Assessing Uber: Competition and Regulation in Transportation Networks

For consumers, it’s easy to applaud Uber, Lyft, and kin (transportation network companies or TNCs). Faster service, usually more reliable, often in nicer vehicles—all at lower prices. What’s to dislike?

Look behind the curtain and things are not so clear. TNCs cut corners on issues from insurance to inspections to background checks, thereby pushing costs from their customers to the general public—while also delivering a service that plausibly falls short of generally-applicable requirements duly established by law and, sometimes, their own marketing promises.

In a forthcoming article in Competition Policy International, Whither Uber?: Competitive Dynamics in Transportation Networks, I look at a range of concerns in this area, focusing on market dynamics and enforcement practices that have invited TNC to play fast-and-loose. This page offers excerpts and some further thoughts.

Corners cut

My article enumerates a variety of concerns resulting from prevailing TNC practices:

In most jurisdictions, a "for hire" livery driver needs a commercial driver’s license, a background check and criminal records check, and a vehicle with commercial plates, which often means a more detailed and/or more frequent inspection. Using ordinary drivers in noncommercial vehicles, TNCs skip most of these requirements, and where they take such steps (such as some efforts towards a background check), they do importantly less than what is required for other commercial drivers (as discussed further below). One might reasonably ask whether the standard commercial requirements in fact increase safety or advance other important policy objectives. On one hand, detailed and frequent vehicle inspections seem bound to help, and seem reasonable for vehicles in more frequent use. TNCs typically counter that such requirements are unduly burdensome, especially for casual drivers who may provide just a few hours of commercial activity per month. Nonetheless, applicable legal rules offer no "de minimis" exception and little support for TNCs’ position.

Differing standards for background checks raise similar questions. TNCs typically use standard commercial background check services which suffer from predictable weaknesses. For one, TNC verifications are predicated on a prospective driver submitting his correct name and verification details, but drivers with poor records have every incentive to use a friend’s information. (Online instructions tell drivers how to do it.) In contrast, other commercial drivers are typically subject to fingerprint verification. Furthermore, TNC verifications typically only check for recent violations—a technique far less comprehensive than the law allows. (For example, Uber admits checking only convictions within the last seven years, which the company claims is the maximum duration permitted by law. But federal law has no such limitation, and California law allows reporting of any crime for which release or parole was at most seven years earlier.) In People of the State of California v. Uber, these concerns were revealed to be more than speculative, including 25 different Uber drivers who passed Uber’s verifications but would have failed the more comprehensive checks permitted by law.

Relatedly, TNC representations to consumers at best gloss over potential risks, but in some areas appear to misstate what the company does and what assurances it can provide. For example, Uber claimed its service offered "best in class safety and accountability" and "the safest rides on the road" which "far exceed… what’s expected of taxis"—but taxis, with fingerprint verification of driver identity, offer improved assurances that the person being verified is the same person whose information is checked. Moreover, Uber has claimed to be "working diligently to ensure we’re doing everything we can to make Uber the safest experience on the road" at the same time that the company lobbies against legislation requiring greater verifications and higher safety standards.

Passengers with disabilities offer additional complaints about TNCs. Under the Americans with Disabilities Act (ADA) and many state laws, passengers with disabilities are broadly entitled to use transportation services, and passengers cannot be denied transport on the basis of disability. Yet myriad disabled passengers report being denied transport by TNCs. Blind passengers traveling with guide dogs repeatedly report that TNC drivers sometimes reject them. In litigation Uber argued that its service falls beyond the scope of the ADA and thus need not serve passengers with disabilities, an argument that a federal court promptly rejected. Nonetheless, as of November 2015, Uber’s "Drivers" page continues to tell drivers they can "choose who you pick up," with no mention of ADA obligations, nor of prohibitions on discrimination on the basis of race, gender, or other prohibited factors.

