense that search could not function without it, and indeed Google’s own raters seemed to think search would be better without it. And these insertions were surely "strange" in the sense that they were unknown outside Google until the FTC memorandum became available last week. In response to a question from Senator Lee, asking whether Google "cooked it" to make its results always appear in a particular position, Schmidt responded "I can assure you, we’ve not cooked anything"–but in fact the "concurring sites" feature exactly guaranteed that Google’s service would appear, and Google staff deliberated at length over the position in which Google services would appear (footnote 138).

All in all, Google’s internal discussions show a company acutely aware of its special advantage: Google could increase the chance of its new services succeeding by making them prominent. Users might dislike the changes, but Google managers were plainly willing to take actions their own raters considered undesirable in order to increase the uptake of the company’s new services. Schmidt denied that such tampering was possible or even logically coherent, but in fact it was widespread.

Payments to publishers: as much as possible, or just enough to meet waning competition?

In public statements, Google touts its efforts to "help… online publishers … earn the most advertising revenue possible." I’ve always found this a strange claim: Google could easily cut its fees so that publishers retain more of advertisers’ payments. Instead, publishers have long reported — and the FTC’s document now explicitly confirms — that Google has raised its fees and thus cut payments to publishers. The FTC memorandum quotes Google co-founder Sergey Brin: "Our general philosophy with renewals has been to reduce TAC across the board" (footnote 517, citing GOOGBRIN-000025680). Google staff confirm an "overall goal [of] better AFS economics" through "stricter AFS Direct revenue-share tiering guidelines" (footnote 517, citing GOOGBRAD-000012890) — that is, lower payments to publishers. The FTC even released revenue share tiers for a representative publisher, reporting a drop from 80%, 85%, and 87.5% to 73%, 75%, and 77% (footnote 320, citing GOOG-AFS-000000327), increasing Google’s fees to the publisher by as much as 84%. (Methodology: divide Google’s new fee by its old fee, e.g. (1-0.875)/(1-0.77)=1.84.)

The FTC’s investigation revealed the reason why Google was able to impose these payment reductions and fee increases: Google does not face effective competition for small to midsized publishers. The FTC memorandum quotes no documents in which Google managers worry about Microsoft (or others) aggressively recruiting Google’s small to midsized publishers. Indeed, FTC staff report that Microsoft largely ceased attempts in this vein. (Assessing Microsoft’s withdrawal, the FTC staff note Google contract provisions preventing a competing advertising service from bidding only on those searches and pages where it has superior ads. Thus, Microsoft had little ability to bid on certain terms but not others. See memorandum p.106.)

The FTC notes Microsoft continuing to pursue some large Google publishers, but with limited success. A notable example is AOL, which Google staff knew Microsoft "aggressively woo[ed] … with large guarantees" (p.108). An internal Google analysis showed little concern about losing AOL but significant concern about Microsoft growing: "AOL holds marginal search share but represents scale gains for a Microsoft + Yahoo! Partnership… AOL/Microsoft combination has modest impact on market dynamics, but material increase in scale of Microsoft’s search & ads platform" (p.108). Google had historically withheld many features from AOL, whereas AOL CEO Tim Armstrong sought more. (WSJ reported: "Armstrong want[ed] AOL to get access to the search innovation pipeline at Google, rather than just receive a more basic product.") By all indications Google accepted AOL’s request only due to pressure from Microsoft: "[E]ven if we make AOL a bit more competitive relative to Google, that seems preferable to growing Bing" (p.108). As usual, Google’s public statements contradicted their private discussions; despite calling AOL’s size "marginal" in internal discussions (p.108), a joint press release quotes Google’s Eric Schmidt praising "AOL’s strength."

A Critical Perspective

The WSJ also recently flagged Google’s "close ties to White House," noting large campaign contributions, more than 230 meetings at the White House, high lobbying expenditures, and ex-Google staff serving in senior staff positions. In an unusual press release, the FTC denied that improper factors affected the Commission’s decision. Google’s Rachel Whetstone, SVP Communications and Policy, responded by shifting focus to WSJ owner Rupert Murdoch personally, then explaining that some of the meetings were industry associations and other matters unrelated to Google’s competition practices.

Without records confirming discussion topics or how decisions were made, it is difficult to reach firm conclusions about the process that led the FTC not to pursue claims against Google. It is also difficult to rule out the WSJ’s conclusion of political influence. Indeed, Google used exactly this reasoning in critiquing the WSJ’s analysis: "We understand that what was sent to the Wall Street Journal represents 50% of one document written by 50% of the FTC case teams." Senator Mike Lee this week confirmed that the Senate Committee on the Judiciary will investigate the possibility of improper influence, and perhaps that investigation will yield further insight. But even the incomplete FTC memorandum reproduces scores of quotes from Google documents, and these quotes offer an unusual opportunity to compare Google’s internal statements with its public claims. Google’s broadest claims of lofty motivations and Internet-wide benefits were always suspect, and Google’s public statements fall further into question when compared with frank internal discussions.

There’s plenty more to explore in the FTC’s report. I will post the rest of the document if a further FOIA request or other development makes more of it available.

Google Inc. in 2014 (teaching materials) with Thomas Eisenmann

Edelman, Benjamin, and Thomas R. Eisenmann. “Google Inc. in 2014.” Harvard Business School Case 915-004, September 2014. (Revised June 2017.).(educator access at HBP.)

Describes Google’s history, business model, governance structure, corporate culture, and processes for managing innovation. Reviews Google’s recent strategic initiatives and the threats they pose to selected competitors. Asks what Google should do next.


Google Inc. in 2014 (Abridged) – Case (HBP 915005)

Google Inc. in 2014 — Role Supplement – Supplement (HBP 915017)

Teaching Materials:

Google Inc. in 2014 and Google Inc. in 2014 (Abridged) – Teaching Note (HBP 915011)

Convergence of Position Auctions under Myopic Best-Response Dynamics

Cary, Matthew, Aparna Das, Benjamin Edelman, Ioannis Giotis, Kurtis Heimerl, Anna Karlin, Scott Duke Kominers, Claire Mathieu, and Michael Schwarz. “Convergence of Position Auctions under Myopic Best-Response Dynamics.” ACM Transactions on Economics and Computation 2, no. 3 (July 2014): 1-20.

We study the dynamics of multi-round position auctions, considering both the case of exogenous click-through rates and the case in which click-through rates are determined by an endogenous consumer search process. In both contexts, we demonstrate that the dynamic auctions converge to their associated static, envy-free equilibria. Furthermore, convergence is efficient, and the entry of low-quality advertisers does not slow convergence. Because our approach predominantly relies on assumptions common in the sponsored search literature, our results suggest that dynamic position auctions converge more generally.

Leveraging Market Power through Tying: Does Google Behave Anti-Competitively?

Edelman, Benjamin. “Leveraging Market Power through Tying: Does Google Behave Anti-Competitively?” Harvard Business School Working Paper, No. 14-112, May 2014.

I examine Google’s pattern and practice of tying to leverage its dominance into new sectors. In particular, I show how Google used these tactics to enter numerous markets, to compel usage of its services, and often to dominate competing offerings. I explore the technical and commercial implementations of these practices, then identify their effects on competition. I conclude that Google’s tying tactics are suspect under antitrust law.