I offer my sharpest criticism for certain TNC practices as to insurance:

TNCs encourage drivers to carry personal insurance rather than commercial insurance —anticipating, no doubt correctly, that drivers might be put off by the higher cost of commercial coverage. But TNC drivers are likely to have more frequent and more costly accidents than ordinary drivers: they drive more often, longer distances, with passengers, in unfamiliar locations, primarily in congested areas, and while using mobile apps. To the extent that drivers make claims on their personal insurance, they distort the market in two different ways: First, they push up premiums for other drivers. Second, the cost of their TNC accidents are not borne by TNC customers; by pushing the cost to drivers in general, TNCs appear to be cheaper than they really are.

In a notable twist, certain TNC policies not only encourage drivers to make claims on their personal policies, but further encourage drivers to commit insurance fraud. Consider a driver who has an accident during the so-called "period 1" in which the driver is running a TNC app, but no passenger has yet requested a ride from the driver. If the driver gets into an accident in this period, TNCs historically would deny both liability and collision coverage, claiming the driver was not yet providing service through the TNC. An affected driver might instead claim from his personal insurance, but if the driver admits that he was acting as a TNC driver—he had left home only to provide TNC services; he had transported several passengers already; he was planning more—the insurer will deny his claim. In fact, in all likelihood, an insurer in that situation would drop the driver’s coverage, and the driver would also be unable to get replacement coverage since any new insurer would learn the reason for the drop. As a practical matter, the driver’s only choices are to forego insurance coverage (a possibility in case of a collision claim, though more difficult after injuring others or damaging others’ property) or, more likely, lie to his insurance issuer. California law AB 2293, effective July 1, 2015, ended this problem as to collision claims in that state, requiring TNCs to provide liability coverage during period 1, but offering nothing elsewhere, nor any assistance on collision claims.

Where TNC practices merely shortchange a company’s own customers, such as providing a level of safety less than customers were led to believe, we might hope that market forces would eventually fix the problem—informing consumers of the benefits they are actually receiving, or compelling TNCs to live up to their promises. But where TNC practices push costs onto third parties, such as raising insurance rates for all drivers, there is no reason to expect market forces to suffice. Regulatory enforcement, discussed below, is the only apparent way forward on such issues.

Competitive dynamics when enforcement is lax

A striking development is the incompleteness of regulation of TNC or, more precisely, the incompleteness of enforcement of existing and plainly-applicable regulation. I explain:

In this environment, competition reflects unusual incentives: Rather than competing on lawful activities permitted under the applicable regulatory environment, TNC operators compete in part to defy the law—to provide a service that, to be sure, passengers want to receive and buyers want to provide, notwithstanding the legal requirements to the contrary.

The brief history of TNCs is instructive. Though Uber today leads the casual driving platforms, it was competing transportation platform Lyft that first invited drivers to provide transportation through their personal vehicles. Initially, Uber only provided service via black cars that were properly licensed, insured, and permitted for that purpose. In an April 2013 posting by CEO Travis Kalanick, Uber summarized the situation, effectively recognizing that competitors’ casual drivers are largely unlawful, calling competitors’ approach "quite aggressive" and "non-licensed." (Note: After I posted this article, Uber removed that document from its site. But Archive.org kept a copy. I also preserved a screenshot of the first screen of the document, a PDF of the full document, and a print-friendly PDF of the full document.)

Uber’s ultimate decision, to recognize Lyft’s approach as unlawful but nonetheless to follow that same approach, is hard to praise on either substantive or procedural grounds. On substance, it ignores the important externalities discussed above—including safety concerns that sometimes culminate in grave physical injury and, indeed, death. On procedure, it defies the democratic process, ignoring the authority of democratic institutions to impose the will of the majority. Uber has all but styled itself as a modern Rosa Parks defying unjust laws for everyone’s benefit. But Uber challenges purely commercial regulation of business activity, a context where civil disobedience is less likely to resonate. And in a world where anyone dissatisfied with a law can simply ignore it, who’s to say that Uber is on the side of the angels? One might equally remember former Arkansas governor Orville Faubus’ 1957 refusal to desegregate public schools despite a court order.

Notice the impact on competition: Competitors effectively must match Uber’s approach, including ignoring applicable laws and regulation, or suffer a perpetual cost disadvantage.

Consider Hailo’s 2013-2014 attempt to provide taxi-dispatch service in New York City. On paper, Hailo had every advantage: $100 million of funding from A-list investors, a strong track record in the UK, licensed and insured vehicles, and full compliance with every applicable law and regulation. But Uber’s "casual driver" model offered a perpetual cost advantage, and in October 2014 Hailo abandoned the U.S. market. Uber’s lesson to Hailo: Complying with the law is bad business if your competitor doesn’t have to. Facing Uber’s assault in numerous markets in Southeast Asia, transportation app GrabTaxi abandoned its roots providing only lawful commercial vehicles, and began "GrabCar" with casual drivers whose legality is disputed. One can hardly blame them—the alternative is Hailo-style irrelevance. When Uber ignores applicable laws and regulators stand by the wayside, competitors are effectively compelled to follow.

Moreover, the firm that prevails in this type of competition may build a corporate character that creates other problems for consumers and further burdens on the legal system. My assessment:

Notice Uber’s recent scandals: Threatening to hire researchers to "dig up dirt" on reporters who were critical of the company. A "God view" that let Uber staff see any rider’s activity at any time without a bona fide purpose. Analyzing passengers’ rides to and from unfamiliar overnight locations to chronicle and tabulate one-night-stands. Charging passengers a "Logan Massport Surcharge & Toll" for a journey where no such fee was paid, or was even required. A promotion promising service by scantily-clad female drivers. The CEO bragging about his business success yielding frequent sexual exploits. "Knowing and intentional" "obstructive" "recalcitrance" in its "blatant," "egregious," "defiant refusal" to produce documents and records when so ordered by administrative law judges.

On one view, these are the unfortunate mishaps of a fast-growing company. But arguably it’s actually something more than that. Rare is the company that can pull off Uber’s strategy—fighting regulators and regulation in scores of markets in parallel, flouting decades of regulation and managing to push past so many legal impediments. Any company attempting this strategy necessarily establishes a corporate culture grounded in a certain disdain for the law. Perhaps some laws are ill-advised and should be revisited. But it may be unrealistic to expect a company to train employees to recognize which laws should be ignored versus which must be followed. Once a company establishes a corporate culture premised on ignoring the law, its employees may feel empowered to ignore many or most laws, not just the (perhaps) outdated laws genuinely impeding its launch. That is the beast we create when we admit a corporate culture grounded in, to put it generously, regulatory arbitrage.

An alternative model

Uber offers one approach to regulation: Ignore any laws the company considers outdated or ill-advised. But in other sectors, firms have chosen a different model to demonstrate their benefits and push for regulatory change. I offer one example as to the launch of Southwest Airilnes:

Planning early low-fare operations in 1967, Southwest leaders realized that the comprehensive regulatory scheme, imposed by the federal Civil Aeronautics Board, required unduly high prices, while simultaneously limiting routes and service in ways that, in Southwest’s view, harmed consumers. Envisioning a world of low-fare transport, Southwest sought to serve routes and schedules CAB would never approve, at prices well below what regulation required.

Had Southwest simply begun its desired service at its desired price, it would have faced immediate company-ending sanctions; though CAB’s rules were increasingly seen as overbearing and ill-advised, CAB would not have allowed an airline to brazenly defy the law. Instead, Southwest managers had to find a way to square its approach with CAB rules. To the company’s credit, they were able to do so. In particular, by providing solely intra-state transport within Texas, Southwest was not subject to CAB rules, letting the company serve whatever routes it chose, at the prices it thought best. Moreover, these advantages predictably lasted beyond the impending end of regulation: After honing its operations in the intra-state Texas market, Southwest was well positioned for future expansion.

In fact Southwest is far from unique in its attention to regulatory matters. Consider the recent experience of AT&T. In October 2015, AT&T sought to offer wifi calling for certain smartphones, but the company noticed that FCC rules required a teletypewriter (TTY) service for deaf users, whereas AT&T envisioned a replacement called real-time text (RTT). Competitors Sprint and T-Mobile pushed ahead without TTY, not bothering to address the unambiguous regulatory shortfall. To AT&T’s credit, it urged the FCC to promptly approve its alternative approach, noting the "asymmetry in the application of federal regulation to AT&T on the one hand and its marketplace competitors on the other hand." With the issue framed so clearly, FCC leaders saw the need for action, and they did so just days after AT&T’s urgent request.

Knowing that its casual-driver service was unlawful, as effectively admitted in CEO Travis Kalanick’s April 2013 posting Uber could have sought a different approach. (Note: After I posted this article, Uber removed that document from its site. But Archive.org kept a copy. I also preserved a screenshot of the first screen of the document, a PDF of the full document, and a print-friendly PDF of the full document.) I argue that this approach might have worked:

Assuming strict compliance with the law, how might Uber have tried to get its service off the ground? One possibility: Uber could have sought some jurisdiction willing to let the company demonstrate its approach. Consider a municipality with little taxi service or deeply unsatisfactory service, where regulators and legislators would be so desperate for the improvements Uber promised that they would be willing to amend laws to match Uber’s request. Uber need not have sought permanent permission; with great confidence in its offering, even a temporary waiver might have sufficed, as Uber would have anticipated the change becoming permanent once its model took off. Perhaps Uber’s service would have been a huge hit—inspiring other cities to copy the regulatory changes to attract Uber. Indeed, Uber could have flipped the story to make municipalities want its offering, just as cities today vie for Google Fiber and, indeed, make far-reaching commitments to attract that service.

Where’s the enforcement?

Park in front of a fire hydrant, and you can be pretty sure that you’ll get a ticket—even if there’s no fire and even if no one is harmed. TNCs violate laws that are often equally unambiguous, yet often avoid sanction. I discuss Uber’s standard approach to unfavorable regulation:

[Regulators’ findings of unlawfulness] are not self-effectuating, even when backed up with cease and desist letters, notices of violation, or the like. In fact, Uber’s standard response to such notices is to continue operation. Pennsylvania Public Utility Commission prosecutor Michael Swindler summarized his surprise at Uber’s approach: "In my two-plus decades in practice, I have never seen this level of blatant defiance," noting that Uber continued to operate in despite an unambiguous cease-and-desist order. Pennsylvania Administrative Law Judges were convinced, in November 2015 imposing $49 million of civil penalties, electing to impose "the maximum penalty" because Uber flouted the cease-and-desist order in a "deliberate and calculated" "business decision."

Nor was this defiance limited to Pennsylvania. Uber similarly continued to provide service at San Francisco International Airport, and affirmatively told passengers "you can request" an Uber at SFO, even after signing a 2013 agreement with the California Public Utilities Commission disallowing transport onto airport property unless the airport granted permission and even after San Francisco International Airport served Uber with a cease-and-desist letter noting the lack of such permission. In some instances, cities ultimately force Uber to cease or suspend operations. But experience in Paris is instructive. There, Uber continued operation despite a series of judicial and police interventions. Only the arrest of two Uber executives compelled the company to suspend its casual driving service in Paris.

While TNCs continue operation in most jurisdictions where they have begun, they nonetheless face a growing onslaught of litigation. PlainSite indexes 77 different dockets involving Uber, including complaints from competitors, regulators, drivers and passengers. (Notably, this is only a small portion of the disputes, omitting all international matters, most state proceedings, and most or all local and regulatory proceedings.) But no decision has gone as far as the Pennsylvania Public Utility Commission docket culminating in the remarkable 57-page November 2015 decision by two administrative law judges. In a July 1, 2014 order, the judges had ordered Uber to cease and desist its UberX service throughout the state for lack of required permits. Uber refused. The judges eviscerate Uber’s response, noting that their prior order "clearly directed Uber to cease its ridesharing service until it received authority from the ion," and "Uber was acting in defiance … as a calculated business decision" because "Uber simply did not want to comply … so it continued to operate." Uber then argued that it was justified in continuing to operate because the July 1, 2014 order was subject to further review and appeal. The PUC judges call this argument "incredibl[e]," noting the lack of any legal basis for Uber to refuse to comply with a duly issued order. It’s hard to imagine a decision more thoroughly rejecting Uber’s conduct in this period.

Notably, the Pennsylvania PUC fully engages with Uber’s defenses. In this proceeding and elsewhere, Uber argued that it is "just a software company" and hence not subject to longstanding laws that regulate transportation providers. The PUC picks apart this argument with care, noting Uber’s extensive control over the system. The PUC notes relevant facts demonstrating Uber’s "active role": Uber screened drivers and ejected some. Uber initially required drivers to use company-owned smartphones. Uber offered and touted an insurance policy which it claimed would cover possible accidents. Uber held the service out to the public as "Uber," including emails subject lines like "Your first Uber ride" and "Your ride with Uber" as well as message text like "Uber invite code" and "thanks for choosing Uber," all of which indicate a service that is Uber, with the company providing a full service, not just software. Uber further charges customer credit cards, using a charge descriptor solely referencing Uber. Not mentioned by PUC but equally relevant, Uber attracted both drivers and passengers with subsidies and price adjustments, set compulsory prices that neither side could vary, published drivers whose conduct fell short of Uber’s requirements, and mediated disputes between passengers and drivers. The PUC notes the breadth of conduct requiring license authority: "offering, or undertaking, directly or indirectly, service for compensation to the public for the transportation of passengers" (emphasis added). If the word "indirect" is to have any meaning in this statute, how could it not include Uber?

The PUC imposed a $49 million civil penalty against Uber for its intentional operation in violation of a PUC order. The PUC discussed the purpose of this penalty: "not just to deter Uber, but also [to deter] other entities who may wish to launch … without Commission approval." Their rationale is compelling: If the legal system requires a permit for Uber’s activity, and if we are to retain that requirement, sizable penalties are required to reestablish the expectation that following the law is indeed compulsory.

Meanwhile, the PUC sets a benchmark for others. Uber flouted a PUC order in Pennsylvania from July 1, 2014 through August 21, 2014. In how many other cities, states, and countries do Uber and Lyft equally violate the law? If each such jurisdiction imposed a similar fine, the total could well reach the billions of dollars—enough to put a dent in even Uber’s sizable balance sheet, and enough to compel future firms to rethink the way they approach law and regulation.

Looking back and looking ahead

Tempting as it may be to think Uber is first of its kind, others have tried this strategy before. I explain:

Take a walk down memory lane for a game of "name that company." At an entrepreneurial California startup, modern electronic communication systems brought speed and cost savings to a sector that had been slow to adopt new technology. Consumers quickly embraced the company’s new approach, particularly thanks to a major price advantage compared to incumbents’ offerings, as well as higher quality service, faster service, and the avoidance of unwanted impediments and frictions. Incumbents complained that the entrant cut corners and didn’t comply with applicable legal requirements. The entrant knew about the problems but wanted to proceed at full speed in order to serve as many customers as possible, as quickly as possible, both to expand the market and to defend against potential competition. When challenged, the entrant styled its behavior as "sharing" and said this was the new world order.

You might think I’m talking about Uber, and indeed these statements all apply squarely to Uber. But the statements fit just as well with Napster, the "music sharing" service that, during brief operation from 1999 to 2001, transformed the music business like nothing before or since. And we must not understate the benefits Napster brought: It offered convenient music with no need to drive to the record store, a celestial jukebox unconstrained by retail inventory, track-by-track choice unencumbered by any requirement to buy the rest of the album, and mobile-friendly MP3’s without slow "ripping" from a CD.

In fact, copyright litigation soon brought an end to Napster, including Chapter 7 bankruptcy, liquidation of the company’s assets, and zero return to investors. Where does that leave us?

One might worry that Napster’s demise could set society back a decade in technological progress. But subsequent offerings quickly found legal ways to implement Napster’s advances. Consider iTunes, Amazon Music, and Spotify, among so many others.

In fact, the main impact of Napster’s cessation was to clear the way for legal competitors—to increase the likelihood that consumers might pay a negotiated price for music rather than take it for free. When Napster offered easy free music with a major price advantage from foregoing payments to rights-holders, no competitor had a chance. Only the end of Napster let legitimate services take hold.

And what of Napster’s investors? We all now benefit from the company’s innovations, yet investors got nothing for the risk they took. But perhaps that’s the right result: Napster’s major innovations were arguably insufficient to outweigh the obvious and intentional illegalities.

I conclude the comparison:

Uber CEO Travis Kalanick knows the Napster story all too well. Beginning in 1998, he ran a file-sharing service soon sued by the MPAA and RIAA on claims of copyright infringement. Scour entered bankruptcy in response, giving Travis a first-hand view of the impact of flouting the law. Uber today has its share of fans, including many who would never have dared to run Napster. Yet the parallels are deep.

Despite the many concerns raised by TNC practices, I am fundamentally optimistic about the TNC approach:

It is inconceivable that the taxis of 2025 will look like taxis of 2005. Uber has capably demonstrated the benefits of electronic dispatch and electronic record-keeping, and society would be crazy to reject these valuable innovations. But Uber’s efforts don’t guarantee the $50+ billion valuation the company now anticipates—and indeed, the company’s aggressive methods seem to create massive liability for intentional violations in most jurisdictions where Uber operates. If applicable regulators, competitors, and consumers succeed in litigation efforts, they could well bankrupt Uber, arguably rightly so. But as with Napster’s indisputable effect on the music industry, Uber’s core contributions are unstoppable and irreversible. Consumers in the coming decades will no more telephone a taxi dispatcher than buy a $16.99 compact disc at Tower Records. And that much is surely for the best.

Will it be Uber (and perhaps Lyft) that bring us there? Or will their legal violations force a shut down, like Napster before them, to make way for lawful competitors? That, to my eye, is the multi-billion-dollar question.

Does Google Leverage Market Power Through Tying and Bundling?

Edelman, Benjamin. “Does Google Leverage Market Power Through Tying and Bundling?” Journal of Competition Law & Economics 11, no. 2 (June 2015): 365-400.

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.

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 Google.com 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 "Google.com 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.

Whither Uber? Competitive Dynamics in Transportation Networks

Edelman, Benjamin. “Whither Uber? Competitive Dynamics in Transportation Networks.” Competition Policy International 11, no. 1 (Spring-Fall 2015).

Transportation Network Companies offer notable service advances–but do they comply with the law? I offer evidence of some important shortfalls, then consider how the legal system might appropriately respond. Though it is tempting to forgive many violations in light of the companies’ benefits, I offer a cautionary assessment. For one, I note the incentives that might result, including a race-to-the-bottom as a series of companies forego all manner of requirements. Furthermore, the firms that best compete in such an environment are likely to be those that build a corporate culture of ignoring laws, a diagnosis that finds support in numerous controversial Uber practices. On the whole, I suggest evenhanded enforcement of applicable laws, with thoughtful changes implemented with appropriate formality, but no automatic free pass for the platforms that have recently framed laws and regulations as suggestions rather than requirements.

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.

Supplements:

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)

Price Restrictions in Multi-sided Platforms: Practices and Responses

Edelman, Benjamin, and Julian Wright. “Price Restrictions in Multi-sided Platforms: Practices and Responses.” Competition Policy International 10, no. 2 (Fall 2014).

In connecting buyers to sellers, some two-sided platforms require that sellers offer their lowest prices through the platform, disallowing lower prices for direct sales or sales through competing platforms. In this article, we explore the various contexts where such restrictions have arisen, then consider effects on competition, entry, and efficiency. Where there are plausible mitigating factors, such as efficiencies from platforms’ price restrictions, we explore those rationales and compare them to the harms. We identify a set of responses for competition policy, look at experiences to date, and suggest some future attempts to improve the functioning of these markets.

Mastering the Intermediaries: Strategies for Dealing with the Likes of Google, Amazon, and Kayak

Edelman, Benjamin. “Mastering the Intermediaries: Strategies for Dealing with the Likes of Google, Amazon, and Kayak.” Harvard Business Review 92, no. 6 (June 2014): 86-92.

Many companies depend on powerful platforms which distinctively influence buyers’ purchasing. (Consider, Google, Amazon, and myriad others in their respective spheres.) I consider implications of these platforms’ market power, then suggest strategies to help companies recapture value or at least protect themselves from abuse.

Google’s Tying and Bundling

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.

Google often argues that “competition is one click away” — as if Google’s many successes result solely from competition on the merits. Let me offer a different perspective: After early success in search and search advertising, Google used its strength in those sectors to increase its likelihood of success elsewhere — even where competitors’ offerings were objectively preferable and even where consumers would have preferred alternatives had that choice been genuinely available.

For example, in September 2013 web sites buzzed with the news that users would be required to create Google+ social networking accounts to comment on YouTube videos. There was no obvious reason why a user should need to join Google’s social network in order to post a brief comment on a video. Indeed, for years users had routinely posted via separate YouTube accounts. Google claimed that improvements would increase the quality of YouTube comment discussions and to prevent spam, but there was no obvious reason why those benefits required using Google+. That said, critics quickly saw the strategic implication: Google+ was years late to the market; other social networking services were far better established and already enjoyed much more success. But Google could use its other powerful properties, YouTube among others, to increase the pressure for users to join Google+.

Nor was Google+ unusual in benefiting from Google’s other products. In the context of mobile phones and tablets, Google had established a series of restrictions requiring that if a manufacturer sought to install any Google service–such as Maps, YouTube, or the Google Play store for installing other apps from Google and others–the manufacturer must accept a variety of obligations. For example, the manufacturer must install all the Google apps that Google specified–even if the manufacturer preferred another app. Furthermore, Google required that apps icons be placed in the locations that Google specified, including multiple entries on the device’s prominent “home” screen. The device must use Google Location Services, not competitors’ offerings, even if competitors’ offerings were faster, more accurate, or more protective of privacy. And manufacturers must take all these actions for Google’s benefit without any payment from Google. As a result, competing apps had to struggle to reach users–resorting to soliciting user installations one-by-one, rather than faster and more predictable bulk installations by device manufacturers.

Most obviously, Google’s core search service systematically favors Google results. Search for a stock ticker symbol, and you’re encouraged to go to Google Finance. If a video is deemed relevant, it will almost always be from YouTube. And so on. Sometimes these services are just as good for consumers; sometimes, not. But for any user unwilling to spend extra time requesting other services–day in and day out, ad infinitum–Google’s offerings become the easy and obvious defaults in every affected sector. Yelp may be a little better or even a lot better. But when Google puts Google Local front and center, many users will go there instead.

Today I’m posting an article exploring a series of incidents where Google used similar methods–broadly, tying and bundling–to expand its dominance into additional markets. In each market, I present the details of Google’s approach, then assess concerns under antitrust law. Selected examples:

If a ___ wants ___ Then it must accept ___
If a consumer wants to use Google Search Google Finance, Images, Maps, News, Products, Shopping, YouTube, and more
If a mobile carrier wants to preinstall YouTube for Android Google Search, Google Maps (even if a competitor is willing to pay to be default)
If an advertiser wants to advertise on any AdWords Search Network Partner All AdWords Search Network sites (in whatever proportion Google specifies)
If an advertiser wants to advertise on Google Search as viewed on computers   Tablet placements and, with limited restrictions, smartphone placements
If an advertiser wants image ads Google Affiliate Network (historic)
If an advertiser wants a logo in search ads Google Checkout (historic)
If a video producer wants preferred video indexing YouTube hosting
If a web site publisher wants preferred search indexing Google Plus participation

My bottom line: Google’s use of tying portends a future of reduced choice, slower innovation, lower quality, and higher prices. To date, Google has focused its harshest terms on advertisers, but after paying Google some $60+ billion each year, advertisers recoup these expenses through higher prices to consumers. Meanwhile, if a broad class of opportunities are effectively off-limits to competitors because Google either has claimed those sectors or is positioned to be able to claim them whenever it chooses, the incentive to invest is sharply attenuated. These are exactly the practices that competition law seeks to prevent.

My full article:

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

(update: published as “Does Google Leverage Market Power Through Tying and Bundling?” Journal of Competition Law & Economics 11, no. 2 (June 2015): 365-400.)

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.